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CASE NO.: Appeal (civil)  5048 of 2005

PETITIONER: Shin-Etsu Chemical Co. Ltd.                              

RESPONDENT: M/s. Aksh Optifibre Ltd. & Anr                         

DATE OF JUDGMENT: 12/08/2005

BENCH: Y.K. Sabharwal

JUDGMENT: J U D G M E N T (Arising out of SLP(C) No.3160 of 2005)

Y.K. Sabharwal, J.

       Leave granted.         The interpretation of Section 45 of the Arbitration and Conciliation  Act, 1996 (for short ’the Act’) falls for determination in this matter.  Section  45 is as under: "45. Power of judicial authority to refer parties  to arbitration.\027 Notwithstanding anything  contained in Part I or in the Code of Civil  Procedure, 1908 (5 of 1908), a judicial authority,  when seized of an action in a matter in respect of  which the parties have made an agreement  referred to in section 44, shall, at the request of  one of the parties or any person claiming through  or under him, refer the parties to arbitration,  unless it finds that the said agreement is null and  void, inoperative or incapable of being  performed."

       The real question for consideration is as to the nature of adjudication  that is contemplated by Section 45 when the objection about the  agreement being "null and void, inoperative or incapable of being  performed" is raised before a judicial authority.  Should the judicial  authority while exercising power under Section 45 decide the objection on  a prima facie view of the matter and render a prima facie finding or a final  finding on merits on affording parties such opportunity as the justice of the  case may demand having regard to facts of the case?         The question is important and at the same time not free from  difficulty.  World over the opinion is divided.  Courts in some of the  countries have preferred the view that the adjudication should be prima  facie so as to be raised again before arbitral forum and others have  preferred a final adjudication.         Under Section 45 of the Act, the judicial authority has to mandatorily  refer the parties to arbitration, if conditions specified in the section are  fulfilled and agreement is not found to be null and void, inoperative or  incapable of being performed.         From Indian perspective to answer the question, first it would be  useful to examine few other provisions of the Act besides the Preamble  and the Statement of Objects and Reasons and in that light consider the  international precedents.         The question being examined by this Court is in relation to a  consolidated legislation which deals with domestic arbitration, international  commercial arbitration and enforcement of foreign arbitral awards.  Before  enactment of the Act there were separate statutes governing the  international arbitration and domestic arbitration, namely, the Arbitration  (Protocol and Convention) Act, 1937 (6 of 1937), The Arbitration Act, 1940

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(10 of 1940) and The Foreign Awards (Recognition and Enforcement) Act,  1961 (45 of 1961).  These statutes have been repealed as provided in  Section 85 of the Act.         The 1996 Act was enacted considering the international scenario as  is evident from its Preamble, which reads :

"WHEREAS the United Nations Commission on  International Trade Law (UNCITRAL) has  adopted the UNCITRAL Model Law on  International Commercial Arbitration in 1985:   AND WHEREAS the General Assembly of the  United Nations has recommended that all  countries give due consideration to the said  Model Law, in view of the desirability of uniformity  of the law of arbitral procedures and the specific  needs of international commercial arbitration  practice;   AND WHEREAS the UNCITRAL has adopted the  UNCITRAL Conciliation Rules in 1980;   AND WHEREAS the General Assembly of the  United Nations has recommended the use of the  said Rules in cases where a dispute arises in the  context of international commercial relations and  the parties seek an amicable settlement of that  dispute by recourse to conciliation;   AND WHEREAS the said Model Law and Rules  make significant contribution to the establishment  of a unified legal framework for the fair and  efficient settlement of disputes arising in  international commercial relations;   AND WHEREAS it is expedient to make law  respecting arbitration and conciliation, taking into  account the aforesaid Model Law and Rules;"

The enforcement of foreign awards has been dealt with in Part II of  the Act which has two Chapters, Chapter I dealing with New York  Convention Awards and Chapter II dealing with Geneva Convention  Awards.  In this matter we are concerned with Chapter I which comprises  of Sections 44 to 52.  Section 44 defines foreign award.  It is not in dispute  that the present case falls under the ambit of Section 44.  Section 45 has  already been extracted above.  Conditions for enforcement of foreign  awards are stipulated in Section 48 under which enforcement may be  refused at the request of the party against whom it is invoked only if that  party furnishes to the court proof as postulated in clauses (a) and (e).  In  addition, the enforcement of the award may also be refused on the  grounds stipulated in Section 48(2) of the Act.  Section 49 provides that  where the court is satisfied that the foreign award is enforceable under  Chapter I, the award shall be deemed to be a decree of the court.  Section  50 provides as to against which orders an appeal shall lie.  It reads as  under : "50. Appealable orders.\027(1) An appeal shall lie  from the order refusing to\027  (a) refer the parties to arbitration under  section 45;  (b)   enforce a foreign award under section  48, to the court authorised by law to hear  appeals from such order.  (2) No second appeal shall lie from an order  passed in appeal under this section, but nothing  in this section shall affect or take away any right

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to appeal to the Supreme Court."

As can be seen from above, an order refusing to refer the parties to  arbitration under Section 45 of the Act is appealable.  There is, however,  no provision for filing an appeal if the judicial authority refers the parties to  arbitration. Reference may also be made to Section 8 of the Act although it  deals with domestic arbitration.  It reads thus: "8. Power to refer parties to arbitration where  there is an arbitration agreement.\027 (1) A  judicial authority before which an action is brought  in a matter which is the subject of an arbitration  agreement shall, if a party so applies not later  than when submitting his first statement on the  substance of the dispute, refer the parties to  arbitration.  (2) The application referred to in sub-section (1)  shall not be entertained unless it is accompanied  by the original arbitration agreement or a duly  certified copy thereof.  (3) Notwithstanding that an application has been  made under sub-section (1) and that the issue is  pending before the judicial authority, an  arbitration may be commenced or continued and  an arbitral award made."

       Under the Old Arbitration Act (Section 34 of Arbitration Act, 1940),  court had discretion in the matter of grant of stay of legal proceedings  where there was an arbitration agreement on being satisfied that the  arbitration agreement exists factually and legally and disputes between the  parties are in regard to the matter agreed to be referred to arbitration.  The  Court in exercise of its discretion could also decline an order of stay  despite existence of aforesaid conditions, depending upon the facts and  circumstances of the case.  The discretion was, however, required to be  exercised on well settled judicial principles.   Section 8 of the Act is a departure from Section 34 of the old Act.   Under this section judicial authority has no discretion.   It is mandatory for  the judicial authority to refer the parties to arbitration on the existence of  conditions stipulated in the section.  Unlike Section 45, the judicial  authority under Section 8 has not been conferred the power to refuse  reference to arbitration on the ground of invalidity of the agreement.  It is  evident that the object is to avoid delay and accelerate reference to  arbitration leaving the parties to raise objection, if any, to the validity of the  arbitration agreement before the arbitral forum and/or post award under  Section 34 of the Act. Dealing with the statement of object and reasons of the Act, this  Court in Konkan Railway Corpn. Ltd. & Ors. v. Mehul Construction Co.  [(2000) 7 SCC 201] said: "At the outset, it must be borne in mind that prior  to the 1996 Act, the Arbitration Act of 1940, which  was in force in India provided for domestic  arbitration and no provision was there to deal with  the Foreign Awards. So far as the Foreign  Awards are concerned, the same were being  dealt with by the Arbitration (Protocol and  Convention) Act, 1937, and the Foreign Awards  (Recognition and Enforcement) Act, 1961. The  increasing growth of global trade and the delay in  disposal of cases in Courts under the normal  system in several countries made it imperative to  have the perception of an alternative Dispute  Resolution System, more particularly, in the  matter of commercial disputes. When the entire  world was moving in favour of a speedy resolution  of commercial disputes, the United Nations

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Commission on International Trade Law way back  in 1985 adopted the Uncitral Model Law of  International Commercial Arbitration and since  then, number of countries have given recognition  to that Model in their respective legislative  system. With the said Uncitral Model Law in view  the present Arbitration and Conciliation Act of  1996 has been enacted in India replacing the  Indian Arbitration Act, 1940, which was the  principal legislation on Arbitration in the country  that had been enacted during the British Rule.  The Arbitration Act of 1996 provides not only for  domestic arbitration but spreads its sweep to  International Commercial Arbitration too. The  Indian law relating to the enforcement of Foreign  Arbitration Awards provides for greater autonomy  in the arbitral process and limits judicial  intervention to a narrower circumference than  under the previous law. To, attract the confidence  of International Mercantile community and the  growing volume of India’s trade and commercial  relationship with the rest of the world after the  new liberalisation policy of the Government,  Indian Parliament was persuaded to enact the  Arbitration and Conciliation Act of 1996 in Uncitral  Model and, therefore, in interpreting any  provisions of the 1996 Act Courts must not ignore  the objects and purpose of the enactment of  1996. A bare comparison of different provisions of  the Arbitration Act of 1940 with the provisions of  the Arbitration and Conciliation Act, 1996 would  unequivocally indicate that 1996 Act limits  intervention of Court with an arbitral process to  the minimum and it is certainly not the legislative  intent that each and every order passed by an  authority under the Act would be a subject matter  of judicial scrutiny of a Court of Law. Under the  new law the grounds on which an award of an  Arbitrator could be challenged before the Court  have been severely cut down and such challenge  is now permitted on the basis of invalidity of the  agreement, want of jurisdiction on the part of the  Arbitrator or want of proper notice to a party of the  appointment of the Arbitrator or of Arbitral  proceedings. The powers of the Arbitrator have  been amplified by insertion of specific provisions  of several matters. Obstructive tactics adopted by  the parties in arbitration proceedings are sought  to be thwarted by an express provision inasmuch  as if a party knowingly keeps silent and then  suddenly raises a procedural objection will not be  allowed to do so. The role of institutions in  promoting and organising arbitration has been  recognised. The power to nominate Arbitrators  has been given to the Chief Justice or to an  institution or person designated by him. The time  limit for making awards has been deleted. The  existing provisions in 1940 Act relating to  arbitration through intervention of Court, when  there is no suit pending or by order of the Court  when there is a suit pending, have been removed.  The importance of transnational commercial  arbitration has been recognised and it has been  specifically provided that even where the  arbitration is held in India, the parties to the

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contract would be free to designate the law  applicable to the substance of the dispute. Under  the new law unless the agreement provides  otherwise, the Arbitrators are required to give  reasons for the award. The award itself has now  been vested with status of a decree, inasmuch as  the award itself is made executable as a decree  and it will no longer be necessary to apply to the  Court for a decree in terms of the award. All these  aim at achieving the sole object to resolve the  dispute as expeditiously as possible with the  minimum intervention of a Court of Law so that  the trade and commerce is not affected on  account of litigations before a Court. When United  Nations established the Commission on  International Trade Law it is on account of the fact  that the General Assembly recognised that  disparities in national laws governing international  trade created obstacles to the flow of trade. The  General Assembly regarded the Commission on  International Trade Law as a medium which could  play a more active role in reducing or removing  the obstacles. Such Commission, therefore, was  given a mandate for progressive harmonization  and unification of the law of International Trade.  With that objective when Uncitral Model has been  prepared and the Parliament in our country  enacted the Arbitration and Conciliation Act of  1996 adopting Uncitral Model, it would be  appropriate to bear the said objective in mind  while interpreting any provision of the Act. The  Statement of Objects and Reasons of the Act  clearly enunciates that the main objective of the  legislation was to minimise the supervisory role of  Courts in the arbitral process\005\005..."

       True, now the judicial interference has been limited to a narrower  circumference than under the old arbitration laws but the question here is  when Section 45 of the Act envisages judicial interference, what is the  extent thereof having regard to the language of the section and the  scheme of the Act.  What is the standard of review that the judicial  authority should adopt in relation to the arbitration agreement at the initial  stage of Section 45, viz., a prima facie finding or a final finding?         At this stage, we may briefly notice the circumstances under which  the matter has come up for consideration before this Court.  There is  hardly any controversy in respect of material facts necessary for  examination of the question involved.  The controversy is only in regard to  the power exercisable by a judicial authority under Section 45 of the Act.   Parties (Appellant and Respondent No.1) entered into an agreement  dated 16/18th November, 2000 which contained an arbitration clause as  under: "Governing Law.  This Agreement shall be  governed by and construed and interpreted under  the laws of Japan.  All disputes arising out of or in  relation to this Agreement which cannot be settled  by mutual accord shall be settled by arbitration in  Tokyo, Japan, in accordance with the Rules of  Conciliation and Arbitration of International  Chamber of Commerce.  The award of arbitration  shall be final and binding upon both parties."

       The appellant terminated the agreement in terms of its letter dated  31st December, 2002.  The first respondent instituted a suit claiming a  decree of declaration and injunction against the appellant for cancellation

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of the document dated 16/18th November, 2000 and/or declaration that the  long term sale and purchase agreement dated 16/18th November, 2000  including the arbitration clause on the ground that the terms of agreement  are unconscionable, unfair and unreasonable and against the public policy  and the same was entered into under undue influence and is, therefore,  void ab initio, inoperative and incapable of performance and cannot be  given effect to.  The appellant made an application in the suit praying that  the plaintiff shall be directed to submit to the ongoing arbitration  proceedings before the International Chamber of Commerce in Tokyo,  Japan.  The application was, however, filed under Section 8 of the Act.         The trial court by order dated 29th September, 2003 came to the  conclusion that the application of the appellant under Section 8 of the Act  deserves to be allowed.  Consequently, the parties were referred to  arbitration.  It was urged on behalf of the appellant before the trial court  that since there is an arbitration clause in the agreement, court’s  jurisdiction is exhausted as Section 8 is mandatory and, therefore, court  must refer the dispute to arbitration.  As already noticed, unlike Section 45  the objection as to the validity of the arbitration agreement cannot be  raised as a defence to an application filed under Section 8.  This seems to  be the reason for the appellant insisting before the trial court that Section 8  is applicable and not Section 45 of the Act.  It is clearly not a case of filing  an application under a wrong provision.  The trial court also proceeded  under erroneous assumption that Section 45 comes into play after the  award is made as such a submission seems to have been made by the  appellant before that court.           The order of the trial court was challenged by the first respondent  before the High Court in a petition filed under Article 227 of the  Constitution of India, there being no provision of appeal against an order of  reference to arbitration.  Even before the High Court, it was contented for  the appellant that as both Section 8 and Section 45 were applicable, the  application under Section 8 of the Act was rightly moved before the trial  court and the court did not commit any error in considering the matter for  reference to arbitration after application of Section 45 of the Act.   The High Court examined the question whether Section 45 has been  applied by the trial court and, if so, in its true perspective.  The High Court  held that the trial court ought to have proceeded to examine the application  under Section 45 of the Act which was not done.  Under these  circumstances, without entering into merits of the case, the High Court  directed fresh adjudication of the application by the trial court after  application of Section 45 of the Act.  Consequently, by the impugned  judgment, the order of the trial court dated 29th September, 2003 was set  aside and matter remanded for fresh decision of the trial court.         Before this Court, learned counsel for the parties have rightly taken  the stand that only Section 45 is applicable and Section 8 has no  applicability.  It is evident that there has been no adjudication of the  application by the trial court in terms of Section 45 of the Act.  The trial  court has not gone into the question, prima facie or finally, as to agreement  being null and void, inoperative or incapable of being performed, which  was the objection raised by the first respondent in reply to the application  of the appellant.  Thus, on ingredients of Section 45, there was no  adjudication.  Therefore, the direction of the High Court for fresh  adjudication of application of the appellant having regard to the provisions  of Section 45 of the Act cannot be faulted.  It is also necessary to issue  directions for expeditious adjudication of the said application by the trial  court but after first determining the scope of adjudication in exercise of  power under Section 45.         On behalf of the appellant, Mr.Nariman contends that the  consideration by the judicial authority under Section 45 has to be on a  prima facie view of the matter based on examination of the plaint and any  documents attached thereto, reply to the application for reference and any  documents attached thereto and the affidavits filed by the parties.  The  court, on a prima facie examination of the pleadings and documents,  should come to the conclusion as to whether the arbitration agreement is  null or void, inoperative or incapable of being performed.  Learned counsel  submits that final determination on merits in some cases may even require

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recording of evidence and proceedings may turn out to be a full fledged  trial thereby defeating the very purpose for the enactment of the Act.  It is  urged that the final determination can be made if such objections are  raised before the arbitral forum and/or post award by the court.          On the other hand, on behalf of first respondent, Mr. Ganesh  contends that Section 45 of the Act should be interpreted so as to give full  effect to the opening non-obstante clause and to the wordings of Section  45 which are entirely different from Section 8 in their effect and operation.   It is urged that Section 45 cannot be construed in a way that it becomes  indistinguishable from Section 8.  It is further submitted that under Section  45, if an issue is raised before the court regarding the legality or validity of  the agreement, then the court must give a finding on the issue.  The  contention is that the court would make an order of reference to arbitration  only if the arbitration agreement is legal and valid.  Further, it is contended  that it would be a different matter if objection as to the validity of the  arbitration agreement is not raised before the judicial authority and the  party prefers to raise it before the arbitral forum and/or post award, in the  event of award being against that party.         Which of the two views is correct requires determination.         It may be noted that Section 3 of the Foreign Awards Act, 1961,  before the enactment of the Act, contained somewhat similar provision  providing for the stay of the proceedings in the court, unless the agreement  was null and void, inoperative or incapable of being performed.  The only  material difference between the said Section 3 and present Section 45, is  that former contains provision for stay of the proceedings in the suit and  latter for reference to be made to arbitration.  That difference, for our  purposes, is of no consequence.  Section 3 of the Foreign Awards Act,  1961 as amended by Act 47 of 1973, (omitting unnecessary words) reads  as under : "3. Stay of proceedings in respect of matters to be  referred to arbitration. - Notwithstanding anything  contained in the Arbitration Act, 1940, or in the  Code of Civil Procedure, 1908, if any party to an  agreement to which Articles II of Convention set  forth in the Schedule applies, commences any  legal proceedings in any court against any other  party to the agreement, in respect of any matter  agreed to be referred to arbitration in such  agreement, any party to such legal proceedings  may, at any time after appearance and before  filing a written statement or taking any other step  in the proceedings, apply to the court to stay the  proceeding and the court, unless satisfied that the  agreement is null and void, inoperative or  incapable of being performed or that there is not,  in fact, any dispute between the parties with  regard to the matter agreed to be referred, shall  make an order staying the proceedings."  

       Both the sections start with a non-obstante clause giving overriding  effect to the provisions contained therein and making it prevail over  anything to the contrary contained in the Arbitration Act, 1940 in one case,  or Part I of the Act in the other case or the Code of Civil Procedure.   Further, unlike Section 34 of the Arbitration Act, 1940, which confers a  discretion upon the court, as earlier noted, Section 3 uses the mandatory  expression and makes it obligatory for the court to pass an order staying  the legal proceedings commenced by a party to the agreement if the  conditions specified therein are fulfilled.

A non obstante clause is a legislative device which is usually implied  to give overriding effect to certain provisions over some contrary provisions  that may be found either in the same enactment or some other enactment,  that is to say, to avoid the operation of all contrary provisions.  {Union of  India & Anr. v. G.M.Kokil & Ors. [(1984) Supp.SCC 196]}.         Section 45 uses the expression ’shall’ in respect of referring the

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parties to arbitration, unless judicial authority finds that the said agreement  is null and void, inoperative or incapable of being performed.  The term  ’shall’ in its ordinary significance is mandatory and the court shall ordinarily  give that interpretation unless such an interpretation leads to some absurd  or inconvenient consequence or be at variance with the intent of the  legislature, to be collected from other parts of the statute. {[Khub Chand &  Ors. v. State of Rajasthan & Ors. [AIR (1967) SC 1074]}.         The words ’shall’ and ’unless’ appearing in Section 45 mandates that  before referring the parties to arbitration, the judicial authority should be  satisfied that the arbitration agreement is not null and void, inoperative or  incapable of being performed.  In Brace Transport Corporation of  Monrovia, Bermuda v. Orient Middle East Lines Ltd., Saudi Arabia &  Ors.  [1995 Supp.(2) SCC 280 at 286] this Court held : "The court of a contracting State, when seized of  an action in a matter in respect of which the  parties have made an agreement within the  meaning of Article II shall upon the request of one  of the parties, refer to arbitration, unless it finds  the agreement is null and void, inoperative or  incapable of being performed."

       If the requirements of a statute which prescribes the manner in  which something is to be done are expressed in negative language, that is  to say, if the statute enacts that it shall be done in such a manner and no  other manner, it has been laid down that those requirements are in all  cases absolute, and that neglect to attend to them will invalidate the whole  proceeding.  [Craies on Statute Law; 7th Ed., at page 263].         Section 45 is clear; there is no doubt, ambiguity or vagueness in it.         Now, I may refer to decision in Renusagar Power Co. Ltd. v.  General Electric Co. & Anr.  [(1984) 4 SCC 679] in which interpretation of  Section 3 of the Foreign Awards Act, 1961 came up for consideration.   One of the parties to the arbitration agreement invoked the arbitration  clause while the other party filed a suit seeking declaration that claims  referred to the arbitration were beyond the scope of the arbitration  agreement and the other party is not entitled to refer the claims to the  arbitration and making consequential prayers for injunction restraining the  party invoking arbitration clause and the arbitrator from proceeding with the  matter and obtained an interim order.  The other party filed a petition under  Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961  seeking the stay of the proceedings in the suit and praying for vacating the  interim relief granted in the matter.  Learned Single Judge of the High  Court allowed the petition under Section 3 and granted stay of proceedings  in the suit and vacated the interim relief.  The order was maintained by the  Division Bench.  Before this Court, it was argued that a stay, if granted in a  petition under Section 3, would render the suit dead for all purposes and  there would be nothing left to be decided in the suit either because the suit  is stayed indefinitely or alternatively because the decision on the issue  would operate as res judicata in the suit, and, therefore, no relief of stay  should be granted which will have such effect merely on a prima facie view  or a pro tanto finding on the issue of arbitrability of the claims.  In other  words, the contention was that a Section 3 petition could not be a proper  stage to decide the issue of arbitrability of the claims but the same should  be decided in the suit when it will be finally tried.         While rejecting this contention it was held that : "if regard be had to the provisions of Section 3 as  well as the legal position arising under decided  cases the contention will be found to be devoid of  any substance. It may be that a stay of the suit  either under Section 3 of the Foreign Awards Act  or under Section 34 of the Arbitration Act, 1940  may have the effect of finally disposing of the suit  for all practical purposes as pointed out by the  Allahabad High Court. But that is no reason why  the relief of stay should be refused by the Court if

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the concerned legal provision requires the court  to do so. Here we are concerned with Section 3  which makes it obligatory upon the Court to stay  the legal proceedings if the conditions of the  section are satisfied and what is more the section  itself requires that before any stay is granted the  Court should be satisfied that the arbitration  agreement is valid, operative and capable of  being performed and that there are disputes  between the parties with regard to the matters  agreed to be referred to arbitration [conditions (v)  and (vi) mentioned earlier]. In other words, the  section itself indicates that the proper stage at  which the Court has to be fully satisfied about  these conditions is before granting the relief of  stay in a Section 3 petition and there is no  question of the Court getting satisfied about these  conditions on any prima facie view or a pro tanto  finding thereon. Parties have to put their entire  material before the Court on these issues  (whichever may be raised) and the Court has to  record its finding thereon after considering such  material.  [Emphasis supplied by us]"

       In Para 59 the Court further observed that : "It may be stated that though Section 34 of the  Arbitration Act, 1940 confers a discretion upon  the Court in the matter of granting stay of legal  proceedings where there is an arbitration  agreement, it cannot be disputed that before  granting the stay the Court has to satisfy itself  that arbitration agreement exists factually and  legally and that the disputes between the parties  are in regard to the maters agreed to be referred  to arbitration."

The question is : did the Parliament intend differently while using the  terminology in Section 45 as it did? When words in an earlier statute have  received an authoritative exposition by superior Court (interpretation of  Section 3 in Renusagar’s case), use of same words in a similar context in  a later Act will give rise to a strong presumption that the Parliament intends  that the same interpretation should also be followed for construction of  these words in the later statute : "D’ Emden v. Pedder (1904) 1 C.L.R. 91, 100 per  Griffiths C.J.: " When a particular form of  legislative enactment which has received  authoritative interpretation, whether by judicial  decision or by a long course of practice, is  adopted in the framing of a later statute, it is a  sound rule of construction to hold that the words  so adopted were intended by the legislature to  bear the meaning which had been so put upon  them." "According to Lord Macmillian, ’if an Act of  Parliament referring to the same subject, and  passed with the same purpose, and for the same  object, the safe and well-known rule of  construction is to assume that the legislature  when using well-known words upon which there  have been well-known decisions uses those  words in the sense which the decisions have  attached to them’."

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In Bengal Immunity Co. Ltd. V. State of Bihar [1955 (2) SCR 603],  Venkatarama Aiyer, J. stated that : "It is a well-settled rule of construction that when  a statute is repealed and re-enacted and words in  the repealed statute are reproduced in the new  statute, they should be interpreted in the sense  which had been judicially put on them under the  repealed Act, because the legislature is  presumed to be acquainted with the construction  which the courts have put upon the words, and  when they repeat the same words, they must be  taken to have accepted the interpretation put on  them by the court as correctly reflecting the  legislative mind."

       Further, Part II of the Act was enacted to update the international  commercial arbitration regime to meet the present day challenges.  If the  legislature intended a minimalist role of the courts, it would have enacted  Section 45 more in terms of Section 8 than its present form.         Section 3 of the Foreign Awards Act above noticed, was analogous  to Article II (3) of the New York Convention which is in the following terms : "Article II of the New York Convention 1. *** 2. *** 3. The court of a Contracting State, when seized  of an action in a matter in respect of which the  parties have made an agreement within the  meaning of this article, at the request of one of  the parties, refer the parties to arbitration, unless  it finds that the said agreement is null and void,  inoperative or incapable of being performed."

       The aforesaid provision has been substantially reproduced in  Section 45.  

       Clearly Section 45 casts an obligation upon the judicial authority  when seized of the matter to record a finding as to the validity of the  arbitration agreement as stipulated in the Section and there is nothing to  suggest either from the language of the section or otherwise that the  finding to be recorded is to be only ex facie or prima facie.         It is true that Section 5 limits judicial intervention in the manner  provided therein.  It accelerates the arbitral process by curtailing chances  of delay that may be caused in court proceedings.  But, at the same time, it  is also clear that though Sections 8 and 45 both deal with the power of  judicial authority to refer parties to arbitration, in the former which deals  with domestic arbitration, no provision has been made for examining at  that stage the validity of the arbitration agreement whereas under Section  45 which deals with arbitrations to which New York Convention applies, a  specific provision has been made to examine the validity of the arbitration  agreement in the manner provided in Section 45.  Both provisions are  differently structured albeit the purpose of both is to refer parties to  arbitration but in one case domestic arbitration and in other case  international arbitration.  Unlike Section 8 which provides that the  application shall be moved not later than when submitting the first  statement of the substance of the dispute, under Section 45 there is no  such limitation.  The apparent reason is that insofar as domestic arbitration  is concerned, the legislature intended to achieve speedy reference of  disputes to arbitration tribunal and left most of the matters to be raised  before the arbitrators or post award.  In case of foreign arbitration,  however, in its wisdom the legislature left the question relating to validity of  arbitration agreement being examined by the court.  One of the main  reasons for the departure being the heavy expense involved in such  arbitrations which may be unnecessary if the arbitration agreement is to be  invalidated in the manner prescribed in Section 45.           In view of the aforesaid, adopting liberal approach and restricting the

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determination by judicial authority about validity of agreement only from  prima facie angle, would amount to adding words to Section 45 without  there being any ambiguity or vagueness therein.         The traditional approach has been to allow a court, where a dispute  has been brought despite an arbitration agreement, to fully rule on the  existence and validity of the arbitration agreement.  This approach would  ensure that the parties are not proceeding on an invalid agreement as this  would be a fruitless exercise involving much time and expenditure.  In  some countries, however, the traditional approach has changed.  The  liberal approach which seems to be gaining increasing popularity in many  legal systems both statutorily as well as through judicial interpretation is to  restrict the review of validity of arbitration agreement at a prima facie level.   For final review the parties may raise issue before arbitral forum or post  award. The 1987 Swiss Private International Law Statute stipulates that "if  the parties have concluded an arbitration agreement covering an arbitrable  dispute, a Swiss court seized of it shall decline jurisdiction unless: \005 b. the  court finds that the arbitral agreement is null and void, inoperative or  incapable of being performed" (Article 7).  These provisions could easily be  read as implying that a court seized of the merits of a dispute in spite of the  existence of an arbitration agreement would have to fully address the  question of that agreement’s effectiveness.  However, after some  hesitation, the Swiss Federal Tribunal decided to interpret them as  restricting the court’s review at the outset of proceedings to a prima facie  verification of the existence and effectiveness of the arbitration clause.   (Fouchard Gaillard Goldman on International Commercial Arbitration-  Emmanuel Gaillard and John Savage Ed.1999 \026 Para 675, Page 409) According to the French Code of Civil Procedure (which applies to  both domestic and international arbitration), the courts are obliged to  decline jurisdiction where an arbitration agreement exists, provided that the  merits of the dispute have already been put before an arbitral tribunal.   Even where the dispute is not before an arbitral tribunal, the French Courts  must also decline jurisdiction unless the arbitration agreement is "patently  void".  This in substance amounts to a prima facie review of the existence  and validity of the arbitration agreement.  Similarly, Art.VI (2) of the  European Convention on International Commercial Arbitration (1961)  adopts a prima facie standard by providing that courts shall not determine  the initial validity/existence of the arbitration agreement unless there are  "good and substantial reasons to the contrary". The Geneva Protocol on Arbitration Clauses in Commercial Matters  (1923) (Art.IV, Para 1), the New York Convention (Art.II, Para 3) as well as  the UNCITRAL, Model Law (Art.VIII) like Section 45 of the Act have  similarly ambiguous phraseology capable of either interpretation.  It is true  that courts in two common law jurisdictions, Ontario and Hong Kong, both  of which have based their law on the UNCITRAL Model Law (like India),  have adopted a liberal approach to the issue. In Pacific International Lines (Pte) Ltd. v. Tsinlien Metal and  Minerals Co. Ltd, the High Court of Hong Kong (Year Book of Commercial  Arbitration, Vol. XVIII, 1993, pg.180) was concerned with the issue as to  whether on the facts of the case there was an arbitration agreement within  the meaning of Article 7 of the UNCITRAL Model Law, which deals with the  definition and form of arbitration agreement and reads thus :

"Article 7.     Definition and form of arbitration  agreement (1)     "Arbitration agreement" is an agreement by  the parties to submit to arbitration all or certain  disputes which have arisen or which  may arise  between them in respect of a defined legal  relationship, whether  contractual or not. An  arbitration agreement may be in the form of an  arbitration clause in a contract or in the form of a  separate agreement. (2)     The arbitration agreement shall be in

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writing.  An agreement is in writing if it is  contained in a document signed by the parties or  in an  exchange of letters, telex, telegrams or  other means of telecommunications  which  provide a record of the agreement, or in an  exchange of statements  of claim and defence in  which the existence of an agreement is alleged by   one party and not denied by another.  The  reference in a contract to a document containing  an arbitration clause constitutes an arbitration   agreement provided that the contract is in writing  and the reference is such as to make that clause  part of the contract."  

The parties entered into a charter party agreement containing an  arbitration clause through a broker.  The ship company raised a claim for  certain sum of money.  The arbitration clause provided that one arbitrator  was to be nominated by the shipping company and the other by the  charters.  The charters failed to appoint its arbitrator, whereupon, the  shipping company approached the High Court to appoint an arbitrator on  behalf of the charters.  The charters objected that there was no valid  arbitral clause between the parties.  It was the contention of the charters  that they entered into charter party agreement with the broker and not with  the shipping company who deny having given the brokers any authority to  enter into an agreement. The Court laid down the proposition that "if the  court is satisfied that there is a ’plainly arguable’ case to support the  proposition and there was an arbitration agreement which complies with  Article 7 of the Model Law, the Court should proceed to appoint the  arbitrator in the full knowledge that the defendants will not be precluded  from raising the point before the arbitrator and having the matter re- considered by the court consequent upon that preliminary ruling."

The Court after examining the documents and taking into account  the commercial reality of the situation came to the conclusion that the  plaintiffs, i.e., shipping company has made out a ’strongly arguable case’ in  support of the existence of an arbitration agreement.  The Court further  observed that "obviously it has not been possible for me to go into this in  any great detail and indeed the whole matter has been dealt with affidavit  evidence.  Despite the fact that there is no document before me, which  shows that World Ace were held out or authorized by the defendant to act  for them in relation to its fixture.  I cannot believe that such documentation  does not exist.  The arbitrator will have to go into this matter and sort it out  but for my part and I am satisfied at this stage that Article 7 of the Model  Law has been complied with and that there is an arbitration agreement  between these parties".  Thus, the court found the arbitral clause as  existing and valid and referred the dispute to arbitration and granted time  to the charters to appoint its arbitrator.   

The court decided the matter on the basis of the affidavits, as it was  not possible for it to examine in detail the documents since the parties  failed to produce the document containing the authorization given to the  broker to act on behalf of the shipping company. Therefore, the court has  referred to the commercial reality as well as the affidavits of the parties to  arrive at the conclusion that there was an arbitration agreement. The court  has adapted the standard of "plainly arguable case" or "strongly arguable  case" since the arbitral tribunal would examine the issue once again.  Therefore, it cannot be stated as a general rule that in every case there  should be a "plainly arguable case" or "strongly arguable case", since the  legislations in other jurisdictions may not provide for such a provision.  More over, the case did not concern directly with Article 8 of the  UNCITRAL Model Law, the court was concerned with Article 7 of the  UNCITRAL Model Law dealing with definition and form of the arbitration  agreement.   

Apart from the fact that the Arbitration and Conciliation Act, 1996 is

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not a complete adaptation of the UNCITRAL Model Law, the scheme/  provisions of the Hong Kong Arbitration Ordinance are different from the  Arbitration and Conciliation Act,1996. Therefore it may not be appropriate  to follow the decisions interpreting the provisions of UNCITRAL Model Law  or Hong Kong Arbitration Ordinance. Section 6 of the Hong Kong  Arbitration Ordinance is similar to Section 32 of the English Arbitration Act  1996, which is not present in the Arbitration and Conciliation Act 1996. It  reads as under : "(1)    Subject to subsections (2) and (3), article 8  of the UNCITRAL Model Law (Arbitration  agreement and substantive claim before court)  applies to a matter that is the subject of a  domestic arbitration agreement in the same way  as it applies to a matter that is the subject of an  international arbitration agreement. (2) Subject to subsection (3), if a party to an  arbitration agreement that provides for the  arbitration of a dispute involving a claim or other  matter this is within the jurisdiction of the Labour  Tribunal or a person claiming through or under  such a party, commences legal proceedings in  any court against any other party to the  agreement or any person claiming through or  under that other party, in respect of any matter  agreed to be referred, and any party to those  legal proceedings applies to that court after  appearance and before delivering any pleadings   or taking any other step in the proceedings, to  stay the proceedings, the  court or a judge of that  court may make an order staying the  proceedings,  if satisfied that- (a)     there is no sufficient reason why the matter  should not be  referred in accordance with the  agreement; and  (b) the applicant was ready and willing at the time  the proceedings  were commenced to do all  things necessary for the proper conduct of the   arbitration, and remains so. (3) Subsections (1) and (2) have effect subject to  section 15 of  the Control of Exemption Clauses  Ordinance  (Cap 71). (Replaced 75 of 1996 s. 9)"

Section 23 A of the Hong Kong Arbitration Ordinance provides for  the determination of preliminary point of law by the court and there is a no  analogous provision in the Arbitration and conciliation Act 1996         It is clear from a plain reading of Hong Kong and English provisions  that both confer discretion on the court, unlike Section 45 of the Act, which  is mandatory.  It is evident from the words ’may’ and ’satisfied’ used in  Hong Kong provision and also from the language used in Section 32 of the  English Arbitration Act, 1996, that the intention in the said two jurisdictions  was to confer on court discretionary powers indicative of limited review  from prima facie point of view. In Rio Algom Ltd. v. Sammi Steel Co. Ltd., Ontario Court of  Justice, General Division (Year book of Commercial Arbitration, Vol. XVIII,  1993, Page 166) dealt with Article 16 of the UNCITRAL Model Law dealing  with the competence of arbitral tribunal to rule on its jurisdiction which  reads as under: "Article 16.    Competence of arbitral tribunal to  rule on its jurisdiction (1)     The arbitral tribunal may rule on its own  jurisdiction, including any objections with respect  to the existence or validity of the arbitration  agreement. For that purpose, an arbitration  clause which forms part of a contract shall be

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treated as an agreement independent of the other  terms of the contract. A decision by the arbitral  tribunal that the contract is null and void shall not  entail ipso jure the invalidity of the arbitration  clause. (2)     A plea that the arbitral tribunal does not  have jurisdiction shall be raised not later than the  submission of the statement of defence.  A party  is not precluded from raising such a plea by the  fact that he has appointed, or participated in the  appointment of, an arbitrator. A plea that the  arbitral tribunal is exceeding the scope of its  authority shall be raised as soon as the matter  alleged to be beyond the scope of its authority is  raised during the arbitral proceedings. The arbitral  tribunal may, in either case, admit a later plea if it  considers the delay justified. (3)     The arbitral tribunal may rule on a plea  referred to in paragraph (2) of this article either as  a preliminary question or in an award on the  merits. If the arbitral tribunal rules as a  preliminary question that it has jurisdiction, any  party may request, within 30 days after having  received notice of that ruling, the court specified  in article 6 to decide the matter, which decision  shall be subject to no appeal; while such a  request is pending, the arbitral tribunal may  continue the arbitral proceedings and make an  award."

In pursuance of an arbitration agreement, one of the parties referred  the dispute to the arbitrator whereas the other party commenced an action  before the court challenging the jurisdiction of the arbitrator to arbitrate the  issues and for an order staying the arbitration proceedings.  The Court  ordered the trial of issues raising matters of the contract interpretation  affecting arbitrator’s jurisdiction.  On appeal, it was held that issues  defining the scope of the arbitration agreement, which raise matters of  contract interpretation, ought to be resolved by the arbitrators in the first  instance before resort to the courts.  The Court observed that ’what  appears to me of significance is that the Model Law reflects an emphasis  in favour of arbitration in the first instance in international commercial  arbitrations to which it applies’.  The Courts in matters of contract  interpretation as such are limited in that they do not appear to have a role  in determining matters of law or construction; jurisdiction and scope of  authority are for the arbitrator to determine in the first instance, subject to  later recourse to set aside the ruling or award.  The role of the court before  arbitration appears to be confined to determining whether the arbitration  clause is null and void, inoperative or incapable of being performed (Article  8), if not it is mandatory to send the parties to arbitration. Thus, it was  observed that the issue of validity of the arbitration agreement is to be  determined by the court. However, there is no reference as to whether the  court should take a prima facie view or a final view.

The 1996 English Arbitration Act adopted a slightly different solution,  whereby the courts may only rule on the issue of jurisdiction with the  agreement of the parties or, if the parties do not agree, with the consent of  the arbitral tribunal.  In this latter case, the court must also find that its  decision is liable to save substantial cost, that the application was made  promptly, and that there is a valid reason for the claim to be heard by a  court (Sec.32).  (Fouchard (supra) Para 675 Page 409).

The American approach also favours traditional approach of final  review of court.  (Comptek Telecomm v. IVD Corp., XXII Y.B. COMM.  ARB.905 (1997) decided on August 1, 1995 and SMG Swedish Machine  Group v. Swedish Machine Group, XVIII Y.B. COMM.ARB.457 (1993)

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decided on January 4, 1991. It may be noted that both approaches have its own advantage and  disadvantage.  The approach whereby the court finally decides on merits  on the issue of existence and validity of the arbitration agreement results to  a certain degree time and cost avoidance.  It may prevent parties to wait  for several months or in some cases years before knowing the final  outcome of the dispute regarding jurisdiction.  It will often take that long for  the arbitrators and then the courts to reach their decisions.  The same  considerations of cost and time explain the position taken in English Law  which under Section 32(2) of the 1996 English Arbitration Act provides that  the parties may agree (or, if the parties fail to agree, the arbitral tribunal  may agree) that it would be more efficient to have the question resolved  immediately by the courts.  (Fouchard (supra) Para 678, Page 410)         I may also deal with the contention urged on behalf of the appellant  that only prima facie finding is required to be given on combined reading of  Sections 45, 48 and 50 from which it can be culled out that a party who  has suffered an award can always challenge the same under Section 48  on the ground that the arbitration agreement is null and void.  This read in  conjunction with the right of appeal given under Section 50 and the power  of the arbitrator to rule on his own jurisdiction clearly shows the intent of  the legislature to avoid delay which would be inevitable if it has to be a final  decision and it would defeat the object of soon placing all material before  the arbitration tribunal.  I am afraid that this cannot be accepted as the real  purpose of Section 48 is to ensure that at some stage whether pre-award,  post award or both, a judicial authority must decide the validity, operation,  capability of performance of the arbitration agreement.  In various cases  the parties may not resort to Section 45 in the first place, and to overcome  such eventuality, the legislature has enacted Section 48(1)(a).  In other  words, if the court is not asked to satisfy itself as to the validity of the  agreement at a pre-award stage (Section 45), then by virtue of Section 48,  it is given another opportunity to do so.  Apart from this, under Section 48,  the court may refuse to enforce the foreign award on the ground other than  the invalidity of the arbitration agreement.  As far as the question of  Section 50 is concerned, it is well settled in law that an appeal is a creature  of statute {M/s M. Ramnarain (P) Ltd. & Anr. v. State Trading  Corporation of India Ltd. [(1983) 3 SCC 75]} and a right to appeal  inheres in no one {Gujarat Agro Industries Co. Ltd. v. Municipal  Corporation of the City of Ahmedabad & Ors. [(1999) 4 SCC 468]}.   The legislature under Section 50 has clearly allowed appeal only in case  the judicial authority refuses to refer the parties to arbitration or refuses to  enforce the foreign award.  The fact that a provision is not made for an  appeal in case reference is made to arbitration is not a ground to say that  the court should prima facie decide the validity of the agreement ignoring  the express provisions of Section 45.  The legislature has granted right of  appeal in the event of refusal to refer but not in the event of order being  made for reference of the parties to arbitration.  This provision for appeal is  not determinative of the scope of Section 45 to mean that the  determination thereunder has to be only prima facie.

I am of the view that Indian Legislature has consciously adopted a  conventional approach so as to save the huge expense involved in  international commercial arbitration as compared to domestic arbitration.           In view of the aforesaid discussion, I am of the view that under  Section 45 of the Act, the determination has to be on merits, final and  binding and not prima facie.   Turning to the present case, I direct that the application filed by the  appellant before the trial court would be treated as an application under  Section 45 of the Act.  Having regard to the nature of controversy in the  present case, parties would be given opportunity to file documents and  affidavits by way of evidence.  No oral evidence would be examined.   Though the appellant itself is responsible for the delay that has occurred  because of application under provisions which had no applicability and  insistence thereupon, yet, considering that the application has been  pending for nearly two years, I direct its disposal within a period of two  months of the receipt of the copy of this order.  

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Before concluding, this Court also deems it necessary to issue  general directions for expeditious disposal of petitions/applications filed so  as to challenge the validity of the arbitration agreement under Section 45.   Ordinarily, such cases shall be decided on the basis of affidavits and other  relevant documents and without oral evidence.  There may, however, be  few exceptional cases where it may become necessary to grant  opportunity to the parties to lead oral evidence.  In both eventualities, the  judicial authority is required to decide the issue expeditiously within a fix  timeframe and not to treat such matters like regular civil suit.         The object of arbitration including international commercial  arbitration is expedition.  The object of the Act would be defeated if the  international commercial disputes remain pending in court for months and  years before even commencement of arbitration.         Accordingly, I direct that any application that may be filed under  Section 45 of the Act must be decided within three months of its filing.  In  rare and exceptional cases, the judicial authority may extend the time by  another three months but by sending a report to the superior/appellate  authority setting out the reasons for such extension.  It would be for the  superior/appellate authority to issue appropriate directions to the judicial  authority and/or take such other action as may be called for. The appeal is disposed of in the above terms.