2008 Supreme(Mad) 2595

High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE V. RAMASUBRAMANIAN
Sundaram Brake Linings Ltd., & Another
Versus
Kotak Mahindra Bank Ltd., & Others
A.NO.8078 OF 2007 IN C.S.NO.1072 OF 2007
Decided on: 24-07-2008

Headnote:

Whether in an application under section 8 of the Arbitration and Conciliation Act, 1996, this Court can take up the exercise of determining whether the I.S.D.A. Agreement is null and void, unenforceable and vitiated by fraud or not.

Fact of the Case:

The plaintiff entered into an Agreement known as I.S.D.A. Master Agreement with the defendant Bank. The said agreement is in a standard format, as prescribed by International Swap Dealers Association. The Master Agreement has a Schedule attached to it, comprising of 5 parts. It is only in the Schedule that the actual transaction between the parties is reduced into specifics. The aforesaid I.S.D.A. Master Agreement was signed on behalf of the plaintiff by its authorised signatory and on behalf of the defendant Bank by its Financial Controller and Secretary, who is impleaded as the 2nd defendant in the suit. The I.S.D.A. Master Agreement is actually a transaction in derivatives. It is a "forward contract" entered into by the plaintiff with the first defendant (who is an authorised dealer in foreign exchange) to hedge an exposure to exchange risk, on account of heavy fluctuation in the rate of exchange of foreign currencies. Though such transactions border on speculations to some extent, they have been recognised statutorily by the Foreign Exchange Management (Foreign exchange derivatives contracts) Regulations, 2000 issued under the Foreign Exchange Management Act, 1999 and by the Reserve Bank of India (Amendment) Act, 2006. Therefore, in pursuance of a Resolution passed by the Board of Directors of the plaintiff Company on 21.07.2005 (Resolution No.2065), authorising the 2nd defendant (Financial Controller and Secretary of the plaintiff) to enter into Spot and Forward Foreign Exchange Contracts, Options and any other Derivative Instruments, the 2nd and 3rd defendants are said to have finalised 52 Derivative Cross Currency Deals. Out of those 52 Deals, only 9 Deals are now in force and the rest of them are already closed. Out of those 9 Deals, 2 were with the applicant (Bank) herein and the other Deals were with other Banks. Out of the 2 Deals which the defendants 2 and 3 entered into on behalf of the plaintiff with the applicant/1st defendant, one relates to the I.S.D.A. Master Agreement dated 05.01.2007, which is the subject matter of the present dispute. It is the case of the plaintiff that the Cross Currency Deals were finalised and the agreements were entered into by the defendants 2 and 3 on behalf of the plaintiff, without the specific authorisation or approval of the Board of Directors and that the Chairman of the plaintiff Company came to know about such deals only on 011. 2007 from one of the independent Directors of the Company. Thereafter, the plaintiff has come to Court with the present suit seeking a declaration that the I.S.D.A. Master Agreement dated 05.01.2007 is void ab-initio, illegal, vitiated by fraud, opposed to Public Policy and not binding on the plaintiff Company and for a permanent injunction restraining the 1st defendant from acting under the terms of the Master Agreement.

Finding of the Court:

The court held that in an application under section 8 of the Arbitration and Conciliation Act, 1996, the Judicial Authority cannot go into the question as to whether the agreement is null and void, inoperative or incapable of being performed.

Issues: Whether in an application under section 8 of the Arbitration and Conciliation Act, 1996, this Court can take up the exercise of determining whether the I.S.D.A. Agreement is null and void, unenforceable and vitiated by fraud or not.

Ratio Decidendi: The court held that the Arbitration and Conciliation Act, 1996, leaves no scope for the judicial authority to go into the question of nullity and voidity of the agreement, at the pre-reference stage, in an application under section 8. The court further held that the difference in language between sections 8 and 45, the adoption of the UNCITRAL Model Law as such in section 45, but with a modification in section 8, the doctrine of separability incorporated in section 16 with a power for the arbitrator to adjudicate even the question of nullity and voidity, the deviation made in Section 16 from Article 16 of the Model Law, and the developments that have taken place world wide, are all pointers to the fact that the arbitration clause, contained in a contract to which Part-I of the 1996 Act would apply, is to act as a black box in an aircraft. The crash of the contract (like that of the aircraft), its reasons, implications and consequences are to be ascertained only by invoking the arbitration clause.

Final Decision: The court allowed the application and held that the plaintiff should only raise the issues of nullity and voidity before the Arbitrator Justice B.N.Srikrishna (Retd.), who has already entered reference.