Author: Adv. Vidya Bharath Puthran, Bangalore
Introduction:
Section 8 of the Arbitration and Conciliation Act, 1996 provides ‘Power to refer parties to arbitration where there is an arbitration agreement’. It is clear that an Arbitration Agreement should exists between parties to the suit and if in spite of the arbitration agreement, one of the party files a suit against the other party to the arbitration agreement, then the defendant in that suit has to file an application under Section 8 before filing his first statement of defense on merits and raise an objection that, there exists an arbitration agreement between the parties and parties to the suit and parties to the agreement are same, the dispute which is subject matter of the suit is also covered by the arbitration agreement.
Section 8 reads as under;
"8. Power to refer parties to arbitration where there is an arbitration agreement-
(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 to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.
(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof: Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.
(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made."
Ingredients of Section 8:
In P. Anand Gajapathi Raju v. P.V.G. Raju AIR 2000 SC 1886 Hon’ble Supreme Court held that the following conditions are to be satisfied in an application under Section 8 of the Arbitration and Conciliation Act, 1996;
(1) There is an Arbitration agreement.
(2) A party to the agreement brings an action in the court against the other party.
(3) Subject-matter of the action is same as the subject-matter of the Arbitration Agreement.
(4) The other party moves the court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.
The Hon’ble Supreme Court in this case also observed that, Agreement is not required to be already in existence before the action is brought in court. The phrase “which is subject of an Arbitration Agreement” in Section 8 also connotes an Arbitration Agreement being brought into existence while the action is still pending.
In order to afford the plaintiff a complete opportunity of being heard on an application under Section 8 of the Arbitration Act, it would have to be held that the party which seeks to refer the dispute to the Arbitrator has to make a written application for that purpose, so that the plaintiff who has instituted the suit knows exactly the grounds on which the reference is sought. Thus, the provisions of Section 8(2) indicate that the application that is contemplated by Section 8 (1) is a written application.[1]
In such event, when an application under Section 8 is filed, the view taken by the Supreme Court consistently is, that it is duty of that court to refer parties to arbitration. Court has to take a prima facie view whether arbitration agreement exists or not, court also has to see whether all the parties to arbitration agreement are parties to the suit and vice- versa. Also, entire cause of action of the suit should be covered by the arbitration agreement.
A two Judges Bench of Supreme Court in case of Zenith Drugs & Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd., 2019 SCC Online SC 946 has held that the parties can be referred to arbitration in an application filed under Section 8 of the Arbitration Act only if the subject matter of the action before the judicial authority relates to dispute which is the subject matter of the arbitration agreement. The conditions prescribed in Section 8 have to be satisfied for referring the parties to arbitration. Such an application can be made only if the subject matter of the suit is also the same as the subject matter of arbitration. Only those disputes which are specifically agreed to be resolved through arbitration can be the subject matter of the arbitration and upon satisfaction of the same, the Court can refer the parties to arbitration. Supreme Court held that in view of a party challenging the compromise decree alleging that it has been obtained by inducement and fraud, parties cannot be referred to arbitration. The merits of such a plea could be decided only by the Civil Court upon consideration of the evidence adduced by the parties.
According to Hon’ble Supreme Court in S.N. Palanitkar v. State of Bihar AIR 2001 SC 2960, “…merely because there is an arbitration clause in a commercial agreement, that cannot prevent criminal prosecution against the accused if an act constituting a criminal offence is made out even prima facie…”
Supreme Court in the case of H. Srinivasa Pai & Anr v. H.V. Pai (D) Thr LRs. & Ors (2010) 12 SCC 521 held that it does not matter whether the dispute is a civil suit or a commercial suit, only existence of Arbitration Agreement matters in deciding an application under Section 8 of the Act.
Supreme Court in India Household & Healthcare Ltd. v. L.G. Household & Healthcare Ltd. (2007) 5 SCC 510 held that, if the existence of arbitration clause is admitted, then the court ought to refer the dispute to arbitration. The validity of the Arbitration Clause or agreement will be presumed in such case.
In the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and Anr. (2003) 5 SCC 531 it was observed that, “in a matter which is the subject-matter of an arbitration agreement court is required to refer the parties to arbitration. Therefore, the suit should be in respect of ‘a matter’ which the parties have agreed to refer and which comes within the ambit of arbitration agreement.”
In the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 53 it was held that where the cause or dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration under Section 8.
In the case of N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC 72 wherein the Apex Court held that in disputes, where serious allegations against the opposite party are alleged for having committed malpractices in the account books, finances and the case relates to allegation of fraud, serious malpractices, such a situation can only be settled in court through furtherance of detail evidence adduced by either parties and such a case cannot be referred for arbitration, as arbitrator cannot properly go into the matter.
23rd October 2015 Amendment to Section 8-
· Judicial Authority compulsorily refer parties to arbitration irrespective of any decision by Supreme Court or any other Court, if the judicial authority finds that a valid arbitration clause prima-facie exists.
· Joinder of non-signatories to arbitration agreement not permissible.
· Order refusing to refer parties to arbitration is appealable under Section 37(1).
If the court refuses to appoint an arbitrator on the ground that, there does not exist any arbitration agreement, or some parties are not parties to the suit who are parties to the arbitration agreement. That order is now made appealable after 2015 amendment, by providing a remedy of appeal under Section 37(1) A.
Delhi District Court in the case of Subodh Kumar Singh v. SWO India Ltd. (2019) observed that, the Superior Courts in catena of cases have laid down the scope of judicial intervention, in cases where there is an arbitration clause with clear and unambiguous message that in such an event judicial intervention would be very limited and minimal. It is not out of place to mention that the Act provides for provisions to challenge the award, such as Section 34 and 48 of the Act, however, the Act does not provide the disputes which are non-arbitrable. The courts have held that certain kinds of disputes may not be capable of adjudication through the means of arbitration. The courts have also held that certain disputes such as criminal offences of public nature, disputes arising out of illegal agreements and disputes relating to status such as divorce cannot be referred to arbitration. The following category of disputes are treated as non-arbitrable:
i. patent, trademarks and copyright;
ii. anti-trust/competition laws;
iii. insolvency/winding up;
iv. bribery/corruption;
v. fraud;
vi. criminal matters.
Fraud is one such category spelt out by the decisions of the Apex Court, where disputes would be considered as non-arbitrable.
Conclusion:
The position in law is well settled that once there is an arbitration agreement in place and the same being a valid arbitration agreement, the courts must give deference to arbitration. Section 5 of the Act, prohibits judicial intervention. Section 8 of the Act contains a mandate that where an action is brought before a judicial authority in the matter which is the subject of an arbitration agreement, the parties shall be referred by court to arbitration, if a party to or a person claiming through a party to the arbitration agreement applies not later than the date of submitting the first statement on the substance of the dispute. The only exception is where the court finds prima facie that there is no valid arbitration agreement.
[1] Garden Finance Ltd. V. Prakash Inds. Ltd. AIR 2002 Bom 8.
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