Court Under Section 11(6) Must Determine Existence And Validity Of Arbitration Agreement: Telangana High Court

The bench held that the court while exercising the jurisdiction under Section 11(6) must conclusively determine the existence and validity of the arbitration agreement as the same goes to the root of the matter.

Section 11(6) empowers a party to apply to the Chief Justice or a designated authority if there is a failure in the agreed procedure for appointing arbitrators.

Brief Facts:

Sri Sai Krishna Constructions (“Applicant”), a Partnership Firm registered under the Partnership Act, of 1932, argued that it was subcontracted for 9 out of 10 works by Harvins Constructions Limited (“Respondent”). It argued that while no formal subcontract was signed, correspondence and business interactions infer such an arrangement. Disputes arose subsequently which prompted the Applicant to send a legal notice to the Respondent demanding significant sums. In response, the Respondent denied liability.

Following unsuccessful attempts at conciliation, the Applicant sought arbitration through a notice, which the Respondent resisted. The Applicant approached the Telangana High Court and filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 for the appointment of an arbitrator.

The Applicant argued that the arbitration clause in the agreements between the parties binds both parties and any dispute regarding its validity should be arbitrated under Section 16 of the Arbitration Act.

Conversely, the Respondent contended that under Section 11(6) of the Arbitration Act, the court must first establish the existence of an arbitration clause. It pointed out that the agreements presented by the Applicant, including those in question, lacked signatures on their initial pages and were written on the same stamp paper as the agreement. Therefore, it argued that there was insufficient prima facie evidence to confirm the arbitration clause's existence.

Observations by the High Court:

The High Court referred to Section 7 of the Arbitration Act, which defines an arbitration agreement as encompassing disputes arising from a defined legal relationship, whether contractual or not. Further, it referred to the decision of the Supreme Court in Vidya Drolia vs. Durga Trading Corporation where the SC held that for an arbitration agreement to be valid, it must meet the requirements set out in Section 10 of the Contract Act, which mandates that contracts be made by the free consent of competent parties, for lawful consideration and with a lawful object.

The Supreme Court emphasized that these principles are integral to determining the enforceability of arbitration agreements. It further expounded on the conditions necessary for an agreement to qualify as a valid arbitration clause and held that such agreements must adhere to the principles of contract law laid down in the Contract Act.

The High Court examined three arbitration agreements. It noted that while one agreement was properly executed with signatures on all pages and a valid stamp paper, the remaining two agreements lacked such formalities. Notably, these agreements lacked signatures on the first three pages and were executed on the same stamp paper which suggested procedural irregularities. Therefore, the High Court held that the Applicant failed to establish prima facie evidence of the existence of valid arbitration agreements for the disputed matters.

Consequently, the High Court dismissed the application filed for the appointment of an arbitrator.

Case Title: Sri Sai Krishna Constructions vs Harvins Constructions Plimited

Citation: 2024 LiveLaw (TS)103

Case Number: ARBITRATION APPLICATION Nos.221 of 2023 and 32 of 2024

Advocate for the Applicant: D.Neeharika Reddy

Advocate for the Respondent: V. Ravinder Rao

Date of Judgment: 19 June, 2024

Click Here To Read/Download Order or Judgment