India: Supreme Court says that mere reference to the 1940 Arbitration Act will not render the entire Arbitration Agreement invalid

August 20, 2018
Supreme High Court


Brief Facts

  • Purrushottam s/o Tulsiram Badwaik (herein after referred to as the “Appellant”) and Anil (herein after referred to as the Respondent) entered into a partnership agreement dated November 9, 2005. Clause 15 of the 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.”
  • In April 2014, the Respondents filed a civil suit for declaration, damages, accounts and permanent injunction against the Appellant.
  • After receipt of the notice, the Appellant preferred an application under Section 8 of the Arbitration Act, 1996 (hereinafter referred to as the “1996 Act”) to refer the dispute to arbitration in the view of the aforementioned clause 15 of the partnership agreement.
  • The Trial Court rejected the application and held that the aforesaid Clause 15 was vague, since there was no reference as to who the arbitrator should be, and how should the arbitrators be selected further. The dispute did not form subject matter of agreement within the meaning of Section 8 of 1996 Act.
  • The Appellant then filed a civil revision application in the High Court. The High Court rejected the challenge and the dismissed the application relying on a portion of the decision of Supreme Court in Thyssen Stahlunion GMBH v. Steel Authority of India Ltd. The High Court took the view that the relevant Clause 15 indicated an agreement between the parties to refer the disputes to arbitration as per provisions of the Indian Arbitration Act, 1940, (hereinafter referred to as the “1940 Act”) although the Partnership Agreement was entered into much after the enactment of 1996 Act.
  • The Appellant challenged the order of the High Court before the Supreme Court in this appeal.

Contentions of Appellant

  • It was contended by the Learned Counsel for the Appellant that the reference to the 1940 Act in the partnership deed dated November 09, 2005, has to be necessarily referred to the Arbitration process, as prevalent on the date of signing of the Agreement.
  • It was further submitted that the mention of 1940 Act will not defeat the intention of the parties to go for arbitration as a dispute resolution mechanism.

Contentions of Respondent

  • Mr. Amol Nirmalkumar Suryawanshi, the advocate appearing on behalf of the Respondents submitted, that the question as to whether the relationship between the parties would be governed by the 1940 Act or the 1996 Act was so fundamental, that any mistakes in that behalf would invalidate the entire arbitration clause and as such there could not be any reference to arbitration at all. Therefore, the Courts were justified in rejecting the submissions advanced by the Appellant.

Court’s View

  • The Court held that all the requirements of an arbitration agreement as mentioned in Section 7 of the 1996 Act were satisfied in the present matter.
  • While deciding the question as to whether the reference made to the 1940 Act will have any bearing, the Court considered Section 85 of the 1996 Act, wherein sub section (2) stipulates that “notwithstanding such repeal the provisions of 1996 Act would apply in relation to arbitral proceedings which commenced on or after 1996 Act came into force.”
  • Relying on the M.M.T.C. Limited v. Sterlite Industries (India) Ltd decision, the Court inferred that the date of commencement of the arbitral proceedings was crucial and if such commencement was after 1996 Act had come into force, the provisions of the 1996 Act would govern the situation.
  • The Court opined that the correct approach would be in promoting the object of implementing the scheme of alternate dispute resolution, as submitted in MMTC Ltd. case. “It would be farfetched to come to the conclusion that there could be no arbitration at all” the Court further held.
  • The Court took a view that for the purposes of the applicability of 1996 Act it is material that there is an agreement between the parties to refer the disputes to arbitration. If there is such an arbitration agreement which satisfies the requirements of Section 7 of 1996 Act, and if no arbitral proceeding had commenced before 1996 Act came into force, the matter would be completely governed by the provisions of 1996 Act. Any reference to 1940 Act, in the arbitration agreement would be of no consequence and the matter would be referred to arbitration only in terms of 1996 Act consistent with the basic intent of the parties to refer the disputes to arbitration.
  • The Supreme Court thus set aside the order and judgement passed by the High Court and accepted the appeal preferred by the Appellant.
  • It ordered that the matter will be dealt by the trial court in accordance with Section 8 of the 1996 Act for effectuating the arbitration agreement. It further directed the Chief Justice of the High Court to appoint a third arbitrator under Section 11(4)(b) of the 1996 Act due to the failure of the two appointed arbitrators (by the parties) to appoint the third arbitrator within thirty days from the date of their appointments.
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