#pre engineered builders in erode

[legalseat]

Analysing the Non-obstante Clause of Section 8 of the Arbitration Act

[Rajvansh Singh is a 3rd year student at National Law University Odisha]

In Aftab Singh v. Emaar MGF Land Limited, the complainants approached the consumer forum seeking possession of flat/villa and compensation from the builder in lieu of the delay in handing over the possession of the same. The builder contended that builder-buyer agreement contains an arbitration clause by virtue of which parties should be referred to arbitration. However, the National Consumer Disputes Redressal Commission (“NCDRC”) opined that the Consumer Protection Act is to safeguard the rights of consumer. Thus, any dispute related to the consumer’s rights cannot be referred to arbitration as such matters are reserved to be adjudicated by the special public forum established by law.

A two-judge bench of the Supreme Court (“SC”) agreed with the decision of NCDRC that an arbitration clause cannot limit the jurisdiction of consumer forum. In this post, I argue that the SC erred in dismissing the plea of builder and should have scrutinized NCDRC’s judgment in greater detail. This is because the latter has misinterpreted the non-obstante clause as provided in section 8 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”).

What is Arbitrability?

‘Arbitrabily of disputes’ involves a simple question on whether a dispute can be adjudicated through arbitration or not. In India, the locus classicus on the subject isBooz Allen v. SBI. In this case the SC opined that there are two kinds of disputes that are inarbitrable:those that are to be adjudicated by a public forum established by law and those that are rendered inarbitrable because of their very nature. The reason for abovementioned rule has been explained vividly in the ratio:

“A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals.”

Traditionally, disputes pertaining to right in remare not arbitrable, but on the other hand disputes pertaining to right in personam can be submitted to arbitration. It is pertinent to note that the legislature has not classified disputes as inarbitrable. The same has been developed through judicial pronouncements.

There are three stages at which the issues of arbitrability can arise:

While making reference to arbitration (section 8);

During the arbitral proceedings; and

At the time of challenging the award.

Tussle under section 8

While interpreting section 8, the SC has subscribed to two different opinions. Firstly, in cases like Booz Allen, Ayyasamy, and Natraj Studios, which were referred to in the present case, the SC held that when any arbitration agreement is valid and the dispute is not arbitrable or reserved to be adjudicated by special public fora, reference to arbitration cannot be made.

Secondly, the SC in P. Anand Gajapathi Raju v. P.V.G. Raju held that “nature of section 8 is peremptory”. This implies that presence of an arbitration agreement makes it mandatory for the court to refer the matter to arbitration provided: “(1) there is an arbitration agreement; (2) a party to the agreement brings an action in the Court against the other party; (3) subject matter of the action is the same as the subject matter of the arbitration agreement; (4) the other party moves the Court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.” Further, the SC in Hindustan Petroleum Corpn. Ltd. held that once the arbitration agreement is recognized as valid, reference to arbitration has to be made in light of the mandatory nature of section 8.

Non-obstante clause and its interpretation

To settle the ongoing tussle and to limit the judicial intervention, section 8 was amended by adding a non-obstante clause, which reads – “….notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

This implies that judicial authority is under obligation to refer the matter to arbitration, unless on a prima facie basis it finds there is “no valid arbitration agreement which exist” or the same is “null and void”. The Arbitration Act very well recognizes the principle of kompetenz-kompetenz. Relying on this principle, the arbitral tribunal should be the authority to determine if the dispute intended to be resolved by arbitration is arbitrable or not.

Section 34(2)(b) reads as follows: “the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” This acknowledges the fact that if the arbitral tribunal fails to inspect the arbitrability of the matter, then the concerned court will quash the award based on it. Similarly, section 48(2) provides that if a matter is not arbitrable, the court can refuse to enforce the foreign award.

The NCDRC explained the purpose of amendment in following words: “the import of the Law Commission’s Report is very clear and limited – it deals with the fallout of the judgment in SBP & Co. v. Patel Engineering regarding the scope of judicial intervention in the context of the appointment of an Arbitrator, and nothing more.” Further, the amended section 8 does not aim to attack pre-amendment case laws. Hence, placing reliance on Skypack Couriers Ltd.and National Seed Corporation, the NCDRC opined that presence of arbitration clause would not be a bar for a consumer to file a suit before Consumer Court, as the suit is not arbitrable.

It is suggested that while deciding the case, the NCDRC totally misinterpreted the Law Commission Report. The Law Commission, headed by Justice A.P. Shah, submitted that intervention of courts at pre-arbitration stage has an adverse effect on the arbitral proceedings. The report stated in explicit terms that the test regarding scope of judicial intervention should be same for sections 8 and 11. While determining the nature of intervention, the approach of the SC in Shin-Etsu Chemicals Co. Ltd. v. Aksh Optifibre, i.e. “prima facie inquiry of the arbitration agreement” has to be followed. Thus, the effect of the amendment is not limited to section 11, but it also extends to section 8.

The newly amended section 8 cannot find its existence in Ayyasamy, Booz Allen, Skypack Couriers Ltd. and National Seed Corporation, which authoritatively opine that arbitration agreement will not bar the Consumer Court from entertaining the complaint made by the consumer. Hence, a blind reliance on these cases will never provide the correct picture regarding section 8. According to Ayyasamy, when an application under section 8 is made, the court will determine the nature of fraud before the parties are referred to arbitration. This implies that the court will have the power to interfere at pre-arbitration stage.  Thus, the judgment of Ayyasamy is per incuriam as it contradicts the legislative intent behind the amendment. By taking the amended section 8 into account the abovementioned judgments fail to set a good precedent.

Further, section 2(3) of the Arbitration Act states that if the dispute in question is referable by virtue of the provisions of this Act, it cannot be referred if such reference is barred under some other law. The intention behind sections 8 and 2(3) seems to contradict each other. It is suggested that section 8 read with section 5 should prevail over section 2(3) because it will fulfill the prime intention of legislature i.e. “to restrict the scope of judicial interference at pre-arbitration stage”.

Conclusion

A plain reading of the unamended section 8 of Arbitration Act shows that intervention of judiciary should be limited. However, the SC through various case laws held that intervention is acceptable to the extent of determining the arbitrability of the matter. In light of the newly amended section 8, such case laws should be declared invalid. Further, if there is a validity check of the arbitration agreement before the courts, the legislative intent behind the amendment will be defeated. Thus, in my opinion, the arbitral tribunal should be the only authority to decide on the issue of arbitrability at the pre-award stage, so that the purpose, which the provisions of the Act seek to fulfill, is not eroded.

– Rajvansh Singh

The post Analysing the Non-obstante Clause of Section 8 of the Arbitration Act appeared first on IndiaCorpLaw.

Analysing the Non-obstante Clause of Section 8 of the Arbitration Act published first on https://divorcelawyermumbai.tumblr.com/

[bettydgunter90]

Mitigate Risk with Build-for-Rent

In early April, I read a well-known real estate website and came across an article that discussed potential ramifications of the COVID-19 crisis on the real estate market. In one scenario, the article stated that potential listings will remain low, interest rates will remain low, and homes are likely to maintain their value.

Yet, in another section of the article, the author added some big caveats. Rising unemployment could tank the economy. A recession could dampen demand, which could cause home prices to plummet.

In short, the author really had no idea what was about to transpire. I can understand why. COVID-19 created a scenario no one had encountered before. Making a definitive prediction about market direction with the information at hand became virtually impossible.

My take-away from the article? No matter how well the market is moving along — and it was still pretty hot pre-virus — real estate investment always comes with risk. As a real estate developer and investor, one of the most important strategies is to mitigate risk wherever and whenever possible. It’s why my company Kinloch Partners has adopted a new investment model that spreads more of the risk — and perhaps more importantly rewards — to our builder partners.

We call it Build-FOR-Rent, rather than Build-TO-Rent, and while it sounds like a small difference in language, it can make all the difference between success and failure for the single-family rental strategy. At the same time, it provides a nice safety net for builders, who otherwise might sit on the sidelines during volatile stretches in the housing market.

Under the Build-TO-Rent model, we were wearing multiple hats, including developer and builder. We assumed the risk at every stage of development and construction. Under Build-FOR-Rent, we are contracting with a builder but asking them to shoulder some of the risk. Here’s a look at how it works:

Build-to-Rent Creates End-to-End Risk for Developers

I’ve been investing in single-family rental homes since 2005, using a mixture of strategies, including buying homes from distressed builders at a discount, building homes with the express purpose of building a rental business, and building entire subdivisions — creating entire rental communities. Each of these strategies comes with its own inherent risk.

As a developer who also wears the homebuilder hat, our risk started right out of the gate. We were tasked with land acquisition, the entitlement process, design and engineering, among other items. All of those tasks took time and money, even before the first yard of dirt was moved.

Once we got rolling with grading, we had to install utilities. Once those initial stages were completed, we had to put on our homebuilder hat. At that point, we were on the hook for material and labor costs and we had to meet our own construction deadlines. If we weren’t meeting deadlines, we were paying interest on loans that weren’t bringing in any rental income. As they say, time is money, and missed construction deadlines add up to lost money daily.

That whole process, from initial inception of an idea to completed construction, represents multiple steps where something can go wrong. And, of course, everything that goes wrong equals a cost overrun that erodes profit margins even before the first renter signs a lease.

Traditional builders manage these risks on their own as a routine course of running their business. Bringing a project in on time and under budget is the builder’s area of expertise. But, when traditional builders go to sell, they pay commissions, incur marketing costs, and assume the risk of the bottom falling out of the market and no one willing to purchase their homes. In tough times, it’s easy for builders to end up with houses sitting vacant, with a big bank loan coming due.

I have purchased hundreds foreclosed properties over the years from subdivisions to building lots to single-family houses, townhouses and condos. The majority of these have been purchased from banks and the loans that went bad were from builders and developers. In my experience, very few single-family rental owners have gone bankrupt or lost their houses to a bank. It would be tough to do, as the business is relatively simple — buy a house, find renters, then hold for long-term appreciation or package and sell a portfolio of rental homes to institutional funds. I do both.

But, to be truthful, instead of buying distressed properties, we’d much rather have long-term relationships with builders that are mutually profitable. That’s where a Build-For-Rent partnership is a great strategy.

Build-for-Rent Combines Risk and Reward for Builders and Investors

A Build-For-Rent strategy combines the best skill sets of developers, builders, and property management companies. It helps mitigate construction cost risk in a project’s early phases, then weeds out the cost — and risk — of marketing and selling the house at construction completion.

In this scenario, the investor does not become the property owner until the home’s completion. The sale and the sale price will have been negotiated up front in partnership with the builder. Both parties focus on what they do best: the builder focuses on managing the construction process, while the investor focuses on finding renters and managing the property. This arrangement cuts out all costs of marketing and selling the house and eliminates the risk of the house sitting on the market for months.

With Build-for-Rent, we typically pay a slight premium for the homes in comparison to an end-to-end Build-to-Rent scenario, but we know the homes will be done right and done on time. The higher price is also our reward to the builder for helping shoulder their portion of the risk.

We have formed relationships with local, regional and national builders to put this strategy to work. We negotiate discounts from these builders that average 10-to-15 percent reductions to appraised values. As an investor, I’m happy paying more for a negotiated home price up front. I know exactly what I need in rental income to meet my metrics and I have completely removed construction headaches and potential cost over-runs off of my plate.

Build-for-Rent Partnerships Work as Rental Homes Stay Hot

Builders and investors need to seek these types of partnerships as the rental home market is highly likely to stay hot. Millennials (born between 1981 and 1998) continue to start families. Unfortunately, they are saddled with a large portion of our nation’s $1.6 trillion in student debt. They still want a house with four sides and a yard for their children to play. Renting a single-family home makes sense for them.

Builders want to stay in business, but the risk of putting up spec houses in an unpredictable market might keep builders on the sideline.

Real estate investors are always looking for another avenue to generate a return. The returns from single-family rentals can provide a safe haven in an otherwise volatile market.

Throw all these factors together and a Build-for-Rent scenario is a win-win-win for builders, investors, and consumers alike. It’s highly likely we’ll see this scenario continue to grow over the coming months.

The post Mitigate Risk with Build-for-Rent appeared first on Think Realty | A Real Estate of Mind.

from Real Estate Tips https://thinkrealty.com/mitigate-risk-with-build-for-rent/

[bettydgunter90]

Mitigate Risk with Build-for-Rent

In early April, I read a well-known real estate website and came across an article that discussed potential ramifications of the COVID-19 crisis on the real estate market. In one scenario, the article stated that potential listings will remain low, interest rates will remain low, and homes are likely to maintain their value.

Yet, in another section of the article, the author added some big caveats. Rising unemployment could tank the economy. A recession could dampen demand, which could cause home prices to plummet.

In short, the author really had no idea what was about to transpire. I can understand why. COVID-19 created a scenario no one had encountered before. Making a definitive prediction about market direction with the information at hand became virtually impossible.

My take-away from the article? No matter how well the market is moving along — and it was still pretty hot pre-virus — real estate investment always comes with risk. As a real estate developer and investor, one of the most important strategies is to mitigate risk wherever and whenever possible. It’s why my company Kinloch Partners has adopted a new investment model that spreads more of the risk — and perhaps more importantly rewards — to our builder partners.

We call it Build-FOR-Rent, rather than Build-TO-Rent, and while it sounds like a small difference in language, it can make all the difference between success and failure for the single-family rental strategy. At the same time, it provides a nice safety net for builders, who otherwise might sit on the sidelines during volatile stretches in the housing market.

Under the Build-TO-Rent model, we were wearing multiple hats, including developer and builder. We assumed the risk at every stage of development and construction. Under Build-FOR-Rent, we are contracting with a builder but asking them to shoulder some of the risk. Here’s a look at how it works:

Build-to-Rent Creates End-to-End Risk for Developers

I’ve been investing in single-family rental homes since 2005, using a mixture of strategies, including buying homes from distressed builders at a discount, building homes with the express purpose of building a rental business, and building entire subdivisions — creating entire rental communities. Each of these strategies comes with its own inherent risk.

As a developer who also wears the homebuilder hat, our risk started right out of the gate. We were tasked with land acquisition, the entitlement process, design and engineering, among other items. All of those tasks took time and money, even before the first yard of dirt was moved.

Once we got rolling with grading, we had to install utilities. Once those initial stages were completed, we had to put on our homebuilder hat. At that point, we were on the hook for material and labor costs and we had to meet our own construction deadlines. If we weren’t meeting deadlines, we were paying interest on loans that weren’t bringing in any rental income. As they say, time is money, and missed construction deadlines add up to lost money daily.

That whole process, from initial inception of an idea to completed construction, represents multiple steps where something can go wrong. And, of course, everything that goes wrong equals a cost overrun that erodes profit margins even before the first renter signs a lease.

Traditional builders manage these risks on their own as a routine course of running their business. Bringing a project in on time and under budget is the builder’s area of expertise. But, when traditional builders go to sell, they pay commissions, incur marketing costs, and assume the risk of the bottom falling out of the market and no one willing to purchase their homes. In tough times, it’s easy for builders to end up with houses sitting vacant, with a big bank loan coming due.

I have purchased hundreds foreclosed properties over the years from subdivisions to building lots to single-family houses, townhouses and condos. The majority of these have been purchased from banks and the loans that went bad were from builders and developers. In my experience, very few single-family rental owners have gone bankrupt or lost their houses to a bank. It would be tough to do, as the business is relatively simple — buy a house, find renters, then hold for long-term appreciation or package and sell a portfolio of rental homes to institutional funds. I do both.

But, to be truthful, instead of buying distressed properties, we’d much rather have long-term relationships with builders that are mutually profitable. That’s where a Build-For-Rent partnership is a great strategy.

Build-for-Rent Combines Risk and Reward for Builders and Investors

A Build-For-Rent strategy combines the best skill sets of developers, builders, and property management companies. It helps mitigate construction cost risk in a project’s early phases, then weeds out the cost — and risk — of marketing and selling the house at construction completion.

In this scenario, the investor does not become the property owner until the home’s completion. The sale and the sale price will have been negotiated up front in partnership with the builder. Both parties focus on what they do best: the builder focuses on managing the construction process, while the investor focuses on finding renters and managing the property. This arrangement cuts out all costs of marketing and selling the house and eliminates the risk of the house sitting on the market for months.

With Build-for-Rent, we typically pay a slight premium for the homes in comparison to an end-to-end Build-to-Rent scenario, but we know the homes will be done right and done on time. The higher price is also our reward to the builder for helping shoulder their portion of the risk.

We have formed relationships with local, regional and national builders to put this strategy to work. We negotiate discounts from these builders that average 10-to-15 percent reductions to appraised values. As an investor, I’m happy paying more for a negotiated home price up front. I know exactly what I need in rental income to meet my metrics and I have completely removed construction headaches and potential cost over-runs off of my plate.

Build-for-Rent Partnerships Work as Rental Homes Stay Hot

Builders and investors need to seek these types of partnerships as the rental home market is highly likely to stay hot. Millennials (born between 1981 and 1998) continue to start families. Unfortunately, they are saddled with a large portion of our nation’s $1.6 trillion in student debt. They still want a house with four sides and a yard for their children to play. Renting a single-family home makes sense for them.

Builders want to stay in business, but the risk of putting up spec houses in an unpredictable market might keep builders on the sideline.

Real estate investors are always looking for another avenue to generate a return. The returns from single-family rentals can provide a safe haven in an otherwise volatile market.

Throw all these factors together and a Build-for-Rent scenario is a win-win-win for builders, investors, and consumers alike. It’s highly likely we’ll see this scenario continue to grow over the coming months.

The post Mitigate Risk with Build-for-Rent appeared first on Think Realty | A Real Estate of Mind.

from Real Estate Tips https://thinkrealty.com/mitigate-risk-with-build-for-rent/

[bettydgunter90]

Mitigate Risk with Build-for-Rent

In early April, I read a well-known real estate website and came across an article that discussed potential ramifications of the COVID-19 crisis on the real estate market. In one scenario, the article stated that potential listings will remain low, interest rates will remain low, and homes are likely to maintain their value.

Yet, in another section of the article, the author added some big caveats. Rising unemployment could tank the economy. A recession could dampen demand, which could cause home prices to plummet.

In short, the author really had no idea what was about to transpire. I can understand why. COVID-19 created a scenario no one had encountered before. Making a definitive prediction about market direction with the information at hand became virtually impossible.

My take-away from the article? No matter how well the market is moving along — and it was still pretty hot pre-virus — real estate investment always comes with risk. As a real estate developer and investor, one of the most important strategies is to mitigate risk wherever and whenever possible. It’s why my company Kinloch Partners has adopted a new investment model that spreads more of the risk — and perhaps more importantly rewards — to our builder partners.

We call it Build-FOR-Rent, rather than Build-TO-Rent, and while it sounds like a small difference in language, it can make all the difference between success and failure for the single-family rental strategy. At the same time, it provides a nice safety net for builders, who otherwise might sit on the sidelines during volatile stretches in the housing market.

Under the Build-TO-Rent model, we were wearing multiple hats, including developer and builder. We assumed the risk at every stage of development and construction. Under Build-FOR-Rent, we are contracting with a builder but asking them to shoulder some of the risk. Here’s a look at how it works:

Build-to-Rent Creates End-to-End Risk for Developers

I’ve been investing in single-family rental homes since 2005, using a mixture of strategies, including buying homes from distressed builders at a discount, building homes with the express purpose of building a rental business, and building entire subdivisions — creating entire rental communities. Each of these strategies comes with its own inherent risk.

As a developer who also wears the homebuilder hat, our risk started right out of the gate. We were tasked with land acquisition, the entitlement process, design and engineering, among other items. All of those tasks took time and money, even before the first yard of dirt was moved.

Once we got rolling with grading, we had to install utilities. Once those initial stages were completed, we had to put on our homebuilder hat. At that point, we were on the hook for material and labor costs and we had to meet our own construction deadlines. If we weren’t meeting deadlines, we were paying interest on loans that weren’t bringing in any rental income. As they say, time is money, and missed construction deadlines add up to lost money daily.

That whole process, from initial inception of an idea to completed construction, represents multiple steps where something can go wrong. And, of course, everything that goes wrong equals a cost overrun that erodes profit margins even before the first renter signs a lease.

Traditional builders manage these risks on their own as a routine course of running their business. Bringing a project in on time and under budget is the builder’s area of expertise. But, when traditional builders go to sell, they pay commissions, incur marketing costs, and assume the risk of the bottom falling out of the market and no one willing to purchase their homes. In tough times, it’s easy for builders to end up with houses sitting vacant, with a big bank loan coming due.

I have purchased hundreds foreclosed properties over the years from subdivisions to building lots to single-family houses, townhouses and condos. The majority of these have been purchased from banks and the loans that went bad were from builders and developers. In my experience, very few single-family rental owners have gone bankrupt or lost their houses to a bank. It would be tough to do, as the business is relatively simple — buy a house, find renters, then hold for long-term appreciation or package and sell a portfolio of rental homes to institutional funds. I do both.

But, to be truthful, instead of buying distressed properties, we’d much rather have long-term relationships with builders that are mutually profitable. That’s where a Build-For-Rent partnership is a great strategy.

Build-for-Rent Combines Risk and Reward for Builders and Investors

A Build-For-Rent strategy combines the best skill sets of developers, builders, and property management companies. It helps mitigate construction cost risk in a project’s early phases, then weeds out the cost — and risk — of marketing and selling the house at construction completion.

In this scenario, the investor does not become the property owner until the home’s completion. The sale and the sale price will have been negotiated up front in partnership with the builder. Both parties focus on what they do best: the builder focuses on managing the construction process, while the investor focuses on finding renters and managing the property. This arrangement cuts out all costs of marketing and selling the house and eliminates the risk of the house sitting on the market for months.

With Build-for-Rent, we typically pay a slight premium for the homes in comparison to an end-to-end Build-to-Rent scenario, but we know the homes will be done right and done on time. The higher price is also our reward to the builder for helping shoulder their portion of the risk.

We have formed relationships with local, regional and national builders to put this strategy to work. We negotiate discounts from these builders that average 10-to-15 percent reductions to appraised values. As an investor, I’m happy paying more for a negotiated home price up front. I know exactly what I need in rental income to meet my metrics and I have completely removed construction headaches and potential cost over-runs off of my plate.

Build-for-Rent Partnerships Work as Rental Homes Stay Hot

Builders and investors need to seek these types of partnerships as the rental home market is highly likely to stay hot. Millennials (born between 1981 and 1998) continue to start families. Unfortunately, they are saddled with a large portion of our nation’s $1.6 trillion in student debt. They still want a house with four sides and a yard for their children to play. Renting a single-family home makes sense for them.

Builders want to stay in business, but the risk of putting up spec houses in an unpredictable market might keep builders on the sideline.

Real estate investors are always looking for another avenue to generate a return. The returns from single-family rentals can provide a safe haven in an otherwise volatile market.

Throw all these factors together and a Build-for-Rent scenario is a win-win-win for builders, investors, and consumers alike. It’s highly likely we’ll see this scenario continue to grow over the coming months.

The post Mitigate Risk with Build-for-Rent appeared first on Think Realty | A Real Estate of Mind.

from Real Estate Tips https://thinkrealty.com/mitigate-risk-with-build-for-rent/

[legalseat]

Analysing the Non-obstante Clause of Section 8 of the Arbitration Act

[Rajvansh Singh is a 3rd year student at National Law University Odisha]

In Aftab Singh v. Emaar MGF Land Limited, the complainants approached the consumer forum seeking possession of flat/villa and compensation from the builder in lieu of the delay in handing over the possession of the same. The builder contended that builder-buyer agreement contains an arbitration clause by virtue of which parties should be referred to arbitration. However, the National Consumer Disputes Redressal Commission (“NCDRC”) opined that the Consumer Protection Act is to safeguard the rights of consumer. Thus, any dispute related to the consumer’s rights cannot be referred to arbitration as such matters are reserved to be adjudicated by the special public forum established by law.

A two-judge bench of the Supreme Court (“SC”) agreed with the decision of NCDRC that an arbitration clause cannot limit the jurisdiction of consumer forum. In this post, I argue that the SC erred in dismissing the plea of builder and should have scrutinized NCDRC’s judgment in greater detail. This is because the latter has misinterpreted the non-obstante clause as provided in section 8 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”).

What is Arbitrability?

‘Arbitrabily of disputes’ involves a simple question on whether a dispute can be adjudicated through arbitration or not. In India, the locus classicus on the subject isBooz Allen v. SBI. In this case the SC opined that there are two kinds of disputes that are inarbitrable:those that are to be adjudicated by a public forum established by law and those that are rendered inarbitrable because of their very nature. The reason for abovementioned rule has been explained vividly in the ratio:

“A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals.”

Traditionally, disputes pertaining to right in remare not arbitrable, but on the other hand disputes pertaining to right in personam can be submitted to arbitration. It is pertinent to note that the legislature has not classified disputes as inarbitrable. The same has been developed through judicial pronouncements.

There are three stages at which the issues of arbitrability can arise:

While making reference to arbitration (section 8);

During the arbitral proceedings; and

At the time of challenging the award.

Tussle under section 8

While interpreting section 8, the SC has subscribed to two different opinions. Firstly, in cases like Booz Allen, Ayyasamy, and Natraj Studios, which were referred to in the present case, the SC held that when any arbitration agreement is valid and the dispute is not arbitrable or reserved to be adjudicated by special public fora, reference to arbitration cannot be made.

Secondly, the SC in P. Anand Gajapathi Raju v. P.V.G. Raju held that “nature of section 8 is peremptory”. This implies that presence of an arbitration agreement makes it mandatory for the court to refer the matter to arbitration provided: “(1) there is an arbitration agreement; (2) a party to the agreement brings an action in the Court against the other party; (3) subject matter of the action is the same as the subject matter of the arbitration agreement; (4) the other party moves the Court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.” Further, the SC in Hindustan Petroleum Corpn. Ltd. held that once the arbitration agreement is recognized as valid, reference to arbitration has to be made in light of the mandatory nature of section 8.

Non-obstante clause and its interpretation

To settle the ongoing tussle and to limit the judicial intervention, section 8 was amended by adding a non-obstante clause, which reads – “….notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

This implies that judicial authority is under obligation to refer the matter to arbitration, unless on a prima facie basis it finds there is “no valid arbitration agreement which exist” or the same is “null and void”. The Arbitration Act very well recognizes the principle of kompetenz-kompetenz. Relying on this principle, the arbitral tribunal should be the authority to determine if the dispute intended to be resolved by arbitration is arbitrable or not.

Section 34(2)(b) reads as follows: “the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” This acknowledges the fact that if the arbitral tribunal fails to inspect the arbitrability of the matter, then the concerned court will quash the award based on it. Similarly, section 48(2) provides that if a matter is not arbitrable, the court can refuse to enforce the foreign award.

The NCDRC explained the purpose of amendment in following words: “the import of the Law Commission’s Report is very clear and limited – it deals with the fallout of the judgment in SBP & Co. v. Patel Engineering regarding the scope of judicial intervention in the context of the appointment of an Arbitrator, and nothing more.” Further, the amended section 8 does not aim to attack pre-amendment case laws. Hence, placing reliance on Skypack Couriers Ltd.and National Seed Corporation, the NCDRC opined that presence of arbitration clause would not be a bar for a consumer to file a suit before Consumer Court, as the suit is not arbitrable.

It is suggested that while deciding the case, the NCDRC totally misinterpreted the Law Commission Report. The Law Commission, headed by Justice A.P. Shah, submitted that intervention of courts at pre-arbitration stage has an adverse effect on the arbitral proceedings. The report stated in explicit terms that the test regarding scope of judicial intervention should be same for sections 8 and 11. While determining the nature of intervention, the approach of the SC in Shin-Etsu Chemicals Co. Ltd. v. Aksh Optifibre, i.e. “prima facie inquiry of the arbitration agreement” has to be followed. Thus, the effect of the amendment is not limited to section 11, but it also extends to section 8.

The newly amended section 8 cannot find its existence in Ayyasamy, Booz Allen, Skypack Couriers Ltd. and National Seed Corporation, which authoritatively opine that arbitration agreement will not bar the Consumer Court from entertaining the complaint made by the consumer. Hence, a blind reliance on these cases will never provide the correct picture regarding section 8. According to Ayyasamy, when an application under section 8 is made, the court will determine the nature of fraud before the parties are referred to arbitration. This implies that the court will have the power to interfere at pre-arbitration stage.  Thus, the judgment of Ayyasamy is per incuriam as it contradicts the legislative intent behind the amendment. By taking the amended section 8 into account the abovementioned judgments fail to set a good precedent.

Further, section 2(3) of the Arbitration Act states that if the dispute in question is referable by virtue of the provisions of this Act, it cannot be referred if such reference is barred under some other law. The intention behind sections 8 and 2(3) seems to contradict each other. It is suggested that section 8 read with section 5 should prevail over section 2(3) because it will fulfill the prime intention of legislature i.e. “to restrict the scope of judicial interference at pre-arbitration stage”.

Conclusion

A plain reading of the unamended section 8 of Arbitration Act shows that intervention of judiciary should be limited. However, the SC through various case laws held that intervention is acceptable to the extent of determining the arbitrability of the matter. In light of the newly amended section 8, such case laws should be declared invalid. Further, if there is a validity check of the arbitration agreement before the courts, the legislative intent behind the amendment will be defeated. Thus, in my opinion, the arbitral tribunal should be the only authority to decide on the issue of arbitrability at the pre-award stage, so that the purpose, which the provisions of the Act seek to fulfill, is not eroded.

– Rajvansh Singh

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