Court is empowered to examine the existence as well as validity of an arbitration agreement: High Court of Delhi
The Court has to consider the existence as well as the validity of the arbitration agreement in the present proceedings under Section 11 of the Arbitration and Conciliation Act. An agreement enforceable by law is a contract defined in Section 2 (h) of the Indian Contract Act whereas an agreement not enforceable in law is void as per Section 2 (g) of the Indian Contract Act. This was held in BANGA ELECTRONICS PVT. LTD. v. JAGMOHAN SINGH[ARB.P.1/2019] in the High Court of Delhi by a single bench consisting of JUSTICE J.R. MIDHA. Facts are that the petitioner had entered a purchase agreement for an undivided share in the property from the respondent. Against the same property which is the subject matter of purchase, a stay order had been passed by the family court in a separate matrimonial case between the respondent and his wife. The petitioner is seeking the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act. The counsel for the petitioner submitted that the agreement is valid and enforceable. The arbitration agreement between the parties is contained in clause 14 of the agreement. The petitioner was not aware of the stay order at the time of execution of the agreement dated the same was vacated when the respondent’s wife withdrew the petition with liberty to file a fresh one and there is no impediment to the enforcement of the agreement and petitioner cannot be denied specific performance. The counsel for the respondent submitted that the alleged agreement is in contravention of the stay order. The respondent vehemently disputes that the stay order has been vacated and it can be confirmed that the stay order is still continuing. The agreement has not been signed by the petitioner and was not a concluded contract.  The court discussed the scope of Section 11 of the Arbitration and Conciliation Act, which has been explained by the Supreme Court in the case of  Vidya Drolia v. Durga Trading Corporation, the following observations were made, “Exercise of power of prima facie judicial review of existence as including validity is justified as a court is the first forum that examines and decides the request for the referral. Absolute ―hands off‖ approach would be counterproductive and harm arbitration, as an alternative dispute resolution mechanism. Limited, yet effective intervention is acceptable as it does not obstruct but effectuates arbitration. 147.7. Exercise of the limited prima facie review does not in any way interfere with the principle of competence– competence and separation as to obstruct arbitration proceedings but ensures that vexatious and frivolous matters get over at the initial stage.” The court also made reference to the case of  Subrata Roy Sahara v. Union of India, from which the court had drawn the following observations, “Exercise of prima facie power of judicial review as to the validity of the arbitration agreement would save costs and check harassment of objecting parties when there is clearly no justification and a good reason not to accept plea of non-arbitrability.”
 IN THE HIGH COURT OF DELHI AT NEW DELHI Date of Decision: 04th May 2021 JAGMOHAN SINGH Respondent BANGA ELECTRONICS PVT. LTD. Petitioner ARB.P. 1 2019 HON BLE MR. JUSTICE J.R. MIDHA O R A L JUDGMENT The petitioner is seeking appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act. On 13th August 2018 the petitioner agreed to purchase 50% undivided share in property bearing No.C 41 Rajouri Garden New Delhi 110027 from the respondent for Rs.8 90 00 000 . The petitioner paid Rs.1 50 00 000 to the respondent 20 2018 against the respondent which he withdrew on 21st December 2018. On 12th November 2018 the petitioner invoked the arbitration by On 21st December 2018 the petitioner instituted this petition for appointment of an arbitrator under Section 11 of the Arbitration and legal notice. Conciliation Act. The respondent is opposing this petition on the ground that the impugned agreement dated 13th August 2018 is null and void being in violation of the stay order dated 09th March 2018 and therefore not enforceable in law. Submissions of the petitioner The agreement dated 13th August 2018 is valid and enforceable. The arbitration agreement between the parties is contained in clause 14 of the agreement dated 13th August 2018. The petitioner invoked the arbitration vide notice dated 12th November 2018. 10. With respect to the stay order dated 09th March 2018 it is submitted that the petitioner was not aware of the stay order dated 09th March 2018 at the time of execution of the agreement dated 13th August 2018. 11. The stay order was vacated on 27th August 2019 when the respondent’s wife withdrew the petition with liberty to file a fresh one and there is no impediment to the enforcement of the agreement dated 13th August 2018. 12. Even if the stay order is continuing the petitioner is entitled to the specific performance. It is submitted that the petitioner may be guilty of contempt for violation of the stay order but the petitioner cannot be denied the relief of specific performance. Submissions of the respondent 13. The respondent is 70 years old and he executed the agreement dated 13th August 2018 to get rid of the matrimonial disputes by selling of his one half share to the petitioner at a lower price just to buy peace of mind. 14. The respondent was not aware of the stay order dated 09th March 2018 at that time. The respondent was not present before the Family Court on 09th March 2018 when the stay order was passed restraining the respondent from selling the subject property. The respondent’s counsel was present before the Family Court on 09th March 2021 but there was a communication gap with his counsel and he was unaware of the stay order. 15. The respondent appeared before the Family Court on 29th September 2018 when he came to know of the stay order dated 09th March 2018. The respondent immediately contacted the petitioner and informed him about the stay order. The respondent sent a written intimation to the petitioner by e mail on 19th October 2018. The respondent transferred Rs.1 40 00 000 to the petitioner on 18th October 2018 and Rs.10 00 000 in January 2019. The respondent also offered Rs.10 00 000 as interest for two months but the respondent demanded Rs.40 00 000 towards interest for keeping Rs.1 50 00 000 for two months. 16. The alleged agreement dated 13th August 2018 is in contravention of the stay order. The learned counsel for the respondent vehemently disputes that the stay order has been vacated on 27th August 2019. According to the respondent the matter was listed before the Family Court on 18th November 2019 when the ld. Court adjourned the matter to 19th December 2019 for awaiting the record from this Court. The original record of the Family Court dispute was requisitioned by this Court and it can be confirmed that the stay order is still continuing. 17. The agreement dated 13th August 2018 has not been signed by the petitioner and was not a concluded contract. There was no Board Resolution of the petitioner company at the relevant time for execution of the agreement. Discussion and Analysis 18. The first question arises for consideration Whether the stay order dated 09th March 2018 is continuing as alleged by the respondent or it was vacated on 27th August 2019 as alleged by the petitioner 19. Vide order dated 03rd July 2019 this Court requisitioned the record of the maintenance case bearing M.T.No.222 2017 titled Manjeet Sahni v. Jagmohan Sahni pending before the Family Court Vs. JagmohanPetitioner in person with her son Harpal Singh with counsel Mr.Imran Counsel Sh. Sameer Diwan for the respondent. V N by Sh. Diwan filed. Petitioner submits that the respondent has sold few properties and he may be restrained from selling the matrimonial home at Rajouri Garden where the parties are residing. Admittedly both the parties are getting the rental income of Rs.2 48 000 per month each. In the given facts and circumstances till NDOH both the parties are directed not to create any third party interest in the matrimonial home at Rajouri Garden. Both the parties are directed to file their affidavit on their assets income and expenditure along with documents. The affidavit shall be in format at Annexure A1 which can be downloaded from the website: www.delhicourts.nic.in july17 27x.pdf. by the male spouse to be paid to the female spouse. 26.03.2018 in court no.8 Tis Hazari Delhi. The divorce case of the male spouse is stated to be fixed on Towards litigation costs sum of Rs.11 000 in cash be brought Put up on 26.03.2018. Sd ) ADDL.PRINCIPAL JUDGE FAMILY COURT TIS HAZARI DELHI Emphasis supplied) 21. The record of the Family Court reveals that the respondent had filed a petition for divorce against his wife in 2014 and the maintenance case was transferred and listed before the Family Court along with the divorce petition on 11th May 2018 30th May 2018 09th July 2018 16th July 2018 30th August 2018 and 28th September 2018 30th October 2018 06th February 2019 and 04th April 2019 when the respondent was present along with his counsel. On 28th September 2018 the learned Family Court extended the interim order dated 09th March 2018 till further orders. 22. The record of the Family Court requisitioned by this Court on 03rd July 2019 is still with this Court along with this case and there is no order dated 27th August 2019 as alleged by the petitioner. The stay order dated 09th March 2018 is still continuing and the submission of the petitioner that the stay order was vacated on 27th August 2019 is false and incorrect. 23. The second question arises for consideration Whether agreement dated 13th August 2018 is not enforceable in view of the stay order dated 09th March 2018 passed by the Family Court 24. According to the petitioner the agreement dated 13th August 2018 is enforceable whereas according to the respondent the agreement dated 13th August 2018 is not enforceable by law. 25. The law with respect to the scope of Section 11 of the Arbitration and Conciliation Act has been settled by three Judges Bench of the Supreme Court in Vidya Drolia v. Durga Trading Corporation 2 SCC 1. The Supreme Court held that the Court is empowered to examine the existence as well as validity of an arbitration agreement in proceedings under Section 11 of the Arbitration and Conciliation Act. The relevant portion of the Supreme Court judgment is reproduced hereunder: ―21. The term ―agreement‖ is not defined in the Arbitration Act albeit it is defined in Section 10 of the Contract Act 1872 [―10. What agreements are contracts.—All agreements are contracts if they are made by the free consent of parties competent to contract for a lawful consideration and with a lawful object and are not hereby expressly declared to be void.Nothing herein contained shall affect any law in force in India and not hereby expressly repealed by which any contract is required to be made in writing or in the presence of witnesses or any law relating to the registration of documents.‖] as contracts made by free consent of parties competent to contract for a lawful consideration and with a lawful object and are not thereby expressly declared to be void. Section 10 of the Contract Act also stipulates that aforesaid requirements shall not affect any law in force in Indiaby which a contract is required to be made in writing in presence of witnesses or any law relating to registration of documents. Thus an arbitration agreement should satisfy the mandate of Section 10 of the Contract Act in addition to satisfying other requirements stipulated in Section 7 of the Arbitration 22. Sections 12 to 18 of the Contract Act state when a person can be said to be of a sound mind for the purpose of contracting and define the consent‖ ―coercion‖ ―undue expressions ―consent‖ ―free influence‖ ―fraud‖ and ―misrepresentation‖. Sections 19 to 23 relate to voidability of agreements the power to set aside contracts induced by undue influence when both the parties are under mistake as to a matter of fact effect of a mistake as to the law effect of a mistake by one party as to a matter of fact and what considerations and objects are lawful and unlawful. Sections 24 to 30 relate to void contracts and Sections 26 and 27 therein state that agreements in restraint of marriage and agreements in restraint of trade respectively are void albeit Exception to Section 27 saves agreements for not carrying out the business of which goodwill is sold. Section 28 of the Contract Act states that agreements in restraint of legal proceedings are void but Exception specifically saves contracts by which two or more persons agree that any dispute or one which may arise between them in respect of any subject or class of subjects shall be referred to 23. Arbitration agreement must satisfy the objective mandates of the law of contract to qualify as an agreement. Clauses and of Section 2 of the Contract Act state that an agreement not enforceable in law is void and an agreement enforceable in law is a contract. As a sequitur it follows that an arbitration agreement that is not enforceable in law is void and not legally valid. 146. We now proceed to examine the question whether the word ―existence‖ in Section 11 merely refers to contract formationand excludes the question of enforcement and therefore the latter falls outside the jurisdiction of the court at the referral stage. On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement. Such interpretation can draw support from the plain meaning of the word ―existence‖. However it is equally possible jurisprudentially and on contextualism to hold that an agreement has no existence if it is not enforceable and not binding. Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. Legalistic and plain meaning interpretation would be contrary to the contextual background including the definition clause and would result in unpalatable consequences. A reasonable and just interpretation of ―existence‖ requires understanding the context the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law. 147.1.. ….Existence and validity are intertwined and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement. 147.2. The court at the reference stage exercises judicial powers. ‗Examination‘ as an ordinary expression in common parlance refers to an act of looking or considering something carefully in order to discover something 8 SCC 470 this Court has ―191. The Indian judicial system is grossly afflicted with frivolous litigation. Ways and means need to be evolved to deter litigants from their compulsive obsession towards senseless and ill considered claims. One needs to keep in mind that in the process of litigation there is an innocent sufferer on the other side of every irresponsible and senseless claim. He suffers long drawn anxious periods of nervousness and restlessness whilst the litigation is pending without any fault on his part. He pays for the litigation from out of his savings worrying that the other side may trick him into defeat for no fault of his. He spends invaluable time briefing counsel and preparing them for his claim. Time which he should have spent at work or with his family is lost for no fault of his. Should a litigant not be compensated for what he has lost for no fault The suggestion to the legislature is that a litigant who has succeeded must be compensated by the one who has lost. The suggestion to the legislature is to formulate a mechanism that anyone who initiates and continues a litigation senselessly pays for the same. It is suggested that the legislature should consider the introduction of a ―Code of Compulsory Costs‖. 147.11. The interpretation appropriately balances the allocation of the decision making authority between the court at the referral stage and the arbitrators‘ primary jurisdiction to decide disputes on merits. The court as the judicial forum of the first instance can exercise prima facie test jurisdiction to screen and knockdown ex facie meritless frivolous and dishonest litigation. Limited jurisdiction of the courts ensures expeditious alacritous and efficient disposal when required at the referral stage. 153. Accordingly we hold that the expression ‗existence of an arbitration agreement‘ in Section 11 of the Arbitration Act would include aspect of validity of an arbitration agreement albeit the court at the referral stage would apply the prima facie test on the basis of principles set out in this judgment. In cases of debatable and disputable facts and good reasonable arguable case etc. the court would force the parties to abide by the arbitration agreement as the arbitral tribunal has primary jurisdiction and authority to decide the disputes including the question of jurisdiction and non arbitrability.” Emphasis supplied) 26. Applying the well settled principles of law laid by the Supreme Court this Court has to consider the existence as well as validity of the arbitration agreement in the present proceedings under Section 11 of the Arbitration and Conciliation Act. An agreement enforceable by law is a contract defined in Section 2 of the Indian Contract Act whereas an agreement not enforceable in law is void as per Section 2of the Indian Contract Act. In the present case the agreement dated 13th August 2018 is in violation of the stay order dated 09th March 2018 which is continuing. The agreement dated 13th August 2018 is therefore not enforceable and is void in terms of Section 2(g) of the Contract Act. This Court is of the view that an arbitrator cannot be appointed to enforce a void agreement. 28. This petition for appointment of an arbitrator is dismissed. J.R. MIDHA J. MAY 04 2021 