Purshottam s/o Tulsiram Badwaik Vs. Anil & ors. Civil Appeal No. 4664 of 2018

Author- Snehal Tanaji Shirke
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  • Case name: Purshottam s/o Tulsiram Badwaik Vs. Anil & ors.
  • Court: Supreme Court of India
  • Case No: Civil Appeal No. 4664 of 2018.
  • Appellant: Purshottam s/o Tulsiram Badwaik
  • Respondent: Anil and ors.
  • Date of Judgement: 2nd May 2018.
  • Bench: Uday Umesh Lalit J.

Introduction:

This case is mainly concerned with section 8 of the Arbitration and conciliation Act 1996. This appeal challenged the rejection of the application under section 8 of the Arbitration and conciliation Act,1996. It also includes or states the Validity of the 1940 act. When the matter is brought before the district court and later to High Court, Both courts rejected such an application, and thus this appeal called upon the Hon’ble Supreme Court to uphold the Arbitration agreement.

Facts:

  • Appellant and respondent entered into the partnership agreement stating 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 Indian Arbitration Act, 1940, and the decision of the Arbitrator shall be final and binding on all the partners.
  • The Respondents filed Special Civil Suit No. 16 of 2014 in the Court of Hon’ble Civil Judge, Senior Division, Bhandara for declaration, damages, accounts, and permanent injunction against the Appellant.
  • After receiving the notice by the appellant preferred this application under section 8 to refer the matter to as according to the agreement.
  • Later when the case came in front of the trial court, it rejected the application and held that the clause was vague that there was no reference as to who should be the arbitrator, that there was no mention of a selection of the arbitrator and that the dispute did not form the subject matter of agreement within the meaning of Section 8 of 1996 Act.
  • The Appellant moved to the High court and filed for revision application against the trial court, High court rejected the application on the ground that the dispute did not form the subject matter and there was a bar to agree to the applicability of the 1940 act after the enactment of 1996 act and reference to arbitration in terms of 1940 Act would invalidate the entire arbitration clause.[1]

Issue:

Whether the whole of an arbitration agreement made after 1996 is invalid because it seeks to subject the parties to the provisions of the 1940 Act?

Rules:

Arbitration and Conciliation Act,1996- Section 7, 8, 85

Arbitration Act, 1940 – Section 10

Section 7:

Arbitration agreement. —

(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

Section 8:

Power to refer parties to arbitration where there is an arbitration agreement—

(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 so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to the arbitration.

(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.

(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 85:

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.

(2) Notwithstanding such repeal, –

(a) the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force;

(b) all rules made and notifications published, under the said enactments shall, to the extent to which they are not repugnant to this Act, be deemed respectively to have been made or issued under this Act.”

Section 10 of Arbitration Act,1940:

Provisions as to appointment of three or more arbitrators.

Where an arbitration agreement provides that a reference shall be to three Arbitrators, one to be appointed by each party and the third by the two appointed arbitrators, the agreement shall have effect as if it provided for the appointment of an umpire, and not for the appointment of a third arbitrator, by the two arbitrators appointed by the parties.[2]

Arguments:

(Purshottam s/o Tulsiram Badwaik Vs. Anil & ors. Arguments)

Argument by Appellant:

  • Appellant argued that an arbitration agreement providing for the appointment of an even number of arbitrators is not a valid agreement because of section 10(1) of the new act and therefore the only remedy in such a case is by suit and not by arbitration.
  • That sub-section (2) of section 10 is not attracted since there is no failure to determine the number of arbitrators according to sub-section (1).
  • Further, he added that section 10 is a departure from para 2 of the 1st schedule of the Arbitration Act,1940 which reads as under:

If the reference is to an even number of arbitrators the arbitrators  shall appoint an umpire not later than one month from the latest date of their respective appointments.”

Argument by Respondent:

  • Respondent argued that there is no such inconsistency between section 10 of the new Act and the corresponding provision in the 1940’s Act, 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 thus the New Act must be construed to enable the enforcement of the earlier arbitration agreement.
  • It was urged that each of the parties having nominated its arbitrator the 3rd arbitrator required to be appointed according to section 11(3) and failing to which attracts the consequences.
  • Further added to his argument that 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.[3]

Judgement:

(Purshottam s/o Tulsiram Badwaik Vs. Anil & ors. Judgement):
The Court, therefore, held that the High Court had wrongly observed that there could be no arbitration at all. Here, what is crucial in the determination of the application of the 1940 or 1996 Act is the date of commencement of proceedings. An incorrect reference or recital regarding the applicability of the 1940 act would not render the entire arbitration agreement invalid. In this appeal, the agreement itself was made post-1996 therefore the question of application of the 1940 Act to its proceedings doesn’t arise and cannot be upheld. 

Precedents:

  • Thyssen Stahlunion GMBH V. Steel Authority of India Ltd[1]

Parties can agree to the applicability of the new Act even before the new Act comes into force and when the old Act is still holding the field.  There is nothing in the language of Section 85(2)(a) which bars the parties from so agreeing.  There is, however, a bar that they cannot agree to the applicability of the old Act after the new Act has come into force when arbitral proceedings under the Old Act has not commenced though the arbitral agreement was under the old Act.

  • MMTC Limited vs. Sterlite Industries (India) Ltd. (supra)[2]

In this case, it was held that to emphasize the object of the Arbitration and Conciliation Act,1996 is to encourage alternate dispute resolution and discourage unnecessary litigation.

Analysis:

The Apex court has analyzed the legality of the application of the 1940 and 1996 acts. The court has clarified that any arbitration proceeding that commences before the enforcement of the Act 1996 is subject to the provision of the 1940 Act. Any arbitration agreement made before 1996, but proceedings thereby commencing after 1996 would be subject to the 1996 Act.

Any agreement made after the enforcement of the 1996 Act would automatically be covered by the 1996 Act. In order to advance the object of the 1996 Act i.e. encouragement of alternate dispute resolution, the Court must not invalidate the entire agreement on account of an incorrect reference to the 1940 Act. 

Conclusion:

It can be concluded that in this case of Purshottam s/o Tulsiram Badwaik Vs. Anil & ors, the Arbitration agreement is valid as the court is satisfied with all the requirements of arbitration agreement were fulfilled according to section 7 of Arbitration and conciliation Act, 1996.

Any reference to the 1940 Act in the arbitration agreement would be of no consequence and the matter would be referred to arbitration only in terms of the 1996 Act consistent with the basic intent of the parties as discernible from the arbitration agreement to refer the disputes to arbitration. An incorrect reference to the 1940 Act does not and cannot render the whole of the agreement invalid. Courts must always attempt to further the object of the Act and as far as possible, must save arbitration agreements from complete vitiation. Therefore, the judgement given by the High court was set aside by the Hon’ble Supreme Court.

 Case law Reference:

[1] 1999 (9) SCC 334

[2] 1996 (10) SC 390


References:

[1] https://indiankanoon.org/doc/187340220/

[2] http://legislative.gov.in/sites/default/files/A1996-26.pdf

[3] https://www.legalauthority.in/judgement/purushottam-s-o-tulsiram-badwaik-vs-anil-228

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