TaxTMI 
TaxTMI 
2005 (8) TMI 622
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....e a prima facie view formed without a full-fledged trial ? Ambiguity in the Wording of Section 45 The contrast in language between Section 8 and 45 of the Act has been rightly noticed by my Learned Brother. Section 8, which leaves no discretion in the court in the matter of referring parties to arbitration, does not apply to the present case, as we are concerned with Part II of the Act. On the other hand, Section 45 which is directly applicable to the present case, 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". This Court in Konkan Railways Corporation Ltd. & Ors. v. M/s Mehul Construction Co. pointed out that Parliament had clearly indicated that the Act had substantially adopted the Model Law on International Commercial Arbitration 1985 ("the Model Law") which had been drafted by the United Nations Commission on International Trade Law ("UNCITRAL"). The objective, as the court observed, was to pursue the "progressive harmonization and unification of the Law of International Trade". It is further pointed out in the said judgment that, it would be appropri....
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....ntally has been repealed by the Act. What is of relevance is proposition No. 5, which the court states as follows: "(v) the Court has to be satisfied that the agreement is valid, operative and capable of being performed; this relates to the satisfaction about the "existence and validity" of the arbitration agreement. (In the instant case these questions do not arise)" After having said so, the court proceeded to make the observations in paragraph 58, which have been referred to and highlighted by my Learned Brother. In my respectful view, if the court thinks that an issue does not arise, then any observation made with regard to such an issue would be purely obiter dictum. It is a well settled proposition that the ratio decidendi of a case is the principle of law that decided the dispute in the facts of the case and, therefore, a decision cannot be relied upon in support of a proposition that it did not decide. An apt observation about this principle was made in M/s Amarnath Nath Om Prakash v. State of Punjab : "We consider it proper to say, as we have already said in other cases, that judgments of courts are not be construed as statutes. To interpret words, phrases and pro....
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....ence 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. The absence in Part II of the Act of a provision corresponding to Section 5 in Part I has been highlighted as supportive of the view that greater judicial intervention is contemplated in Part II of the Act. The question that has arisen before the Court is not the presence or absence of judicial intervention; it is one with regard to the manner in which the said judicial intervention should proceed whether on a final view or prima facie view of the factors enumerated in Section 45 of the Act. There are distinct advantages in veering to the view that Section 45 does n....
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....lidity of the arbitral agreement were to be treated as final, then the competent court while entertaining an application for enforcement of a foreign award might decline to go into the same question. In other words, the court before which enforcement is sought may not re-examine whether the agreement was valid under the applicable law, on the ground that a final judgment had been rendered on an earlier occasion by another competent court. The principles analogous to res judicata (even though the Code of Civil Procedure, 1908 does not directly apply) might preclude the party from raising the defence under clause (a) of sub section (1) of Section 48. When a party raises the issue as to the validity of the agreement in an application under Section 45, the court must either hold a full-fledged trial and give a final finding or give a prima facie finding on that issue. If we were to hold that a final finding has to be given, then it must necessarily be after a trial recording all necessary evidence, in order to eliminate the likelihood of fraud, coercion etc that may render the agreement void, inoperative or unenforceable. If we were to take the view that it could be done only on the....
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....ed to be held is the proper law of the arbitration agreement. But that is only a rebuttable presumption." Thus, the proper law of the arbitration agreement is the substantive law governing the contract itself. In the present case, to effectively decide whether the arbitration agreement is "null and void, inoperative or incapable of being performed", the court would have to apply the law to which the contract has been expressly subjected, namely, Japanese law. Obviously, proof of Japanese law (as applicable to arbitration agreements) would have to be rendered on the lines of proving facts in a trial. It would not only be unfeasible to prove foreign law exclusively through affidavits, but it would also entail enormous expenditure of time and money. Fouchard, Gaillard, Goldman on International Commercial Arbitration highlights that this problem as best exemplified in the U.S. case of SMG Swedish Machine Group v. Swedish Machine Group. In this case, it was held by the U.S. court that the validity or existence of the arbitration agreement would have to be conclusively determined by the court itself at the pre-award stage. The law applicable to the arbitration agreement was Swedish....
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....erved: "In the interpretation of statutes the courts always presume that the legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have effect." This principle has received widespread acceptance by this court in numerous decisions. If the approach suggested by Brother Sabharwal in interpreting Section 45 were to be adopted, it could effectively make a part of the provision in Section 48(1)(a) redundant; an outcome which Parliament could surely have not intended. Possibility of Multiple Trials It appears to me that, at the post-award stage, at least, the finding has to be recorded on a full trial of the relevant issue under Section 48(1)(a). If this be so, I see no special advantage in taking the view that the finding under Section 45 should be anything other than a prima facie finding. Even if the view were to be taken that the finding under Section 45 of the Act would be a final finding not amenable to reiteration under Section 48(1)(a) at the time of the attempt to enforce the award, it is quite possible that the award may be challenged on the other grounds available under Section 48. As I have ....
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....urisdictions, Ontario and Hong Kong, both of which have based their law on the Model Law (like India), the courts have adopted a 'liberal approach' to the issue, namely, that of prima facie view as to the existence and non-vitiation of the arbitral agreement, before making a reference. The Hong Kong and Ontario judgments will be examined presently. The Hong Kong Judgment There is no doubt that in Pacific International Lines (Pte.) Ltd. v. Tsinlien Metals and Minerals Co. Ltd., ("Pacific International Lines") the High Court of Hong Kong was concerned precisely with the issue as to whether there was a valid arbitration agreement within the meaning of Article 7 of the Model Law. The court was of the view that there was a "plainly arguable" case to support the proposition that there was an arbitration agreement that complied with Article 7 of the Model Law. The Court observed: "It follows, therefore, that if I am satisfied that there is a plainly arguable case to support the proposition and there was an arbitration agreement which complies with Art. 7 of the Model Law, I should proceed to appoint the arbitrator in the full knowledge that the defendants will not be precluded fr....
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....any court against any other party to the agreement or any person claiming through or under that other party, in respect of any matter agreed to be referred, and any party to those legal proceedings applies to that court after appearance and before delivering any pleadings or taking any other step in the proceedings, to stay the proceedings, the court or a judge of that court may make an order staying the proceedings, if satisfied that- (a) there is no sufficient reason why the matter should not be referred in accordance with the agreement; and (b) the applicant was ready and willing at the time the proceedings were commenced to do all things necessary for the proper conduct of the arbitration, and remains so. (3) Subsections (1) and (2) have effect subject to section 15 of the Control of Exemption Clauses Ordinance (Cap 71)." The English Act: "Section 32. - Determination of preliminary point of jurisdiction. (1) The court may, on the application of a party to arbitral proceedings (upon notice to the other parties), determine any question as to the substantive jurisdiction of the tribunal. A party may lose the right to object (see section 73). (2) An application....
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....l not entertain an application under subsection (1)(a) with respect to any question of law unless it is satisfied that- (a) the determination of the application might produce substantial savings in costs to the parties; and (b) the question of law is one in respect of which l eave to appeal would be likely to be given under section 23(3)(b). (3) A decision of the Court under subsection (1) shall be deemed to be a judgment of the Court within the meaning of section 14 of the High Court Ordinance (Cap 4) (appeals to the Court of Appeal), but no appeal shall lie from such a decision unless the Court or the Court of Appeal gives leave. (Amended 25 of 1998 s. 2) (4) (Repealed 64 of 1989 s. 15)" Courts under both Section 32 of the English Act as well as Section 23A of the Hong Kong Arbitration Ordinance, can make a determination of preliminary point of jurisdiction with the 'consent of all the parties' or at least with the 'consent of the arbitrator' and only upon being satisfied that the determination of the application might reduce substantially the costs to the parties, and the question of law is one in which leave is likely to be given. The Hong Kong decision has al....
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....uction of the agreement to trial without apparent reference to the condition specified in Art. 8; these issues to be tried relate to matters of law, including jurisdiction and scope of the arbitrator's authority, but not, so far as I can see, to the issues for the court to determine under Art. 8. It seems to me be at least arguable that the matters referred to trial are not matters that permit the intervention of the court in the light of Art. 5, supra." In my view, this is a clear and unequivocal expression on the part of the court on the issue before us. Indeed, the Ontario Court has clearly held that the court in the matter of interpretation of the existence and nonvitiation of the arbitral agreement has only a prima facie jurisdiction and is not required to render a final decision at that stage. The English Judgment The English judgment in Azov Shipping Co. v. Baltic Shipping Co., raised a different issue altogether. The case of the applicant before the court was that he was not a party to the arbitral agreement, which contained the arbitration clause, and, despite this, the arbitrator had delivered an award in favour of the other party. The arbitrator after a full tri....
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.... commercial arbitrations can be defeated by a totally bogus defence that the agreement is forged or fabricated. If such a defence were to be allowed, it would necessarily require a full-fledged trial (with oral evidence) at the prereference stage with all its consequential delay and expense. On the other hand, if only a prima facie view were to be taken, then the issue could still be examined in-depth after a full trial either before the arbitral tribunal or at any rate under Section 48(1)(a) when the enforceability of the ensuing award is questioned. I am afraid that the suggestion of fixing a time limit, within which an issue can be determined without oral evidence, may also not be practical. As pointed out earlier, if the applicable law is a foreign law (which is not an uncommon feature in international commercial contracts), the time limit of three months is unlikely to be complied with as it would be unfeasible. In any event, since it is undoubted that at the enforcement stage a full trial under Section 48 is permissible, parties are none the better by having two trials i.e. one at the stage of Section 45, and another at the stage of Section 48. I fully agree with my Lea....