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

- **Citation:** [2005] Supp. 2 S.C.R. 699
- **Court:** Supreme Court of India
- **Decided:** 2005-08-12
- **Case number:** Civil Appeal No. 5048 of 2005
- **Bench:** Y.K. Sabharwal, D.M. Dharmadhikari, B.N. Srikrjshna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shin-etsu-chemical-co-ltd-v-aksh-optifibre-ltd-and-anr-20956
- **Pages:** 53

## Headnote

Arbitration and Conciliation Act, 1996-Sections 8, 44, 45 and 50Respondent filing a suit before trial court for declaration and injunction
for cancellation of arbitration agree1nent being void ab intio, inoperative
and incapable of performance-Appellant filing an application under
section 8 of the Act for direction to submit the respondent to arbitration
proceedings under the agreement-Trial Court allowing the application of
A
B
c
the appellant-High Court remanding back to trial court for fresh adjudication under section 45 of the Act-Scope of power of Judicial authority D
in deciding the validity of the arbitration agreement at pre-reference stage
contemplated under section 45 of the Act-Whether the judicial authority
should give a prima facie finding based on materials on record or a final
finding on merits after conducting a full-fledged trial-Held, as per majority
view, the judicial authority should give a prima facie finding and not a
final finding by conducting a full-fledged trial about the validity of the E
arbitration agreement to avoid inordinate delay in legal proceedings
defeating the object of the Act-Arbitration Act, 1940-Section 34; Arbitration (Protocol and Convention) Act, 1937; Foreign Awards (Recognition
and Enforcement) Act, 1961-Section 3.
F
Appellant and first respondent entered into a commercial agreement which contained an international arbitration clause. On termination of the agreement by the appellant, the respondent instituted a suit
before trial court claiming a decree of declaration and injunction against
the appellant for cancellation of the arbitration agreement being void
ab initio, inoperative and incapable of performance. The appellant filed G
an application in the suit, under section 8 of the Arbitration and Conciliation Act, 1996 for direction to the first respondent to submit to
arbitration proceedings under the agreement. The trial court allowed
the application and referred the dispute t'o arbitration. The first respondent challenged the order of the trial before High Court under H
699
700
SUPREME COURT REPORTS [2005) SUPP. 2 S.C.R.
A
Article 227 of the Constitution of India. The High Court, by holding that
the trial court ought to have proceeded to examine the application of
the appellant under section 45 of the Act, set aside the order of the trial
court and remanded back for fresh adjudication.
B
In appeal to this Court, the appellant contended that on combined
reading of Sections 45, 48 and 50 of the Arbitration and Conciliation
Act, 1996, the judicial authority is required only to give a prima facie
finding on examination of the documents and materials on record including the arbitration agreement and not a final finding after conducting a full-fledged trial, and that the intention of the legislature is to avoid
C inordinate delay in the legal proceedings and the full-fledged trial for
a final finding may defeat the very purpose of the Act.
The first respondent contended that Section 45 of the Act should
be interpreted so as to give full effect to the opening non-obstante clause;
D and that 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
after conducting a full-fledged trial.
Remanding back the appeal to the trial Court, the Court
E
HELD : [Per B.N. SRIKRISHNA, J]
1.1. If the court takes a prima facie view that the arbitration
agreement is not vitiated on account of factors enumerated in Section
45 of the Arbitration and Conciliation Act, 1996 and the arbitrator upon
F a full trial holds that there is no vitiating factor in the arbitration
agreement and makes an award, such an award can be challenged under
Section 48 (1) (a) of the Act. The award will be set aside if the party
against whom it is invoked satisfies the court inter alia that the agreement was not valid under the law to which the parties had subjected it
G
or under the law of the country where the award was made. The two
basic re

## Text

_Characters 0–39,977 of 123,910. This is a partial read: ask again with offset=39977 for what follows._

SHIN-ETSU CHEMICAL CO. LTD.
v.
AKSH OPTIFIBRE LTD. AND ANR.
AUGUST 12, 2005
[Y.K. SABHARWAL, D.M. DHARMADHIKARI AND
B.N. SRIKRJSHNA, JJ.]
Arbitration and Conciliation Act, 1996-Sections 8, 44, 45 and 50Respondent filing a suit before trial court for declaration and injunction
for cancellation of arbitration agree1nent being void ab intio, inoperative
and incapable of performance-Appellant filing an application under
section 8 of the Act for direction to submit the respondent to arbitration
proceedings under the agreement-Trial Court allowing the application of
A
B
c
the appellant-High Court remanding back to trial court for fresh adjudication under section 45 of the Act-Scope of power of Judicial authority D
in deciding the validity of the arbitration agreement at pre-reference stage
contemplated under section 45 of the Act-Whether the judicial authority
should give a prima facie finding based on materials on record or a final
finding on merits after conducting a full-fledged trial-Held, as per majority
view, the judicial authority should give a prima facie finding and not a
final finding by conducting a full-fledged trial about the validity of the E
arbitration agreement to avoid inordinate delay in legal proceedings
defeating the object of the Act-Arbitration Act, 1940-Section 34; Arbitration (Protocol and Convention) Act, 1937; Foreign Awards (Recognition
and Enforcement) Act, 1961-Section 3.
F
Appellant and first respondent entered into a commercial agreement which contained an international arbitration clause. On termination of the agreement by the appellant, the respondent instituted a suit
before trial court claiming a decree of declaration and injunction against
the appellant for cancellation of the arbitration agreement being void
ab initio, inoperative and incapable of performance. The appellant filed G
an application in the suit, under section 8 of the Arbitration and Conciliation Act, 1996 for direction to the first respondent to submit to
arbitration proceedings under the agreement. The trial court allowed
the application and referred the dispute t'o arbitration. The first respondent challenged the order of the trial before High Court under H
699
700
SUPREME COURT REPORTS [2005) SUPP. 2 S.C.R.
A
Article 227 of the Constitution of India. The High Court, by holding that
the trial court ought to have proceeded to examine the application of
the appellant under section 45 of the Act, set aside the order of the trial
court and remanded back for fresh adjudication.
B
In appeal to this Court, the appellant contended that on combined
reading of Sections 45, 48 and 50 of the Arbitration and Conciliation
Act, 1996, the judicial authority is required only to give a prima facie
finding on examination of the documents and materials on record including the arbitration agreement and not a final finding after conducting a full-fledged trial, and that the intention of the legislature is to avoid
C inordinate delay in the legal proceedings and the full-fledged trial for
a final finding may defeat the very purpose of the Act.
The first respondent contended that Section 45 of the Act should
be interpreted so as to give full effect to the opening non-obstante clause;
D and that 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
after conducting a full-fledged trial.
Remanding back the appeal to the trial Court, the Court
E
HELD : [Per B.N. SRIKRISHNA, J]
1.1. If the court takes a prima facie view that the arbitration
agreement is not vitiated on account of factors enumerated in Section
45 of the Arbitration and Conciliation Act, 1996 and the arbitrator upon
F a full trial holds that there is no vitiating factor in the arbitration
agreement and makes an award, such an award can be challenged under
Section 48 (1) (a) of the Act. The award will be set aside if the party
against whom it is invoked satisfies the court inter alia that the agreement was not valid under the law to which the parties had subjected it
G
or under the law of the country where the award was made. The two
basic requirements, namely, expedition at the pre-reference stage and
a fair opportunity to contest the award after full trial would be fully
satisfied by interpreting Section 45 of the Act as enabling the court to
act on a prima facie view. [735-C, D, E)
H
1.2. If the finding made under Section 45 of the Act as to the validity
SHIN-ETSU CHEMICAL CO. LTD. v. AKSH OPTIFIBRE LTD.
701
of the arbitral agreement were to be treated as final, then the competent A
court, while entertaining an application for enforcement of a foreign
award, might decline to go into the same question. In other words, the
court before which enforcement is sought may not re-examine whether
the agreement was valid under the applicable law, on the ground that a
final judgment had been rendered on an earlier occasion by another B
competent court. The principles analogous to resjudicata might preclude
the party from raising the defence in a post-award situation under section
48(l)(a) of the Act. Hence, it would be preferable to hold that Section 45
of the Act requires only a primafacie view of the matter as to the absence
of the vitiating factors contemplated therein. (736-B, C, D]
1.3. If it is held that a final finding has to be given under section
45 of the Act, then it must necessarily be after a trial recording all
necessary evidence, in order ·to eliminate the likelihood of fraud, coerc
cion etc that may render the agreement void, inoperative or unenforceable. If the view is taken that it could be done only on the basis of D
affidavits by excluding oral evidence altogether, then it would render
injustice to the party because a final judgment would have been rendered on insufficient material. An award may be challenged on the other
grounds available under Section 48 of the Act, which would 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 E
also be tried fully after the award instead of seeking a final finding at
the pre-reference stage 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. (736-D-E; 740-A, BJ
1.4. It would not only be unfeasible to prove the applicable foreign
law exclusively through affidavits but it would also entail enormous
expenditure of time and money if it has to give a final finding after
conducting a full fledged trial on the validity of the arbitration agreement at the pre-reference stage under section 45 of the Act. If it is held
that the finding under Section 45 of the Act is only a prima facie view,
then all these difficulties could be obviated_ Neither the arbitral trib~nal
nor the court enforcing the arbitral award may consider itself bound
by the prima facie view expresoed under Section 45 of the Act. The
F
G
H
702
SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R.
A
difficulty of having to conclusively prove the applicable foreign law at
a trial would also be obviated. [732-G; 738-D, E]
1.5. Fixing of a time limit, within which an issue can be determined
without oral evidence, may not be practical. If the applicable law is a
B foreign law, the time limit of three months is unlikely to be complied
with as it would be unfeasible. If, at the enforcement stage, a full trial
under Section 48 of the Act is permissible, it is better for the parties not
to have two trials i.e. one at the stage of Section 45 of the Act and another
at the stage of Section 48 of the Act. [748-D, E]
C
1.6. The object of dispute resolution through arbitration, including
international commercial arbitration, is expedition and that the object
or' the Act would bt: defeated if proceedings remain pending in court
even after commencing of the arbitration. Hence, at the pre-reference
stage contemplated by Section 45 of the Act, the court is required to take
D only a prima facie view for making the reference, leaving the parties to
a full trial either before the arbitral tribunal or before the court at the
post-award stage. Adopting a final and determinative approach under
Section 45 of !he Act may not only prolong the proceedings at the initial
stage but also correspondingly increase costs and uncertainty for all the
parties concerned. [748-F, G; 749-A]
E
Renusagar Power Co. v. General Electric Co., (1984] 4 SCC 679,
distinguished.
Mittal Engineering Works v. Collector of Central Excise, [1997] 1
SCC 203; Jagdish Lal v. State of Haryana, [1997) 6 SCC 538; Divisional
F Controller, KSRTC v. Mahadeva Shetty & Ors., (2003] 7 SCC 197; Mis
Amarnath Om Prakash v. State of Punjab, [1985) l SCC 345; Firm Ashok
Traders & Anr. v. Gurumukh Das Saluja, [2004) 3 SCC 155; National
Thermal Power Corporation v. Singer Company, [1992) 3 SCC 551; J.K.
Cotton Mills Spinning and Weaving Mills Co. Ltd. v. State of U.P., AIR
G (1961) SC 1170; Aswini Kumar v. Arabinda Bose, AIR (1952) SC 369;
Nathi Devi v. Radha Devi Gupta, [2005) 2 SCC 271 and Ghanshyamdas
v. Regional Assi~tant Commissioner, AIR (1964) SC 766, referred to.
G.P. Singh, Principles of Statutory Interpretation (9th Edition 2004);
Craies on Statute Law [S.G.G. Edgar eds., 7th Edn., 1971, 1999 Indian
H Reprint], referred to.
SHIN-ETSU CHEMICAL CO. LTD. v. AKSH OPT!FIBRE LTD.
703
SMG Swedish Machine Group v. Swedish Machine Group, XVIII Y.B. A
COMM. ARB 457 [1993); Fondation M v. BanqueX, [1996) BULL. ASA
527 (Swiss Fed. Trib); FOUCHARD, GAILLARD, GOLDMAN ON
INTERNATIONAL COMMERCIAL ARBITRATION [E. Gaillard and J.
Savage, eds. 1999); Pacific International Lines (Pte.) Ltd. v. Tsinlien
Metals and Minerals Co. Ltd [XVIII Y.B. COMM. ARB. 180 (1993)] Rio B
Algom Ltd. v. Sami Steel Co. Ltd., [XVIII Y.B. COMM. ARB. 166 (1993)];
Azov Shipping Co. v. Baltic Shipping Co., (1999) I Lloyd's Rep. 68 Q.B.,
referred to.
[Per D.M DHARMADHIKRRJ, J. concurring]
I. If on a prima facie examination of the documents and material c
on record, including the arbitration agreement on which request for
reference is made by one of the parties, the court decides to make a
reference, it may merely mention the submissions and contentions of!he
parties and summarily decide the objection if any raised on the alleged
nullity; voidness, inoperativeness or incapability of the arbitration D
agreement. In case, however, on aprimafacie 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 agr~ement is 'null and void' or 'inopE
erative' 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 a 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 F
court refuses to make a reference on the grounds available u11der section
45 of the Act, it is necessary for the judicial authority or the court which
is seized of the matter, to pass a reasoned order as the same is subject
to appeal to the appellate court under section 50(1)(a) of the Act and
further appeal to this Court under sub-section (2) of the said section. G
[750-A, B, C, D, EJ
[Per Y.K. SABHARWAL, J. dissenting]
HELD: I.I. fine words 'shall' and 'unless' appearing in section 45
of the Arbitration and Conciliation Act, 1996 mandates that before H
704
SUPREME COURT REPORTS (2005] SUPP. 2 S.C.R.
A 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. If the requirements of a statute which
prescribes the manner in which something is to be done are expressed
in negative language, i.e., if the statute enacts that it shall be done in
B such a manner and no other manner, then those requirements are in all
cases absolute and that neglect to attend to them will invalidate the
whole proceeding. [717-E, F, H, 718-A)
Konkan Railway Corpn. Ltd. & Ors. v. Mehul Construction Co., (2000)
7 SCC 201; Union of India & Anr. v. G.M Kokil & Ors., [1984] Supp. SCC
C 196; Khub Chand & Ors. v. State of Rajasthan & Ors., AIR (1967) SC
1074 and Brace Transport Corporation of Monrovia, Bermuda v. Orient
Middle East Lines Ltd., Saudi Arabia & Ors., [1995] Supp. 2 SCC 280,
referred to.
D
E
Craies on Statute Law; 7th Ed., referred to.
1.2. Under Section 8 of the Act, 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. Under SPction 45 of the Act, in
the case of international arbitration, ~owever, 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. s.uch arbitrations which may be
unnecessary if the arbitration agreement is to be invalidated in the
manner prescribed in Section 45 of the Act. Hence, adopting liberal
F approach and restricting the determination by judicial authority about
validity of agreement only from prima facie angle, would amount to
adding words to Section 45 of the Act without there being any ambiguity
or vagueness therein. (721-G, H, 722-A, BJ
G
Pacific International Lines (Pte) Ltd. v. Tsinlien Metal and Minerals
Co. Ltd., [Year Book of Commercial Arbitration, Vol. XVIII 1993, page
180}; Rio Algom Ltd. v. Sammi Steel Co. Ltd., (Year Book of Commercial
Arbitration, Vol. XVIII 1993, page 160); Comptek Telecomm v. IVD
Corp. (XXII Y. B. COMM. ARB. 905 (1997)) and SMG Swedish Machine
Group v. Swedish Machine Group (XVIII Y.B. COMM.ARB.457(1993)),
H referred to.
'·
SHIN-ETSI I CHEMICAL CO. LTD. v. AKSH OPTIFIBRE LTD.
705
Fouchard Gaillard Goldman on International Commercial Arbitra- A
lion-Emmanuel Gaillard and John Savage Ed. 1999, referred to.
t.3. When words in an earlier statute have received an authoritative
exposition by superior Court, use of the same words in a similar context
in a latter Act will give rise to a strong presumption that the Parliament B
intends that the same interpretation should also be followed for
construction of these words in the latter statute, 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 of the Act than its present form, [719-G-H; 720-F)
C
Renusagar Power Co. Ltd. v, General Electric Co. & Anr., (1984) 4
sec 679, relied on.
Bengal Immunity Co. ltd. v. State of Bihar, [1955) 2 SCR 603, D
referred to.
1.4. lfthe court is not asked to satisfy itself as to the validity of the
agreement at a pre-award stage under Section 45 of the Act, then by
virtue of Section 48, it is given another opportunity to do so, Apart from
this, under Section 48 of the Act, the court may refuse to enforce foreign
award on the ground other than the invalidity of the arbitration
agreement. It is well settled in law that an appeal is a creature of statute,
The legislature under Section 50 of the Act 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 of the Act. 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 of the Act to mean that the determination thereunder has
to be only prima facie. The Indian Legislature has consciously adopted
E
F
G
a conventional approach so a• to save the huge expense involved in
international commercial arbitration as compared to domestic arbitration. Hence, under Section 45 of the Act, the determination has to be H
706
SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R.
A
on merits, final and binding and not primafacie. [729-C, D, E, F, G)·
1.5. The application filed by the appellant before the trial court
would be treated as an application under Section 45 of the Act. The
parties would be given opportunity to file documents and affidavits by
B 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, it is directed for disposal within a period of two
c
months of the receipt of the copy of this order. (729-H; 730-A, Bl
1.6. 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 eventualiD ties, the judicial authority is required to decide the issue expeditiously
within a fixed time frame 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
E and years before even commencement of arbitration. Accordingly, it is
directed chat any application that may be filed under Section 45 of the Act
must be decided within three months ofits 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
F
G
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. [730-C, D, E, F)
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5048 of
2005.
From the Judgment and Order dated 12.1.2005 of the Rajasthan High
Court in S.B.C. W.P. No. 6371 of 2003.
R.F. Nariman, Dhruv Mehta, Mohit Chaudhary, Surendra Mann, and
H Harshvardhan Jha for Mis. K.L. Mehta & Co. for the Appellant.
SHIN-ETSU CHEMICAL CO.LTD. v. AKSH OPTIFIBRE LTD. [SABHARWAL, J.]
707
S. Ganesh and Man ish Singh vi for P .V. Y ogeswaran for the Respondent A
No. I.
Sunil Dogra and Ms. Rashi Malhotra for Mis. Suresh A. Shroff & Co.
for the Respondent. 2.
The Judgment/Order dated of the Court were delivered by
Y.K. SABHARWAL, J.: Leave granted.
B
The interpretation of Section 45 of the Arbitration and Conciliation
Act, 1996 (for short 'the Act') falls for determination in this matter. Section C
45 is as under:
"45. Power of judicial authority to refer parties to arbitration.-
Notwithstanding anything contained in Part I or in the Code of Civil
Procedure, I 908 (5 of I 908), a judicial authority, when seized of D
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.
E
F
G
Under Section 45 of the Act, the judicial authority has to mandatorily H
708
SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R.
A
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
B 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 comC mercial arbitration and enforcement of foreign arbitral awards. Before
enactment of the Act there were separate statutes governing the international
arbitration and domestic arbitration, naniely, the Arbitration (Protocol and
Convention) Act, 1937 (6 of 1937), The Arbitration Act, 1940 (I 0 of 1940)
and The Foreign Awards (Recognition and Enforcement) Act, 1961 (45 of
D
1961). These statutes have been repealed as provided in Section 85 of the
Act.
E
F
G
H
The 19% 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;
SHIN-ETSU CHEMICAL CO. LTD.\". AKSH OPTIFIBRE LTD. [SABHARWAL, J.J
709
AND WHEREAS the said Model Law and Rules make significant A
contribution to the establishment of a unified legal framework f~r
the fair and efficient settlement of disputes arising in international
commercial relations;
AND WHEREAS it is expedient to make law respecting arbitration B
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 lI dealing with Geneva Convention Awards. In this
matter we are concerned with Chapter l 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 a\vards are stipu~
lated 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 l, 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.-(!) An appeal shall lie from the order
refusing to-
(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 to appeal to the Supreme Court."
As can be seen fro1n above, an order refusing to refer the parties to
arbitration under Section 45 of the Act is appealable. There is, however, no
c
D
E
F
G
H
710
SUPREME COURT REPORTS [2005) SUPP. 2 S.C.R.
A
provision for filing an appeal if the judicial authority refers the parties to
arbitration.
B
c
D
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.- (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 subsection (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral
award made."
E
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 l\e referred to arbitration. The Court in
F
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.
G 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 '
H the object is to avoid delay and accelerate reference to arbitration leaving
SHIN~ETSU CHEMICAL CO. LTD.'"· AKSH OPTIF!BRE LTD. [SABHARWAL, J.]
711
the parties to raise objection, if any, to the validity of the arbitration A
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] B
7 sec 20 I 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
c
in several countries made it imperative to have the perception of D
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 Commission on International Trade Law way back in 1985
adopted the Uncitral Model Law of Intern~tional Commercial Arbitration and since then, number of countries have given recognj~
tion 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
ofForeign 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
E
F
G
of 1996 in Uncitral Model and, therefore, in interpreting any proH
A
B
c
D
E
F
G
H
712
SUPREME COURT REPORTS [2005] SUPP. 2 S.C.R.
visions 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 contract would be free to designate the law applicable
to the substance of the dispute. Under ~he 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
SHIN-ETSU CHEMICAL CO. LTD. v. AKSH OPTJFIBRE LTD. [SABHARWAL. J.J
713
Trade Law it is on account of the fact that the General Assembly A
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 B
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 C
Act clearly enunciates that the main objective of the legislation was
to minimise the supervisory role of Courts in the arbitral process ... "
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,
.. ",~hat 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.I) 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."
D
E
F
G
H
714
SUPREME COURT REPORTS [2005] SUPP. 2 S~C.R.
A
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 of the
document dated 16/18th November, 2000 and/or declaration that the long
term sale and purchase agreement dated I 6/18th November, 2000 including
B 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
c 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
D
deserves to be allowed. Consequently, the parties were referred to arbitra-
,,
tion. 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
E
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.
F
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
G
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
H applied by the trial court and, if so, in its true perspective. The High Court
SHIN-ETSU CHEMICAL CO.LTD. v. AKSH OPTIFIBRE LTD. [SABHARWAL, J.]
715
held that the trial court ought to have proceeded to examine the application A
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 B
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 C
into the question, prim a 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 D
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 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.