2008 (7) TMI 1048 - HC - Indian Laws

Summary

Issues Involved:
1. Validity of the ISDA Master Agreement.
2. Allegations of the contract being a wagering contract.
3. Public policy and statutory violations.
4. Authority of defendants 2 and 3 to enter into the contract.
5. Application of Section 8 of the Arbitration and Conciliation Act, 1996.
6. Scope of judicial authority under Section 8.
7. Effect of fraud on the arbitration agreement.
8. Complementary nature of Sections 8 and 11 of the Arbitration Act.
9. Historical context and legislative intent of the Arbitration and Conciliation Act, 1996.
10. Applicability of the arbitration clause to non-signatory defendants.

Detailed Analysis:

1. Validity of the ISDA Master Agreement:
The plaintiff challenged the ISDA Master Agreement dated 05.01.2007, claiming it was void ab initio, illegal, vitiated by fraud, opposed to public policy, and not binding on the company. The plaintiff sought a declaration to this effect and a permanent injunction to restrain the first defendant from acting under the terms of the Master Agreement.

2. Allegations of the Contract Being a Wagering Contract:
The plaintiff argued that the ISDA Master Agreement was a speculative contract with no underlying exposure, making it a wagering contract void under section 30 of the Indian Contract Act.

3. Public Policy and Statutory Violations:
The plaintiff contended that the transaction was opposed to public policy and violated the law declared by the Reserve Bank of India (RBI), thus void under section 23 of the Indian Contract Act.

4. Authority of Defendants 2 and 3 to Enter into the Contract:
The plaintiff alleged that defendants 2 and 3 entered into the agreements without specific authorization or approval from the Board of Directors, exposing the company to significant financial risk. The plaintiff claimed that the company was not bound by their actions.

5. Application of Section 8 of the Arbitration and Conciliation Act, 1996:
The first defendant sought to refer the parties to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996, based on the arbitration clause in the ISDA Master Agreement. The court noted that Section 8 mandates the judicial authority to refer the parties to arbitration if a valid arbitration agreement exists.

6. Scope of Judicial Authority under Section 8:
The court examined whether it could determine the validity of the arbitration agreement under Section 8. It concluded that Section 8 does not explicitly empower the court to decide if the agreement is null and void, inoperative, or incapable of being performed, unlike Section 45, which deals with international commercial arbitration.

7. Effect of Fraud on the Arbitration Agreement:
The court discussed various precedents on whether allegations of fraud could invalidate the arbitration agreement. It noted that the Arbitration and Conciliation Act, 1996, through Section 16, allows the Arbitral Tribunal to rule on its own jurisdiction, including the validity of the arbitration agreement. The court held that even if the main contract is declared null and void, the arbitration clause could still be valid.

8. Complementary Nature of Sections 8 and 11 of the Arbitration Act:
The court referred to the Supreme Court's decision in SBP & Co. v. Patel Engineering Ltd., which stated that Sections 8 and 11 are complementary. It held that the judicial authority must decide on the existence of a valid arbitration agreement before referring the dispute to arbitration.

9. Historical Context and Legislative Intent of the Arbitration and Conciliation Act, 1996:
The court analyzed the legislative history and intent behind the Arbitration and Conciliation Act, 1996, emphasizing its alignment with the UNCITRAL Model Law. It noted that the omission of the rider "unless it finds that the agreement is null and void, inoperative or incapable of being performed" in Section 8 was deliberate, indicating that such determinations should be left to the Arbitral Tribunal.

10. Applicability of the Arbitration Clause to Non-signatory Defendants:
The plaintiff argued that defendants 2 and 3 were not parties to the arbitration agreement, and therefore, the dispute could not be referred to arbitration. The court rejected this argument, stating that the inclusion of defendants 2 and 3, who were officers of the plaintiff company, did not invalidate the arbitration agreement.

Conclusion:
The court allowed the application under Section 8, referring the parties to arbitration. It held that the question of whether the ISDA Master Agreement was null and void, inoperative, or incapable of being performed should be determined by the Arbitral Tribunal. The court emphasized the separability doctrine and the legislative intent to minimize judicial intervention in arbitration matters. The application was allowed, and the dispute was referred to arbitration as per the ISDA Master Agreement.