Analysis of Section 8 of The Arbitration and Conciliation Act, 1996 keeping in view the commercial interest and recent pronouncement of the Court(s) in India?[1]
Introduction
The Arbitration and Conciliation Act was legislated by the parliament in the year 1996 and was amended from time to time. It is pertinent to note that The Arbitration and Conciliation Bill having been passed by both the Houses of Parliament received the assent of the President on 16th August 1996. Prior to the enactment of the Arbitration and Conciliation Act, 1996 there was already a law in place i.e., the Arbitration Act, 1940, the Arbitration (Protocol and Convention) Act, 1937, and the Foreign Award (Recognition and Enforcement) Act, 1961. However, the said Legislation was outdated therefore the Legislature and the Law Commission proposed to bring in the new legislation keeping in view the economic situation prevalent at that time in India.
Out of many objectives, the Act was enacted to provide speedy disposal of cases relating to arbitration with the least Court intervention since the interpretation of the provisions of the Act by Courts in some cases has resulted in a delay in disposal of arbitration proceedings and an increase in the interference by Courts in arbitration matters which tend to defeat the object of the Act. The aim is to reduce the litigation in respective Court(s) and also reduce the burden on the Judiciary. The aim is to solve the dispute that arose between the respected parties in a timely fashion and the parties involved should get respective relief as prayed for within a stipulated time frame as per the Act and is commercially viable as per the convenience of the parties involved.
Commercial perspective
Broadly, it is observed without admitting that a Company operating in India has serval department(s) and may vary across the industries. However, for the sake of listing as per the observation of the Author, the few departments which may be common across the industry are Finance, Marketing, Human Resources, Sales, Research and Development, and Information Technology. Out of several department(s) mentioned, sales and marketing and research and development play a very important role along with other departments. The said department will determine the growth of the Company in terms of commercial success. Why I am saying so? The reason is that the respective consumer who purchases the product or the service from retail shops or directly from the Company through its channel partners wants to know the benefit and for that reason, the company has a division of sales and marketing that enables the company to tell the respective customers about the benefit of use, etc. of the said product or service. So that the customer prefers the said product as and when the customer decides to purchase the same from the market or the E-Commerce website. It is pertinent to note that the consumer is looking for value for the money spent on the respective goods or services purchased. While the Company is looking for the commercial success of the goods and services sold.
As it is an observation with changing times Company might be developing new teams as the economic environment and consumer behaviour are changing. The Companies may be introducing the organization-specific teams such as Consumer Behavior teams, Marketing Analytics team, and Artificial Intelligence, and trying to read the behaviour of the Consumer(s) to enable them to serve the existing and the new consumers with the best products or services as the case may be. Hence, emerging the new E-Commerce market wherein the companies are knowing the behaviour of the customers through the use of the World Wide Web. I am not going into details about the roles of these specific teams and what roles these teams play in different industries (s).
Furthermore, it is a common understanding that the finance team after working on the costing may suggest figures which need to be met in a particular year or a quarter. The figure suggested then may have to be kept in mind by the sales and marketing team to meet the targets. The system of targets is to my knowledge and common understanding might be for the sole reason that Company has to keep itself afloat and also make a gainful profit for its commercial success.
However, presuming and without admitting that in certain situations wherein the Company marketing and sales department are not successful in meeting the targets as per the suggestion of the finance team the company may incur some amount of loss on account of not meeting the targets as the case may be.
Hypothetical situation.
Presuming Mr. X is a director with an XXY company. The company is involved in producing iron. The company was not able to meet the targets in a particular financial year set by the finance team. The board meeting was called by the Company Secretary and a resolution was passed to take the loan of XXXX amount from a particular bank as per the Companies Act, 2013. As per the board resolution, Mr. X approached a concerned Bank manager for a grant of the loan amount in a particular year. Between the respective parties, the loan agreement is signed. In the said agreement the parties have mentioned the Default Terms and Conditions and the Arbitration clause. Now Mr.X was not able to pay the loan amount in the stipulated time frame and defaulted in paying the borrowed amount. Now in the given facts and circumstances, let’s presume that the bank without taking into consideration the agreement signed between the respective parties approached the Court(s) instead of invoking the Arbitration clause. Now in the given circumstances what are the options available to Mr. X who is a director with an XYZ company.
Relevant Provision
Section 8 of The Arbitration and Conciliation Act, 1996 was amended in the year 2015. Prior to the amendment of Section 8 had a different connotation. The Section reproduced is after the amendment.
Section 8 Power To refer parties to arbitration where there is an arbitration agreement; –
- A Judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration exists.]
- The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof:
[Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before the Court.]
- Notwithstanding that an application has been made under section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.
Analysis
Mr X may consider reading Section 8 of the Arbitration Act to find the solution to the said issue mentioned hereinabove. Furthermore, X while reading the said section also may consider the Judgments delivered by the Hon’ble Court(s) time and again. I have mentioned the selective paragraph of the latest decisions of the Hon’ble Court(s) herein below to examine the Hypothetical situation: –
In the matter of Lindsay International Private Limited & Others Versus Laxmi Niwas Mittal and Others, 2022 SCC Online Cal 171 the High Court of Calcutta in para 8 in the judgment observed, and the same is reproduced verbatim: –
Section 8(1) mandates a judicial authority before which an action is brought to refer a matter which is the subject matter of an arbitration agreement to arbitration. If the existence of the arbitration agreement is admitted, all that the Court is required to look into is whether the matter which is going to be referred to arbitration has a valid arbitration agreement. The statutory mandate is subject to the Court ascertaining.
- Whether any valid arbitration agreement exists;
- Whether the matter is arbitrable;
- Whether the party, who seeks reference, has applied before submitting its first statement on the subject matter of the dispute.
If the Court can tick all of the above conditions, the Court must refer the parties to arbitration “unless it finds that prima facie no valid arbitration agreement exists.”
In light of the above observation made by the Hon’ble Court, it is crystal clear that the Hon’ble Court has limited power to intervene to the extent to check the basic requirements as mentioned hereinabove. The Hon’ble Courts through various precedents have tried to interpret the section and the language used by the legislature to ascertain the intent. In another judgment titled Vidya Drolia and Others Versus Durga Trading Corporation (2021) 2 SCC 1 wherein the Hon’ble Apex Court dealt with the legal question and answered the following legal question mentioned hereinbelow: –
- Meaning of Non- arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration.
- The conundrum- “who decides” – whether the court at the reference stage or the Arbitral Tribunal in the arbitration proceedings would decide the question of non-arbitrability.
The Apex Court in para 132, 154.3, 237, and 244.4 observed and the same is reproduced verbatim hereinbelow: –
Para 132 “The Court at the referral stage do not perform ministerial functions. They exercise and perform judicial functions when they decide on objections in terms of Sections 8 and 11 of the Arbitration Act. Section 8 prescribes the court to refer the parties to arbitration if the action brought is the subject of an arbitration agreement, unless it finds that prima facie no valid arbitration agreement exists. Examining the term “prima facie”
In the case of Nirmala J Jhala v State of Gujrat “A prima facie case does not mean a case proved to the hilt but a case that can be said to be established if the evidence which is led in support of the case were (to be) believed. While determining whether a prima facie case had been made out or not the relevant consideration is whether the evidence led it was possible to arrive at the conclusion in question and not whether that was the only conclusion that could be arrived at on that evidence.”
Furthermore, In para 154.3. the Apex Court observed that “general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all question of non-arbitrability. The Court has been conferred the power of “second look” on the aspect of non-arbitrability post the award in terms of sub-clause (i), (ii) or (iv) of Section 34(2) (a) or Sub-clause (i) of Section 34(2) (b) of the Arbitration Act.
In Para 237 has observed In Mayavati Trading case and Garware Wall Ropes Ltd Vs Costal Marine Construction & Engg Ltd, the aforesaid stand has
1. Whether the arbitration agreement was in writing?
2. Whether the arbitration agreement was contained in the exchange of letters, telecommunication, etc?
3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?
Furthermore, Judge observed the Court under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of non-existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding.
In Para 244.4 – The court should refer to a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above i.e., “when in doubt, do refer”.
In the light of the above observation, the following can be deduced from the observation that, until and unless the party establishes that prima facie that the Arbitration Agreement is not valid as per the above standards mentioned, the Hon’ble Court wherein the application is filed under Section 8 of the Arbitration Act, shall refer the parties to settle the dispute before the Arbitrator appointed. Furthermore, if the Court is not convinced or there is a doubt concerning the validity of the agreement, the Court, in that case, shall refer the matter to the Arbitrator who will first decide on the validity of the Agreement and thereafter take up the matter for further proceedings as per the Act and rules made thereunder.
Conclusion
As the times are changing and the Companies are always in need of the cash in hand. Therefore, for the convenience of the commercial parties, Arbitration Act plays a very important role when there is a dispute. As mentioned hereinabove about the default in the loan amount by the Company to repay the loan amount to the bank because the sales and marketing team was not able to meet the targets. Now both the parties concerned are in a tuff situation wherein the parties concerned want immediate relief and in case the matter goes to Court it will take considerably more time to solve the dispute between the parties. Therefore, Arbitration is the preferred solution to settle the dispute and for the same, there needs to be a valid Arbitration Agreement as explained hereinabove in the said judgments between the respective parties. So that wherein there is a circumstance in case one party concerned approaches the Hon’ble Court another party may consider filing a Section 8 application under the Arbitration Act[2].
The author of this article can be reached at dachambersconnect@outlook.com for any discussion or clarification. Please free to drop a mail.
[1] Deepanshu Arora holds a degree in B. Com from the University of Delhi and Law
[2] Disclaimer – This is solely for informational purposes/ knowledge sharing and this information should not be considered as legal, professional advice, service, advertisement, or solicitation in any manner whatsoever. Deepanshu Arora further assumes no liability for the interpretation and/or use of the information contained in this post, nor does it offer a warranty of any kind, either expressed or implied. The contents of the information are provided “as is”, with no guarantees of genuineness, completeness, accuracy, or timeliness, and without representations, warranties, or other contractual terms of any kind, express or implied. Please reach out to your legal advisor for advice before making any decision w.r.t to the contents of the information.
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