IN THE HIGH COURT OF JUDICATURE AT MADRAS (Ordinary Original Civil Jurisdiction) Thursday, the 24th day of July 2008 THE HON'BLE MR. JUSTICE V. RAMASUBRAMANIAN A.NO.8078 OF 2007 IN C.S.NO.1072 OF 2007 Sundaram Brake Linings Ltd., 180, Anna Salai, Chennai 600 006 ..Plaintiff VS 1. Kotak Mahindra Bank Ltd., No.39, Montieth Road, (First Floor) CEEBROS Centre, Chennai 600 008. 2. M.S. Subramanian Block No.85, New Door No.AE 159 4th Avenue, Shanthi Colony, Anna Nagar West, Chennai 600 040. 3. G. Manikandan No.116, 5th Cross Street, Balaji Nagar, Kolathur, Chennai 600 099. ..Defendants A.No.8078 of 2007:- KOTAK MAHINDRA BANK LTD., a banking company, incorporated under the laws of India, having office at 39, Montieth Road, 1st Floor, Ceebros Centre, Chennai- 600 008, with its registered office at 36-38A, Nariman Bhavan, 227, Nariman Point, Mumbai 400 021. ..Applicant VS 1. SUNDDRAM BRAKE LININGS LTD., a company incorporated in India under the Companies Act, 1956, having its registered office at No.180, Anna Salai, Chennai-600 006, and having an office at Padi, Chennai-600 050. 2. M.S. Subramanian Block No.85, New Door No.AE 159 4th Avenue, Shanti Colony, Anna Nagar, West, Chennai-600 040. 3. G. Manikandan No.116, 5th Cross Street, Balaji Nagar, Kolathur, Chennai-600 099. ..Respondents Application praying that this Hon'ble Court be pleased to pass an order directing the Suit to be referred to arbitration in terms of the Arbitration Agreement dated 5.1.2007 between the Plaintiff & First Defendant be not made. This application having been heard on 14.02.2008 in the presence of Mr. A. L. Somayaji, Senior Counsel for M/s. Iyer & Thomas, advocates for the applicant herein, and Mr. Arvind P. Datar, Senior Counsel for M/s. P.R.Raman, C.Seethapathy & A. Umasankar, advocates for the 1st respondent herein, and upon reading the Judges Summons, and the affidavit of R.Prabhakar, and the counter affidavit of K.Mahesh, and the rejoinder of R.Prabhakar, filed herein and having stood over for consideration till this date and coming on this day before this court for orders in the presence of the said advocates for the parties hereto, and the respondents 2 and 3 herein, not appearing in person or by advocate, and this court observing that in an application under section 8 (as distinguished from an application under - section 45), the judicial Authority cannot go into the question as to whether the agreement is null and void, inoperative or incapable of being performed, the plaintiff should only raise these issues before the Arbitrator Justice B. N. Srikrishna (Retd.) who has already entered reference, This is an application taken out by the 1st defendant in the suit, C.S.No.1072 of 2007, under Section 8 of the Arbitration and Conciliation Act, 1996, to refer the parties to arbitration in terms of the agreement dated 05.01.2007. 2.Heard Mr.A.L.Somayaji, learned Senior Counsel for the applicant/1st defendant and Mr. Arvind P. Datar, learned Senior Counsel for the 1st respondent/plaintiff. 3. The brief facts, sans unnecessary details, essential for the disposal of this application, are as follows:- (a) On 05.01.2007, the applicant/1st defendant and the 1st respondent/plaintiff entered into an Agreement known as I.S.D.A. Master Agreement. The said agreement is in a standard format, as prescribed by International Swap Dealers Association. The Master Agreement has a Schedule attached to it, comprising of 5 parts. It is only in the Schedule that the actual transaction between the parties is reduced into specifics. (b) The aforesaid I.S.D.A. Master Agreement was signed on behalf of the applicant by its authorised signatory and on behalf of the 1st respondent (plaintiff) by its Financial Controller and Secretary, who is impleaded as the 2nd defendant in the suit. (c) The I.S.D.A. Master Agreement is actually a transaction in derivatives. It is a "forward contract" entered into by the plaintiff with the first defendant (who is an authorised dealer in foreign exchange) to hedge an exposure to exchange risk, on account of heavy fluctuation in the rate of exchange of foreign currencies. (d) Though such transactions border on speculations to some extent, they have been recognised statutorily by the Foreign Exchange Management (Foreign exchange derivatives contracts) Regulations, 2000 issued under the Foreign Exchange Management Act, 1999 and by the Reserve Bank of India (Amendment) Act, 2006. (e) Therefore, in pursuance of a Resolution passed by the Board of Directors of the plaintiff Company on 21.07.2005 (Resolution No.2065), authorising the 2nd defendant (Financial Controller and Secretary of the plaintiff) to enter into Spot and Forward Foreign Exchange Contracts, Options and any other Derivative Instruments, the 2nd and 3rd defendants are said to have finalised 52 Derivative Cross Currency Deals. Out of those 52 Deals, only 9 Deals are now in force and the rest of them are already closed. Out of those 9 Deals, 2 were with the applicant (Bank) herein and the other Deals were with other Banks. Out of the 2 Deals which the defendants 2 and 3 entered into on behalf of the plaintiff with the applicant/1st defendant, one relates to the I.S.D.A. Master Agreement dated 05.01.2007, which is the subject matter of the present dispute. (f) It is the case of the plaintiff that the Cross Currency Deals were finalised and the agreements were entered into by the defendants 2 and 3 on behalf of the plaintiff, without the specific authorisation or approval of the Board of Directors and that the Chairman of the plaintiff Company came to know about such deals only on 06.11.2007 from one of the independent Directors of the Company. Thereafter, the plaintiff has come to Court with the present suit seeking a declaration that the I.S.D.A. Master Agreement dated 05.01.2007 is void ab initio, illegal, vitiated by fraud, opposed to Public Policy and not binding on the plaintiff Company and for a permanent injunction restraining the 1st defendant from acting under the terms of the Master Agreement. 4. Essentially, the respondent/plaintiff assails the ISDA Master agreement as null and void and unenforceable, on the ground- (i) that there was actually no underlying exposure, on account of which the agreement (to hedge) was just speculative in nature making it a pure and simple wagering contract which is declared as void by section 30 of the Indian Contract Act; (ii) that the transaction is opposed to public policy and violative of the law declared by RBI and hence void by virtue of section 23 of the Contract Act; and (iii) that the defendants 2 and 3 acted in violation of the authority conferred upon them by the Board of Directors of the company, exposing the company to great financial risk and hence the company was not bound by their act. 5. The plaint was presented on 30.11.2007 and it was admitted on 03.12.2007. Along with the suit, the plaintiff filed an application for injunction in O.A.No.1314 of 2007. The 1st defendant Bank was on caveat and hence, they took notice on 04.12.2007 when the application for injunction was moved. Immediately thereafter, the 1st defendant filed the present application under Section 8 of the Arbitration and Conciliation Act, 1996 seeking reference of the dispute to arbitration in terms of Part-5, Clause(j) of the Schedule to the Master Agreement dated 05.01.2007. 6. Before proceeding further, it is relevant to take note of one important fact pleaded by the applicant/1st defendant Bank, viz., that the Bank had already invoked the Arbitration Clause, by a notice dated 26.11.2007 (4 days prior to the filing of the present suit). The Bank had also moved the High Court of Bombay on 27.11.2007 in Arbitration Petition No.446 of 2007 for interim reliefs under Section 9 of the Arbitration and Conciliation Act. A retired Judge of the Supreme Court had already entered upon the reference by a letter dated 29.11.2007. 7. The I.S.D.A. Master Agreement which is the subject matter of dispute in the present suit is dated 5-1-2007. Section 13(a), (b), (c) of the Standard Format of the said Master Agreement, got substituted under Part-5, Clause (j) of the Schedule to the I.S.D.A. Master Agreement, by new provisions. After this substitution, Section 13(b) in the Standard Format of the I.S.D.A. Master Agreement, contains a clause for resolution of any dispute, difference or question, through arbitration. Even the plaintiff does not question the existence of the Arbitration Agreement, but they question only the validity and enforceability of the same. 8. Mr.Arvind P.Datar, learned Senior Counsel appearing for the plaintiff, contended- (a) that when the very validity of the Arbitration Agreement is questioned and a declaration is sought to the effect that the Agreement is null and void and vitiated by fraud, this Court cannot refer the dispute to arbitration, without going into the question about the validity of the agreement at least prima facie; (b) that the agreement in question is nothing but a wagering contract declared by statute to be void ab initio under Section 30 of the Indian Contract Act, 1872 and that therefore, the arbitration clause which forms part of the said agreement cannot be infused with any life; and (c) that the entire transaction covered by the agreement in question is highly speculative in nature, opposed to public policy and violative of the statutory provisions and the rules and guidelines issued by the Reserve Bank of India and hence, it is also hit by Section 23 of the Contract Act, on account of which, the arbitration clause has become a dead letter. 9. Per contra, Mr.A.L.Somayaji, learned Senior Counsel for the applicant (1st defendant Bank) contended- (a) that a reference under Section 8, in contra distinction to a reference under Section 45, is peremptory in nature, without leaving any scope for the judicial authority to go into the question as to whether the agreement is null and void or vitiated by fraud; (b) that the I.S.D.A. Master Agreement is neither a wagering contract nor an agreement opposed to Public Policy and that it is authorised by the Reserve Bank of India and adopted and entered into by several nationalised banks; and (c) that since the 1st defendant Bank has already called the shots, by approaching the Bombay High Court under Section 9 and also by appointing an Arbitrator in terms of the agreement, the suit cannot proceed further. 10. It is true that the Supreme court had held in P.Anand Gajapathi Raju vs. P.V.G.Raju {2000(4) SCC 539} that the language of Section 8 is peremptory in nature. The said decision is also quoted with approval in subsequent decisions in Hindustan Petroleum Corporation Ltd., vs. Pinkcity Midway Petroleums reported in {2003 (6) SCC 503} and Rashtriya Ispat Nigam Ltd., and Another vs. Verma Transport Co. reported in {2006 (7) SCC 275} etc. The rationale behind the said decision is that section 5 of the Arbitration and Conciliation Act,1996 limits the extent of judicial intervention. The relevant portion of the said decision is as follows:- "4. Part I of the new Act deals with domestic arbitrations. Section 5, which is contained in Part I of the new Act, defines the extent of judicial intervention in arbitration proceedings. It says that notwithstanding anything contained in any other law for the time being in force, in matters governed by Part I, no judicial authority shall intervene except where so provided in that Part. Section 5 brings out clearly the object of the new Act, namely, that of encouraging resolution of disputes expeditiously and less expensively and when there is an Arbitration Agreement, the Court's intervention should be minimal........" It is pertinent to note that section 5 is peculiar to Part I of the Act and there is no corresponding provision in Part II, except that sections 45 and 54 (in Part II) contain an in-built safety valve within which a judicial authority is permitted to play a role. The applicability of section 5 is also specifically restricted only to Part I. 11. But section 5 as well as the decisions of the Apex court quoted above, do not deal with a situation where the contract is assailed as void ab-initio and vitiated by fraud. Therefore, the question as to the role of the court while considering an application under section 8, when the contract itself is challenged as void, requires an elaborate consideration. 12. The I.S.D.A. Master Agreement in question in the present suit, is challenged as void ab-initio on the ground that it is hit by Section 23 (as opposed to Public Policy) and section 30 of the Indian Contract Act (on account of being a wagering contract). But before entering into the grey area as to whether it is actually so, it is necessary to see, at the out set, if section 8 of the Arbitration and Conciliation Act, 1996, leaves any scope for this Court to stray into such area at all. This exercise is essential, since section 45 of the Act dealing with International Commercial Arbitration, specifically empowers a judicial authority, while considering an application for reference of the dispute to arbitration, to go into the question as to whether an agreement is null and void or inoperative or incapable of being enforced. But section 8 does not contain, in such express terms, a similar gate pass. It is only by inference, if at all such inference is permissible, that such a power can be read into section 8. Therefore, the question to be taken up, at the threshold, is as to whether in an application under section 8, this Court can take up the exercise of determining whether the I.S.D.A. Agreement is null and void, unenforceable and vitiated by fraud or not. Scope of Enquiry under Section 8. 13. There are 3 provisions in the Arbitration and Conciliation Act, 1996, which enables a party to a judicial proceeding to seek a reference of the dispute to arbitration. They are sections 8, 45 and 54 of the Act. Section 8 of the Act reads as follows:- "8.Power to refer parties to arbitration where there is an Arbitration Agreement.- (1) A judicial authority before which an action is brought in a matter which is the subject of an Arbitration Agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. (2) The application referred to in sub-section(1) shall not be entertained unless it is accompanied by the original Arbitration Agreement or a duly certified copy thereof. (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made." Section 45 of the Act reads as follows:- "45.Power of judicial authority to refer parties to arbitration.- Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed." Section 54 of the Act reads as follows:- "54. Power of judicial authority to refer parties to arbitration- Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, on being seized of a dispute regarding a contract made between persons to whom section 53 applies and including an Arbitration Agreement, whether referring to present or future differences, which is valid under that section and capable of being carried into effect, shall refer the parties on the application of either of them or any person claiming through or under him to the decision of the arbitrators and such reference shall not prejudice the competence of the judicial authority in case the agreement or the arbitration cannot proceed or becomes inoperative." 14. While Section 8, which falls under Part-I of the Act, relates to domestic arbitration, Sections 45 and 54, which fall under Part-II of the Act, relate to International Commercial Arbitration under the New York Convention Awards and the Geneva Convention Awards respectively. On a comparative study of Sections 8, 45 and 54 of the Act, it is seen that the Law Makers made each one of them different and distinct in their scope, ambit and operation. Prima facie, there appears to be the following distinctions between these provisions:- (a) Sections 45 and 54 start with a non obstante clause, so as to exclude anything contained in Part-I of the Act or in the Code of Civil Procedure from being applied to the proceedings, to which sections 45 and 54 apply. Section 8 does not contain such a non obstante clause. Therefore the power of the judicial authority while dealing with an application under section 8 is circumscribed by section 5. To make matters worse, section 16 which falls in Part I of the Act, empowers the Arbitral Tribunal itself to go into such questions relating to jurisdiction and to the existence or validity of the Arbitration Agreement. Therefore section 8 is conditioned by sections 5 and 16. (b) Section 8 makes it mandatory for the court, to refer the parties to arbitration, if the party seeking a reference to arbitration, applies not later than when submitting the first statement on the substance of the dispute. Such a stipulation (to apply before submitting the first statement on the substance of the dispute) is not found in Sections 45 and 54. (c) The word, 'party' appearing in Section 8(1) has a restrictive meaning in view of the definition of the said word under Section 2(1)(h), that it would mean only a party to an Arbitration Clause. On the contrary, Section 45 does not contain such a restriction. Section 45 enables any of the parties to the Arbitration Agreement or even any person claiming through or under him to seek a reference. Section 54 also enables the parties as well as any person claiming through or under them to seek a reference. (d) More importantly, the mandate under Section 45 to refer the parties to arbitration, indicated by the word, "shall" appearing in the section, is watered down by the last part of Section 45, whereby a leverage is given to the Judicial Authority not to refer the parties to arbitration if it finds that the agreement is null and void, inoperative or incapable of being performed. Such a discretion conferred upon the Judicial Authority in the later part of Section 45 is conspicuously absent in Section 8. Section 54 goes a step further in stipulating that if the agreement or the arbitration cannot proceed or becomes inoperative, the reference to arbitration shall not prejudice the competence of the Judicial Authority. (e) As stated above, section 5 of the Act, which restricts the power of intervention of a Judicial authority and section 16 which empowers the Arbitral Tribunal itself to rule on its own jurisdiction, apply only to Part-I. Therefore, they apply only to the proceedings covered by section 8 and not to proceedings covered by sections 45 and 54, since sections 45 and 54 begin with a non obstante clause relating to Part-I. 15. The difference between sections 8 and 45 was noted by the Apex court in Shin-Etsu Chemical Co. Ltd., vs. Aksh Optifibre Ltd., and another (2005) 7 Supreme Court Cases 234, in the following words:- "12. Section 8 of the Act is a departure from Section 34 of the Old Act. Under this section the judicial authority has no discretion. It is mandatory for the judicial authority to refer the parties to arbitration on the existence of conditions stipulated in the section. Unlike Section 45, the judicial authority under Section 8 has not been conferred the power to refuse reference to arbitration on the ground of invalidity of the agreement. It is evident that the object is to avoid delay and accelerate reference to arbitration leaving the parties to raise objections, if any, to the validity of the Arbitration Agreement before the arbitral forum and/or post-award under Section 34 of the Act. 18.....As already noticed, unlike Section 45 the objection as to the validity of the Arbitration Agreement cannot be raised as a defence to an application filed under Section 8. ... 38. It is true that Section 5 limits judicial intervention in the manner provided therein. It accelerates the arbitral process by curtailing chances of delay that may be caused in court proceedings. But, at the same time, it is also clear that though Sections 8 and 45 both deal with the power of judicial authority to refer parties to arbitration, in the former which deals with domestic arbitration, no provision has been made for examining at that stage the validity of the Arbitration Agreement whereas under Section 45 which deals with arbitrations to which the New York Convention applies, a specific provision has been made to examine the validity of the Arbitration Agreement in the manner provided in Section 45. Both provisions are differently structured albeit the purpose of both is to refer parties to arbitration but in one case domestic arbitration and in the other case international arbitration. Unlike Section 8 which provides that the application shall be moved not later than when submitting the first statement of the substance of the dispute, under Section 45 there is no such limitation. The apparent reason is that insofar as domestic arbitration is concerned, the legislature intended to achieve speedy reference of disputes to the Arbitral Tribunal and left most of the matters to be raised before the arbitrators or post-award. In case of foreign arbitration, however, in its wisdom the legislature left the question relating to the validity of the Arbitration Agreement being examined by the court. One of the main reasons for the departure being the heavy expense involved in such arbitrations which may be unnecessary if the Arbitration Agreement is to be invalidated in the manner prescribed in Section 45." Though the above view formed part of the minority decision of Justice Y.K.Sabharwal, as he then was, the majority view of the other 2 learned Judges (Justices D.M.Dharmadhikari and B.N. Srikrishna) was not different, in so far as this particular aspect was concerned. This is seen from the following passage, of the decision of the majority:- "66. The contrast in the language between Sections 8 and 45 of the Act has been rightly noticed by my learned Brother. Section 8, which leaves no discretion in the court in the matter of referring parties to arbitration, does not apply to the present case, as we are concerned with Part II of the Act. On the other hand, Section 45 which is directly applicable to the present case, empowers the court to refuse a reference to arbitration if it "finds" that the Arbitration Agreement is "null and void, inoperative or incapable of being performed". 16. Thus, sections 8, 45 and 54 enumerate 3 different situations in which applications for reference of the disputes to arbitration could be made and the Act maintains a clear distinction between the powers exercisable by a judicial authority in each of those situations. The scope of the enquiry under each of these sections is to be different. Is the distinction so maintained under the Act, between sections 8, 45 and 54, real and substantial or only illusory and insignificant ? Is the absence in section 8, of the rider "unless it finds that the said agreement is null and void, inoperative or incapable of being performed," as found in section 45 of the Act, deliberate, meaningful and has a purpose or is it only an accidental omission on the part of the parliament? Can the court supply the casus omissus? 17. In UNIQUE BUTYLE TUBE INDUSTRIES (P) lTD -VS U.P. FINANCIAL CORPORATION 2003 (2) SCC 455, the Supreme Court pointed out that as a first principle, a court cannot supply the casus omissus. But in para 14 of the said judgment, the Supreme Court also indicated the circumstances under