“Only ex facie invalidity of an agreement can be a ground for refusal of reference”; Calcutta High Court allows Section 11 application

Calcutta High Court: While allowing the present application preferred under S. 11 of the Arbitration and Conciliation Act, 1996 (the Act, 1996) for the appointment of the arbitrators, a single bench comprising of Sabyasachi Bhattacharyya,* J., held that the existence of an arbitral clause in the MOU entered into between the parties, left no scope of refusal to refer the matter to arbitration before this Court.

Factual Matrix

In the instant matter, the respondents and trustees, who are running the secondary section of the Swarna School, an educational institution, entered a Memorandum of Understanding (MOU) to transfer the partnership business and the trust to the petitioners thereby giving over control of Swarna School to the petitioners. Clause 2.5 of the MOU provides that the respondents shall assign the tenancy of the ground floor of the premises to the petitioners and Clause 17 of the MOU provides for arbitration in case of disputes.

A dispute arose between the parties and the petitioners filed an application under S. 9 of the Act, 1996 and later invoked the arbitration clause. The petitioners preferred an application under S. 11 of the Act, 1996 for the appointment of the arbitrators.

Respondents’ Contentions

The respondents challenged the present application on the grounds that the original arbitration agreement and the certified copy of the MOU were not produced and the same is not in accordance with Clause 3(a) of the Scheme for Appointment of Arbitrators by the Chief Justice of this Court, 1996 (1996 Scheme).

The respondents contended that the MoU containing the Arbitration clause is neither registered nor sufficiently stamped. The respondent further contended that the MoU which resulted in transferring or assigning the tenancy rights is barred under S. 5(6) of the West Bengal Premises Tenancy Act, 1997, which precludes a tenant, without the previous consent of the landlord, from transferring or assigning his right in the tenancy or any part thereof. Moreover, S. 11(2) of the Specific Relief Act, 1963 debars specific performance of contracts which are in excess of powers given to the trustees.

The respondents also contended that the application under S. 11 of the Act, 1996 is not maintainable in view of the pendency of a prior filed application under S. 8 of the Act, 1996.

Petitioners’ Contentions

While relying on Rajeev Maheshwari v. Indu Kocher, 2011 SCC OnLine Cal 1243 and Deo Kumar Saraf v. Mangal Keshav Securities Ltd., 2009 SCC OnLine Cal 1003, the petitioners contended that the requirement of producing original or certified copy of the document is waived, if both parties agree on the arbitration clause/agreement. The petitioners further contended that the transfer as provided under the MOU is for the benefit of the trust, therefore, no permission is required.

Moot Point

1. Whether non-filing of the original or certified copy of the arbitration clause/agreement entails, mandatorily, the rejection of the application under S. 11 of the Act, 1996?

2. Whether arbitration clause said to be void in view of alleged illegalities in the agreement?

Court’s Observation

The Court observed that an element of discretion is provided in 1996 Scheme with the use of the word “may”, therefore, it is not always mandatory to reject such an application on non-filing of the original or certified copy of the arbitration clause/agreement. The Court stated that “a two-fold layer of protection has been given to an applicant who has failed to comply technically with all terms of Clause 3. Not only has the rejection been made optional, even on such rejection the petitioner has the further option to apply afresh upon obtaining an approval of the Chief Justice for initiation of a fresh reference.”

The Court observed that in the instant matter, the photocopy of the arbitration agreement was annexed to the application and the petitioners are agreeable to produce a certified copy of the agreement if directed, moreover, the error being patently technical and curable, there is, thus, scope of non-rejection of the same.

The Court further observed that in absence of any provision “which stipulates that the application under S. 8 “shall not be entertained” unless it is accompanied by an original arbitration agreement or a duly certified copy”, the intention of the legislature is very clear that the same is not mandatory.

“…non-filing of the original or a certified copy of the agreement may render the application under Section 11 irregular at the worst, but not outright unlawful.”

Relying on S. 11(6A) of the Act, 1996 and the judgment of Supreme Court in Vidyawati Gupta v. Bhakti Hari Nayak, (2006) 2 SCC 777, the Court observed that when existence of the agreement is not disputed, the application under S. 11 ought not to be dismissed on technical and/or procedural grounds.

The Court observed that the question regarding assignment of tenancy or non-consent of the landlord is premature at this juncture and such defect is curable, therefore, “the allegation made by the respondents cannot be a sufficient ground for refusing the invocation of arbitration clause itself at the S. 11 stage.”

The Court observed that the non-joinder of the trust itself when the same is sufficiently represented by its trustees cannot preclude the Court from referring the matter to arbitration under S. 11 of the Act, 1996.

On the issue of insufficiency of Stamp duty required for the agreement as per N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd., 2023 SCC OnLine SC 495, the Court observed that the same is curable by impoundment and the Supreme Court in N.N. Global (Supra) has also not precluded such option for the court taking up a proceeding under S. 11 of the Act, 1996. While stating “only ex facie invalidity of an agreement can be a ground for refusal of reference”, the Court observed that the interpretation with regards to the actual stamp payable be best left for the Adjudicating Authority to decide and not for this Court within the limited scope of S. 11(6A) of the Act, 1996.

Court’s Verdict

The Court allowed the application filed under S. 11 of the Act, 1996 to refer the matter to arbitration and appointed an Arbitrator. However, the Court made it clear that questions regarding the validity and legality of the arbitration clause as well as the MOU itself containing the said clause and all other issues raised by the parties, are left open to be decided on merits by the Arbitrator.

[Chandan Chatterjee v. Gita Sundararaman, 2023 SCC OnLine Cal 1407, order dated 08-06-2023]

*Judgment by Justice Sabyasachi Bhattacharyya

Advocates who appeared in this case:

Mr. Jishnu Chowdhury, Counsel for the Petitioners;

Mr. Anubhav Sinha, Counsel for the Respondents.