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Case Reviews, The Law

Purushottam v. Anil & Ors. (Civil Appeal No.4664 of 2018)

The case deals with Sections 11 (3) & 85 of the Arbitration Act, 1940 & Sections  7 & 10 of  The Arbitration and Conciliation Act, 1996 in lieu of the rejection of the application of the appellant, the requirements as to the completion of the Arbitration Agreement, and the provisions regarding the appointment of the third arbitrator instead of the appointment of even number of arbitrators. With the enforcement of the Arbitration and Conciliation Act, 1996, the Arbitration Act of 1940 was repealed, which is why the same cannot be considered unless arbitral proceeding commences before the enforcement of the 1996 Act.

By: Hanoon Vahab, BBA LLB, Geeta Institute of Law.

Background:

The rejection of application preferred by the appellant u/s 8 of Arbitration & Conciliation Act, 1996 as affirmed by the High Court of Bombay at Nagpur by its judgment & order dated December 10, 2015, in Civil Revision Application, is under challenge in this appeal. 

Facts:

  • On November 9, 2005, the appellant and the respondents had entered into a partnership agreement, wherein clause 15 of the agreement stated that in case of any dispute between them, the same shall be dealt with by following the provisions of the Indian Arbitration Act 1940.1
  • On December 28, 2006, the appellant executed a registered Power of Attorney in favor of the partners.
  • In April 2014, the respondents filed Special Civil Suit for declaration, damages, accounts, and permanent injunction against the appellant.
  • The appellant, after receiving the notice, preferred an application u/s 8 of the1996 Act.2
  • On January 5, 2015, the application of the appellant was rejected by the trial court, thereby declaring clause 15 as vague.3
  • In 2015, the appellant further filed a Civil Revision Application in the High Court.
  • Under Section 85 of the 1996 Act4, three enactments including the 1940 Act was repealed. Moreover, the repealed enactment namely the 1940 Act would continue to apply concerning arbitral proceedings which had commenced before the 1996 Act came into force.
  • The appellant and the respondent had nominated their arbitrators.
  • The appellant and the respondent appointed the arbitrators namely, Justice M.N Chandurkar, and Justice S.P. Sapra respectively; but failed to appoint the third arbitrator which is in contrast with Section 11(3) Arbitration and Conciliation Act 1996.5
  • Notwithstanding, as per Section 7 of the 1996 Act, the basic requirements for an arbitration agreement are certainly satisfied in the present matter.
  • The High Court concluded that there could be no arbitration at all in the instant case and thereby, rejected the application filed by the appellant.

Issues:

  • Whether reference to the 1940 Act in the agreement would have any bearing or not?
  • Whether there exists anything in the new Act to make such an agreement unenforceable?

Precedents:

  • Thyssen Stahlunion GMBH v. Steel Authority of India6

Referring to the judgment of this case, it can be seen that if the arbitration proceeding had not commenced under the Act of 1940 till the Act of 1996 came into force, the same could not be commenced thereafter.

It was further observed that there is a bar to agree to the applicability of the Act of 1940 after the Act of 1996 has come into force.

  • Rajan Kumar Verma And Anr. vs Sachchidanand Singh7

In context to this judgment, the High Court thus rejected the challenge and dismissed the said Civil Revision by its judgment under appeal.

  • M.M.T.C Limited v. Sterlite Industries (India) Limited8

Referring to this judgment, the arbitration agreement was of a date before the commencement of the 1996 Act while the arbitral proceedings commenced after the enforcement of the Act of 1996. Therefore, it was held that the provisions of the 1996 Act would apply.

Rules:

  1. The Arbitration Act, 1940
  2. The Arbitration and Conciliation Act, 1960

Arguments Advanced:

Appellant

  • The Appellant contended, referring to the Act of 1940 in the partnership deed in 2005, it has to be necessarily referred to the arbitration process as prevalent in the date of signing of the Agreement.
  • He further argued that the mention of the 1940 Act will not deceit the intention of the parties to go for arbitration as a dispute resolution mechanism.


An Arbitration Agreement providing for the appointment of an even number of arbitrators is not valid because of Section 10(1) of the new Act.9

  • The provision for the number of arbitrators is a machinery provision and does not affect the validity of the Arbitration Agreement which is to be determined according to section 7 of the New Act.10

Respondent

  • The respondent submitted that the question as to whether the 1996 Act or the 1940 Act would govern the relationship between the parties was so fundamental that mistakes in that behalf would invalidate the entire Arbitration clause.

He contended there is no such inconsistency between Section 10 of the new Act and the corresponding provision in the 1940 Act as both being substantially the same.

  • The provision of the new Act must be construed to promote the object of implementing the scheme of alternative dispute resolution; and the New Act must be construed to enable the enforcement of the earlier arbitration agreement.

Decision:

The decision set aside the judgment & order passed by the High Court & accepted the appeal preferred by the appellant.

The matter, however, will have to be dealt with by the trial court in the context of Section 8 of the 1996 Act.

Endnotes:

  1. Clause 15 of the partnership agreement 2005- That in case of any dispute between the partners as regards the interpretation of this Deed or any other matter connected with the partnership business, the same shall be referred to for arbitration in accordance with the provisions of the Indian Arbitration Act, 1940, and the decision of the Arbitrator shall be final and binding on all the partners.
  2. Section 8 of Arbitration and Conciliation Act 1996.
  3. As there was no reference as to who should the arbitrator; there was no mention about the selection of the arbitrators and the dispute didn’t form the subject matter of agreement within the meaning of section 8 of the 1996 Act.
  4. Repeal and savings – (1) The Arbitration (Protocol and Convention) Act, 1937 (6 of 1937), the Arbitration Act, 1940 (10 of 1940), and the Foreign Awards (Recognition and Enforcement) Act, 1961 (45 of 1961) are hereby repealed.
  5. Section 11(3) Arbitration and Conciliation Act 1996Where an arbitrator or umpire is removed under this section, he shall not be entitled to receive any remuneration in respect of his services.
  6. Thyssen StahlunionGmbh Etc vs Steel Authority Of India Ltd on 7 October 1999.
  7. Rajan Kumar Verma And Anr. vs Sachchidanand Singh on 22 September 2005 AIR 2006 Pat 1. 
  8. M.M.T.C. Limited vs Sterlite Industries (India) Ltd. on 18 November, 19961996 IXAD SC25.
  9. Section 10 is a departure from para 2 of the first schedule of the Arbitration Act, 1940The provision for the number of arbitrators is a machinery provision and does not affect the validity of the Arbitration Agreement which is to be determined according to section 7 of the New Act.
  10. Section 7 of Arbitration and Conciliation Act, 1996.

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