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TMI Blog2002 (11) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... ent dated 18-1-2001 between Appellant and Respondent No. 2 is concerned, the arbitral clause is contained in Clauses 13 and 15 and they read as under: "13. If at any time any dispute or question shall arise between the parties to this Agreement in connection with this Agreement or its validity construction or performance then the same shall be referred to an arbitrator to be agreed upon by the parties and failing such agreement within (15) days of either party requesting the appointment of an arbitrator and suggesting a name, the arbitrator shall be appointed by the President for the time being of the Chartered Institute of Arbitrators and according to the provisions of the Arbitration Acts, 1950 and 1979 and the decision of the arbitrator shall be final and binding on both the parties and unless otherwise agreed the cost of arbitration shall be borne by the parties equally. 15. The construction, validity and performance of this agreement shall be governed in all respects by English law." 2. The Plaintiffs have filed a suit before the Civil Judge, Senior Division, Thane being Special Civil Suit No. 50 of 2002 against the respondents. The main reliefs sought in the suit read as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that in spite of the arbitral agreement and even invocation of the arbitral clauses, there is no ouster of jurisdiction of the Civil Court. Civil Court it is contended, will retain jurisdiction to decide all issues including issue as to the invalidity of the contract considering section 9 of C.P.C. The issue involves interpretation of sections 8, 16 and 45 of the Arbitration and Conciliation Act, 1996, read with the other provisions of the Act of 1996. Let us therefore, examine the various provisions in the Act under which in the case of existence of an arbitral clause, the judicial authority can direct parties to arbitration. Section 45 of the Arbitration & Conciliation Act, 1996 is a power in the Judicial authority to direct. Plaintiffs to direct parties to proceed to arbitration if there be an arbitral clause in the agreement, between the parties. If that power is not invoked, the civil court retains jurisdiction, section 45 reads as under : "Power of judicial authority to refer parties to arbitration - Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed together and jointly heard by the same Arbitrator. In other words it was sought to be contended that the appellants would have no objection to combining the two arbitral references and for a common award as there the rights of the appellants would be fairly dealt with against the Respondents. At the outset under English law, the Court would have no such power unless parties agree. Support for that can be found in para 3-029 of 21st Edition of Russel on arbitration for the following observations : "Where however, the parties to all the related disputes have chosen arbitration, the courts will not intervene to stop duplication of proceedings. In these cases, the most that the court may do, in the absence of agreement between all the parties on the arbitrators to constitute a Tribunal or on an appointing authority, is to appoint the same Tribunal to hear a number of different disputes in consecutive hearings. The Court cannot require the parties to agree to that arbitral Tribunal hearing the different cases simultaneously. Judges have noted the benefits that would result from the abolition of the rules preventing joinder, but the draftsman of the Arbitration Act, 1996 decided thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other face of Respondent No. 1. In these circumstances, to drive the appellant to separate arbitral proceeding would cause irreparable injustice inasmuch as even if the appellant may succeed against one respondent yet considering material on record, they will end up paying another Respondent and unable to recover from the other considering the financial position. It is further contended that English Arbitration Act, 1950 and English Arbitration Act of 1979 have been repealed. Once the Act had been repealed, there was no valid arbitration clause which was enforceable between the parties. The conduct of the appellant in merely exchanging correspondence in the matter of appointment of Arbitrator, cannot amount to acquiescence in arbitration. It is further contended that the learned judge misdirected himself in law in not addressing himself to the issue of fraud, considering the material on record. If the learned judge had answered this basic question in the affirmative, then the learned Judge would have to consider whether the appellants have established prima facie case for restraining respondents from participating in the arbitral proceedings and or taking further steps in arbitrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the legal or equitable rights. In the instant case, no legal or equitable right of the appellant has been infringed and no legal injury would be caused if the arbitration is allowed to proceed. If it is the contention of the appellants that the agreement is invalid, the same can be raised before the arbitrator and if aggrieved by the Award by subsequently challenging the Award before the competent forum. In the case of International commercial arbitration where the parties have agreed to a foreign Forum and the law of that country to apply to arbitration, the remedy of the party is to do so before the arbitrator by raising the issue. Under sections 7 and 30 of the English Arbitration Act, 1996, the issue about nullity of the agreement can be raised before the arbitral Forum. The Award so passed can be challenged in the forum provided under the Act. The appellant therefore, has effective legal remedies available. In these circumstances, the party should be directed to proceed with the forum voluntarily chosen by the parties. The case of the appellant themselves is that there has been misrepresentation or suppression of material facts to the knowledge of the Respondents and as su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e court is barred in respect of domestic arbitration, the same principles apply to International commercial arbitration. The principle which applies for grant of anti-suit injunction or for the stay of the suit on the ground of forum non- convenience do not apply to arbitration. Arbitration being consensual cannot be injuncted or stayed. 6. From the above, three questions will have to be answered in considering the contention raised by the appellant for the grant of relief as prayed for. The questions that arise are : (a)Does the Civil Court have jurisdiction to entertain a suit between the parties to an agreement which contains an arbitral clause considering sections 8, 16 and 45 of the Arbitration and Conciliation Act, 1996 read with section 9 of Code of Civil Procedure, 1908 ? (b)Will a Civil Court, in case of an agreement containing an arbitral clause governed by English Law, which agreement in the suit is challenged as null and void, in the absence of the Defendant, requesting the Civil Court, to direct parties to arbitration considering section 45 of the Indian Arbitration Act, 1996, refer the parties to arbitration ? (c)On the facts and circumstances of this case, would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the suit and the parties then would have to seek remedies against the award before the appropriate court. The issue of jurisdiction of the Civil Court under the Arbitration Act of 1940 to entertain the suit under section 9 of the C.P.C. in a case where the agreement contained an arbitral clause was considered by the Apex Court in Food Corpn. of India v. Yadav Engineer & Contractor AIR 1982 SC 1302. At the outset, it may be mentioned that neither under the Act of 1940 or the Act of 1996, is there a specific provision, barring the jurisdiction of the civil court to entertain the suit, where the cause of action arises from an agreement containing an arbitral clause. There is also no express exclusion in the Act. The jurisdiction of the civil court is also not impliedly barred, because rights to be adjudicated are not rights created by the Act. On the contrary, they are mostly common law rights or existing civil rights based on statute. There is thus no implied ouster of jurisdiction of the civil court. It was only in the event a party invoked in the case of domestic arbitration the provisions of section 34 of the Act of 1940, would the court direct the stay of the suit. Under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rather than to find loopholes therein. If the party therefore in breach of agreement rushes to the court, unless a clear case to the contrary is made out, the approach of the court should be to hold the parties to their bargain, provided necessary conditions for invoking section 34 are satisfied. Section 34 of the Act of 1940 clearly indicates that the parties to the contract may waive their right of proceeding before the chosen forum. On the inspection of the judicial proceedings, defendant may choose not to invoke the arbitral clause and instead choose to have the decision of the Civil Court. In such cases, it would be presumed that both the parties do not wish to proceed with the arbitration clause by their conduct, inasmuch as Plaintiff has moved the court for breach of the arbitration clause and the defendant by not invoking the arbitral clause, for the stay of the suit or other directions to judicial authority to direct the parties to arbitration have waived their right to proceed before the arbitral Forum. It is thus clear that merely because of the arbitral clause, there is no ouster of jurisdiction of the Civil Court and the Civil Court retains jurisdiction to hear and dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. Law. The relevant portion of section 16 of the Indian Arbitration Act is reproduced below : "Competence of Arbitral Tribunal to rule on its jurisdiction - (1) The arbitral Tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,-- (a )an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b)a decision by the arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause." It is clear therefore, that the arbitral clause in an arbitration agreement has to be treated as an independent agreement, independent of the other terms of the contract. It is further clear that even if the contract is declared null and void, it shall not entail ipso facto invalidation of the arbitral clause. It is therefore, within the jurisdiction of the Arbitral Tribunal apart from ruling on its own jurisdiction to decide whether the agreement before it is null and void. Even if it has come to the conclusion that the contract is null and void it neces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract provides for arbitration of disputes which arise thereunder, does the invalidity, termination, nullification or suspension of the contract vitiate the arbitral obligations of the parties ? The question is posed on the assumption that when the agreement contains an obligation to arbitrate the disputes arising from it but the agreement is invalid or no longer in force, the obligation to arbitrate disappears with the agreement of which it is a part. If the agreement was never entered at all, then the arbitral clause never came into force. If the agreement was not validly entered into, then, prima facie, it is invalid as a whole, as must be all of its parts, including its arbitral clause. If the agreement has been nullified or terminated, or, arguably suspended it must presumably follow that the obligation to arbitrate disputes arising under the agreement is nullified, terminated or suspended. Now if, in these various contingencies, there is no initial or sustained obligation to arbitrate under an agreement which either never came into force or is no longer in force, then the arbitral Tribunal which may be or is constituted pursuant to the arbitral clause of the void or voided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lude not one agreement but two : first, the substantive or principal agreement, which provides for a certain course of action; second, an additional, separable agreement which provides for arbitration of disputes arising out of the principal agreement. Even if it be argued, or even if it be authoritatively decided, that the principal agreement is invalid, or voided, nullified, terminated, or suspended, nevertheless the arbitral agreement is separable and separated, and, so separated, survives to furnish a viable basis for the arbitration Tribunal to rule upon such arguments or arrive at those or other determinations. Thus when the parties to an agreement containing an arbitration clause, enter into that agreement, they conclude not one but two agreements, the arbitral twin of which survives any birth defect or acquired disability of the principal agreement. Fourthly the consideration which militates in favour of the rule of the severability of the arbitral clause because, if severability were not the rule, the courts would, contrary to the norm, be drawn into passing upon the substance of the dispute submitted to arbitration. (See "Severability of the Arbitration Agreement" by Ste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties from all subsequent liabilities under the contract, such as repudiation of the contract by one party accepted by the other, or frustration of the contract. The issue was whether the contract, containing clause for arbitration was ever entered into at all or was void ab initio, for example because the making of it was illegal. It was held on the construction of the arbitral cause that the dispute fall within the terms of the arbitration clause and that the action before the Civil Court ought to be stayed in order to enable the parties to proceed with the arbitration. The leading Judgment was by Viscount, Simon, who summed up the position insofar as arbitration clause is concerned. Considering that the arbitration clause is a written submission agreed to by the parties to the contract, unlike other submissions to arbitration must be construed according to its language and in the light of circumstances in which it is made. The position was summarised thus: (a)If the dispute is whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular dispute which has already arisen on some matter, such as contract, tort, trust or family arrangement. Thus, to take a single instance, in Joseph Constantine Steamship Ltd. v. Imperial Smelting Corporation Ltd. (2), recently decided by this House, there was a specific submission of the difference whether the charter party in question had been frustrated, the charters claiming damages because the vessel had not been tendered to load her cargo, the shipowners defending the claim on the ground of frustration. That illustrates clearly one aspect of an arbitration agreement, namely, that it is collateral to the substantial stipulations of the contract. It is merely procedural and ancillary, it is a mode of settling disputes, though the agreement to do so is itself subject to the discretion of the court. All this may be said of every agreement to arbitrate, even though not a separate bargain, but one incorporated in the general contract. It may also be noted that the agreement to arbitrate depends on there being a dispute or difference in respect of the substantive stipulation. It appertains to the stage of pleadings or allegations. It is in regard to these that it has to be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings. Injunction was granted. In appeal preferred, the injunction was confirmed. This matter came before the House of Lords. The Appeal was allowed and the injunction vacated. One of the questions considered was general jurisdiction of the High Court (England) to grant injunctions as an alternative source of its power to control the conduct in an arbitration of the parties to it or the arbitrator. In so considering, the House also considered the analogy between action at law and arbitration. Considering the arbitration clause it was observed that it constitutes a self-contained contract, collateral or ancillary to main agreement. The Judgment recognizes that the injunction could be granted in two types of cases. First is whether one party claims that arbitration agreement relied on was void or voidable ab initio (e.g. for fraud, mistake, ultra vires or want of authority). This type of case is to be distinguished from the cases where the arbitration agreement itself is not impeached but one party claims that no dispute has arisen under it. Whether there is a dispute or not is a matter to be decided by the arbitrator, and no injunction will be granted. The second type of case in w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her party knows when the agreement is entered into whether he will be claimant or respondent in disputes to which the arbitration agreement will apply. If it creates any contractual obligation to proceed with reasonable dispatch in all future arbitrations held pursuant to the clause, the obligation, is in my view, mutual, it obliges each party to cooperate with the other in taking appropriate steps to keep the procedure of arbitration moving. Another fundamental difference between an action and an arbitration is that in an action the successive steps to be taken by each party and the time-table for taking them are prescribed by the rules and practice of the court. An underlying principle of civil litigation in the English Courts is that the court takes no action in it of its own motion but only on the application of one or other of the parties to the litigation, whereas in an arbitration there is no fixed pattern of procedure. This position of law in England came to be considered or if it may be put, reconsidered by the Court of Appeal in Harbour Assurance Co. (UK) Ltd. v. Kansa General International Insurance Co. Ltd. [1993] Vol. 1 Loyds Law Reports 455. The leading Judgment was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended to survive, the validity of the contract. The Court then observed that such a rule of law in the court's judgment, should be rejected, if the court can properly hold that it is not part of the English law. The Court noted that the arbitral clause without special words to ensure survival is usually and has been held to be a self-contained contract collateral to the containing contract. As with any other contract, it must be construed according to its terms in and with regard to the relevant factual situation. The leading Judgment of Lord Gibson then dealt with issues arising in the judgments of Mackender's case (supra), Joe Lee Ltd.'s case (supra), David Taylor & Son Ltd.'s case (supra) and differentiated them on the ground that those judgments had not taken a view that the arbitral clause was not separable and that the arbitral clause can cover the issue of illegality. The learned judge after considering the issue and culling down the ratio of the judgments referred, observed as under : "The question whether all the promises contained in the agreement, were rendered invalid and void at the time when the parties signed the documents by the illegality of the agreement, is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntails a denial that there was any agreement to arbitrate. The cases of non est factum or denial that there was a concluded agreement, or mistake as to the identity of the other contracting party suggest themselves as examples. But there is no reason why every case of initial invalidly should have this consequence. Proceeding further the learned Judge observed that in every case it seems that the logical question is not whether the issue goes to the validity of the contract but whether it goes to the validity of the arbitration clause. The one may entail the other but, as seen it may not. When one comes to voidness for illegality, it is particularly necessary to have regard to the purpose and policy of the rule which invalidates the contract and to ask, as the House of Lords did in Heyman v. Darwins Ltd., whether the rule strikes down the arbitration clause as well. Proceeding further, the learned Judge observed that saying that arbitration clauses, because separable, are never affected by the illegality of the principal contract is as much a case of false logic as saying that they must be. The learned Judge then referred to the development of the separability clause and the land m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. As a corollary, if a party to a subsisting arbitration agreement in breach or violation of the agreement to refer dispute to arbitration approaches the Court, the Court would not lend its assistance to such a party and by staying the suit compel the party in breach to abide by its contract. When the parties have agreed to an arbitration by a foreign arbitral Tribunal, the case for stay would be stronger than if there was a domestic arbitration agreement. This proceeds on the assumption that parties not only sought and agreed upon the forum for resolution of dispute but also the law according to which the dispute would be resolved. However, this is not an absolute rule. Granting or refusing to grant stay is still a matter within the discretion of the Court. How discretion would be exercised in a given case would depend upon various circumstances...." (p. 2095) The position in England is now governed by the Arbitration Act of 1996. As noted earlier both the arbitral agreements are governed by the English Law. We have earlier referred and noted sections 7 and 30 of the English Arbitration Act of 1996. The arbitral clause in the contract is not to be regarded as invalid, non-existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the agreement is null and void. The position under section 45 and section 54 which fall in Part II is slightly different. Under section 45, the Court before directing the parties to arbitration has to consider whether the agreement is null and void. Under section 54, it has to examine whether the agreement is valid and capable of being carried into effect. For the present discussion section 54 is not attracted. The arbitral clause or agreement will be subject to an application under section 45. If a suit is filed, the Defendant, in a case where there is an arbitral clause, can ask the judicial authority to refer the parties to arbitration. However, in doing so, the court will consider the plea raised, that the arbitral agreement is invalid being null and void ab initio or inoperative or incapable of being performed. The expression agreement in section 45 must be read with section 44, which speaks of the arbitral agreement. The Civil Court will only in a case where the Defendant seeks resolution of the dispute by arbitration, in case of a valid agreement, direct the parties to arbitration. It is only in those cases where the validity of the arbitral agreement is itself challenged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract. In R.C. Thakkar v. Gujarat Housing Board AIR 1973 Guj. 34, a Division Bench of the Gujarat High Court was considering section 17 of the Indian Contract Act and the requirements thereto. The court placed reliance on Halsbury's Laws of England (third edition), volume 26 to hold that representation is deemed to have been false and therefore, a misrepresentation, if it was at the material date false on substance and in fact. Therefore, to constitute the falsity of a representation it should be found false in substance as well as in fact. The further observations are the standard by which the truth or falsity of a representation is to be judged. If the material circumstances are incorrectly stated, that is to say, if the discrepancy between the facts as represented and the actual facts is such as would be considered material by a reasonable representee, the representation is false, if otherwise, it is not. In Esso Petroleum Co. Ltd. v. Mardon 1976 (2) All E.R. 47, the issue was of the case of negligent misrepresentation. Lord Danning speaking for the court relying on various decisions, summing up the proposition set out that those decisions show, that in the case of a professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being performed. It is to avoid a situation, where all that the arbitral Tribunal would have to do is to record the same finding that the arbitral agreement is null and void, inoperative or incapable of being performed and then close the proceedings. To that extent in the matter of international commercial arbitration, the law has put a rider on the power of the court to direct the parties to arbitration. In such circumstances, the Civil Court can proceed with the suit, if defendant seeks to direct the parties to arbitration. In the instant case, defendant in the suit, respondent herein, has chosen not to take any steps. It may also be relevant to note that there is nothing in section 45 like section 8 setting out at what stage the application should be made. As we have discussed earlier, section 8 requires an application to be made to the judicial authority not latter than submitting first statement on the substance of dispute. There is no such limitation under section 45. However, this exercise is to be done at the instance of the defendant. If the defendant chooses not to invoke the provisions of section 45, nothing will prevent the court from proceeding with the suit. Again wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to provisions of the Arbitration Act, 1950 and 1979. It is therefore, clear that even if the Acts have been repealed (without going into that issue), the procedural provisions contained there for appointment of Arbitrator would as terms of contract by incorporation which parties have agreed would be applicable for appointment of arbitrators. The law would be the law for the time being in force in the United Kingdom. Therefore, in case of both the contracts, the law applicable would be the law as governed by the English Arbitration Act, 1996. Having so held, it will be clear that insofar as Respondent No. 2 is concerned, arbitral clause has already been invoked. In these circumstances, it will not be appropriate for this court to stay the arbitral proceedings but allow the parties to agitate these disputes before the forum chosen. Insofar as Respondent No. 1 is concerned, arbitral clause has been invoked. It is left to the parties to now move the court under English Arbitration Act, the law under which they are governed for redressal of their disputes for appointment of an Arbitral Tribunal. The contention of the Petitioner that even if they get an award against Respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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