Vasudeo Wadiraj Rao vs Hotel Padma and Others

P.S. Patankar, J.—Rule.

The learned Counsel for Respondent No. 2 waives notice. The Respondent No. 1 is the firm constituted originally by Petitioner and Respondent No. 2.

Heard forthwith.

The Petitioner, who is defendant in the suit, filed an application u/s 8 of Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act, 1996) for referring the dispute to Arbitration. The said application came to be rejected by the learned Joint Civil Judge, S.D., Nasik by order dated 28.9.1999. This is challenged here.

The suit came to be filed by Respondent No. 2 for dissolution of partnership firm by name Hotel Padma and for taking accounts. There is no dispute that Clause 15 of deed of partnership dated 7.4.1992 provided for referring the dispute for arbitration in accordance with the provisions of the Arbitration Act, 1940 (hereinafter referred to as the Act, 1940) to two Arbitrators one chosen by each.

The learned Counsel for the Petitioner submitted that the learned Judge has failed to consider the provisions of Section 8 of Act, 1940 and the Court should have granted the application as the Petitioner has not made any submission on merits of the dispute between the parties. As against this, the learned Counsel for the Respondent No. 2 submitted that the Petitioner has taken steps in the proceedings and hence there can be no reference of the dispute for arbitration and the application was not maintainable. He submitted that Act of 1940 is repealed in view of Section 85 of the Act, 1996 and hence the Petitioner cannot rely upon Clause 15 and ask for referring the dispute for arbitration to 2 Arbitrators. Further the clause is invalid in view of Section 10(1) of the Arbitration Act, 1996 and hence there can be no reference.

It is first necessary to note that Section 8 of Act, 1996, which corresponds to the Section 34 of the Act, 1940, has brought about various changes. I do not propose to compare these two sections fully. However, it is clear that Section 34 of Act, 1940 and Section 8 of Act, 1996 contemplate pre existence of an arbitration agreement relating to a dispute which forms the subject-matter of a suit. However, Section 34 have given discretion to the Judicial Authority to stay the proceedings. But Section 8 imposes mandatory duty on the Judiciary Authority to refer the parties to arbitration. Section 8(1) 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 in first statement on the substance of the dispute, refer the parties to arbitration.

Thus Section 8 envisages an application by a party to be made not later than submitting his first statement on the substance of the dispute. Thus the only eventuality in which the application would be barred is if the statement on merits of the dispute has been made earlier. While Section 34 envisages an application "before filing a written statement or taking any other steps in the proceedings". Section 8 therefore has changed the position and simplified it. It is clearly with the object to avoid the litigation which has taken place due to the use of above quoted requirement in Section 34. The learned Counsel for Respondent No. 2 has relied upon the following cases:

(1) The State of Uttar Pradesh and Another Vs. Janki Saran Kailash Chandra and Another, .

(2) Anandkumar Parmanand Kejriwala and Another Vs. Kamaladevi Hiralal Kejriwal, .

(3) Rameshchandra Ramlal Khandelwal v. Shankarlal Maganlal Joshi and Ors. 1984 M.L.J. 187, Single Judge, and.

(4) Food Corporation of India and Another Vs. Yadav Engineer and Contractor, .

In fact in all these cases the phrase used in Section 34 "taking any other steps in the proceedings" was considered. As Section 8 of 1996 Act has changed the position, as pointed out above, I am not discussing these authorities. However, I shall refer to Food Corporation of India and Another Vs. Yadav Engineer and Contractor, a little later.

In the present case what has been pointed out by the learned Counsel for Respondent No. 2 is that Respondent No. 2 has earlier engaged 2 Advocates. The Petitioner raised an objection for their appearance. Further it has been pointed out that this respondent No. 2 filed an application Exh. 5 for interim injunction. This was contested by Petitioner by filing reply. Petitioner has also filed an application for producing documents on record. Respondent No, 2 filed an application Exh. 20 for restraining the Petitioner from taking photographs of the business. The Petitioner filed a reply to the said application. Therefore according to the learned Counsel for Respondent No. 2 the Petitioner cannot ask for referring the dispute for arbitration. In my opinion, all the above steps cannot amount to "submitting any statement on the substance of the dispute." The Petitioner has not stated anything on merits of the matter. Even in the case of Food Corporation of India and Another Vs. Yadav Engineer and Contractor, while considering Section 34 of the Act, 1940, the Supreme Court observed in para 12:

Giving the expression "taking any other steps in the proceedings" such wide connotation as making an application for any purpose in the suit such as vacating stay, discharge of the Receiver or even modifying the interim orders would work hardship and would be iniquitous to the party who is willing to abide by the arbitration agreement and yet be forced to suffer the inequity of ex parte orders. Therefore, the expression "taking any other steps in the proceedings" must be given a narrow meaning in that the step must be taken in the main proceeding of the suit and it must be such step as would clearly and unambiguously manifest the intention to waive the benefit of the arbitration agreement and to acquiesce in the proceedings. Interlocutory proceedings are incidental to the main proceedings. They have a lift till the disposal of the main proceeding. As the suit or the proceeding is likely to take some time before the dispute in the suit is finally adjudicated, more often interim orders have to be made for the protection of the rights of the parties. Such interlocutory proceedings stand independent and aloof of the main dispute between the parties involved in the suit. They are steps taken for facilitating the just and fair disposal of the main dispute. When these interlocutory proceedings are contested it cannot be said that the party contesting such proceedings has displayed an unequivocal intention to waive the benefit of the arbitration agreement or that it has submitted to the jurisdiction of the Court. When ex-parte orders are made at the back of the party the other party is forced to come to the Court to vindicate its right. Such compulsion cannot disclose an unambiguous intention to give up the benefit of the arbitration agreement. Therefore, taking any other steps in the proceedings must be confined to taking steps in the proceedings for resolution of the substantial dispute in the suit.

Therefore I hold that the application filed by the Petitioner was maintainable.

Section 85(1) of Act, 1996, repeals Arbitration Act, 1940. But Section 85(2)(a) provides as under:

Section 85(2)". Notwithstanding such repeal, -

(a) the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Ordinance came into force unless otherwise agreed by the parties but this Ordinance shall apply in relation to arbitral proceedings which commenced on or after this Ordinance comes into forces.

In view thereof provisions of Act, 1996 shall be applicable in the present case as these arbitration proceedings would commence after coming into force Act of 1996. The Clause 15 of the deed of partnership, providing for reference to arbitration, would not come to an end. In M.M.T.C. Ltd, v. Sterlite Industries (I) Ltd., the Supreme Court was required to consider the similar situation. The Arbitration agreement in that case provided for appointment of even numbers of Arbitrators which was made prior to commencement of the Act but the arbitration proceedings commenced after the Act came into force. The validity of such an agreement was challenged in view of provisions of Section 10(1) of Arbitration Act, 1996. The Supreme Court repelled it holding that validity of an arbitration agreement does not depend on the number of Arbitrators specified therein. The requirements for valid arbitration agreement are provided by Section 7. The number of Arbitrators is dealt with separately in Section 10 which is a part of machinery provision for the working of the arbitration agreement. It is, therefore, clear that an arbitration agreement specifying an even number of Arbitrators cannot be a ground to render it invalid under the Act 1996. It was held that the arbitration agreement is valid if it satisfies the requirement of Section 7, then the appointment of Arbitrators would be governed of Section 11 of Act, 1996. Under the 1940 Act, para 2 of First Schedule gave power to appoint a third one as Umpire in case of disagreement between 2 Arbitrators provided under the agreement. Similarly Section 11(3) of the Act, 1996 requires two Arbitrators to appoint a third Arbitrator who would act as Presiding Arbitrator or Umpire. Hence there is no substance in any of the arguments advanced by the learned Counsel for Respondent No. 2. The learned Judge of the Trial Court completely failed to appreciate the change brought about in law by Section 8 of the Act of 1996.

Hence rule is made absolute. The application filed by the Petitioner is granted. However, it is made clear that the arbitration proceedings shall take place as per the provisions of Act of 1996.