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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Counsel for Appellant: Mr. V. Nataraj
  • Counsel for Respondents: Mr. Rajkumar Bhagwatsaran, for Mr. Rajkishore
Judges
  • K. Govindarajan
  • N. Kannadasan, JJ.
Acts
  • Sec. 8 of the Arbitration and Conciliation Act, 1996, hereinafter called the Act,
  • ARBITRATION ACT 1940
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Counsel for Appellant: Mr. V. Nataraj
  • Counsel for Respondents: Mr. Rajkumar Bhagwatsaran, for Mr. Rajkishore
Judges
  • K. Govindarajan
  • N. Kannadasan, JJ.
Acts
  • Sec. 8 of the Arbitration and Conciliation Act, 1996, hereinafter called the Act,
  • ARBITRATION ACT 1940
See more information ...
Smart Summary

Judgment Summary — K. Govindarajan, J.

Factual and Procedural Background

The respondents/plaintiffs filed a suit (C.S. No. 1007/1994) seeking a declaration that the licence agreement dated 25.4.1991, as amended, was unenforceable, illegal, invalid and void, and claiming monetary reliefs of Rs. 10,92,710/- (losses) and Rs. 4,40,000/- (compensatory damages) arising from alleged constructive fraud and tortious acts by the defendant.

Pending the suit, the appellant/defendant filed Application No. 3758/1996 under Section 8 of the Arbitration and Conciliation Act, 1996, asking the civil court to stay further proceedings in C.S. No. 1007/1994 and to refer the dispute to arbitration in terms of Article 15 of the licence agreement dated 25.4.1991. The respondents contested that application.

A learned single Judge, by order dated 20.3.1997, rejected the Section 8 application on the ground that the reliefs sought in the suit (including a challenge to the agreement itself) could not be decided by an arbitrator; consequently, the learned Judge held that reference to arbitration was not appropriate. The appellant/defendant appealed against that order to the court delivering this judgment.

Legal Issues Presented

  1. Whether the Application filed under Section 8 of the Arbitration and Conciliation Act, 1996, based on Article 15 of the arbitration agreement dated 25.4.1991, is sustainable in law?

Arguments of the Parties

Appellant/Defendant's Arguments

  • The arbitration clause in Article 15 of the agreement requires that the disputes (including the issues raised in the suit) be decided by an arbitrator.
  • Relying on Section 16 of the Act, the arbitrator is competent to rule on objections as to the existence or validity of the arbitration agreement, so the learned Judge erred in rejecting the Section 8 application.

Respondents/Plaintiffs' Arguments

  • The respondents sought a declaration that the arbitration agreement itself is invalid and unenforceable, and therefore the appellant cannot insist on Article 15 to obtain a reference under Section 8.
  • The reliefs sought (challenge to the entire agreement) can be granted only by the civil court and not by an arbitrator, so the learned Judge rightly rejected the Section 8 application.
  • There is no provision under Section 8 of the Act to stay the suit; hence the application is not maintainable.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Jaikishan v. L. Manoria & Co., 1974 SC 1579 Under the Arbitration Act, 1940, the decision was applied by the learned single Judge to hold that where plaintiffs challenge the entire agreement as illegal, the question of referring disputes to arbitration does not arise. The learned single Judge relied on this decision to dismiss the appellant's Section 8 application; the present court recorded that the learned Judge had so held but proceeded to consider the effect of the 1996 Act and Section 16.
Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388 Interpreted Section 16 of the Arbitration and Conciliation Act, 1996, holding that the arbitral tribunal may rule on its own jurisdiction, including objections with respect to the existence or validity of the arbitration agreement; this reaches to the root of jurisdiction. The court relied on this Constitution Bench decision to support the proposition that an arbitral tribunal has competence to rule on its own jurisdiction and on the validity of the arbitration agreement under Section 16.
Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503 The decision follows and applies the scope of Section 16; it also discusses Section 8 and the mandatory nature of referral to arbitration. The court cited this decision as following Konkan Rly. and used it (including a quoted passage) to reinforce the mandatory duty under Section 8 to refer disputes to arbitration where an arbitration clause exists.
P. Anand Gajapathi Raju v. P.V.G Raju, (2000) 4 SCC 539 Held that the language of Section 8 is peremptory in nature, making it obligatory for a court to refer parties to arbitration in terms of their arbitration agreement. The court quoted this authority (as cited in Hindustan Petroleum) to conclude that if an arbitration clause exists and is relied upon, the civil court is obliged to refer the dispute to arbitration.

Court's Reasoning and Analysis

The court proceeded by first setting out Article 15 of the agreement (Article 15.1: arbitration to sole arbitrator — Chairman of Board of Licensors — venue Delhi; and Article 15.2: jurisdiction of Delhi courts). From the text of Article 15, the court observed that the parties had plainly agreed to arbitrate disputes between them.

The court reviewed the learned single Judge's reliance on Jaikishan (1974) under the Arbitration Act, 1940, which had supported refusal to refer disputes to arbitration where the entire agreement was challenged as illegal. The court contrasted the law under the old Act (1940) with the Arbitration and Conciliation Act, 1996.

The court then examined Section 16 of the 1996 Act (quoted in the judgment), emphasizing three points found in the text:

  • Section 16 expressly empowers an arbitral tribunal to rule on its own jurisdiction, including objections to the existence or validity of the arbitration agreement.
  • Section 16 treats an arbitration clause as an agreement independent of the contract.
  • Under Section 16, a tribunal's decision that the contract is null and void does not automatically invalidate the arbitration clause.

The court regarded Section 16 as a "moderate departure" from the 1940 Act and held that the power conferred upon the arbitrator by Section 16 is not subject to party agreement (not rendered optional by an "unless otherwise agreed" wording). Therefore, parties cannot, by agreement, exclude the arbitrator's competence to decide on its own jurisdiction or the existence/validity of the arbitration agreement.

The court relied on the Constitution Bench decision in Konkan Rly. (2002) and the follow-up decision in Hindustan Petroleum (2003) to support the proposition that under Section 16 the arbitral tribunal may rule on objections going to its jurisdiction, and that Section 8 of the Act is peremptory. The court quoted a passage establishing that an arbitral tribunal's authority under Section 16 extends to the very root of its jurisdiction.

Applying these principles to the instant dispute, the court concluded that although the respondents challenged the validity of the agreement alleging fraud, that issue falls within the competence of the arbitral tribunal under Section 16. The learned single Judge had not considered this aspect and therefore erred in refusing the Section 8 application.

Finally, the court addressed the contention that Section 8 contains no provision to stay the suit. It held that a stay is only consequential and discretionary; because the court concluded the matter must be referred to arbitration, the suit could not be allowed to proceed and therefore a stay was appropriate.

Holding and Implications

Holding:

The order dated 20.3.1997 passed by the learned Judge in Application No. 3758/1996 is set aside. The Section 8 application is allowed: the matter is directed to be referred to the arbitrator as provided in Article 15.1 of the agreement; the civil suit is to be stayed; and the arbitrator is directed to decide the issue, including the issues raised by the respondents/plaintiffs, within six months from the date of the judgment. The appeal is allowed. No costs.

Implications:

  • Direct effect on the parties: the civil court's refusal to refer the matter to arbitration has been overturned; the dispute (including challenges to the validity of the agreement) is to be decided by the arbitrator appointed under Article 15.1, and the suit is stayed pending arbitration.
  • Broader implications as discussed in the judgment: the court's decision applies and follows existing Supreme Court authorities interpreting Sections 8 and 16 of the Arbitration and Conciliation Act, 1996. The judgment does not purport in its text to announce a new legal principle beyond applying those precedents to the facts of this case.

End of summary — based exclusively on the content of the provided opinion.

Show full summary ...

    Niit Limited v. Ashish Deb, 2. Excel Advanced Systems Pvt. Ltd. Rep., By Its Director, Ashish Deb S

    Judgment — K. Govindarajan, J.

    The above Appeal is filed against the order dated 20.3.1997, passed by the learned single Judge in rejecting the Application filed in A. No. 3758/1996.

    2. The respondents filed a suit in C.S No. 1007/1994 on the file of this Court to declare that the licence agreement dated 25.4.1991, as amended, is unenforceable, illegal, invalid and void, and to direct the defendant to pay the plaintiffs a sum of Rs. 10,92,710/- towards the losses sustained by the plaintiff on account of the constructive fraud played by the defendant through illegal agreements and means and also for a direction to pay a sum of Rs. 4,40,000/- towards compensatory damages suffered by the plaintiffs on account of the tortious acts committed by the defendant. Pending Appeal, the appellant/defendant filed Application No. 3758/1996 under Sec. 8 of the Arbitration and Conciliation Act, 1996, hereinafter called ‘the Act’, to stay further proceedings of the suit in C.S No. 1007/1994 and to refer a dispute for arbitration in terms of Article 15 of the agreement dated 25.4.1991 The said Application was contested by the respondents/plaintiffs.

    3. The learned Judge accepted the case of the respondents/plaintiffs and rejected the Application filed by the appellant/defendant holding that the prayer sought for in the suit cannot be decided by the arbitrator and so the Application filed under Sec. 8 of the Act cannot be sustained. Aggrieved against the same, the appellant/defendant has field the above Appeal.

    4. Learned counsel appearing, for the appellant/defendant submitted that in view of Article 15 of the arbitration agreement, even the issue raised in the suit has to be decided by the arbitrator as contemplated under Sec. 16 of the Act. On that basis, learned counsel also submitted that the learned Judge is not correct in rejecting the said Application.

    5. Learned counsel for the respondents/plaintiffs submitted that in the suit, the respondents/plaintiffs prayed for a declaration that the arbitration agreement itself is not valid and unenforceable and so the appellant/defendant cannot insist Article 15 in support of their claim made in the application filed under Sec. 8 of the Act. According to him, the prayer sought for can be granted only by the civil Court and not by the Arbitrator. So, he further submitted that the learned Judge has rightly rejected the Application and it does not warrant any interference. He also submitted that since there is no provision under Sec. 8 of the Act to stay the suit, the Application is not maintainable.

    6. On the above said pleadings and arguments, the following point arises for determination:—

    “Whether the Application filed under Sec. 8 of the Act on the basis of Article 15 of the arbitration agreement dated 25.4.1991 is sustainable in law?”

    7. To decide the above said issue, it is beneficial to extract Article 15 of the agreement which reads as follows:—

    Sec. 15.1: Arbitration

    “All disputes and differences of whatsoever nature arising out of this agreement, whether during its term or after expiry thereof or prior termination shall be referred to the sole arbitration of the Chairman of the Board of Directors of the Licensors, whose decision shall be final on any matter arising hereunder. It is further agreed that the fact that the Chairman of the Board of Directors of the Licenser may have had occasion to deal with any matter related to this licence either before or after its execution, shall not disqualify him from acting as Arbitrator. The venue of the Arbitration shall only be Delhi.

    Section 15.2: Jurisdiction:

    The parties agree that only the Courts in Delhi in the Republic of India shall have jurisdiction to entertain any proceedings related to this agreement whether during pendency, or after termination. No other Court shall have jurisdiction.”

    So from the above, it is clear that the parties have agreed for arbitration to decide the disputes arise between them. The learned Judge referring to the decision of the Apex court in the decision in Jaikishan v. L. Manoria & Co., 1974 SC 1579, arising out of the Arbitration Act 1940, held that since the plaintiffs in the suit has challenged the entire agreement as illegal, the question of referring the said arbitration agreement to the arbitrator does not arise and dismissed the application filed under Sec. 8 of the Act.

    8. Learned counsel for the appellant/defendant put forth his argument basing on Sec. 16 of the Act, which reads as follows:—

    “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 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”.

    There is no corresponding provision in the Arbitration Act, 1940. The law codified in this Section is moderate departure from the provisions in this regard contained in the Old Act 1940. The controversy with regard to the competence of the arbitrator to rule on its own jurisdiction and the validity of the agreement has now been put at rest by the above said Sec. 16. Under the said provision, the arbitrator is competent to rule its own jurisdiction, including ruling on any objections, with respect to the existence or validity of the arbitration agreement. The power conferred on the arbitrator under Sec. 16 of the Act to rule on its own jurisdiction including the existence or validity of the arbitration agreement is not subject to the agreement of the parties which is evident from the absence of the expression “unless otherwise agreed by the parties” which precedes most of the non-mandatory provisions of the Act. So the parties to the arbitration, by agreement, cannot exclude the arbitrator's competence to decide on its own jurisdiction including the existence or validity of the arbitration agreement. The arbitration clause has to be treated as an agreement independent of the other terms of the contract and so the arbitrator has power to rule on its own jurisdiction including the existence and validity of the arbitration agreement. As stated already, this is a departure from the Act, 1940 under which the arbitrator has no power and it will be decided only by the Court.

    9. The Constitution Bench of the Apex Court in the decision in Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388=2002-3-L.W. 223, dealt with the scope of Sec. 16 and held as follows:—

    “21. It might also be that in a given case the Chief Justice or his designate may have nominated an arbitrator although the period of thirty days had not expired. If so, the Arbitral Tribunal would have been improperly constituted and be without jurisdiction. It would then be open to the aggrieved party to require the Arbitral Tribunal to rule on its jurisdiction. Section 16 provides for this. It states that the Arbitral Tribunal may rule on its own jurisdiction. That the Arbitral Tribunal may rule ‘on any objections with respect to the existence or validity of the arbitration agreement’ shows that the Arbitral Tribunal's authority under Section 16 is not confined to the width of its jurisdiction, as was submitted by learned counsel for the appellants, but goes to the very root of its jurisdiction. There would, therefore, be no impediment in contending before the Arbitral Tribunal that it had been wrongly constituted by reason of the fact that the Chief Justice or his designate had nominated an arbitrator although the period of thirdy days had not expired and that, therefore, it had no jurisdiction.”

    10. The above said decision is also followed in the decision in Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums., (2003)6 SCC 503.

    11. Sec. 16 of the Act gives power to the arbitrator to decide even the validity of the agreement. If it is brought to the notice of the Court that there was an arbitration agreement, it is obligatory for the Court to refer the matter for arbitration in terms of the arbitration agreement. In the present case, though the appellant/defendant has brought to the notice of the civil Court that there was an agreement providing for arbitration, the appellant is entitled to sustain the Application under Sec. 8 of the Act to refer the matter to arbitrator.

    12. While considering the scope of Sec. 8 of the Act, in the decision in (2003)6 SCC 503 (supra), the Apex Court has held as follows:—

    “14. This Court in the case of P. Anand Gajapathi Raju v. P.V.G Raju, (2000) 4 SCC 539 (supra), has held that the language of Section 8 is peremptory in nature. Therefore, in cases where there is an arbitration clause 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. In the instant case the existence of an arbitral clause in the Agreement is accepted by both the parties as also by the courts below but the applicability thereof is disputed by the respondent and the said dispute is accepted by the courts below. Be that as it may, at the cost of repetition, we may again state that the existence of the arbitration clause is admitted. If that be so, in view of the mandatory language of Section 8 of the Act, the courts below ought to have referred the dispute to arbitration.”

    13. Though the respondents/plaintiffs have challenged the validity of the agreement on the ground that a fraud was played on them, the same also can be gone into by the arbitrator in view of powers given under Sec. 16 of the Act. This aspect was not considered by the learned Judge while rejecting the Application filed under Sec. 8 of the Act by the appellant/defendant. Hence we are inclined to interfere with the order passed by the learned Judge.

    14. Though the learned counsel for the respondents/plaintiffs submitted that there is no provision to stay the suit, such a submission cannot be accepted, since the provision to stay the suit is only consequential and discretionary. Since this Court has come to the conclusion that the matter has to be referred to the arbitrator, the suit cannot be allowed to proceed further. Hence it has to be stayed.

    15. For the above reasons, we set aside the order dated 20.3.1997 passed by the learned Judge in Application No. 3758/1996 and the said Application is ordered accordingly and it is directed to refer the matter to arbitrator as mentioned in Article 15.1 of the agreement and decide the issue including the issue raised by the respondents/plaintiffs within six months from today. With the above direction, the above Appeal is allowed. No costs.

    VCJ/VCS

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    Comments

    Niit Limited v. Ashish Deb, 2. Excel Advanced Systems Pvt. Ltd. Rep., By Its Director, Ashish Deb S
    (Feb 13, 2004)