In this blog post, Shivam Anand,  Student, DSNLU, Vishakhapatnam, writes about the role of the judiciary with respect to  the arbitration agreement.

Scope of the Article

This article deals with the scenario where the question with respect to an arbitration agreement is raised. Special emphasis has been laid upon the case analysis of A.P.Tourism Development Corporation Limited v. Pampa Hotels Limited[1] and Konkan Railways Corporation Limited v. Rani Construction Private Limited[2]

Introduction

With the long pending cases in the courts in India and the fact that litigation comes at a cost of the lengthy time period and a huge amount of money, “Alternative Dispute Resolution” came as a silver lining for the homo sapiens. Though it’s on the verge of development and needs a lot of time to get into the nerves of Indian system yet with the pace of Indian judicial system, it’s surely has a scope in future.

Arbitration

In simple words “Arbitration” is one of the alternative dispute resolution systems where the two parties elect a neutral party to make a decision on behalf of them. In India, it’s being regulated by the provisions of Arbitration and Conciliation Act 1996.  Under Section 2 of the act “Arbitration” has been defined as any “Arbitration whether or not administered by permanent arbitral institution”. The arbitral tribunal which makes the arbitration decision may consist of a sole arbitrator or a panel of arbitrators.

Arbitration agreement

Under Section 7 of the Arbitration and Conciliation Act arbitration agreement is defined as “an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”[3] Thus, in recent times, many corporate bodies emphasize on an arbitration agreement along with the contractual agreement when they enter into business with some other entity which helps them to settle any sort of dispute which may arise between them related to their business transaction. Both the company entering into a business transaction through contractual agreement should have a legal existence. Now we have a scenario where there is an arbitration agreement entered into by two companies A and B, one of which is not incorporated at the time of the signing of the arbitration agreement (say B). But subsequently, B got incorporated within a year. The dispute arises, and A invokes the provisions of the arbitration agreement and notifies the B to opt for arbitration to settle their dispute. After the prescribed time period of 30 days to choose an arbitrator by the B, it fails to choose one, so A approaches the Hon’ble court to intervene and choose one arbitrator. A contends that the arbitration agreement is invalid as B wasn’t incorporated at the time of the signing of the arbitration agreement, so it has no legal validity. According to powers provided under the Act to the court in appointing an arbitrator, it has no liability to entertain contentious issues and its only obligation is to choose an arbitrator. This may be understood from the decision of the in Konkan Railways Corporation Limited v. Rani Construction Private Limited, where it observed that the Chief Justice or his designate does not perform the adjudicatory function under Section 11 of the Arbitration and Conciliation Act, 1996. Observing so, it held thus:

Section 11 did not require the Chief Justice or his designate to perform any adjudicatory function. All that the Chief Justice or his designate was required to do was to nominate an Arbitrator if a party to an arbitration agreement had failed to do so within the specified time after a requestan ex facie basis; no element of adjudication came into it.[4]

Thus with respect to the above-mentioned case, in case either of the party on the basis of an arbitration agreement moves to the court for the appointment of an arbitrator in case the other party fails to choose one within the prescribed period of time then the issue of the validity of the arbitration agreement if raised is of no concern to the court and it’s the only obligation is to choose an arbitrator. In the very same judgment, the apex Court further held as follows:

As we see it, the only function of the Chief Justice or his designate under Section 11 is to fill the gap left by a party to the arbitration agreement or by the two arbitrators appointed by the parties and nominate an Arbitrator. This is to enable the Arbitral Tribunal to be expeditiously constituted and the arbitration proceedings to commence. The function has been left to the Chief Justice or his designate advisedly, with a view .[5]

Thus in one of the landmark cases of A.P.Tourism Development Corporation Limited v. Pampa Hotels Limited the Supreme Court gave its verdict with respect to the question of “Whether the court has adjudicating power with respect to the validity of the arbitration agreement or has to appoint an arbitration as according to the request made by the party and put the ball in the court of the appointed arbitrator to look into the jurisdictional manner. With respect to the Section 16 of The Arbitration and Conciliation Act, 1996 the arbitral tribunal has the authority to look into the jurisdictional aspect and the scope of the authority of the tribunal. But in this case, one of the important aspects was that the validity of the arbitration agreement was in question as one of the parties did not have the legal existence at the time of the signing of the agreement. Already in Konkan Railways case, the court restricted the administrative role of the Chief Justice/Designate to appointing an arbitrator as per the agreed procedure when the parties reach out to the court, leaving all contentious issues including whether there was any arbitration agreement or not to be decided by the arbitrator. Hon’ble Supreme Court while making its decision said that

“Under Section 34(2) of the Companies Act, 1956 provides that from the time of the incorporation of the company as specified in the certificate of the incorporation, members who have subscribed to the memorandum of the company and other members are competent in exercising all the functions of an incorporated company. With reference to Section 149 of the companies act any contract that has been entered into before the date of which company as entitled can’t be any managing director of the company too. The scenario would have been completely different in case the agreement was entered into by the promoters of the company as such contract is secured by the Section 15(h) of the Specific Relief Act 1963 which reads as “when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation of the company: Provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract

Conclusion

Thus citing the judgment made in the case of S.B.P & Co. v. Patel Engineering Ltd.& Anr. [6]

The court made a “Prospective Overruling” (with respect to the fact that any judgment which is made prior to this would be disturbed putting a burden on the judicial system) that under Section 11 of the Arbitration and Conciliation Act 1996 Chief Justice/Designate will not have only administrative function but also judicial function. In the case of any contentious issue over the validity of the arbitration agreement with respect to which a party has reached out to the Hon’ble court, the same will have to be decided by the Chief Justice/ Designate subsequent to which the court will use its administrative function to choose an arbitrator. Thus, the court ruled that the judgment of the S.B.P case will be followed, the exception being that any appointment made before 26.10.2005 will be valid and in such circumstance the arbitrator will look into the question of the validity of the arbitration agreement. But after 26.10.2005 such adjudicating power lies in the hand of the Chief Justice/Designate. When one of the party after the prescribed period of 30 days fails to choose an arbitration after being notified by the other party to do the same and approaches the court and the question is raised over the validity of the arbitration agreement, then the same will be first decided upon by the court before appointing an arbitrator.

[1]2005 (4) Suppl. SCR 688

[2]AIR  2000(8) SCC 159

[3] Section 7 of Arbitration and Conciliation Act,1996

[4] http://indiankanoon.org/doc/51972963/

[5] Ibid. 2

[6] AIR 2005 (8) SCC 618]