K.B. Peethambaran vs E.V. Thomas @ Kunjachan, Laisa T.J. and George

R. Bhaskaran, J.—This original petition is filed challenging Ext.P5 order passed by the Additional Munsiff, Ernakulam, and Ext.P6 order closing O.S. No. 1341 of 2002 before that court. The petitioner is the plaintiff in the suit. The suit is filed for a permanent injunction restraining defendants 1 and 2 from carrying on any business in plaint items 1 to 3 other than the business of the firm by name "Slim Collections" of which the plaintiff and 1st defendant are partners and from dealing with, selling out or otherwise disposing of the readymade garments, tailoring units and equipments and the furniture and fittings for any purpose otherwise than for and on behalf of the firm. After receipt of summons in the suit, the defendants filed an application u/s 8 of the Arbitration and Conciliation Act. The trial court accepted the contentions of the defendants and found that in view of the arbitration clause in the partnership deed entered into between the parties, the dispute between the parties has to be settled by an arbitrator and the suit is not maintainable. The learned counsel for the petitioner submits that the respondents are not admitting that they are the partners and therefore the petition filed u/s 8 of the Arbitration Act is not maintainable. In support of the above contention, the learned counsel brought to my notice the description of the defendaNt in the petition filed u/s 8. In that, the defendant describes himself as the Proprietor of the business and therefore he submits that he cannot claim to be a partner also in which case the claim for referring the matter to the Arbitrator is not maintainable. Under the Scheme of the Arbitration Act when an arbitration agreement is existing between the parties and a dispute arises between them the matter has to be settled by the Arbitrator and if any suit is filed without invoking the arbitration clause, it is open to the defendant to point out the existence of the arbitration clause and request the court to stop further proceedings and refer the parties to the Arbitration. That is why it is stated that the application u/s 8 should be made not later than submitting his first statement on the substance of the dispute. He is not expected to disclose the defence in the statement u/s 8. All that he needs to say is that the parties have entered into an agreement providing for arbitration in the partnership and the court has to see whether the plaintiff has sought relief under the agreement which contains an arbitration clause. The learned counsel for the appellant/plaintiff has no submission that the relief sought for in the suit is not based on the partnership deed which contains an arbitration clause. There is also no submission that the dispute between the parties is not relating to the partnership business. Therefore, both the conditions are satisfied and the matter has to be decided by the Arbitrator.

The learned counsel for the petitioner sought the assistance of the decision of the Supreme Court in P. Anand Gajapathi Raju v. P.V.G. Raju (AIR 2000 SC 1886 ). It is stated in paragraph 5 of the judgment that the conditions to be satisfied for invoking Section 8 are (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, and (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. According to the learned counsel for the petitioner, conditions 1, 2 and 4 are present and condition No. 3 is not present. Condition No. 3 says that the subject matter of the action is the same as the subject matter of the arbitration agreement. As already noted earlier the reason for the learned counsel to contend that the subject matter is different is that the defendant has described himself as the Proprietor of the business in the petition filed u/s 8. That by itself is not sufficient to take the dispute outside the agreement between the parties as the petitioner himself has approached the Court on the basis of the partnership agreement. He cannot say that he is not having any dispute as per the partnership agreement. The learned counsel also relied on the decision in Haryana Telecom Ltd. Vs. Sterlite Industries (India) Ltd., . In that decision the Supreme Court has held that Sub-section (1) of Section 8 postulates that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide. That was a case where a petition filed u/s 8 was filed before the High Court dealing with the winding up of a company and the High Court rejected the petition stating that the High Court has no jurisdiction. That was affirmed by the Supreme Court. I do not think that the factual situation in this case is as was present in the case before the Supreme Court and therefore that decision will not apply to the facts of this Case.

Learned counsel for the appellant then contended that the respondent had filed a caveat in the District Court and in that caveat he had stated that the partnership agreement has not come into effect and therefore such a person cannot turn round and contend that the parties must be referred to an arbitration. It is not possible for this court to accept this contention. Though the caveat is not produced as an exhibit, a copy of the same was handed over to me for my perusal. In that caveat it is stated by the first respondent that though a document has been executed between the parties and the document is styled as a partnership deed it has not taken effect. According to the learned counsel if the first respondent himself admits that the partnership deed has not taken effect he cannot compel a reference to arbitration u/s 8 of the Act. In support of this argument learned counsel relied on the decision of the House of Lords in Heyman and Anr. v. Darwins Ltd. (1942 (1) All ER 337. The learned counsel relied on the sentences in page 341 which reads as follows:

"If the respondents were denying that the contract had ever bound them at all, such an attitude would disentitle them from relying on the arbitration clause which it contains; but that is not the position they take up. They admit the contract, and deny that they have repudiated it. Whether they have, or have not, is one of the disputes arising out of the agreement."

The observation is page 343 that if one party to the alleged contract is contending that it is void ab initio the arbitration clause cannot operate is also relied on. It is also pointed out that in page 360 it is stated that where the contract itself is repudiated in the sense that its original existence or its binding force is challenged, e.g., where it is said that the parties never were ad idem, or where it is said that the contract is voidable (e.g., in cases of fraud, misrepresentation or mistake) and that it has been avoided, the parties are not bound by any contract and escape the obligation to perform any of its terms including the arbitration clause, unless the provisions of the clause are wide enough to include the question of jurisdiction. Learned counsel also relied on the decisions reported in Dinasari Ltd. Vs. Hussain Ali and Sons and Another, , Birla Jute Manufacturing Co. Ltd. Vs. Dulichand Pratapmull, , Subhash Industries and Others Vs. Bhagwandas Ratanji Panchal, . All these decisions relied on by the learned counsel except the decision in 2000 (Suppl.) Arb. LR are under Arbitration Act 1940. There is marked difference between Section 34 of the Arbitration Act 1940 and Section 8 of the Arbitration and Conciliation Act 1996.

Section 34 of the Arbitration Act 1940 reads as follows:

Where any party to an arbitration agreement or any person claiming under him commences any legal proceedings against any other party in the agreement or any person claiming under him in respect of any matter agreed to be referred, any party to such legal proceedings may at any time before filing a written statement or taking any other steps in the proceedings, apply to the judicial authority before which the proceedings are pending to stay the proceedings; and if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the arbitration agreement and that the applicant was, at the time when the proceedings were commenced, and still remains ready and willing to do all things necessary to the proper conduct of the arbitration, such authority may make an order staying the proceedings."

Section 8 of the Arbitration and Conciliation Act 1996 reads as follows:

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 so applies not later than when submitting his first statement of 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.

Learned counsel for the respondents emphasised the word "may" in Section 34 of 1940 Act and the word "shall" used in Section 8 of the 1996 Act. It is therefore contended by the learned counsel for the respondents that the decision under the old Arbitration Act cannot be blindly followed for interpreting the corresponding provisions as changes are made in the new Act. It is also submitted that when the Arbitration Act 1940 was only an Act to consolidate and amend the law relating to arbitration, 1996 Act is an Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto. It is also brought to my notice that in Section 5 of the new Act there is complete exclusion of other judicial authority except as provided in the Act. When the petitioner admits the execution of the partnership deed and the existence of an arbitration clause and the respondent points out that the matter has to be left for arbitration in view of the existence of such a clause, the court has to refer the parties to an arbitration. Since it is a mandatory provision in the Act, the court has no jurisdiction to deal with the matter thereafter. This aspect has been considered by this Court in Asokan v. Jayan (1998 (1) KLT 430 and by the Supreme Court in Smt. Kalpana Kothari Vs. Smt. Sudha Yadav and Others, .

In Kalpana Kothari''s case the Supreme Court has stated that Section 8 of the 1996 mandates that the judicial authority before which an action has been brought in respect of a matter which is the subject matter of an arbitration agreement, shall refer the parties to arbitration if a party to such an agreement applies not later than submitting his first statement. The provisions of the 1996 Act do not envisage the specific obtaining of any stay as under the 1940 Act.

In P. Anand Gajapathi Raju and Others Vs. P.V.G. Raju (Died) and Others, the Supreme Court has even stated that a reference of the dispute u/s 8 can be made even after the submission of the first statement, if the party which instituted civil suit did not object. Learned counsel for the petitioner then submitted that civil court should have itself referred the matter for arbitration and not closed the suit. What Section 8 says is that when an application is made u/s 8 pointing out the arbitration agreement, it shall refer the parties to arbitration and not refer the suit for arbitration. Learned counsel for respondent also brought to my notice that the appointment of arbitrator by the court is only u/s 11 by the Chief Justice or any person or institution designated by him. There is no merit in the contention that court should refer the case to arbitrator.

u/s 16 of the Arbitration and Conciliation Act 1996 the Arbitral Tribunal has got the jurisdiction to rule on its own jurisdiction including ruling on any objections with respect to the existence or validity of the arbitration agreement and a party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with Section 34.

There is difference between the 1940 Act and the present Act. Under the old Act the Arbitrator had no power to decide upon the validity of the contract. Such disputes were to be decided by the court and not by the Arbitrator. But under the new Act the Tribunal can decide its own jurisdiction. In this case the plaintiff has admitted the existence of the partnership and has filed the suit on that basis. The agreement contained the arbitration clause. The defendants have invoked the arbitration clause and requested to refer the parties to arbitration. Therefore on the admission of the plaintiff with regard to the existence of arbitration clause the civil court lacks jurisdiction to decide the dispute. The further dispute as to whether the parties have acted upon the agreement etc are for the Arbitrator to decide. The Supreme Court in the decision reported in Smt. Kalpana Kothari Vs. Smt. Sudha Yadav and Others, has noted the striking contrast of the provisions of 1940 Act with those of 1996 Act. It is stated that Section 8 of 1996 Act mandates the Judicial Authority before which action has been brought in respect of a matter which is the subject matter of arbitration agreement to refer the matter to arbitration if a party to such an agreement applies not later than when submitting his first statement. In view of the authoritative pronouncements of the Supreme Court on the subject I do not think that it is necessary to further discuss the case law referred to earlier by the learned counsel for the petitioner under the 1940 Act.

The only other contention put forward by the counsel for the petitioner is that the Arbitrator has no power to grant reliefs prayed for in the suit by the petitioner. That contention also is without any force as Section 17 of the 1996 Act gives the Arbitral Tribunal power to order a party to take interim measure of protection as the arbitral tribunal may consider necessary in respect of the subject matter of the dispute.

Section 9 of the 1996 Act also gives powers to the court to pass orders for appointment of a guardian, for interim measure of protection, the preservation of interim custody or sale of any goods which are the subject matter of the arbitration agreement, secure the amount in dispute in the arbitration, for detention, preservation or inspection of any property, interim injunction or the appointment of a receiver and such other interim measures. Section 2(e) of the Act defines the court as the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject matter of the arbitration if the same had been the subject matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes. It is therefore clear that the court before which the present suit is filed being a Munsiff Court, Ernakulam is not a Court u/s 9 which has no jurisdiction to pass orders.

For the above reasons I do not find any merit in the original petition and the same is dismissed.