Introduction
The arbitration clause is often viewed as a ‘separable’ contract, distinct from the main agreement, which provides a framework for dispute resolution. However, like any contractual agreement, it is subject to various influences that can lead to its repudiation, termination, or cessation through direct or indirect actions. One significant event that raises questions about the survivability and invocation of an arbitration clause is the death of a contracting party.
This issue is critical, as it affects the continuity of the arbitration process and the rights of the parties involved. In this article, we will explore how courts interpret the question of whether an arbitration agreement shall be discharged upon the death of any party, examining key legal principles and judicial decisions that provide clarity on this important aspect of arbitration law.
Statutory Framework
Section 40 of the Arbitration and Conciliation Act 1996 Acts states:
‘Arbitration agreement not to be discharged by death of party thereto.
- “(1) An arbitration agreement shall not be discharged by the death of any party thereto either as respects the deceased or as respects any other party but shall in such event be enforceable by or against the legal representative of the deceased.
(2) The mandate of an arbitrator shall not be terminated by the death of any party by whom he was appointed.
(3) Nothing in this section shall affect the operation of any law by virtue of which any right of action is extinguished by the death of a person.”
Section 40 of the Arbitration Act clearly establishes that an arbitration agreement remains valid even after the death of any party. In such instances, it can be enforced by or against the legal representatives of the deceased. Furthermore, the authority of the arbitrator is not terminated by the death of the party who appointed them, unless dictated by any law that extinguishes a person’s right of action upon their death.
Effect of Section 40 of the Act
In Ravi Prakash Goel vs. Chandra Prakash Goel & Anr. (2008) 13 SCC 667, the Supreme Court further considered the effect of Section 40 of the Act and held as under:-
“It is clear from Section 40 of the Arbitration Act that an arbitration agreement is not discharged by the death of any party thereto and on such death it is enforceable by or against the legal representatives of the deceased, nor is the authority of the arbitrator revoked by the death of the party appointing him, subject to the operation of any law by virtue of which the death of a person extinguishes the right of action of that person.”
Section 2(1)(g) defines “legal representative” which reads thus:
2.(1)(g) ‘legal representative’ means a person who in law represents the estate of a deceased person, and includes any person who intermeddles with the estate of the deceased, and, where a party acts in a representative character, the person on whom the estate devolves on the death of the party so acting;”Explain this point a little.
Further, Section 35 of the 1996 Act which imparts the touch of finality to an arbitral award says that the award shall have binding effect on the “parties and persons claiming under them”. Persons claiming under the rights of a deceased person are the personal representatives of the deceased party and they have the right to enforce the award and are also bound by it. The arbitration agreement is enforceable by or against the legal representative of a deceased party provided the right to sue in respect of the cause of action survives.
This means that the obligations and rights established by the award extend not only to the original parties involved in the arbitration but also to any individuals who may claim rights through them, including the legal representatives of a deceased party.
When a party to an arbitration agreement passes away, their legal representatives—who are typically the personal representatives or heirs—step into their shoes. They inherit both the rights and responsibilities associated with the arbitration agreement. This legal transition ensures that the outcome of the arbitration remains enforceable, thereby providing continuity and stability in the resolution of disputes.
For the legal representatives to enforce the award, however, the right to sue must survive the death of the original party. This means that the cause of action must not be extinguished by the individual’s passing. If the cause of action is one that survives, the legal representatives are empowered to pursue any claims arising from the award. They can enforce it against the remaining parties or claim benefits as stipulated in the award, thus ensuring that the arbitration process retains its effectiveness even in the face of such significant changes.
Inherent Rights: Suing for Firm Dissolution and Enforcing Arbitration
In the case of Prem Lata (Smt) & Another vs. M/s Ishar Dass Chaman Lal & Others (1995) 2 SCC 145, the Supreme Court examined the implications of a partner’s death on the arbitration agreement. The Court noted that, upon the death of partners, the partnership is automatically dissolved. In this context, the legal representatives of the deceased partner seek to enforce their rights concerning the accounts of the dissolved firm and any authority to realize the firm’s property.
The Court emphasized that the right “to sue” for the dissolution of the firm inherently includes the right to enforce the arbitration clause. This right is crucial for resolving disputes that arise from the dissolution or for obtaining a final accounting of the partnership’s assets. Essentially, the legal representatives are not just seeking to enforce their claims; they are also invoking the arbitration agreement to ensure that any disputes related to the dissolved firm are resolved in accordance with the established arbitration process. This interpretation reinforces the notion that the arbitration clause remains viable and enforceable, even after the dissolution of the partnership, thereby preserving the integrity of the dispute resolution mechanism.
In Jyoti Gupta vs. Kewalsons (2017), the Supreme Court reaffirmed the principle that an arbitration agreement remains in effect even after the death of a partner. Citing the earlier judgments in Prem Lata vs. M/s Ishar Dass Chaman Lal (1995) 2 SCC 145 and Ravi Prakash Goel vs. Chandra Prakash Goel (2008) 13 SCC 667, the Court held that the arbitration agreement between partners survives and can be enforced by the legal heirs of the deceased partner.
The Court clarified that the mere fact that the arbitration agreement pertains to disputes exclusively between “partners” does not negate the enforcement rights of the legal heirs. In light of Section 40 of the Arbitration and Conciliation Act, the legal representatives of a deceased partner retain the right to invoke the arbitration agreement.
In the case of Perumalla Satyanarayana v. Perumalla Venkata Rangayya, it was pointed out that “the policy of the Indian Legislature in a matter like this has been not to follow the English Common Law with regard to references to arbitration, and that such contracts are not revocable in India at the will of either party, nor will the authority of the arbitrator be deemed as necessarily revoked by the death of one of the parties to the arbitration.’’
Doctrine of Alter Ego
In Vatsala Jagannathan v. Tristar Accommodations Limited (2023), the court addressed the doctrine of “Alter Egos,” affirming that non-signatories can be included in arbitral proceedings if they qualify as the ‘alter ego’ of a signatory. This doctrine permits one corporation to be held legally accountable for the actions of another, despite the protections offered by limited liability. The court, drawing on Gary B. Born’s International Commercial Arbitration, emphasized that the doctrine is invoked only in exceptional circumstances, representing a significant departure from the principle that only signatories to an arbitration agreement are bound by it. For this departure to be justified, there must be compelling evidence demonstrating that the non-signatory is indeed the alter ego of the signatory.
Additionally, the court referenced the case of Papiya Mukherjee v. Aruna Banerjea (2022), which applied Section 40 of the Arbitration Act. In that case, it was determined that the non-signatory legal heirs were bound by the arbitration clause contained in the relevant partnership deed. This reinforced the notion that the arbitrator retains authority to adjudicate matters involving non-signatory parties, ensuring that the arbitration process remains effective and inclusive, even in complex scenarios involving multiple parties.
Conclusion
In summary, the Indian legal framework firmly supports the principle that an arbitration agreement shall not be discharged by the death of any party, ensuring that such agreements are enforceable by or against the legal representatives of the deceased. The provisions of the Arbitration and Conciliation Act, particularly Section 40, along with judicial interpretations from cases such as Ravi Prakash Goel and Prem Lata, reinforce the continuity and stability of arbitration agreements in the face of a party’s demise. These principles not only safeguard the rights of the deceased party’s estate but also promote fairness in dispute resolution. As arbitration continues to evolve, these established legal tenets will serve as a cornerstone for upholding the integrity and effectiveness of the arbitration process, ensuring that disputes can be resolved without unnecessary disruption.