An Incorrect Reference to the 1940 Act does not vitiate the Arbitration Agreement

Asmita Kuvalekar | Government Law College, Mumbai | 21^st March 2020. 

PURUSHOTTAM s/o TULSIRAM BADWAIK V ANIL AND ORS (CIVIL APPEAL NO. 4664 OF 2018 ARISING OUT OF SPECIAL LEAVE PETITION (CIVIL) NO 14589 OF 2016) 

FACTS OF THE CASE: 

This appeal challenged the rejection of an application under Section 8 of the Arbitration and Conciliation Act 1996 (hereinafter referred to as the ‘1996 Act’), by the Bombay High Court at Nagpur. The Partnership agreement between the appellants and the respondents made in 2005, contained an Arbitration clause referring all or any disputes between the parties to arbitration, to be governed by the Indian Arbitration Act 1940. 

In a subsequent dispute, when the respondents sought to file a suit, the appellants acted promptly to refer the matter to arbitration per the abovementioned clause. However, both the district Court and the High Court rejected such an application. Thus this appeal called upon the Supreme Court to uphold the arbitration agreement. The ground for rejection of the appellant’s argument was held to be the arbitration agreement’s invalidity in entirety because of the incorrect reference to the non-existing, repealed Act of 1940. 

ISSUE: 

1. Whether the whole of an arbitration agreement made after 1996 is invalid because it seeks to subject the parties to the provisions of the 1940 Act? 

JUDGEMENT: 

Before deciding upon the legal issue at hand the Apex Court analysed the time and legality of the application of the 1940 and the 1996 Act respectively. With reference to various past judgements, the Court clarified that any arbitration proceeding that commences before the enforcement of the 1996 Act is subject to the provisions of the 1940 Act unless the parties decide otherwise. Any arbitration agreement made before 1996, but proceedings thereby commencing after 1996 would be subject to the 1996 Act. Any agreement made after the enforcement of the 1996 Act would automatically be covered by the 1996 Act. 

Advocate for the appellants, Mr. Chirag M. Shroff, submitted that the reference to the 1940 Act in the impugned arbitration agreement has to be construed as applicable to the arbitration proceedings and nothing else. It cannot be taken to decide the validity of the agreement itself. Furthermore, in order to advance the object of the 1996 Act i.e. encouragement of alternate dispute resolution, the Court must not invalidate the entire agreement on account of an incorrect reference to the 1940 Act. 

Called upon to decide whether the reference to the 1940 Act is so fundamental to the agreement that the impossible nature of such a reference would vitiate the whole agreement, the Court looked into the provisions of Section 7 and Section 85 of the 1996 Act. While Section 7 lays down the legal requirements of a valid arbitration agreement, Section 85 deals with repeal and savings of the 1940 Act limiting its application to proceedings commenced before the 1996 Act. 

The Court therefore held that what is crucial in the determination of the application of the 1940 or 1996 Act is the date of commencement of proceedings. In this appeal, the agreement itself was made post 1996 therefore the question of application of the 1940 Act to its proceedings doesn’t arise and cannot be upheld. 

But it becomes incumbent in such a situation to analyse whether this defect completely invalidates the agreement, thereby rendering the parties free from their arbitration agreement. On this point, the object of the 1996 Act becomes important. If every incorrect reference to application of the 1940 Act is taken to vitiate the agreement itself, the object of the 1996 Act would stand defeated as all parties would then approach the Courts despite an original willingness to subject themselves to alternate dispute resolution. As far as the agreement fulfils the requirements under Section 7, any other flaw can be corrected so as to make the agreement functional and not null and void. 

Therefore, “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.” In view of the same, the High Court’s order rejecting the application of the appellant was declared erroneous. An incorrect reference to the 1940 Act does not and cannot render the whole of the agreement invalid. Courts must always attempt to further the object of the Act and as far as possible, must save arbitration agreements from complete vitiation. The High Court judgement was therefore, duly set aside.