SHIN-ETSU CHEMICAL CO. LTD. v. AKSH OPTIFIBRE LTD. AND ANR.

A that the award may be challenged on the other grounds available under ' Section 48. As I have already said, this challenge will have to be tried out by a full trial by involving all kinds of evidence (including oral evidence). If that be so, then all issues including the present issue could be tried fully after the award instead of seeking a final finding at the pre-reference stage B under Section 45 of the Act. This would be in consonance with the ethos of the Act to avoid delay at different stages, to centralize the court review of all disputes relating to the arbitration at the post-award stage, and also carry forward the objectives of the Model Law.

Approach in Foreign Jurisdictions c The importance of carrying forward the objectives underlying the Model Law can hardly be gainsaid. There is evident dearth of guiding Indian precedent which might be useful in interpreting Section 45 of the Act. Hence, it becomes necessary to seek light from foreign judgments interpret- D ing corresponding provisions that have been modeled on the Model Law. Now, for a survey of such foreign precedents.

It has rightly been noticed in the judgment of Brother Sabharwal that different countries have approached tpe issue depending on their substantive and processual laws. It has been noticed that the situation under the French E Code of Civil Procedure favours a prima facie view, since under the Statute if the dispute is not before an arbitral tribunal, the French Courts must decline jurisdiction unless the arbitration agreement is "patently void".

Similarly, Article 7 of the 1987 Swiss Private International Law Statute F stipulates that the courts decline jurisdiction" ... b. unless the court finds that the arbitral agreement is null and void, inoperative or incapable of being performed". This has been interpreted by the Swiss Federal Tribunal as restricting the courts review at the start of the proceedings to a prima facie verification of the existence and effectiveness of the arbitration clause. 18

G As far as the U.S. jurisdiction is concerned, the statute there, which deals both with the substantive law and the law of procedure, is worded

18Copy pinpoint18. See, Foundation M. v. Banque X., 1996 BULL. ASA 527 (SWISS Fed. Trib., Apr. 29, 1996) cited from FOUCHARD, GAILLARD, GOLDMAN ON INTERNATIONAL COMMERCIAL ARBITRATION (E. Gaillard and J. Savage, eds. 1999) at p. 409 (para) H 675).

SHIN-ETSUCHEMICAL CO. LTD. v. AKSH OPTIFIBRE LTD. [SRIKRJSHNA, J.J 741

differently from the Act. Indeed, not all jurisdictions in the U.S. have even modeled their law on the Model Law and U.S. cases must be approached with great caution. The U.S. position is, therefore, not very helpful in resolving the issue before us.

It has been noticed in Brother Sabharwal' s judgment that in at least two common law jurisdictions, Ontario and Hong Kong, both of which have based their law on the Model Law (like India), the courts have adopted a 'liberal approach' to the issue, namely, that of primafacie view as to the existence and non-vitiation of the arbitral agreemeat, before making a reference. The Hong Kong and Ontario judgments will be examined pres- ently. c The Hong Kong Judgment

There is no doubt that in Pacific International lines (Pte.) Ltd v. Tsinlien Metals and Minerals Co. Ltd., 19 ("Pacific International Lines") the High Court of Hong Kong was concerned precise1y with the issue as to D whether there was a valid arbitration agreement within the meaning of Article 7 of the Model Law. The court was of the view that there was a "plainly arguable" case to support the proposition that there was an arbi- tration agreement that complied with Article 7 of the Model Law. The Court observed: E "It follows, therefore, that if I am satisfied that there is a plainly arguable case to support the proposition and there was an arbitra- tion agreement which complies with Art. 7 of the Model Law, I 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 reconsidered by the court F consequent upon that preliminary ruling."20

Further, the court held:

"I am quite satisfied that the plaintiffs have made out a strongly arguable case in support of an arbitration agreement which com- G plies Article 7 of the Model Law." 21

19Copy pinpoint19. XVlll Y.B. COMM. ARB. 180 (1993) (decided on l.7.1992).

20Copy pinpoint20. Ibid. at p. 185 (par 18), per Kaplan, J.

21Copy pinpoint21. Ibid. at p. 185 (para 19, per Kaplan, J. H

p. 742 Copy page pinpoint

A In my reading of the case, the Hong Kong High Court was squarely concerned with the issue as to whether the arbitration agreement complied with Article 7 of the Model Law or not. This became relevant because under Article 8 the Court was empowered to decide as to the existence or otherwise of the arbitral agreement and Article 7 required the agreement to be in the B form prescribed by that Article itself. With respect, it would be incorrect to distinguish the case on the ground that it was not concerned with Article 8 of the Model Law. In my view, the court was directly concerned with the validity of the arbitration agreement as it was argued that the arbitration agreement did not comply with Article 7 and, therefore, was invalid.

C The second ground of distinction sought to be made by my learned Brother is that the Hong Kong Arbitration Ordinance ("the Hong Kong Ordinance") was based upon the English Arbitration Act, 1996 ("the English Act") and that the Hong Kong judgment was in the special context of these statutes. In particular, my Learned Brother holds that Section 6 of the Hong D Kong Ordinance is similar to Section 32 of the English Act (both of which are not present in our Act), as a distinguishing feature rendering the Hong Kong judgment inapplicable to the present case. To clear the air, I quote below both the concern~d provisions.

The Hong Kong Ordinance: E "Section 6 Court to refer matter to arbitration in certain cases

(I) 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 agree- ment 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

SHIN-ETSU CHEMICAL CO.LTD. v. AKSH OPTIFIBRE LTD. (SRIKRISHNA, J.J 743

delivering any pleadings or taking any other step in the proceed- A ings, 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 (b) the applicant was ready and willing at the time the pro- ceedings were commenced to do all things necessary for the proper conduct of the arbitration, and remains so.

(3) Subsections (I) and (2) have effect subject to section 15 of the C Control of Exemption Clauses Ordinance (Cap 71)."

The English Act:

"Section 32. -Determination ofpreliminary point ofjurisdiction. D (I) The court may, on the application of a party to arbitral proceed- ings (upon notice to the other parties), determine any question as to the substantive jurisdiction of the tribunal. A party may lose the right to object (see section 73).

(2) An application under this section shall not be considered unless- E (a) it is made with the agreement in writing of all the other parties to the proceedings, or

(b) it is made with the permission of the tribunal and the court is satisfied - F (i) that the determination of the question is likely to produce substantial savings in costs,

(ii) that the application was made without delay, and G (iii) that there is good reason why the matter should be decided by the court.

(3) An application under this section, unless made with the agree- ment of all the other parties to the proceedings, shall state the H

p. 744 Copy page pinpoint

A grounds on which it is said that the matter should be decided by the court.

(4) Unless otherwise agreed by the parties, the arbitral tribunal may continue the arbitral proceedings and make an award while an application to the court under this section is pending. B (5) Unless the court gives leave, no appeal lies from a decision of the court whether the conditions specified in subsection (2) are met.

(6) The decision of the court on the question of jurisdiction shall •' I

c be treated as a judgment of the court for the purposes of an appeal. But no appeal lies without the leave of the court which shall not be given unless the court considers that the question involves a point of law which is one of general importance or is one which for some other special reason should be considered by the Court of Appeal." D On a comparative reading of Section 6 of the Hong Kong Ordinance and Section 32 of the English Act, it appears to me that the two are neither similar, nor resemble each other, the purposes of the two sections being totally different. This distinction made by Brother Sabharwal, with respect, E appears to be unsupportable.

On the other hand, what corresponds to Section 32 of the English Act is Section 23A of the Hong Kong Ordinance, which is reproduced below:

"Section 2 3A Determination ofpreliminary point of law by Court F (I) Subject to subsection (2) and section 23B, on an application to the Court made by any of the parties to a reference-

(a) with the consent of an arbitrator who has entered on the 'reference or, if an umpire has enter~id" on the reference, with his consent, or

(b) with the consent of all the other parties,

the Court shall have jurisdiction to determine any question of law arising in the course of the reference.

p. 745 Copy page pinpoint

(2) The Court shall not entertain an application under subsection A (l)(a) with respect to any question of law unless it is satisfied that-

(a) the determination of the application might produce sub- stantial savings in costs to the parties; and

(b) the question of law is one in respect of which leave to B appeal would be likely to be given under section 23(3)(b).

(3) A decision of the Court under subsection (I) shall be deemed to be a judgment of the Court within the meaning of section 14 of the High Court Ordinance (Cap 4) (appeals to the Court of Appeal), but no appeal shall lie from such a decision unless the Court or the c Court of Appeal gives leave. (Amended 25 of 1998 s. 2)

(4) (Repealed 64 of 1989 s. 15)"

Courts under both Section 32 of the English Act as well as Section 23A D of the Hong Kong Arbitration Ordinance, can make a determination of preliminary point of jurisdiction with the 'consent of all the parties' or atleast with the 'consent of the arbitrator' and only upon being satisfied that the determination of the application might reduce substantially the costs to the parties, and the question oflaw is one in which leave is likely to be given. E The Hong Kong decision has also been distinguished on the ground that Section 23A of the Hong Kong Ordinance specifically provides for determination of the preliminary issue by the court and that there is no similar provision in the Act. With respect, this distinction may also not be valid. In the first place, the judgment in Pacific International lines (supra) F was rendered in the year 1992; it does not make any reference whatsoever to Section 23A of the Hong Kong Ordinance. Nor does it appear from the judgment that there was any analogous provision when the Hong Kong High Court decided the matter. Indeed, all references in the judgment are to the provisions of the Model Law. Moreover, if Section 23A had been applicable, it would have been wholly unnecessary for the court to express its opinion G on an interpretation of Article 7 or 8 of the Model Law as it could straighta- way have relied on Section 23A. In my view, the Hong Kong judgment squarely deals with the issue before us and conclusively holds that the approach to be adopted is whether it is a "plainly arguable" that the arbi- tration agreement was in existence. H

p. 746 Copy page pinpoint

A The Ontario Judgment

The Ontario Court of Justice in Rio Algom Ltd. v. Sarni Steel Co. Ltd. 22

dealt with Article 16 of the Model Law with regard to the competence of the arbitral tribunal to rule on its jurisdiction and the court's own powers B at the preliminary stage. Article 16 has been quoted in Learned Brother Sabharwal's judgment. The court expressed its categorical opinion on the relevant issue in the following words:

"What appears to me of significance is that the Model Law reflects an emphasis in favour of arbitration in the first instance in inter- c national commercial arbitrations to which it applies (of which it is common ground this is one). 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, inop- erative or incapable of being performed (Art. 8) - if not it is mandatory to send the parties to arbitration. Kane, J. did not follow this course - he referred questions of the construction of the agree- ment to trial without apparent reference to the condition specified in Art. 8; these issues to be tried relate to matters of law, including jurisdiction and scope of the arbitrator's authority, but not, so far as I can see, to the issues for the court to determine under Art. 8. It seems to me be at least arguable that the matters referred to trial are not matters that permit the intervention of the court in the light of Art. 5, (supra)." 23

In my view, this is a clear and unequivocal expression on the part of the court on the issue before us. Indeed, the Ontario Court has clearly held that the court in the matter of interpretation of the existence and non- vitiation of the arbitral agreement has only a prima facie jurisdiction and is not required to render a final decision at that stage.

22Copy pinpoint22. XVIII Y.C. COMM. ARB. 166 (1993) (decided on l.3.1991).

23Copy pinpoint23. Ibid. at pp. 170-171 (para 13).

p. 747 Copy page pinpoint

The English Judgment A

The English judgment in Azov Shipping Co. v. Baltic Shipping Co., 24 raised a different issue altogether. The case of the applicant before the court was that he was not a party to the arbitral agreement, which contained the arbitration clause, and, despite this, the arbitrator had delivered an award B in favour of the other party. The arbitrator after a full trial found that there was a valid arbitration agreement and that he had jurisdiction over the parties. There was a challenge to the award. The issue before the court was: Where a full-scale hearing on jurisdiction had been completed before the arbitrator, and there was a challenge to the award, whether the jurisdiction of the arbitrator could be challenged with complete oral evidence and cross- c examination so the challenge in effect became a full hearing of what had already occurred before the arbitrator?

The court allowed the application and held that even at the post-award stage, it was permissible to lead oral evidence to demonstrate that the arbitrator had no jurisdiction. The point of distinction is that the court was dealing with a challenge at a post-award stage. There could be no doubt that, at that stage the finding on the jurisdictional issue or the existence of vitiating factors has to be rendered only after complete trial and has to be a final finding. Further, the observations of the court were perfectly in consonance of Sections 32 and 67 of the English Act which are not in any manner reflected in the Act.

Consequences of the Mollificatory Suggestions

The suggestions made by Learned Brother Sabharwal to mollify some of the obvious drawbacks of the approach that he adopts, also needs closer scrutiny. He has suggested a trial by affidavits as well as a fixed time-frame to reduce the possible delays ensuing from a protracted trial at the pre- reference stage. In my view, any attempt to mollify the significant adverse consequences of the determinative approach by enabling the court to render final judgment only on the basis of affidavits, albeit within a fixed time- G frame, may prove counter-productive.

There are several instances where affidavit evidence cannot aid in

24Copy pinpoint24. [1999] I Lloyds Rep. 68 (Q.B.). H

p. 748 Copy page pinpoint

A making a final determinative finding on the issue. For instance, where a defence taken is that the signature of a party was forged or that agreement itself is entirely fabricated, I cannot conceive of the issue being satisfactorily determined fully and finally merely on the basis of affidavits without oral evidence. Correspondingly, if courts at the preliminary stage were to admit B oral evidence, simply because forgery or the like is pleaded, the conse- quences are still troublesome. In fact, if the view postulated by learned Brother Sabharwal were to prevail, then all international commercial arbi- trations can be defeated by a totally bogus defence that the agreement is forged or fabricated. If such a defence were to be allowed, it would nec- essarily require a full-fledged trial (with oral evidence) at the pre-reference c stage with all its consequential delay and expense. On the other hand, if only a prima facie view were to be taken, then the issue could still be examined in-depth after a full trial either before the arbitral tribunal or at any rate under Section 48(1 )(a) when the enforceability of the ensuing award is questioned.

D I am afraid that the suggestion of fixing a time limit, within which an issue can be determined without oral evidence, may also not be practical. As pointed out earlier, if the applicable law is a foreign law (which is not an uncommon feature in international commercial contracts), the time limit of three months is unlikely to be complied with as it would be unfeasible. In any event, since it is undoubted that at the enforcement stage a full trial under Section 48 is permissible, parties are none the better by having two trials i.e. one at the stage of Section 45, and another at the stage of Section 48.

I fully agree with my Learned Brother's view that the object of dispute resolution through arbitration, including international commercial arbitra- tion, is expedition and that the object of the Act would be defeated if proceedings remain pending in court even after commencing of the arbitra- tion. It is precisely for this reason that I am inclined to the view that at the pre-reference stage contemplated by Section 45, the court is required to take only a prima facie view for making the reference, leaving the parties to a G full trial either before the arbitral tribunal or before the court at the post- award stage.

Undoubtedly, an international commercial arbitration involves huge expenses, particularly where the parties have subjected the contract to a H foreign law. But, that cannot be a deterrent to this Court from pronouncing

p. 749 Copy page pinpoint

on the correct approach to be adopted under Section 45 of the Act. In fact, as I have pointed out, adopting a final and determinative approach under Section 45 may not only prolong proceedings at the initial stage but also correspondingly increase costs and uncertainty for all the parties concerned. Finally, having regard to the structure of the Act, consequences arising from particular interpretations, judgments in other jurisdictions, as well as the opinion of learned authors on the subject," I am of the view that, the correct approach to be adopted under section 45 at the pre-reference stage, is one of a prima facie finding by the trial court as to the validity or otherwise of the arbitration agreement.

For all these reasons, I respectfully differ from the judgment of my esteemed Brother Sabharwal. I am of the view that the present matter needs to be remitted to the trial court, but not for a full trial as directed by the impugned judgment of the High Court. The application under Section 45 would have to be determined by the trial court after arriving at the prima facie satisfaction that there exists an arbitral agreement, which is "not null and void, inoperative or incapable of being performed''.' If the trial court finds thus, the parties shall be referred to arbitration.

The appeal is accordingly allowed and Ordered accordingly.

DHARMADHIKARI, J. : Leave granted. E

I have carefully gone through very elaborate and well-considered opinions differing with each other of learned Brethren Y. K. Sabharwal and B. N. Srikrishna JJ. F With utmost resp,ct to both of them, I am inclined to agree with the view expressed by learned Brother Srikrishna J. but only with a rider and a partly different reason which may I state below:-

The main issue is regarding the scope of power of any judicial authority including a regular civil court under section 45 of the Act in making or G

25Copy pinpoint25. See, for example, FOUCHARD, GAILLARD, GOOLMAN ON INTERNATIONAL COMMERCIAL ARBITRATION (E. Gaillard and J. Savage, eds. 1999) al pp. 412- 412 (para 682) as well as JULIAN D.M. LEW ET AL., COMPARATIVE INTER- NATIONAL COMMERCIAL ARBITRATION (2003) ATP. 346 (para 14-53) who support the prima facie approach. H

p. 750 Copy page pinpoint

A refusing a reference of dispute arising from an international arbitration agreement governed by the provisions contained in Part III Chapter-I of the Act of 1996. I respectfully Agree with learned Brother Srikrishna J only to the extent that if on prima facie examination of the documents and material on record, including the arbitration agreement on which request for refer- B ence is made by one of the parties, the judicial authority or the court decides to make a reference, it may merely mention the submissions and contentions of the parties and summarily decide the objection if any raised on the alleged nullity, voidness, inoperativeness or incapability of the arbitration agree- ment. In case, however, on a prima facie view of the matter, which is required to be objectively taken on the basis of material and evidence produced by the parties on the record of the case, the judicial authority including a regular civil court, is inclined to reject the request for reference on the ground that the agreement is 'null and void' or 'inoperative' or 'incapable of being performed' within the meaning of section 45 of the Act, the judicial authority or the court must afford full opportunities to the parties to lead whatever documentary or oral evidence they want to lead and then decide the question like trial of a preliminary issue on jurisdiction or limitation in regular civil suit and pass an elaborate reasoned order. Where a judicial authority or the court refuses to make a reference on the grounds available under section 45 of the Act, it is necessary for the judicial authority or the court wnich is seized of the matter, to pass a reasoned order as the same is subject to appeal to the appellate court under section 50(l)(a) of the Act and further appeal to this Court under sub-section (2) of the said section.

Whether such a decision of the judicial authority or the court of refusal to make a reference on grounds permissible under section 45 of the Act F would be subjected to further reexamination before the arbitral tribunal or the court in which eventually the award comes up for enforcement in accordance with section 48( I)( a) of the Act, is a legal question of sufficient complexity and in my considered opinion since that question does not directly arise on the facts of the present case, it should be left open for consideration in an appropriate case where such a question is directly raised and decided by the court.

With this addition, I agree with the view expressed by learned Brother Srikrishna J., and with his conclusion that the matter should be remitted to the original court for a fresh decision in the light of the view ~xpressed by this Court.

SHIN-ETSU CHEMICAL CO. LID. '· AKSH OPTIFIBRE LID. [DHARMADHIKARI, J.] 75 J

ORDER A The direction of the High Court in the impugned judgment remanding the application under Sectin 45 of the Arbitration and Conciliation Act, 1996, for fresh decision by the trial court is confirmed. On remand, the trial court would decide the application in the light of the majority opinion within B two months of receipt of the judgment of this Court.

B.S. Appeal disposed of.