Arbitration and Contracts Table of Cases 1) Scott v. Avery, [1843-60] All ER Rep 1. 2) Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Manufacturing, Co. Ltd, AIR 1996 SC 543. 3) Coringa Oil Co., Ltd. v. Koegler, (1876) 1 Cal 466. 4) M. D'cruz v. Secretary of State for India, (1936) 40 Cal WN 865. 5) Aghore Nath Banerjee v. Calcutta Tramways Co. Ltd, (1885) ILR 11 Cal 232. 6) Trainor v. Phoenix Fire Assurance Co, (1891-65 LT 825) 7) Union Construction Co. (PrivateLtd.) v. Chief Engineer, Eastern Command, Lucknow and Anr, AIR 1960 All 72. 8) National Insurance Co. Ltd v. Calcuta Dock Labour Board, AIR 1977 Cal 492. 9) Jagadhatri Bhandar and Jagadhatri Oil Mills v. Commercial Union Insurance Co. Ltd, AIR 1979 Cal 56. 10) Thawardas Pherumal v. Union of India, AIR 1955 SC 468 11) Waverly Jute Mills Co. Ltd. v. Raymon & Co. Pvt. Ltd., AIR 1963 SC 90. 12) Union of IndiaÂ v. Kishorilal Gupta, AIR 1959 SC 1362
Table of Statutes 1) Arbitration Act 1950. 2) Arbitration Act 1979
Introduction Arbitration has an ancient lineage dating back to 403 B.C. Although arbitration has a long and ancient lineage, until the 1960s courts were reluctant to encourage arbitration as an alternative method of dispute resolution. In effect, the movement to establish functional national legal institutions precipitated a reaction against informal, non legal, and non judicial forms of adjudication. If courts were to function as the national oracles of normative law and procedural justice, there was little room for makeshift, party- confected modes of dispute resolution. The courts were a central organ of the state and an instrument for implementing the dictates of society's juridical creed. The mission of achieving justice required public investiture and accountability. Judicial responsibilities, therefore, were too august and serious to be exercised by just anyone. So, courts were hostile to arbitration because judges viewed arbitration as ousting the courts from their jurisdiction. This discouragement took two forms; either courts refused to enforce the executory contract requiring the dispute to be resolved through arbitration, or they permitted the arbitration agreement to be revoked at anytime until the arbitrator issued the award. Even after the courts became more accepting of arbitration, arbitration has not been used more frequently because attorneys and their clients are not fully aware of the advantages of arbitration. Today, the use of arbitrators to resolve domestic and international conflicts among private parties is a
well established and accepted practice. Accordingly, there are well-developed institutions supporting arbitration and a substantial body of domestic and international law that facilitates the enforcement of arbitral awards. Arbitration is usually legitimized on one or more of the following jurisprudential theories: (1) the jurisdictional theory that arbitration is but an exercise of the sovereign's prerogative to prescribe dispute resolution within its territory; (2) the contract theory that arbitration is but the expression of private parties agreeing to resolve their disputes; (3) the hybrid theory that arbitration is some mixture of traditional principles of sovereignty and contract; and (4) the sui generis theory that arbitration is unique and does not fit into existing juridical paradigms1. An agreement to arbitrate is the foundation stone of the arbitral process. It may be contained in an arbitration clause which forms a part of the main contract between the parties 2. An arbitration to refer disputes to arbitration 3 in a contract indicates that the parties agree to determine their differences themselves, with the aid of a person, or persons, or institution of their own choice. An arbitration agreement is understood as “that part of a contract or treaty that pledges the parties concerned to use arbitration as a means of settling any present or future dispute”.4 The term ‘Arbitration Agreement’ is sometimes used interchangeably with arbitration clause. It should be noted that the arbitration clause is quite distinct from the other clauses of the contract.
Other clauses of agreement impose obligations, which the parties undertake towards each other. But arbitration clause does not impose on any of the parties any obligation in favour of the other party. Such arbitration agreement embodies an agreement between the
1 Llewellyn Joseph Gibbons, “Rusticum Justicum Judicum ? Private “Courts” Enforcing Private Law and Public Rights: Regulations Virtual Arbitration in Cyberspace”, <http://law.utoledo.edu/publications/Gibbons-Ohio %20N.U.%20L.%20Rev.htm>, (17/12/2002). 2 As defined under S.7 of the Arbitration and Conciliation Act, 1996. 3 i.e. Arbitration Clause. 4 “A Dictionary of Arbitration and its Terms” (Katharine Seide ed., Oceana Publications Inc, New York, 1970) at 25.
parties that in case of a dispute, arbitrator, or umpire of their own constitution or by an arbitrator to be appointed by the Court in an appropriate case shall settle such dispute.
An ordinary contract the obligation of the parties to each other cannot, in general, be specifically enforced and breach of such terms of contract results only in damages. The arbitration clause however can be specifically enforced by the machinery of the Arbitration Act. The appropriate remedy for breach of an agreement to arbitrate is enforcement of the agreement to arbitrate and not to damage arising out of such breach.
An arbitration agreement no way classifies the right of the parties under the Contract but it relates wholly to the mode of determining the rights.
Aims and Objectives – 1) To understand the importance of arbitration as an effective means of resolving disputes. 2) To explain why an agreement to refer dispute to arbitration is an exception to Section 28 of the Indian Contract Act. 3) To examine case law to find where these agreements have been enforced and why. 4) To examine the relation between the arbitration clause and the rest of the contract. Scope and Limitations – Though there is very large amounts of information to be found about arbitration in general, there is very little on agreements to refer disputes to arbitration as an exception to Section 28 of the Indian Contract Act.. Mode of Citation – The researcher has used a uniform mode of citation as follows. Author, Name of the Book/Article, (Editor, Edition, Publisher ,Place of Publication, Year of Publication), Page no. Author, Name of Article, <URL>, (date of visit). Method of Writing Researcher has followed a descriptive, analytical and comparative form of writing.
Research Questions 1) Why is there a provision in article 28 of the Indian Contract Act that provides that and agreement to refer disputes to arbitration is an exception to the terms of Section 28 ? 2) Can the courts make a decision on a dispute when there exists an arbitration clause and the dispute has not been referred to arbitraton ?
3) What is the difference between an arbitration clause and any other clause in a contract ? 4) What would happen to the arbitration clause if the contract were declared void or frustrated ? Chapterisation – Chapter 1 – provides an explaination of Section 28 of the Indian Contract Act and attempts to explain why an agreement to refer disputes to arbitration is a valid exception and does not oust the jurisdiction of the court. Chapter 2 – makes use of case law to show the view of the courts on the legality of agreements to refer disputes to arbitration in various situations. Chapter 3 – attempts to explain the relation between the arbitration clause and the rest of the contract.
Sources of Data – An exhaustive research was done secondary sources from books, articles and over the internet. A comprehensive bibliography is provided at the end of this project.
Statutory provision under Law of Contracts for Agreements to Refer Disputes to Arbitration To have recourse to a Court of law for redress of one's grievances or injury is a fundamental right so to say. It is a facet, of the rule of law, and is inherent in every suitor. This right has been considered to be so very important that some countries have gone so far as to lay down, either by specific legislation, or through judicial decisions, that its citizens cannot contract
themselves out of this right, or, in other words, cannot shut out the jurisdiction of the Courts absolutely by any agreement between themselves. Our country is no exception to this salutary rule, and has provided in Section 28 of the Contract Act, that every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights, is void to that extent. Section 28 Agreements in restraint of legal proceedings void.— Every agreement,—
by which any party thereto is restricted absolutely from enforcing his rights
under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; (b)
which extinguishes the rights of any party thereto, or discharges any party
thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to the extent.
If parties should seek to take the law out of the hands of the court and put it in the hands of a privete tribunal, without any recourse at all to the Courts, in cases of error in law then the agreement is contrary to public policy and void5 But this proposition is not an absolute one. Law provides also that if the parties so desire they may settle their disputes by arbitration. There are two exceptions to Section 28 of the Indian Contract Act . Exception 1:-"This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred." Exception 2 :-5 T.S Venkatesa Iyer, “The Law of Contract and Tenderss”, (7th Edition, S. Goohia & Co., Hyderbad, 1999), p. 305.
â€œ Nor shall this section render illegal any contract in writing by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration."
Case Law Dealing with the Legality and General Principles of Agreements to Refer Disputes to Arbitration
The judiciary does indeed follow the legislature (i.e. the case law is as per the statute) with regard to agreements to refer disputes to arbitration. Along with this the researcher will also attempt to establish the first important principle which is that if there exists an agreement to refer disputes to arbitration then the matter cannot be taken directly to court unless it is first decided upon by an arbitrator The leading case in England in this respect is that of Scott v. Avery6. In this case Lord Campbell has observed as follows: "But what pretence can there be for saying that there is anything contrary to public policy in allowing parties to contract that they shall not be liable to any action until their liability has been ascertained by a domestic and private tribunal upon which they themselves agree? Can the public be injured by it? It seems to me that it would be a most inexpedient encroachment upon the liberty of the subject, if he were not allowed to enter into such a contract."
6 [1843-60] All ER Rep 1.
An agreement to refer a dispute to arbitration couched in such language as entirely to oust the jurisdiction of the Courts is invalid; but there is no legal objection to an agreement which makes it a condition precedent to the enforcement of a claim that the liability and the amount shall first be determined by arbitration7. As a general rule, however, the arbitration clause provides that the award of an arbitrator is to be a condition precedent to any action on the policy, and that no action is to be brought except for the amount of the award. In this case the cause of action is not complete until an arbitration has taken place in accordance with the clause and an award has been made by an arbitrator8. In India, the principles laid down in Scott v. Avery9 have been followed. The first case of this kind is the Coringa Oil Co., Ltd. v. Koegler10. In this case the contract was to the effect that in case of any dispute the same is to be decided by two competent London brokers--one to be appointed by the buyers and the other by the seller's agents; such broker's decision is to be final. The contract did not provide that no action should be brought till such decision was pronounced. The Court on a consideration of Section 28 of the Contract Act came to the conclusion that such clause is legal and valid. That section does not apply to contracts which merely contain a provision for referring disputes to arbitration but to those which wholly or partially prohibit the parties from having recourse to a Court of law. If, for instance, a contract were to contain a stipulation that no action should be brought upon it, that stipulation would, under the first part of Section 21, be void, because it would restrict both parties from enforcing their rights under the contract in the ordinary legal tribunal, and so, if a contract were to contain a double stipulation, that any dispute between the parties should be settled by arbitration and that neither party should enforce their rights under it in a Court of law, that would be a valid stipulation, so far as regards its first branch, viz. that all disputes between the parties should be referred to arbitration, because that by itself would not have the effect of ousting the jurisdiction of the Courts; but the latter branch of the stipulation would be void; because by that, the jurisdiction of the Court would be necessarily 7 â€œHalsburyâ€™s Laws of Englandâ€?, Vol. 2, ( Lord Hailsham of St. Marylebone ed., 4th Edition, Butterworths, London, 1991), p. 359. 8 Id. 9 [1843-60] All ER Rep 1. 10 (1876) 1 Cal 466.
excluded. Then the first exception in the 28th section applies only to a class of contracts where (as in the case of Scott v. Avery11) the parties have agreed that no action shall be brought until some question of amount has first been decided by a reference, as for instance, the amount of damage which the assured has sustained in a marine or fire policy. Such an agreement does not exclude the jurisdiction of the Courts; it only stays the plaintiff's hand till some particular amount of money has been first ascertained by reference." One of the best Indian decisions to put forth principle that the courts should take no action on a matter where there exists an arbitration clause unless there has first been a decision by the arbitrator is clearly exhibited in The New Great Insurance Company of India Ltd. v. United Equipments and Stores (Pvt.) Ltd 12. The broad facts of this case are the opposite party's motor car was insured with the petitioner company and it was involved in an accident. The opposite party sent the claim form duly filled in and signed, together with detailed estimate of repairs done by Barman and Company in respect of the damage to whom it had paid a sum of Rs. 1113.35 on this account. The petitioner company contended that the opposite party had taken away the motor car from the garage and did not give any opportunity to the surveyor appointed by the petitioner company to inspect the car, and as such, the petitioner company repudiated the claim. Thereafter the opposite party filed the instant suit in the court of the Small Causes, at Calcutta for recovery of the sum of Rs. 1113.35 paise. The insurance contract contained an arbitration clause which reads as follows Clause 7:-"All differences arising out of this party policy shall be referred to the decision of an Arbitrator to be appointed in writing by the parties in difference or if they cannot agree upon a single arbitrator to the decision of two arbitrators one to be appointed in writing by each of the parties within one calendar month after having been required in writing so to do by either of the parties or in case the Arbitrators do not agree of an umpire appointed in writing by the Arbitrators before entering upon the reference. The Umpire shall sit with the Arbitrators and preside at their meeting and the making of an Award shall be a condition precedent to any right of action against the company. If the Company shall disclaim liability to the insured for any claim here-under and such claim shall not within twelve calendar months from the date of such disclaimer have been 11 [1843-60] All ER Rep 1. 12 AIR 1970 Cal 221.
referred to arbitration under the provisions herein contained then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable here-under." The petitioner raised only one point before the trial judge which was to the effect that in view of clause 7 of the Contract of Insurance the dispute in question was to be referred to arbitration, and the making of an award was a condition precedent to the institution of the suit, and as arbitration had not been resorted to, the suit was a premature one and should be dismissed. The trial Judge did not accept this contention and decreed the suit. The petitioner then filed an application under Section 38 of the Presidency Small Cause Courts Act before the Full Bench of the small causes Court at Calcutta and that Full Bench also upheld the decision of the trial Court resulting in the appeal in the high court. The judge held that Clause 7 clearly indicated that all differences between the parties arising out of the policy including the differences based upon disclaimer of liability by the Insurance Company, will have to be referred to arbitration, and that the making of an award was to be a condition precedent to any right of action against the company. In this particular case, the insurance company had disclaimed its liability in total, and it was therefore, necessary for the opposite party to have referred the matter to arbitration before it could file the instant suit. As that has not been done, the suit was held to be premature and dismissed. The other important case in this respect is the case of M. D'cruz v. Secretary of State for India13. In that case Rule 28 of the Provident Fund Rules came up for consideration and it was provided therein that in cases of dispute the matter in dispute was to be referred in writing to the Advocate General or Standing Counsel in Calcutta and an award, order or decision of the said referee shall be a condition precedent to any right of action of any party in difference in respect of any of the matters by the rules provided or in any way arising thereout or connected therewith and whatever award, order or decision shall be made by the said referee shall be binding and conclusive on all parties and shall be final to all intents and purposes without any appeal. No reference contemplated by the rule was made in that case. The Court observed as follows: "The legality of a clause in a contract to the effect that no cause of action can accrue until a third person has decided on any difference that may arise between the contracting parties was recognised long ago in Scott v. Avery14. The court referred to the cases of Aghore Nath Banerjee 13 (1936) 40 Cal WN 865. 14 [1843-60] All ER Rep 1.
v. Calcutta Tramways Co. Ltd15. and Trainor v. Phoenix Fire Assurance Co.16, that the principle holds good when the referee has power to determine liability and his decision is not limited to quantum and held therefore, that the plaintiffs have no cause of action, in respect of the Provident Fund."
Another important case with this regard is that of Union Construction Co. (PrivateLtd.) v. Chief Engineer, Eastern Command, Lucknow and Anr17. The facts of the case are as follows. The petitioner the Union Construction Company (Private) Limited is a private limited company having its registered office in the city of Madras and is doing the business of a building contractor. It is registered as such with the Military Engineering Service (hereinafter called the M.E.S.), Eastern Command, Lucknow. During the years 1953-56 the petitioner entered into four building contracts with the military department through the Chief Engineer. M.E.S., Eastern Command, Lucknow . Admittedly the works mentioned above could not be completed within the stipulated time. There was an arbitration clause in the agreement which reads as follows. Clause 68 "68. Arbitration. -- All disputes, between the parities to the Contract arising out of or relating to the Contract, other than those for which the decision of the C. W. E. or of any other person is by the Contract expressed to be final and conclusive, shall after written notice by either party to the Contract to the other of them be referred to the sole arbitration of an Engineer Officer to be appointed by the authority mentioned in the tender documents. Unless the parties otherwise agree, such reference shall not take place until after the completion, alleged completion or abandonment of the Works or, the determination of the Contract. The venue of Arbitration shall be such place or places as may be fixed by the Arbitrator in his sole discretion. The award of the Arbitrator shall be final, conclusive and binding on both parties to the 15 (1885) ILR 11 Cal 232. 16 (1891-65 LT 825) 17 AIR 1960 All 72.
Contract." The appeal was dismissed on the grounds that as per the arbitration agreement, the parties must first attempt to resolve the dispute by means of arbitration before approaching the courts. It was also held that the part of the arbitration agreement which said that the award of the arbitrator shall be final, conclusive and binding on the parties is void as per Section 28 however, the rest of the arbitration agreement is not void and stands. The reasoning behind this is that though under exception 1 of Section 28 of the Contract Act a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration is not invalid, a contract which stipulates that the decision of the arbitrator shall be final and conclusive and which thus bars the jurisdiction of the ordinary tribunals from examining the validity of the award is void, and, notwithstanding that Clause, the Court's would have jurisdiction to examine the validity of the award in a properly framed proceeding. The contract to refer to arbitration is not void because that of itself could not have the effect of ousting the jurisdiction of the Courts but the stipulation making the award conclusive and final becomes void as those words have the effect of excluding the jurisdiction of the ordinary Court. In National Insurance Co. Ltd v. Calcuta Dock Labour Board18, it was once again held that if the making of an award is a condition precedent for the accrual of the case then the condition has to be satisfied before the plaintiff can institute a suit. In the case of Jagadhatri Bhandar and Jagadhatri Oil Mills v. Commercial Union Insurance Co. Ltd19, a different approach was taken by the courts. The facts of the case are as follows. The plaintiff, Jagadhatri Bhandar entered into a contract of insurance with the defendant,Commercial Union Assurance Company Limited, entered into a contract of insurance with the plaintiff by issuing a Burglary and House Breaking Policy, indemnifying loss of money to the limit of Rs. 30,000/- in respect of a securely locked country made safe in the shop of the plaintiff known as "Jagadhatri Bhandarâ€?. On Feb. 6, 1970, four men, three of whom carrying revolvers, rushed into the plaintiffs said shop, Jagadhatri Bhandar, and compelled one of the partners of the plaintiff firm by violence and/or threat of violence to open the safe, and took 18 AIR 1977 Cal 492. 19 AIR 1979 Cal 56.
away at the point of revolvers Rs. 32,871/- from the safe. The plaintiff submitted to the defendant company a claim for the loss of money for Rs. 30,000/- which was the limit of indemnity for loss under the said contract of insurance, although actual loss was more. The defendant company, accordingly, refused to entertain the claim arising out of the risk covered by the said contract of insurance on the allegation that the policy did not cover such a risk and repudiated the contract of insurance and did not take further steps in the matter to implement the terms of the contract of insurance in spite of repeated requests by the plaintiff. The plaintiff, accordingly, instituted the suit for the recovery of the sum of Rs. 30,000/-. The defendant that the suit was not maintainable in view of the Arbitration clause as contained in clause (9) of the Conditions of Policy of Insurance which reads as follows "(9). All differences arising out of this Policy shall be referred to the decision of two Arbitrators, one to be obtained in writing by each of the parties, within the calendar month after having required in writing so to do by either of the parties or in case the Arbitrators do not agree of an Umpire of the parties obtained in writing by the Arbitrators before entering upon the reference. The making of the Award shall be a condition precedent to any right of action against the Company. If the Company shall disclaim liability to the Insured for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to arbitration under the provisions herein contained then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder." The court allowed the appeal and held that the plaintiff is entitled to be indemnified by the defendant company on payment of Rs. 30,000/-. The reasoning behind this was that since the arbitration clause dispute was about a purely legal matter 20 it is not desirable that an arbitrator who is generally a layman having no knowledge in law, should decide a point of law. The court however also made the provision that where the parties specifically agree to refer a point of law to the arbitrator, in that case, such point of law should be decided by the arbitrator and not by the Court. Researcer however, feels that this decision is not in keeping with the trend of the cases 20 The question of law here, being wether and armed robbery could be brought under a â€œBurglary and House Breaking Policyâ€?.
previously seen. Researcher is of the view that even if the dispute is a purely legal one, it should first be referred to arbitration if the clause says that all disputes arising between the parties should be first referred to arbitration before going to court. If any party is dissatisfied with the decision of the arbitrator on the point of law involved they can always approach the court then. Researcher feels that in many cases an arbitrator might make a fair decision which may satisfy both parties even if the dispute is one on a point of law. Thus researcher feels that whether the dispute is on a point of law or fact or both, if there is an arbitration agreement then the dispute should first be referred to arbitration before a suit can be filed in a court of law. The courts however have held in Thawardas Pherumal v. Union of India21 that when a question of law is the point at issue, unless both sides specifically agree to refer it and agree to be bound by the Arbitrator's decision, the jurisdiction of the Courts to set an Arbitration right when the error is apparent on the face of the award is not ousted. Researcher feels that there should not be the necessity for the parties to specifically state in the arbitration clause that even disputes on points of law should be referred to arbitration. Researcher is of the opinion that if there exists an arbitration clause stating that all disputes would first be referred to arbitration then this would encompass disputes pertaining to points of law and thus the distinction is unnecessary.
21 AIR 1955 SC 468
THE SEPARABILITY OF AN ARBITRATION CLAUSE The separability doctrine states that the arbitration clause is an agreement separate and apart from the contract in which it appears.22The doctrine of separability has had varied acceptance. The courts recognize the principle of separability and allow the arbitrator to decide any issue so long as the arbitration clause is valid and broad enough to cover the issue. The issue, which remains to be determined, is whether the arbitration clause stands valid if the contract is no longer valid. Party autonomy militates in favour of the full recognition of the separability principle. If the arbitration clause is not held to survive the invalidity of the contract, a party is afforded the opportunity to evade his obligation to arbitrate by the simple expedient of alleging that the contract is void. In such cases courts of law then inevitably become involved in deciding the substance of a dispute. Moreover, in international transactions where the neutrality of the arbitral process is highly prized, the collapse of this consensual method of dispute resolution compels a party to resort to national courts where in the real world the badge of neutrality is sometimes perceived to be absent. For parties the perceived effectiveness of the neutral arbitral process is often a vital condition in the process of negotiation of the contract. If that perception is absent, it will often represent a formidable hurdle to the conclusion of the transaction. In Waverly Jute Mills Co. Ltd. v. Raymon & Co. (India) Pvt. Ltd.,23 a Constitution Bench held that if a contract is illegal and void, the arbitration clause which is one of the terms of the contract thereof must also perish along with it. Where the arbitration clause is a term of the particular contract whose validity is in question it has no existence apart from the impugned contract and must perish with it.
22 Supra note 1, at 107. 23 AIR 1963 SC 90.
Similarly in Birla Jute Manufacturing Co. Ltd. v. Dulichand,24 it was held that where the contract itself is repudiated in the sense that its original existence or its binding force is challenged, for example, where it is said that the parties were never 'ad idem' or where it is said that the contract is voidable ab initio on the ground of fraud, misrepresentation or mistake and it has been avoided, the parties are not bound by any contract and escape the obligation to perform any of its terms, including the arbitration clause, unless the provisions of that clause are wide enough to included the question of jurisdiction as well. In cases which include the issue of fraudulent inducement of the contract, a dispute regarding the validity of the main contract is to be determined by the arbitrator, while such issues involving the arbitration clause must be determined by the court.25 As to when on termination of an agreement, arbitration clause would also cease to be operative, has been well explained by a three-Judge Bench of this Court in Union of IndiaÂ v. Kishorilal Gupta26. In that case Subba Rao, J., as he then was, speaking for the majority held that the discussion of the law on the subject led to the emergence of the following principles in this regard27: "(1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it; (2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation, it perishes with contract; (3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio; (4) though the contract was validly executed, the parties may put an end to it as if it had never existed any substitute a new contract for solely governing their rights and liabilities there under; 24 AIR 1953 Cal 450. 25 P.Chandrashekhara Rao, The Arbitration and Conciliation Act, 1996- A Commentary ( Delhi: Universal Law Publishing Co.,1997) at 76. 26 AIR 1959 SC 1362 27 Ibid at 1370.this was reiterated in Indian Drugs & Pharmaceuticals Ltd. v. Indo Swiss Synthetics Gem Manufacturing, Co. Ltd, AIR 1996 SC 543.
(5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void, in the case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it, and (6) between the two falls many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. In these cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract act subsists for certain purposes, the arbitration clause operates in respect of these purposes." So, an arbitration clause, however comprehensive in terms, can be operative only if the contract is in existence. The arbitration clause would perish in case where either there is substitution of a new contract, or rescission or alteration of the original contract.
It is the view of the researcher that resolving a dispute by arbitration is preferable to going to the courts for legal remedies. Indian courts are notorious for the amount of time they take to resolve a case and there are a lot of expenses involved in taking a dispute to court for both parties. Arbitration is a private matter, and issues are not made public as in the court system. The proceedings and resolution remain confidential.The parties have a choice in the selection of arbitrators, so they can chose qualified arbitrators with experience relevant to their dispute. This is particularly important when the dispute involves highly technical issues. The procedure is flexible in terms of time and format. There is no waiting for the matter to come before a court and the parties can agree to the procedure and to the timetable. They can be represented by people they choose. Thus it would be beneficial to both parties if an attempt is made to resolve a dispute by means of arbitration before approaching the courts. An agreement to refer disputes to arbitration in no way ousts the jurisdiction of the courts and thus a contract containing an arbitration clause is not hit by Section 28 of the Indian Contracts Act. An agreement to refer disputes to arbitration simply makes a it a prerequisite for the parties to attempt to resolve their disputes by arbitration. If any or both of the parties are dissatisfied with the outcome of the arbitration proceedings they are free to approach the courts on various grounds. Thus I would like to conclude by saying that an agreement to refer disputes to arbitration is a valid clause in a contract and in most cases beneficial to both parties.
Bibliography Books 1)
“A Dictionary of Arbitration and its Terms” (Katharine Seide ed., Oceana Publications Inc, New York, 1970)
Pollock & Mulla, “The law of Contracts
T.S Venkatesa Iyer, “The Law of Contract and Tenderss”, (7th Edition, S. Goohia & Co., Hyderbad, 1999),
Published on Oct 13, 2010