Wankanner Jain Social Welfare Society vs Jugal Kishore Sapani

The dismissal of the application u/s 8 of the Arbitration and Conciliation Act has given rise to the revision. The respondent filed O.S.No.8628 of

1998 for permanent injunction restraining the petitioner and office bearers of the petitioner Society from conducting the foreign joy tour and for

other reliefs. The respondent is a member of the petitioner Society. The objectives of the Society inter alia are to help the members of the Society

by way of loan or other assistance, to promote business, trade etc. The bye-laws of the petitioner Society provides for an arbitration clause

whereby, all matters, disputes etc. arising in the course of the conduct of the Society affairs or arising in the course of or out of transaction between

members inter se shall be settled only be arbitration by a sole Arbitrator. The Arbitrator was a nominee appointed by the Managing Committee of

the petitioner Society. The respondent filed the above suit and prayed for interim injunction restraining the petitioner from conducting the foreign

tour referred to above. This application for interim injunction was I.A. No.20778 of 1998. The petitioner received notice in LA. on 22.12.1998,

entered appearance and filed counter and also argued the matter on 23.12.1998. On 24.12.1998, the Court below dismissed the I.A. framed the

preliminary issue and adjourned the matter till 18.1.1999 for trial of that preliminary issue. The preliminary issue was, ""Whether the suit was

maintainable or whether the parties should refer to arbitration"". On 13.1.1999, the petitioner moved I.A.No.4348 of 1999 u/s 8 of the Act. The

matter was argued on 22.1.1999. The first hearing of the suit was on 16.2.1999. The petitioner''s application u/s 8 was rejected on 17.10.2000

and therefore, this revision has been filed.

Mr. Ashok Viswanath, learned counsel for the petitioner submitted that Section 8 of the Act provides that the Court before which proceedings

are -pending shall refer the same to arbitration if the application u/s 8 is filed at any time before the first statement on the substance of the dispute is

filed by the said application. He submitted that the lower Court erred in dismissing the application since once an application u/s 8 is, made in

accordance with the provisions thereof, the Court below ought to refer the matter to arbitration. He referred to the following decisions:

(i) Manna Lal Kedia and others v. State of Bihar and others, 1999 (Suppl.) Arb. L.R 528 (Patna) in which the party who filed an application u/s 8

had also filed an application for dismissal of the suit on the ground of limitation. By the impugned order, the Court had dismissed the application u/s

8 on the ground that the application for dismissal of the suit on the ground of limitation will not be the first statement on the substance of the dispute

for the purpose of deciding the application u/s 8 and therefore, set aside the order of the lower Court.

(ii) He also referred to the case of M/s. Sundaram Finance Ltd. Vs. M/s. NEPC India Ltd., in which the Supreme Court held that the provisions of

the 1996 Arbitration Act must be interpreted and construed independently of the 1940 Act and in fact, reference to the 1940 Act may lead to

misconstruction.

(iii) He also referred to the decision reported in Varan Seacon Ltd. v. Bharat Bijlee Ltd., AIR 1998 Guj. 199 where the learned Single Judge of

the Gujarat High Court held that mere filing of applications for adjournments to file written statement would not debar the defendant from

prosecuting the application u/s 8 of the new Act. Therefore, the learned counsel would submit that the petitioner had only contested the interim

injunction application and had not submitted its first statement on the substance of the dispute and therefore, the Court below ought to have

referred the matter to arbitration.

Mr. G.Rajagopalan, learned Senior Counsel appearing for the respondent on the other hand, stated that the word ""statement"" referred in the Act

is not referable to written statement so that it is construed that only if a written statement is filed, the Court shall not entertain the application u/s 8.

He also submitted that in any event, if a Court exercises discretion u/s 8 and dismisses the application, that cannot be set aside word ""shall"" used in

Section 8 can only be construed as ""may"". He also referred to the decision reported in 1981 T.N.L.J. 206. In that case, the application u/s 34 of

the old Act was made and it was dismissed. This Court confirmed the order on the ground that the party seeking stay of suit had not only taken

steps in both the suits which bar them from filing the application u/s 34, but had also failed to refer the matters to arbitration. According to the

learned Senior Counsel, in this matter, till date, the petitioner had not taken any steps to refer the matter to arbitration and therefore, he cannot be

allowed to approach the Court for reference to arbitration.

The decision reported in M/s. Sundaram Finance Ltd. Vs. M/s. NEPC India Ltd., clearly lays down the guidelines for deciding questions that

arise under the new Act. In fact, it goes so far as to say that reference to the old Act may actually lead to misconstruction. Section 8 of the new

Act reads thus:

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 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.

The comparable section in the old Act is Section 34 which is as follows:

Power to stay legal proceedings where there is an arbitration agreement.-- Where any party to an arbitration agreement or any person claiming

under him commences any legal proceedings against any other party to 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 ..... such authority may make an

order staying the proceedings.

The focus of the two sections itself shows that they are different. While Section 34 gives the Court, the power to stay the proceedings pending in

the Civil Court, the focus of Section 8 of the new Act is to empower the Civil Court or the other judicial authority to refer the matter to arbitration.

The intention of the new Act is clear that where there is a contract between parties to refer to arbitration, the Courts shall advance the contractual

consensus. In fact, this difference in the two sections is highlighted in the Gujarat High Court decision referred'' to by the learned counsel for the

petitioner where the learned Judge had held thus:

Now, the underlined words in sub-section (1) of Section 8 make a clear departure from the legal position as contained in Section 34 of the Old

Act, under which if the defendant had filed an application for adjournment for filing written statement, it was treated as taking a step in the suit

proceedings and therefore, it was held that in such a case the suit was not required to be stayed at the instance of a defendant who had displayed

an intention to proceed with the suit and acquiesce in the method of resolution of dispute adopted by the plaintiff, namely filing of the suit and

thereby indicated that it had abandoned its right under the arbitration agreement to get the dispute resolved by arbitration. Realizing that such an

interpretation was bringing about anomalous results and frustrating the laudable object of the arbitration law, the legislature has advisedly made a

clear departure from the earlier position and, therefore, now a party is disentitled from getting stay of the suit only if the party has earlier submitted

its statement on the substance of the dispute, that is, if earlier the defendant has filed its reply on merits.

It is useful to bear this in mind while deciding the suit.

That there is an arbitration agreement is not denied by the parties. The arbitration clause reads thus:

Arbitration: "" All matters, disputes, claims, questions, doubts, clarifications, differences arising either in the course of the conduct of the society''s

affairs or arising in the course of or out of transaction/s the members inter se may have, in connection with their role and in consultation with and/or

in connection with their relationship with the Society or in the course of any transaction, business in any manner whatsoever which the Society, may

have with one or more of the members and any dissatisfaction with any decision of any office bearer, Managing Committee, Loan Committee or

any other person or clarifications and dissatisfaction with any decision whatsoever arising in any manner whatsoever shall be settled only by

arbitration by a sole arbitrator to be nominated and appointed by the Managing Committee and all and every provisions of the law relating to

Arbitration shall apply to such Arbitration.

The suit is for bare injunction restraining the petitioner from conducting the joy tour. The averments made in the plaint is that there are litigations

pending regarding payment of dividend. The petitioner Society has got huge funds and it is sanctioning illegally, several loans and that, in these

circumstances, the conduct of joy tour is in violation of the objectives of the Society and it will cause damage to the members. Interim injunction

was also sought for on the same grounds and the affidavit sought to refer to the averments in the plaint as part and parcel thereof.

Learned counsel for the petitioner submitted that the counter in the injunction application had been filed without the advantage of the plaint since

neither the suit summons nor the plaint documents were served on the petitioner and therefore, they cannot be regarded as a statement in defence

for the purpose of Section 8. Paragraphs 4 and 7 of the counter runs thus:

Paragraph 4: As to para 2 of the affidavit: The Respondent is not conducting any ""Foreign Joy Tour"" as alleged, in particular any such tour

scheduled to be held either on 24-12-98 or on 26.12.98 or on any other date at Madras as alleged. I deny that the Managing office bearers of the

defendant who are alleged to be rich are interested only for the interest of other rich members. In any event such a wild allegation is not germane to

the decision of the points that arise for consideration in this petition. The Defendant is not spending nor has it planned to spend ""a sum of Rs.30

Lakhs"" for the purpose of joy tour from and out of the Society''s funds. I rely upon the Registered Memorandum of Association of the Defendant

and submit that the grant of loan by the Defendant Society to its members is duly authorized by the said Memorandum of Association. There is no

violation of the objects. The Defendant has not been served with a copy of the plaint and is hence unable to traverse the same.

Paragraph 7: The Defendant society in accordance with its objects as contained in its Registered Memorandum of Association is granting loans

through the Loan Committee to its members for various purposes namely, Business Loan, Purchase Loan for buying domestic, office appliances

etc., Vehicle Loan, Housing Loan, Education Loan, Foreign Travel Loan, Medical Loan, Marriage Loan etc. The Defendant Society is not

conducting any foreign tour as alleged by the petitioner but is only granting Foreign Travel Loan to those members who have applied for such loan

and such Travel Loan is being disbursed for travel through Recognised Travel Agency and Tour operators.

These averments in the counter are really not with reference to the averments in the affidavit alone but also appear to deny some of the

allegations raised in the plaint. In any event, the petitioner has categorically stated in his counter that the grant of loan by the defendant Society is

authorized by Memorandum of Association and there is no violation of the objects of the Association. They have also stated in the counter that the

petitioner''s application for business loan was sanctioned by the Loan Committee and that the defendant has acted in accordance with its objects as

contained in the registered memorandum of Association. In effect, the counter clearly states that there is no violation or breach of the understanding

between the Society, namely the petitioner and its members and the sanction of the loan to the various members have also been made in

accordance with the Memorandum of objects of the Association. Therefore, it is clear from this that the petitioner knows that the dispute between

the petitioner and the respondent is with regard to the conduct of the Society''s affairs or arising in the course of transactions between the members

or in their relationship with the Society. Though in the counter, at paragraph 2, the petitioner has stated that the suit is in accordance with the bye-

laws, even here, there is no reference to the suit not being maintainable because of the arbitration agreement. Learned counsel for the petitioner

submitted that the new Act should be construed without reference to the old Act. Under the old Act, application u/s 34 may, be filed before filing a

written statement or taking any other steps. Now, Section 8 narrows this area with regard to what is the nature of the steps taken on behalf of the

applicant, by requiring the party to apply u/s 8 not later than when submitting his first statement on the substance of the dispute. Now, we have to

see what these words ""first statement on the substance of the dispute"" refer to. An application for adjournment or time for counter are all most

certainly not first statements on the substance of the dispute, but, when the substance of the dispute has been made clear to the opposing party and

the party sets down its stand clearly in any proceedings pending action before the Judicial Authority, then it would definitely amount to first

statement. If, as the petitioner would like us to construe, the first statement is only the written statement, and until the written statement is filed, the

applicant can approach the Court u/s 8, then, the question arises, ""What are the subsequent statements after the written statement ; that may be

filed by the party on the substance of the dispute"". Obviously therefore, the first statement need not necessarily be the written statement. In a

particular case, it may very well be the written statement. But, it is not so in the case on hand. The party had clearly stated its case that there was

no violation of the objects of the Association in the counter filed in the injunction application. To my mind, this is clearly the ""first statement on the

substance of the dispute"". Not only had he stated his defence in his counter, he had also abided by the condition imposed by the learned Judge in

the interlocutory application. To me, the filing of the counter which is the first statement and obtaining an order from the civil court permitting the

petitioner to go on the joy tour subject to certain conditions are all matters which point to the petitioner subjecting, itself to the jurisdiction of the

Civil Court. Therefore, this application u/s 8 has been filed after the petitioner had submitted the first statement on the substance of the dispute.

Therefore, the dismissal of application u/s 8 is in accordance with law.

As regards the question as to whether the word ""shall"" in Section 8 can only be ""may"", the learned Senior Counsel for the respondent

submitted that if it should be construed as ""shall"", then, it would be restricting the discretionary power of a judicial authority and the Statute cannot

be construed in such a manner. The heading of the Section reads as ""Power to refer parties to arbitration where there is an arbitration agreement.

The exercise of power can only be discretionary but however, I do not propose to decide this question since in any event, I have held in the

aforesaid paragraphs that the application u/s 8 is not maintainable because it has come after the petitioner had submitted his first statement on the

dispute. The decisions cited by the learned counsel for the petitioner do not come to his aid in view of the fact that I hold that the petitioner had

placed before the Court, his first statement in defence of the suit. For these reasons, the C.R.P. is dismissed. No costs. CMP 1811 of 2001 is

closed.