Does an Arbitration Agreement Stand if the Main Contract is Void?

In the case of Ludhiana Improvement Trust v. M/s. Today Homes and Infrastructure P. Ltd, the Supreme Court of India considered the issue: Whether an arbitration agreement can survive independently if the main contract in which it is embedded is alleged to be void due to fraudulent practices?

The Ludhiana Improvement Trust (the Trust), established for the planned development of Ludhiana city, entered into a joint venture with Today Homes for the construction of the City Centre. The agreement included an arbitration clause for dispute resolution. However, allegations soon surfaced that Today Homes engaged in underhanded dealings, resulting in significant revenue losses to the Punjab government. The Trust sought to appoint an arbitrator to audit the accounts, but Today Homes insisted on following the dispute resolution process outlined in the agreement, which included conciliation and amicable settlement before arbitration.

When the Trust rejected this approach, Today Homes filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, for the appointment of an arbitrator. The Trust contested the petition, arguing that the main contract was void due to fraudulent circumstances, which would inherently invalidate the arbitration agreement within it.

The Punjab and Haryana High Court, relying on the precedent set by the Konkan Railway Corporation Limited case, appointed an arbitrator, leaving the question of jurisdiction to the arbitrator's discretion. However, this decision was challenged in the Supreme Court, which noted that the High Court had overlooked the overruling judgment of a seven-judge bench in S.B.P. and Company vs. Patel Engineering Ltd. and Anr. The Supreme Court clarified that the appointment of an arbitrator is a judicial order, not an administrative one, and thus the High Court should have addressed the validity of the main contract and the arbitration agreement before appointing an arbitrator.

The apex court set aside the High Court's order and remanded the matter for a fresh decision in line with the Patel Engineering case.