The Calcutta High Court vide its judgment dated February 19, 2020 in the case of The Indian Golf Union & Ors. vs. West Bengal Golf Society & Ors. F.M.A. No. 617 of 2019, has decided upon the applicability of the principle of severability when an old contract comprising the arbitration agreement is substituted by a new contract.
Facts of the case:
The appellant no. 1, i.e. the Indian Golf Union, is a society registered under the West Bengal Societies Registration Act, 1961 and is a federation of all the golf associations in the different states in India. The respondent no. 1, i.e. the West Bengal Golf Society, is also a society registered under the West Bengal Societies Registration Act, 1961 and is a union or federation of certain golf clubs in the State of West Bengal. The respondent no. 1 was a member association of the appellant no. 1.
The appellant no. 1 issued a notice dated May 4, 2018 for an Extra-ordinary General Meeting (“EGM”) of its members, which included the respondent No. 1, to be held on June 6, 2018. The main purpose of this meeting was to amend the Rules and Regulations, 2014 (“2014 Rules”) of the appellant No. 1. The significant changes brought about in this E.G.M. to the 2014 Rules was the mode of settlement of disputes and the criteria for affiliation of a State Golf Association with the appellant No. 1. The existing dispute resolution mechanism in the 2014 Rules was replaced by the dispute resolution mechanism under Rules and Regulations, 2018 (“2018 Rules”).
The dispute resolution clause enumerated under the 2014 Rules and the 2018 Rules is mentioned hereunder:-
Rule 70 of the 2014 Rules |
Rule 66 of the 2018 Rules |
“All disputes arising within the Union shall be referred to the All India Council for Sports for settlement under the Arbitration and Conciliation Act, 1996. The All India Council for Sports shall appoint a panel of Arbitrators out of whom parties to the disputes in the Union will select one arbitrator each and the third arbitrator out of the said panel will be mutually agreed upon by the two arbitrators. The arbitration proceedings should be completed within the period specified under the Arbitration Act or within the time period specified under the Arbitration Act or within the time extended by the arbitrators with the consent of the parties.” |
“All unresolved disputes shall be settled by the Arbitration Commission of Indian Olympic Association and all affiliated members of the IGU shall voluntarily surrender their right of seeking redress in any court of law.” |
The Issue:
The issue which arose before the court for consideration was whether the arbitration clause contained under Rule 70 of the 2014 Rules, would be applicable in order to determine the validity of the 2018 Rules? or, would it be the arbitration clause enumerated under Rule 66 of the 2018 Rules, that would be applicable to determine the validity of the 2018 Rules?
Findings of the court:
The court while reiterating the principle of severability of an arbitration agreement enumerated under Section 16(1) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act, 1996”) observed that an arbitration agreement is an agreement that stands apart from and independent of the main contract and does not automatically become null and void if it is found that the underlying contract was in itself null and void. The rationale behind the same being that the severability doctrine is to safeguard the arbitral process and to entrench a pro-arbitration regime by ensuring that challenges to the validity of the underlying contract do not defeat the very mechanism of arbitration that the parties have selected to assess such and other challenges. However, the court also noted that:
“36…one cannot say for certain that the same follows when the underlying contract is substituted by a new contract…”
The court further placed reliance on the judgment rendered by the Supreme Court in the case of Union of India vs. Kishorilal Gupta & Brothers AIR 1959 SC 1362 and opined that:
“37….the arbitration agreement cannot de hors the contract to which it is attached. Being parasitic, it therefore cannot survive when the contract to which it is attached has been substituted by a new contract. This by no means offends the principle of severability, it merely operates outside it by pointing out that severability is confined to the relationship an arbitral agreement has with the contract with which it is associated, and that it cannot be severed and then attached to something totally different, such as a new and different contract.
38. It is in consonance with this aforesaid understanding of the parasitic nature of the arbitration agreement that Kishorilal Gupta (supra) holds that when the dispute is whether the superseding contract is void ab initio, the arbitration agreement in that contract cannot encompass such a dispute because then the operability of the agreement is itself brought into question due to the operability of the main contract being brought into question…..” (emphasis supplied)
Thus, as per the court, since the arbitration agreement is parasitic to the new contract, the arbitration agreement cannot be severed from the new contract and then be made to cover the dispute of whether the old contract has been replaced.
The court further, went onto note that:-
“42…the principle severability of an arbitration agreement applies when the validity of the contract to which it is attached is under question. But when the contract whose validity is under question has been superseded by a new contract then the arbitration agreement in the old contract cannot be severed and then attached to a new contract. However, if the validity of the new superseding contract is itself in question then severability does not operate to allow the arbitration agreement in the new contract to govern the dispute of whether the new contract is void ab initio. Instead, the arbitration agreement in the old contract is the one that governs that dispute of whether the new contract is void ab initio.” (emphasis supplied)
Thus, in the light of the aforesaid, the court held that since the question of the validity of the 2018 Rules depends upon whether the 2014 Rules were followed in bringing about amendments to the 2014 Rules, it would be the arbitration clause in the 2014 Rules which would be applicable to the dispute between the parties.
This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate).
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