Court to act with caution and circumspection while deciding on plea of not invoking arbitration on the ground of contract being void or voidable

Court ought to act with caution and circumspection whilst examining the plea that the main contract is void or voidable. The Court ought to decline reference to arbitration only where the Court can reach the conclusion that the contract is void on a meaningful reading of the contract document itself without the requirement of any further proof.

The present petition was filed under Section 11(4) read with Section. 11(6) of the Arbitration and Conciliation Act, 1996 (‘Act’) for appointment of nominee arbitrator of the Respondent and to further constitute the arbitral tribunal, by appointing the presiding arbitrator in order to adjudicate the disputes that have arisen between the parties.

There were two basic grounds taken to challenge the validity of agreement so as to make arbitration clause invocable. One, it was objected that the dispute resolution mechanism as expressly provided in the agreement was not followed and secondly, the contract stood vitiated being void ab initio as the Petitioner had warranted of not or never getting engaged in corrupt, fraudulent, collusive or coercive practices in connection with the agreement, failing which it would be liable to indemnify the Respondent against all losses suffered or incurred as a result of any breach of the agreement or any negligence, unlawful conduct or willful misconduct. The Respondent also sought to establish the aforesaid non-liability clause on the basis of registration of Criminal Case and due to the pendency of the criminal proceedings in the trial court, the arbitration petition ought not to be entertained.

With respect to the first objection, it was held that considerable efforts, as evident, were taken by the Petitioner and hence the ground was held to be not sustainable. The petition was filed only when all efforts ended in vain.

With respect to the second preliminary objection that the contract stood vitiated and had become void- ab-initio in view of warranty clauses of the agreement, it was held that this objection also had no substance as these allegations were have to be established in a proper forum on the basis of the oral and documentary evidence, produced by the parties, support their respective claims. As a pure question of law, the proposition that whenever a contract is said to be void-ab-initio, the Courts exercising jurisdiction under Section 8 and S. 11 of the Arbitration Act, 1996 are rendered powerless to refer the disputes to arbitration, was held to be unacceptable.

It was opined and held that whenever a plea is taken to avoid arbitration on the ground that the underlying contract is void, the Court is required to ascertain the true nature of the defence. Often, the terms “void” and “voidable” are confused and used loosely and interchangeably with each other. Therefore, the Court ought to examine the plea by keeping in mind the relevant statutory provisions in the Indian Contract Act, 1872, defining the terms “void” and “voidable”. Sections 2(g) to 2(j) clearly delineate and differentiate between term “void” and “voidable”. S. 2(j) provides as to when a voidable contract would reach the stage of being void. In cases, where the Court can come to a conclusion that the contract is void without receiving any evidence, it would be justified in declining reference to arbitration but such cases would be few and isolated. These would be cases where the Court can readily conclude that the contract is void upon a meaningful reading of the contract document itself. Some examples of where a contract may fall in this category would be:

(a)           Where a contract is entered into by a person, who has not attained the age of majority (Section 11);

(b)           Where both the parties are under a mistake as to a matter of fact essential to the agreement (Section 19);

(c)           Where the consideration or object of the contract is forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law or where the object of the contract is to indulge in any immoral activity or would be opposed to public policy. Glaring examples of this would be where a contract is entered into between the parties for running a prostitution racket, smuggling drugs, human trafficking and any other activities falling in that category.

(d)           Similarly, S. 30 renders wagering contracts as void. The only exception to this is betting on horse racing. In the circumstances noted above, it may not be necessary for the Court to take any further evidence apart from reading the contract document itself. Therefore, whilst exercising jurisdiction u/s. 11(6) of the Arbitration Act, the Court could decline to make a reference to arbitration as the contract would be patently void.

It, however, as held to be not possible to shut out arbitration even in cases where the defence taken is that the contract is voidable. These would be cases which are covered under the circumstances narrated in S. 12 – unsoundness of mind; S. 14 – absence of free consent, i.e. where the consent is said to be vitiated as it was obtained by Coercion (Section 15), Undue Influence (Section 16), Fraud (S. 17) or Misrepresentation (S. 18). Such a contract will only become void when the party claiming lack of free consent is able to prove the same and thus rendering contract void.

In exercising powers u/s. 11(6) of the Arbitration Act, the Court has to keep in view the provisions contained in Section 8 of the Arbitration Act, which provides that a reference to arbitration shall be made if a party applies not later than when submitting his first statement on the substance of the dispute. In contrast, Section 45 of the Act permits the Court to decline reference to arbitration in case the Court finds that the agreement is null and void, inoperative or incapable of being performed. To shut out arbitration at the initial stage would destroy the very purpose for which the parties had entered into arbitration. Furthermore, there is no inherent risk of prejudice to any of the parties in permitting arbitration to proceed simultaneously to the criminal proceedings. In an eventuality where ultimately an award is rendered by arbitral tribunal, and the criminal proceedings result in conviction rendering the underlying contract void, necessary plea can be taken on the basis of the conviction to resist the execution/enforcement of the award. Conversely, if the matter is not referred to arbitration and the criminal proceedings result in an acquittal and thus leaving little or no ground for claiming that the underlying contract is void or voidable, it would have the wholly undesirable result of delaying the arbitration.

Therefore, the Court ought to act with caution and circumspection whilst examining the plea that the main contract is void or voidable. The Court ought to decline reference to arbitration only where the Court can reach the conclusion that the contract is void on a meaningful reading of the contract document itself without the requirement of any further proof. It was observed that the defence of the contract being void is taken routinely along with the other usual grounds to avoid/delay reference to arbitration and such ground needs to be summarily rejected unless there is clear indication that the defence has a reasonable chance of success.

[Swiss Timing Limited vs. Organising Committee, Commonwealth Games 2010, Delhi]

(SC, 28.05.2014 – Arbitration Petition No. 34 of 2013)