In this article, Tarun Gaur, Advocate, Delhi High Court discusses Section 8 of the Arbitration and Conciliation Act, 1996.
Introduction
The trend of arbitration has increased tremendously over the past decade, at both national and international level. Arbitration is a mechanism whereby which the parties enter into an agreement, either in advance or after the dispute crops up, to resolve their dispute privately and expeditiously. But the key to a successful arbitration is restricted interference by judicial courts in the arbitration proceedings. When it comes to judicial intervention in arbitration proceedings, the reputation of Indian judiciary is undistinguished which has time and again proved to be a major roadblock for many things including but not limited to, getting FDI, India being chosen as a suitable seat in International Commercial Arbitrations etc.
Keeping all that in mind, the parliament, enacted the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “act”) by virtue of which, the parliament made sure that the unnecessary intervention of judicial authorities in arbitration proceedings be restricted at all times. The biggest proof of which lies in section 5 of the act.
“Section 5 of the Arbitration and Conciliation Act, 1996: Extent of judicial intervention — Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”
This clearly stipulates that, irrespective what is mentioned in any other law for the time being in force, no judicial authority shall intervene in the matters governed by part 1 of the act, and the only exception to this is when the said intervention is provided by the part 1 of the act. Therefore, it becomes clear that the power of courts to intervene has been curtailed completely except for when it is expressly provided in the act.
Now, despite having such express exclusion of judicial intervention in the arbitration proceedings, the courts have time and again usurped more power than what is provided to them under the act which has led to unnecessary interference in the arbitration proceedings. One such example is of section 8.
Section 8 states as follows:
“8: Power to refer parties to arbitration where there is an arbitration agreement.—
Section 8 (1) – A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”
Section 8 (2) – The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof:
Provided that where the original arbitration agreement or a certified copy
thereof is not available with the party applying for reference to arbitration
under sub-section (1), and the said agreement or certified copy is retained by
the other party to that agreement, then, the party so applying shall file such
application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.
Section 8 (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”
Section 8 clearly stipulates that whenever a suit is filed in a civil court and the cause of action of said suit emanates from a contract in which the parties had voluntarily and willingly agreed to settle the dispute via arbitration, then, if the essentials of section 8 are met, it is the bounden duty of court to refer the parties to the arbitration.
The position of Section 8 of the act becomes further clear when it is compared with the Uncitral Model Law as section 8 of the act differs from Article 8 of model law. Article 8 enabled a court to decline to refer parties to arbitration if it is found that the arbitration agreement is null and void, inoperative or incapable of being performed. Section 8 has made a departure which is indicative of the wide reach and ambit of the statutory mandate.
Section 8 uses the expansive expression “judicial authority” rather than “court” and the words “unless it finds that the agreement is null and void, inoperative and incapable of being performed” do not find a place in section 8. This distinction clearly dictates that the legislature has intentionally endowed less power on judicial courts with respect to section 8 applications to make sure the arbitration process is facilitated and unnecessary intervention by courts be avoided.
Despite the position being this crystal clear, this section has been subjected to various interpretation by our courts time and again which has led to a lot of confusion.
There have been instances where Courts have adopted the literal interpretation route and hence construed the section in the way it is meant to be and has referred the matter to arbitration, when the essentials of section 8 are fulfilled, irrespective of the prevailing circumstances. Yet, there had been instances where the courts had completely neglected valid precedents and had tenuously interpreted the section in a manner it is not meant to be and has denied the reference thereby deviating from the valid line of precedents. Further, it is not just the deviation alone, in one matter the SC has actually gone to the extent whereby which it has laid down certain exceptions to this rule, which in my opinion is wholly erroneous. If there would have been some need for such exceptions, the legislature would have done that by adding such exceptions in the act itself.
Judicial Decisions
In Swiss Timing Ltd v. Commonwealth Games 2010 Organising Committee[1], the court categorically, held that even if a criminal case is pending against a party, that in itself does not disentitle said party from taking recourse under section 8 and referred the dispute to arbitration.
The dispute arose because the respondent failed to make the payment towards petitioner’s services after the commonwealth games. The petitioner tried to resolve the dispute in accordance with the procedure mentioned in clause 34 of their agreement but the respondent denied the payment and when petitioner filed petition under section 11 of the act, the respondent contended that the amount is not payable as the petitioner has violated clauses 29, 30 & 34 of the agreement as the petitioner has engaged in corrupt practices on the basis of complaint bearing, CC no. 22 of 2011 u/s 120B, 420, 427, 488 and 477 IPC R/w Ss 13(1)(d) and 13(2) of the PC Act, registered against it.
The main contention of the defendant was that since a complaint case has been filed against petitioner for corruption, hence the reference of dispute to arbitration is not tenable.
The court rejected this argument of the respondent and held that such allegations as are mentioned in the criminal case, are such which have to be proved in a proper forum on the basis of the oral and documentary evidence, produced by the parties, in support of their respective claims and existence of such allegations does not disentitle the petitioner to resort to the arbitration with respect to the dispute arose on the basis of the contract.
Further, the respondent tried to contend that since the allegations of corruption is levied on the petitioner, which is in contravention to the representations and warranties undertaken by the petitioner in the contract, the contract becomes void ab initio and hence the arbitration clause dies then and there.
To support this contention, the respondent placed reliance on N. Radhakrishnan V. Maestro Engineers[2]. In the said case, even after finding that the subject matter of the suit was within the ambit of arbitration, the court refused to refer the dispute to arbitration by holding that once the contract is held to be void ab initio, the arbitration clause dies then and there.
In response to this, the court held that, the law laid down in the Radhakrishnan runs counter to the ratio laid down in Hindustan Petroleum Corpn Ltd v. Pinkcity Midway Petroleums[3], where the court in para 14 observed that if in an agreement the parties before the civil court, there is a clause for arbitration, it is mandatory for the civil court to refer the dispute to arbitrator. In the said case, the existence of arbitral clause was not denied by either of the parties and hence in accordance with the mandatory nature of section 8, the court referred the dispute to arbitration.
The court in the present case held that, the law laid down in Hindustan Petroleum is correct law on the point and not the ratio of Radhakrishnan’s judgment. The court gave two reasons on the basis of which it invalidated Radhakrishnan’s judgment i.e. (a) the judgment in Hindustan Petroleum though referred, was not distinguished nor followed and (b) provisions mentioned under section 16 of arbitration act were also not brought before the court.
Section 16 provides that Arbitral tribunal would be competent to rule on its own jurisdiction including ruling on any objection with regard to existence or validity of the arbitration agreement. The arbitration act emphasizes that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It further provides that the decision by the arbitral tribunal that the contract is null and void does not entail ipso jure that the arbitration clause is invalid. Hence Radhakrishnan’s judgment does not lay down correct law and hence cannot be relied upon.
Further, the court mentioned another matter i.e. Today Homes & infra pvt ltd v. Ludhiana Improvement Trust[4] in which the Punjab & Haryana High Court refused to refer the dispute to arbitration under section 8 on the basis that underlying contract is void. An SLP was filed against this decision of the Punjab & Haryana High Court in the Supreme Court and the Court held that the Ld. Judge of High Court has erred in not referring the dispute to the arbitration by going into detailed scrutiny of the agreement as at the stage of section 8, the Judge is only required to decide such preliminary issues as of jurisdiction to entertain the application, existence of valid arbitration agreement, whether a live claim existed or not for the purpose of appointment of an arbitrator. By not referring the dispute to the arbitration, the judge has sought to do more than what is required under section 11(6) of the act without any evidence being adduced by the parties. The issue regarding the continued existence of the arbitration agreement, notwithstanding the main agreement itself being declared void, was considered by the seven-judge bench in SBP & Co.[5] and it was held that an arbitration agreement could stand independent of the main agreement and did not necessarily become otiose, even if the main agreement, of which it is a part, is declared void.
In view of Today Homes & infra pvt ltd v. Ludhiana Improvement Trust, the court held that the submission of respondent that a criminal case is registered against respondent and hence court cannot refer it to the arbitration is wholly tenuous and not maintainable.
The court further held that, it is mandatory for the courts to refer disputes to arbitration, if agreement between the parties provides for reference to arbitration and the ground that a criminal case is registered with reference to the execution of the agreement is not an absolute bar to refer the disputes to arbitration.
The court held that there is no inherent risk of prejudice to any party in permitting arbitration to proceed simultaneously with criminal proceedings since findings recorded by arbitral tribunal are not binding in criminal proceedings and in an eventuality where ultimately the award is rendered by arbitral tribunal, and criminal proceedings result in conviction rendering the contract void, such conviction can be placed on record to resist the enforcement of the award. But if the criminal proceedings end up in acquittal and the dispute is not referred to arbitration, it would result in undesirable delay in the arbitration.
After Swiss Timing Ltd, in Sundaram Finance Ltd & Anr v. T. Thankam[6], the question as to ‘what should be the approach of a civil court when an application in terms of section 8 is filed before the said civil court’ again reached Supreme Court.
The court, citing P. Anand Gajapathi Raju V. PVG Raju[7] and Hindustan Petroleum Corpn. Ltd v. Pink City Midway Petroleums (Supra), held that language of section 8 of the act is peremptory in nature and therefore in cases where arbitration clause is there in the agreement, it is obligatory for the court to refer the parties to arbitration in terms of their arbitration agreement and nothing remains to be decided in the original action after such an application is made except to refer the dispute to an arbitrator. Therefore it is clear that if as contended by a party in an agreement between the parties before the civil court, there is a clause for arbitration, it is mandatory for the civil court to refer the dispute to an arbitrator.
The court further referred to Magma Leasing and Finance Ltd. V. Potluri Madhavilata[8] in which it was again reiterated that no option is left to the court, once the prerequisites of section 8 of act are fully satisfied.
In the end, the court held that once an application in due compliance of section 8 is filed, the approach of civil court should be not to see whether the court has jurisdiction, but to see whether its jurisdiction has been ousted. There is a lot of difference between the two approaches. Once it is brought to the notice of the court that its jurisdiction is barred by virtue of procedure under a special statue, the civil court should first see whether there is an ouster of its jurisdiction in terms of compliance with the procedure under the special statue.
The basic principle of our jurisprudence is generalia specialibus non derogant i.e. a general law should yield to the special law. In such a situation, the approach shall not be to see where there is still jurisdiction of civil court under general law but whether it has been ousted by the special law.
Exceptions
In A. Ayyasamy V. A. Paramasivam[9], the court though accepting the fact that provision in section 8 is pre-emptive and mandatory in nature and hence the court should refer the dispute to arbitration when existence of arbitration clause is not disputed, went a step ahead and laid down certain exceptions to this rule. The court carved out exceptions on the basis of which a court can refuse to refer the dispute to arbitration even when essentials of section 8 are fulfilled.
These exceptions are
- Where court finds very serious allegation of fraud that makes a virtual case of criminal offence, or
- Where allegations of fraud are so complicated that it becomes essential that such complex issues can be decided only by civil court on appreciation of voluminous evidence, or
- Where serious allegations of forgery/fabrication of documents in support of the plea of fraud, or
- Where fraud is alleged against arbitration provision itself, or
- Where fraud alleged permeates the entire contract, including agreement to arbitrate where fraud goes to the validity of contract itself or contract that contains arbitration clause or validity of arbitration clause itself.
The court carved out these exceptions after considering Radhakrishnan’s judgment and in my opinion, this judgment is not correct in the eyes of law for two reasons.
One is presence of section 16 of the act, which enables arbitrators to decide on its own, the jurisdiction and on the question of validity of arbitration clause and second, the reliance placed on the ratio of Radhakrishnan’s case is in itself not correct as in an earlier decision i.e. Sundaram Finance, the court categorically invalidated ratio of Radhakrishnan’s judgment, hence placing reliance on said judgment even after it being invalidated by Supreme Court is incorrect.
In a recent judgment, Sasan Power Ltd. vs North American Coal Corporation India Private Ltd.[10], the Supreme Court has held that:
During section 8 proceedings, the court cannot go into the question of validity of entire agreement and can only look at the question of validity of arbitration clause/agreement i.e. whether the arbitration clause/agreement is null and void, inoperative or incapable of being performed.
Arbitrability
Besides accepting objections like ‘since the contract is void hence the arbitration clause is void as well’, the courts have also started entertaining objections on the arbitrability of the dispute as well, at the stage of section 8 application. The worst part of entertaining such objections is, that the courts have even accepted such objections in certain cases and had denied reference in such cases. The courts should keep in mind that first of all, there is no such classification as arbitrable or non arbitrable disputes in the entire act and second, if based on the common law principle, the parties feel that their disputes fall in one such exception where it cannot be resolved via arbitration, then they can raise the said objection before arbitrator as the arbitrator, by virtue of section 16 of the act, is competent to rule on such objections. Therefore, the interference of courts especially on the basis of objections regarding dispute being arbitrable or not arbitrable, in my opinion, is totally unjustified.
Further Sec 8(3) stipulates that pending application under section 8 will not affect proceedings under section 11. According to this, there’s always a risk of reference being denied under section 8 on the basis that the court agreed with the objection that the dispute in question is non arbitrable, and on the flip side, arbitrator gets appointed under section 11 of the act as the court deem it fit to refer the dispute to arbitration. Now, in such a case, what will be the fate of that case? Wouldn’t it become travesty of justice then?
Conclusion
From above discussion, it can safely be deduced that after Sasan Power Ltd. judgment, the question of referring the dispute under section 8 is somewhat resolved for now but this conundrum of whether to refer or not to refer under section 8 still needs a proper ruling by a larger bench of SC on this issue so that the position will settle once and for all.
Further, in my opinion, this conundrum of whether to refer or not to refer a dispute to arbitration under section 8 of the act be put to an end and the courts should work towards fostering the arbitration by referring the dispute to arbitration when all the essentials of section 8 are fulfilled instead of halting the entire arbitration process for no reason or on unjustified reasons like accepting objections on arbitrability of dispute or existence of other proceedings against one party etc.
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References
[1] (2014) 6 SCC 677
[2] (2010) 1 SCC 72
[3] (2003) 6 SCC 503
[4] (2014) 5 SCC 68
[5] SBP & Co. V. Patel Engg. Ltd., (2005) 8 SCC 618
[6] (2015) 14 SCC 444
[7] (2000) 4 SCC 539
[8] (2009) 10 SCC 103
[9] (2016) 10 SCC 386
[10] SLP (c) No. 33227 of 2015
