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To what degree should courts intervene when referring matters to arbitration? - International Law Office

International Law Office

Litigation - India

To what degree should courts intervene when referring matters to arbitration?

November 01 2011

Background
Facts
Decision
Comment


Background

In Bharat Rasiklal Ashra v Gautam Rasiklal Ashra(1) the Supreme Court considered whether the chief justice of the concerned high court (or the judge designated by the chief justice) could, in exercise of the judicial powers under Section 11 of the Arbitration and Conciliation Act 1996, appoint an arbitrator without first deciding the preliminary question of whether there was a valid arbitration agreement between the parties, instead of leaving this question to be decided only by the appointed arbitrator.

While deciding the case, the Supreme Court deliberated on the precise degree of intervention mandated by a court of law when appointing an arbitrator under an application preferred by one of the parties under Section 11 of the act. In arriving at its decision, the Supreme Court also referred to the earlier decision rendered by a constitution bench in SBP and Co v Patel Engineering(2) in order to reaffirm the settled principle that the question of whether there exists a valid arbitration agreement between the parties must be exclusively decided only by the chief justice (or his or her designate), and should not be left to the decision of the arbitral tribunal.

Facts

The appellant and the first respondent were brothers. On June 12 1988 they entered into a deed of partnership with their grandfather to carry on business under the name of M/s Kanji Pitamber & Company (the second respondent firm). Under the partnership deed, the shares of the appellant and the first respondent in the second respondent firm were 30% each, while the grandfather held the remaining share of 40%. Clause 11 of the partnership deed mandated that all disputes between partners of the firm regarding their rights and liabilities, or arising out of transactions and accounts of the firm, were to be referred to arbitration.

The appellant had stated that, on the death of their grandfather, the appellant and the first respondent had continued carrying on the business of the firm, by increasing their shares in the firm to 50% each. However, the first respondent stated that, on the death of their grandfather, the first respondent and the appellant had modified their shares in the firm by executing two further agreements on September 6 1991 and May 19 2000. According to the first respondent, in the September 6 1991 agreement the appellant had allegedly agreed to reduce his share in the firm from 50% to 25%. The first respondent further alleged that in the May 19 2000 agreement, the appellant further agreed to reduce his share to 10% subject to the condition that, if he did not attend to the business of the partnership firm due to other commitments, the remaining shares of the appellant would then devolve to the first respondent.

In terms of the purported May 19 2000 agreement, on August 19 2010 the first respondent addressed a letter stating that the appellant had abandoned his interest in the firm (as he had shown no inclination to participate in running its business and affairs) certain issues had arisen in this regard, which required adjudication by an arbitrator. Accordingly, the first respondent nominated his arbitrator and called on the appellant to nominate his arbitrator.

However, through a letter dated September 7 2010, the appellant stated that he had not executed either of the two aforesaid agreements and the only deed that existed with respect to the firm was the partnership deed of June 12 1988. Accordingly, the appellant stated that there arose no question as to the appointment of an arbitrator under the agreement of May 19 2000, as he had not entered into this agreement.

In view of the above, the first respondent filed an application under Section 11 of the act before the Bombay High Court for the appointment of an arbitrator in terms of the agreement dated May 19 2000. This was opposed by the appellant on the ground that the said agreement was forged and that the parties were governed only by the partnership deed of June 12 1988. However, the High Court allowed the application of the first respondent and appointed an arbitrator to decide whether the subsequent agreements dated September 6 1991 and May 19 2000 were valid. The appellant challenged the above order of the High Court before the Supreme Court arguing, among other things, that before appointing an arbitrator under Section 11 of the act, serious questions of fraud, forgery and fabrication of the documents on which the arbitration clause was premised should first be adjudicated by the chief justice, in order to determine the validity of the arbitration clause.

Decision

Referring to its decision in SBP and Co and in National Insurance Company Ltd,(3) the Supreme Court held that there were certain issues that mandatorily required consideration of the chief justice in an application under Section 11 of the act, such as whether:

  • the party making the application had approached the appropriate High Court;
  • a valid arbitration agreement subsisted between the parties; and
  • the party that had applied under Section 11 of the act was a party to the said arbitration agreement.

The Supreme Court observed that it was clear that deciding the issue of whether a valid arbitration agreement was in existence between the parties was within the domain of adjudication of the chief justice and could not be left open to the arbitrator. The court argued that unless a valid arbitration agreement exists, the application under Section 11 of the act for the appointment of an arbitrator is not maintainable. The Supreme Court observed that although an arbitration agreement was referenced in the partnership deed of June 12 1988, the dispute was raised and the appointment of an arbitrator was sought without reference to such deed, instead referring to the alleged agreement dated May 19 2000. Therefore, unless the party filing the application under Section 11 of the act was able to make out that there was a valid arbitration clause in the contract of May 19 2000, there could be no appointment of an arbitrator.

Further, in response to the first respondent's submissions that consideration of issues such as fabrication and forgery would merely protract the proceedings governing appointment of an arbitrator under Section 11 of the act, the Supreme Court clarified that the foremost issue for consideration was the determination of the existence of a valid and enforceable arbitration agreement as a condition precedent, before the appointment of any arbitrator. The Supreme Court thereafter clarified that the legislature has entrusted it with the power to appoint an arbitrator, and in doing so was also entrusted with the power to determine any false or vexatious claims made by the parties with a view to protract proceedings or defeat arbitration. Armed with such powers, the Supreme Court observed that, under Section 11 of the act, if a party is found to have falsely contended that the documents were forged, the chief justice may subject such parties to costs so that such false claims are discouraged.

The Supreme Court therefore set aside the order of the concerned High Court appointing an arbitrator in the matter, and remanded the case back for reconsideration by the High Court on whether the partnership deed of May 19 2000 was indeed forged and whether there was a valid or enforceable arbitration agreement in existence between the parties.

Comment

The Supreme Court has thus reiterated the settled principle of law that when deciding whether the arbitral procedure is to be set into motion through an application under Section 11 of the act, the chief justice (or the designate judge) must examine and record that a satisfactory arbitration agreement exists between the parties. Only when satisfied that a valid agreement exists, can the chief justice allow the application and appoint either an arbitral tribunal or a sole arbitrator, as the case may be. However, if it is found that no such agreement is in existence, the judge must decline the request for the appointment of an arbitrator.

Furthermore, the Supreme Court has held that in case of allegations of fraud and forgery, the examination of the arbitration agreement's veracity must be deliberated by the court appointing an arbitrator under an application under Section 11 of the act. By doing so, the Supreme Court has disregarded apprehensions on the protraction of 'summary proceedings' concerning the appointment of an arbitrator and has emphasised that any issue relating to the existence of a valid arbitration agreement, based on which the court shall appoint an arbitrator, is solely within its domain of adjudication.

For further information on this topic please contact Saanjh Purohit or Adit Pujari at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (saanjh.purohit@amarchand.com or adit.pujari@amarchand.com).

Endnotes

(1) (2011) 9 SCALE 457.

(2) (2005) 8 SCC 618.

(3) (2009) 1 SCC 267.


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