Jojy George Koduvath.

PART – I

Introspection

• Will the arbitration clause survive, on the termination of the agreement/contract?
• Will the arbitration clause survive, notwithstanding a declaration of the contract being null and void?

Arbitration clause is treated as an independent contract

Sec. 16(1)(a) of the Arbitration and Conciliation Act, 1996 provides that the arbitration clause forming part of a contract shall be treated as an agreement independent of such a contract. (Enercon (India) Ltd. v. Enercon GMBH, 2014-5 SCC 1).

• Therefore-
• Even on the termination of the agreement/contract, the arbitration clause will survive.
• Even when the agreement/contract comes to an end by efflux of time, the arbitration clause will not come to an end.
• In spite of the declaration that a contract is null and void, the arbitration clause continues to be enforceable.

Sec. 16(1) of the Arbitration and Conciliation Act, 1996 provides as under:

• “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 other 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.”

Sec. 16(1) of the Arbitration and Conciliation Act, 1996 has been enacted in the light of Article 16 of the UNCITRAL Model Law. It reads as under:

• “Article 16 – Competence of arbitral tribunal to rule on its jurisdiction –
• (1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be  treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.
• (2) …… (3) ……..”

In Everest Holding Limited Vs. Shyam Kumar Shrivastava, 2008 (16) SCC 774, it is held as under:

• “Though the JVA (Joint Venture Agreement) may have been terminated and cancelled as stated but it was a valid JVA containing a valid arbitration agreement for settlement of disputes arising out of or in relation to the subject matter of the JVA. The argument of the respondent that the disputes cannot be referred to the arbitration as the agreement is not in existence as of today is therefore devoid of merit.”

Referring Everest Holding Limited Vs. Shyam Kumar Shrivastava, 2008 (16) SCC 774, it is held in Reva Electric Car Co. Ltd v. Green Mobil, (2012) 2 SCC 93, it is held as under:

• “Section 16(1)(a) presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. By virtue of Section 16(1)(b), it continues to be enforceable notwithstanding a declaration of the contract being null and void. In view of the provisions contained in Section 16(1) of the Arbitration and Conciliation Act, 1996, it would not be possible to accept the submission of Ms.Ahmadi that with the termination of the MOU on 31st December, 2007, the arbitration clause would also cease to exist.”

In Reliance Industries Limited v. Union of India, 2014-7 SCC 603, referring Sec. 16 of the Arbitration and Conciliation Act, 1996  it is held as under:

• “61. A bare perusal of the aforesaid would show that the arbitration agreement is independent of the other terms of the contract. Further, even if the contract is declared null and void, it would not lead to the foregone conclusion that the arbitration clause in invalid. The aforesaid provision has been considered by this Court in a number of cases, which are as follows-
  • Reva Electric Car Company P. Ltd. v. Green Mobil, 2012-2 SCC 93,
  • Today Homes and Infrastructure Pvt. Ltd . v. Ludhiana Improvement Trust and Anr., 2013-7 SCALE 327,
  • Enercon (India) Ltd. v. Enercon GMBH, 2014-1 ArbLR 257,
  • World Sport Group (Mauritius) Ltd . v. MSM Satellite (Singapore) PTC Ltd. [Civil Appeal No. 895 of 2014]”

Arbitration Clause  Forms Independent Contract

In Enercon (India) Ltd. v. Enercon GMBH, 2014-5 SCC 1, it is held as under:

• 83. The concept of separability of the arbitration clause/agreement from the underlying contract is a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract. The Indian Arbitration Act, 1996, as noticed above, under Section 16 accepts the concept that the main contract and the arbitration agreement form two independent contracts. Commercial rights and obligations are contained in the underlying, substantive, or the main contract. It is followed by a second contract, which expresses the agreement and the intention of the parties to resolve the disputes relating to the underlying contract through arbitration. A remedy is elected by parties outside the normal civil court remedy. It is true that support of the national courts would be required to ensure the success of arbitration, but this would not detract from the legitimacy or independence of the collateral arbitration agreement, even if it is contained in a contract, which is claimed to be void or voidable or unconcluded by one of the parties.” (Quoted in: Ashapura Mine -Chem Ltd.  v. Gujarat Mineral Development Corporation,  2015-8 SCC 193).

Note: It is beyond doubt that the intention of Sec. 16(1) the Act is not-

• to resurrect an arbitration clause that cannot be invoked in cases (i) where the period of limitation provided for suits is elapsed; or (ii) where there is a rescission or alteration of contract under Sec. 62 of the Contract Act, and thereby the parties need not have performed the original contract (as shown below).

PART – II

Sea Change by 2015 Amendment on Arbitration and Conciliation Act, 1996

• There is a sea change by 2015 Amendment on Arbitration and Conciliation Act, 1996 (i) as regards reference for arbitration under Sec. 8, and (ii) for appointment of arbitrator under Sec. 11.
• After 2015 Amendment, for referring  parties to arbitration and for appointing arbitrator, the courts should have “FOND“ ‘PRIMA FACIE’ –
  • (i) the EXISTENCE of the arbitration agreement and
  • (ii) the VALIDITY thereof
  • (in short, legitimacy of arbitrability).
• Sec. 8(1), as amended, reads as under:
  • “A judicial authority …. shall … refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”
• The arbitration agreement should be a ‘binding’ and ‘subsisting’ one, for qualifying it to be “valid” and “existing”.
• Referral proceedings are preliminary and summary and not a “mini trial”. But, there are certain cases where the prima facie examination may require a deeper consideration. This prima facie examination is to make a “check” and to protect parties from being forced to arbitrate when the matter is demonstrably “non-­arbitrable” (See: Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1).
• The limited scrutiny, “through the eye of the needle”, is necessary and compelling. “If there is the slightest doubt, the rule is to refer the dispute to arbitration” (NTPC Ltd. v. SPML Infra Ltd., 2023 SCC OnLine SC 389).

Expiry of Contract by Efflux of Time – Can Arbitration Clause be Invoked?

It is beyond doubt that the arbitration clause cannot be invoked in a case where the period of limitation provided for suits is elapsed.

If the period fixed in a contract for sale of a property (where time is essence of contract) is over and the vendor alleges breach from the part of purchaser, there will not be a valid and subsisting contract from the viewpoint of the vendor. In such a case –

• if a dispute arises (even within the limitation period for taking legal action), the “existence or validity of an arbitration agreement” has to be decided by the Court.

Existence of Contract – Necessary Condition for Operation of Arbitration Clause

It was held by the Supreme Court, in Union of India v. Kishorilal Gupta and Bros., AIR 1959 SC 1362 (a case on rescission or alteration of contract under Sec. 62 of the Contract Act – where the parties to need not have performed the original contract), as under:

• “10. The following principles relevant to the present case emerge from the aforesaid discussion:
  • (1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it;
  • (2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation; it perishes with the contract;
  • (3) … (4) … (5) … (6) …..”
• (The aforestated passage in Union of India v. Kishorilal Gupta is quoted in: Indian Drugs and Pharmaceuticals Limited v. Indo Swiss Synthetics Gem Manufacture Company Limited, 1996-1 SCC 54; Sanjiv Prakash v. Seema Kukreja, 2021-9 SCC 732; Vidya Drolia v. Durga Trading Corporation, 2021-2 SCC 1)

Dispute Mut have been covered by the arbitration clause

It is held by the Supreme Court, in Zenith Drugs & Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd., AIR 2019 SC 3785, 2020-17 SCC 419, that for appointment of an arbitrator, there must have been an arbitration agreement, and the existence of the arbitration dispute must have been covered by an arbitration clause.

Effect of Fraud on Arbitration Agreement

In A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386, it was held as under:

• “25. ……..It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence  or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself…….”. (Quoted in: Zenith Drugs & Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd., AIR 2019 SC 3785, 2020-17 SCC 419)

It was pointed out in Zenith Drugs & Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd., AIR 2019 SC 3785, 2020-17 SCC 419, that the plea of fraud being raised in entering the compromise, the merits of such a plea could be decided only by the Civil Court upon consideration of the evidence adduced by the parties.

Arbitration Clause in a Perished/Expired Contract, Arbitrator Not Appointed

Relying on Union of India v. Kishorilal Gupta and Bros., AIR 1959 SC 1362 it is held in Eigen Technical Service Pvt.  Ltd.  v. Vatika Limited,  2013-172 Pun LR  27: 2013-4 Arb LR 367, that arbitration clause in a redundant and perished contract by efflux of time, cannot be invoked. The court relied on an Allahabad decision stating as under:

• “ High Court of Allahabad in a judgment dated 10.11.2006 passed in Writ Petition No. 21275 of 2006 titled as Union of India Thru’ Secry., Ministry of Postal v. Jagdish Kaur has also observed that arbitration clause contained in an expired agreement is also deemed as expired and is no more valid.”

Read Blogs:

• What are Non-Arbitrable Disputes? When a Dispute is Not Referred to Arbitration in spite of Arbitration Clause
• Expiry of Contract by Efflux of Time – Arbitration Clause Cannot be Invoked