1963 (4) TMI 105 - SC - Indian Laws

Summary

Issues Involved:
1. Validity of an arbitration agreement between an Indian company and a foreign entity.
2. Applicability of Section 389 of the Indian Companies Act, 1956.
3. Applicability of the Arbitration (Protocol and Convention) Act, 1937.
4. Interpretation of Section 47 of the Arbitration Act, 1940.

Detailed Analysis:

1. Validity of an Arbitration Agreement Between an Indian Company and a Foreign Entity:
The primary issue was whether an agreement to refer future disputes to arbitration according to the rules of the International Chamber of Commerce (ICC) between an Indian company and a foreign entity is binding. The court examined the arbitration clause in the collaboration agreement and the relevant rules of the ICC. The High Court had previously held that the arbitration clause was invalid because it required arbitration outside the provisions of the Arbitration Act, 1940, which was contrary to Section 389 of the Indian Companies Act, 1956.

2. Applicability of Section 389 of the Indian Companies Act, 1956:
Section 389(1) of the Indian Companies Act, 1956, states that a company may refer disputes to arbitration in accordance with the Arbitration Act, 1940. The High Court interpreted this to mean that any arbitration agreement obliging the company to submit to arbitration outside the Arbitration Act, 1940, was invalid. The Supreme Court, however, clarified that Section 389 is not merely an enabling provision but also regulates the company's power to enter into arbitration agreements, making it obligatory to follow the Arbitration Act, 1940.

3. Applicability of the Arbitration (Protocol and Convention) Act, 1937:
The court noted that the Arbitration (Protocol and Convention) Act, 1937, applies to international arbitration agreements and awards. Section 3 of this Act mandates that if a party to an arbitration agreement commences legal proceedings, the court must stay the proceedings unless the arbitration agreement is found to be inoperative or invalid. The Supreme Court emphasized that this Act applies to all arbitration agreements, including those involving companies, making the ICC arbitration agreement valid under this Act.

4. Interpretation of Section 47 of the Arbitration Act, 1940:
Section 47 of the Arbitration Act, 1940, states that the provisions of the Act apply to all arbitrations and proceedings thereunder, subject to any other law in force. The Supreme Court held that this section makes the provisions of the Arbitration (Protocol and Convention) Act, 1937, applicable to consensual arbitrations under the Arbitration Act, 1940, even if the arbitration scheme is inconsistent with Sections 3 to 38 of the Arbitration Act, 1940. This interpretation supports the validity of the ICC arbitration agreement under the Arbitration (Protocol and Convention) Act, 1937.

Conclusion:
The Supreme Court concluded that the arbitration agreement between the Indian company and the foreign entity was valid and enforceable under the Arbitration (Protocol and Convention) Act, 1937. The High Court's decision to refuse the stay of the suit was based on an incorrect interpretation of Section 389 of the Indian Companies Act, 1956, and the provisions of the Arbitration Act, 1940. The case was remanded to the Court of First Instance to be heard and disposed of according to law, with costs to abide the result of the proceedings in the trial court.