2005 (8) TMI 622 - SC - Companies Law

Whether the finding of the court made under Section 45 of the Indian Arbitration and Conciliation Act, 1996 that the arbitration agreement, falling within the definition of Section 44 of the Act, is or is not null and void, inoperative or incapable of being performed should be a final expression of the view of the court or should it be a prima facie view formed without a full-fledged trial? Held that - An international commercial arbitration involves huge expenses, particularly where the parties have subjected the contract to a foreign law. But, that cannot be a deterrent to this Court from pronouncing on the correct approach to be adopted under Section 45 of the Act. In fact, as I have pointed out, adopting a final and determinative approach under Section 45 may not only prolong proceedings at the initial stage but also correspondingly increase costs and uncertainty for all the parties concerned. The present matter needs to be remitted to the trial court, but not for a full trial as directed by the impugned judgment of the High Court. The application under Section 45 would have to be determined by the trial court after arriving at the prima facie satisfaction that there exists an arbitral agreement, which is not null and void, inoperative or incapable of being performed . If the trial court finds thus, the parties shall be referred to arbitration. The appeal is accordingly allowed and Ordered accordingly.

Issues Involved:

1. Interpretation of Section 45 of the Indian Arbitration and Conciliation Act, 1996.
2. Ambiguity in the wording of Section 45.
3. Applicability of the judgment in Renusagar.
4. Ex visceribus interpretation of the statute.
5. Res judicata and unfairness.
6. Proof of applicable foreign law.
7. Redundancy in the statute.
8. Possibility of multiple trials.
9. Approach in foreign jurisdictions, including Hong Kong, Ontario, and England.
10. Consequences of mollificatory suggestions.

Issue-wise Detailed Analysis:

1. Interpretation of Section 45 of the Indian Arbitration and Conciliation Act, 1996:
The core issue is whether the court's finding under Section 45 regarding the arbitration agreement being "null and void, inoperative or incapable of being performed" should be final or prima facie. The judgment explores whether this finding should be based on a prima facie view or a full-fledged trial.

2. Ambiguity in the Wording of Section 45:
The contrast between Section 8 and Section 45 of the Act is highlighted. Section 8 mandates referral to arbitration without discretion, while Section 45 allows the court to refuse arbitration if it "finds" the agreement to be invalid. The judgment notes the difficulty in interpreting Section 45 due to the lack of clear indicators on whether the court's finding should be prima facie or final.

3. Applicability of the Judgment in Renusagar:
The judgment in Renusagar is discussed, which suggests that the court must be fully satisfied of the arbitration agreement's validity before granting a stay of proceedings. However, it is argued that the observations in Renusagar are distinguishable and should be considered obiter dictum. The judgment emphasizes that decisions under the Arbitration Act, 1940, or the Foreign Awards Act should be applied cautiously under the new Act.

4. Ex Visceribus Interpretation of the Statute:
The judgment argues that an ex visceribus interpretation of the statute implies that the finding under Section 45 should be prima facie. The absence of a provision similar to Section 5 in Part II of the Act suggests that judicial intervention at the pre-reference stage should be minimal to avoid delays in arbitration.

5. Res Judicata and Unfairness:
If the finding under Section 45 is treated as final, it might preclude re-examination of the agreement's validity at the enforcement stage under Section 48. This could result in unfairness as a final judgment might be rendered on insufficient material. Therefore, a prima facie view is preferable to ensure a fair opportunity to contest the award after a full trial.

6. Proof of Applicable Foreign Law:
The judgment highlights the difficulties in proving foreign law at the pre-reference stage if a final finding is required. It cites the case of SMG Swedish Machine Group, where determining the validity of an arbitration agreement under foreign law proved to be complex and time-consuming. A prima facie view would obviate these difficulties.

7. Redundancy in the Statute:
Treating the finding under Section 45 as final could render part of Section 48(1)(a) redundant, as it would preclude challenging the validity of the arbitration agreement at the enforcement stage. The judgment emphasizes that every part of a statute should have effect and not be rendered redundant.

8. Possibility of Multiple Trials:
The judgment notes that if the finding under Section 45 is final, it might lead to multiple trials, first at the pre-reference stage and then at the enforcement stage under Section 48. This would be contrary to the ethos of the Act, which aims to avoid delays and centralize court review at the post-award stage.

9. Approach in Foreign Jurisdictions:
The judgment surveys foreign precedents, noting that jurisdictions like Hong Kong and Ontario adopt a prima facie view regarding the validity of arbitration agreements. The Hong Kong High Court in Pacific International Lines and the Ontario Court of Justice in Rio Algom Ltd. support a prima facie approach, which aligns with the objectives of the Model Law.

10. Consequences of Mollificatory Suggestions:
The judgment critiques the suggestion of a trial by affidavits within a fixed timeframe, arguing that it may not be practical in cases involving allegations of forgery or fabricated agreements. It emphasizes that a prima facie view at the pre-reference stage would be more efficient and fair, avoiding the need for multiple trials and reducing costs and delays.

Conclusion:
The judgment concludes that the correct approach under Section 45 is to take a prima facie view regarding the validity of the arbitration agreement. The matter is remitted to the trial court to determine the existence of a valid arbitration agreement on a prima facie basis, and if found valid, the parties should be referred to arbitration. The appeal is allowed accordingly.

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