2005 Supreme(SC) 1040

2005(6) Supreme 15
Supreme Court of India
(From Rajasthan High Court)
Y.K. Sabharwal, D.M. Dharmadhikari & B.N. Srikrishna, JJ.
Shin-Etsu Chemical Co. Ltd. —Appellant
versus
M/s. Aksh Optifibre Ltd. and Anr. —Respondents
Civil Appeal No. 5048 of 2005
(Arising out of SLP (C) No. 3160 of 2005)
Decided on 12-8-2005
Counsel for the Parties :
For the Appellant : R.F. Nariman, Sr. Advocate, Dhruv Mehta, Mohit Chaudhary, Surendra Mann, Harshvardhan Jha, Advocates for M/s. K.L. Mehta & Co., Advocates.
For the Respondent No. 1 : S. Ganesh, Sr. Advocate, Manish Singhvi, Advocate for P.V. Yogeswaran, Advocate.
For the Respondent No. 2 : Sunil Dogra, Advocate, Ms. Rashi Malhotra, Advocate for M/s. Suresh A. Shroff & Co., Advocates.

Important point
At the pre-reference stage contemplated by Section 45 of the Arbitration and Conciliation Act, 1996, the Court is required to take only a prima facie view for making the reference, leaving the parties to a full trial either before the arbitral tribunal or before the Court.

Headnote:(i) Arbitration and Conciliation Act, 1996—Sections 8 and 45—Interpretation of—Reference of dispute arising from an international arbitration agreement—Scope of power of any judicial authority including a regular civil court u/s 45 of the Act in making or refusing reference—Section 45 empowers the court to refuse a reference to arbitration if it ‘finds’ that the arbitration agreement is ‘null and void, inoperative or incapable of being performed’—Whether finding of the court made u/s 45 should be a final expression of the view of the court or should it be a prima facie view without a full fledged trial—Held, application u/s 45 of the Act would have to be determined by the trial Court after arriving at the prima facie satisfaction that there exists an arbitral agreement (Majority Judgment) [D. M. Dharmadhikari and B.N. Srikrishna, JJ.]

       B.N. Srikrishna, J.

       Held : The core issue in this case is: Whether the finding of the court made under Section 45 of the Indian Arbitration and Conciliation Act, 1996 (“the Act”) that the arbitration agreement, falling within the definition of Section 44 of the Act, is or is not “null and void, inoperative or incapable of being performed” should be a final expression of the view of the court or should it be a prima facie view formed without a full-fledged trial? (Para 71)

       True, that there is nothing in Section 45 which suggests that the finding as to the nature of the arbitral agreement has to be ex facie or prima facie. In my view, however, this is an inescapable inference from an ex visceribus interpretation of the statute. Sub-section (3) of Section 8 in Part I of the Act envisages that even in a situation where an application to the court has been made under sub-section (1), the arbitration may commence, continue and even an arbitral award be made. This was obviously meant to cut down delay in the conclusion of the arbitral proceedings. There is conspicuous absence of a corresponding provision either in Section 45 or in the rest of the provisions in Part II. This legitimately gives rise to an inference that once the arbitral agreement has been subjected to scrutiny before the court under Section 45 of the Act, conceivably, the arbitral proceedings could be stayed till the decision of the court on the nature of the arbitral agreement. If it were to be held that the finding of the court under Section 45 should be a final, determinative conclusion, then it is obvious that, until such a pronouncement is made, the arbitral proceedings would have to be in limbo. This evidently defeats the credo and ethos of the Act, which is to enable expeditious arbitration without avoidable intervention by judicial authorities. (Para 80)

       There are distinct advantages in veering to the view that Section 45 does not require a final determinative finding by the Court. First, under the Rules of Arbitration of the International Chamber of Commerce (as in force with effect from 1.1.1998), as in the present case, invariably the arbitral tribunal is vested with the power to rule upon its own jurisdiction. Even if the court takes the view that the arbitral agreement is not vitiated or that it is not invalid, inoperative or unenforceable, based upon purely a prima facie view, nothing prevents the arbitrator from trying the issue fully and rendering a final decision thereupon. If the arbitrator finds the agreement valid, there is no problem as the arbitration will proceed and the award will be made. However, if the arbitrator finds the agreement invalid, inoperative or void, this means that the party who wanted to proceed for arbitration was given an opportunity of proceeding to arbitration, and the arbitrator after fully trying the issue has found that there no scope for arbitration. Since the arbitrator’s finding would not be an enforceable award, there is no need to take recourse to the judicial intercession available under Section 48(1)(a) of the Act. The finding of the court that the arbitration agreement is valid, operative and enforceable, if in favour of the party setting up the arbitration agreement, is not appealable under Section 50 as a matter of legislative policy. Refusing to refer parties to arbitration under Section 45, is however, made appealable under Section 50(1)(a) of the Act. Even after the court takes a prima facie view that the arbitration agreement is not vitiated on account of factors enumerated in Section 45, and the arbitrator upon a full trial holds that there is no vitiating factor in the arbitration agreement and makes an award, such an award can be challenged under Section 48(1)(a). The award will be set aside if the party against whom it is invoked satisfies the court inter alia that the agreement was not valid under the law to which the parties had subjected it or under the law of the country where the award was made. The two basic requirements, namely, expedition at the pre-reference stage, and a fair opportunity to contest the award after full trial, would be fully satisfied by interpreting Section 45 as enabling the court to act on a prima facie view. (Paras 82 & 83)

       Treating the finding under Section 45 as final results in a paradoxical situation. A final decision rendered by the competent court on the nature of the arbitral agreement may have to be ignored by the arbitral tribunal, which would be entitled to decide the issue afresh on the material presented to it. It may also lead to another curious result, that the competent court in the jurisdiction where the arbitration proceeds (Japan, as in the present case) would have to reckon with the fully binding effect of a finding made under Section 45 by a competent court in India arrived at by following a summary procedure without admitting all relevant evidence. (Para 87)

       Undoubtedly, an international commercial arbitration involves huge expenses, particularly where the parties have subjected the contract to a foreign law. But, that cannot be a deterrent to this Court from pronouncing on the correct approach to be adopted under Section 45 of the Act. In fact, as I have pointed out, adopting a final and determinative approach under Section 45 may not only prolong proceedings at the initial stage but also correspondingly increase costs and uncertainty for all the parties concerned. Finally, having regard to the structure of the Act, consequences arising from particular interpretations, judgments in other jurisdictions, as well as the opinion of learned authors on the subject, [See, for example, Fochard, Gaillard, Goldman on International Commercial Arbitration (E. Gaillard and J. Savage, eds. 1999) at pp. 412-412 (para 682) as well as Julian D.M. Lew Et Al., Comparative International Commercial Arbitration (2003) at p.346 (para 14-53) who support the prima facie approach.] I am of the view that, the correct approach to be adopted under section 45 at the pre-reference stage, is one of a prima facie finding by the trial court as to the validity or otherwise of the arbitration agreement. (Para 117)

       For all these reasons, I respectfully differ from the judgment of my esteemed Brother Sabharwal. I am of the view that the present matter needs to be remitted to the trial court, but not for a full trial as directed by the impugned judgment of the High Court. The application under Section 45 would have to be determined by the trial court after arriving at the prima facie satisfaction that there exists an arbitral agreement, which is “not null and void, inoperative or incapable of being performed”. If the trial court finds thus, the parties shall be referred to arbitration. (Para 118)

       As per D.M. Dharmadhikari, J. (Concurring Judgment)

       I respectfully Agree with learned Brother Srikrishna J only to the extent that if on prima facie examination of the documents and material on record including the arbitration agreement on which request for reference is made by one of the parties, the judicial authority or the court decides to make a reference; it may merely mention the submissions and contentions of the parties and summarily decide the objection if any raised on the alleged nullity, voidness, inoperativeness or incapability of the arbitration agreement. In case, however, on a prima facie view of the matter, which is required to be objectively taken on the basis of material and evidence produced by the parties on the record of the case, the judicial authority including a regular civil court, is inclined to reject the request for reference on the ground that the agreement is ‘null and void’ or ‘inoperative’ or ‘incapable of being performed’ within the meaning of section 45 of the Act, the judicial authority or the court must afford full opportunities to the parties to lead whatever documentary or oral evidence they want to lead and then decide the question like trial of a preliminary issue on jurisdiction or limitation in regular civil suit and pass an elaborate reasoned order. Where a judicial authority or the court refuses to make a reference on the grounds available under section 45 of the Act, it is necessary for the judicial authority or the court, which is seized of the matter, to pass a reasoned order as the same is subject to appeal to the appellate court under section 50(1)(a) of the Act and further appeal to this Court under sub-section (2) of the said section. (Para 67)

       With this addition, I agree with the view expressed by learned Brother Srikrishna J., and with his conclusion that the matter should be remitted to the original court for a fresh decision in the light of the view expressed by this Court. (Para 69)

       Y.K. Sabharwal, J. (Minority Judgment)

       The real question for consideration is as to the nature of adjudication that is contemplated by Section 45 when the objection about the agreement being “null and void, inoperative or incapable of being performed” is raised before a judicial authority. Should the judicial authority while exercising power under Section 45 decide the objection on a prima facie view of the matter and render a prima facie finding or final finding on merits on affording parties such opportunity as the justice of the case may demand having regard to facts of the case? (Para 3)

       The question is important and at the same time not free from difficulty. World over the opinion is divided. Courts in some of the countries have preferred the view that the adjudication should be prima facie so as to be raised again before arbitral forum and others have preferred a final adjudication. Under Section 45 of the Act, the judicial authority has to mandatorily refer the parties to arbitration, if conditions specified in the section are fulfilled and agreement is not found to be null and void, inoperative or incapable of being performed. (Paras 4 and 5)

       Section 45 uses the expression ‘shall’ in respect of referring to the parties to arbitration, unless judicial authority finds that the said agreement is null and void, inoperative or incapable of being performed. The term ‘shall’ in its ordinary significance is mandatory and the court shall ordinarily give that interpretation unless such an interpretation leads to some absurd or inconvenient consequence or be at variance with the intent of the legislature, to be collected from other parts of the statute. (Para 29)

       The words ‘shall’ and ‘unless’ appearing in Section 45 mandates that before referring the parties to arbitration, the judicial authority should be satisfied that the arbitration agreement is not null and void, inoperative or incapable of being performed. (Para 30)

       It may be noted that both approaches have its own advantage and disadvantage. The approach whereby the court finally decides on merits on the issue of existence and validity of the arbitration agreement results to a certain degree time and cost avoidance. It may prevent parties to wait for several months or in some cases years before knowing the final outcome of the dispute regarding jurisdiction. It will often take that long for the arbitrators and then the courts to reach their decisions. (Para 57)

       In view of the aforesaid discussion, I am of the view that under Section 45 of the Act, the determination has to be on merits, final and binding and not prima facie. Turning to the present case, I direct that the application filed by the appellant before the trial court would be treated as an application under Section 45 of the Act. Having regard to the nature of controversy in the present case, parties would be given opportunity to file documents and affidavits by way of evidence. No oral evidence would be examined. (Paras 60 & 61)

       (ii) Arbitration and Conciliation Act, 1996—Sections 8 and 45—Reference of dispute arising from an international arbitration agreement—Nature of adjudication contemplated by Section 45—Objection about agreement being ‘null and void’ is raised before a judicial authority—Parties, appellant and respondent entered into an agreement which contained an arbitration clause—Appellant terminated the agreement—Respondent filed a suit claiming a decree of declaration and injunction against appellant for cancellation of the document including arbitration clause on ground that terms of agreement are unconscionable, unfair and unreasonable, therefore, void ab initio—Appellant filed an application under Section 8 of the Act praying that plaintiff shall be directed to submit to the ongoing arbitration proceedings before the International Chamber of Commerce in Tokyo, Japan—Trial Court allowed appellant’s application—Parties were referred to arbitration—Appellant insisting before the trial Court that Section 8 is applicable and not Section 45 of the Act—High Court directed fresh adjudication of the application by the trial Court after application of Section 45 of the Act—There has been no adjudication of the application by the trial Court in terms of Section 45 of the Act—Should the judicial authority while exercising power under Section 45 decide the objection on a prima facie view of the matter and render a prima facie finding or a final finding on merits—Held, matter remitted to the trial Court, but not for a full trial—Correct approach to be adopted under Section 45 at the pre-reference stage, is one of prima facie finding.

       Held : The direction of the High Court in the impugned judgment remanding the application under Section 45 of the Arbitration and Conciliation Act, 1996, for fresh decision by the trial court is confirmed. On remand, the trial court would decide the application in the light of the majority opinion within two months of receipt of the judgment of this Court. (Para 120)