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Reference to arbitration in cases of void or voidable contracts – SC lays down guidelines

6 June, 2014

The Supreme Court of India has, on 28th of May, 2014 declined to accept the proposition that whenever a contract is alleged to be void ab-initio, the courts exercising jurisdiction under Section 8 and Section 11 of the Arbitration and Conciliation Act, 1996 are rendered powerless to refer the disputes to arbitration. The Apex Court in this regard relied on an earlier judgement in the case of Hindustan Petroleum Corpn., laying down that if there is a clause for arbitration in an agreement, it is mandatory for the civil court to refer the dispute to an arbitrator. Accordingly, the judgement in the case of N. Radhakrishnan, was held as being per incuriam by the court in the present case where the respondent (Organising Committee, Commonwealth Games 2010, Delhi) had pleaded that the contract is void inasmuch as the petitioner (Swiss Timing Limited) had engaged in corrupt or fraudulent practices in connection with the agreement.

Further, acknowledging Section 16 of the Arbitration Act, 1996 and noticing the concept of separability of arbitration clause/agreement from the underlying or the main contract, the Supreme Court was of the view that all matters including the issue as to whether the main contract was void or voidable can be referred to arbitration. Elaborating on the issue while noting difference in the term “void” and “voidable” in the Indian Contract Act, 1872, it was held that where the court can conclude that the contract is void, on a meaningful reading of the contract document itself without requiring any further proof, arbitration can be declined. It was however clarified, providing few examples, that such cases would be few and isolated. Benefit of arbitration was hence found to be available in cases of voidable contracts of circumstances like unsoundness of mind, absence of free consent, undue influence, fraud or misrepresentation, etc. The Apex Court also advised the courts to act with caution and circumspection while examining the plea that the main contract is void or voidable.

The Court permitted arbitration to proceed simultaneously along with criminal proceedings. Defence that the decision of the criminal proceedings, in respect of corrupt practices, should be awaited before the arbitral tribunal is constituted, was hence rejected. It noted that if the matter is not referred to arbitration and the criminal proceedings result in an acquittal, it would lead to delay in arbitration. According to the Court, even if the arbitration award is given and the criminal proceedings lead to conviction, thereby proving that the contract was void, necessary plea can be taken to resist enforcement of the award.
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