RELEGATION OF ARBITRATION TO A CIVIL SUIT

Submitted to:

Mr. S.K.Sinha


(Faculty, International Commercial Arbitration)



Date of Submission: October 10
th
, 2014



SUBMITTED BY:

Kapil Maini

Semester: VII

Roll No. 62




















HIDAYATULLAH NATIONAL LAW UNNIVERSITY, RAIPUR (CG)



1



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 teacher Mr. 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






















3
LIST OF ABBREVIATIONS



1. AIR- All India Reporter
2. All- Allahabad
3. 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 civil
suit



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, shall refer 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 peremptory and
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 its
first statement on the substance of the dispute.




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

2
P. Anand Gajapati Raju v. P.V.G. Raju, (2000) 4 SCC 539

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


7

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.
5
The 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 to Anand Gajapati Raju case
6
has 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 531

5
Ramakrishna Theatre Ltd. v. General Investments & Commercial Corpn. Ltd., ILR 2003 Kar 3463

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


8

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 in HPCLcase3 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. case
7
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. case
8
was 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
in Konkan Rly.

The Supreme Court has now in HPCL
9
held 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 HPCL case3. It is submitted that HPCL
case
10
requires to be reconsidered especially in the light of the decision in Sukanya Holdings
case
11
and the other exceptions mentioned above.



7
Konkan Rly. Corpn. Ltd. v. Rani Construction (P) Ltd., (2002) 2 SCC 388


8
Ibid

9
Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503

10
Ibid

11
Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503


9

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 Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums
13
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 8 of 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

13
2003 (6) SCC 503


10

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 Anr
14

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. Sterlite Industries (I ndia) Ltd.
15
wherein this Court
under para 4 observed:

Sub-section (1) of Section 8 provides 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.










14
AIR 1962 SC 406

15
AIR 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
Sait
16
wherein 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, carrying on similar business without consent of
other partner are serious allegations of fraud, misrepresentations etc., and therefore

application for reference to Arbitrator is liable 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 there
is 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


16
2001 (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 7
th
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 1
st
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 1
st
Addl. 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 7
th
of April 2003
and had not filed the original copy thereof. Further, Ex-P23 is the notarized copy of the
Partnership deed dated 6
th
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 7
th
of April, 2003, still the Court
would not be empowered to refer the matter to an Arbitrator

13

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 1
st
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



























15