Monday, May 30, 2011

Formalism under Section 8 of Arbitration Act wins the day in Delhi High Court

(The following post is contributed by Sumit Rai, who is an associate with Economic Laws Practice, Mumbai since 2007 and has been on a long study leave pursuing his LLM, Masters in International Dispute Settlement at Geneva)
In Arti Jethani v. Daeshan Trading (India) Pvt. Ltd. (decision dated 16.05.2011), the Delhi High Court held that a Section 8 application under the Arbitration & Conciliation Act, 1996 (Arbitration Act) was not maintainable if brought after the filing of written statement, even if the written statement raised jurisdictional objections on grounds of existence of an arbitration agreement. While there is authority to support this conclusion, it suggests a formalistic bias in the court’s approach to interpretation. An extremely formalistic approach to interpretation of the Arbitration Act, defeating an arbitration agreement, is the very anti-thesis of the policy that led to the new law in 1996. This decision also fails to take into account the negative effect of an arbitration agreement.
Background
The Court was hearing a petition under section 8 of the Act in a suit filed by one Ms. Arti Jethani (Applicant) against M/s. Daeshan Trading (India) Pvt. Ltd (Defendant). The Defendant appearing on summons on 04.01.2011 was ordered to file a written statement within 30 days. It did so on 25.01.2011, wherein a defense against the jurisdiction of the court was raised on grounds of existence of an arbitration agreement. The Plaintiff in its reply stated that having filed the written statement and not an application under Section 8 of the Act, there was no requirement to refer parties to arbitration. The Defendant filed the application on 22.02.2011.
Court’s Decision
The Court held that Section 8 of the Act clearly lays down that an application must be made “not later than when submitting …first statement on the substance of the dispute”. Since this was not done, Court held that one of the pre-conditions under the provision was not met.
The Court rejected Defendant’s contention that disputing jurisdiction on grounds of existence of an arbitration agreement in the written statement should amount to sufficient compliance under Section 8. It noted that “[m]ere disclosure of arbitration agreement in the Written Statement and claiming that Civil Court has no jurisdiction to try the suit would be of no consequences unless the Written Statement itself contains a prayer for referring the dispute to arbitration”. The Court also held that the jurisdiction of the Civil Court is not ousted on account of an arbitration agreement between the parties.
Form over Spirit
This is not the first time that a court has refused to consider a jurisdictional objection taken in the written statement as sufficient. This decision relies on some of them.
The Delhi High Court, however, recognized that an application in strict sense is not required under Section 8. It also agreed that such application could be made in the written statement itself. However, it held that such application cannot be read from a mere objection to jurisdiction based on the existence of an arbitration agreement and must be supplemented by a prayer to refer the parties to arbitration.
It seems pedantic to negate an arbitration agreement merely on grounds that a prayer for reference was not made. Further, a prayer to dismiss the suit must be sufficient for a defendant seeking enforcement of an arbitration agreement under the text of Section 8. Why should it be required of a defendant that may have no counter-claim or interests in pursuing a dispute to compulsorily seek a reference to arbitration? A meaningful construction would suggest that reference to arbitration would be the result of an objection to jurisdiction citing existence of an arbitration agreement, when read together with the plaint seeking adjudication of a dispute.
Civil Courts Retain Jurisdiction?
The real hurdle in a purposive interpretation of Section 8 lies in the conceptual rejection of the negative effect of arbitration agreement. An arbitration agreement necessarily implies the exclusion of jurisdiction of civil courts from adjudicating disputes subject to such agreement. It is a consequence of the positive effect, i.e. the transfer of right of adjudication from courts to an arbitral tribunal. This must also follow from the exception for arbitration agreements contained in Section 28 of the Indian Contract Act.
The Supreme Court in Sukanya Holdings Pvt. Ltd. v. Jayesh Pandya rejected this concept. It laid down three conditions that Section 8 requires to be met before a matter can be referred to arbitration, and concluded from it that until such conditions are met, civil court jurisdiction is not excluded. This interpretation hoists Section 8 by its own petard. What was meant to be a safeguard provision to mandate reference to arbitration on an application has now become the enabling provision for civil courts to usurp arbitral jurisdiction unless strict compliance of Section 8 is met.
Arbitration agreement, by force of pacta sunt servanda read with Section 28 of the Contract Act, leads to the obvious conclusion of exclusion of civil court jurisdiction. Section 8 is essentially an acknowledgment of the fact that parties can waive an arbitration agreement. Conditions under Section 8 are meant to provide for reading such waiver by conduct. When a suit is filed despite an arbitration agreement, it is an offer by one party to terminate this agreement. If the other party joins the suit by contesting it on substance, it accepts such offer and the arbitration agreement comes to an end. Section 8 provides that failure to invoke the arbitration agreement within reasonable time shall also be deemed to be an acceptance.
Nothing in the text of Section 8 suggests that civil courts retain jurisdiction despite arbitration agreement, unless it is excluded by a decision of the court itself in such application. On the contrary, Section 8(3) provides that notwithstanding a pending application, an arbitration could be commenced, continued, and an award be made. If the legislative intent were to prohibit the negative effect of arbitration agreement, this provision would be inane.
Conclusion
The manner in which Section 8 has been interpreted over the years raises serious concerns regarding the effectiveness of the Indian arbitral regime. The Delhi High Court decision has once again necessitated focus on this issue. It is interesting to note that other significant common law jurisdictions (England and US), where arbitration regime has essentially been successful, have legislations more comprehensive than that suggested by the UNCITRAL Model Law. Probably, this is a fact that needs to be noticed by the legislature.
However, no legislation can ensure its successful application. It can only provide tools. “The success of the [legislation] will depend on these tools being skillfully used to fashion the product for which they were designed. This means, above all, that they should be knowledgeably used, with an understanding of their origin, and of why they were designed as they were” (Rt. Hon. The Lord Bingham of Cornhill, Lord Chief Justice of England).
- Sumit Rai

10 comments:

jayavel said...

section 89 of the civil procedure code envisages stay of proceedings till disposal or otherwise of ADR, to facilitate the arbitration which is later enacted provision of law

Aditya said...

Well written!!!
You are right as far as subsection (3) of the section 8 is concerned and that has been by the Supreme Court itself in the matter of P. Anand Gajapathi Raju & Others vs. P.V.G. Raju (Dead) & Others. It further goes on to say that an Arbitration Agreement can be brought into existence during the pendency of the action.
However if the party in its written statement does not put in a prayer asking for the matter to be referred to Arbitration under Section 8, I wonder how the courts can do it, although the section appears (on a bare reading) to make it incumbent upon the Courts to do so. According to me a prayer to the effect of allowing the parties to refer the disputes to Arbitration under Section 8 would very much be required.
Also under Section 16 the Arbitrator has a right to rule on its own jurisdiction, therefore even if the Plaintiff subsequently objects, the "judicial authority cannot take that into consideration.
Vis a vis section 89 of the CPC, one needs to recognise that this remedy would be available even if the application under Section 8 is rejected provided ofcourse the requirements of Section 89 is satisfied.

Aditya said...

Well written!!!
You are right as far as subsection (3) of the section 8 is concerned and that has been by the Supreme Court itself in the matter of P. Anand Gajapathi Raju & Others vs. P.V.G. Raju (Dead) & Others. It further goes on to say that an Arbitration Agreement can be brought into existence during the pendency of the action.
However if the party in its written statement does not put in a prayer asking for the matter to be referred to Arbitration under Section 8, I wonder how the courts can do it, although the section appears (on a bare reading) to make it incumbent upon the Courts to do so. According to me a prayer to the effect of allowing the parties to refer the disputes to Arbitration under Section 8 would very much be required.
Also under Section 16 the Arbitrator has a right to rule on its own jurisdiction, therefore even if the Plaintiff subsequently objects, the "judicial authority cannot take that into consideration.
Vis a vis section 89 of the CPC, one needs to recognise that this remedy would be available even if the application under Section 8 is rejected provided ofcourse the requirements of Section 89 is satisfied.

Sumit Rai said...

I think sec. 89 CPC applies only in court ordered arbitrations, not in arbitrations pursuant to an agreement to arbitrate. Sukanya Holdings made clear that sec8 arb. act is independent of sec. 89 CPC.

Aditya said...

Well ur interpretation is what I would subscribe to as well. But lets for a moment read the relevant extract of the Sukanya case which is why I said what I did

"Reliance was placed on Section 89 of CPC in support of the argument that the matter should have been referred to arbitration. In our view, Section 89 CPC cannot be resorted to for interpreting Section 8 of the Act as it stands on a different footing AND IT WOULD BE APPLICABLE EVEN IN CASES WHERE THERE IS NO ARBITRATION AGREEMENT for referring the dispute for arbitration. Further, for that purpose, the Court has to apply its mind to the condition contemplated under Section 89 CPC and even if application under Section 8 of the Act is rejected, the Court is required to follow the procedure prescribed under the said Section"

The "... EVEN IN....." coupled with the last few lines is what caught my attention.

So probably it could cover cases where there is an Arbitration Agreement but the Section 8 application has been thrown out on a technicality (the subject of ur blog) and subsequently the court comes to a conclusion that it is a fit case to be referred to Arbitration.

Sounds a bit absurd but not outlandish or impossible considering the assignments in the Bombay High Court and if the two proceedings end up with different judges.

Sumit Rai said...

Aditya

My take on 89 was in response to the first comment. I agree with you on Sukanya Holding's interpretation.

On your point on how a court could refer parties to arbitration without a prayer under section 8, I have tried to answer it in the post. If a Respondent objects on this ground to the civil suit, and the Plaintiff's case evidences one parties intention to adjudicate a dispute - then the court can put together the both and refer them to arbitration. It does not sound logical to me that a pure defendant be 'forced' to ask for arbitration. He intends to defend alone - why should he be forced to ask for a claim against him?

Also, is not rendering an arb agr ineffective on a mere absence of prayer pedantic? I thought it was established that the absence of a prayer is a curable defect. I think once an objection is made in WS, the requirement of timing under sec 8 should be considered satisfied. the court can either consider that as an appln or ask the party to file an appln.

But I agree on a technical interpretation, court is correct. My argument in the blog is that such interpretation is a result of Sukanya Holdings rejection of ouster of civil court jurisdiction by an arb agr.

Renu Gupta said...

Hi. I want to make the following points:

1. Language of Section 8 is very clear. An objection has to be raised not later than filing the “first statement on substance of dispute”. The meaning of this phrase is clear in the Rashtriya Ispat judgment (see paragraph 9 of the Delhi High Court judgment)

By allowing an application under Section 8 after “first statement on substance of despite” has been filed, i.e., in this case the written statement, the provisions of Section 8 would be rendered otiose.

The judge in the Delhi High Court judgment rightly explains the rationale for this in paragraph 2, i.e., the defendant would be allowed to first commence trial and then stop it mid-way.

Ignorance of legal provisions can be no excuse for party to expect courts to stretch the law.

2. Once a written statement, i.e., first statement on the substance of dispute, has been filed, it is a statement on merits of the suit. After receiving summons in a suit where there is an arbitration agreement, the procedurally right thing to do for a defendant is to first file a Section 8 application saving its right to file a written statement later. The Court is mandated to decide such an application first.

Why must a party give its defence on merits first if it wants to raise an objection to jurisdiction?

3. One must appreciate that prayer for dismissal of a suit is not same as a prayer for reference of the subject matter of the dispute to arbitration, as sought in an application under Section 8. The very basis of a challenge under Section 8 is the existence of an arbitration agreement between the parties. If a party has not prayed for reference of the disputes to arbitration, the Court cannot exercise its jurisdiction under Section 8, simply because such jurisdiction has not even been invoked. Section 8 is required to be invoked by a party before a court exercises jurisdiction under it.

If the defendant has no counterclaims, even then if it seeks to raise its defence to the claims of the plaintiff before an arbitral tribunal, it must invoke Section 8. If it chooses not to invoke Section 8, then it is understood that the defendant wishes that the suit be decided on merits by the court and it has waived its right to seek a reference to arbitration under Section 8.


4. Section 89 of CPC is applicable to cases where there exists no arbitration agreement between the parties. This position of law has been recently upheld by the Hon’ble Supreme Court in the case of Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., Civil Appeal No. 6000 of 2010.

Krishna said...

Also in many instances, parties are wriggling out of Arbitration Agreement by simply adding a party who is not a party to the Arbitration Agreement , either as Proforma Defendant or otherwise to the Civil Suits filed by them. Unfortunately, Hon'ble SC too seems to have backed the practice in Sukayna Holdings and expressed helplessness and have held that in such a case it would lead to multiplicity of proceedings and Civil Court and not the Arbitrator is the proper forum of adjudicating such disputes. Has there been any shift in the position since ? (Kensoft Infotech vs Sundaram BNP Paribas 2010 Madras HC seems to suggest that the view still holds good).

Question arises though, if the other Defendant, who is not a party to Arbitration Agreement, is also willing to submit itself to Arbitration by making Application U/S. 89 CPC, then whether the S.8 Application of other Defendant deserves to be considered and the parties be directed to Arbitrator, for there would be no such multiplicity of proceedings ? Would be interested to know if any judgment dealt on this aspect ?

Renu Gupta said...

@ Krishna - If I may respond to your query.

The law is crystal clear that only a "party" to an arbitration agreement can take recourse to arbitration.

In your example, the third person who has disputes and wants them resolved through arbitration, has to first seek a consensual arrangement, or in other words, arrive at an arbitration agreement with the other party, to resolve their disputes through arbitration.

In the absence of any privity of arbitration agreement between two parties, neither can take recourse to arbitration, even under Section 89 of CPC, where court with consent of parties refers them to arbitration.

ARS said...

Achint Ranjan Singh, Adv
Singh.achint@gmail.com
In a recent judgment of Union of India v Tantia Construction Private Limited [2011 (4) SCALE 745], the Supreme Court of India has held that the existence of an arbitration clause in an agreement does not bar the parties from invoking the writ jurisdiction of the High Courts and the Supreme Court without exhausting the alternative remedies available to them.

In this case, East Central Railways (ECR), a public sector undertaking, had issued a tender in relation to the construction of a rail over-bridge at Bailey Road over the proposed railway alignment over the Ganga Bridge at Patna for an approximate cost of Rs. 15.42 crores (the “Project”) which was awarded to Tantia . However, owing to necessity of additional work, Tantia was requested to undertake the same at the pre estimated cost quoted by it at the time of tender documentation. Tantia resisted this by moving to the Patna High Court, which stated that the entire work could not be thrust on Tantia at its risk and cost. The Union of India appealed to the Supreme Court, arguing that since the agreement between the parties had an arbitration clause in respect of all disputes, the Writ Court was not competent to decide the issue involved in the dispute which had been raised by the respondent company.

Union of India’s arguments were based on Section 5 and Section 8 of the Arbitration and Conciliation Act, 1996, which read as follows:

Section 5: Extent of judicial intervention. Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.

Section 8 (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.

Further, the maintainability of the writ petition on account of the arbitration clause included in the agreement between the parties was also questioned.

Tantia argued that on account of an alteration in the design of the Project, which included a completely new work project, a fresh tender needed to be floated since the new work could not be treated to be part of the initial contract. Tantia submitted that it had never been it’s intention to execute the entire work, including the variation on account of the alteration of the design, at the same rates that it had submitted for the initial work in relation to the Project.

In this case, the Supreme Court referred to and relied on the decisions of Harbanslal Sahnia v. Indian Oil Corporation Limited (2003) 2 SCC 107; Whirlpool Corporation v. Registrar of Trade Marks (1998) 8 SCC 1; National Sample Survey Organization and Another v. Champa Properties Limited and Another (2009) 14 SCC 451 and Hindustan Petroleum Corporation Limited and Ors. v. Super Highway Services and Another (2010) 3 SCC 321 wherein the Supreme Court observed that the rule of exclusion of writ jurisdiction by availability of an alternative remedy, was a rule of discretion and not one of compulsion and there could be contingencies in which the High Court exercised its jurisdiction inspite of availability of an alternative remedy.

In relation to the same, the Supreme Court held “Injustice, whenever and wherever it takes place, has to be struck down as an anathema to the rule of law and the provisions of the Constitution”

On a concluding note, the Supreme Court observed that an alternative remedy would not be an absolute bar to the invocation of the writ jurisdiction of the High Court or the Supreme Court by the concerned parties and if there is a fit case for invoking the writ jurisdiction, the Courts can go ahead and do so.