Karnataka High Court
Lexicon Finance Limited, Unit No. Ii, ... vs Union Of India (Uoi) And Ors. on 6 March, 2002
Equivalent citations: ILR2002KAR2050, 2002(4)KARLJ1, 2002 AIR - KANT. H. C. R. 2212, (2002) 4 KANT LJ 1, (2002) 3 ARBILR 60, (2002) 3 ICC 24, (2002) 3 CIVLJ 265, (2002) 3 BANKCLR 521
Author: N. Kumar
Bench: N. Kumar
ORDER N.K. Jain, C.J.
1. In this writ petition, the petitioner- Lexicon Finance Limited has challenged the vires of Section 16(5) of the Arbitration and Conciliation Act, 1996 (for short 'the Act').
2. The necessary facts as stated are that the petitioner is a public limited company incorporated under the Companies Act, having its registered office at Mumbai and the 2nd respondent is also a company registered under the Companies Act, having its registered office at Manipal, Karnataka. The 2nd respondent claims to have advanced finance by way of bill of discounting on various dates during February 1998 to March 1999 to the petitioner and has entered into a Bill Discounting Agreement on 15-12-1998 with the petitioner, which contains an Arbitration Clause for settlement of disputes between the parties. The 2nd respondent claims to have issued a notice to the petitioner demanding payment of Rs. 33,06,794/- on 1-4-2000 and on failure to make payment referred the dispute to the Sole Arbitrator Sri A.S.N. Hebbar, 3rd respondent herein, as per Clause 9 of the terms and conditions of the agreement, and subsequently a notice was issued to the petitioner. On receipt of notice the petitioner appeared before the Arbitrator and filed an application under Section 16 of the Act denying the agreement and stating that the Arbitrator has no jurisdiction and as such the matter was posted for deciding the preliminary issue of jurisdiction. The learned Arbitrator held an enquiry on the preliminary point. After recording the evidence of both the parties, on appreciation of oral and documentary evidence, he rejected the preliminary objection of the petitioner vide order dated 6-10-2001 and held the arbitration reference was validly made and the Arbitrator has jurisdiction and therefore ordered that the enquiry shall proceed and a copy of the same was received by the petitioner on 19-10-2001. It is against the order dated 6-10-2001 passed by the Arbitrator, the present writ petition is filed praying to declare Section 16(5) of the Act as ultra vires of the Constitution.
3. Learned Counsel for the petitioner contended that the agreement dated 15-12-1998 is void and therefore the clause providing for arbitration in the said agreement is not in existence as per the decision of the Hon'ble Supreme Court of India in the case of Waverly Jute Mills Company Limited v. Raymon and Company (India) Private Limited, ; as such the Arbitrator has no jurisdiction. Secondly, he contended that Section 16(5) of the Act is ultra vires the Constitution of India as the same is inequitable and violates the principles of natural justice, and as an aggrieved party is left without any effective remedy except to go through the entire trial which is unconstitutional. Therefore, he contends the same is liable to be struck down as ultra vires the Constitution.
4. Learned Counsel for the respondents contend that there is absolutely no substance in either of the contentions raised by the petitioner and the case cited is not applicable to the facts of the given case and further in view of the new Act which has come into force with effect from 25-1-1996 before the agreement.
5. We have heard the learned Counsels for the parties and perused the materials placed on the record and the relevant provisions and case-law cited.
6. The Supreme Court in the case of Waverly Jute Mills Company Limited, supra, relied on by the petitioner's Counsel in support of his first contention, has held as under:
"17. ...............if a contract is illegal and void, an arbitration clause which is one of the terms thereof, must also perish along with it and that a dispute relating to the validity of a contract is in such cases for the Court and not for the Arbitrators to decide .........".
7. From the aforesaid decision it is clear that if the entire contract which contains the arbitration agreement is held to be void the arbitration clause in such a void contract has no independent existence and therefore the dispute arising between the parties under such void contract cannot be referred to arbitration. The said judgment was rendered while interpreting the provisions of the Arbitration Act of 1940. It is seen that the new Arbitration Act has come into force. Probably taking note of the law declared by the Supreme Court, the Parliament in its wisdom has tried to remedy the situation by enacting Section 16(1) of the new Act. It will be appropriate to reproduce Section 16 of the Act, which reads as follows:
"16. Competence of Arbitral Tribunal to rule on its jurisdiction,--(1) The Arbitral Tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for the purpose.-
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause".
8. A perusal of the aforesaid provision makes it clear that an arbitration clause in an agreement shall be treated an agreement independent of other terms of the contract and even if the Arbitral Tribunal were to hold that the contract is null and void it shall not entail ipso jure the invalidity of the arbitration clause. In other words even if the contract is held to be void the clause regarding arbitration found in a void contract would not become void. It exists independently of the said contract and it could be enforced. Therefore, in the light of the statutory provision the contention of the learned Counsel for the petitioner is not applicable and the above case is not helpful to the facts of the given case and the argument has no substance. However, this Court cannot go into the question of fact and further the Arbitrator has already decided the issue.
9. It is also to be seen that Section 16(2) of the Act provides that a plea regarding the jurisdiction of the Arbitral Tribunal to go into the dispute has to be raised before the Tribunal itself. Similarly, the plea that the Tribunal is exceeding the scope of its authority also should be raised before the Tribunal itself. By virtue of Section 16(1) the Arbitral Tribunal has the competence to rule on its jurisdiction.
10. The main contention of the learned Counsel for the petitioner is that Section 16(5) of the Act is ultra vires. Section 16(5) of the Act reads as under:
"The Arbitral Tribunal shall decide on a plea referred to in Sub-section (2) or (3) and, where the Arbitral Tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award".
A bare reading of the section reveals that if the objection regarding jurisdiction is rejected by the Tribunal, the Tribunal shall continue with the arbitral proceedings and make an arbitral award. If the party is aggrieved by such an arbitral award, he has been provided with a remedy by way of an application under Section 34 of the Act for setting aside such an arbitration award as is clear from Section 16(6) of the Act. Therefore, an arbitral award passed by an Arbitral Tribunal could be challenged under Section 34 of the Act not only on the grounds set out in Section 34(2) of the Act but also on the ground that the Tribunal had no jurisdiction or that the Tribunal has exceeded its authority as contemplated under Section 16(2) and (3) of the Act. If the plea referred to in Sub-section (2) or (3) of Section 16 is accepted by the Tribunal then under Section 37(2) of the Act an appeal is provided against such finding. Therefore, the legislature in its wisdom has provided for appropriate remedies under the Act both when the plea regarding jurisdiction is accepted by the Tribunal and rejected by the Tribunal. The aggrieved party has a statutory remedy. Merely because after the plea is rejected the person raising the said objection is made to contest the proceedings on merits and only when an arbitral award is passed on merits he is permitted to challenge the said award both on the question of jurisdiction and on merits under Section 34, that would not render Section 16(5) of the Act inequitable and violative of principles of natural justice. It does not violate the fundamental right of the petitioner as contended by him. The learned Counsel for the petitioner has not been able to show any other ground to declare Section 16(5) of the Act as ultra vires. Merely because he is expected to be subject to the jurisdiction of the Tribunal and go through the entire trial, it would not render such provision arbitrary or oppressive or unconstitutional. As stated, Section 34 of the Act gives a party adversely affected by an arbitral award the right to approach the Arbitral Tribunal and any order passed under Section 34 is appealable under Section 37 of the Act. Such being the fact situation, this Court cannot go into the merits of the case. The contentions of the learned Counsel for the petitioner have no substance.
11. In view of the above discussion, we do not find any good ground to declare Section 16(5) of the Act as ultra vires of the Constitution.
This writ petition is dismissed. However, we make no order as to costs.