K. Govindarajan, J.@mdashThe above Appeal is filed against the order dated 20.3.1997, passed by the learned single Judge in rejecting the
Application filed in A. No. 3758/1996.
2. The respondents filed a suit in C.S.No.1007/1994 on the file of this Court to declare that the licence agreement dated 25.4.1991, as amended,
is unenforceable, illegal, invalid and void, and to direct the defendant to pay the plaintiffs a sum of Rs. 10,92,710/- towards the losses sustained by
the plaintiff on account of the constructive fraud played by the defendant through illegal agreements and means and also for a direction to pay a
sum of Rs. 4,40,000/- towards compensatory damages suffered by the plaintiffs on account of the tortious acts committed by the defendant.
Pending Appeal, the appellant/defendant filed Application No.3758/1996 under Sec. 8 of the Arbitration and Conciliation Act, 1996, hereinafter
called ''the Act'', to stay further proceedings of the suit in C.S.No.1007/1994 and to refer a dispute for arbitration in terms of Article 15 of the
agreement dated 25.4.1991. The said Application was contested by the respondents/plaintiffs.
3. The learned Judge accepted the case of the respondents/plaintiffs and rejected the Application filed by the appellant/defendant holding that the
prayer sought for in the suit cannot be decided by the arbitrator and so the Application filed under Sec. 8 of the Act cannot be sustained.
Aggrieved against the same, the appellant/defendant has field the above Appeal.
4. Learned counsel appearing for the appellant/defendant submitted that in view of Article 15 of the arbitration agreement, even the issue raised in
the suit has to be decided by the arbitrator as contemplated under Sec. 16 of the Act. On that basis, learned counsel also submitted that the
learned Judge is not correct in rejecting the said Application.
5. Learned counsel for the respondents/plaintiffs submitted that in the suit, the respondents/plaintiffs prayed for a declaration that the arbitration
agreement itself is not valid and unenforceable and so the appellant/defendant cannot insist Article 15 in support of their claim made in the
application filed under Sec. 8 of the Act. According to him, the prayer sought for can be granted only by the civil Court and not by the Arbitrator.
So, he further submitted that the learned Judge has rightly rejected the Application and it does not warrant any interference. He also submitted that
since there is no provision under Sec. 8 of the Act to stay the suit, the Application is not maintainable.
6. On the above said pleadings and arguments, the following point arises for determination:-
Whether the Application filed under Sec. 8 of the Act on the basis of Article 15 of the arbitration agreement dated 25.4.1991 is sustainable in
law?
7. To decide the above said issue, it is beneficial to extract Article 15 of the agreement which reads as follows:-
Sec. 15.1: Arbitration
All disputes and differences of whatsoever nature arising out of this agreement, whether during its term or after expiry thereof or prior termination
shall be referred to the sole arbitration of the Chairman of the Board of Directors of the Licensors, whose decision shall be final on any matter
arising hereunder. It is further agreed that the fact that the Chairman of the Board of Directors of the Licenser may have had occasion to deal with
any matter related to this licence either before or after its execution, shall not disqualify him from acting as Arbitrator. The venue of the Arbitration
shall only be Delhi.
Section 15.2: Jurisdiction:
The parties agree that only the Courts in Delhi in the Republic of India shall have jurisdiction to entertain any proceedings related to this agreement
whether during pendency, or after termination. No other Court shall have jurisdiction.
So from the above, it is clear that the parties have agreed for arbitration to decide the disputes arise between them. The learned Judge referring to
the decision of the Apex court in the decision in Jaikishan v. L.Manoria & Co., 1974 SC 1579, arising out of the Arbitration Act 1940, held that
since the plaintiffs in the suit has challenged the entire agreement as illegal, the question of referring the said arbitration agreement to the arbitrator
does not arise and dismissed the application filed under Sec. 8 of the Act.
8. Learned counsel for the appellant/defendant put forth his argument basing on Sec. 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 that purpose -
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the 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"".
There is no corresponding provision in the Arbitration Act, 1940. The law codified in this Section is moderate departure from the provisions in this
regard contained in the Old Act 1940. The controversy with regard to the competence of the arbitrator to rule on its own jurisdiction and the
validity of the agreement has now been put at rest by the above said Sec. 16. Under the said provision, the arbitrator is competent to rule its own
jurisdiction, including ruling on any objections, with respect to the existence or validity of the arbitration agreement. The power conferred on the
arbitrator under Sec. 16 of the Act to rule on its own jurisdiction including the existence or validity of the arbitration agreement is not subject to the
agreement of the parties which is evident from the absence of the expression ""unless otherwise agreed by the parties"" which precedes most of the
non-mandatory provisions of the Act. So the parties to the arbitration, by agreement, cannot exclude the arbitrator''s competence to decide on its
own jurisdiction including the existence or validity of the arbitration agreement. The arbitration clause has to be treated as an agreement
independent of the other terms of the contract and so the arbitrator has power to rule on its own jurisdiction including the existence and validity of
the arbitration agreement. As stated already, this is a departure from the Act, 1940 under which the arbitrator has no power and it will be decided
only by the Court.
9. The Constitution Bench of the Apex Court in the decision in Konkan Railway Corporation Ltd. and Another Vs. Rani Construction Pvt. Ltd., ,
dealt with the scope of Sec. 16 and held as follows:-
21. It might also be that in a given case the Chief Justice or his designate may have nominated an arbitrator although the period of thirty days had
not expired. If so, the Arbitral Tribunal would have been improperly constituted and be without jurisdiction. It would then be open to the aggrieved
party to require the Arbitral Tribunal to rule on its jurisdiction. Section 16 provides for this. It states that the Arbitral Tribunal may rule on its own
jurisdiction. That the Arbitral Tribunal may rule ''on any objections with respect to the existence or validity of the arbitration agreement'' shows that
the Arbitral Tribunal''s authority u/s 16 is not confined to the width of its jurisdiction, as was submitted by learned counsel for the appellants, but
goes to the very root of its jurisdiction. There would, therefore, be no impediment in contending before the Arbitral Tribunal that it had been
wrongly constituted by reason of the fact that the Chief Justice or his designate had nominated an arbitrator although the period of thirdy days had
not expired and that, therefore, it had no jurisdiction.
10. The above said decision is also followed in the decision in Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity Midway Petroleums, .
11. Sec. 16 of the Act gives power to the arbitrator to decide even the validity of the agreement. If it is brought to the notice of the Court that there
was an arbitration agreement, it is obligatory for the Court to refer the matter for arbitration in terms of the arbitration agreement. In the present
case, though the appellant/defendant has brought to the notice of the civil Court that there was an agreement providing for arbitration, the appellant
is entitled to sustain the Application under Sec. 8 of the Act, to refer the matter to arbitrator.
12. While considering the scope of Sec. 8 of the Act, in the decision in Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity Midway Petroleums, , the
Apex Court has held as follows:-
14. This Court in the case of P. Anand Gajapathi Raju and Others Vs. P.V.G. Raju (Died) and Others, is peremptory in nature. Therefore, in
cases where there is an arbitration clause in the agreement, it is obligatory for the court to refer the parties to arbitration in terms of their arbitration
agreement and nothing remains to be decided in the original action after such an application is made except to refer the dispute to an arbitrator.
Therefore, it is clear that if, as contended by a party in an agreement between the parties before the civil court, there is a clause for arbitration, it is
mandatory for the civil court to refer the dispute to an arbitrator. In the instant case the existence of an arbitral clause in the Agreement is accepted
by both the parties as also by the courts below but the applicability thereof is disputed by the respondent and the said dispute is accepted by the
courts below. Be that as it may, at the cost of repetition, we may again state that the existence of the arbitration clause is admitted. If that be so, in
view of the mandatory language of Section 8 of the Act, the courts below ought to have referred the dispute to arbitration.
13. Though the respondents/plaintiffs have challenged the validity of the agreement on the ground that a fraud was played on them, the same also
can be gone into by the arbitrator in view of powers given under Sec. 16 of the Act. This aspect was not considered by the learned Judge while
rejecting the Application filed under Sec. 8 of the Act by the appellant/defendant. Hence we are inclined to interfere with the order passed by the
learned Judge.
14. Though the learned counsel for the respondents/plaintiffs submitted that there is no provision to stay the suit, such a submission cannot be
accepted, since the provision to stay the suit is only consequential and discretionary. Since this Court has come to the conclusion that the matter
has to be referred to the arbitrator, the suit cannot be allowed to proceed further. Hence it has to be stayed.
15. For the above reasons, we set aside the order dated 20.3.1997 passed by the learned Judge in Application No.3758/1996 and the said
Application is ordered accordingly and it is directed to refer the matter to arbitrator as mentioned in Article 15.1 of the agreement and decide the
issue including the issue raised by the respondents/plaintiffs within six months from today. With the above direction, the above Appeal is allowed.
No costs.
