Incorrect Reference Regarding Applicability Of Indian Arbitration Act, 1940 Wouldn’t Render Entire Arbitration Agreement Invalid: SC [Read Judgment]

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

Setting aside, what it termed as a ‘completely erroneous’ order, the Supreme Court observed that even if an arbitration agreement entered into after Arbitration and Conciliation Act, 1996 had come into force makes a reference to the applicable provisions of those under Indian Arbitration Act or 1940 Act, such stipulation would be of no consequence and the matter must be governed under provisions of 1996 Act.

In this case, the Bombay High Court had taken a view that the relevant clause indicated agreement between the parties to refer the disputes to arbitration as per provisions of the Indian Arbitration Act, 1940, although the Partnership Agreement was entered into much after the enactment of 1996 Act. Observing thus, the high court upheld the lower court order rejecting reference to arbitration.

The high court had relied on an apex court decision in Thyssen Stahlunion GMBH v. Steel Authority of India Ltd. and Patna High Court judgment in Rajan Kumar Verma and Anr. v. Sachchidanand Singh. The high court had quoted the relevant part of apex court judgment in Thyssen and observed that if the arbitration proceedings had not been commenced under the Act of 1940 till the Act of 1996 came into force, same could not be commenced thereafter.

Quoted SC judgment completely out of context

The bench of Justice Arun Mishra and Justice UU Lalit observed that the observations made in Thyssen has been quoted completely out of context and it was only held therein that if the arbitral proceedings had not commenced before 1996 Act came into force, the parties could not by their agreement agree on the applicability of 1940 Act.

“These observations do not in any way suggest that, “if the arbitral proceedings had not commenced under the Act of 1940 till the Act of 1996 came into force, the same could not be commenced thereafter”. All that these observations indicate is that in such cases there cannot be applicability of 1940 Act and not, and we repeat, that there can be no arbitration at all”, the bench said.

The court said 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.

Justice Lalit, who authored the judgment, said: “Logically, even if in a given case, reference to arbitration in the agreement entered into before 1996 Act came into force was in terms of 1940 Act and if the arbitral proceedings had not commenced before 1996 Act came into force, the provisions of 1996 Act alone would govern the situation. The reference to “Indian Arbitration Act” or to “arbitration under 1940 Act” in such cases would be of no consequence and the matter would still be governed under 1996 Act. Would it then make any difference if in an agreement entered into after 1996 Act, the reference made by the parties in the agreement was to arbitration in terms of 1940 Act.”

Summary dismissal of SLP doesn’ mean affirmation of view vis-à-vis declaration of law

With regard to observation of the high court that Patna High Court view in a similar matter is upheld by the apex court by dismissing SLP against it, the bench said Summary dismissal of SLP against a high court order would not mean affirmation of the view taken by the high court insofar as declaration of law is concerned.

Read the Judgment Here