The initiation of arbitration proceedings is customary on the arbitrability of the dispute. Section 7 of the Arbitration and Conciliation Act, 1996 (“The Arbitration Act”) provides for arbitration agreement. An Arbitration agreement is an agreement to submit present or future disputes (whether they are contractual or not). Russell on Arbitration, 22nd Edition states, an arbitration agreement is therefore a contractual undertaking by two or more parties to resolve disputes by the process of arbitration, even if the disputes themselves are not based on contractual obligations. From the aforementioned definition it can be said that agreement which allows the parties to submit their disputes in front of a third independent party.
Section 2(1) (h) of the Arbitration Act defines Party: ‘Party’ means a party to an arbitration agreement. The bare language would lead to conclude only the parties to an arbitration agreement can refer their disputes to arbitration. However, at times party tries to wiggle out of their contractual obligation and subsequently deny the existence of an arbitration agreement or worse off, they question its validity. Section 8 of the Arbitration Act provides for courts obligation to refer the parties to arbitration in light of an existing arbitration clause. Where an arbitration agreement exists, the court is under an obligation to refer the parties to arbitration in terms thereof. [Agri Gold Exims Ltd. v. Sri Lakshmi Knits & Wovens]
The article here will reflect and illuminate of the essentials of maintainability of suit in light of section 8, the suits which are barred and the suits which are not barred.
The prerequisites to be followed while filing a petition under Section 8 of the Arbitration Act have been duly recognized by the High Court of Madras in the case of Kotak Mahindra Finance Ltd. v. T.N. Balasubramanian. The conditions to be satisfied before approaching the court as are follows:
• An arbitration agreement exists;
• Action has been brought forth by a party to the arbitration agreement against the other; • Subject matter of the action and arbitration are in line;
• Reference of arbitration by the other party prior to filing of the first statement in dispute.
The reference to arbitration is dependent on the requirements of the section being satisfied by the parties [Kohinoor Creations v. Syndicate Bank]. An application visualized under this section has to be a written application, said the Bombay High Court in the case of Garden Finance Ltd.
v. Prakash Industries Ltd. The question of who proves the onus to be not bound by the arbitration agreement arises. Ideally, the agreement exists. The parties are factually bound and contractually bound by it, in such scenario the onus to prove lies on the plaintiff. [Ranwa Const. Co. v. Administrator, Pant Krishi Bhawan]
SUITS BARRED UNDER SECTION 8
The following grounds are debarred from filing by a party to an arbitration agreement. They are as follows:
i .A suit to challenge an award or an agreement: The agreement and award cannot be challenged or enforced by a civil suit. As decided in the case of Ratanji Virpal & Jamnadhar Rungta respectively.
ii. A suit for affirm agreement or award: a declaration for the same is barred. [Jawahar Lal Burman v. Union of India]
iii. Suits arising out of arbitration agreement: The differences or disputes arising out of a contract, which fall under the subject matter of the arbitration agreement, shall be only adjudicated by the arbitral tribunal. [Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khaitan]
iv. Matters already referred to arbitration: where arbitration proceedings have begun, the same subject matter cannot be the cause of action or is maintainable in a civil suit. [Abhishek Mehra v. DLF Commercial Developers Ltd.]
v. False allegations for undue influence: A party cannot be allowed to tale advantage of an agreement for ten years and later seek to avoid it by saying that it was induced by undue influence. [Champa Pictures v. Md. Ibrahim Chamoo]
vi. Claims on account of extra or consequential service on the basis of oral instructions: Such claims fall under the purview of arbitration agreement and hence, to be decided by the arbitrator. [Avtar Singh Gujral v. National Power Construction Corp. Ltd.]
SUITS NOT BARRED UNDER SECTION 8
The following grounds are not barred notwithstanding the quiddity of an arbitration clause:
i. Stranger to a contract
a. A stranger to a contract against whom a relief or an award has been granted, can challenge the validity of the award through an suit. [Nathuni Pandey v. Paras Pandey]
b. Where a partnership has been reconstituted illegally, in such scenario, a stranger cannot be debarred from filing a suit. [Atul Singh v. Sunil Kumar Singh]
ii. Suits alleging fraud
A. The court should not refer the matter where a case is made out to be a prima facie case of fraud. [Jayant Mulchand Shah v. Elsen Und Metall Aktiengfsells] b. In the case of Raja Picture Palace, the Andhra Pradesh laid down some grounds where the court will be held to be rightful in not referring the matter to arbitration.
i . The dispute involves grave allegations of fraud or misrepresentation;
ii. The plaintiff alleges collusion and conspiracy among the defendants;
iii. The dispute involves determination of complicated questions of law which can be properly decided by a court;
iv. The arbitration agreement itself is disputed, and;
v. There is a good ground for apprehending that the arbitrators will not act fairly in the matter.
Howbeit, where an allegation is made on the basis of fraud, can also be tried under an arbitrator, a mere allegation or fabrication of a claim by the petitioner, cannot be said to take away the matter from arbitration. [Ministry of Sound Int’l Ltd. v. Indus Renaissance Partners Entertainment Pvt. Ltd]
iii. Subject matter of suit not arising out of arbitration agreement: Any relief independent of the subject matter of arbitration is maintainable in a suit.[ P. Narayanan Nair v. E. Achuthan Nair] iv. Suit for specific performance and further relief: Dispute pertaining to specific relief has to be decided by the Arbitral Tribunal, whereas, further relief not falling under the subject matter is not barred. [Shanti Mann v. Moral Properties & Mulchand v. Tolaram respectively]
v. Suit by Minor and Criminal Proceedings: A minor can sue to set aside an award ordered against him on the basis that the reference to arbitration was made without leave of the court as required by Order 32, Rule 7, CPC. [Davuluru Vijaya Ramayya v. Venkatasubha Rao]
An arbitration agreement cannot prevent a criminal prosecution against an accused. [S. W Palantikar v. State of Bihar]
vi. Long Pendency of suit and to avoid multiplicity of litigation: If a matter has been pending for more than 20 years, then the available remedy lies in a suit and not arbitration. [State of UP v. Janki Saran Kailash Chandra]
If a matter against a single party and a non party to an agreement cannot be split up it should not be referred to arbitration. Bifurcation of the subject matter of the suit is not permitted. [Barirum Chemical Ltd. v. Bombay Industrial and Chemical Co.] vii. Suits under Special Enactments and statutory arbitration: The Arbitration Act does not have overriding effect over Lex Specialis (Special Enactments) or statutory arbitration as mentioned under Indian Telegraph Act and the Displaced Persons (Debt Adjustment) Act of 1951.
viii. Settlement of disputes between Public Sector Undertaking (PSU’s) : Dispute between two PSU’s are referred to a High Power Commission for resolution as per policy of the Government of India. [Board of Trustees of Chennai Port Trust v. Ircon Int’l Sree Bhavani Builder (JV)]
An application made under section 8 for referring the matter to arbitration is not a suit by nature. It’s a proceeding for the determination of the said question. A court cannot pass an order and direct a person be made a party to the arbitration. [Patanjali v. Rawalpindi Theaters Pvt. Ltd.] The similar recourse for international commercial arbitration lies under Section 45 of the Arbitration Act. This section is different from what is envisaged in Section 89 of CPC. Section 89 empowers to refer those matters to arbitration which per se do not contain an arbitration clause or an agreement, but, fall under the scope of arbitration. Similarity lies in approaching the court, the parties wanting to enforce arbitration approach the court of proper jurisdiction as the case may be.
The application filed under section 8 of the arbitration act is in the nature of a summary proceeding. This was held by the Bombay High Court in the case of Shriram Hanutram v. Mohanlal & Co. The judiciary is qualified and tethered to decide the issue of jurisdiction raised before it. A court can look into plaints [Lal Chand v. Alliance Jute Mills Co. Ltd.], affidavits and counter affidavits. [Mithailal Gupta v. Inland Auto Finance] The determination to be made by the court is apropos the circumstances in which recourse has been sought for by the party. The courts have to analyze if the particular party has prima facie made out a case for seeking recourse to civil suit for appropriate relief or not. [Ramji Dayawala & Sons (P) Ltd. v. Invest Import] The Court has to state sufficient reasons for denying or referring the matter to arbitration. [Raghunandan Sao v. Narain Sao].