India: Facts Of The Case Would Decide The Applicability Of The Arbitration Act Of 1996 Or 1940

Notwithstanding Section 85 of the Arbitration Act, 1996, arbitration proceedings can be commenced in the presence of a valid arbitration agreement.

IN THE SUPREME COURT OF INDIA
PURUSHOTTAM S/O TULSIRAM BADWAIK
VS.
ANIL & ORS.
CIVIL APPEAL NO.4664 OF 2018
[ARISING OUT OF SLP (CIVIL) NO.14589 OF 2016]

FACTS

In the instant case the Appellant and the Respondent entered into a Partnership Agreement that contained a Dispute Resolution Clause. As per the said clause, any dispute with regard to the Partnership Agreement was to be referred to arbitration in accordance with the Arbitration and Conciliation Act, 1940 (hereinafter referred to as 'the 1940 Act'). The Appellant also executed a registered Power of Attorney (POA) in favor of all its Partners, dated 28.12.2006.

In April 2014, the Respondents filed Special Civil Suit No. 16 of 2014 in the Court of Hon'ble Civil Judge, Senior Division, Bhandara for declaration, damages, accounts and permanent injunction against the Appellant.

Soon after receipt of the notice, the Appellant preferred an application under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act of 1996'), to refer the dispute to arbitration in view of the aforesaid Dispute Resolution Clause.

The Trial Court rejected the said application and held that the clause was vague since it did not provide for the procedure for appointment of an arbitrator and the matter in dispute did not form subject matter of Agreement within Section 8 of the Act of 1996.

Further, a Civil Revision Application No. 88 of 2015 was filed in the Hon'ble High Court of Bombay, Nagpur Bench, by the Applicant wherein the Hon'ble High Court took the view that the relevant clause indicated an agreement between the parties to refer the disputes to arbitration as per provisions of the Act of 1940, although the Partnership Agreement was entered into much after the enactment of the Act of 1996.

The High Court, vide order dated  10.12.2015, rejected the Civil Revision Application No. 88 of 2015 on the basis of several case laws, holding that there is a bar against an agreement to the applicability of the Act of 1940 after the commencement of the Act of 1996.

This Civil Appeal No. 4664 of 2018 has been filed to challenge the order dated 10.12.2015, of the High Court of Bombay, Nagpur Bench.

ISSUE BEFORE SC

Whether the reference to arbitration in terms of the Arbitration and Conciliation Act, 1940, is such a fundamental mistake that it would invalidate the entire arbitration clause.

OBSERVATION

The Hon'ble Bombay High Court observed that the question is whether there was anything in the Act of 1996 to make such an agreement unenforceable. There was no dispute that the arbitral proceedings and the Partnership Agreement were entered into after the Act of 1996 came into force.

This Hon'ble Court analysed Section 7 of the Act of 1996. The said Section has been reproduced herein below:

Thus, it was observed, that the basic requirements for an "Arbitration Agreement" as per Section 7 of the Act of 1996 are:

1. An agreement between the parties to submit to arbitration, any disputes between the parties, and
2. The Arbitration Agreement should be in writing.

This Hon'ble Court further analysed Section 85 of the Act of 1996. The Section has been reproduced herein below:

Further, it was observed by this Hon'ble Court that Section 85 repealed the Act of 1940; however it also stipulates that notwithstanding such repeal, the provisions of the Act of 1940 would apply to proceedings that commenced before the enactment of the Act of 1996.

Consequently, the Act of 1996 was to apply to proceedings that commenced after the enactment of the Act of 1996.

This Hon'ble Court referred to the decision of the Hon'ble Apex Court in MMTC Limited vs. Sterlite Industries (India) Ltd. (1996) 6 SCC 716 and stated that what is needed to be noted is the commencement of the arbitration proceedings, in order to determine which Act shall apply. If the Arbitration Proceedings commenced after the enactment of the Act of 1996, then the Act of 1996 shall apply.

Similarly, if the arbitration proceedings commenced before the Act of 1996 was enacted, then the Act of 1940 shall apply.

CONCLUDING VIEW

The Bench comprising of Justice Arun Mishra and Justice Uday Umesh Lalit, held that the High Court was not right in observing that there could be no arbitration proceeding, at all, in the present case.

The court referred to the judgment of MMTC Limited vs. Sterlite Industries (India) Ltd. (supra) to emphasize that the object of the Arbitration and Conciliation Act, 1996 is to encourage alternate dispute resolution and discourage unnecessary litigation.

Relying on the Act of 1996 and the MMTC Ltd. Judgment, what is material is the existence of a valid Arbitration Agreement as per Section 7. Secondly, an incorrect reference or recital regarding applicability of the Act of 1940 would not render the entire arbitration agreement invalid. Such stipulation will have to be read in the light of Section 85 of the Act of 1996 and according to the court's view, the principles governing such relationships have to be under and in tune with the 1996 Act.

In the present facts and circumstances of the case, the court held that all the requirements of "arbitration agreement" as provided by the provisions of Section 7 of the Act of 1996, stand completely satisfied. Further, the arbitration agreement is also a valid one.

Thus, in the interest of the parties and in favour of alternate dispute resolution mechanisms, this Hon'ble Court set aside the order of the High Court of Bombay, dated 10.12.2015 and the application under Section 8 of the Act of 1996 was ordered to be taken up by the Hon'ble Trial Court on 14.05.2018.

AMLEGALS REMARKS

The Hon'ble Supreme Court, in this case has focused on the object of the Arbitration and Conciliation Act, 1996, that is the promotion of alternate dispute resolution mechanisms.

Also, this Judgment has focused on the importance of protection and furtherance of the interest of parties involved. Blindly abiding by the technicalities and procedure of the Arbitration Act, at the cost of violating the object of the Act has been discouraged. A harmonious approach has been adopted by this Hon'ble Court in order to simplify the confusion with regard to the question of applicability of the Arbitration and Conciliation Act, 1996.

To conclude, this Judgment has also brought clarity on the matter of the applicability of the Arbitration Act of 1996 and the Arbitration Act of 1940, by formulating a fixed principle for determining which act is to be applied when, based on the facts of each case.

This content is purely an academic analysis under "Legal intelligence series".

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