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Court cannot decide on existence of arbitration agreement merely on a prima facie review of facts of that case

In SANJIV PRAKASH vs SEEMA KUKREJA AND ORS., the dispute was whether a Memorandum of Understanding (MOU) has been superseded and novated by a Share Holder Agreement (SHA) and therefore the arbitration agreement and the Respondents denied that there was any arbitration clause between the parties as the MoU itself had been superseded and did not exist after signing of the SHA.

On appeal the Supreme Court referring to Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, Pravin Electricals Pvt. Ltd. v. Galaxy Infra and Engineering Pvt. Ltd., 2021 SCC OnLine SC 190, decided to examine whether the word “existence” in Section 11 merely refers to contract formation (whether there is an arbitration agreement) and excludes the question of enforcement (validity) and therefore the latter falls outside the jurisdiction of the court at the referral stage. On jurisprudentially and textualism it is possible to differentiate between existence of an arbitration agreement and validity of an arbitration agreement.

Existence of an arbitration agreement presupposes a valid agreement which would be enforced by the court by relegating the parties to arbitration. A reasonable and just interpretation of “existence” requires understanding the context, the purpose and the relevant legal norms applicable for a binding and enforceable arbitration agreement. An agreement evidenced in writing has no meaning unless the parties can be compelled to adhere and abide by the terms. A party cannot sue and claim rights based on an unenforceable document. Thus, there are good reasons to hold that an arbitration agreement exists only when it is valid and legal. A void and unenforceable understanding is no agreement to do anything. Existence of an arbitration agreement means an arbitration agreement that meets and satisfies the statutory requirements of both the Arbitration Act and the Contract Act and when it is enforceable in law.

In Garware Wall Ropes Ltd. [Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 : (2019) 4 SCC (Civ) 324], Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal or does not satisfy mandatory legal requirements. Invalid agreement is no agreement.

The Court then concluded, on the facts of that case, that it would be unsafe to conclude one way or the other that an arbitration agreement exists between the parties on a prima facie review of facts of that case, and that a deeper consideration must be left to an arbitrator, who is to examine the documentary and oral evidence and then arrive at a conclusion.

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