Arbitration Agreement Valid Even If It Refers To Arbitration Act, 1940 As Applicable Law: Karnataka High Court

Brief Facts:

The matter pertained to a Hire Purchase Agreement signed between M/s. ICDS Ltd. (“Appellant”) as the owner, Respondent No.1 as the hirer, and Respondent No.2 as the guarantor. The Appellant submitted a claim petition on June 23, 1999, seeking arbitration with a claim amounting to Rs. 3,02,350. The parties agreed to arbitration through Sri B. Yogishwara Holla, who initiated proceedings in 1999. However, due to the previous arbitrator's age-related health issues, the case was transferred to a new arbitrator in 2005. The new arbitrator continued the proceedings, issuing notices to all concerned parties and their advocates. After conducting hearings and receiving arguments, the arbitrator directed the Respondents to pay Rs. 3,06,750/- to the Plaintiff.

In response to the arbitration award, an arbitration suit was filed by the Respondents, contesting the validity of the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The District Court, after considering the grounds raised, set aside the arbitration award. According to the District Judge, the agreement's reference to arbitration under the provisions of the repealed Act meant that the arbitration clause was not valid. Consequently, the arbitrator lacked jurisdiction to adjudicate the dispute between the parties.

The Appellant, displeased with this decision, filed a miscellaneous first appeal in Karnataka High Court (“High Court”).

The Appellant argued that the mistake in referring to the Arbitration Act, 1940, in the printed Hire Purchase Agreement form was merely an oversight and does not invalidate the proceedings conducted under the Arbitration and Conciliation Act, 1996. Despite the agreement's reference to the outdated Act, the proceedings were carried out in accordance with the new Act. Additionally, the Appellant emphasized that the agreement's mention of "any statutory amendment thereof" encompasses the new Act, making the proceedings valid.

The arbitration clause is reproduced below:

“Clause VII (a) – All disputes, differences and or claims arising out of this Hire Purchase Agreement shall be settled by arbitration in accordance with the provisions of the Indian Arbitration Act, 1940 or any statutory amendment thereof and shall be referred to the arbitration of Mr B. Yogishwara Holla, Advocate, Udupi, or in case of his death, refusal, neglect or incapacity to act as an Arbitrator to the sold arbitration of Mr S.V. Shettigar, Advocate, Udupi. The reference to the Arbitrator shall be within the Clauses, Terms and Conditions of this Agreement. The award given by the Arbitrator shall be final and binding on all the parties concerned”.

Observations by the High Court:

The High Court noted that the arbitrator held that the agreement should be interpreted in light of the new Act of 1996, as it effectively amended the previous Act and empowered arbitrators to decide their own jurisdiction. Additionally, the arbitrator noted the applicability of Section 6 of the General Clauses Act, indicating that unless there is a clear intention to destroy existing rights and liabilities, they continue to exist under the repealed Act.

The High Court held that despite the repeal of the 1940 Act, arbitral proceedings initiated under it before the enactment of the 1996 Act could continue under the old Act unless the parties agreed otherwise. Conversely, proceedings initiated after the enactment of the 1996 Act would be governed by its provisions. The High Court noted that references to the 1940 Act in arbitration agreements made after the enactment of the 1996 Act would not render the agreements invalid. Even if such agreements erroneously referred to the provisions of the 1940 Act, they would still be governed by the 1996 Act.

The High Court held that the District Judge erred in dismissing the Appellant's claim and setting aside the arbitration award solely on the grounds of jurisdiction. It held that the District Judge failed to consider whether the arbitration award should be interfered with under Section 34 of the Arbitration and Conciliation Act, 1996.

Therefore, the appeal was allowed.

Case Title: M/s. ICDS Ltd vs Sri Bhaskaran Pillai and Others.

Case Number: M.F.A. NO.6319/2014 (AA)

Advocate for the Appellant: Miss. Archana Nair, Advocate for Sri Ananda Shetty A., Advocate

Advocate for the Respondent: Sri Vijaykumar V.

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