Limited Judicial Intervention U/s 8 And 11 Of Arbitration Act, Presumption In Favor Of Arbitration: Calcutta High Court

Brief Facts:

Shahnaz Husain (“Defendant”) engaged in manufacturing ayurvedic, herbal, and cosmetic goods entered into an agreement with Suresh Dhanuka (“Plaintiff”) to appoint the Plaintiff as a distributor for its goods in the territory of West Bengal for 36 months. According to the Defendant, the agreement was extended by mutual consent beyond its initial term of 36 months. Notably, the agreement contained an arbitration clause, stipulating that disputes arising from it shall be resolved amicably within a specified period, failing which the parties should resolve the dispute in arbitration. The Plaintiff filed a civil suit under Original Jurisdiction in Calcutta High Court (“High Court”) against the Defendant for a decree Rs. 1,29,39,103/- along with interest at the rate of 12% per annum. Thereafter, Defendant filed an application under Section 8 under Arbitration and Conciliation Act, 1986 (“Arbitration Act”) for referring the parties to arbitration arguing that the clause in the agreement limits the jurisdiction of the courts and asserted that the Plaintiff's claims should be resolved through arbitration as per the agreement.

The Plaintiff contested the Defendant's position, asserting that the agreement's validity lapsed before March 2014. He further argued that the Defendant unilaterally altered the distribution policy for West Bengal, thereby, terminating the agreement. He argued that the contractual relationship continued on the orally agreed terms and conditions. He emphasized that the original agreement was terminated and the further negotiations were based on the new terms agreed orally.

Clause X of the agreement dated 16th April 2008 is as follows:

“X. ARBITRATION

(i) All disputes arising in connection with this MOU shall be settled, if possible, by amicable negotiation of the parties.

(ii) If the matter is not resolved by amicable negotiations within 20 (twenty) business days or such later date as may be unanimously agreed upon, then the dispute shall be finally settled by arbitration in accordance with Indian Arbitration and Conciliation Act 1996. It is specifically agreed between the parties that the Arbitrator shall be of Indian origin.

(iii) The arbitration shall be conducted in the English language in New Delhi. The laws of India shall govern the validity, Interpretation, construction, performance and enforcement of the arbitration and the conduct of any arbitration proceedings hereunder, including making the arbitral award.

(iv) The arbitration award shall be final and binding upon both the parties.”

Observations by the High Court:

Referring to the decision of the Supreme Court in Vidya Drolia vs Durga Trading Corporation [(2021) 2 SCC 1], the High Court held that while interpreting arbitration agreements, the courts should favour the liberal construction approach in commercial disputes, aligning with a presumption favouring arbitration for efficient adjudication. Further, it highlighted the limited and restricted nature of the power of the courts under Sections 8 and 11 of the Arbitration Act, endorsing the principle of competence-competence, wherein the Arbitral Tribunal holds the primary authority to determine questions of non-arbitrability. It underscored the necessity for courts to refer matters to arbitration unless a party demonstrates a prima facie case of the non-existence of a valid arbitration agreement.

The High Court held that Section 16 of the Arbitration Act confers significant powers upon the Arbitral Tribunal, including the authority to rule on its jurisdiction. This provision empowers the tribunal to determine any objections concerning the existence or validity of the arbitration agreement. The section specifies that an arbitration clause within a contract is to be treated as an independent agreement, and a decision by the tribunal declaring the contract null and void does not automatically invalidate the arbitration clause. Further, the High Court noted that the doctrine of "kompetenz-kompetenz" underscores the tribunal's competence to rule on its jurisdiction, encompassing all jurisdictional issues and the validity of the arbitration agreement. However, the High Court noted that there are certain exceptions to this doctrine, such as when the arbitration agreement is tainted by fraud or deception.

It held that legislative intent behind the Arbitration Act emphasizes party autonomy and limits judicial intervention in the arbitral process. Once the arbitrator or tribunal is appointed, all issues and objections, including jurisdictional matters, are to be decided by the arbitrator.

Furthermore, the High Court held that the communications from the Plaintiff were closely linked to the initial email, therefore, there was a close connection to the original agreement. This contradicted Plaintiff's claim that Defendant's actions, such as appointing other distributors in West Bengal and failing to clear dues for damaged and expired goods, were not aligned with the agreement's terms. Therefore, the High Court held that the emails and invoices, prima facie establish that the disputes are intricately linked with the original agreement.

The High Court dismissed the civil suit filed by the Plaintiff and noted that the Plaintiff did not establish a prima facie case of non-existence of the agreement. Resultantly, it referred the parties to arbitration.

Case Title: Suresh Dhanuka vs Shahnaz Husain

Case No.: GA 2 of 2022 in CS 118 of 2021

Advocate for the Plaintiff: Sabyasachi Chowdhury, Chayan Gupta and Rajesh Upadhyay

Advocate for the Defendant: Dyutiman Banerjee, Arnab Sinha, Soumajit Majumdar and Amartya Basu

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