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Report No. 176

2.4.5 Whether certain preliminary issues at the stage of section 8 could be decided

We then turn to another and more important aspect In Art. 8(1) of the Model Law, it is provided that the court before which an action is brought shall, if an arbitration agreement is pleaded, refer the parties to arbitration "unless it finds that the agreement is null and void, inoperative or incapable of being performed". These words have been omitted in sec.8 of the 1996 Act. The result of the omission is that, in view of sec.5, the judicial authority cannot decide if the arbitration agreement is 'null and void, inoperative or incapable of being performed'.

In the Consultation Paper (Annexure-II), it was proposed that sec.8 is to be amended to bring it in conformity with Art.8(1) of the Model Law, so as to enable the judicial authority to decide these jurisdictional issues at the initial stage. It has been suggested at the Bombay seminar that the 'judicial authority' may be empowered, if need be, to decide these issues, in case they can be decided on 38 admitted facts or documents and without receiving oral evidence and if there is no likelihood of delay.

As far as deviation of the 1996 Act from the Model Law is concerned (as set out above), the only reason one can find is that any decision rejecting the plea that the agreement is 'null and void, inoperative or incapable of being performed' may be challenged and that this may lead to delay in the commencement of arbitration proceedings. But even otherwise, any order under Section 8 is amenable to Art. 227 of the Constitution of India. So this cannot be a good reason to exclude these words.

Now these words have been there in the corresponding provision under the New York Convention, 1958 and are retained in sec.45 of the 1996 Act. In other words these words are retained in Part II in sec. 45, however, they have been omitted in sec.8 of Part I. This aspect was exhaustively considered by the UN Commission in its 1985 Report (Report of the United Nations Commission on International Trade Law on the work of its 18 Session, 21 August, 1985).

In its para 91, the U.N. Commission referred to the fundamental principle that if the jurisdictional issues were first raised before court, "priority should be accorded to the court proceedings by recognizing power in the courts to stay the arbitral proceedings or, at least, by precluding the arbitral tribunal from rendering an award". The UN Commission felt that the above words were to be retained in Art.8 and that the arbitral tribunal is to be permitted, to continue the proceedings (including the making of an award), while the issue of jurisdiction is before the Court. The UN Commission in the said Report regarding deliberation of the Commission leading to the adoption of UNCITRAL Model in para 92 states:

"It was pointed out that expenses could be saved by awaiting the decision of the Court in those cases where the Court later ruled against the jurisdiction of the arbitral tribunal. However, it was for that reason not recommendable to provide for a postponement of the court's ruling on the jurisdiction of the arbitral tribunal. Furthermore, where the arbitral tribunal had serious doubts as to its jurisdiction, it should either decide it under Art.16(2) as a preliminary issue or await the court's decision."

Thus the UN Commission considered this aspect in depth and retained the words "null and void, inoperative or incapable of being performed" in the Model Law. The above words 'null and void etc.' which have been copied from the New York Convention, 1958 in to Art.8 of the Model Law are also found in the statutes of various countries which have adopted the Model Law (See for example, section 1032 of the German Act, 1998, Art. 9 of the Korean Act 1999, Art 8 of the Canadian Act 1986, Art. 8 of the Zimbabwe Act, 1996 and also sec.15 of the British Columbia Act 1996 which is supposed to have been kept in view when the 1996 Act was drafted, see Dr. P.C. Rao's Commentary on the Act at p.9).

Section 9(4) of the English Act, 1996 also includes these words in the corresponding section and calls for a decision at that stage itself as done in the Model Law and other statutes which followed the Model Law. Redfern and Hunter in Law and Practice of International Commercial Arbitration (1999) (see para 3.34) has cited an example to show why these words have to be retained. They explain as follows:

"Suppose, for example, that one of the parties claims that it was not a party to the main contract ("that's not my signature"), and therefore not a party to the arbitration clause within that contract. If it is right, there can be no valid arbitration and no valid award. No amount of insistence upon the autonomy of the arbitration clause (i.e., Art.16) can make it valid if the respondent was not a party to it."

Russell in Russell on Arbitration (21st Edn. 1997) (para 7.005) says:

"if the arbitration agreement itself is challenged the Court will have to decide its validity before granting stay of the legal proceedings. The Court will however lean towards giving effect to the arbitration agreement if at all possible".

Fouchard and others in International Commercial Arbitration (1999) have made an important distinction between similar cases which come under sec.8 and those which come under sec.16 of our Act, i.e., cases which start from the court and cases which are already before the arbitral tribunal to start with. The authors said that these issues can be left to be decided by the arbitral tribunal in cases where reference is made by parties without court assistance but not if the matter starts from the court. They said (see para 680):

"If the dispute is already before the arbitral tribunal, i.e., under sec.16, the Courts have no jurisdiction, because of the risk of deliberate delay. On the other hand, the attitude of a plaintiff who brings its dispute directly before the Courts is less likely to be in bad faith. Since the dispute has not yet gone before the arbitral tribunal, the idea of avoiding duplication of effort resurfaces: the court will retain jurisdiction to rule on the merits of the dispute only if it considers the arbitration agreement to be patently void."

The above reasons are, in the opinion of the Commission, very weighty and cannot be ignored. Russell says that these words also include by implication a situation where there is no arbitration agreement or where it is invalid or is one to which the applicant (opposite party) is not a party. (Russell on Arbitration Act, (1999) (See 7.013, 7.004, 7.007 and 7.006).

It may also be a case where the plaintiff or petitioner before the judicial authority is not a party to the arbitration clause. According to the decisions of our Supreme Court, under sec.20 of the old Act this jurisdiction covers also cases where there is no dispute in existence. In all these situations, should the judicial authority fold its hands?

In fact, even if the Court is not to decide at that stage and the arbitral tribunal alone is to first decide these issues, such a decision of the tribunal will anyway be subject to the decision of the Court ultimately. Can't time and money be saved by permitting these issues to be decided at this stage ? Or can we make a flexible provision in order to prevent delay at this stage ?

Under sec.34 of the Act of 1940, the Supreme Court held that before the Court allows an application for reference to arbitration, the Court could decide about the existence, validity of the arbitration clause or its binding nature on the plaintiff or whether the applicant was a party bound by the clause or if there was a dispute. (See UOI vs. Birla Cotton Spg & Wg. Mills, AIR 1997 SC 6; Anderson Wright Ltd. vs. Molan & Co., AIR 1955 SC 53; ITC Ltd. vs. George Joseph Fernandes AIR 1989 SC 839; Security & Finance (P) Ltd. vs. Gurcharan Singh, 1969 SC WR 877). But perhaps now, in view of sec. 5, unless the Court is empowered to decide these issues, it will have no jurisdiction under section 8 of the 1996 Act.



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