Legality and Validity of substantive contract cannot be enquired under Section 8/Section 45 of Arbitration and Conciliation Act, 1996 [Read Judgment]

The scope of enquiry under the Section 45 is confined only to the question whether the arbitration agreement is “null and void, inoperative or incapable of being performed”, the Court observed.

The Apex Court in Sasan Power Limited vs. North American Coal Corporation India Private Limited, has held that the scope of enquiry under the Section 8 and Section 45 of the Arbitration and Conciliation Act, 1996, is confined only to the question whether the arbitration agreement is “null and void, inoperative or incapable of being performed” but not the legality and validity of the substantive contract.

The Apex Court bench comprising of Justices J. Chelameswar and A M Sapre, dismissed an appeal against the High Court judgment which had upheld the dismissal of suit preferred by one of the party to the agreement.

The Court observed that Arbitration agreement is independent of Substantive contract and the scope of enquiry under Section 45 of the Arbitration and Conciliation Act does not extend to examination of legality of substantive contract. The Court also made a pertinent observation that concession made by a Counsel of a party before the Court, with regard to an agreement between parties, is not a secondary evidence. Justice Sapre, in a concurring Judgment, observed that the Court, instead of only dismissing the suit, should also have referred the dispute to arbitration.

ARBITRATION AGREEMENT INDEPENDENT OF SUBSTANTIVE CONTRACT

The Court observed: “It is settled law that an arbitration agreement is an independent or “self-contained” agreement. In a given case, a written agreement for arbitration could form part of another agreement, described by Lord Diplock as the “substantive contract” by which parties create contractual rights and obligations. Notwithstanding the fact that all such rights and obligations arising out of a substantive contract and the agreement to have the disputes (if any, arising out of such substantive contract) settled through the process of arbitration are contained in the same document, the arbitration agreement is an independent agreement. Arbitration agreement/clause is not that governs rights and obligations arising out of the substantive contract: It only governs the way of settling disputes between the parties.”

SCOPE OF ENQUIRY LIMITED TO ARBITRATION AGREEMENT, NOT SUBSTANTIVE CONTRACT

The Court held: “The scope of enquiry (even) under the Section 45 is confined only to the question whether the arbitration agreement is “null and void, inoperative or incapable of being performed” but not the legality and validity of the substantive contract…All that we hold is that the scope of enquiry under the Section 45 does not extend to the examination of the legality of the substantive contract. The language of the Section is plain and does not admit of any other construction. For the purpose of deciding whether the suit filed by the appellant herein is maintainable or impliedly barred by Section 45 of the 1996 Act, the Court is required to examine only the validity of the arbitration agreement within the parameters set out in Section 45, but not the substantive contract of which the arbitration agreement is a part.”

Referring to Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums, the Court held: “If it is impermissible for a civil court to examine whether a dispute is really covered by the arbitration agreement, we see no reason to hold that a civil court exercising jurisdiction under Section 45 could examine the question whether the substantive agreement (of which the 30 arbitration agreement is a part) is a valid agreement. No doubt that HPCL case was in the context of the bar contained in Section 8 of the 1996 Act. But the same principles of interpretation apply even for the interpretation of Section 45.”

CONCESSION MADE BY COUNSEL FOR PARTIES

With regard to a contention that, there was a concession by the respondent before the High Court that AGREEMENT-II is not a tripartite agreement but a bipartite agreement, the Bench observed: “a concession at the bar regarding the content of a written agreement including the fact as to who are the parties to the document, in our opinion, does not stand on any different footing than the oral evidence of the parties. The concession made by the counsel for the respondent is not secondary evidence admissible under any of the clauses of Section 65 of the Evidence Act. Therefore, in our opinion, the concession made at the bar by the learned counsel (for the respondent herein) before the High Court does not preclude the respondent from asserting that AGREEMENT-II is a tripartite agreement. The tenor and content and the fact that representatives of the three companies signed the document cannot be ignored simply on the basis of an uninformed concession made at the bar.”

OBLIGATORY ON COURT TO REFER PARTIES TO ARBITRATION WHEN THERE IS A LEGAL AND VALID ARBITRATION AGREEMENT

Justice Sapre opined that consequential order should have been made, as required under Section 45 by referring the parties to the arbitration, and instead of simply dismissing the suit as not maintainable. Justice Sapre opined: “Mere reading of Section 45 would go to show that the use of the words "shall" and "refer the parties to arbitration" in 43 the section makes it legally obligatory on the Court to refer the parties to the arbitration once it finds that the agreement in question is neither null and void nor inoperative and nor incapable of being performed. In other words, once it is found that the agreement in question is a legal and valid agreement, which is capable of being performed by the parties to the suit, the Court has no discretion but to pass an order by referring the parties to the arbitration in terms of the agreement.”

Read the Judgment here.