Recent High Court decision confirms effect of clause 8(1), of the First Schedule of the Arbitration Act 1996: arbitration agreements will remain operative and binding following cancellation of main contract unless proved otherwise.
Background
Savvy Vineyards 4334 Limited and Savvy Vineyards 3552 Limited (together, the Plaintiffs) had entered into contracts with Weta Estate Limited and Tirosh Estate Limited (together, the Defendants).
Litigation between the Plaintiffs and Defendants over the contracts, specifically vineyard management agreements (VMAs) and grape supply agreements (GSAs), has been ongoing for some eight years. Earlier litigation determined that the Defendants had invalidly terminated the VMAs and GSAs and their notices of termination were of no effect. The Defendants were required to continue to perform their obligations pursuant to those agreements.
The present proceeding relates to the Plaintiffs’ claims for damages under the GSAs for various harvest years, and claims for management fees and operations charges under the VMAs for breach of agreement and in quantum meruit.
Decision
The Defendants sought an order staying the Plaintiffs’ causes of action relating to the VMAs and referring those claims to arbitration. In particular, the Defendants relied on clause 8(1) of Schedule 1 of the Arbitration Act 1996 (Act) and Article 16(1) of Schedule 1(1) of the Act, which provide as follows:
8
(1)
16
(1)
(emphasis added)
The Defendants argued that clause 8(1) made a stay of Court proceedings and referral to arbitration mandatory and that pursuant to Article 16(1) of Schedule 1(1) of the Act, the arbitration agreement survived the termination of the VMAs. The Plaintiffs agreed that in light of Article 16(1), the arbitration clause in the contract was to be considered as a separate contract which remained operative. However, the Plaintiffs argued that while the arbitration agreement might have survived, it did not encompass disputes being dealt with after the principal contract had come to an end and was therefore inoperative.
The Plaintiff’s relied on clause 25 of the VMAs which related to disputes and dispute resolution. Clause 25 included provision for cancellation specifically under clause 25.5. The Plaintiffs contended that their cancellation letter complied with clause 25.5 and therefore effected valid termination of the VMAs. However, the Defendants argued instead that the prerequisites of clause 25.5 had not occurred, and that the Plaintiffs were mistakenly relying on clause 25.5 when they were in fact relying on an alleged substantial breach under the Contractual Remedies Act 1979, meaning the VMAs remained operative.
In his decision to grant the stay, Associate Judge Osborne held that unless the Plaintiffs could establish the arbitration had in fact become inoperative, Article 8(1) of the Act meant that the Defendants were entitled to a stay of the Plaintiffs’ claims and to have the disputes referred to arbitration. Pursuant to Article 16(1), Schedule 1 of the Act, the arbitral tribunal has the power to rule on its own jurisdiction, including as to the existence or validity of an arbitration agreement. The Plaintiffs failed to shift the burden of the proof. Associate Judge Osborne held that the Defendants had established prima facie that the arbitration agreement remained operative in this case as the evidence indicates that the event which would have rendered the arbitration agreement inoperative…cancellation…did not occur.
In reaching his decision to grant the stay to allow the arbitral tribunal to determine whether it has jurisdiction in relation to the dispute, Associate Judge Osborne relied on the approach applied in three recent cases, as summarised by Simon France J in Tamihere v Media Works Radio Ltd:
The authorities were recently reviewed in Ursem v Chung. It seems there is support for three approaches, being immediate referral, a prima facie assessment of whether the arbitration agreement is valid or applies, or a full consideration of the issue. Associate Judge Abbott adopted the prima facie test, an approach I am content to follow for the reasons he gives. It seems to best reflect the right of the arbitration tribunal to determine its own jurisdiction.
(footnotes omitted).
Associate Judge Osborne also ordered security for costs of $12,800 (representing 80 percent of a 2B award) after balancing the respective interests of the parties, on the grounds that there were no considerations strongly weighing against requiring the Plaintiffs to provide security and there was a high degree of likelihood that the Plaintiffs will be without funds at the end of the litigation if it proves to be unsuccessful. He also dismissed the Defendants’ application to strike out a number of the Plaintiffs’ claims.
Comment
Associate Judge Osborne’s decision confirms the operation of clause 8(1), Schedule 1 of the Act, namely that arbitration agreements are independent of the other terms of a contract and will survive termination of the primary contract unless it can be established that the arbitration agreement has been rendered inoperative, with the upshot being that parties who include provision for arbitration in their agreements will likely be bound by such a clause following termination or cancellation of the main agreement.
ReSolution | Nov 2017 28
Case in Brief
Savvy Vineyards 4334 Limited v Weta Estate Limited
-by Sarah Redding
Even on facts, the Supreme Court has ignored the factual findings of the Delhi High Court that though the CEO of Aravali Power was not the Engineer-in-Charge or the day-to-day in-charge of the work which was to be performed by Era Infra, but those who were responsible for such day-to-day work ultimately reported to the CEO. Therefore, the CEO had a controlling influence in Aravali Power against whom Era Infra sought to assert claims. In view of the above, circumstances existed for Era Infra to have justifiable doubts as to the independence and impartiality of the tribunal or that the arbitration procedure would be fair and unbiased.
Independence and impartiality are the touchstone of any adjudication process and more so in an arbitration process, where it is an alternative dispute resolution mechanism created by agreement between the parties. The endeavour of the legislature and the judiciary in the recent past has been to promote faster dispute redressal through mechanisms like – arbitration as compared to tardy and cumbersome Court process. Therefore, the role of fairness, independence and impartiality of the tribunals are indispensable. In view of limited judicial interference in the adjudication and post-adjudication stage, it is quintessential that there is a fair and unbiased adjudication. Apprehension of bias or justifiable doubts to the independence and impartiality of arbitral tribunals are to be resolved at the very outset rather than leaving it to a challenge at a later stage so as to avoid multiplicity of judicial proceedings, which has been one of the primary objectives of alternative dispute resolution. The whole scheme behind ensuring independence and impartiality of an arbitrator is to provide the necessary confidence and relief to contesting parties involved in the process of dispute resolution by resorting to the machinery of alternative disputes redressal. This becomes more important when a private party is contracting with a dominant government undertaking or a public sector undertaking (PSU), where the private party has minimal negotiating powers. In view of settled legal position, such government undertakings/ PSUs may strive to defend claims of the private contracting parties on merits rather than resorting to technical pleas.
Though the arbitration proceedings which have commenced post 2015 Amendment will continue to reap the benefits of the order passed in Voestalpine (Supra), the arbitration proceedings which commenced pre-2015 Amendment are bound to receive a differential treatment in this regard. The above judgment also dilutes the directives, with respect to procedure of appointment of arbitrators especially in cases of various Government agencies/ PSUs, as laid in another recent judgment of the Hon’ble Supreme Court dated 03 July 2017 passed in TRF Limited v. Energo Engineering Projects Limited[5]. A party, left with no choice or freedom of selection of an independent and impartial arbitral tribunal under the 1996 Act, will be left at the mercy of such an arbitral tribunal without any effective recourse to seek a fair, unbiased and reasonable adjudication of its disputes.
The content of this document does not necessarily reflect the views / position of Khaitan & Co but remain solely those of the author(s).
End Notes
1- Civil Appeal Nos. 12627 - 12628 of 2017
2- (2009) 8 SCC 520
3- (2008) 10 SCC 240
4- (2017) 4 SCC 665
5- (2017) 8 SCC 377
Employee of a party allowed as ‘arbitrator’ in proceedings... - CONT.