What are essential requirement for valid arbitration agreement? What is the meaning of the term "arbitrability" & which type of disputes are capable of settlement by arbitration under the Act?
Section
2(b) and 2(h) and Section 7 of the Act are relevant to examine the question
involved.
These
Sections read as under:
2. Definitions.-(1)…………………………………..
(a)……………………………………………..
(b) “arbitration agreement” means an
agreement referred to in section7;
(h) “party” means a party to an arbitration
agreement.
7. Arbitration agreement.-(1) In this Part,
“arbitration agreement” means an agreement
by the parties to submit to arbitration all or
certain disputes which have arisen or which
may arise between them in respect of a
defined legal relationship, whether
contractual or not.
(2) An arbitration agreement may be in the
form of an arbitration clause in a contract or
in the form of a separate agreement.
(3) An arbitration agreement shall be in
writing.
(4) An arbitration agreement is in writing if it
is contained in-
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or
other means of telecommunication which
provide
a record of the agreement; or
(c) an exchange of statements of claim and
defence in which the existence of the
agreement is alleged by one party and not
denied by the other.
(5) The reference in a contract to a document
containing an arbitration clause constitutes
an arbitration agreement if the contract is in
writing and the reference is such as to make
that
arbitration clause part of the contract.”
A
reading of the aforementioned sections in juxtaposition
goes to show that in order to constitute
a valid, binding and enforceable arbitration agreement, the requirements
contained in Section 7 have to be satisfied strictly. These requirements, apart
from others, are (1) there has to be an agreement (2) it has to be in writing
(3) parties must sign such agreement
or
in other words, the agreement must bear the signatures of the parties concerned
and (4) such agreement must contain an arbitration clause.
In
other words, aforementioned four conditions are sine qua non for
constituting a valid and enforceable arbitration agreement. Failure to satisfy
any
of the four conditions would render the arbitration agreement invalid and
unenforceable and, in consequence, would result in dismissal of the
application
filed under Section 11 of the Act at its threshold.
The
question as to what are the conditions which are necessary for constituting a
valid and enforceable arbitration agreement came up for consideration before Hon’ble
Supreme Court in Vijay Kumar Sharma Alias Manju vs.
Raghunandan Sharma Alias Baburam & Ors., 2010
(2) SCC 486.
In
this case, a question arose in the context as to whether a clause in a Will,
which provides that in the event of any dispute arising in relation to the
properties bequeathed by the testator would be settled by named arbitrator, can
such a clause or/and the Will be considered as an arbitration agreement within
the meaning of Section 2(b) read with Section 7 of the Act for the purpose of
invoking the jurisdiction of the High Court under Section 11 for appointment of
an arbitrator for resolving the disputes. This question arose on the following facts.
The
father executed a Will in favour of his one son whereby he bequeathed to him
his one house. He had another son to whom he did not give any share in the said
house. In the Will, father appointed two executors and expressed that if any
dispute arises in relation to the bequeathed property, one named arbitrator
will decide such dispute. On the death of the father, one son filed a suit for
declaration of his 1/6th share in the
bequeathed property and also demanded partition whereas the other son filed a
suit
on
the strength of the Will and claimed his exclusive ownership to the exclusion
of all his brothers and sisters. The suits were clubbed for trial.
The
two executors, who were also made parties to the suits, filed an application
under Section 8 of the Act contending therein that the testator had declared in
the Will as also in one separate declaration that in the event of any dispute
arising in relation to the bequeathed house, the same will be referred to a named
arbitrator for his decision. It was, therefore, contended that in the light of
this, the two civil suits filed by the parties are liable to be dismissed as
being not maintainable with a liberty to be granted to the parties to submit
themselves to the jurisdiction of the named arbitrator so as to enable the
arbitrator to decide the disputes as per arbitration clause contained in the
Will/declaration.
The
Trial Court allowed the application filed by the executors under Section 8 of
the Act and, in consequence, dismissed the suits with a liberty granted to the
parties to approach the named arbitrator. One party, accordingly, submitted
himself to the jurisdiction of the named arbitrator and filed his
claim
whereas the other party objected to the jurisdiction of the arbitrator. He contended
that there was neither any arbitration agreement between the parties for
appointment of any arbitrator and nor he ever signed the Will or any
declaration, if made, by his late father and nor gave his consent for
appointment of any named arbitrator. He, therefore, challenged the very
initiation of arbitration proceedings before the arbitrator as being without
jurisdiction.
This
led to named arbitrator withdrawing from the arbitral proceedings which, in
turn, gave rise to the filing of the application by one son under Section 11 of
the Act before the High Court of Rajasthan. He prayed therein for appointment
of new arbitrator in place of earlier named arbitrator. The application was contested
by other son reiterating the same objection, which he had raised earlier,
namely, that there is no valid and enforceable arbitration agreement between the
parties and neither the Will and nor the declaration constitute any arbitration
agreement for deciding any dispute between them in relation to the house in
suit.
The
learned designate of Chief Justice overruled the objection and allowed the
application and appointed new arbitrator for deciding the disputes arising
between the parties to the application in relation to the house. It is this
order, which was impugned in the special leave to appeal before Supreme Court.
Allowing the appeal and setting aside of the order of the High Court, this
Court held that firstly, the Will did not contain any such clause; Secondly, even
assuming that it had any such clause then also it
was
merely an expression of the wish by the testator that the disputes relating to
bequeathed property should be settled by the arbitrator and nothing more. It
was held that in no case the Will could be considered as constituting an arbitration
agreement; Thirdly, even if there was some declaration made by the testator
subsequent to the execution of Will to this
effect
yet since it was a unilateral declaration made by the father and hence by no
stretch of imagination such declaration could be considered as an arbitration agreement
among his children. It was further held that at best such declaration could be
taken as an expression of a fond hope of a father that his children should get
the disputes settled in case if they arise between them by means of arbitration
but certainly it did not partake the nature of an arbitration agreement within
the meaning of Section 2(b) read with Section 7 of the Act. Justice Raveendran,
speaking for the Bench, succinctly dealt with this issue in paras 18 to 22 and
held as under:
“18. In this case, admittedly, there is no
document signed by the parties to the
dispute, nor any exchange of letters, telex,
telegrams
(or other means of telecommunication)
referring
to or recording
an arbitration agreement between the
parties. It is also not in dispute that there is
no exchange of statement of claims or
defence where the allegation of existence of
an arbitration agreement by one party is not
denied by the other. In other words, there is
no arbitration agreement as defined in
Section 7 between the parties.
19. In Jagdish
Chander v. Ramesh Chander,
(2007) 5 SCC 719, this Court held: (SCC p.
726, para 11)
“11. The existence of an arbitration
agreement as defined under Section 7 of the
Act is a condition precedent for exercise of
power to appoint an arbitrator/Arbitral
Tribunal, under Section 11 of the Act by the
Chief Justice or his designate. It is not
permissible to appoint an arbitrator to
adjudicate the disputes between the parties,
in the absence of an arbitration agreement or
mutual consent.”
20. While the respondents rely upon the will,
the appellant denies the existence of any
such will. The validity of the will is pending
consideration in the two civil suits filed by
the appellant and the first respondent,
referred to above. The alleged will,
admittedly, does not contain any provision
for arbitration, though the learned designate
has proceeded on an erroneous assumption
that the will provides for arbitration. Even if
the will had provided for reference of
disputes to arbitration, it would be merely an
expression of a wish by the testator that the
disputes
should be settled by arbitration and
cannot be considered as an arbitration
agreement among the legatees.
21. In this case, according to the
respondents, the provision for arbitration is
not in the will but in a subsequent
declaration allegedly made by Durganarayan
Sharma, stating that if there is any dispute in
regard to his will dated 28-12-2003, it shall
be referred to his friend, U.N. Bhandari,
Advocate, as the sole arbitrator whose
decision shall be final and binding on the
parties. A unilateral declaration by a father
that any future disputes among the sons
should be settled by an arbitrator named by
him, can by no stretch of imagination be
considered as an arbitration agreement
among his children, or such of his children
who become parties to a dispute. At best,
such a declaration can be an expression of a
fond hope by a father that his children, in the
event of a dispute, should get the same
settled by arbitration. It is for the children, if
and when they become parties to a dispute,
to decide whether they would heed to the
advice of their father or not. Such a wish
expressed in a declaration by a father, even if
proved, cannot be construed as an agreement
in writing between the parties to the dispute
agreeing to refer their disputes to arbitration.
22. We are therefore of the view that there is
no arbitration agreement between the parties
and the learned designate committed a
serious error in allowing the application
under Sections 11 and 15(2) of the Act and
holding that there is an arbitration
agreement between the parties to the dispute
and
appointing an arbitrator.”
In
the case of a Will, the testator executes the Will in favour of legatee(s)
whereas in the case of a Trust, the settler executes the deed in favour of the
beneficiaries. In both the cases, it is the testator/settlor who signs the
document
alone. That apart, both the deeds convey the interest in the estate in favour
of the legatees or/and beneficiaries. However, since legatee/beneficiaries do
not sign the document or we may say are not required to sign such document,
they are not regarded as party to such deed despite legatee/beneficiaries/trustees
accepting the deed. Such deed, therefore, does not partake the nature of an
agreement between such parties.
If
the Will is held not to constitute an arbitration agreement despite containing
an arbitration clause therein - a
fortiori, the Trust Deed can also not be held to
constitute an agreement much less an arbitration agreement despite containing
an arbitration clause therein.
The
aforesaid issue can be examined from yet another angle as was examined by the
High Court of Calcutta in Bijoy Ballav
Kundu & Anr. Vs. Tapeti Ranjan Kundu, AIR
1965 Calcutta 628.
The
facts of the Bijoy Ballav Kundu’s case (supra)
were that One Dhananjay Kundu, a resident of Calcutta was the owner of a house.
He executed a trust/settlement deed wherein he nominated two trustees to manage
the affairs of the Trust. He conveyed his house together with Rs.500/- to the trustees
as the corpus of the Trust to carry on its activities for the benefit of the
beneficiaries. The Trust Deed had several clauses providing therein as to how trustee
and beneficiaries should carry out the
activities
of the Trust, how they should manage the Trust affairs and maintain its
accounts etc. Clause 12 provided that in the event of any dispute/differences arising
between the trustees concerning management
and
the affairs of the Trust, the same shall be referred to named arbitrator who
would decide the disputes in accordance with the provisions of Indian
Arbitration Act, 1940.
After
some time, the disputes arose between the trustees concerning the affairs and
the management of the Trust. They were accordingly referred to the arbitrator
in terms of clause 12 for his decision. One trustee, however, objected to
making of the reference to the arbitrator. The arbitrator, however, delivered
the award. One trustee, who had objected to making of
the
reference to the arbitrator, challenged the legality of the award in the civil
Court inter alia on the ground that since there was no
arbitration agreement between the parties (trustees) to make reference to the arbitrator
and hence the award passed by the arbitrator is rendered without jurisdiction
and is, therefore, liable to be set aside. The Court upheld the objection and
set aside the award. The aggrieved trustee appealed to the Calcutta High Court.
The
Division Bench of the High Court, by their well-reasoned judgment, examined the
issue thread bear in the context of the provisions of the Trust Act and the
Arbitration Act 1940 and while upholding the order of the Trial Court dismissed
the appeal. It is apposite to mention the reasoning of Their Lordships hereinbelow:
“5. ………………… The question however in
this case is, as to whether the trustees can be
said to be a party to any agreement at all for
referring their disputes to arbitration. The
way
Mr. Basak argues is this: He says that
the deed of settlement directs that there
shall be such a reference to arbitration and
the trustees by their conduct in accepting
the trusteeship and agreeing to act as
trustees must be said to be parties to that
agreement or to have become parties to the
agreement by their conduct. In other words,
once they accept the trust, they must be
deemed to be parties to the agreement for
reference to arbitration, which according to
the learned counsel is contained in the
arbitration clause. In my opinion, this
contention is not sound. In order to become
an agreement there must be a proposal and
an acceptance. If we are to hold that the
arbitration clause constitutes the written
agreement, then we must hold that each
trustee has, at some point of time, made a
proposal to the other trustee or trustees as to
whether the disputes should be referred to
arbitration and each of them has accepted
the same. In the circumstances of this case,
it can never be said that any such incident
has ever happened. By accepting a trust, a
trustee merely undertakes to carry out the
terms of the trust, in so far as the same may
be in accordance with law. The reference to
arbitration is only one of the many terms of
the deed of settlement. There are other
directions, for example, directions as to the
amount that should be expended upon
diverse matters or diverse acts done. It can
never be said that in accepting the trust
there is any question of the trustees agreeing
among themselves that such amount should
be expended or such acts done. Being
trustees, they are bound to carry out the
provisions of the deed of settlement. There
can be no question of any agreement
amongst
themselves; otherwise we are faced
with this absurd situation that with regard to
every provisions in the deed of trust we have
to visualize the trustees agreeing among
themselves to carry it out by making a
proposal and an acceptance. The learned
Judge has pointed out that in order to accept
a trust it is not necessary to signify to the
other trustees any willingness to do so or to
enter into any agreement to do or abstain
from doing anything. In other words, no
question of any proposal by one trustee or
acceptance of the same by another arises. It
may be an attractive argument to say that
trustees having consented to accept
trusteeship under a deed of trust must have
agreed to carry out each and every term
contained in it. That however is quite
different from saying that they have entered
into a written agreement amongst themselves
to do so. The provision as to reference of
disputes to arbitration is a matter that
concerns the jurisdiction of courts.
Ordinarily, the Courts are zealous of their
jurisdiction and can only allow it to be
curtailed by some provision of law. The
provisions of the Indian Arbitration Act
constitute such a law, but the provision must
be strictly construed. In order that there may
be a reference to arbitration which ousts the
jurisdiction of Courts, the parties must enter
into an arbitration agreement. That is a
matter that must be governed by the law and
in a given case it must be shown that the
parties have lawfully entered into such an
agreement and there is in existence a lawful
agreement. Nothing short of it can support
such an agreement and any reference to
arbitration or an award consequent thereon,
in contravention of the provisions of the law
cannot
be supported and must be declared
invalid. In our opinion, the conclusions
reached by the learned Judge are correct on
that point and must be upheld. In the facts of
this case it must be held that there was no
arbitration agreement and no valid reference
to
arbitration…….”
As
rightly held by the Calcutta High Court in the case of Bijoy Ballav Kundu (supra),
there is always a proposal and then its acceptance in the case of every agreement,
which is not required in the case of creation of the Trust because in the case
of a Trust, the trustee and beneficiary though accept its creation but by such
acceptance, they merely undertake to carry out the terms of the Trust Deed in
so far as the same may be in accordance with law. The clause relating to
arbitration in the Trust Deed is one of the several clauses. The other clauses
which deal with several types of directions to the trustees and beneficiaries
such as how the Trust should be managed, how the amount of the Trust should be spent
etc. are not in the nature of agreement between the trustees or/and
beneficiaries. In other words, by accepting the Trust Deed, it cannot be said
that the trustees or beneficiaries have agreed amongst themselves as to how
they should spend the money or how they should manage the affairs of the Trust
or
receive
any benefit.
In
such case, the trustees or/and beneficiaries are only required to carry out the
provisions of the Trust Deed. There cannot, therefore, be any agreement inter se trustees or
beneficiaries to carry out any such activity. If that were to be so then the
trustees/beneficiaries would have to give proposal and acceptance in respect of
each clause of the Trust Deed inter
se. It would be then a sheer absurdity and hence
such situation, in our view, cannot be countenanced.
The
Arbitration Act is one such law, which provides for ouster of jurisdiction of
the Civil Courts. The Act, inter alia,
provides a forum for deciding the
disputes inter se parties
to an agreement through arbitration. Such clause, requires strict rule of interpretation
to find out whether it provides an ouster
of
jurisdiction and, if so, to which Court/Tribunal/Authority as the case may be.
In
the light of what we have discussed above, the Arbitration clause in the
Trust
Deed, which provides for settlement of disputes/differences arising between the
beneficiaries of the Trust, does not constitute an arbitration
agreement
inter se beneficiaries
within the meaning of Section 7 of the Act.
The
question came up for consideration before Supreme Court in the case of Booz Allen & Hamilton Inc. vs. SBI Home Finance Ltd.
& Ors. (2011) 5 SCC 532 as to what is the meaning
of the term "arbitrability" and secondly, which type of disputes are
capable of settlement by arbitration under the Act. Their Lordships framed three
questions to answer the question viz., - (1) whether the disputes having regard
to their nature could be resolved by a private forum chosen by the parties
(arbitral Tribunal) or whether such disputes exclusively fall within the domain
of public Fora
(Courts);
(2) Whether the disputes are covered by the arbitration agreement; and (3)
whether the parties have referred the disputes to arbitrator?
Supreme
Court speaking through Justice Raveendran answered the questions. While
answering question No.
Their
Lordships carved out six categories of cases. These six categories
of
cases were held as not capable for being decided by private arbitration under
the Arbitration Act even though parties agreed for their settlement through private
arbitration. This is what Their Lordships held in Paras 35 and 36:
“35. The Arbitral Tribunals are private fora
chosen
voluntarily by the parties to the
dispute, to adjudicate their disputes in place
of courts and tribunals which are public fora
constituted under the laws of the country.
Every civil or commercial dispute, either
contractual or non-contractual, which can be
decided by a court, is in principle capable of
being adjudicated and resolved by arbitration
unless the jurisdiction of the Arbitral
Tribunals is excluded either expressly or by
necessary implication. Adjudication of
certain categories of proceedings are reserved
by the legislature exclusively for public fora
as a matter of public policy. Certain other
categories of cases, though not expressly
reserved for adjudication by public fora
(courts and tribunals), may by necessary
implication stand excluded from the purview
of private fora. Consequently, where the
cause/dispute is inarbitrable, the court where
a suit is pending, will refuse to refer the
parties to arbitration, under Section 8 of the
Act, even if the parties might have agreed
upon arbitration as the forum for settlement
of such disputes.
36. The well-recognised examples of
non-arbitrable disputes are: (i)
disputes
relating to rights and liabilities which give
rise to or arise out of criminal offences; (ii)
matrimonial disputes relating to divorce,
judicial separation, restitution of conjugal
rights, child custody; (iii)
guardianship
matters; (iv) insolvency and winding-up
matters; (v) testamentary matters (grant of
probate, letters of administration and
succession certificate); and (vi)
eviction or
tenancy matters governed by special statutes
where the tenant enjoys statutory protection
against eviction and only the specified courts
are conferred jurisdiction to grant eviction or
decide
the disputes.”
Ref:
IN THE SUPREME COURT OF INDIA
CIVIL APPEAL NO.8164 OF 2016
(ARISING OUT OF SLP(C) No. 13369 of 2013)
Shri Vimal Kishor Shah & Ors. Appellant(s)
VERSUS
Mr. Jayesh Dinesh Shah & Ors. Respondent(s)
.……...................................J. [J. CHELAMESWAR]
………..................................J. [ABHAY MANOHAR SAPRE]
August 17, 2016.
