Court is empowered to examine the existence as well as validity of an arbitration agreement: High Court of Delhi

The Court has to consider the existence as well as the validity of the arbitration agreement in the present proceedings under Section 11 of the Arbitration and Conciliation Act. An agreement enforceable by law is a contract defined in Section 2 (h) of the Indian Contract Act whereas an agreement not enforceable in law is void as per Section 2 (g) of the Indian Contract Act. This was held in BANGA ELECTRONICS PVT. LTD. v. JAGMOHAN SINGH[ARB.P.1/2019] in the High Court of Delhi by a single bench consisting of JUSTICE J.R. MIDHA.

Facts are that the petitioner had entered a purchase agreement for an undivided share in the property from the respondent. Against the same property which is the subject matter of purchase, a stay order had been passed by the family court in a separate matrimonial case between the respondent and his wife. The petitioner is seeking the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act.

The counsel for the petitioner submitted that the agreement is valid and enforceable. The arbitration agreement between the parties is contained in clause 14 of the agreement. The petitioner was not aware of the stay order at the time of execution of the agreement dated the same was vacated when the respondent’s wife withdrew the petition with liberty to file a fresh one and there is no impediment to the enforcement of the agreement and petitioner cannot be denied specific performance.

The counsel for the respondent submitted that the alleged agreement is in contravention of the stay order. The respondent vehemently disputes that the stay order has been vacated and it can be confirmed that the stay order is still continuing. The agreement has not been signed by the petitioner and was not a concluded contract.

The court discussed the scope of Section 11 of the Arbitration and Conciliation Act, which has been explained by the Supreme Court in the case of  Vidya Drolia v. Durga Trading Corporation, the following observations were made, “Exercise of power of prima facie judicial review of existence as including validity is justified as a court is the first forum that examines and decides the request for the referral. Absolute ―hands off‖ approach would be counterproductive and harm arbitration, as an alternative dispute resolution mechanism. Limited, yet effective intervention is acceptable as it does not obstruct but effectuates arbitration. 147.7. Exercise of the limited prima facie review does not in any way interfere with the principle of competence– competence and separation as to obstruct arbitration proceedings but ensures that vexatious and frivolous matters get over at the initial stage.”

The court also made reference to the case of  Subrata Roy Sahara v. Union of India, from which the court had drawn the following observations, “Exercise of prima facie power of judicial review as to the validity of the arbitration agreement would save costs and check harassment of objecting parties when there is clearly no justification and a good reason not to accept plea of non-arbitrability.”

Considering the facts of the case and keeping in mind the provisions of law applicable the Court held that, it has to consider the existence as well as the validity of the arbitration agreement in the proceeding under Section 11 of the Arbitration and Conciliation Act. As the agreement dated 13th August 2018 was not enforceable and void in terms of Section 2(g) of the Contract Act. An arbitrator cannot be appointed to enforce a void agreement. Thus the court dismissed the petition.

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