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RELEGATION OF ARBITRATION TO A CIVIL SUIT

Submitted to:

Mr. S.K.Sinha

(Faculty, International Commercial Arbitration)

Date of Submission: October 10th

, 2014

SUBMITTED BY:

Kapil Maini

Semester: VII

Roll No. 62

HIDAYATULLAH NATIONAL LAW UNNIVERSITY, RAIPUR (CG)

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ACKNOWLEDGEMENT

I am highly elated to carry out my research on this topic Relegation of Arbitration to a civil

suit I would like to give my deepest regard to our course teacherMr. S.K.Sinha, who helped

me with her immense advice, direction and valuable assistance, which enabled me to march

ahead with this topic. I am thankful to her for providing such important and interesting topics for

project report which are not only helpful but also encouraging from future perspective.

I thank my parents, who gave me moral and mental support. I would like to thank my friends,

who gave me their precious time for guidance and helped me a lot in completing my project by

giving their helpful suggestion and assistance.

Kapil Maini

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TABLE OF CONTENTS

LIST OF ABBREVIATIONS .......................................................................................4

OBJECTIVES.........................................................................................................................5

RESEARCH METHODOLOGY................................................................................ .5

INTRODUCTION................................................................................................................6

SCOPE OF ENQUIRY OF CIVIL COURTS UNDER SECTION 8 OF

THE ARBITRATION AND CONCILIATION ACT.......................................6

THE LAW AS SETTLED BY N. RADHAKRISHNAN v. MAESTRO

ENGINEERS AND OTHERS.................................................................................... 10

CONCLUSION................................................................................................................... 14

BIBLIOGRAPHY.............................................................................................................. 15

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LIST OF ABBREVIATIONS

1. AIR- All India Reporter

2. All- Allahabad3. Cal.- Calcutta

4. Co.- Company

5. Del Delhi

6. Ed.- Edition

7. ILR- Indian Law Review

8. Int. LR- International Law Review

9. Ltd.- Limited

10. Mys- Mysore

11. P.- Page

12. Pvt.- Private

13. SC- Supreme Court

14. SCC- Supreme Court Cases

15. SCR- Supreme Court Review

16. UP- Uttar Pradesh

17. V- Vurses

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OBJECTIVES

To understand the circumstances under which an arbitration proceeding is converted to a civilsuit

RESEARCH METHODOLOGY

SOURCES OF DATA

The sources of data for this project are secondary in nature, including books case laws & online

resources.

MODE OF WRITING

The mode of writing in this project is descriptive & analytical.

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INTRODUCTION

Under the arbitration jurisprudence, certain matters are of such nature that they cannot be

referred to arbitration at all.

However, there are certain circumstances wherein the matters referred to arbitration, because of a

procedural abnormality or substantive difference in nature which is different than the one

contemplated by the arbitration agreement are declared not referable to arbitration.

In such cases, those matters must be referred to civil courts for adjudication of the opposing

claims of the parties as the same cannot be legally done under arbitration.

SCOPE OF ENQUIRY OF CIVIL COURTS UNDER SECTION 8 OF THE

ARBITRATION AND CONCILIATION ACT

The scope of Section 8 of the Arbitration and Conciliation Act, 1996 and the extent of judicial

intervention on its invocation have been the subject-matter of a series of pronouncements of the

Supreme Court and various High Courts.

Although Section 34 of the erstwhile Arbitration Act, 1940 provided for stay of legal proceedings

initiated by a party to an arbitration agreement, the language of Section 34 complicated matters.

Various courts took diverse views regarding the stage at which an application for stay could be filed

in legal proceedings. Questions also frequently arose regarding the fate of the legal proceedings after

passing of the award or when the arbitrator held that the disputes referred to arbitration were beyond

the scope of the arbitration agreement between the parties.

Section 8 of the Arbitration and Conciliation Act, 1996, inter alia, seeks to remedy the defects

noticed in the working of Section 34 of the old Act. Section 8 of the 1996 Act mandates that a

judicial authority before whom an action is brought, which is the subject of an arbitration agreement

between the parties,shallrefer the parties to arbitration. The Supreme Court, while interpreting the

provisions of the Act, has held that Section 8 of the new Act is not in pari materia

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with Section 34 of the old Act and that the two provisions are distinct and different from each

other.1 The Supreme Court has also clarified that as soon as the matter before any judicial

authority is referred to arbitration, the suit/legal proceedings pending before it stand disposed of.2

What then would be the scope of enquiry before a judicial authority that considers an application

under Section 8 of the Act to refer a matter pending before it to arbitration?

Under the old Act, the judicial authority, before whom such an application was moved, was

empowered to stay further proceedings only if the following twin conditions were satisfied:

(i) that there is sufficient reason for referring the matter to arbitration in accordance with the

arbitration agreement; and

(ii) that the applicant was, at the time when the proceedings were commenced, and still continues

to be, ready and willing to do all things necessary for the proper conduct of the arbitration.

Under the new Act, the power of a judicial authority to refer the parties to arbitration has been

streamlined. The scope for exercising discretion as provided for under the old Act has been taken

away. The Supreme Court has consistently held that the language of Section 8 is peremptoryand

it is obligatory for the courts to refer the parties to arbitration in terms of their arbitration

agreement.3 In contrast to the conditions for stay envisaged in Section 34 of the old Act, the

conditions required to be satisfied for a court/judicial authority to refer parties to arbitration

under Section 8 are:

(i) there is an arbitration agreement;

(ii) a party to the agreement brings an action against the other party to the agreement;

(iii) the subject-matter of the action is the same as the subject-matter of the arbitration

agreement;

(iv) the other party moves the court for referring the parties to arbitration before it submits itsfirst statement on the substance of the dispute.

1

Kalpana Kothari v.Sudha Yadav, (2002) 1 SCC 2032P. Anand Gajapati Raju v.P.V.G. Raju, (2000) 4 SCC 539

3Hindustan Petroleum Corpn. Ltd. v.Pinkcity Midway Petroleums, (2003) 6 SCC 503

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Would this mean that the court/judicial authority acting in terms of the provisions under the new

Act has no power at all to refuse relief under Section 8 assuming that the applicant has satisfied

all the conditions envisaged therein?

Certain exceptions have been carved out of Section 8 when it would be permissible for the

court/judicial authority to decline to refer the parties to arbitration and the arbitration agreement

notwithstanding, continue adjudication of the proceedings. These exceptions, in practice, are

usually applicable to proceedings/actions that arise out of building contracts/construction

agreements where multifarious reliefs are claimed not only against the parties to the arbitration

agreement but also against third persons, who are strangers to the arbitration agreement. In such

an event, it has been held that the subject-matter of the suit ought not to be bifurcated. Any

bifurcation of the subject-matter of the suit, one to be decided by the Arbitral Tribunal and the

other to be decided by the court/judicial authority would lead to anomalous results. The Supreme

Court noticed that this would inevitably lead to delay and increase the cost of litigation between

the parties. The possibility of two fora passing conflicting orders cannot also be ruled out if such

bifurcation of distinct causes of action is permitted. Said succinctly, when the subject-matter of

the suit/legal proceedings includes subject-matter of the arbitration agreement as well as other

disputes, the parties cannot be referred to arbitration.4

Another exception to Section 8 has been recently noticed by the Karnataka High Court. The High

Court has laid down that the principles of estoppel, waiver and acquiescence are applicable to a

party seeking reference of a matter to arbitration.5The question arose whether it was permissible

for a party to an arbitration agreement, who had earlier contended that the dispute is not

arbitrable, to seek reference of the very same matter to arbitration by invoking Section 8. The

High Court, after referring toAnand Gajapati Rajucase6has held that if parties are permitted to

approbate and reprobate regarding the arbitrability of the dispute, it would work hardship against

the other party and declined to refer the parties to arbitration under Section 8.

4

Sukanya Holdings (P) Ltd. v.Jayesh H. Pandya, (2003) 5 SCC 5315Ramakrishna Theatre Ltd. v.General Investments & Commercial Corpn. Ltd., ILR 2003 Kar 3463

6P. Anand Gajapati Raju v.P.V.G. Raju, (2000) 4 SCC 539

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There are two other obvious situations when the court would be justified in refusing relief under

Section 8. They are:

(i) when the power of the court is not invoked before submission of the first statement on the

substance of the dispute; and

(ii) when the original or a duly certified copy of the arbitration agreement is not filed along with

the application seeking reference to arbitration.6

It is pertinent to mention here that the Supreme Court inHPCLcase3 has examined the question

relating to the role of the civil court under Section 8 when a contention is raised before it that the

arbitration agreement is inapplicable to the facts of the case. After referring to the decision of the

Constitution Bench in Konkan Rly. case7 it has held that the answer to the question lies in

Section 16 of the Act which empowers the Arbitral Tribunal to rule on its own jurisdiction

including rule on any objection relating to the existence/validity/applicability of the arbitration

agreement. However, the Supreme Court in Konkan Rly.case8was concerned and decided only

on the power exercised by the Chief Justice or his designate under Section 11 of the Act and not

the power of a civil court under Section 8. The question whether the power exercised by the civil

court under Section 8 is administrative or adjudicatory was not gone into by the Supreme Court

inKonkan Rly.

The Supreme Court has now in HPCL9held that if there is an objection before the civil court as

to the applicability of the arbitration clause to the facts of the case, the same will have to be

raised before the Arbitral Tribunal under Section 16 of the Act and the civil court cannot proceed

to examine the applicability of the arbitration agreement to the facts of the case . (emphasis

supplied) The exceptions noticed by the Supreme Court and the High Courts in their earlier

rulings have neither been referred to nor adverted to in HPCLcase3. It is submitted that HPCL

case10

requires to be reconsidered especially in the light of the decision in Sukanya Holdings

case11

and the other exceptions mentioned above.

7

Konkan Rly. Corpn. Ltd. v.Rani Construction (P) Ltd., (2002) 2 SCC 388

8Ibid


10Ibid


9
http://www.ebc-india.com/lawyer/articles/852.htm#Ref7http://www.ebc-india.com/lawyer/articles/852.htm#Ref7http://www.ebc-india.com/lawyer/articles/852.htm#Ref7

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THE LAW AS SETTLED BY N. RADHAKRISHNAN v. MAESTRO

ENGINEERS AND OTHERS

The law relating to relegation of arbitration has been settled in its entirety by the honourable

Supreme Court in N. Radhakrishnan v Maestro Engineers And Others.12

The court held in a detailed judgment that:

In our opinion, the contention of the respondents relating to the jurisdiction of the Arbitrator

to decide a dispute pertaining to a matter of this proportion should be upheld, in view of the

facts and circumstances of the case. The High Court in its impugned judgment has rightly held

that since the case relates to allegations of fraud and serious malpractices on the part of the

respondents, such a situation can only be settled in court through furtherance of detailed

evidence by either parties and such a situation can not be properly gone into by the

Arbitrator.

8. Reliance was placed by the learned Counsel for the appellant on a decision of this Court in

the case of H industan Petroleum Corpn. Ltd. v. Pinkcity M idway Petroleums13

wherein this

Court in Para 14 observed:

If in an agreement between the parties before the civil court, there is a clause for arbitration, it

is mandatory for the civil court to refer the dispute to an arbitrator. In the instant case the

existence of an arbitral clause in the Agreement is accepted by both the parties as also by the

courts below. Therefore, in view of the mandatory language of Section 8of the Act, the courts

below ought to have referred the dispute to arbitration.

9. The learned Counsel for the appellant relying on the above- mentioned observations of this

Court in the aforesaid judgment submitted that the High Court was wrong in ignoring the

ratio of the case and should have accordingly allowed the petition of the appellant for setting

aside the order of the trial court.

12(2010) 1 SCC 72

132003 (6) SCC 503

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10. The learned Counsel appearing on behalf of the respondents on the other hand contended

that the appellant had made serious allegations against the respondent alleging that they had

manipulated the accounts and defrauded the appellant by cheating the appellant of his dues,

thereby warning the respondents with serious criminal action against them for the alleged

commission of criminal offences. In this connection, reliance was placed in a decision of this

Court in the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak and Anr14

in which this Court under para 17 held as under:

There is no doubt that where serious allegations of fraud are made against a party and the party

who is charged with fraud desires that the matter should be tried in open court, that would be a

sufficient cause for the court not to order an arbitration agreement to be filed and not to make

the reference....

11. In our view and relying on the aforesaid observations of this Court in the aforesaid

decision and going by the ratio of the above mentioned case, the facts of the present case does

not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of

justice, it should be tried in a court of law which would be more competent and have the

means to decide such a complicated matter involving various questions and issues raised in

the present dispute. This view has been further enunciated and affirmed by this Court in the

decision of Haryana Telecom Ltd. v. Ster li te I ndustri es (I ndia) Ltd.15 wherein this Court

under para 4 observed:

Sub-section (1) of Section 8provides that where the judicial authority before whom an action is

brought in a matter, will refer the parties to arbitration the said matter in accordance with the

arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the

Arbitrator is only that dispute or matter which the Arbitrator is competent or empowered to

decide.

14AIR 1962 SC 406

15AIR 1999 SC 2354

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12. The learned Counsel for the respondent further elaborated his contention citing the

decision of the High Court of Judicature at Madras in the case of Oomor Sait HG v. Asiam

Sait16wherein it was held:

...Power of civil court to refuse to stay of suit in view of arbitration clause on existence

of certain grounds available under 1940 Act continues to be available under 1996 Act

as well and the civil court is not prevented from proceeding with the suit despite an

arbitration clause if dispute involves serious questions of law or complicated

questions of fact adjudication of which would depend upon detailed oral and

documentary evidence.

Civil Court can refuse to refer matter to arbitration if complicated question of fact or

law is involved or where allegation of fraud is made.

...Allegations regarding clandestine operation of business under some other name, issue

of bogus bills, manipulation of accounts, carryingon similar business without consent of

other partner are serious allegations of fraud, misrepresentations etc., and therefore

application for reference to Arbitr ator is li able to be rejected.

13. We are in consonance with the above-referred decision made by the High Court in the

concerned matter. In the present dispute faced by us, the appellant had made serious

allegations against the respondents alleging him to commit malpractices in the account books

and manipulate the finances of the partnership firm, which, in our opinion, cannot be properly

dealt with by the Arbitrator. As such, the High Court was justified in dismissing the petition of

the appellant to refer the matter to an Arbitrator. In this connection, it is relevant to refer the

observation made by the High Court in its impugned judgment:

The above decision squarely applies to the facts of the present case. In the present case as well thereis allegation of running rival firm, interference with the smooth administration of the firm. As

already stated since the suit has been filed for declaration to declare that the revision petitioner is

not a partner with effect from 18.11.2005, and for consequential injunction restraining the

162001 (3) CTC 269

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petitioner from disturbing the smooth functioning of the first respondent firm, the issue relates to

the causes which compelled the respondents to expel the revision petitioner from the partnership

firm and the necessity to reconstitute the firm by entering into a fresh partnership deed.

Therefore such issues involve detailed evidence which could be done only by a civil court....

14. Arguments were favoured by either parties relating to the ambit of Section 8(2)of the Act

wherein the scope of the mandatory requirement to file the original copy of the partnership

deed dated 7th

of April, 2003 was elaborately discussed. It is to be noted that since we have

already decided that there is no requirement to appoint an Arbitrator in view of the matter

that the issues involved in the case involved detailed investigations into the same and

production of elaborate evidence to prove the allegations or refute the same, there is no need

to dwell into this matter. Even assuming that a dispute subsists and an Arbitrator is

appointed, still the appellant cannot absolve himself from the mandatory requirement of filing

an original copy of the deed. The learned Counsel for the appellant, however, argued that

since the notarized copy of the deed was already filed by the respondents before the 1st

Addl.

District Munsif Court at Coimbatore, there was no need for the appellant to produce the

same. Learned Counsel for the appellant cited various decisions to substantiate his claim. But

from a careful perusal of the order of the 1stAddl. District Munsif Court at Coimbatore, in I.A.

No. 494 of 2006 (in O.S. No. 526 of 2006) it would be evident that the learned Munsif had

noted that the appellant had filed a Xerox copy of the partnership deed dated 7thof April 2003

and had not filed the original copy thereof. Further, Ex-P23 is the notarized copy of the

Partnership deed dated 6th

of December, 2005, which was the reconstituted deed formed after

the alleged retirement of the appellant from the firm. The learned Counsel for the appellant

pointed out to this deed and argued that since the original copy of this deed was filed by the

respondents, there was no need for him to file the original copy thereof under Section 8(2)of

the Act. But it is to be noted herein that the claim of the appellant regarding the dispute was

under the arbitration clause mentioned under the original partnership deed and not on the

subsequent one. Since the original deed was not filed within the requirement of Section 8(2)

of the Act, it must be held that the mandatory requirement under the Act had not been

complied with. Accordingly, even if we accept the factum of a dispute relating to the

retirement of the appellant under the original deed dated 7th

of April, 2003, still the Court

would not be empowered to refer the matter to an Arbitrator

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due to the non compliance of the provisions mentioned under Section 8(2)of the Act. For the

above-mentioned reasons and in view of our discussions made hereinabove, we, therefore, do

not find any merit in this appeal and we direct the 1st

Addl. District Munsif at Coimbatore to

dispose of the suit being O.S. No. 526 of 2006 filed by the respondents for a declaration that

the appellant was not a partner of the Respondent No 1 (the firm herein) after 18 th of

November, 2005 and to prevent him from causing any disturbance to the respondent no 1 for

its peaceful running by way of a permanent injunction within a period of six months from the

date of receipt of a copy of this judgment.

CONCLUSION

Under the arbitration jurisprudence, certain matters are of such nature that they cannot be

referred to arbitration at all.

However, there are certain circumstances wherein the matters referred to arbitration, because of a

procedural abnormality or substantive difference in nature which is different than the one

contemplated by the arbitration agreement are declared not referable to arbitration.

In such cases, those matters must be referred to civil courts for adjudication of the opposing

claims of the parties as the same cannot be legally done under arbitration.

Now the law has been settled by the Supreme Court in a detailed judgment in N. Radhakrishnan

v. Maestro Engineers and others.

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BIBLIOGRAPHY

1. Hindustan Petroleum Corpn. Ltd. v.Pinkcity Midway Petroleums, (2003) 6 SCC 503

2. India Lease Development Ltd. v.Thimmakka, (2002) 5 Kar LJ 551

3. Kalpana Kothari v.Sudha Yadav, (2002) 1 SCC 203

4. Konkan Rly. Corpn. Ltd. v.Rani Construction (P) Ltd., (2002) 2 SCC 388

5.

N. Radhakrishnan v Maestro Enginners and Others, (2010) SCC 1 72

6. P. Anand Gajapati Raju v.P.V.G. Raju, (2000) 4 SCC 539

7. Ramakrishna Theatre Ltd. v.General Investments & Commercial Corpn. Ltd., ILR

2003 Kar 3463

8. Sukanya Holdings (P) Ltd. v.Jayesh H. Pandya, (2003) 5 SCC 531

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