2013 (5) TMI 381 - SC - Companies Law

Arbitration Agreement Separate from Contract: Jurisdictional Limits Emphasized

M/s Today Homes & Infrastructure Pvt. Ltd. Versus Ludhiana Improvement Trust & Anr.

The Supreme Court held that an arbitration agreement can stand independently of the main contract. The designated Judge exceeded jurisdiction by ... Scope of arbitration agreement - whether once the main agreement between the parties was declared void, the entire contents thereof, including any arbitration clause in the main agreement were rendered invalid? - Held that:- The learned designated Judge exceeded the bounds of his jurisdiction, as envisaged in SBP & Co. (2005 (10) TMI 495 - SUPREME COURT). The designated Judge was not required to undertake a detailed scrutiny of the merits and de-merits of the case, almost as if he was deciding a suit as he was only required to decide such preliminary issues such as jurisdiction to entertain the application, the existence of a valid arbitration agreement, whether a live claim existed or not, for the purpose of appointment of an arbitrator. By the impugned order, much more than what is contemplated under Section 11(6) of the 1996 Act was sought to be decided, without any evidence being adduced by the parties. The issue regarding the continued existence of the arbitration agreement, notwithstanding the main agreement itself being declared void, was considered by the 7-Judge Bench in SBP & Co. (supra) and it was held that an arbitration agreement could stand independent of the main agreement and did not necessarily become otiose, even if the main agreement, of which it is a part, is declared void. Also in the case of Reva Electric Car Company Private Limited Vs. Green Mobil [2012 (10) TMI 270 - Supreme Court] wherein held that by virtue of Section 16(1)(b) of the 1996 Act, the arbitration clause continues to be enforceable, notwithstanding a declaration that the contract was null and void. Thus the designated Judge misunderstood the scope of the order passed in the earlier proceedings and the provisions of Section 16 of the 1996 Act in going into a detailed examination regarding the merits of the case and the existence of an arbitration agreement and in holding that once the main agreement between the parties was declared void, the entire contents thereof, including any arbitration clause that may have been incorporated in the main agreement, were rendered invalid - no hesitation in setting aside the impugned judgment and the order of the designated Judge once again and directing that the matter be again considered de novo in the light of the observations made hereinabove and the various decisions cited at the Bar. Issues Involved:1. Validity of the main agreement and its impact on the arbitration agreement.2. Jurisdiction and scope of the designated Judge under Section 11(6) of the Arbitration and Conciliation Act, 1996.3. Appointment of an arbitrator and the role of the Chief Justice or designated Judge.Issue-wise Detailed Analysis:1. Validity of the Main Agreement and its Impact on the Arbitration Agreement:The dispute arose from a joint venture agreement between the Trust and the Company for the development of the City Centre in Ludhiana. The Trust later contended that the main agreement was void, and hence the arbitration agreement contained within it was also void. The Supreme Court referred to the 7-Judge Bench decision in SBP & Co. vs. Patel Engineering Ltd., which established that an arbitration agreement can stand independent of the main agreement. The Court reiterated that under Section 16(1) of the 1996 Act, an arbitration clause should be treated as an independent agreement, and its validity is not automatically nullified if the main contract is declared void.2. Jurisdiction and Scope of the Designated Judge under Section 11(6) of the Arbitration and Conciliation Act, 1996:The Supreme Court found that the designated Judge of the Punjab and Haryana High Court exceeded his jurisdiction by undertaking a detailed scrutiny of the merits of the case, which is beyond the scope of Section 11(6). The designated Judge should only decide preliminary issues such as jurisdiction, the existence of a valid arbitration agreement, and whether a live claim exists for the purpose of appointing an arbitrator. The Court emphasized that the detailed examination of the merits should be left to the arbitrator.3. Appointment of an Arbitrator and the Role of the Chief Justice or Designated Judge:The Supreme Court highlighted the role of the Chief Justice or designated Judge in appointing an arbitrator under Section 11(6). The Chief Justice must first determine his own jurisdiction, whether there is an arbitration agreement, and whether the applicant is a party to such agreement. The Court clarified that the Chief Justice or designated Judge has the right to decide preliminary aspects but should not delve into the merits of the case. The Court set aside the order of the designated Judge and directed the matter to be reconsidered de novo in light of the observations made.Conclusion:The Supreme Court set aside the impugned judgment and order of the designated Judge, directing a fresh consideration of the matter. The Court reiterated that an arbitration agreement can survive independently of the main agreement and that the designated Judge should only address preliminary issues without delving into the merits of the case. The appeals were disposed of, with each party bearing its own costs.