Sunday, March 15, 2009

Jurisdiction of CJ under Arbitration Act

Jurisdiction of CJ under Arbitration Act

R.N. Sahai

SECTION 16 of the Arbitration and Conciliation Act, 1996 (`the Act') does not take away the jurisdiction of the Chief Justice of India or his designate, if need be, to decide the question of the `existence' of the arbitration agreement.

Merely because the new Act permits the Arbitrator to decide this question, it does not necessarily follow that at the stage of Section 11 the Chief Justice of India or his designate cannot decide a question as to the existence of the arbitration clause.

In cases where to start with there is a dispute raised at the stage of the application under Section 11 that there is no arbitration clause at all, then it will be absurd to refer the very issue to an arbitrator without deciding whether there is an arbit ration clause at all between the parties to start with.

In this case, the parties used in the relevant clause, the word `may' not without reason. Under the preceding Clause 4 parties desired that in case of disputes, the Civil Courts at Bombay are to be approached by way of a suit. Then follows Clause 5 with the words `it is also agreed' that the dispute `may' be referred to arbitration implying that parties need not necessarily go to the Civil Court by way of suit but can also go before an arbitrator.

Reading Clause 4 and Clause 5 together, it is not the intention of the parties that arbitration is to be the sole remedy. It appears that the parties agreed that they can `also' go to arbitration in case the aggrieved party does not wish to go to a Civil Court by way of a suit. But in that event, obviously, fresh consent to go to arbitration is necessary.

So decided Mr. justice M. Jagannadha Rao of the Supreme Court as designate of the Chief Justice an application filed under sub-clauses (2), (6), (10) and (12) of Section 11 of the Act.

Deciding that there was no arbitration agreement the application for appointment of arbitrators was dismissed.

However, the honourable judge stated that in case a civil suit is filed, it will be for the petitioner to seek an early disposal of the case, and he has no reason to doubt that the civil court will treat the request of the petitioner for early disposal w ith due consideration. That was in Wellington Associates Ltd vs. Mr. Kirit Mehta (Arbitration Petition No, 9 of 1999 decided on April 4, 2000).

The brief facts are that the petitioner-company having its registered office in Mauritius entered into two agreements with the promoter and managing director of CMM Ltd, Mumbai, (`respondent') to subscribe to a private placement of two lots of 85,000 equ ity shares each of CMM Ltd. Each share was of face value of Rs. 10, and the shares were to be acquired at a premium of Rs. 20 per share.

The respondent agreed to compulsorily purchase back the shares after the expiry of one year in the following manner (i) under the first agreement, 85,000 with an assured return at the rate of 35 per cent per annum and (ii) under the second agreement, 85, 000 with an assured return at the rate of 29 per cent per annum. It was also agreed that upon default, the respondent would be liable to penal interest at three per cent per annum from the date of subscription till actual date of payment.

Another company, namely, Sigma Credit and Capital Services Pvt Ltd, wrote to the petitioner that it had taken up the deal of CMM Ltd. It ensured, inter alia, that the agreements would be fully complied with by the CMM Ltd. It further undertook to buy-bac k the 85,000 NRI shares of CMM Ltd at the end of 12 months from the date of investment, at the rate of 25 per cent per annum in case the respondent failed to meet the commitment of buy-back.

Pursuant to the above agreement, the petitioner paid Rs. 51 lakhs to the respondent on October 9, 1995 and 1,70,000 shares were allotted to the petitioner. As regards buy-back, by October 8, 1996, the respondent did not buy back the shares, nor did the S igma Credit and Capital Services Pvt Ltd buy-back the shares.

The detailed judgment by Mr. Justice Rao was based on the following reasoning:

I Section 33 of the Indian Arbitration Act, 1940 vested jurisdiction only in the court to decide whether there was in `existence' an arbitration clause or not.

I In Renusagar Power Co Ltd vs. General Electric Co AIR 1985 SC 1156, it was stated that ordinarily an arbitrator has no authority to clothe himself with power to decide the question of his own jurisdiction. This disability has been removed by Section 16 of the new Act.

I The provision in Section 16 is only an enabling one which, unlike Section 33 in the old Act of 1940, permits the arbitral tribunal to decide a question relating to the `existence', of the arbitration clause.

I Section 16 does not exclude the jurisdiction of the Chief Justice of India or his designate in this behalf if a question as to the existence of the arbitration clause is raised by the respondent in his reply to the petition filed under Section 11.

I Even if the Chief Justice of India or his designate under Section 11(12) is to be treated as an administrative authority, when the said authority is approached seeking appointment of an arbitrator/arbitral tribunal under Section 11, and a question is raised that there is, to start with, no arbitration clause at all between the parties, the Chief Justice of India or his designate has to decide the said question.

I Where the matter has gone to the arbitrator without the intervention of an application under Section 11, if the question as to the existence of the arbitration clause is raised before the arbitral tribunal, the arbitral tribunal has power to decide the question.

I Similarly, where the arbitration clause is not in issue at the time of section 11 application but a point is raised before the arbitral tribunal that the said clause or the contract in which it is contained has ceased to be in force, then also the arbi trator can decide whether the arbitration clause has ceased to be in force.

(By arrangement with Corporate Law Adviser, New Delhi.)


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