HC Set Aside Award Passed without Jurisdiction by Arbitrator

The Madras High Court in Madras Hospitality Services v. Tangy Enterprises Pvt Ltd. and others in O.A. No. 436 of 2012 and A. No. 2319 of 2012 in C.S. No. 335 of 2012 set aside the award that was passed by the Arbitrator (who was also one of the respondents) in an arbitration proceeding that was from the beginning nullity and void and also directed the Arbitrator (respondent 5) to pay rupees 2 lakhs for passing the award in spite of pending application before the court seeking restraint to the passing of the award in the said arbitration proceedings. The Madras High Court also took note of the fact that the arbitrators were running institution that had been conducting arbitration proceedings unilaterally without the consent of parties.

The facts that led to the dispute were that the applicant and the respondents had entered into collaborative venture of running a pub and had supported this arrangement with Memorandum of Understanding or MOU providing details of functions of both the parties. The venture was a success but after some days from the starting of the venture, the respondents made some claims towards the applicants which the applicant denied and to a dispute between the two with respect to the same. This led to the respondent sending notice to the applicant for initiating arbitration proceedings to settle the dispute in accordance to clause 8.2 of MOU. The applicant alleged that there was no arbitration agreement and hence denied submission to the arbitration proceedings initiated by respondents. The applicant sought copies of MOU from the respondent which the respondent did not supply and deemed the appearance of applicant with the counsel for the inspection of MOU as initiation of arbitration. The applicant thereafter filed application to the Madras High court (which pronounced the judgment) seeking interim relief of injunction to the conduct of the said arbitration proceedings and passing of the award in these proceedings. The respondent 5 or the Arbitrator in spite the presence of pending application of injunction passed an award in favour of the other respondents.

The Madras High Court relying on the pleadings and the Memorandum of Understanding observed that the dispute resolution stipulated in the Memorandum of understanding entered between the Applicant and Respondent 1 (Tangy Enterprises) cannot be said to be arbitration agreement by any stretch of imagination. The court observed that the clause 8.2 that was relied upon by the respondents as provided in Memorandum of understanding stipulated:

8.2. Both parties agree to use best efforts to amicable resolve any disputes or differences between them before resorting to litigation before the Courts at Chennai.

The Madras High court observed that the clause has clearly stipulated that Litigation before the court at Chennai shall be held in case the dispute between the parties is not settled amicably. The Court observed that the clause did not stipulated arbitration as a way for settlement of the dispute in case amicable settlement is not reached.

The Court also relying upon various Supreme Court decisions observed that it well settled law that arbitration agreement is the very foundation on which the jurisdiction of arbitration rests and said further that in case where arbitration agreement is in not existence at the time when arbitration enters reference than the proceedings are totally without jurisdiction and this defect cannot be cured by the appearance of parties in these said proceedings even in case this appearance was without protest as it is settled position of law that consent does not and cannot confer jurisdiction. The court also said that participation by a party in arbitration proceedings cannot stop the parties from challenging the jurisdiction.

The court also observed that it is only in the case of valid arbitration agreement that the Court does not interfere with arbitration proceedings or award passed in exercise of civil jurisdiction but in case the proceedings are held to be void and a nullity than the jurisdiction of the Court is not ousted and the Court can set aside null and void award that was passed without jurisdiction in exercise of its civil jurisdiction.

The Court therefore set aside the award and held that the arbitrator had attempted to overreach the jurisdiction of the court by passing the award before the final hearing of the application of the applicant. The court also held that the arbitrator did not have the jurisdiction to enter reference or pass award and hence held that the proceedings and passing of the award by the Arbitrator were patently void having no force of law and a nullity and allowed the O.A No. 436 of 2012 with exemplary cost directing the respondent 5 or arbitrator to deposit rupees 2 lakhs to Tamil Nadu Legal Service Authority, Madras High Court.

Law Senate Comment

The Madras High Court reaffirmed the well settled principle of law that arbitration agreement is the basis for the initiation of arbitration proceedings and unless clear and unambiguous intension appears, arbitration proceedings cannot be initiated and award passed thereunder is void and has no force of law.

The court also held in case the arbitration proceedings are declared null and void than it is open for the court to set aside award passed in these proceedings in its exercise of power under civil jurisdiction.