Legal Briefing

Qualifying a reference to arbitrate

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India | 01 March 2010

Section 8 of the Indian Arbitration and Conciliation Act 1996 (the 1996 Act) empowers the court to refer matters brought before it to arbitration, in the event that the matter falls within the scope of an arbitration agreement between the parties (see the ‘Section 8’ box below).

The Supreme Court of India has categorically held, throughout a string of judgments, that this reference is mandatory and that the judicial authority has no discretion on the matter.1 As such, s8 was seen to echo the objectives of the 1996 Act, in that it curtailed judicial interference, thereby ensuring a faster resolution of matters.

On closer scrutiny, it appears that the judiciary, over a period of time, has tinged s8 with a discretionary element to justify its interference in certain matters, eg those tainted with elements of criminality or involving serious allegations of fraud. This is best illustrated by the recent judgment in N Radhakrishnan v Maestro Engineers & ors [2009].

Section 8

Section 8 of the Arbitration and Conciliation Act 1996 deals with the power of the court to refer the parties to arbitration, and reads as follows:

‘8. Power to refer parties to arbitration where there is an arbitration agreement.

  1. A judicial authority before which an action is brought in a matter, which is the subject of an arbitration agreement, shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
  2. The application referred to in subsection (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
  3. Notwithstanding that an application has been made under subsection (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.’

Review

In Radhakrishnan, disputes arose between parties who were partners in a firm. The disputes also involved allegations of fraud, collusion and financial malpractice, which allegedly resulted in the unfair retirement of N Radhakrishnan (the appellant) and the constitution of a new partnership deed. Maestro Engineers filed a suit before the District Court seeking a declaration that N Radhakrishnan was not a partner of the firm. As a counterblast to this suit, N Radhakrishnan filed an application under s8 seeking reference to arbitration since the partnership deed had an arbitration clause. This application for reference to arbitration was rejected by the Trial Court and by the Madras High Court on the basis that the allegations of fraud merited detailed appreciation of evidence that could only be settled in court.

The Supreme Court, despite having found that the subject matter of the suit was within the jurisdiction of the arbitrator, concurred with the interference of the High Court on the basis that the court, as opposed to the arbitrator, was the more competent forum to deal with the issues raised by the parties. In support, the Supreme Court referred to its earlier decision in Abdul Kadir Shamsuddin Bubere v Madhav Prabhakar Oak & anor [1962] and the High Court decision in H G Oomor Sait & anor v O Aslam Sait [2001], which observed that the court is a more appropriate forum to adjudicate matters involving the scrutiny of detailed oral and documentary evidence, given that rules of procedure and evidence are not binding on an arbitral tribunal.

Fraud, financial malpractice and collusion are weighty allegations with criminal repercussions. The arbitrator is a creature of the contract and their jurisdiction is limited to the four corners of the contract. The courts, on the contrary, are guided by exhaustive provisions of the Indian Evidence Act 1872, the Code of Civil Procedure 1908 and the Code of Criminal Procedure 1973, making them more equipped to adjudicate serious and complex allegations, and can offer a wider range of reliefs to the parties in dispute. It is against this background that the courts have resisted the mandatory reference in fraud allegations and have cloaked their interference under the armour of discretion.

Comment

While there are reasons for the interference of the judiciary, it remains to be seen how far the courts will go to broaden the scope and extent of their interference in arbitral proceedings. This may well be used to strike a blow to party autonomy, which is at the very root of the evolution of alternative dispute resolution mechanisms, including arbitrations.

Notes

  1. See Shin-Etsu Chemical Case Co Ltd v Aksh Optifibre Ltd & anor [2005] 7 SCC 234; Hindustan Petroleum Corp Ltd v Pinkcity Midway Petroleums [2003] (6) SCC 503; and Sumitomo Corporation v CDC Financial Services (Mauritius) Ltd & ors [2008] 4 SCC 91.