Facts
Decision

Comment


Facts

The petitioner – a Swiss company – and the respondent – the Organising Committee of the Commonwealth Games – entered into an agreement to provide timing, scoring and results systems and supporting services for the Commonwealth Games. The petitioner alleged that the respondent defaulted in making payments without any justifiable reason and hence initiated arbitration under Clause 38.6 of the contract. When the respondent failed to nominate its arbitrator, the petitioner filed a petition under Section 11 of the Arbitration and Conciliation Act in order to constitute the arbitral tribunal.

The respondent objected, claiming that the contract was void from the outset and thus vitiated; therefore, the petitioner could not invoke arbitration. Further, the respondent argued that the contract was void from the outset because the petitioner had indulged in corrupt practices when procuring the contract, despite having guaranteed that it would never engage in corrupt, fraudulent, collusive or coercive practices in connection with the contract. To substantiate its objection and establish corruption, the respondent relied on the pending criminal proceedings against the chairperson and other officials of the respondent. Finally, the respondent contended that continuation of simultaneous arbitration proceedings and criminal proceedings could result in conflicting conclusions, leading to unnecessary confusion.

The respondent relied heavily on the Supreme Court judgment in N Radhakrishnan v Maestro Engineers,(1) in which the court held that allegations of fraud and serious malpractice cannot be dealt with properly through arbitration.

The respondent also relied on India Household and Healthcare Ltd v LG Household and Healthcare Ltd.(2)

The issue at hand was whether the court or arbitral tribunal has jurisdiction when one of the parties alleges fraud and malpractice.

Decision

The Supreme Court held that a court exercising jurisdiction under Sections 8 and 11 of the act is not rendered powerless to refer the dispute to arbitration just because a contract is said to be void from the outset. In this case, the court held that all allegations raised by the respondent needed to be established in a proper forum (using oral and documentary evidence), and that the proper forum would be the arbitral tribunal.

The court then went on to analyse the Maestro judgment, since the respondent relied on it heavily. In Maestro, the court concluded that since the matter related to allegations of fraud and serious malpractice, it could be settled only in court, through furtherance of detailed evidence, and that an arbitrator could not properly assess such a case.

The court held that the decision in Maestro runs counter to the rationale of the law as laid down in Hindustan Petroleum Corporation Ltd v Pinkcity Midway Petroleums(3) – in which it was held that civil courts must refer parties to arbitration when the agreement contains an arbitration clause – and that the law laid down in Hindustan was correct. The court further held that the decision in Maestro was per incuriam (ie, a judgment that was made without reference to a relevant statutory provision or earlier judgment) for the following reasons:

  • The Hindustan judgment was neither distinguished nor followed.
  • The judgment in P Anand Gajapathi Raju v PVG Raju (Dead)(4) was not even brought to the court's attention; in this case the court held that the language of Section 8 of the act is pre-emptory and therefore the courts are obliged to refer parties to arbitration.
  • Section 16 of the act was not brought to the court's attention.

The court emphasised that Section 16 of the act sets out the concept of separability of the arbitration agreement from the underlying contract. A combined reading of Sections 5 and 16 makes it clear that the issue of whether the main contract was void or voidable could be referred to arbitration. Thus, the judgment in Maestro was incorrect and could not be relied on. The court emphasised that parties should not be allowed to avoid arbitration by claiming that the underlying contract is void.

The court then went on to hold that where the court can conclude that a contract is void without receiving any evidence, it can justifiably deny reference to arbitration, although such cases would be rare. They would include:

  • where a contract is entered into by a person who has not reached the age of majority (Section 11);
  • where both parties are unclear about a matter of fact essential to the agreement (Section 19);
  • where the consideration or object of the contract is forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law;
  • where the object of the contract is any immoral activity or the contract would be opposed to public policy (eg, a contract for prostitution, drug smuggling, human trafficking or any other such activities); and
  • wagering contracts, which are void under Section 30.

However, the court held that where a party claims that the contract is voidable, arbitration cannot be avoided. Reasons for voidability include:

  • Section 12 – unsound mind;
  • Section 14 – absence of free consent (ie, where the consent is said to be vitiated as it was obtained through coercion (Section 15));
  • Section 16 – undue influence;
  • Section 17 – fraud; or
  • Section 18 – misrepresentation.

A contract will become void only once the party claiming voidability can prove that the contract is void.

In this case, the court held that stopping arbitration at the initial stage would destroy the purpose for which the parties had entered into the arbitration agreement.

On the issue of simultaneous continuation of arbitration and criminal proceedings, the court rejected the respondent's contention that arbitration should not be commenced pending criminal proceedings. The court relied on MS Sheriff v State of Madras,(5) in which it was held that the solitary rule to restrain simultaneous proceedings is to avoid embarrassment to the accused.

The court also opined that where the award is made in favour of the petitioner, the respondent can resist the enforcement if the chair or officials of the contracting parties are subsequently convicted.

Finally, the court reconsidered its much-criticised decision in Maestro in favour of arbitration. Earlier in 2014, in World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd,(6) through a Section 45 application, the court reached the same conclusion – that an allegation of fraud does not prevent the court from referring parties to arbitration under Section 45 of the act. By this decision, the court has now adopted a uniform position, even in Indian seated arbitration.

Comment

The exercise of power of appointment of an arbitrator under Section 11 has been held to be judicial in nature – as was the case in SBP & Company v Patel Engineering Limited(7) – which is all the more reason to follow judicial discipline. The Indian legal system is based on common law and precedents play an important role in this.

Another important factor is that Swiss Timing was a single-bench decision, whereas Maestro was a Division-Bench decision. The question thus becomes whether a single judge can overrule the decision of the Division Bench. In State of Punjab v Nestle India Ltd(8) the court held that judicial discipline requires that the decision of the larger bench should be followed. Even with respect to coordinate benches, in State of Punjab v Devans Modern Breweries Ltd,(9) the court held that if a coordinate bench disagrees with the law as enunciated by another bench, the matter may be referred only to a larger bench, but no decision can be contrary to or inconsistent with the law laid down by the coordinate bench.

With respect to decisions of a larger bench, the courts in Central Board of Dawoodi Bohra Community v State of Maharashtra,(10) Bharat Petroleum Corpn v Mumbai Shramik Sangha(11) and Pradip Chandra Parija v Pramod Chandra Patnaik(12) held that a smaller bench cannot disagree or dissent from a larger bench's view of the law. If the smaller bench doubts a decision, it can only refer the matter to the chief justice and request that the matter to be placed before a bench that is larger than the bench where the decision came up for consideration. While the decision in Swiss Timing can be supported not only because it is pro-arbitration, but also correct, in light of the legal position on precedents, there will likely be another round of litigation before the final word on the subject.

Further, in light of the decision in SPS v Patel Engineering,(13) the seven-judge bench of the Supreme Court held that power exercised by a court is a judicial function, not an administrative function. Hence, it will be interesting to observe the effect of the Swiss Timing judgment and whether it will be binding.

For further information on this topic please contact Vikram Nankani or Neeti Sachdeva at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (vikramnankani@elp-in.com or neetisachdeva@elp-in.com).

Endnotes

(1) (2010) 1 SCC 72.

(2) 2007 (5) SCC 510.

(3) (2003) 6 SCC 503.

(4) (2000) 4 SCC 539.

(5) AIR 1954 SC 397.

(6) Civil Appeal 895/2014.

(7) (2005) 8 SCC 618.

(8) (2004) 6 SCC 465.

(9) (2004) 11 SCC 26.

(10) (2005) 2 SCC 673.

(11) (2001) 4 SCC 448.

(12) (2002) 1 SCC 1.

(13) (2005) 8 SCC 618.