Supreme Court on existence of arbitration agreement

Reva Electric Car Co. P. Ltd. v. Green Mobil, decided by the Supreme Court on 25 November 2011, was an application under sections 11(4) and (6) of the Arbitration and Conciliation Act, 1996 (the "Act") for appointment of arbitrator by the Chief Justice of India ("CJI"). 

Facts

Petitioner had entered into a Memorandum of Understanding ("MoU") with Respondent for marketing of cars by Petitioner. The term of the MoU was from 25 September 2007 until December 2007, but it was extendable at the sole discretion of Petitioner in terms of clause 2 of the MoU and, according to Petitioner, was in fact extended by acts of Parties. These acts were various requests in 2008 and 2009 by Respondent for supply of cars in terms of the MoU. In September 2009, according to Petitioner, disputes arose between the Parties, with Petitioner claiming that Respondent did not have necessary resources to build Petitioner's brand, since enough cars were not sold in the Belgium region. Via email on 25 September 2009, Petitioner asked Respondent to cease marketing on behalf of Petitioner, thus constituting termination of the MoU, according to Petitioner. 

Petitioner received on 14 January 2010, a writ of summons of legal proceedings initiated by Respondent in the Commercial Court in Brussels, Belgium. Respondent claimed damages for termination of the MoU. An email from Respondent dated 15 March 2010 suggested a global settlement with Petitioner and the latter construed this as acknowledgement of the fact that the rights and obligation of both the parties were covered by the MoU, which stood duly terminated. 

On appointment of a sole arbitrator by Petitioner, for confirmation by Respondent, under the terms of the MoU, Respondent denied existence of a contractual relation between Parties on 25 September 2009. A Section 9 application was thus filed by Petitioner in Bangalore, attempting to restrain legal proceedings in Brussels. On this being granted, the present section 11 application was filed, in terms of clause 11 of the MoU. 

Contentions

Respondent claimed that the MoU expired on 31 December 2007, and claims made by Petitioner related to commercial distribution of cars, commencing in 2008 and the distribution agreement, entered into after expiry of the MoU in 2007. Respondent also contended that Petitioner had invoked arbitration proceedings only to avoid legal proceedings in Brussels, as evident from the arbitration clause being invoked after Petitioner was intimated of proceedings in Brussels. 

Petitioner, on the other hand stated that it was Respondent’s intention to avoid arbitration by starting legal proceedings in Brussels. Moreover, Petitioner submitted that irrespective of the continued existence of the MoU, the arbitration clause would survive. Further, the Court, when acting under section 11 of the Act, is required to refer disputes without in-depth examination. It must only be satisfied that the disputes fall within the ambit of the arbitration clause. 

Respondent contended that the arbitration clause in the MoU related only to the test and trial period when the MoU was subsisting. Thus, disputes pertaining to a period after this were outside the ambit of the arbitration clause and could not be referred for arbitration by the Court. 

Decision

The Court, relying on Patel Engineering, National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd., A. P. Tourism Development Corporation Ltd. v. Pampa Hotels Ltd. [(2010) 5 SCC 425], and Alva Aluminium Ltd., Bangkok v. Gabriel India Ltd., stated that while entertaining a section 11 application, the CJI was bound to decide on: 

a) The existence of an arbitration agreement; and 

b) Whether the party applying under such an agreement was a party to that agreement. 

The issues which the CJI had the option of deciding are: 

a) Whether the claim is barred by time; and 

b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection. 

Issues which are to be left for decision by the tribunal are: 

a) Whether a particular claim falls outside the scope of the arbitration clause; and 

b) Merits of any claim involved in the arbitration. 

Therefore, existence of the arbitration agreement itself is a question which must be decided by the CJI in the first instance, since without the existence of an arbitration agreement, a reference under section 11 of the Act cannot be made. 

The Court, in light of the material on record already stated above, ruled in favour of Petitioner that the MoU had been extended by actions of the parties. Therefore, the arbitration clause was in existence, and did merit appointment of arbitrators under Section 11 of the Act. The Supreme Court further observed, relying on Everest Holding Ltd. v. Shyam Kumar Shrivastava and Ors., that irrespective of continued existence of the MoU, the arbitration clause would survive. This is in view of section 16(1)(a) of the Act, which reiterates the independent existence of an arbitration clause in a contract, separate from the main contract. Invalidation of the parent contract does not automatically entail invalidation of the arbitration clause, as evident from Section 16(1)(b) of the Act. Since disputes arising between the parties clearly related to subject matter of the contract, they must be adjudicated upon, through the arbitration agreement in that contract.

Conclusion

Thus, although section 16 of the Act, incorporating the principle of Competence-Competence, empowers the arbitral tribunal to adjudicate on matters pertaining to its own jurisdiction, under Indian law it is well-settled that when the Chief Justice is approached (whether for a domestic or international arbitration) to appoint arbitrators, he holds the power of making a preliminary determination of whether there exists an arbitration agreement at all.

Guest Post on Rasiklal case.

We have already covered the Rasiklal case in an earlier post. Below is a complete analysis of the same case by Mr.Debargha Basu where he has put his comments too. Mr.Basu is currently a Senior Associate at Hemant Sahai Associates. He is an alumnus of NUJS and in past has worked with Nishith Desai Associates and Paras Kuhad & Associates. The readers can direct their queries on this post to him on debargha.basu@hsalegal.com.

The Supreme Court of India (“SC”) recently held in the case of Bharat Rasiklal Ashra (“Appellant”) –Vs- Gautam Rasiklal Ashra (“Respondent no.1”) & Anr. (Civil Appeal No. 7334 of 2011) that while deciding an application u/Sec. 11 of Arbitration & Conciliation Act, 1996, Courts will have to decide the issue relating to the existence of an arbitration agreement before referring the disputes between the parties and towards this shall have to decide questions of fraud, forgery and fabrication of documents if these issues have been raised.

Facts:

A Deed of Partnership (“Partnership Deed”) was entered among one Kanji Pitamber Ashra and his two grandsons, being the Appellant and the Respondent no.1 in the year 1988 to carry a partnership business. One of the clauses of the Partnership Deed provided that death of any partner shall not dissolve the partnership firm.

In the year 1991, Kanji Pitamber Ashra died and the Appellant alleged that the Appellant and Respondent no.1 continued the business of the partnership firm. The Appellant further alleged that subsequently he came to know that the Respondent no.1 was claiming that fresh partnership deeds were executed by the Appellant and Respondent no.1 in 1991 and 2000 (“fresh partnership deeds’). The Appellant claims that he has not executed any fresh partnership deeds. Whereas, according to Respondent no.1, immediately after the death of Kanji Pitamber Ashra a fresh partnership deed was executed in 1991 and subsequently another deed was executed in 2000. It was alleged by the Respondent no.1 that as a result of execution of the fresh partnership deeds, the share of the Appellant was reduced to 10% with a further condition that if the Appellant did not attend to the business of the partnership firm, the entire profit and loss of the partnership business shall either belong to or be borne by the Respondent no.1 as the case may be.

By a letter dated August 19, 2010, the Respondent no.1 wrote to the Appellant raising several disputes in relation to the partnership firm and stated that such disputes needs to be resolved through arbitration in terms of the fresh arbitration deed of 2000. The Respondent no.1 therefore appointed his arbitrator and called upon the Appellant to appoint his arbitrator. The Appellant replied to the said letter stating that he had not signed the fresh partnership deeds and alleged that the fresh partnership deeds were forged documents and therefore appointing an arbitrator in terms of fresh partnership deed of 2000 cannot and did not arise.

Subsequently, the Respondent no.1 filed an application under Section 11 of the Arbitration & Conciliation Act, 1996 (“Section 11 Application”) for appointment of the person named in his letter dated August 19, 2010 as the sole arbitrator in terms of the arbitration agreement contained in the alleged fresh partnership deed of 2000. The Appellant resisted the Sec.11 Application on the ground that the fresh partnership deed of 2000 was forged and therefore the question of appointment of arbitrator in terms of such forged partnership deed did not arise.

When the Sec.11 Application came up for hearing, the designate of the Chief Justice made an order for appointment of a Commissioner for recording the evidence of the parties as it was necessary to decide whether the fresh partnership deeds were valid or not before a reference could be made in terms of arbitration clause contained in fresh partnership deed of 2000.

Subsequently, when the case was heard by another designate of the Chief Justice, the earlier order for recording of evidence was ignored and the Sec.11 application was allowed by appointing a sole arbitrator and by leaving the question of the validity of the fresh partnership deeds to be decided by such sole arbitrator (“impugned order”).

The impugned order was challenged before the SC by way of special leave.

Issue:

In the factual matrix of the case, the issue which was framed before the SC was whether the Chief Justice or his designate in deciding Sec.11 Application can appoint an arbitrator without deciding the validity of an arbitration agreement and by leaving such question open to be decided by the arbitrator.

Judgement:

The SC relied on its decisions in the case of SBP & Co. –Vs- Patel Engineering Ltd. [2005 (8) SCC 618] and National Insurance Co. Ltd. –Vs- Boghara Polyfab Pvt. Ltd. [2009 (1) SCC 267] and held that while deciding Sec.11 Application, it is for the Chief Justice or his designate to decide whether there is an arbitration agreement as defined under the Arbitration & Conciliation Act, 1996 and whether the party making such request is a party to such agreement as because, ‘… the question whether there is an arbitration agreement is a jurisdictional issue and unless there is a valid arbitration agreement, the application under section 11 of the Act will not be maintainable and the Chief Justice or his designate will have no jurisdiction to appoint an arbitrator under section 11 of the Act.”

The SC further held that where allegations of forgery and fabrication are made in regard to the documents, it would be appropriate for the Chief Justice or his designate to decide the issue.

Comments:

While deciding the issue in hand, the SC stated that where allegations of forgery and fabrication are made in regard to the documents, it would be appropriate for the Chief Justice or his Designate to decide the issue.

Though it was contended before the SC that if the Chief Justice or his designate is required to examine the allegations of fabrication and forgery made by a party in regard to the contract containing arbitration agreement before Sec.11 Application is decided, Sec.11 proceedings shall cease to be a summary proceedings and become cumbersome and protracted, the SC refused to accept this contention. The Supreme Court stated that, “Existence of a valid and enforceable arbitration agreement is a condition precedent before an arbitrator can be appointed under Sec.11 of the Act. When serious allegations of fraud and fabrication are made, it is not possible for the Court to proceed to appoint an arbitrator without deciding the said issue which relates to the very validity of the arbitration agreement. Therefore the fact that the allegations of fraud, forgery and fabrication are likely to involve some delay in disposal, are not grounds for refusing to consider the existence of a valid arbitration agreement.”

It was further contended before the SC that allegations of fabrication and forgery is likely to be raised very often with the ulterior motive to protract Sec.11 proceedings thereby defeating the very purpose of Sec.11 of the Arbitration & Conciliation Act, 1996. The SC rejected this contention, however, with a view to safeguard abuse of this process, it clarified that, “where agreements have been performed in part, allegations of forgery shall not be entertained. It is only in a very few cases, where an agreement which had not seen the light of the day is suddenly propounded, or where the agreement had never been acted upon or where sufficient circumstances exist to doubt the genuineness of the agreement, the Chief Justice or his designate will examine this issue….on the ground of termination, performance or frustration of contract, arbitration agreement cannot be avoided.” The Supreme Court also stated that, “if a party is found to have falsely contended that the contract was forged/fabricated, the Chief Justice or his designate may subject such part (sic) to heavy costs so that such false claims are discouraged.”

The judgment has expanded the courts scope to analyze the competence of the arbitrator to deal with the disputes before it. Earlier, the Supreme Court in the case of N. Radhkrishnan v. M/s. Maestro Engineers & Ors. (Civil Appeal No. 7019 of 2009), while deciding a case in the context of an application under Sec.8 of Arbitration & Conciliation Act, 1996 has held that allegations of fraud and serious malpractices “must be tried in court and the Arbitrator could not be competent to deal with such matters which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation.”

Moreover, inspite of the safeguards put in by the SC, in practice it is not entirely inconceivable that some parties may make allegations fraud, forgery and fabrication of documents with an ulterior motive to prolong litigation and frustrate the legitimate claims of the other parties. This is quite apart from the inordinate delay to be caused in deciding Sec.11 Application which was envisaged to be a summary proceeding under the Arbitration & Conciliation Act, 1996.

For the full text of the judgment please click HERE.

Dallah v. Pakistan: Why The Buzz?

Since, this case promises to be a landmark judgment in current development of international arbitration revolving around the most fundamental concepts of arbitration such as the "principle of competence-competence", "parties to an arbitration agreement" and "enforcement of awards" which is very important for the beginners and advanced learners of arbitration alike, I shall try and put forth this case and issues involved in as simple and defined way as possible.

Lord Collins has already described this as a caseof “International Importance” in the context of interpretation of Article V(1) (a) of theNew York Convention(NYC) whereby an award can be set aside if it is not valid. This case went up till the Supreme Court of UK which affirmed the decisions of the High Court and the Court of Appeal. Also, apart from this case there are only 2 other reported cases where the English courts have refused enforcement of international arbitration awards under NYC, namely Irvani v Irvani,1999 and Kanoria v Guiness,2006.

Rent a Center v Jackson: Guest Post by Mr. Badrinath Srinivasan

Mr. Badrinath Srinivasan (Badri) has been one of the most supportive readers of this blog. He has contributed several comments on this blog and an interesting piece on amendment of applications filed under Section 34 of the Arbitration and Conciliation Act. Recently, he published a short post on The Practical Academic Blog on Rent a Center v Jackson. While signing off, he had promised to come back with further analysis on the topic soon. In this guest post, he analyses the decision in further detail. Following is the text of Badri's post.

Recently, the US Supreme Court judgement (USSC) has delivered the judgement in Rent-A-Center v Jackson (Jackson) which is probably one of the most closely followed cases in the recent times on arbitration. We had several blogs like the Contract Professor Blog, ADR Professor Blog post quite a few posts on it.