Arbitration Agreement Remains Valid Even If Underlying Contract Is Terminated: Sikkim High Court

The Sikkim High Court bench of Chief Justice Biswanath Somadder and Justice Bhaskar Raj Pradhan affirmed that it is well settled that if the contract containing arbitration clause is rendered invalid or void, it does not affect the arbitration agreement. The arbitration agreement would continue to exist and the validity of which will be decided by the Arbitral Tribunal under section 16 of the Arbitration Act. Brief Facts The learned District Judge has, vide the impugned order dated 29.07.2016, set aside the arbitral award dated 06.06.2011 under section 34(2)(a)(ii) of the Arbitration and Conciliation Act, 1996 (Arbitration Act of 1996) on the ground that the tender process as well as the agreement dated 24.08.2001 had been quashed by this Court, as such, the arbitration clause of the agreement dated 24.08.2001 also became non-existent. The learned District Judge thus held that although the parties had agreed to the arbitration the learned Sole Arbitrator had no jurisdiction to arbitrate the dispute.An agreement dated 24.08.2001 was entered between the State of Sikkim and the Director, Sikkim State Lotteries (appellants) and M/s Tashi Delek Gaming Solutions (P) Ltd. (respondent). The respondent was appointed as the sole and exclusive marketing agent for the respondents for initiating the business of Online Computerized Lottery System for a period of seven years with a provision for further extension of five years thereafter. Thereafter, the payment of minimum assured revenue was not according to clause 10 of the agreement dated 24.08.2001. In the meantime, the legality of the tender notice dated 10.07.2001 and the agreement dated 24.08.2001 were challenged before this Court in two writ petitions. This Court quashed the entire process awarding the contract to the respondent and nullified the agreement dated 24.08.2001. Direction was issued to the appellants to issue fresh tender and to complete the entire exercise within three months from 24.06.2003. Two days later, on 26.06.2003, the appellants issued a letter requesting the respondent to continue as marketing agent for three more months on the same terms and conditions stipulated in the agreement dated 24.08.2001. Without any letter of acceptance, the respondent continued with the business of marketing online computerized lottery system for the appellants. Since the appellants had not been able to float new tender, the respondent expressed their desire to discontinue being the marketing agent for the Sikkim online lottery. The appellants were not in favour of reducing the State's share and the minimum assured revenue. Since the dues payable by the respondent had accumulated to a noticeable amount, the respondent by letter dated 11.09.2003 gave notice for arbitration under section 11 of the Arbitration Act of 1996 and by letter dated 04.11.2003 expressed their desire for terminating the agreement dated 24.08.2001. By a letter dated 12.11.2003, the respondent issued notice for termination of the agreement dated 24.08.2001. The letter of termination issued by the respondent was not accepted by the appellants. Since the dispute between the parties remained unresolved, vide letter dated 05.10.2004, the respondent gave a notice to the appellants for arbitration in terms of the agreement dated 24.08.2001. The learned Sole Arbitrator passed the award dated 06.06.2011 holding the respondent liable to pay a total sum of Rs.96,48,38,070.00 to the appellants for the period of 2003-2006 along with interest at the rate 12% per annum. The respondent challenged the award under section 34 of the Arbitration Act of 1996 before the learned District Judge in T.S (Arbitration) Case No.02 of 2013. The learned District Judge set aside the arbitration award. Court's Analysis In this case, the respondent did not appear despite giving a significant time to present their case therefore the court proceeded to decide the case only on the basis of the argument led by the appellant. The court noted that the district judge in the impugned order had held that since the contract containing arbitration clause had been quashed by the High Court, arbitration clause would also perish thereby rendering the arbitration application not maintainable. The learned judge had relied on the multiple decisions of the Supreme Court in arriving at this conclusion. The court noted that the judgments on which the learned judge based its conclusion were rendered in the context of the Arbitration Act, 1940 therefore the ld. Judge was not justified to rely on them. The court noted in Sundaram Finance Ltd. vs. NEPC India Ltd, 1999, the Apex Cout has held that “The 1996 Act is very different from the Arbitration Act, 1940. The provisions of this Act have, therefore, to be interpreted and construed independently and in fact reference to the 1940 Act may actually lead to misconstruction. In other words, the...

Arbitration Agreement Remains Valid Even If Underlying Contract Is Terminated: Sikkim High Court

Mohd Malik Chauhan

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