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Power of Court to Refer Parties to Arbitration

Categories: Arbitration & ADRs
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Published on: January 26, 2013

Arbitration is a settlement of dispute by the decision of one or more persons called arbitrators. It is an arrangement for investigation and settlement of a dispute between opposing parties by one or more unofficial persons chosen by the parties. In arbitration some dispute is referred by the parties for settlement to a tribunal of their own choosing. The dispute is not submitted for decision to the ordinary courts but to a domestic tribunal. It is thus a method of settling the disputes in a quasi-judicial manner. The essence of arbitration is that the arbitrator decides the case and his award is in the nature of a judgment. Arbitration is speedy and inexpensive method of setting the disputes between the parties.

Arbitration is a striking feature of ordinary Indian life and it prevails in all ranks of life to a much greater extent than is the case of England. To refer matter to arbitration is one of the natural ways of deciding many disputes in India.

The Arbitration and Conciliation Act, 1996 increased the powers of the Arbitrators but could not avoid the role of court. One of the main objectives of the Act is to minimize the supervisory and interventionary role of courts in arbitral process.

The laws governing arbitration agreements in India and enforcement of foreign arbitral awards are embodied in the Arbitration and Conciliation Act, 1996. Section 89 of the Code of Civil Procedure 1908 gives authority to the courts to refer some cases to arbitration. This project highlights the power of court to refer parties to arbitration. The scope of the project has been restricted to the power of court to refer parties to arbitration.

POWER OF COURT TO REFER PARTIES TO ARBITRATION

If an action is brought before the Court despite having an arbitration agreement in existence and if a party so applies with the original arbitration agreement or a duly certified copy thereof not later than when submitting his first statement on the substance of this dispute, the court may refer the dispute to arbitration under Sec. 8 of the Arbitration and Conciliation Act 1996. Unless the application is without the original arbitration agreement or duly certified copy the court shall not entertain the application.

Section 8 of the Arbitration and Conciliation Act 1996 read as under:

(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.

(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.

(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.
In case Wankanner Jain Social Welfare Society V Jugal Kishore Sapani
The respondent had filed a suit for interim injunction. The petitioner, after receiving the notice, entered appearance and filed counter and argued the matter. Thereafter the petitioner moved an application under Section 8.
The court held that filing of the counter by the petitioner was clearly the first statement on the substance of the dispute and an application, after submitting the first statement on the substance of the dispute, was not maintainable. It was further held that filing of the counter by the petitioner points to the petitioner subjecting itself to the jurisdiction of the Civil Court and accordingly, dismissal of the application under Section 8 is in accordance with law.

Analysis of Section 8 of the Arbitration and Conciliation Act 1996

Section 8 of the Act, 1996 is on the pattern of Article 8 of the Model Law; however, Section 8 has its distinction from Article 8 of the Model Law, which are the followings:
i. If, an agreement is not null and void and one of the parties to an arbitration agreement before proceeding with the subject-matter before the court, makes request in his first statement to refer the subject-matter to an arbitration but not at later stage, such subject-matter would be referred to an arbitration, it is operative and capable of being performed.

ii. If, the subject-matter has been brought before the court as in the aforesaid manner and consequently arbitral proceedings commenced or continued, an arbitration tribunal may make an award while the issue is pending before the court.

It is important to note that Section 8 of the 1996 Act postulates, not only request by the party for staying legal proceedings but also contemplates for referring the parties to arbitration. Detail analysis of Section 8 of 1996 Act is given below:

A. Expression “party” under Section 8- meaning of
Although, section 2(1)(h) of the 1996 Act defines the expression “party”, it means a party to an arbitration agreement. Thus, the party to an arbitration agreement, may be between two or more persons, it may also be between body of persons or incorporated bodies. But, certainly they are parties to dispute who submit their dispute for settlement under the arbitration agreement.
It is to be noted that the “party” referred to in section 8 of 1996 Act is a party who is entitled to maintain the application thereunder.

B. Nature of Section 8
The Supreme Court in Hindustan Petroleum Corporation Ltd. V. Pink City Midway Petroleum’s AIR 2003 SC 2881, has held that Section 8 is pre-empotory in nature and mandatory for Civil Court to refer the dispute to arbitrator if the agreement contained arbitration clause., the Supreme Court observed if there is any objection as toi application of arbitration clause to the facts of the case, same will have to be raised before the concerned Arbitration Tribunal.

C. Section 8 – Determination of existence of arbitration agreement
In case AK Jaju Vs Avni Kumar:
There were 2 agreements of which the 2nd one did not contain an arbitration agreement but was alleged to be in continuation of the first agreement. The plaintiff argued that the 2nd agreement was executed in supersession of the first one and thus no reference of dispute could be made to an arbitral tribunal.
The court held that the hand written endorsement at the top of the agreement implied that the same was in continuation to the earlier agreement and was to be treated as part and parcel of the earlier agreement. The 2nd agreement was necessitated to modify certain terms and conditions in the first agreement and not to override it.

D. Section 8 & 11 – Application before District Judge not maintainable
In case NEPC-MICON Ltd Vs Perfect Engineering (Mysore) Works:
The party had made an application under Section 8 for a direction to appoint an arbitration in terms of the arbitration clause, before the Principal District Judge. The issue that arose was whether the court can entertain such a prayer and it was held no.

The court stated that it is of utmost importance to note that under the scheme of the 1996 Act, an application simplicitor for referring the matter to an arbitrator is entertainable only by the concerned Chief Justice of the High Court or any person or institution designated by him, as has been specifically contemplated under Section 11. In the court’s opinion, the lower court had erred in assuming jurisdiction under Section 8 for entertaining the application.

E. Expression “first statement on the substance of the dispute”-meaning of
The expression ‘first statement on the substance of the dispute’ contained in sub-section (1) of section 8 must be contra-distinguished with the expression ‘written statement’. It employs submission of the party to the jurisdiction of the judicial authority. What is, therefore, needed is a finding on the part of judicial authority that the party has waived his right to invoke the arbitration clause. If an application is filed before actually filing the first statement on the substance of the dispute, the party cannot be said to have waived his right or acquiesced himself to the jurisdiction of the court; Rashtriya Ispat Nigam Ltd. v. Verma Transport Company, AIR 2006 SC 2800.

F. Section 8 – Entering into arbitration agreement after dispute has arisen
In case P. Anand Gajapathi Raju Vs. PVG Raju:
In the instant case, during the pendency of the appeal before Supreme Court, all the parties entered into an arbitration agreement and agreed to refer their dispute to a retired Supreme Court Judge as sole arbitrator. The agreement was in the form of an application and had been signed by all the parties.

It was held that the agreement need not already be in existence; the phrase ‘which is the subject of an arbitration agreement’ does not necessarily require that the agreement must already be in existence before the action is brought in the Court- the phrase also connotes an arbitration agreement being brought into existence while the action is pending.
The court further stated that the arbitration agreement satisfied the requirements of section 7 and that the language of section 8 is peremptory. It is therefore obligatory for the court to refer the parties to arbitration in terms of their agreement. An application under section 8 merely brings to the court’s notice that the subject matter of the action before it is the subject matter of an arbitration agreement.

G. Section 8 – Limitation for application
In case Sunil Kumar Vs AAKAR:
This case considered the issue of limitation for petition for appointment of arbitrator. The right to invoke the arbitration clause accrued to the petitioner in 1996 who filed this instant petition in 2000.
In view of the given facts and circumstances, it was held that the right to file the application arose on the date when the petitioner intimated to the respondent that he was no longer interested in the partnership and sought dissolution and not from the date of the notice given 3 years later. Therefore the petition is barred by time and dismissed.

The court further elucidated that the right to invoke the arbitration clause accrues to a party the moment differences or disputes arise and are brought to each other’s notice. No party can be allowed to sleep over or continue for years as in the present case where the petitioner had waited for 3 years to invoke the clause. It is not the date on which the notice is sent for invoking the arbitration clause which is relevant but the moment differences arise and are brought to each other’s notice.

H. Section 8(1) – Formal application necessary
In case Sunair Hotels Ltd Vs Union of India:
The issue was whether a formal application was necessary under section 8(1) and it was held in the affirmative.

The court held that section 8(1) specifically speaks about the party applying to the Judicial Authority for referring the parties to arbitration. Section 8(2) states that the application will not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. In view of the clear provisions of Section8, it cannot be said that a formal application is not required.
Considering the whole scheme of the Act, the option available to the party to subject himself to the jurisdiction of the Judicial Authority without resorting to arbitration, the stipulation of time when the application for reference should be filed and the specific condition that the application should be accompanied by the original arbitration agreement or a duly certified copy thereof, there is no doubt that the application under section 8(1) is a formal application.
I. Section 8(1) – Meaning of judicial authority
In case Management Committee of Montfort Sr Sec School Vs Vijay Kumar:
The issue that came up for consideration was whether the Delhi School Tribunal set up under section 8(3) of the Delhi School Education Act was a ‘judicial authority’ within the meaning of section 8(1).

It was held that as such, when an authority other than a court in the ordinary sense, is in discharge of the duties which are expected to be acted out fairly and honestly or the authority exercises some of the powers akin to the powers of a civil court, it may not be a court in its strictest sense but it would essentially fall within the definition of a judicial authority. It is bound by law to act on the facts and circumstances as determined upon the enquiry in which a person who is to be affected is given full opportunity to place his case.

J. Section 8(2) – Xerox copy of original arbitration agreement is acceptable
In case ITC Classic Finance Ltd Vs. Grapco Mining & Co.:
The issue came up as the present application had annexed with it, Xerox copies of the lease agreement which also formed part of the plaint filed in the suit. The said lease agreements were relied upon by both the parties and it was not disputed that the said Xerox copies were indeed true copies of the original documents.

It was held that the Xerox copies of the said lease agreement containing the arbitration clause were in sufficient compliance with Section 8(2) of the Act.

K. Section 8(3) – Reference of dispute to arbitrator during pendency of civil suit
In case Air Conditioning Corporation Ltd, Calcutta Vs. Rajasthan Agriculture University, Bikaner:
According to the facts, a dispute arose between the parties which were referred to arbitration in 1999. While the proceedings were going on, the petitioner filed an application u/s 17 for interim measures which was allowed by the arbitrator in 2002. The Respondent appealed before the District Judge Bikaner u/s 37 and the order was set aside. Aggrieved by this decision, the petitioner filed the revision petition which was allowed.
The petitioner, in 2004, had filed another application u/s 151 CPC stating that since the arbitrator had passed the final award in 2003, which was published in 2004, the respondent should be directed to pay according to the terms of the award.

It was held that there is no dispute that if any final order is passed in the proceedings before any forum, the life of the interim order comes to an end with the passing of the final order in that proceeding. In the present case, the arbitrator had passed an interim award in 2002, which was set aside by the District Judge. However, with the passing of the award in 2003, the life of the interim orders dt. 2002 passed away and therefore, this revision petition has become infructuous.
It was further held that this Court cannot give any directions for execution of terms of the final award because it will be the domain of the Executing Court before whom the execution petition for executing the award is filed.

ROLE OF COURTS IN THE ABSENCE OF AN ARBITRATION AGREEMENT

In the recent case of Afcons Infrastructure Ltd v Cherian Varkey Construction Co (P) Ltd, the Supreme Court was challenged with a situation whether the court can refer the parties to arbitration under section 89 of the Code in the absence of an arbitration agreement between the parties. After an elaborate and detailed analysis, the Division bench held that the Civil Courts are not empowered to refer a suit to arbitration without the consent of both parties and the consent of all parties to the suit is mandatory for reference to arbitration under section 89 of the Code.

In this case, Cochin Port Trust (“the second respondent”) was entrusted with the work of construction of certain bridges and roads for Afcons Infrastructure (“the appellants”) under an agreement dated 20th April, 2001. The appellants sub-contracted a part of the construction work to Cherian (“the first respondent”) under an agreement dated 1st August, 2001. The agreement between the appellants and the first respondent did not contain any provision for reference of the disputes in case of any to arbitration.

When disputes arose, the first respondent filed a suit in the trial court against the appellants for recovery of approximately Rs. 2.10 crores and their assets and/or the amounts due to the appellants from the second respondent, with interest @ 18% p.a. The trial court passed an order of attachment for a sum of Rs. 2.25 crores. Thereafter in March 2005, the first respondent filed an application under section 89 of the Code before the trial court praying that the court may formulate the terms of settlement and refer the matter to arbitration.

The appellants filed a counter statement dated 24th October, 2005 to the above application of the first respondent submitting, that they were not agreeable for referring the matter to arbitration or any of the other alternate dispute resolution processes under the Code. Simultaneously, the appellants also filed an Appeal against the order of attachment in the High Court of Kerala which by an order allowed the appeal filed by the appellants against the order of attachment and raised the attachment granted by the trial court subject to certain conditions. While doing so, the High Court also directed the trial court to consider and dispose off the application filed by the first respondent under section 89 of the Code which deals with referring the parties to arbitration.

The order was challenged before the SC by the appellant who filed a Special Leave Petition. When the matter was heard, two imperative questions were raised by the SC:

(i) What is the procedure to be followed by a court in implementing section89 and Order 10 Rule 1A of the Code? and

(ii) Whether consent of all parties to the suit is necessary for reference to arbitration under section 89 of the Code?

After in-depth discussions and analysis of the various provisions under the Code dealing with arbitration the SC reiterated and confirmed the order which was passed in the case of Jagdish Chander v. Ramesh Chander stating that no reference can be made to arbitration even under section 89 of the Code unless there is a mutual consent of all parties, for such reference.

Under the circumstances, the above questions were answered as follows:

(i) The trial court did not adopt the proper procedure while enforcing section 89 of the Code. Failure to invoke section 89 of the Code suo moto after completion of pleadings and considering it only after an application under section 89 was filed was erroneous; and

(ii) A civil court exercising power under section 89 of the Code cannot refer a suit to arbitration unless all the parties to the suit agree for such reference.

The appeal filed by the appellants was allowed and the order of the trial court referring the matter to arbitration and the order of the High Court affirming the said reference are set aside.

The provisions of section 8 of the Arbitration and Conciliation Act, 1996 also clearly indicate that parties can be referred to arbitration only in the presence of an arbitration agreement and not otherwise. Thus, the SC was right in holding that parties cannot be referred to arbitration in the absence of an arbitration agreement unless by their mutual consent.

INTERFERENCE OF COURTS IN REFERRING DISPUTES TO ARBITRATION

Section 8 of the Indian Arbitration and Conciliation Act, 1996 empowers the court to refer a matter before it to arbitration, in the event that the matter falls within the scope of an arbitration agreement between the parties. The Indian Supreme Court in a string of judgments has categorically held that this reference is mandatory and the judicial authority has no discretion in the same. As such, Section 8 was seen to echo the objectives of the Act, in that it curtailed judicial interference thereby ensuring speedier resolution of matters. On closer scrutiny, it appears that the judiciary over a period of time has tinged Section 8 with a discretionary element to justify its interference in matters, e.g. tainted with elements of criminality or involving serious allegations of fraud. This is best illustrated by the recent Judgment in Radhakrishnan v. Maestro Engineers.

In Radhakrishnan v. Maestro Engineer, disputes arose between parties who were partners in a partnership firm. The disputes also involved allegations of fraud, collusion and financial malpractices, which allegedly resulted in the unfair retirement of N. Radhakrishnan (the Appellant) and the reconstitution of a new partnership deed. Maestro Engineers filed a suit before the District Court seeking a declaration that N. Radhakrishnan was not a partner of the firm. As a counter blast to this Suit, N. Radhakrishnan filed an Application under Section 8 seeking reference to arbitration since the Partnership Deed had an Arbitration Clause. This Application for reference to Arbitration was rejected by the Trial Court and by the Madras High Court as well on the basis that the allegations of fraud merited detailed appreciation of evidence which could only be settled in court.

The Supreme Court, despite having found that the subject matter of the suit was within the jurisdiction of the Arbitrator, concurred with the interference of the High Court on the basis that the Court, as opposed to the Arbitrator, was the more competent forum to deal with the dispute raised by the parties. In support, the Supreme Court referred to its earlier decision in Abdul Kadir and the High Court decision in Oomor Sait which observed that the court is a more appropriate forum to adjudicate matters involving scrutiny of derailed oral and documentary evidence, given that rules of procedure and evidence are not binding in arbitration.

Fraud, financial malpractice and collusion are weighty allegations having criminal repercussions. The arbitrator is a creature of the contract, and his Jurisdiction is limited to the four corners of the Contract. The courts, to the contrary, are guided by exhaustive provisions of the Evidence Act, Codes of Civil and Criminal Procedure making it more equipped to adjudicate serious and complex allegations and are competent to offer a wider range of reliefs to the parties in dispute. It is against this background that the courts have resisted the mandatory reference in fraud allegations and cloaked its interference under the armor of discretion.

Whilst the intent of the judiciary has a rationale, it remains to be seen how far in practice, will the Courts broaden the scope and extent of their interference in Arbitral proceedings, by taking aid of this view. This may well be used to strike a blow to party autonomy, which is the very root of evolution of Alternate Dispute Resolution Mechanisms, including Arbitrations.

CONCLUSION

The foundation of arbitration is the Arbitration Agreement between the parties to submit to arbitration all certain disputes which have arisen or which may arise between them. Thus, the provision of arbitration can be made at the time of entering the contract itself, so that if any dispute arises in future, the dispute can be referred to arbitrator as per the agreement. It is also possible to refer a dispute to arbitration after the dispute has arisen. Arbitration Agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. The agreement must be in writing and must be signed by both parties. The Arbitration Agreement can be by exchange of letters, document, telex, telegram etc.

The laws governing arbitration agreements in India and enforcement of foreign arbitral awards are embodied in the Arbitration and Conciliation Act, 1996. Section 89 of the Code of Civil Procedure 1908 gives authority to the courts to refer some cases to arbitration. The provisions of section 8 of the Arbitration and Conciliation Act, 1996 clearly indicate that parties can be referred to arbitration only in the presence of an arbitration agreement and not otherwise.

If a party approaches court despite the Arbitration Agreement, the other party can raise objection. However, such objection must be raised before submitting his first statement on the substance of dispute. Such objection must be accompanied by the original Arbitration Agreement or its certified copy. On such application the judicial authority shall refer the parties to arbitration. Since the word used is “shall”, it is mandatory for judicial authority to refer the matter to arbitration. However, once first statement to court is already made by the opposite party, the matter has to continue in the court. Once an application is made by other party for referring the matter to arbitration, the arbitrator can continue with arbitration and even make an arbitral award.

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