Section 45 of Arbitration and Conciliation Act 1996 does not include the enquiry as to the legality and validity of the substantive contract

Supreme Court: A pivotal question that came before the Court for consideration was that whether two Indian companies, Sasan Power Ltd. and NACC India Ltd., each of whom have been incorporated and registered in India could in law be said to have “made an agreement referred to in Section 44” of the the Arbitration and Conciliation Act 1996, so as to confer jurisdiction and authority on the competent Court (District Court of Singrauli, Madhya Pradesh) to refer the parties to ICC arbitration in London under Section 45 of 1996 Act. Considering the facts of the case, it was held that NAC is an American company and being a party to Agreement-I as also to Agreement-II along with two Indian companies (appellant and the respondent), a fortiori, Agreement-I and Agreement-II become an “international commercial arbitration” within the meaning of Section 2(f) of the Act which, in clear terms, provides that if one of the parties to the agreement is a foreign company then such agreement would be regarded as “international commercial arbitration”.

As regards the facts of the case, Agreement-I was executed between the appellant and the American Company (NAC) whereas the Agreement-II was executed between the appellant, respondent (NACC-India) and American Company (NAC). Hence, it was held that Agreement-I is a bi-party agreement between an Indian Company (appellant) and American Company (NAC) whereas Agreement-II is a tri-partite agreement between the three companies viz., two Indian companies (appellant and the respondent) and third-an American company(NAC).

Further, interpreting Section 45 of the 1996 Act, the bench of J. Chelameswar and Abhay Manohar Sapre, JJ held that the scope of enquiry under the Section 45 is confined only to the question whether the arbitration agreement is “null and void, inoperative or incapable of being performed” but not the legality and validity of the substantive contract. For the purpose of deciding whether the suit is maintainable or impliedly barred by Section 45 of the 1996 Act, the Court is required to examine only the validity of the arbitration agreement within the parameters set out in Section 45, but not the substantive contract of which the arbitration agreement is a part. Mere reading of Section 45 would go to show that the use of the words “shall” and “refer the parties to arbitration” in the section makes it legally obligatory on the Court to refer the parties to the arbitration once it finds that the agreement in question is neither null and void nor inoperative and nor incapable of being performed. [Sasan Power Limited v. North American Coal Corporation India Private Limited, 2016 SCC OnLine SC 855, decided on 24.08.2016]

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