Indian Supreme Court: Whether reference to arbitration in terms of 1940 Act (in an agreement signed after 1996 Act came into force) was such a fundamental mistake to invalidate the entire arbitration clause such that there could not be any reference to arbitration at all?

In Purushottam s/o Tulsiram Badwaik v. Anil & Ors. (Civil Appeal No.4664 OF 2018(Arising out of SLP (Civil) No.14589 of 2016)) dated 2nd May 2018, the Supreme Court of India, addressed the issue of whether reference to arbitration in terms of Indian Arbitration Act, 1940 (in an agreement signed after the new Indian Arbitration Act, 1996 came into force) was such a fundamental mistake to invalidate the entire arbitration clause such that there could not be any reference to arbitration at all. The case involves around a partnership agreement which was entered into after the new Indian Arbitration Act, 1996 (the New 1996 Act) had come into force, the relevant clause made reference to “arbitration in accordance with the provisions of Indian Arbitration Act, 1940”. The court while promoting the object of implementing the scheme of alternative dispute resolution concluded that an incorrect reference or recital regarding applicability of Indian Arbitration Act, 1940 (the 1940 Act) would not render the entire arbitration agreement invalid. Such stipulation will have to be read in the light of Section 85 of the New Act and principles governing such relationship have to be under and in tune with the New 1996 Act.

Relevant Law in the New 1996 Act

Sub-section (1) of Section 85 of the New 1996 Act repealed three enactments including the 1940 Act. Sub-section (2) stipulates inter alia that notwithstanding such repeal, the repealed enactment namely the 1940 Act would continue to apply in relation to arbitral proceedings which had commenced before the New 1996 Act came into force unless the parties were to agree otherwise. The second limb of first clause of said sub-section (2) further stipulates that notwithstanding such repeal the provisions of the New 1996 Act would apply in relation to arbitral proceedings which commenced on or after the New 1996 Act came into force. The relevant section is reproduced below:

85. Repeal and savings.—

(1) The Arbitration (Protocol and Convention) Act, 1937 (6 of 1937), the Arbitration Act, 1940 (10 of 1940) and the Foreign Awards (Recognition and Enforcement) Act, 1961 (45 of 1961) are hereby repealed.

(2) Notwithstanding such repeal,—

(a) the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force;

Impugned Dispute resolution clause

Parties entered into a partnership agreement and clause 15 of said partnership agreement was as under:

“15) That in case of any dispute between the partners as regards interpretation of this Deed or any other matter connected with the partnership business, the same shall be referred to for arbitration in accordance with the provisions of Indian Arbitration Act, 1940, and the decision of the Arbitrator shall be final and binding on all the partners.”

Factual Matrix

Disputes arouse for declaration, damages and accounts arising out of the partnership agreement and respondent filed a civil suit for permanent injunction against the appellant. Soon after receipt of the notice, the appellant preferred an application under Section 8 of the New 1996 Act to refer the dispute to arbitration in view of aforesaid clause 15 in the partnership agreement. This application was set aside by lower court holding that the clause vague, that there was no reference as to who should be the arbitrator, that there was no mention about selection of the arbitrator and that the dispute did not form subject matter of agreement within the meaning of Section 8 of the New 1996 Act. Section 8 of the New 1996 Act gives powers judicial authorities in India to refer parties to arbitration where there is an arbitration agreement. On appeal, the High Court took the view that the relevant clause indicated agreement between the parties to refer the disputes to arbitration as per provisions of the 1940 Act although the partnership agreement was entered into much after the enactment of the New 1996 Act. The High Court wrongly relied on another ruling on the Supreme Court of India in Thyssen Stahlunion GMBH  v. Steel Authority of India Ltd, (1999) 9 SCC 334. In that case the commencement of arbitral proceedings was much before the New 1996 Act came into force. Therefore, on the strength of Section 85(2)(a) of the New 1996 Act, it was held that the provisions of the repealed enactments including the 1940 Act would continue to apply in relation to such arbitral proceedings.

Conclusion

The Supreme Court of India relied on its ruling in M.M.T.C. Limited v. Sterlite Industries (India) Ltd. (1996) 6 SCC 716, where the arbitration agreement was of a date prior to the commencement of the New 1996 Act. The commencement of arbitral proceedings was however after the New 1996 Act had come into force and as such it was held that the provisions of the New 1996 Act would apply.

In that case, the arbitration clause in contemplated an appointment process which was not strictly in tune with the provisions of the New 1996 Act and the agreement was

 “the provisions of the Indian Arbitration Act and Rules made thereunder shall apply for proceedings”.

The reference was thus to the provisions of the 1940 Act. The reading of the decision shows that what was found crucial was date of commencement of the arbitral proceedings and if such commencement was after the New 1996 Act had come into force, the provisions that would govern the situation were held to be that of the New 1996 Act. The appointment process was also directed to be in tune with the New 1996 Act. What was found to be fundamental was whether there was an arbitration agreement in writing in terms of Section 7 of the New 1996 Act. Section 7 of the New 1996 Act defines the term “Arbitration Agreement”.  As per Section 7, the basic requirements for an “arbitration agreement” are – (a) an agreement between the parties to submit to arbitration all or certain disputes which have arisen or which may arise in future in respect of a defined legal relationship; (b) such an arbitration agreement shall be in writing. The second requirement can be discernible from the documents or exchange of communication as well. In this case, the court further held that the New 1996 Act must be so construed to enable the enforcement of the earlier arbitration agreement.

The court relying on M.M.T.C. Limited (Supra) concluded if the arbitral proceedings had not commenced before the New 1996 Act came into force, the parties could not by their agreement agree on the applicability of 1940 Act.

If there be such an arbitration agreement which satisfies the requirements of Section 7 of 1996 Act, and if no arbitral proceeding had commenced before the New 1996 Act came into force, the matter would be completely governed by the provisions of the New 1996 Act. Any reference to the 1940 Act in the arbitration agreement would be of no consequence and the matter would be referred to arbitration only in terms of the New 1996 Act consistent with the basic intent of the parties as discernible from the arbitration agreement to refer the disputes to arbitration.

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