Incorrect Reference Regarding Applicability Of Arbitration Act 1940 Would Not Render Entire Arbitration Agreement Invalid: Karnataka HC

The Karnataka High Court held that an incorrect reference or recital regarding applicability of the Arbitration Act 1940 would not render the entire arbitration agreement invalid.

The Court allowed the appeal challenging the judgment of the District Court that had set aside the arbitral award.

The Court noted that the District Judge erred in observing that since the arbitration agreement in the Hire Purchase Agreement referred to the repealed Arbitration Act, 1940, it cannot be enforced.

“Arbitration agreement incorrectly stipulating arbitration under the 1940 Act i.e., even after the 1996 Act had come into effect, not to render the entire agreement invalid and further held that, even if an arbitration agreement entered into after the 1996 Act had come into force were to make a reference to the applicable provisions of those under Indian Arbitration Act or the 1940 Act, such stipulation would be of no consequence and the matter must be governed under provisions of the 1996 Act”, the Bench of Justice H. P. Sandesh observed.

The Bench also noted, “It is further held that an incorrect reference or recital regarding applicability of the 1940 Act would not render the entire arbitration agreement invalid and such stipulation will have to be read in the light of Section 85 of the 1996 Act and principles governing such relationship have to be under and in tune with the 1996 Act”.

Advocate Archana Nair appeared for the Petitioner and Advocate Vijaykumar V. appeared for the Respondent.

The Appellant submitted a claim petition with connected documents to an arbitrator regarding a dispute arising from a Hire Purchase Agreement. The agreement included arbitration clauses. The initial arbitrator conducted proceedings until 2005 but couldn't continue due to age and health issues, passing the papers to a new arbitrator. This new arbitrator began proceedings in 2005, issuing notices to the parties and their advocates. With no objections, the arbitrator proceeded to hear arguments and eventually directed the respondents to pay the appellant a specified amount. The Original Respondents (Petitioners) approached the High Court challenging the judgment of the District Court that set aside the arbitral award.

The Court framed the following issue: “Whether the learned District Judge has committed an error in allowing the Arbitration Suit No.18 of 2006, considering Clause No. VII (a) at Ex.P1 and erroneously arrived at a conclusion that the arbitration is invalid and the Arbitrator has no jurisdiction to set aside the judgment and award”.

The Court observed the existence of a Hire Purchase Agreement between the involved parties, which had initially been referred to an arbitrator for proceedings. The issue arose from this agreement, involving the appellant as the owner, respondent No.1 as the hirer, and respondent No.2 as the guarantor, with a claim of Rs. 3,02,350/-. Following the initial arbitrator's inability to continue due to health reasons, a new arbitrator assumed responsibility on July 8, 2005. The new arbitrator proceeded with the case, heard arguments, and rendered an award directing the respondents to pay Rs. 3,06,750/-. Subsequently, an arbitration suit was filed contesting this award.

Upon examination of the arbitration proceedings, the Court noted the respondent's argument before the Arbitrator regarding the enforceability of the arbitration clause inserted under the Act, 1940, following the enactment of the Central Act, 1996. An additional issue arose concerning the validity of the Hire Purchase Agreement made under the Act, 1940 after its repeal. The Arbitrator examined Clause No. VII (a) of the Hire Purchase Agreement, which referenced arbitration under the provisions of the Act, 1940, and assessed the parties' intention at the time of agreement. Concluding that the 1996 Act, while replacing the Act 1940, constituted an amendment rather than a complete overhaul, the Arbitrator considered Section 7 of the Act, 1996 and emphasized the importance of the parties' intention, asserting the Arbitrator's authority to determine jurisdiction.

Additionally, the Court noted the Arbitrator's consideration of Section 6 of the General Clauses Act, concluding that unless the new Act explicitly manifested an intention to nullify the rights and liabilities under the repealed Act, they would persist. Given that the Hire Purchase Agreement referenced both the 1940 Act and any statutory amendments, the Arbitrator deemed the arbitration clause valid and binding on the respondents.

The Court reviewed the rationale provided by the District Judge in the Arbitration Suit, who considered the contents of Clause No. VII (a) of the Hire Purchase Agreement. Despite the agreement predating the enactment of the new Act, the District Judge deemed the arbitration clause unenforceable as it referred to arbitration under the repealed Act. Consequently, the arbitration clause was invalidated, and the Arbitrator was considered lacking jurisdiction over the dispute.

Referring to legal precedents, including MMTC Ltd. v Sterlite Industries (India) Ltd. [(1996) 6 Scc 716] and Purushottam v Anil And Others [(2018) 8 Scc 95], the Court noted the applicability of the Act, 1996 over the Act, 1940 in arbitral proceedings, emphasizing the importance of party agreement and the irrelevance of references to the Act, 1940 in agreements.

After scrutinizing the District Judge's reasoning, the High Court concluded that the District Judge erred in setting aside the arbitration award solely based on jurisdictional grounds. Consequently, the matter was remanded to the District Court for a reconsideration of the pertinent issue.

Accordingly, the Court allowed the appeal and set aside the impugned judgment.

Cause Title: M/S. ICDS Ltd v Sri Bhaskaran Pillai

Appearance:

Petitioner(s): Advocates Archana Nair and Ananda Shetty A.

Respondent(s): Advocate Vijaykumar V.

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