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November 21, 2008
Validity of Arbitration Agreement: Who decides?
The Hon’ble Supreme Court of India (“Court”) in
a recent decision in the matter of Ludhiana Improvement Trust (“Trust”)
& Anr. Vs. Today Homes and Infrastructure (Pvt.) Limited (“Today
Homes”) in Civil Appeal No. 6104 of 2008 decided on
October 14, 2008 examined the powers of appointment of
arbitrators by the Chief Justice of Supreme / High court, in the
backdrop of section 11 (6)i,
read with the competence of arbitral tribunal to rule on its
jurisdiction, as envisaged under section 16ii
of the Arbitration and Conciliation Act, 1996. (“Act”).
On the issue of the powers conferred under section 11 (6) of the
Act, the Court relied on its constitutional bench decision in
the case of
S.B.P.& Co. v/s Patel Engineering Ltd.iii
(“Patel Engineering”) reinforcing that such
power is judicial and not an administrative power, overruling
the case of Konkan Railway Corportation v. Rani Construction and
Anr. (“Konkan Railway”). In this important
decision, the Court remanded the matter to the Punjab & Haryana
High Court, whose order was appealed before the Court. The Court
emphasized that Chief Justice under section 11(6) in the
exercise of his judicial power, is expected to adjudicate on
contentious issues such as existence of valid arbitration
agreement.
Background & Submissions:
The Trust executed a Letter of Intent pursuant to a contract (“Contract”)
with Today Homes for the development of City Center in the city
of Ludhiana (State of Punjab & Haryana.) The said Contract
contained an arbitration clause. During the continuance of the
Contract, certain disputes arose, pursuant to which Today Homes
invoked the arbitration agreement (“Arbitration
Agreement”) in the Contract. On failure of the Trust to
appoint an arbitrator as provided under the Arbitration
Agreement, an application was made to the Chief Justice of
Punjab and Haryana High Court, under section 11(6) of the Act
for appointment of an arbitrator. On behalf of the Trust, one of
the contentions raised was that as the Contract was induced by
fraud and various irregularities the same was rendered void.
Consequently, the Arbitration Agreement which formed a part of
the said Contract was also null and void and therefore the
disputes under the Contract could not be referred to
arbitration.. After consideration of the submissions and mainly
relying on the decision in the Konkan Railway case, the High
Court appointed an arbitrator and referred the disputes
including the validity of the Contract before the arbitrator..
Accordingly, it was for the arbitrator and not the Chief Justice
to decide the question of jurisdiction as provided under section
16 of the Act.
Aggrieved by the decision of the Punjab & Haryana High Court,
Today Homes preferred an appeal to the Court. On behalf of the
Trust it was mainly argued that since the Contract was
fraudulently obtained, even the Arbitration Agreement contained
therein was void and unenforceable. On the other hand, Today
Homes mainly contended that the Contract and Arbitration
Agreement could not be equated as both were for different
purposes and even if the Contract was void, that would not
affect the Arbitration Agreement, on the basis of severability
of the Arbitration Agreement from the Contract as stipulated
under section 16 of the Act.
Judgment:
The Court after hearing the submissions categorically observed
that the decision in the case of Patel Engineering was not
considered by the High Court. The Court inter alia held that the
High Court, unfortunately relying on the earlier constitution
bench decision in the Konkan Railway case, left it to the
arbitrator to decide the issues including that of jurisdiction
and validity of the arbitration agreement under section 16 of
the Act. This was contrary to the seven judge bench decision of
the Court in Patel Engineering case, which overruled the
decision in the Konkan Railway case. Accordingly, the High Court
ought to have exercised its jurisdiction under section 11(6) in
deciding the issues inter alia that of validity of the
Arbitration Agreement. The rationale being that the powers
exercised by the Chief Justice of Supreme /High Court under
section 11(6) were judicial and not an administrative powers as
held in Patel Engineering.
The Court in that case had categorically held that the Chief
Justice or the designated judge will have the right to decide
the preliminary aspects as: (i) right to rule on its own
jurisdiction and to entertain such request; (ii) the existence
or otherwise of a live claim;(iii) the existence of the
condition for the exercise of his power and on the
qualifications of the arbitrator or arbitrators.
In view thereof, the Court set aside the order of the Chief
Justice of the Punjab & Haryana High Court and remanded the
matter back for a fresh decision considering the judgment in
case of Patel Engineering.
Analysis and implications:
The said decision echoes and re affirms the principles laid down
by the Court in the constitutional bench judgment in the Patel
Engineering case. In the case discussed, the Trust had also
raised the issue of invalidity of the Arbitration Agreement on
the ground that the Contract was vitiated by fraud and hence
invalid. The Court has not decided on this issue specifically.
However, the Court relying on the Patel Engineering case seem to
have reaffirmed the crucial distinction between an
administrative and judicial power. While exercising a judicial
power, unlike a mere administrative function, the Chief Justice
of Supreme / High Court would be expected to adjudicate on
contentious issues such as the existence and validity of an
arbitration agreement and whether the dispute is capable of
being arbitrated upon.
Section 16 of the Act incorporates the important doctrine of
Kompetenz – Kompetenz or competence de la competence by
which the arbitral tribunal is primarily competent to determine
the issue of its own jurisdiction including objections raised
with regard to the existence or validity of the arbitration
agreement, subject to of course final review of a competent
court. This judgment is crucial as it indicates a shift in the
realm of power exercised by the arbitral tribunal under section
16 to the court, while exercising its judicial power of
appointment of arbitrator under section 11(6) of the Act. This
to an extent dilutes the applicability of the Section 16 of the
Act, as also observed by the Hon’ble Judge in the dissenting
judgment in Patel Engineering case.
Finally, we believe that the two ends of minimizing judicial
intervention in arbitration and reducing delays in the process
which the Act seek to promulgate, are once again put to test in
the judgment discussed.
Source:
Ludhiana Improvement Trust (“Trust”) & Anr. Vs.
Today Homes and Infrastructure (Pvt.) Limited (“Today
Homes”)
-
Advait
Sethna
&
Vyapak
Desai
You can direct your queries or comments to the authors
__________________________
Source: Ludhiana
Improvement Trust & Anr. Vs. Today Homes and Infrastructure
(Pvt.) Limited
i.
Section 11(6): Appointment of Arbitrators:
Where, under an appointment procedure agreed upon by the
parties,—
(a) a party fails to
act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach
an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any
function entrusted to him or it under that procedure,
a party may request
the Chief Justice or any person or institution designated by him
to take the necessary measure, unless the agreement on the
appointment procedure provides other means for securing the
appointment.
ii. Section 16: 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.
(2) A plea that the
arbitral Tribunal does not have jurisdiction shall be raised not
later than the submission of the statement of defence; however,
a party shall not be precluded from raising such a plea merely
because that he has appointed, or participated in the
appointment of, an arbitrator.
(3) A plea that the arbitral Tribunal is exceeding the scope of
its authority shall be raised as soon as the matter alleged to
be beyond the scope of its authority is raised during the
arbitral proceedings.
(4) The arbitral Tribunal may, in either of the cases referred
to in sub-section (2) or sub-section (3), admit a later plea if
it considers the delay justified.
(5) The arbitral Tribunal shall decide on a plea referred to in
sub-section (2) or sub-section (3) and, where the arbitral
Tribunal takes a decision rejecting the plea, continue with the
arbitral proceedings and make an arbitral award.
(6) A party aggrieved by such an arbitral award may make an
application for setting aside such an arbitral award in
accordance with section 34.
iii. AIR2006SC450.
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