Arbitration Agreement Remains Valid Even If Underlying Contract Is Terminated: Sikkim High Court

Brief Facts

The learned District Judge has, vide the impugned order dated 29.07.2016, set aside the arbitral award dated 06.06.2011 under section 34(2)(a)(ii) of the Arbitration and Conciliation Act, 1996 (Arbitration Act of 1996) on the ground that the tender process as well as the agreement dated 24.08.2001 had been quashed by this Court, as such, the arbitration clause of the agreement dated 24.08.2001 also became non-existent.

The learned District Judge thus held that although the parties had agreed to the arbitration the learned Sole Arbitrator had no jurisdiction to arbitrate the dispute.An agreement dated 24.08.2001 was entered between the State of Sikkim and the Director, Sikkim State Lotteries (appellants) and M/s Tashi Delek Gaming Solutions (P) Ltd. (respondent).

The respondent was appointed as the sole and exclusive marketing agent for the respondents for initiating the business of Online Computerized Lottery System for a period of seven years with a provision for further extension of five years thereafter.

Thereafter, the payment of minimum assured revenue was not according to clause 10 of the agreement dated 24.08.2001.

In the meantime, the legality of the tender notice dated 10.07.2001 and the agreement dated 24.08.2001 were challenged before this Court in two writ petitions. This Court quashed the entire process awarding the contract to the respondent and nullified the agreement dated 24.08.2001. Direction was issued to the appellants to issue fresh tender and to complete the entire exercise within three months from 24.06.2003.

Two days later, on 26.06.2003, the appellants issued a letter requesting the respondent to continue as marketing agent for three more months on the same terms and conditions stipulated in the agreement dated 24.08.2001. Without any letter of acceptance, the respondent continued with the business of marketing online computerized lottery system for the appellants.

Since the appellants had not been able to float new tender, the respondent expressed their desire to discontinue being the marketing agent for the Sikkim online lottery. The appellants were not in favour of reducing the State's share and the minimum assured revenue.

Since the dues payable by the respondent had accumulated to a noticeable amount, the respondent by letter dated 11.09.2003 gave notice for arbitration under section 11 of the Arbitration Act of 1996 and by letter dated 04.11.2003 expressed their desire for terminating the agreement dated 24.08.2001. By a letter dated 12.11.2003, the respondent issued notice for termination of the agreement dated 24.08.2001. The letter of termination issued by the respondent was not accepted by the appellants.

Since the dispute between the parties remained unresolved, vide letter dated 05.10.2004, the respondent gave a notice to the appellants for arbitration in terms of the agreement dated 24.08.2001.

The learned Sole Arbitrator passed the award dated 06.06.2011 holding the respondent liable to pay a total sum of Rs.96,48,38,070.00 to the appellants for the period of 2003-2006 along with interest at the rate 12% per annum. The respondent challenged the award under section 34 of the Arbitration Act of 1996 before the learned District Judge in T.S (Arbitration) Case No.02 of 2013. The learned District Judge set aside the arbitration award.

Court's Analysis

In this case, the respondent did not appear despite giving a significant time to present their case therefore the court proceeded to decide the case only on the basis of the argument led by the appellant.

The court noted that the district judge in the impugned order had held that since the contract containing arbitration clause had been quashed by the High Court, arbitration clause would also perish thereby rendering the arbitration application not maintainable. The learned judge had relied on the multiple decisions of the Supreme Court in arriving at this conclusion.

The court noted that the judgments on which the learned judge based its conclusion were rendered in the context of the Arbitration Act, 1940 therefore the ld. Judge was not justified to rely on them.

The court noted in Sundaram Finance Ltd. vs. NEPC India Ltd, 1999, the Apex Cout has held that “The 1996 Act is very different from the Arbitration Act, 1940. The provisions of this Act have, therefore, to be interpreted and construed independently and in fact reference to the 1940 Act may actually lead to misconstruction. In other words, the provisions of the 1996 Act have to be interpreted being uninfluenced by the principles underlying the 1940 Act. In order to get help in construing these provisions, it is more relevant to refer to the UNCITRAL Model Law rather than the 1940 Act.”

The court further noted that after the enactment of the Arbitration Act, 1996, the situation has completely changed. Section 16 of the Arbitration empowers the Arbitral Tribunal to decide the validity of an arbitration agreement despite the underlying contract has been rendered invalid.

The court relied on the Supreme Court judgment in Interplay between Arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899, In Re, 2024 wherein the court after analsying various judgments and provisions of the Act held that when the parties append their signatures to a contract containing an arbitration agreement, they are regarded in effect as independently appending their signatures to the arbitration agreement. The reason is that the parties intend to treat an arbitration agreement contained in an underlying contract as distinct from the other terms of the contract.

The court further noted that “the validity of an arbitration agreement, in the face of the invalidity of the underlying contract, allows the Arbitral Tribunal to assume jurisdiction and decide on its own jurisdiction by determining the existence and validity of the arbitration agreement. In the process, the separability presumption gives effect to the doctrine of competence-competence.”

The court concluded that the learned District Judge did not realise that with the enactment of the Arbitration Act of 1996, the view that the arbitration clause was an integral part of the contract and perished with it, had undergone a change. Now, the separability presumption ensures the validity of an arbitration agreement contained in an underlying contract, notwithstanding the invalidity, illegality, or termination of such contract.

Accordingly, the present appeal was allowed and the impugned order was set aside.

Case Title: State of Sikkim Versus M/s Tashi Delek Gaming Solutions (P) Ltd.

Case Reference: Arb. A. No. 02 of 2016

Judgment Date: 12/11/2024

Mr. Zangpo Sherpa, Additional Advocate General and Mr. Shakil Raj Karki, Government Advocate for the Appellant.

None for the Respondent.