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Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4664  OF 2018 (Arising out of SLP (Civil) No.14589 of 2016)

Purushottam s/o Tulsiram Badwaik         ……Appellant

VERSUS

Anil & Ors.          ..…. Respondents

JUDGMENT

Uday Umesh Lalit, J.

Leave granted.

2. Rejection of application preferred by the appellant under Section 8 of

the Arbitration and Conciliation Act, 1996 (“1996 Act” for short) as affirmed

by the High Court of Bombay at Nagpur by its judgment and order dated

10.12.2015 in Civil Revision Application No.88 of 2015, is under challenge

in this appeal.

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3. The  appellant  and  the  respondents  had  entered  into  a  Partnership

Agreement dated 09.11.2005.  Clause 15 of said Partnership Agreement was

as under:

“15)  That  in  case  of  any dispute  between the  partners  as regards  interpretation  of  this  Deed  or  any  other  matter connected with the  partnership business,  the  same shall  be referred to for arbitration in accordance with the provisions of Indian  Arbitration  Act,  1940,  and  the  decision  of  the Arbitrator shall be final and binding on all the partners.”

4. The appellant had also executed a registered Power of Attorney on

28.12.2006 in favour of the partners.  In April 2014 the respondents filed

Special  Civil  Suit  No.16  of  2014  in  the  Court  of  Civil  Judge,  Senior

Division,  Bhandara  for  declaration,  damages,  accounts  and  permanent

injunction  against  the  appellant.   Soon  after  receipt  of  the  notice,  the

appellant preferred an application under Section 8 of 1996 Act to refer the

dispute  to  arbitration  in  view  of  aforesaid  clause  15  in  the  Partnership

Agreement.   The  matter  was  contested.   The  Trial  Court  rejected  said

application by its order dated 05.01.2015.  It was held that aforesaid clause

15 was vague, that there was no reference as to who should be the arbitrator,

that  there  was  no  mention  about  selection  of  the  arbitrator  and  that  the

dispute  did not  form subject  matter  of  agreement  within the  meaning of

Section 8 of 1996 Act.

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5. The  matter  was  carried  further  by  the  appellant  by  filing  Civil

Revision Application No.88 of 2015 in the High Court.   The High Court

took  the  view  that  the  relevant  clause  indicated  agreement  between  the

parties to refer the disputes to arbitration as per  provisions of  the Indian

Arbitration  Act,  1940,  (1940  Act,  for  short)  although  the  Partnership

Agreement was entered into much after the enactment of 1996 Act.   Relying

on portion of para 35 of the decision of this Court in  Thyssen Stahlunion

GMBH  v. Steel Authority of India Ltd.1 and on the decision of a learned

Single Judge of the Patna High Court in Rajan Kumar Verma and anr. v.

Sachchidanand Singh2, the High Court observed in paragraphs 6 and 7 as

under :-

“The Supreme Court in Thyssen Stahlunion GMBH (supra) has observed in paragraph 35 of its judgment as under:

“35.  Parties can agree to the applicability of the new Act even before the new Act comes into force and when the old Act is still holding the field.  There is nothing in the language of Section 85(2)(a) which bars the parties from so agreeing.  There is, however, a bar that they cannot agree to the applicability of the old Act after the new Act has come into force when arbitral proceedings under the old  Act  have  not  commenced  though  the  arbitral agreement was under the old Act.”

From aforesaid observations of the Supreme Court, it can be seen that  if  the  arbitration  proceedings  had not  been commenced under the Act of 1940 till  the Act of 1996 came into force, same

1 (1999) 9 SCC 334 2 AIR 2006 Patna 1

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could not be commenced thereafter.   It  has further been observed that there is a bar to agree to the applicability of the Act of 1940 after the Act of 1996 has come into force.

Similar view taken in Rajan Kumar Verma (supra) by learned Single  Judge  of  the  Patna  High  Court  stands  upheld  in  view  of rejection of the challenge thereto before the Supreme Court.”

The High Court thus rejected the challenge and dismissed said Civil

Revision by its judgment under appeal.

6. In support  of  this  appeal,  Mr.  Chirag  M.  Shroff,  learned Advocate

submitted :-  

(a) The reference  to  the  1940 Act  in  the partnership  deed dated

09.11.2005 has to be necessarily referred to Arbitration process,  as

prevalent on the date of signing of the Agreement.

(b) The mention of 1940 Act will not defeat the intention of the

parties to go for arbitration as a dispute resolution mechanism.

7. On  the  other  hand,  Mr.  Amol  Nirmalkumar  Suryawanshi,  learned

Advocate  appearing for  the  respondent  submitted  that  the  question  as  to

whether 1996 Act or 1940 Act would govern the relationship between the

parties was so fundamental that mistakes in that behalf would invalidate the

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entire  arbitration  clause  and  as  such  the  courts  below  were  justified  in

rejecting the submissions advanced by the appellant.

8. In the present case though the Partnership Agreement was entered into

after 1996 Act had come into force, the relevant clause made reference to

“arbitration  in  accordance  with  the  provisions  of  Indian  Arbitration  Act,

1940”.  It is not the case of the respondent that the agreement between the

parties  suffered from any infirmity on account  of  fraud,  coercion,  undue

influence  or  misrepresentation.   What  is  however  projected  is  that  the

reference to arbitration in terms of 1940 Act was such a fundamental mistake

that it would invalidate the entire arbitration clause and as such there could

not be any reference to arbitration at all.

9. The term “Arbitration Agreement” has been defined in Section 7 of

1996 Act as under :-

“7.   Arbitration  agreement.  – (1)   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.

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

(3)  An arbitration agreement shall be in writing.

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(4)  An arbitration agreement is in writing if it is contained in –  

(a)  a document signed by the parties;

(b) an exchange of letters, telex telegrams or other means of telecommunication  (including  communication  through electronic means) which provide a record of the agreement; or

(c)  an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5)   The  reference  in  a  contract  to  a  document  containing  an arbitration clause constitutes an arbitration agreement if the contract is  in  writing and the reference is  such as to  make the  arbitration clause part of the contract.”

10. Thus the basic  requirements  for  an “arbitration agreement”  are  – (a)  an

agreement between the parties to submit to arbitration all or certain disputes which

have arisen or which may arise in future in respect of a defined legal relationship;

(b) such an arbitration agreement shall be in writing. The second requirement can

be discernible from the documents or exchange of communication as well.   These

requirements as stipulated in Section 7 are certainly satisfied in the present matter.

The question however remains is whether reference to 1940 Act in the agreement

would have any bearing.  At this stage, we may consider the provisions of Section

85 of 1996 Act which Section is to the following effect:  

“85. Repeal and savings – (1)  The Arbitration (Protocol and Convention) Act,  1937 (6 of 1937),  the Arbitration Act,  1940 (10 of 1940) and the Foreign Awards (Recognition and Enforcement) Act, 1961 (45 of 1961) are hereby repealed.

(2) Notwithstanding such repeal, -

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(a)  the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force;

(b)  all  rules  made  and  notifications  published,  under  the  said enactments shall, to the extend to which they are not repugnant to this  Act,  be deemed respectively to  have been  made or issued under this Act.”

11. Sub-section  (1)  of  Section  85  repealed  three  enactments  including

1940 Act.   Sub-section (2) stipulates  inter alia  that notwithstanding such

repeal, the repealed enactment namely 1940 Act would continue to apply in

relation to arbitral proceedings which had commenced before 1996 Act came

into force unless the parties were to agree otherwise.  The second limb of

first  clause  of  said  sub-section  (2)  further  stipulates  that  notwithstanding

such repeal the provisions of 1996 Act would apply in relation to arbitral

proceedings which commenced on or after 1996 Act came into force.   

12. In  M.M.T.C.  Limited v.  Sterlite  Industries  (India)  Ltd.3, the

arbitration agreement was of a date prior to the commencement of 1996 Act.

The commencement of arbitral proceedings was however after 1996 Act had

come into force and as such it was held by this Court in paragraph 11 that

the  provisions  of  1996  Act  would  apply.   Further,  the  arbitration  clause

3 (1996) 6 SCC 716

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contemplated  appointment  of  two  arbitrators  and  a  question  also  arose

whether the appointment of arbitrators had to be in tune with the clause in

question or in terms of the provisions of 1996 Act.  Paragraph Nos.1, 4, 5, 8,

10, 11, 12, and 13 of said decision are quoted hereunder for ready reference:

“1.  The  point  involved  for  decision  is,  the  effect  of  the Arbitration and Conciliation Act, 1996 (for short “New Act”) in the present  case  on  the  arbitration  agreement  made  prior  to  the commencement of the New Act. Clause VII of the agreement dated 14-12-1993 between the parties is, as under:

“VII.  In the event of any question or dispute arising under or out of or relating to the construction, meaning and  operation  or  effect  of  this  agreement  or  breach thereof, the matter in dispute shall be referred to arbitrator. Both the parties shall nominate one arbitrator each and the arbitrators shall appoint an umpire before proceeding with the  reference.  The decision of  arbitrators  or in  the event of their not agreeing the decision of the umpire will be final and binding on the parties.  The provisions of the Indian Arbitration Act and Rules made thereunder shall apply for proceedings.  The arbitrators  or the umpire,  as the case may be, shall be entitled with the consent of the parties to enlarge the time, from time to time, for making the  award.  The  arbitrators/umpire  shall  give  a  reasoned award. The venue of the arbitration shall be Bombay.”

(emphasis supplied)

4. The contention of the learned Attorney General on behalf of the  appellant  is  that  an  arbitration  agreement  providing  for  the appointment  of  an  even  number  of  arbitrators  is  not  a  valid agreement because of Section 10(1) of the New Act; and, therefore, the only remedy in such a case is by a suit and not by arbitration. For this  reason,  he  urged,  that  sub-section  (2)  of  Section  10  is  not attracted  since  there  is  no  failure  to  determine  the  number  of arbitrators  according  to  sub-section  (1).  Another  argument  of  the learned Attorney General was that Section 10 is a departure from

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para 2 of the First Schedule of the Arbitration Act, 1940 (for short the 1940 Act), which reads as under:

“2. If the reference is to an even number of arbitrators the arbitrators shall  appoint an umpire not later than one  month  from  the  latest  date  of  their  respective appointments.”

 5. In  reply  Shri  Dave,  learned  counsel  for  the  respondent, contended that there is no such inconsistency between Section 10 of the New Act and the corresponding provision in the 1940 Act, both being substantially the same. The learned counsel contended that the provisions of the New Act must be construed to promote the object of implementing the scheme of alternative dispute resolution; and the New Act must be construed to enable the enforcement of the earlier arbitration agreements. It was urged that each of the parties having nominated its arbitrator, the third arbitrator was required to be appointed according to  Section 11(3)  and the  failure  to  do so attracts  the consequential  results  under  the  New Act.  The learned counsel contended that the provision for the number of arbitrators is a  machinery  provision  and  does  not  affect  the  validity  of  the arbitration agreement which is to be determined according to Section 7 of the New Act.

8. Sub-section (3) of Section 7 requires an arbitration agreement to  be  in  writing  and  sub-section  (4)  describes  the  kind  of  that writing. There is nothing in Section 7 to indicate the requirement of the number of arbitrators as a part of the arbitration agreement. Thus the  validity  of  an  arbitration  agreement  does  not  depend  on  the number of arbitrators specified therein. The number of arbitrators is dealt  with separately in  Section  10 which is  a  part  of  machinery provision  for  the  working  of  the  arbitration  agreement.  It  is, therefore,  clear  that  an  arbitration  agreement  specifying  an  even number of arbitrators cannot be a ground to render the arbitration agreement invalid under the New Act as contended by the learned Attorney General.

10. The arbitration clause provides that each party shall nominate one arbitrator and the two arbitrators shall then appoint an umpire before proceeding with the reference. The arbitration agreement is valid as it  satisfies the requirement of Section 7 of the New Act. Section  11(3)  requires  the  two  arbitrators  to  appoint  the  third

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arbitrator or the umpire. There can be no doubt that the arbitration agreement  in  the  present case  accords  with the implied condition contained in para 2 of the First Schedule to the Arbitration Act, 1940 requiring the two arbitrators, one each appointed by the two sides, to appoint an umpire not later than one month from the latest date of their respective appointments.

11. The question is whether there is anything in the New Act to make such an agreement unenforceable? We do not find any such indication  in  the  New  Act.  There  is  no  dispute  that  the  arbitral proceeding in the present case commenced after the New Act came into force and, therefore, the New Act applies. In view of the term in the arbitration agreement that the two arbitrators would appoint the umpire or the third arbitrator before proceeding with the reference, the requirement of sub-section (1) of Section 10 is satisfied and sub- section (2) thereof has no application. As earlier stated the agreement satisfies the requirement of Section 7 of the Act and, therefore, is a valid  arbitration  agreement.  The  appointment  of  arbitrators  must, therefore, be governed by Section 11 of the New Act.

12. In view of the fact that each of the two parties have appointed their own arbitrators, namely, Justice M.N. Chandurkar (Retd.), and Justice S.P. Sapra (Retd.), Section 11(3) was attracted and the two appointed arbitrators were required to appoint a third arbitrator to act as  the  presiding  arbitrator,  failing  which  the  Chief  Justice  of  the High Court or any person or institution designated by him would be required to appoint the third arbitrator as required by Section 11(4) (b) of the New Act. Since the procedure prescribed in Section 11(3) has not been followed the further consequences provided in Section 11 must follow.

13. Accordingly,  we  direct  that  the  Chief  Justice  of  the  High Court is to appoint the third arbitrator under Section 11(4)(b) of the New Act in view of the failure of the two appointed arbitrators to appoint the third arbitrator within thirty days from the date of their appointments. Direction given by the Chief Justice of the High Court is substituted to this effect.”

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13. The  arbitration  clause  in  MMTC  Ltd. (supra)  contemplated  an

appointment process which was not strictly in tune with the provisions of

1996 Act and the agreement was:- “the provisions of the Indian Arbitration Act

and Rules made thereunder shall apply for proceedings”.  The reference was thus

to the provisions of 1940 Act.  The reading of the decision shows that what

was found crucial was date of commencement of the arbitral proceedings

and if  such commencement was after  1996 Act had come into force,  the

provisions that would govern the situation were held to be that of 1996 Act.

The appointment process was also directed to be in tune with 1996 Act.

What was found to be fundamental was whether there was an arbitration

agreement in writing in terms of Section 7 of 1996 Act.  The acceptance of

submission in paragraph 5 would further show that  1996 Act must be so

construed to enable the enforcement of the earlier arbitration agreement.

Logically,  even  if  in  a  given  case,  reference  to  arbitration  in  the

agreement entered into before 1996 Act came into force was in terms of

1940 Act and if the arbitral proceedings had not commenced before 1996

Act came into force,  the provisions of  1996 Act alone would govern the

situation.   The reference to “Indian Arbitration Act” or to “arbitration under

1940 Act” in such cases would be of no consequence and the matter would

still be governed under 1996 Act.  Would it then make any difference if in an

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agreement entered into after 1996 Act, the reference made by the parties in

the agreement was to arbitration in terms of 1940 Act.   

14. In  Thyssen (supra) three appeals were considered together.   In the

first  of  those  three  appeals,  the  arbitral  proceedings  had  commenced  on

14.09.1995 under 1940 Act and the award was given by the sole arbitrator on

24.09.1997.  A petition was filed under Sections 14 and 17 of 1940 Act on

13.10.1997 for making the award rule of the Court.  In these proceedings an

application was moved submitting that 1996 Act having come into force on

25.01.1996, it would be applicable in respect of enforcement of the award.

In the context of these facts, the question which arose for consideration was

whether the award would be governed by 1996 Act for its enforcement or

whether provisions of the 1940 Act would apply.   In the second matter, the

arbitral  proceedings  were  held  in  the  United  Kingdom  prior  to  the

enforcement of 1996 Act and the award was made on 25.02.1996 in London

and the question which arose was whether the award was governed by the

provisions of 1996 Act for its enforcement or by the Foreign Awards Act.  In

the third matter the reference to the sole arbitrator was on 04.12.1993 and

the award was given by the arbitrator on 23.02.1996 i.e. after 1996 Act had

come into force.  The question that was framed in the third matter was, when

Clause  (a)  of  Section  85(2)  of  1996  Act  used  the  expression  “unless

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otherwise agreed  by the parties” could the parties agree for the applicability

of  1996 Act  even  before  1996  Act  had come into  force.   Thus  the  fact

situation in all three matters was clear that the commencement of arbitral

proceedings was much before 1996 Act came into force.  Therefore, on the

strength of Section 85(2)(a) of 1996 Act, it was held that the provisions of

the  repealed  enactments  including  1940  Act  would  continue  to  apply  in

relation  to  such  arbitral  proceedings.   The  conclusions  are  clear  from

paragraphs 29 and 42 of said decision.   

15. However, the High Court has placed reliance on certain observations

in paragraph 35 of Thyssen (supra).  In our view the observations have been

quoted and relied upon by the High Court completely out of context.  What

this  Court  considered in  paragraph 35 was a  possibility  that  in  terms of

Section 85(2)(a) of 1996 Act even when the proceedings had commenced

under 1940 Act, the parties could still agree on the applicability of the 1996

Act.   What this Court thereafter stated was the position in law that if the

arbitral proceedings had not commenced before 1996 Act came into force,

the parties could not by their agreement agree on the applicability of 1940

Act.   The idea was to emphasize that if  the arbitral  proceedings had not

commenced as on the day when 1996 Act came into force, any subsequent

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commencement  of  arbitral  proceedings  had  to  be  in  terms  of  1996  Act.

These  observations  do  not  in  any  way  suggest  that,  “if  the  arbitral

proceedings had not commenced under the Act of 1940 till the Act of 1996

came into force, the same could not be commenced thereafter”.  All that

these observations indicate is that in such cases there cannot be applicability

of 1940 Act and not, and we repeat, that there can be no arbitration at all.  

 16. The correct  approach,  according to  us,  would  be  in  promoting the

object of implementing the scheme of alternative dispute resolution as was

rightly submitted in MMTC Ltd. (Supra).  It would be farfetched to come to

the conclusion that there could be no arbitration at all.  As is clear from

MMTC Ltd. (Supra) what is material for the purposes of the applicability of

1996  Act  is  the  agreement  between  the  parties  to  refer  the  disputes  to

arbitration.   If  there be such an arbitration agreement  which satisfies the

requirements of Section 7 of 1996 Act, and if  no arbitral proceeding had

commenced  before  1996  Act  came  into  force,  the  matter  would  be

completely governed by the provisions of 1996 Act.  Any reference to 1940

Act in the arbitration agreement would be of no consequence and the matter

would be referred to arbitration only in terms of 1996 Act consistent with the

basic intent of the parties as discernible from the arbitration agreement to

refer the disputes to arbitration.

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17. Viewed thus,  the High Court  was not  right  in observing that  there

could be no arbitration at all in the present case.  In situations where the

relevant clause made reference to the applicability of “the provisions of  the

Indian  Arbitration  Act  and  Rules  made  thereunder”  as  was  the  case  in

MMTC  Ltd.  (Supra),  on  the  strength  of  Section  85(2)(a)  the  governing

provisions  in  respect  of  arbitral  proceedings  which  had  not  commenced

before  1996 had came into force would be those of 1996 Act alone.  On the

same reasoning even if an arbitration agreement entered into after 1996 Act

had come into force were to make a reference  to the applicable provisions

of those under Indian Arbitration Act or 1940 Act,  such stipulation would be

of no consequence and the matter  must  be governed under provisions of

1996 Act.    An incorrect reference or recital regarding applicability of 1940

Act  would  not  render  the  entire  arbitration  agreement  invalid.   Such

stipulation will have to be read in the light of Section 85 of 1996 Act and in

our view, principles governing such relationship have to be under and in tune

with  1996  Act.   As  observed  earlier,  the  requirements  of  “arbitration

agreement”  as stipulated in Section 7 of 1996 Act stand completely satisfied

in the present matter nor has there been any suggestion that the agreement

stood  vitiated  on  account  of  any  circumstances  in  the  realm  of  undue

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influence, fraud, coercion or misrepresentation.    In the circumstances, the

attempt must be to sub-serve the intent of the parties to resolve the disputes

by  alternative  disputes  resolution  mechanism.    The  High  Court  was,

therefore, completely in error.  

18. We must also hold that the view taken by the learned Single Judge of

the Patna High Court in Rajan Kumar Verma (Supra) is required to be seen

in the light of the present decision.  Said judgment of the learned Single

Judge  had  not  noted  the  decision  of  this  Court  in  MMTC Ltd.  (Supra).

Summary  dismissal  of  SLP(C)  No.25036  of  2005  vide  order  dated

14.12.2005 by this Court would not mean affirmation of the view taken by

the learned Single Judge insofar as declaration of law is concerned4.

19. We therefore set  aside the judgment and order passed by the High

Court and accept the appeal preferred by the appellant. The matter will have

to be dealt with by the trial court in terms of Section 8 of 1996 Act.  The

parties shall appear before the trial court on 14th May, 2018 for effectuating

the arbitration agreement.   

4    See Kunhayammed and others v. State of Kerala and another (2000) 6 SCC 359 para 27          Indian Oil Corporation Ltd.  v. State of  Bihar & Ors. (1986) 4 SCC 146 paras 6 to 10

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20. The appeal stands allowed in aforesaid terms.  No costs.

…………………………J. (Arun Mishra)

..…………………..……J. (Uday Umesh Lalit)

New Delhi, May 2, 2018