2018 (5) TMI 328 - SC - Indian Laws

Rejection of arbitration application - Section 8 of the Arbitration and Conciliation Act, 1996 - Trial Court rejected said application holding 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 1996 Act. Held that - In the present case though the Partnership Agreement was entered into after 1996 Act had come into force, the relevant clause made reference to arbitration in accordance with the provisions of Indian Arbitration Act, 1940 . It is not the case of the respondent that the agreement between the parties suffered from any infirmity on account of fraud, coercion, undue influence or misrepresentation. What is however projected is that the reference to arbitration in terms of 1940 Act was such a fundamental mistake that it would invalidate the entire arbitration clause and as such there could not be any reference to arbitration at all. In a given case, reference to arbitration in the agreement entered into before 1996 Act came into force was in terms of 1940 Act and if the arbitral proceedings had not commenced before 1996 Act came into force, the provisions of 1996 Act alone would govern the situation. The reference to Indian Arbitration Act or to arbitration under 1940 Act in such cases would be of no consequence and the matter would still be governed under 1996 Act. Would it then make any difference if in an agreement entered into after 1996 Act, the reference made by the parties in the agreement was to arbitration in terms of 1940 Act. The High Court was not right in observing that there could be no arbitration at all in the present case - even if an arbitration agreement entered into after 1996 Act had come into force were to make a reference to the applicable provisions of those under Indian Arbitration Act or 1940 Act, such stipulation would be of no consequence and the matter must be governed under provisions of 1996 Act. An incorrect reference or recital regarding applicability of 1940 Act would not render the entire arbitration agreement invalid. The matter will have to be dealt with by the trial court in terms of Section 8 of 1996 Act - appeal allowed.

Issues Involved:
1. Applicability of the Arbitration and Conciliation Act, 1996 versus the Indian Arbitration Act, 1940.
2. Validity of the arbitration clause in the Partnership Agreement.
3. Interpretation of Section 8 of the Arbitration and Conciliation Act, 1996.
4. Relevance of the commencement date of arbitral proceedings.

Issue-wise Detailed Analysis:

1. Applicability of the Arbitration and Conciliation Act, 1996 versus the Indian Arbitration Act, 1940:
The core issue was whether the arbitration clause in the Partnership Agreement, which referenced the Indian Arbitration Act, 1940, was valid given that the 1996 Act was in force at the time the agreement was signed. The Supreme Court clarified that the reference to the 1940 Act in the agreement was of no consequence since the 1996 Act was already in force. The Court emphasized that if arbitral proceedings had not commenced before the 1996 Act came into force, the provisions of the 1996 Act would apply. This interpretation is supported by Section 85 of the 1996 Act, which repeals the 1940 Act and stipulates that the 1996 Act governs arbitral proceedings commencing after its enactment.

2. Validity of the arbitration clause in the Partnership Agreement:
The Court examined whether the arbitration clause, which mentioned the 1940 Act, invalidated the agreement. It was determined that the arbitration clause met the requirements of an "arbitration agreement" under Section 7 of the 1996 Act, which includes an agreement to submit disputes to arbitration and must be in writing. The Court held that an incorrect reference to the 1940 Act did not render the arbitration agreement invalid. The intent of the parties to resolve disputes through arbitration was clear, and the agreement was valid under the 1996 Act.

3. Interpretation of Section 8 of the Arbitration and Conciliation Act, 1996:
The appellant had filed an application under Section 8 of the 1996 Act to refer the dispute to arbitration, which was initially rejected by the Trial Court and affirmed by the High Court. The Supreme Court, however, held that the matter should be dealt with under Section 8 of the 1996 Act, which mandates that if a valid arbitration agreement exists, the judicial authority must refer the parties to arbitration. The Court directed the trial court to effectuate the arbitration agreement in accordance with Section 8.

4. Relevance of the commencement date of arbitral proceedings:
The Supreme Court reiterated that the commencement date of arbitral proceedings is crucial in determining the applicable arbitration law. If the proceedings commenced after the 1996 Act came into force, the provisions of the 1996 Act would apply regardless of any reference to the 1940 Act in the agreement. The Court cited previous judgments, including MMTC Limited v. Sterlite Industries (India) Ltd. and Thyssen Stahlunion GMBH v. Steel Authority of India Ltd., to support this view. The Court concluded that the High Court had erred in its interpretation, and the arbitration clause should be governed by the 1996 Act.

Conclusion:
The Supreme Court set aside the judgment of the High Court and allowed the appeal, directing the trial court to proceed in terms of Section 8 of the 1996 Act. The Court emphasized the importance of promoting alternative dispute resolution mechanisms and ensuring that arbitration agreements are effectuated in accordance with the prevailing law. The appeal was allowed with no costs.

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