Law of arbitration – company matters

A brief about Arbitration Mechanism: In order to reduce the delay in courts in the process of traditional adjudication mechanism, the Alternative Disposal Mechanism (ADR) was mooted. The dispute resolution through Conciliation, Arbitration and Mediation etc., is regarded as alternative mechanism to resolve the disputes between or among the parties in a defined legal relationship. The dispute resolution through Arbitration has occupied great significance in India in the recent past though it was successfully practiced in the developed nations like United States etc.  The Arbitration and Conciliation Act, 1996 replacing the earlier act of 1940, governs the issue of dispute resolution through Arbitration. Any dispute arising out of a defined legal relationship can be resolved through Arbitration.  In ArbitrationMechanism, the parties themselves will choose the Arbitrator; agree to the procedure for appointment of Arbitrator, the procedure to be followed by Arbitration, the place of Arbitration proceedings etc. It is all meant to provide the parties to resolve their dispute effectively and speedily without burdening the traditional courts.

Now-a-day, in all transactions and the pursuant documents, the Arbitration clause is incorporated mechanically. Admittedly, the Arbitration mechanism is useful for resolving the disputes and it is costly. In commercial transactions, where there is a genuine dispute and where the stakes are very high, the Arbitrationmechanism is useful. But, the common man may not benefit much from the Arbitration mechanism as it is costly.

Section 7 of Arbitration and Conciliation Act, 1996 deal with the “Arbitration Agreement” and the same is extracted below:

“7.Arbitration Agreement. – (1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2)  An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3)  An Arbitration agreement shall be in writing.

(4)  An arbitration agreement is in writing if it is contained in –

(a)  a document signed by the parties;

(b)  an exchange of letters, telex, telegrams, or other means of telecommunications which provide a record of the agreement; or

(c)  an exchange of statements of a claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”

Whether an Arbitration clause ousts the jurisdiction of Company Law Board/Tribunal and the Company Court?

When there was a dispute between the company and other, between the company and its shareholder and between two companies, then,the issue will be complicated and stakes will be high very often. The parties in a company dispute may require immediate orders having the binding nature. Generally speaking, there is no bar on referring a company dispute to an Arbitrator, but, the question is as to whether the Arbitration clause will oust the jurisdiction of Company Law Board/National Company Law Tribunal or the Company Court. This issue is to be carefully considered as otherwise, the dispute resolution process may get unnecessarily delayed on the basic question of legal sanctity of an Arbitration Clause in Company documents. This is very very significant issue. Company Law is very very complicated by its very nature and the question as to whether an Arbitration Clause will oust the jurisdiction of Company Law Board or the Company Court, is really interesting to consider.

Normally, unless there is  a specific bar on the party concerned in providing an arbitration clause, the parties concerned may have an arbitration clause with regard to the contractual relation between or among them or otherwise. But, the arbitration clause may not come in the way of Company Law Board/Tribunal or Company Court in passing various orders exercising powers under the Companies Act, 1956. Because, the process of winding-up a company cannot be handled effectively by anArbitrator. Again, even by agreement, the procedure prescribed for sanctioning a scheme of amalgamation or compromise can not be ignored and it can only be done by the Company Court as provided under the Act. Thus, the question very often comes is as to whether the Arbitration clause in a document or a company document will oust the jurisdiction of Company Law Board or the Company Court. Referring the issue of providing a arbitration clause between the company and members whatsoever and connecting the  same to the right of the member/s to file an application under section 397/398 of the Act, the High Court of Delhi, in In the matter of Surendara Kumar Dhawan and another Vs. R.Vir and others, (1977) 47 Com Cases 277, was pleased to observe that “the shareholders of a  company have a right to file a petition under section 397 or section 398 of the Companies Act, 1956, for relief against mismanagement or oppression, if the provisions of section 399 are satisfied. Their right is a statutory right which, by section 9, can not be ousted by a provision in the articles of association of the company. Any article providing that a difference between the company and its directors or between the directors themselves or between any members of the company or between the company and any person shall be referred to arbitration can not debar the jurisdiction of the court in the matter of a petition under section 397 or 398. The court will not stay a petition under section 397 and 398 on an application under section 397 or 398 on an application under section 34 of the Arbitration Act, 1940, based on thearbitration clause”. On the same lines, the High Court of Delhi, in O.P.Gupta Vs. Shiv General Fianance (P.) Ltd. and others, (1977) 47 Com Cases 279, was pleased to observe that “merely because there is an article in the articles of association of the company to the effect that any dispute between the company on the one hand and its members on the other will be referred to arbitration, the court will not stay a petition under section 397 and 398 of the Companies Act, 1956, for relief against mismanagement or oppression in the affairs of a company. Such an article can not be called into play for the purpose of staying proceedings under section 397 or section 398. The provisions of sections 397 and 398 and of section 434 give exclusive jurisdiction to the court and the matters dealt with thereby can not be referred to arbitration. Noarbitrator can possibly give relief to the petitioner under sections 397 and 398 or pass any order under section 402 or section 403”. Again, on the same lines, it was reiterated by the Bombay High Court, in Manavendra Ckhitnis and another Vs. Leela Chitnis Studios P.Ltd. and others, (1985) 58 Com Cases 113, wherein the court was pleased to observe that “merely because there is an arbitration clause or an arbitration proceeding, or for that matter an award, the court’s jurisdiction under ss.397 and 398 of the Companies Act, 1956, can not stand fettered. On the other hand, the matter which can form the subject-matter of a petition under ss.397 and 398 cannot be the subject-matter of arbitration, for anarbitrator can have no powers such as are conferred on the court by sections such as s.402.”

Complications – conclusion:

The reason assigned by the courts as can perceived for saying that the Arbitration Clause will not oust the jurisdiction of Company Court is the requirement of “expertise”. This is very interesting issue to dealwith. Even in other matters, where there is a special set-up or law, can that subject matter be referred to Arbitration? For example, the Rent Control Law provides for depositing the rent in court, how can that issue be handled by anArbitrator if the lease agreement between the landlord and the tenant contains an Arbitration Clause and the dispute is referred to arbitrator .  These are all the problems we very often encounter when it comes to invoking the law of Arbitration for resolving the disputes. The issue is to be carefully looked into and we need clarity in this regard.