Kerala High Court
Vijaya Narayanan vs Prabhakaran on 8 February, 2006
Equivalent citations: AIR2006KER373, 2007(1)ARBLR1(KERALA), 2006(1)KLT797
Author: M. Sasidharan Nambiar
Bench: M. Sasidharan Nambiar
JUDGMENT M. Sasidharan Nambiar, J.
1. Whether a court before which an action is brought in a matter which is the subject of an arbitration agreement has only to refer the parties to arbitration or to appoint an arbitrator and refer the parties to arbitration before that arbitrator under Section 8 of Arbitration and Conciliation Act, 1996. This is the vital question to be resolved in the appeal.
2. Appellants were the plaintiffs in a suit for dissolution of a partnership firm and for accounting on the file of Sub Court, Kozhikode. Respondents were the defendants in the suit who are the other partners of the firm M/s.Deepa Restaurant and Tourist Home, Ramanattukara. On appearance before court on receipt of the summons, respondents filed I.A.2676/03, a petition under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the 1996 Act) for a reference to arbitration. The partnership deed admittedly contained an arbitration clause. Appellants did not oppose the petition. The learned Sub Judge allowed I. A. 2676/03 and referred the parties to arbitration. The suit was disposed accordingly, as per judgment dated 31.7.04. Appellants are challenging the said judgment contending that application of the respondents was for stay and reference of the suit to arbitration and appellants did not oppose that application and the court below should not have disposed the suit itself and instead should have stayed the suit and referred the dispute to an arbitrator. Before filing the appeal, they had filed Arbitration O.P.470/04 before District Court and when the maintainability of the O.P. was disputed, this appeal was filed.
3. We heard the learned Counsel appearing for the appellants and the respondents at the admission stage. The learned Counsel for the appellants vehemently argued that under Section 8 of the 1996 Act, the court below could have only referred the dispute to an arbitrator for arbitration and should not have disposed of the suit by an order referring the parties to an arbitration. The learned Counsel relying on the decision of the Apex Court in SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618, in Firm Ashok Traders and Anr. v. Gurumukh Das Saluja (2004) 3 SCC 1433, in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Anr. , and in P. Anand Gajapathi Raju v. P.V.G. Raju AIR 2000 SC 1886 argued that Section 8 was enacted to enable the parties to have a speedier decision of the case and in such circumstances, court below should have referred the dispute to a named arbitrator. The argument is that as there is an arbitration clause in the partnership deed and respondents wanted a reference of the dispute for arbitration and appellants did not oppose the request, court below should have called upon the parties to name an arbitrator and should have referred the arbitration to that arbitrator and the disposal of the suit by referring the parties for arbitration is against the ambit and spirit of Section 8 of the 1996 Act and is to be set aside. Learned Counsel appearing for the respondents argued that under Section 8 of the Act, court is bound to refer the parties to arbitration, if there is an arbitration agreement and the subject of the dispute in the suit is the subject of the arbitration agreement and defendants applied for a reference under Section 8 of the Act, before they submitted their first statement in the suit and in such circumstances there is no reason to interfere with the judgment or the procedure adopted by the court below.
4. The learned Counsel appearing for the parties did not point out arty decision of the Apex Court or any of the High Courts on the question to be resolved in the appeal.
5. Prior to the promulgation of the 1996 Act, the law on arbitration in India was substantially contained in three enactments viz., the Arbitration Act. 1940, the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. The United Nations Commission on International Trade Law (UNCITRAL) adopted in 1985 the Model Law on International Commercial Arbitration. The General Assembly of the United Nations recommended that all countries give due consideration to the said Model law. It was to have a harmonised concepts on arbitration and conciliation of different legal systems of the world. It was pursuant to this recommendation, 1996 Act was promulgated. The preamble of the 1996 Act shows that the Act was enacted as it is expedient to make law respecting arbitration and conciliation, taking into account the Model Law and Rules as recommended by the General Assembly of the United Nations and as the said Model Law and Rules make significant contribution to the establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations. Under Section 85 of the Act, the Arbitration (Protocol and Convention) Act, 1937, the Arbitration Act, 1940 and the Foreign Awards (Recognition and Enforcement) Act, 1961 are repealed. Section 8 of the 1996 Act deals with the power to refer parties to arbitration where there is an arbitration agreement. It reads :
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 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.
To attract Section 8, the subject of dispute in the pending suit should be the subject of the arbitration agreement. The party has to apply before filing his first statement in the suit. If the substance of dispute in the suit and the arbitration agreement is the same, court has no discretion. It has to refer the parties to arbitration as provided under Sub-section (1). Under Sub-section (2) the application shall be filed accompanied by the original arbitration agreement or a duly certified copy thereof. If not, application shall not be entertained. Under Sub-section 3 notwithstanding that such an application has been filed in court and the issue is pending before the Court, an arbitration may either be commenced or continued or an arbitral award be made. Section 8 of 1996 Act in fact takes the place of Section 34 of Arbitration Act 1940. True, there are a number of dissimilarities from Section 34 of 1940 Act. For a proper understanding of the ambit and scope of Section 8, it is necessary to bear in mind the provision of Section 34 of 1940 Act. When Section 34 of 1940 Act provides for a stay of further proceedings in the suit, Section 8 does not contemplate a stay of the proceedings. Instead it mandates that the parties are to be referred to arbitration. Section 34 of 1940 Act reads:
34. 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 if satisfied that there is no sufficient reason why the matters 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.
As stated earlier, 1996 Act was enacted taking into account UNCITRAL Model Law on International Commercial Arbitration, so as to have a unified legal frame work for the fair and efficient settlement of disputes arising in international commercial relations. Section 8 has been enacted in conformity with Article 8 of UNCITRAL Model law, with slight modifications. Article 8 of UNCITRAL Model Law reads:
Arbitration agreement and substantive claim before court. (1) A court before which an action is brought in a matter which is the subject matter of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
Section 8 of 1996 Act does not exactly follow Article 8 of UNCITRAL Model Law. It makes an important departure in so far as the words "unless it finds that the said agreement is null and void, inoperative or incapable of being performed" in the concluding part of Article 8(1) which are missing in Section 8.
6. When Section 34 of 1940 Act provides a discretion to the court, Section 8 does not provide for any such discretion. If the conditions provided thereunder are satisfied, court is bound to refer the parties to arbitration. Section 8 does not provide that parties are to be referred to an arbitrator or arbitrators, either named by the parties or to be appointed by the parties or the Court. Section 20 of 1940 Act provides for an application before the court by a party to the arbitration agreement, for a direction to file the arbitration agreement in court and for an order of reference to the arbitrator agreed by the parties or to be appointed by the court. Section 20 of 1940 Act reads:
(1) Where any persons have entered into an arbitration agreement before the institution of any suit with respect to the subject-matter of the agreement or any part of it, and where a difference has arisen to which the agreement applies, they or any of them, instead of proceeding under Chapter II, many apply to a court having jurisdiction in the matter to which the agreement relates, that the agreement be filed in Court.
(2) The application shall be in writing and shall be numbered and registered as a suit between one or more of the parties interested or claiming to be interested as plaintiff or plaintiffs and the remainder as defendant or defendants, if the application has been presented by all the parties, or, if otherwise, between the applicant as plaintiff and the other parties as defendants.
(3) On such application being made, the Court shall direct notice thereof to be given to all parties to the agreement other than the applicants, requiring them to show cause within the time specified in the notice why the agreement should not be filed.
(4) Where no sufficient cause is shown, the Court shall order the agreement to be filed, and shall make an order of reference, to the arbitrator appointed by the parties, whether in the agreement or otherwise or, where the parties cannot agree upon an arbitrator, to an arbitrator appointed by the Court.
(5) Thereafter the arbitration shall proceed in accordance with, and shall be governed by the other provisions of this Act so far as they can be made applicable.
7. Section 8 is not in pari materia with Section 20 of 1940 Act. 1996 Act does not contain any provision similar to Section 20 of 1940 Act. Section 11 of 1996 Act provides for appointment of arbitrators. Under the said section parties are free to agree on a procedure for appointing arbitrator or arbitrators. Sub-section 6 provides that where, under the appointment procedure agreed upon by the parties, a party fails to act as required under that procedure or the parties or the two appointed arbitrators fails to reach an agreement expected of them under that procedure or a person, including an institution fails to perform any function entrusted to him or it a party may request the Chief Justice or any person or institution designated by the Chief Justice to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. Sub-section 2 provides that parties are free to agree on a procedure for appointing arbitrator or arbitrators subject to the provisions of Sub-section 6. Sub-section 3 mandates that in an arbitration with three arbitrators, each party shall appoint one arbitrator and the two appointed arbitrators shall appoint the third arbitrator who shall act as presiding arbitrator. Sub-section 4 provides that if the appointment procedure in Sub-section 3 applies and a party fails to appoint an arbitrator within thirty days from receipt of request to do so from the other party or the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, upon a request of the party the appointment shall be made by the Chief Justice or any person or institution designated by him. Sub-section 5 provides for a contingency where the parties fail to agree on the sole arbitrator within thirty days from the receipt of the request by the other party to agree the appointment. In that case on the request made by a party appointment shall be made by the Chief Justice or any person or institution designated by him. Therefore, any appointment of arbitrator or arbitrators is governed only by the provisions of Section 11 of 1996 Act. Section 8 does not enable the court to appoint an arbitrator, as was the case under Section 20 of 1940 Act. When an application under Section 8 is filed in court and the conditions provided under the Section are satisfied, court is bound to refer the parties to arbitration. The court is not called upon to require the parties to name the arbitrator or arbitrators and refer the dispute to that arbitrator. It only provides for an order referring the parties to arbitration.
8. Apex Court in Sundaram Finance Ltd. v. NEPC India Ltd. has considered the difference between 1996 Act and Arbitration Act 1940. It was held:
The 1996 Act is very different from the Arbitration Act, 1940. The provisions of this Act have, therefore, to be interpreted and construed independently and in fact reference to the 1940 Act may actually lead to misconstruction. In other words, the provisions of the 1996 Act have to be interpreted being uninfluenced by the principles underlying the 1940 Act. In order to get help in construing these provisions, it is more relevant to refer to the UNCITRAL Model Law rather than the 1940 Act.
It was also held:
Section 8 of the new Act is not in pari materia with Section 20 of the 1940 Act. It is only if in an action which is pending before the Court that a party applies that the matter is the subject of an arbitration agreement does the Court get jurisdiction to refer the parties to arbitration. The said provision does not contemplate, unlike Section 20 of the 1940 Act, a party applying to a court for appointing an arbitrator when no matter is pending before the court. Under the 1996 Act, appointment of arbitrator/s is as per the provision of Section 11 which does not require the court to pass a judicial order appointing arbitrator/s.
The scope of Section 8 of 1996 Act was considered by the Apex court in P. Anand Gajapathi Raju and Ors. v. P.V.G. Raju and Ors. AIR 2000 SC 1886 and it was held:
The language of Section 8 is peremptory. It is therefore, obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement. Nothing remains to be decided in the original action or the appeal arising therefrom. There is no question of stay of the proceedings till the arbitration proceedings conclude and the award becomes final in terms of the provisions of the new Act. All the rights, obligations and remedies of the parties would now be governed by the new Act including the right to challenge the Award. The Court to which the party shall have recourse to challenge the Award would be the Court as defined in Clause (e) of Section 2 of the new Act and not the Court to which an application under Section 8 of the new Act is made. An application before a Court 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.
9. The Apex Court in Smt. Kalpana Kothari v. Smt. Sudha Yadav and Ors. 2002 SAR(Civil) 64 considered this aspect again and held:
Section 34 of the 1940 Act provided for filing an application to stay legal proceedings instituted by any party to an arbitration agreement against any other party to such agreement, in derogation of the arbitration clause and attempts for settlement of disputes otherwise than in accordance with the arbitration clause by substantiating the existence of an arbitration clause and the judicial authority concerned may stay such proceedings on being satisfied that there is no sufficient reason as to why the matter and that the applicant for stay was at the time the proceedings were commenced and still remained ready and willing to do all things necessary to the proper conduct of the arbitration. This provision under the 1940 Act had nothing to do with actual reference to the arbitration of the disputes and that was left to be taken care of under Section s 8 and 20 of the 1940 Act. In striking contrast to the said scheme underlying the provisions of the 1940 Act. In the new 1996 Act, there is no provision corresponding to Section 34 of the old Act and Section 8 of the 1996 Act 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 when submitting his first statement. The provisions of the 1996 Act do not envisage the specific obtaining of any stay as under the 1940 Act, for the reason that not only the direction to make reference is mandatory but notwithstanding the pendency of the proceedings before the judicial Authority or the making of an application under Section 8(1) of the 1996 Act, the arbitration proceedings are enabled, under Section 8(3) of the 1996 Act to be commenced or continued and an arbitral award also made unhampered by such pendency.
10. The learned Counsel appearing for the appellants relied on 176th report of the Law Commission of India on the Arbitration and Conciliation Amendment Bill 2001 dealing with the amendment proposed to Section 8 of 1996 Act. The proposed amendment is an improvement over what is contained in Article 8 of the Model Law or the New York Convention 1958. The said report is not helpful to decide the ambit and scope of Section 8 of the 1996 Act as it now stands. Though learned Counsel appearing for the appellants relied on the decisions of the High Courts of Delhi, Bombay, Rajasthan, Madras and Andhra Pradesh, in none of those decisions, the question whether a court has to appoint an arbitrator, when a reference is made as provided under Section 8 of 1996 Act was considered either directly or incidentally. The said decisions are not helpful to resolve the dispute herein. So also the Constitution Bench in SBP & Co. v. Patal Engineering Ltd. (2005) 8 SCC 618 did not consider this aspect. The Constitution Bench analysing the previous decisions and the provisions of 1996 Act held that the power conferred on the Chief Justice of India or the Chief Justice of the High Court under Section 11(6) of the Act is not an administrative power. It was also held that the judicial authority, in the absence of any restriction has necessarily to decide whether in fact there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it is covered by the arbitration clause, while exercising the power under Section 8 of the 1996 Act. It was also held that the judicial authority cannot act mechanically and refer the parties to an arbitration but has to decide whether there exists a valid arbitration agreement and whether the dispute that is sought to be raised before it is covered by the arbitration clause. That decision also is not helpful to decide the question involved in this case.
11. Construing Section 8 along with Section 11 of 1996 Act, we hold that appointment of an arbitrator or arbitrators is fully covered by the provisions of Section 11 of the Act. A judicial authority, under Section 8 of the Act, cannot exercise the power provided under Section 11 and appoint an Arbitrator. An arbitrator could be appointed only in strict conformity with the provisions of Section 11. A judicial authority, under Section 8 of 1996 Act cannot exercise that power and appoint an arbitrator or arbitrators. Section 8 of 1996 Act does not contemplate appointment of an arbitrator by the court and a reference to that arbitrator, as has been canvassed by the learned Counsel for the appellants. The position would be different if the parties had agreed on a procedure for appointing the arbitrator and had appointed an arbitrator. In that case, when the court refer the parties to arbitration would mean a reference to that arbitrator. When an application is filed under Section 8, the court has to decide whether there exists a valid arbitration agreement. If there is a valid arbitration agreement, it has to further decide whether the dispute that is sought to be raised before it is the one covered by the arbitration clause. If these aspects are found in favour of the applicant and the party had applied under Section 8 before submitting his first statement on the substance of the dispute before the court, the court is bound to refer the parties to arbitration. It is not for the court to appoint an arbitrator. The court cannot also stay the proceedings till the arbitration proceedings conclude. All the rights and obligations and remedies of the parties including the right to challenge the award are governed by the provisions of the 1996 Act. Once it is found that subject matter of the action before it is the subject matter of an arbitration agreement and an order is passed referring the parties to arbitration, the proceedings of the suit has necessarily to end. The court below rightly disposed the suit in the light of the order of reference made under Section 8 of the Act. The procedure adopted by the court below is perfectly correct.
We find no merit in the appeal. It is dismissed in limine.