International Arbitration Practice: Introduction to Arbitration Agreements (Lecture 1)

We have been doing video lectures on international arbitration practice, which can be accessed from here. Thirty one lectures have been uploaded so far covering various aspects including drafting arbitration agreements in commercial arbitrations, invoking arbitration in commercial and investment treaty arbitrations. In this post and the next few in this series, we provide the script of these lectures, starting from lecture 1.

 

Welcome to the 1^st lecture in this lecture series titled “Introduction to International Arbitration Practice”. This lecture series will focus on the practical elements of international commercial and investment treaty arbitration. The first lecture in this lecture series will deal with Arbitration Agreements. The focus will be on commercial arbitration agreements.

Most of us are familiar with arbitration agreements. They are, in simple, agreement to refer disputes to arbitration, rather than resolving disputes through other forums.

Such agreements could be entered into for disputes that may arise in future or once a dispute has arisen. Article 7(1) of the UNCITRAL Model Law on International Commercial Arbitration, 1985 states in this regard: “An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.” An identical provision is also contain in Section 7(2) of India’s Arbitration and Conciliation Act, 1996.

Arbitration agreements can be either in the form of arbitration clauses forming a part of an agreement (also called “arbitration clause”) or in the form of separate arbitration agreements (called in arbitration parlance as “submission agreements”). Arbitration clauses are usually part of an agreement. Here the agreement precedes the dispute.

Submission agreements are agreements for reference of disputes to arbitration. Usually, submission agreements are entered into after disputes arises and arbitration clauses refer future disputes to arbitration. It is possible that submission agreements could replace prior arbitration agreements as well.

Now, which one is better? Arbitration clause or submission agreement, you may ask. The answer is: it depends. But there are two factors you should consider: One, it is very difficult for parties to reach a submission agreement after a dispute has arisen. Two, the time between entering into an arbitration agreement in the main agreement and when dispute arises might be long; and by the time dispute has arisen, the arbitration agreement may not be suitable  for resolving that dispute.

Parties therefore opt for the lesser evil and take the risk of providing for resolution of future disputes through the arbitration clause. This is because if no arbitration is agreed upon, parties may have to choose to litigate in the local courts which may not be desirable for various reasons, including non-flexible procedures, formalities, lengthy proceedings, etc.

Whatever may be the case, an arbitration agreement has to satisfy the formal criterial laid down in the relevant law. We will now discuss what the Indian law on this is.

Arbitration & Conciliation Act, 1996 (“1996 Act”)- contains different treatment for different types of arbitration agreements. Part I and Part II of the 1996 Act contain two different types of definition.

Part I of the Act is applicable where the place of arbitration is India. S. 2(1)(b) states: “(b) “arbitration agreement” means an agreement referred to in section 7;”

S. 7(1) states: “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.”

Thus, three main ingredients are to be satisfied:

• There should be an “agreement by the parties”: Parties is defined in S. 2(1)(h): “(h) “party” means a party to an arbitration agreement.”
• The agreement should be “to submit to arbitration”; and
• The submission for arbitration should be for disputes in respect of defined legal relationship.

The expression defined legal relationship has been explained in the case of Vidya Drolia v. Durga TradingCorpn., (2021) 2 SCC 1, where the Supreme Court held in Para 24: “24. … The expression “legal relationship”, again not defined in the Arbitration Act, means a relationship which gives rise to legal obligations and duties and, therefore, confers a right.”

Section 7(3) states that arbitration agreement shall be in writing. So does Article 7(2) of the Model Law.

Now, we make a brief detour on the separability doctrine, to the extent useful from a practical perspective. In simple, separability doctrine enables the arbitration clause to be treated separately from the main agreement, although it forms a part of the said main agreement.

The concept of separability provides doctrinal justification to afford jurisdiction to the arbitral tribunal to decide even on questions relating to the validity of the arbitration clause, rather than going to court for decision on such questions. Article 16(1) of the Model Law recognises this and reads:

 “(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration  agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

This has been incorporated in the 1996 Act in Section 16(1), which reads:

“(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,—

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

The separability doctrine also operates in submission agreements but differently. This has been discussed in the US Supreme Court decision of Rent-A-Center, W., Inc. v. Jackson, 561 US63 (2010) where it was held:

• Application of separability doctrine does not depend on the nature of the remaining portion of the agreement
• Therefore, it applies even to submission agreements
• “delegation” provision contained within an arbitration agreement, providing for resolution of any disputes about the validity or scope of the arbitration agreement by the arbitral tribunal, was itself separable from the more general arbitration agreement

It was therefore held by the US Supreme Court: “In this case, the underlying contract is itself an arbitration agreement. But that makes no difference. Application of the severability rule does not depend on the substance of the remainder of the contract.”

That’s all in this lecture. In the next lecture we will deal with an interesting topic, which has immense practical significance for drafting arbitration agreements.

Hope you enjoyed this first lecture of the lecture series. Do write to lawbadri@gmail.com for feedback and comments. Bye bye and stay safe.

Vidya Drolia v DTC: Part II: Interesting Aspects- Contradiction between Patel Engineering & Booz Allen

Para 17-19 of Vidya Drolia v Durga Trading Corporation is the next interesting aspect we take up in this post. We had discussed the nature of an arbitration agreement and its relation to the law of contracts in the previous post on this subject. In this post, we will discuss the contradiction between Booz Allen and Patel Engineering on whether subject-matter arbitrability is to be decided by a court under Section 8 and11.

In Vidya Drolia, the Supreme Court observed:

" When public policy mandates and states that a case or a dispute is non-arbitrable, the court would not allow an application under Section 8 (or even Section 11 as observed supra) even if the parties have agreed upon arbitration as the mechanism for settlement of such disputes." (Para 19, P. 24).

Justice Ramana's opinion also touches on this topic in many places but does not explicitly note the contradiction between the approaches in these judgments (Patel Engineering &  Booz Allen) noted above. So what exactly is the issue?

The issue relates to whether power exercised under Sections 8 and 11 are similar. What turns on this question is the point whether a court hearing a petition under these sections has to decide subject-matter arbitrability.

In Patel Engineering, the SC held that Sections 8 and 11 were complementary in that the judicial authority under Section 8 or 11 has to decide the jurisdictional issues raised before it. This would logically include questions as to arbitrability of the subject-matter as well. In Booz Allen, however, a two-judge Bench of the Supreme Court held that the nature and scope of issues that arise for consideration in a Section 11 application were narrower than those under Section 8. The court held that arbitrability was not to be determined by the court under Section 11. It is this contradiction that the court in Vidya Drolia highlighted and held: 

"We are clearly bound by the dictum of the Constitutional Bench judgment in Patel Engineering Ltd. that the scope and ambit of court’s jurisdiction under Section 8 or 11 of the Arbitration Act is similar." (Para 17, p. 20).

We invite readers to access this post in this blog written almost a decade back where we argued that given the decision of the larger Bench in Patel Engineering, Booz Allen's approach as regards arbitrability question under Section 11 (that the same has to be decided by the arbitrator) was not consistent with Patel Engineering:

"The pertinent question for the purposes of this post would be whether Patel Engineering gives an indication of whether a decision under Section 11 included a decision on issues of Arbitrability. This blawgger’s view is that it would. Two reasons: (1) In line with the Patel Engg approach, Arbitrability of the dispute would be a jurisdictional fact/ condition precedent for the Chief Justice to exercise jurisdiction; (2) Supreme Court’s concern was for the party who had not agreed to an arbitration agreement but had to go through the entire process of arbitration (because the Act did not permit a court to interfere unless provided so in the Act) and could only challenge the award under Section 34. The same situation applies to Arbitrability as well. In a petition under Section 11, if the contention is that the dispute was not arbitrable, and if the court mechanically refers the parties to arbitration, the party which raised such a contention will be unnecessarily put to the trouble of going through the entire arbitration process...

Therefore, this blawgger is of the view that the obiter dicta of the Supreme Court in Booz Allen ought to be placed below the decision of the Seven Bench Supreme Court in Patel Engineering in terms of binding force."

However, this "contradiction" is a virtually an academic issue, given that Sections 8 and 11 have been amended. We will address Vidya Drolia on the implication of these amendments in another post. But we will conclude this post summarising the concluding observations in Vidya Drolia on this question:

• Judicial review and court's jurisdiction u/ss 8 and 11 are identical but extremely limited [Para 96(b)]
• Patel Engineering is no more good law in view of the 2015 and 2019 amendments to the 1996 Act. [96(a)]
• By virtue of separability and competence principles, arbitral tribunal is the "preferred first authority" to decide all aspects of non-arbitrability and courts can have a second look in terms of Sections 34(2)(a)(i), (ii), or (iv) or 34(2)(b)(i) of the 1996 Act. [96(c)]
• But courts can exercise its jurisdiction where the subject-matter of the dispute is "manifestly and ex facie" non-arbitrable. [96(d)].

[Note that Para 96(d) of the court's view confers very limited jurisdiction on the courts in respect of non-existence or invalidity of agreements as well but we did not deal with these aspects in this post.] 

Further Comments on Icomm v PSWSSB (March 2019: SCI)

In the previous post, we critiqued the decision of the Supreme Court in Icomm v PSWSSB (11 March 2019). Some more comments/ clarifications form the content of this post.

Whether High Courts Should Interfere in Government Contracts?

Generally, High Courts should not interfere in Government contracts unless the party will be unable to seek relief through the contracted dispute resolution mechanisms or the civil courts. Availability of alternative efficacious remedy is a well-entrenched defence in writs. Instead, courts have this nebulous test of arbitrariness and interfere at their discretion, especially when arbitrariness is such a nebulous term. 

In the instant case, the court could very well have interfered considering the contracted dispute resolution clause was onerous on the claimant. But for reasons stated in the previous post, such an argument is not well-founded. 

Another distinction in Government contracts must be kept in mind. There is a difference between commercial procurement by the state/ state entities as an end-in-itself and as a means to an end. For instance, procurement of 10 crores worth stationery for consumption by central government (end-in-itself) is totally different from procurement of goods for manufacture by a central PSU (means to an end). Although both are commercial and not sovereign acts of the state, there is a marked difference: The latter is usually a listed company competing in the market with other private players and should have a level playing field to enable it to compete. They are accountable to their shareholders ultimately. By ordering stay on their projects, the courts are only disabling them from being efficient by competing in open market. Therefore, the court interference in the latter cases should be only when absolutely necessary. There are agencies such as vigilance, government audit, etc. to take care of these things and court interfere in corrupt conduct is called for only if these institutions fail. 

Whether the fact that the Appellant in the instant case accepted the Tender Conditions meant that he had accepted it and cannot later complain?

This argument is well-founded. The Appellant, along with all other bidders, seem to have accepted the tender conditions, including the arbitration clause. It somehow does not comport with justice and prudence to challenge it much after accepting it, taking the benefit of being awarded the contract, and then later challenging it at its convenience.

Further, even in those judicial review cases, courts would not generally go into the question of invalidity of tender clauses but only of processes. Even when courts question tender clauses, such clauses should have laid down arbitrary processes. There are umpteen judgments which state that courts would not decide how tender conditions should be framed [See, for instance, Directorate Of Education v. Educomp Datamatics Ltd. (2004) 4 SCC 19]. The same principle would apply here. 

Now the question is whether the clause was a bad process. For reasons in the previous post, we disagree. Day in and day out, we see exaggerated claims being made in litigation/ arbitration. Many of the times, adjudicators don't really examine the evidence threadbare to see if the damages claimed is actually suffered.

Whether the Proportionality Test is Applicable only to Purely Public Law Aspects?

The proportionality test has been used in the realm of public law to review public law acts. While contracting by government is not a purely private act, contract law applies to it. 

The proportionality test looks at the following questions:

(a) the action must be sanctioned by law;

(b) the proposed action must be necessary in a democratic society for a legitimate aim; 

(c) the extent of such interference must be proportionate to the need for such interference;

(d) There must be procedural guarantees against abuse of such interference

How can one imagine to incorporate these sub-tests in the current context? Look at the second sub-test: "the proposed action must be necessary in a democratic society for a legitimate aim"? I am sure an expert in public law while provide us with insights on all the facets of the proportionality test as is applied in India. But even the most commonly found formulation of the test is wholly inappropriate for application in the present context.

Whether the Decision is Against the Party Autonomy Doctrine?

The doctrine of party autonomy cannot be simply raised as an argument because the dynamics of the party autonomy doctrine's application in government contracts has not yet been analysed theoretically in the Indian context. Many government contracts operate on a take it or leave it basis or government parties agree only to minor tweaks in the arbitration clause in the international context. A theoretical base has to be built in the Indian context before addressing the question. At the most, it could be argued that this clause found place in the tender document and was accepted by all the other bidders. It would now be unjust on the other bidders that Icomm should be awarded the contract and should then be allowed to say that certain clauses should not be applied to it.

[Post Script: Thanks to Ms. Juhi Gupta for raising somewhat similar questions on the decision and our previous post.]

WSG (Mauritius) v MSM Satellite: A Descriptive Comment

Recently, a two judge Bench of the Supreme Court of India had the occasion in WSG (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd (pdf) (24.01.2014) to deal with the issue as to whether an Indian court has the power to restrain foreign arbitral proceedings.

Brief Facts:

Appellant WSG (Mauritius) Ltd., or (WSG) and the Respondent MSM Satellite (Singapore) Pte. Ltd or (MSM) entered into a Deed for Provision of Facilitation Services (Facilitation Deed or Deed). The Deed provided for arbitration under ICC Rules in Singapore. Under the Deed, MSM made payment to the tune of Rs. 125 crores to WSG and was allegedly obligated to pay a total of Rs. 425 crores. On 25 June 2010, MSM rescinded the Deed for the reason that the Deed was voidable on grounds of misrepresentation and fraud.

MSM also filed a suit on the same date in the Bombay High Court for declaration that the Deed was void and for recovery of Rs. 125 crores already paid to WSG. After three days, MSM sent a request for arbitration to ICC. On 30 June 2010, MSM filed another suit for declaration that since the Deed was rescinded, WSG was not entitled to invoke arbitration under the arbitration clause in the Deed. In the said suit, an application for temporary injunction restraining WSG from continuing with the arbitral proceedings was filed.

On 9 August 2010, the Single Judge dismissed the application for temporary injunction on the ground that it was for the arbitrator to consider whether the Facilitation Deed was void and the court could not intervene in matters governed by the arbitration clause. MSM challenged the said order before the Division Bench of the Bombay High Court. The Division Bench set aside the order of the Single Judge and passed an order of temporary injunction restraining WSG from continuing the arbitral proceedings.

[Note that Para 7 of the SC decision states that the order was passed “restraining the arbitration by ICC”. This is erroneous. The order was passed not against ICC but against WSG from continuing the ICC arbitration.] WSG appealed to the Supreme Court.

Contentions:

On Behalf of WSG:

1) Bombay High Court has no jurisdiction to order temporary injunction restraining foreign seated arbitration between Non-Indian residents.

2) Clause 9 of the Deed provided that any party may seek equitable relief in a Singaporean court or any other court having jurisdiction. On the basis of principle of comity of courts, the Bombay High Court should have refused to interfere with the matter and should have allowed the parties to resolve the dispute through ICC arbitration.

3) Unless the court finds that the arbitration agreement, which is the agreement specified under Section 45 is null and void Under Section 45 of the Arbitration and Conciliation Act, 1996 (Act or 1996 Act), the court is obligated to refer a dispute arising out of an agreement specified in Section 44 of the Act to arbitration, unless the court finds that the agreement is null and void, inoperative or incapable of being performed., the court cannot entertain a dispute covered by the arbitration agreement and refer the parties to arbitration.

4) The court should not examine whether the entire Deed was void but only whether the Arbitration Agreement was vitiated by fraud/ misrepresentation.

5) Since WSG is the party against which fraud/ misrepresentation was alleged, as per Abdul Kadir’s case which was relied on in Maestro Engineers case, the party against which fraud was alleged could ask the court to go into the issue to resolve it. In this case, it is for WSG to request the court to deal with the dispute and not MSM.

6) Further, Maestro Engineers was rendered in the context of domestic arbitration and not foreign arbitration. The language of Section 45 differed radically from Section 8, under which Maestro Engineers was decided. Under Section 45, MSM had not made out that the arbitration agreement was null and void Under Section 45 of the Arbitration and Conciliation Act, 1996 (Act or 1996 Act), the court is obligated to refer a dispute arising out of an agreement specified in Section 44 of the Act to arbitration, unless the court finds that the agreement is null and void, inoperative or incapable of being performed.

7) Clause 9 of the Deed is not opposed to public policy under the Indian Contract Act, 1872. The Bombay High Court had wrongly held that Clause 9 foreclosed open trial as Exception 1 to Section 28 clearly exempts arbitration agreements. There was no fraud or misrepresentation by WSG before the Deed was signed.

8) An agreement which is voidable is not the same as an agreement which is void. Hence, the Division Bench should have referred the parties to arbitration.

On Behalf of MSM:

1) The Facilitation Deed which also contains the arbitration clause, is void for fraud and misrepresentation.

2) Section 45 prohibits reference of a Deed that is null and void on account of fraud and misrepresentation. In view of the same, the court will have to decide whether the Deed was null and void.

3) As per Section 9, Code of Civil Procedure, the Bombay High Court had the jurisdiction to try the suit .

4) There is no bar in Section 45 restraining the High Court from trying the said suit.

5) Indian and English Law empowered the court to restrain parties from proceedings with the parties. Some relevant decisions are VO Tractoroexport v. Tarapore & Co. [(1969) 3 SCC 562)], ONGC v. Western Co. of North America [(1987) 1 SCC 496], Claxton Engg v. Txam Olajaes Gaz Kutai Ktf [2011] EWHC 345 (Comm.).

6) As held in Chloro Controls v. Severn Trent Water Purification, Section 45 mandates the court to determine the validity of the agreement at the threshold itself and a decision on the issue will be a futile exercise before the arbitrator. Section 45 requires the court to not only consider the a challenge to the arbitration agreement but also a challenge to the substantive contract [SMS Tea Estates v. Chandmari Tea Co. (2011) 14 SCC 66].

7) Where allegations of fraud are made out prima facie, the judicial trend is to have the same adjudicated in court (Abdul Kadir’s case, Maestro Engineers case). In fact, the Madras High Court held in HG Oomor Sait v. O Aslam Sait (2001) 3 CTC 269 (Mad) (referred to in Maestro Engineers case) even if the party against whom allegations of fraud are made requires reference to arbitration, the matter is to be adjudicated by the court.

8) The case establishes prima facie that fraud has been committed not only on MSM but also on BCCI which is a public body (Zee Telefilms v. Union of India AIR 2005 SC 2677). If the arbitration is allowed to go on, interests of BCCI will also be affected. Further, having regard to the magnitude of fraud, such allegations can only by inquired by the court and not the arbitrator.

Decision of the Court:

The question before the Supreme Court was whether the Division Bench of the Bombay High Court was correct in passing the injunction restraining the Singaporean arbitration. The decision is summarized below:

1) It is not correct to contend that the Bombay High Court would not have the jurisdiction to restrain arbitral proceedings in Singapore merely due to the principle of comity.

2) The principle of comity merely provides that courts of one state or jurisdiction will give effect to the laws and judicial decisions of another state or jurisdiction not as a matter of obligation but out of mutual respect. It does not mean that India should not assume jurisdiction of foreign arbitral proceedings out of mutual respect or deference to foreign courts.

3) Therefore, an appropriate civil court in India as provided in Section 9, CPC would have the jurisdiction to entertain the suit and pass orders as per Section 9 and also Clause 9 of the Deed.

4) The Deed, including the arbitration clause, was executed by WSG in Mumbai, the alleged fraudulent inducement of MSM to enter into the Deed occurred in Mumbai, the rescission of the Deed was also issued from Mumbai. Hence, the cause of action for the purpose of Section 20 of the CPC arose within the jurisdiction of the courts at Mumbai.

5) A civil court which entertains a suit has to follow the mandate of Section 45, Chapter I Part II of the 1996 Act. S. 45 makes it clear that notwithstanding anything stated in Part I of the Act or the CPC, when a civil court is seized of a matter in respect of which parties have entered into an agreement specified in S. 44 of the 1996 Act, such court shall refer the parties to arbitration. This provision is applicable even when no application is made by a party to refer the matter to arbitration. In the present case even though no application has been filed by WSG to refer parties to arbitration, it has stated in its affidavit that the Singapore arbitration has already been invoked.

6) The exception to the above rule is that when the agreement is null and void, inoperative or incapable of being performed. For instance, if an agreement containing an arbitration clause is unstamped, the court cannot refer the matter to arbitration but if such agreement is unregistered, the court can do so since the arbitration agreement is a collateral term of the main contract (SMS Tea Estates case).

7) Thus, the court will have to examine in each case if the arbitration agreement is void, unenforceable or inoperative along with the main agreement or whether the arbitration agreement stands apart from the main agreement and is not null and void (Premium Nafta Products v. Fili Shipping Co., UK House of Lords).

8) In the facts, MSM stated that the Deed was voidable at its option for false representation and fraud. This does not in any way affect the arbitration agreement contained in the Deed, which is independent and separate. Hence, the Division Bench was wrong in refusing to refer the parties to arbitration.

9) Arbitration agreement does not become inoperative or incapable of being performed where allegations of fraud have been made. Maestro Engineers and Abdul Kadir’s case were decisions rendered in the context of domestic arbitration and not arbitrations under Chapter I of Part II. In the latter cases, the court can refuse to refer the matter to arbitration only if the arbitration agreement is null and void, inoperative or incapable of being fraud, and not on the ground that allegations of fraud or misrepresentation have to be gone into.

10) Exception 1 to S. 28 Indian Contract Act clearly saves Clause 9 of the Deed. Further, right to jury is not available under Indian laws and therefore, Clause 9 is in hit by Ss 23 and 28 of the Indian Contract Act.

11) Section 45 does not empower a court to decline reference to arbitration on the ground that another suit on the same issue is pending before an Indian Court.

12) Since Clause 9 of the Deed is wide enough to cover the dispute between the parties, the order of the Single Judge referring the parties to ICC Arbitration is restored.

A critique of the decision shall be the subject of a future post. In the meanwhile, readers may read the following comments on the case:

Herbert Smith Freehills LLP, Bombay High Court grants injunction against arbitration proceedings in Singapore

Nishith Desai & Associates, Allegations Of Fraud Not A Bar To Foreign Seated Arbitration

Recent Developments in Indian Arbitration

In this short post, we give an overview of two recent developments in Indian Arbitration.

 

The first one pertains to the doctrine of separability and its application in the context of Section 45 (Power of Judicial Authority to Refer Parties to Arbitration) of the Arbitration and Conciliation Act, 1996 (1996 Act). Mr. Mihir Naniwadekar of the Indian Corporate Law Blog has written a post on the seeming conflict in approaches between the Supreme Court and the Bombay High Court on applying the separability doctrine in relation to the question as to whether the arbitration clause in the agreement that was novated stood extinguished. The issue is not only that of separability but also, and perhaps more importantly, of competenz-competenz- What types of jurisdictional questions pertaining to novation would the Judicial Authority/Designate decide? See the post in Indian Corporate Law blog for further details.

 

The next development is the case of Embassy Property Developments Limited v. Jumbo World Holdings Limited decided by the Madras High Court on 20 June 2013. The case is interesting because it deals in detail with the availability of interim measures under Section 9 against third parties. The availability of interim measures against third parties is a topic of great interest with there emerging a bit of clarity on the law. Read the posts that appeared in the Lex Arbitri Blog and this blog (series of posts) and also read this paper on the topic.

 

Now, coming back to the Embassy Property case, the Division Bench of the Madras High Court  held that interim measures could be ordered even against third parties to the arbitration agreement under Section 9 of the 1996 Act. On the contours of such power, the court held: 

"We are of the view that the power of this court, under Section 9 of the Arbitration and Conciliation Act, 1996, is wide in scope and it would extend even to third parties in whom the properties or goods are vested, even though such parties may not be a party to the arbitration clause in an agreement. Even though section 9 of the Arbitration and Conciliation Act, 1996, could be invoked only by a party to the arbitration agreement, the interim relief could be granted by this court even against the third parties. Unless such a power is available, under section 9 of the Arbitration and Conciliation act, 1996, the parties to the arbitral agreement could be frustrated even if they succeed in the arbitral proceedings before the Arbitration Tribunal concerned."

 

As the emphasised words clearly suggest, the High Court held that where the goods/ properties that pertain to the arbitration, interim measures would be available against third parties who claim/ enjoy rights relating to such goods/ properties. 

 

The court also observed that since Section 9 aims at preserving and protecting the subject matter of the arbitration, relief would be available even if the subject matter is in the hands of third parties. As long as a nexus is available between the subject matter and the parties to the arbitration agreement, the court could order interim measures even against third parties.

Ex Nihilo Aliquid Fit: Separability and SMS Tea Estates

While explaining the Separability Presumption in the Arbitration and Conciliation Act, 1996, the Supreme Court in SMS Tea Estates Pvt. Ltd. v.Chandmari Tea Company Pvt. Ltd. derived its juristic basis from the fact that the arbitration clause is merely a collateral term in the main agreement.While this alone is not the justification for the Separability Presumption, the Supreme Court went on to hold:

“But where the contract or instrument is voidable at the option of a party (as for example under section 19 of the Indian Contract Act, 1872), the invalidity that attaches itself to the main agreement may also attach itself to the arbitration agreement, if the reasons which make the main agreement voidable, exist in relation to the making of the arbitration agreement also.”

The issue here is why does the court accord a specific treatment to voidable contracts? According to the court, in a voidable contract, the invalidity that attaches to the main agreement may also attach to the arbitration agreement if the reasons which make the main agreement voidable also exist in relation to the making of the arbitration agreement as well. Here, the court cited the following example:

“For example, if a person is made to sign an agreement to sell his property under threat of physical harm or threat to life, and the said person repudiates the agreement on that ground, not only the agreement for sale, but any arbitration agreement therein will not be binding.”

Wouldn’t the same rationale logically apply to a void agreement as well? The invalidity that attaches to the main agreement might also attach to arbitration clause as well. This blawgger is not sure if the separability doctrine was adequately formulated by the Supreme Court. In this post, we look at how the separability doctrine is formulated in the Model Law and see if the text of the statute comports with it. The motive of this exercise is to see if the separability doctrine as enunciated in the Model Law and the statute has been fully appreciated by the judiciary.

Separability in the Model Law:

Relevant Provisions:

Article 7(1):

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

Article 16(1)

"The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause."

The Model Law treats the arbitration clause separable from the main contract for the purposes of according the arbitral tribunal the competence to decide on its own jurisdiction. Article 16(1) quoted above creates two fictions. The first fiction, which provides that the arbitration clause shall be treated as an agreement independent of the main agreement, has the effect of preventing a party from going to court and challenging the validity of the main agreement. The fiction assumes that any objection to the validity of the main agreement would be an objection to the arbitration clause as well. By treating the arbitration clause as an independent agreement, any objection to the validity of the main agreement would not affect the arbitration clause. The fiction in treating the arbitration clause independently presumes (or at least, provides a default rule) that the parties agreed that disputes pertaining to the validity of the agreement(s) has to be raised before the tribunal. The second fiction is a counter to the Ex nihilo nihil fit argument. The Latin phrase means "nothing comes from nothing". The purpose of the fiction is to save the award or decision by the arbitral tribunal in case the tribunal declares the main agreement containing the arbitration clause (and therefore the arbitral clause) to be void.

Separability in the Text of the Arbitration and Conciliation Act, 1996:
It is well known that the Arbitration and Conciliation Act, 1996 (Act) is modelled on the Model Law. Separability being one of the fundamental principles of arbitration law is also modelled on the Model Law. Relevant provisions:

Section 7(2)

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

Section 16(1)

"The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,-
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause."

A comparison of the relevant provisions of the Model Law and the Act would reveal that the provisions are virtually identical and therefore any separability doctrine expounded by the Indian courts should be in consonance with the separability doctrine as found in the Model Law. The separability doctrine expounded by the Supreme Court in SMS Tea Estates as applicable to voidable agreements seems to be not in accord with the language and the spirit of the Act or the Model Law.

Image from here.