Substantive Objections On Validity Or Existence Of Arbitration Agreement Can Be Adjudicated By Tribunal U/S 16 Of Act: Bombay HC

Brief Facts

This is a Petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”) seeking to refer disputes and differences that have arisen between the parties in connection with an agreement dated February 19, 2007, and another deed dated August 14, 2015 (which cancelled the agreement dated February 19, 2007).

Contentions:

The Respondents opposing the reference of dispute to arbitration submitted that Respondent No. 2, the individual partner who executed the agreement on behalf of Respondent No. 1, which is a partnership firm, did not have any implied authority to bind the firm to the arbitration clause contained in these two instruments.

It was also argued that executing any contract which has an arbitration clause in it, constitutes “submission of a dispute to arbitration”. According to him, executing such a contract would require an explicit authorisation, since Section 19(2)(a) of the Indian Partnership Act, 1933 (“Partnership Act”) provides that there can be no implied authority for a partner to submit a dispute relating to the business of the firm to arbitration.

It was further argued that Respondent No. 2 supporting the submissions of the other respondents argued that the dispute on existence of an agreement cannot even be referred to an Arbitral Tribunal, unless the arbitration clause expressly places the determination of existence of an agreement as a matter of dispute that can be referred to arbitration.

Lastly,it was also contended that if the arbitration agreement does not expressly empower the Arbitral Tribunal to determine validity and existence of the agreement, according to him, such question is outside the jurisdiction of the Arbitral Tribunal.

Observations:

The court observed that it is quite clear from Section 16 of the Act that the scope of power of the Arbitral Tribunal is indeed extremely wide and expansive. Under Section 16(1) of the Act, the Arbitral Tribunal may rule on its own jurisdiction. In doing so, the Arbitral Tribunal may also rule on any objections with respect to the existence or validity of the arbitration agreement.

It further added that towards such purpose of ruling on its own jurisdiction, and dealing with objections as to existence and validity, two specific sub-clauses have been inserted in Section 16(1) of the Act. The arbitration clause in a contract is treated as an independent agreement that is distinct from the other terms of the contract. Besides, a decision that the contract containing the arbitration clause is void, would not entail the legal outcome that the arbitration clause is invalid.

The court while relying on the judgment of the Supreme Court in In re: Interplay Between Arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899(2024) observed that it is also now trite law that the referral court under Section 11 of the Act ought to restrict its scrutiny in the course of such proceedings solely to the existence of an arbitration agreement.

It also referred to the Supreme Court judgment in Ajay Madhusudan Patel & Ors. Vs. Jyotindra s. Patel & Ors(2024) where it was held that “the scope of examination under Section 11(6) should be confined to the “existence of the arbitration agreement” under Section 7 of the Act, 1996 and the “validity of an arbitration agreement” must be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. Therefore, substantive objections pertaining to existence and validity on the basis of evidence must be left to the arbitral tribunal.”

The court after cautioning that ingredients of referring the dispute to arbitration exists in the present case, moved to analyse the contention of the respondents concerning section 19 of the Partnership Act and observed that Section 19(2)(a) of the Partnership Act, prima facie, appears to be one that protects the partnership firm from a partner subjecting the firm to arbitration proceedings without consulting other partners.

It opined that it could perhaps be regarded as a provision that prevents a partner from agreeing to opt for arbitration instead of pursuing litigation in Court, when faced with a dispute. There was an era when arbitration was considered inferior to court litigation, and opting for arbitration could have been seen as compromising what could be a stronger prospect for the firm in a Court.

It also said that doing so without consulting other partners, could be the scope of Section 19(2)(1) of the Partnership Act. Even in such situations, whether there is a custom or usage of trade, would also need to be examined.

Accordingly, the present petition was allowed and an arbitrator was appointed.

Case Title: Shreegopal Barasia Versus M/s. Creative Homes & Ors.

Case Number: 2025:BHC-AS:726

Judgment Date: 06/01/2025

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