IN ARB P 1279 OF 2022- DEL HC- Section 16 of Arbitration Act -- Only Arbitral Tribunal has power to decide whether it has locus to adjudicate upon a dispute: Delhi High Court while stating that the arbitration clause would be deemed as a separate and severable clause vis-a-vis Doctrine of Severability
Justice Chandra Dhari Singh [12-06-2023]

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Simran Singh

New Delhi, June 15, 2023: The Delhi High Court, while dealing with a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 in terms of the Arbitration Clause incorporated in the Standard Fire and Special Perils Policy, opined that if there was a valid existing arbitration agreement between the parties, and there was denial of the existence of any arbitrable dispute by one of the parties and refusal to appoint an arbitrator then the Court, in line with the letter and spirit of the Arbitration Act as well as the doctrine of kompetenz-kompetenz, should lean towards referring the matter to arbitration. Therefore, in the facts and circumstances of this case, the Court referred the dispute raised herein to an Arbitral Tribunal.

The Single Judge Bench of Justice Chandra Dhari Singh noted that the arbitration clause vis-a-vis classes 13 pertained to the resolution of disputes arising out of the contract, and thus was in accordance with the Doctrine of Severability. The arbitration clause would be deemed as a separate and severable clause and the arbitration agreement would subsist even after the contract between the parties had extinguished which had also been statutorily recognised under Section 16(1) of the Arbitration Act.

The Bench further reiterated that in view of the clear legislative mandate of the Arbitration Act, and the Doctrine of Severability and kompetenz-kompetenz principle, it was the Arbitral Tribunal which was the preferred first authority to adjudicate all questions of non-arbitrability and the Court had merely been conferred with the power of ‘second look’ with regards to the same.

In the matter at hand, the said policy was valid from 01-11-2017 to 31-10-2018. Due to an electric short circuit, a fire broke out in the premises of the petitioner on 13-06-2018, which caused considerable loss and damage. The same was claimed as Rs. 11,47,67,511/-. Accordingly, the respondent had appointed a surveyor to assess the damage caused, subsequent to which a consent letter dated 23-01-20202 was agreed upon by the petitioners to accept their loss being assessed at Rs.9,81,00,000/-. However, the claim amount of Rs.8,38,10,920/- was released by the respondent on 15-09-2022.

Aggrieved by the deficiency in the claim granted, the petitioner invoked arbitration in terms of clause 13 contained in the said policy and accordingly sent an arbitration notice dated 20-09-2022, calling upon the respondent to suggest names of the arbitrator and to appoint them by mutual consent, and to resolve the dispute pertaining to the claim. Thereafter, the respondent sent a reply dated 26-10-2022, denying the existence of any arbitrable dispute between the parties and refused to appoint an arbitrator. Hence, the present petition.

The issue for consideration before the Court was whether the instant dispute could be referred to arbitration notwithstanding the ‘Discharge Voucher’ given by the petitioner.

The Bench perused clause 13 of the policy which pertained to arbitrability of dispute between the parties in the instant case which provided that once the respondent company had accepted its liability, any dispute or difference arising qua the quantum to be paid under this policy would independently of all other questions be referred to the decision of a sole arbitrator to be appointed in writing by the parties. Therefore, the Court stated that there existed a valid arbitration agreement between the parties and the question of quantum of claim was expressly stated in the agreement as one that could be decided in the course of arbitration.

The Bench referred to a catena of cases wherein it was held that an arbitration agreement that was embedded within a contract would always be considered as separate and severable clause, and despite a reference being made by the court, the arbitrator was free to decide on their jurisdiction including the existence of the arbitration agreement in accordance with the kompetenz-kompetenz principle, which had been recognised under Section 16 of the arbitration Act.

The Court answered the question of whether an Arbitral Tribunal was competent to rule on its own jurisdiction on the kompetenz-kompetenz principle, including on the existence or validity of the arbitration agreement which was no longer res integra, in affirmative. It had further laid down that the very purpose of the kompetenz-kompetenz principle was to minimise judicial interference in arbitral proceedings.

The Bench stated that the Clause 13 of the Policy between the parties contained a valid arbitration agreement, and neither of the parties had disputed the validity and existence of the arbitration clause. Therefore, it was concluded that the arbitration agreement between the parties under Clause 13 was deemed to be in existent and a separate agreement under the Doctrine of Severability, and the arbitration agreement would not have extinguished along with the contract between the parties.

Further, the Court stated that the issue with regard to whether the petitioner’s claims would be maintainable on account of the Discharge Voucher that had been submitted by the petitioner must be adjudicated by the Arbitral Tribunal, in accordance with the judicial mandate of the amendments to the Arbitration Act which purported to minimise judicial intervention in arbitration proceedings and the same would also be in accordance with the kompetenz-kompetenz principle.

The Bench opined that the Court’s power while hearing a Section 11 petition was to test whether or not a valid arbitration agreement existed on the basis of the facts and law. Only when the Court was certain that a valid arbitration agreement did not exist or that the subject matter was not arbitrable, then a referral may be refused, and this was strictly applicable to a very limited category of cases. However, if there was even the slightest doubt, the rule was to refer the dispute to arbitration, and otherwise, it would encroach upon what was essentially a matter to be determined by the tribunal.

The Court stated that a close reading of the clause 13 revealed that only when the respondent company had accepted its liability, any dispute or difference arising qua the quantum to be paid under this policy would be independently of all other questions be referred to the decision of a sole arbitrator to be appointed in writing by the parties. “In the instant case, the existence of liability has not been disputed by the Respondent Company, therefore, prima facie the dispute regarding the quantum of claims can be determined by an arbitrator. This is more so since there exists a valid arbitration agreement between the parties and the question of quantum of claim is expressly stated in the agreement as one that can be decided in the course of arbitration.”

The Court had observed that“It is also clear that the issues pertaining to the quantum of claim that is accruable to the Petitioner and whether the Petitioner’s claims would be maintainable on account of the Discharge Voucher are to be decided by the Arbitral Tribunal under the kompetenz-kompetenz principle and any decision by this Court would be deemed as going into the merits of the dispute, which is not at all warranted under law. Thus, these issues are not being dealt with in the instant petition under Section 11(6) of the Act.”

Accordingly, the Court appointed a sole Arbitrator to adjudicate the disputes between the parties which had arisen under the said Policy, who would ensure the compliance of Section 12(1) of the Arbitration Act.