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Report No. 176

2.2. Whether section 8 should be confined to 'courts' by omitting the word 'judicial authority', and issues of jurisdiction arising under section 8 in suits and other proceedings where defendant/respondent relies upon an arbitration agreement.

2.2.1 Section 8 of the 1996 Act reads as follows:-

"Sec.8(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 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 8(1) of the Act uses the word 'judicial authority'. In Skypack Couriers Ltd. Vs. N.K.Modi, [2000] (5) SCC 294: 2000(3)Arb. Law Reporter 160, the Supreme Court of India assumed without finally deciding the question, that the consumer fora created under the Consumer (Protection) Act, are competent to refer disputes to arbitration. The court held that, even so, the consumer for a could not refer disputes for decision of third parties or experts and make such decisions, decrees nor could the fora deny the right to file objections.

Earlier, in M/s Fair Air Engineers Private Limited v. N.K. Modi, AIR 1997 SC 533 the Supreme Court dealt with sec. 34 of the 1940 Act and as to whether the word 'judicial authority' in the said section could entertain a plea that the subject matter of dispute is covered by the arbitration agreement.

In case the words 'judicial authority' in sec.8 are to include the consumer for a or Debt Recovery Tribunals dealing with debts due to Bank or other quasi judicial tribunals and if they are to decide whether the disputes are to be referred to arbitration (or as proposed below, that they can decide disputes about whether the arbitration agreement is 'null and void, inoperative or not enforceable) then, it may indeed be necessary to decide which authority will decide the correctness of the decision or whether parties should resort to Art.227 of the Constitution of India or an appeal is to be provided under this Act.

It is likely that if the word 'judicial authority' is to include quasi judicial tribunals, several other problems arise. It is therefore considered that instead, the word 'judicial authority' be replaced by the word 'court as in the Model Law and provide and Explanation under sec.8 that the word 'court' in this section shall mean the court in which the suit is filed.

It will also be noticed that in as much as Sec.8(3) of the Indian Act uses the word 'may' enabling arbitration proceedings to go on, it will be open to the arbitrators either to go on or await the decision of the Civil Court.

If in Sec.8(1) of the Indian Act the words "unless it finds the agreement is null and void, inoperative or incapable of being performed." are introduced, it will be open to the arbitrators either to proceed with arbitration or not to proceed with arbitration pending the decision of the Civil Court on the question as to whether the arbitration agreement is "null and void or inoperative or not enforceable."

In cases where suits are filed on the original side of the High Court normally a single Judge of the High Court can decide the question whether the arbitration agreement is null and void etc. But this may result in an appeal to a Division Bench and a further S.L.P. under Article 136 of the Constitution of India.

It would therefore be advisable if, whenever such issues arise under Sec.8 on the original side of the High Court they are decided by a Division Bench of the High Court both in the case of domestic and international arbitrations.

Where suits are filed in courts subordinate to the High Court, the issues as to whether the arbitration agreement is null and void etc can first be allowed to be decided by the same Court and an appeal could be provided to the High Court to be decided by a Division Bench of the High Court.

2.2.2 The next question is whether Sec.8(1) of the 1996 Act should contain the words, "unless it finds that the agreement is null and void, inoperative or incapable of being performed" Art.8(1) of the Model law reads as follows:

"Art.8(1) A Court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null an void, inoperative or incapable of being performed.

2) Where an action referred to in Para.1 of this article has been brought, arbitral proceedings may nevertheless be commenced or continued and award may be made, while the issue is pending before the Court."

The words "unless it finds that the agreement is null and void, inoperative or incapable of being performed" are found not only in Art.8(1) of the Model law but in corresponding articles of the arbitration statutes in various countries which have adopted the Model law.

See in this connection Sec.1032 of the German Act 1998, Article 9 of the Korean Act 1999, Art.8 of the Canadian Act 1986, Article 8 of the Zimbabwe Act 1996, and Sec.15 of the British Columbia Act 1996 on which the Indian Act 1996 is said to have been modelled. (See Dr.P.C.Rao's Commentary on the Act at Page.9).

Further almost all the above statutes do not contain any provision for stay of the proceedings in the Civil Court pending a decision by the Court on the question whether the arbitration agreement is null and void or inoperative or not enforceable. However, the English Arbitration Act 1996 continues to have a provision similar to Sec.34 of the Old Indian Act of 1940. Sec.9 of the English Act 1996 reads as follows:

"Sec.9: A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counter-claim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the Court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

(2) An application may be made notwithstanding that the matter is to be referred to arbitration only after the exhaustion of other dispute resolution proceedings.

(3) An application may not be made by a person before taking the appropriate procedural stay (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim.

(4) On an application under this Section, the Court shall grant a stay unless satisfied that the arbitration agreement is null and void, inoperative, or incapable of being performed.

(5) If the Court refuses to stay the legal proceedings, any provision that an award is a condition precedent to the bringing of legal proceedings in respect of any matter is of no effect in relation to those proceedings".

The above Sec.9 of the English Act is applicable to an international as well as domestic arbitration. However, we may mention that Part II of UK Act which provides for certain modifications to the provisions in Part I in their application to domestic arbitrations has not yet been brought into force. Even so, we may refer to Sec.86 in Part - II, which reads as follows:

"S.86. (1) In section 9 (Stay of legal proceedings), sub-Section (4) (Stay unless the arbitration agreement is null and void, inoperative, or incapable of being performed) does not apply to a domestic arbitration agreement.

(2) On an application under the Section in relation to a domestic arbitration agreement the Court shall grant a stay unless satisfied-

(a) that the arbitration agreement is null and void, inoperative, or incapable of being performed, or

(b) that there are other sufficient grounds for not requiring the parties to abide by the arbitration agreement.

(3) The Court may treat as a sufficient ground under Sub-Section 2(b) the fact that the applicant is or was at any material time not ready and willing to do all things and necessary for the proper conduct of the arbitration or of any other dispute resolution procedures required to be exhausted before resorting to arbitration (4) For the purposes of this section the question whether an arbitration agreement is a domestic arbitration agreement shall be determined by reference to the facts at the time the legal proceedings are commenced".

In the light of the above provisions of Sec.8 of the Indian Act and Article 8 of the Model law and Sections 9 and 86 of the U.K.Act 1996, the following important issues arise for consideration.

(A) The Supreme Court has decided in P. Anandagajapati Raju Vs. P.V.G.Raju 2000(4) SCC 539 = AIR 2000 SC 1086 that under Section 8(1) of the 1996 Act if a defendant in a suit pleads the existence of an arbitration agreement, it is mandatory for the Civil Court to refer the parties to arbitration inasmuch as the discretionary power vested in the Court under Section 34 of the Old Act of 1940 is no longer under the Act of 1996.

Of course, in this case, the Supreme Court did not have the occasion to go into the question whether the expression "arbitration agreement" in Section 8 means a valid and enforceable agreement? So far as English Act of 1996 is concerned, Sec.86 retains the discretionary power for domestic arbitration. It appears that otherwise under Sec.9 there is no discretion vested in the Court.

The first question therefore is whether the discretionary power of the Court which was available under section 34 of the Old Act of 1940 could be restored only so far as domestic arbitration cases are concerned as in England. In other words in a domestic arbitration the Court will not entertain the plea based on an arbitration clause raised by the defendant if he had not been ready and willing earlier for arbitration or if questions of fraud arise or if serious issues of fact or law arise etc.

However so far as international arbitration is concerned, all countries which have followed the Model law make it mandatory for the Court to refer the disputes to arbitration if a plea is raised by the defendant on the basis of an arbitration agreement which is not null and void, inoperative or not enforceable. We can also retain the mandatory provision so far as international arbitration is concerned.

(B) The next question is with regard to the denial of the power under Section 8 (1) of the Indian Act to go into the questions as to whether the arbitration clause is "void or inoperative or not enforceable". When such a power is granted to the Court under the Model law and when such a power is found in the arbitration statutes of almost all countries following the Model law, there appears to be no good reason why such a power should be denied to the judicial authorities in India.

(C) It will also be noticed that in as much as Sec.8(3) of the Indian Act uses the word 'may' enabling arbitration proceedings to go on, it will be open to the arbitrators either to go on or await the decision of the Civil Court. If in Sec.8(1) of the Indian Act the words "unless it finds the agreement is null and void, inoperative or incapable of being performed." are introduced, it will be open to the arbitrators either to proceed with arbitration or not to proceed with arbitration pending the decision of the Civil Court on the question as to whether the arbitration agreement is "null and void or inoperative or not enforceable."

(D) In cases where suits are filed on the original side of the High Court normally a single Judge of the High Court can decide the question whether the arbitration agreement is null and void etc. But this may result in an appeal to a Division Bench and a further S.L.P. under Article 136 of the Constitution of India. It would therefore be advisable if, whenever such issues arise under Sec.8 on the original side of the High Court they are decided by a Division Bench of the High Court both in the case of domestic and international arbitrations.

(E) Where suits are filed in courts subordinate to the High Court, the issues as to whether the arbitration agreement is null and void etc can first be allowed to be decided by the same Court and an appeal could be provided to the High Court to be decided by a Division Bench of the High Court.



The Arbitration and Conciliation (Amendment) Bill, 2001 Back




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