Mrs. Najma Hussain And Ors. vs Smt. Manjari Jain And Anr. on 25 November, 2005

[Cites 13, Cited by 1]

Andhra HC (Pre-Telangana)

Mrs. Najma Hussain And Ors. vs Smt. Manjari Jain And Anr. on 25 November, 2005

Equivalent citations: 2006(1)ALD423, 2006(1)ALT66, 2006(4)ARBLR65(AP)

2. All the abovementioned Civil Revision Petitions are directed against the orders, dated 7-2-2005, passed by the VI11 Additional Senior Civil Judge (Fast Track Court), City Civil Court, Hyderabad, in I.A. Nos. 58 of 2005, 61 of 2005, 62 of 2005, 59 of 2005 and 60 of 2005 in O.S. Nos. 631 of 2001, 634 of 2001, 632 of 2001, 630 of 2001 and 629 of 2001, respectively.

3. Since all the Civil Revision Petitions are inter-related and a common question of law is involved, they are being disposed of by this common order.

4. The petitioners are the plaintiffs and the respondents are the defendants in the suits.

5. For the sake of convenience, in this common order, the parties will be referred to as per their array in the suits.

6. The facts, which are not in dispute, are that the plaintiffs filed the suits of 2001,634 of 2001, 632 of 2001 and 630 of 2001 for recovery of a sum of Rs. 2,35,000/-each and the suit O.S. No. 629 of 2001 for recovery of a sum of Rs. 1,17,800/- on the file of VIII Additional Senior Civil Judge (Fast Track Court), City Civil Court, Hyderabad, on the strength of five promissory notes, dated 1-12-1998, respectively.

7. The defendants in all the suits are the same. In all the suits, the defendants filed different applications for the same relief i.e., seeking stay of suit proceedings and refer the matters to the Arbitrator as provided under Section 8(1) of the Arbitration and Conciliation Act, 1996 (for brevity "new Act"). It was the contention of the defendants in the said applications that different agreements, dated 9-3-1995, were entered into between the plaintiffs and defendants for development of property bearing MCH. Nos. 3-6-330 to 3-6-334 with common areas and appurtenant land covering 850 square yards, situated in Basheerbagh, Hyderabad, subject to certain conditions. It appears that one among the important conditions was that the plaintiffs have to see that the tenants are vacated in order to have progress in the development of land as agreed. Since the same could not be done, the development agreements could not be acted upon. It is further contended that there was an arbitration clause in those agreements, whereby, if any dispute arises, the same shall be referred to an Arbitrator. It was the further case of defendants that some amounts also have been paid to the plaintiffs pursuant to the said agreements. Hence, instead of invoking the arbitration clause and in order to overcome the development agreements, the present suits came to be filed by the plaintiffs. Hence, it is the prime contention of the defendants that the plaintiffs, instead of filing these suits, ought to have invoked the arbitration clause.

8. On the other hand, it is the contention of the plaintiffs that, no doubt, the development agreements were entered into between the parties, but there was no progress shown by the defendants and that, in fact, several other opportunities for higher consideration have come up to them. However, the amounts said to have been paid by the defendants, pursuant to the development agreements, have been deposited in Syndicate Bank, Banjara Hills, Hyderabad. However, certain amounts have been given to the defendants and to that effect, promissory notes have been executed by them in favour of the plaintiffs. The transaction of money between the parties is totally distinct to each other and, in fact, the same does not connect to the transaction of development agreement entered into between the same parties. It is further contended that there is no arbitration clause in the suit promissory notes and, therefore, the dispute in the suits being distinct, need not be referred to the Arbitrator under Section 8 (1) of the new Act.

9. The Court below, having taken into account the material on record, however, opined to the effect that the transactions in the suits are directly related to the development agreements and, therefore, it was felt that it is desirable to refer the matters to the Arbitrator and accordingly, stayed the proceedings of the suits and forwarded the papers to the competent Court for appointment of an arbitrator. Hence, the present Civil Revision Petitions are filed by the plaintiffs.

10. For better appreciation of the question involved, it is necessary to look into Section 8(1) of the new Act, which is thus:

8. 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.

11. From a bare reading of the abovementioned provision, it is obvious that the prime ingredients of the said provisions are not satisfied in the instant cases. Hence, unless and until those ingredients are satisfied, the Court below, which is adjudicating the suits, cannot invoke the jurisdiction under Section 8 (1) of the new Act and stay the proceedings of the suits and further refer the matter for appointment of an arbitrator.

12. At the outset, it is to be noted that there appears to be something more than what actually meets the eye in the transactions between the parties and it looks as though the whole controversy has been revolving around the development agreement only, which contains an arbitration clause.

13. But, it is also to be noticed that there is a categorical denial by the plaintiffs that the transactions of money in the suits and the development agreements are distinct to each other and, therefore, inasmuch as the suits were instituted on the basis of promissory notes, a duty is cast upon the plaintiffs to establish the execution of the same along with other prerequisites like passing of consideration etc. This is possible only during the trial of the suits.

14. Most conspicuous thing to be noted is that the suits were filed basing on the promissory notes. The Court should, in such circumstances and in normal course, shall only go into that aspect. Further, it is to be seen that in the promissory notes, which are the foundation for filing of the suits, there is no reference to the development agreement. In other words, development agreement is not at all subject matter of the suit promissory notes. Therefore, the cause of action for filing the suits and the cause of action for filing the applications under Section 8 (1) of the new Act appears to be two different transactions.

15. It would further be seen that the cause of action for filing the suit is the promissory note and the cause of action of filing an application under Section 8 (1) of the new Act is the development agreement, which contains the arbitration clause. If an application under Section 8 (1) of the new Act is to be filed, arbitration agreement shall be filed (in the present case it was filed) and the subject matter and the basis for filing the suit or an application under Section 8 (1) of the new Act shall be the same. But, in the instant case, a bare perusal of the plaint averments and the application filed under Section 8 (1) of the new Act discloses that both these claims were made basing on two different documents.

16. A perusal of impugned orders would only reveal that the Court below proceeded on the premise that there is nexus between the suit promissory notes and development agreements. In our considered view, such nexus between those two transactions has not been established. If such a nexus is not established, the natural corollary would be that the suits have to be decided on their own merits. If such nexus between these two transactions has been established or crystalised, then only the further course of action has to be given thought of.

17. In other words, merely on the basis of the fact that certain applications were filed seeking stay of proceedings of the suits and to refer the matters to the Arbitrator, as contemplated under the development agreements, it is not permissible for the Court to draw a presumption that there is nexus between those two transactions and the alleged execution of suit promissory notes are in the same nature and are part and parcel of the main transaction i.e., development agreements. Further, in such a case, even if any promissory notes are executed, the same, perhaps, have to be presumed as 'for a collateral purpose', without passing of any consideration.

18. Even in such an extreme case, the Court below has to record a finding to that effect viz. that there is a direct nexus between the development agreements and suit promissory notes and further that development agreements would take primacy and execution of suit promissory notes would become inconsequential. Naturally, when development agreements occupy the front line, the question of invocation of arbitration clause and invoking the jurisdiction of the Court under Section 8 (1) of the Act would arise.

19. Furthermore, it is on record that the development agreement, which is the basis for filing applications under Section 8 (1) of the new Act, was executed on 9-3-1995; whereas the suit promissory notes were executed on 1 -12-1998. From the above, it is obvious that execution of suit promissory notes is subsequent event to the development agreement, which contains an arbitration clause. If the suit promissory notes are to be directly connected to the development agreement, the dates of these two documents must be other way round. In other words, the execution of the promissory notes should precede the execution of development agreements or at least simultaneously. This glaring and apparent anomaly has to be gone into by the Court below during trial. A cursory examination of the issue and mechanical transmission to the Arbitrator is totally uncalled for. That is what exactly had been done by the Court below in our considered view.

20. Furthermore, it is to be seen that development agreement contains the arbitration clause as under:

27. The parties herein have agreed that in case any dispute arises in future touching upon these presents in such an event the parties shall refer and decide their disputes as per the provisions of the Arbitration Act.

21. From the above clause, it is obvious that the development agreement was only with regard to the disputes touching upon the terms and conditions of the said agreement, but not any money transactions.

22. As already pointed out, the money transactions by way of executing promissory notes, which are basis for filing of the suits, were made in the year 1998 much later on the execution of the development agreement. If really there is any direct relationship between the conditions of the development agreement and the execution of the suit promissory notes, as already pointed out, the suit promissory notes must have been executed prior to the development agreement and there must be a specific reference to those money transactions. Therefore, it is rather absurd to connect the suit promissory notes with the development agreement and the arbitration clause. However, all these things can be gone into by the Court below after conducting trial.

23. It is needless to say that it is expedient to frame necessary and appropriate issues. Obviously, an issue regarding the nexus between the two transactions may also be gone into by framing an independent issue in that behalf and, if necessary, such an issue can be examined by the Court below as a 'preliminary issue' as provided under Order XIV Rule 2 of the Code of Civil Procedure.

24. As already noticed, when there was admittedly development agreement between the parties and when the same was not complied with by the defendants, what action was initiated is not known nor any information is forthcoming from both the parties from their affidavits in the applications and the counters. Similarly, it is equally incomprehensible as to the need for developers/defendants to execute promissory notes in favour of the plaintiffs. This becomes an intriguing aspect, particularly on various counts, which are not worth mentioning, at the stage of deciding the present Civil Revision Petitions.

25. The learned counsel appearing for the plaintiffs lays much reliance on the decisions of the apex Court as well as this Court in Rachappa v. Gurusiddappa , Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya , and B. Kamala Devi v. Mehta Builders which will be discussed in the following paragraphs.

26. In Rachappa v. Gurusiddappa the apex Court observed (at paragraph No. 4) thus:

An analysis of the aforesaid section makes it clear that in order to have the proceedings in the suit stayed, there must be an arbitration agreement between the parties covering the disputes in question. The section stipulates that in order that stay may be granted under the section, it is necessary that the following conditions are fulfilled:

(i) The proceedings must have commenced by a party to an arbitration agreement against any other party to the agreement;

(ii) the legal proceedings, in this case the suit, which is sought to be stayed must be in respect of a matter agreed to be referred;

(iii) the applicant for stay must be a party to the legal proceeding, the suit in this case.

(iv) the applicant must have taken on steps in the proceeding after appearance;

(v) the applicant must satisfy that only the applicant was at the time when the proceedings were commenced, ready and willing to do everything necessary for the proper conduct of the arbitration; and

(vi) the Court must also be satisfied that there was no sufficient reason why the matter should not be referred to arbitration.

27. The above said observations were made by the apex Court while dealing with a case under Section 34 of the Arbitration Act, 1940 (for brevity "old Act"), which mainly deals with stay of legal proceedings where there is an arbitration agreement. Under the said provision also, when it is brought to the notice of the Court that it is a matter that should be subjected to the arbitration, the Court can take appropriate steps including referring the matter for arbitration. There is a drastic distinction between Section 34 of the old Act and Section 8 (1) of the new Act. Therefore, the said judgment of the apex Court is not helpful to the plaintiffs.

28. In Sukanya Holding Pvt. Ltd. v. Jayesh H. Pandya (2 supra), the apex Court observed (at paragraph Nos. 12 to 15) thus:

For interpretation of Section, 8 Section 5 would have no bearing because it only contemplates that in the matters governed by Part-1 of the Act, Judicial authority shall not intervene except where so provided in the Act. Except Section 8, there is no other provision in the Act that in a pending suit, the dispute is required to be referred to the arbitrator. Further, the matter is not required to be referred to the arbitral Tribunal, if -(1) the parties to the arbitration agreement have not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. This would, therefore, mean that Arbitration Act does not oust the jurisdiction of the Civil Court to decide the dispute in a case where parties to the Arbitration Agreement do not take appropriate steps as contemplated under Sub-sections (1) and (2) of Section 8 of the Act.

Secondly, there is no provision in the Act that when the subject matter of the suit includes subject matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators.

Thirdly, there is no provision - as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the Court may refer the same to arbitration provided that the same can be separated from the rest of the subject matter of the suit. Section also provided that the suit would continue so far as it related to parties who have not joined in such application.

The relevant language used in Section 8 is -"in a matter which is the subject matter of an arbitration agreement." Court is required to refer the parties to arbitration. Therefore, the suit should be in respect of "a matter" which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced - "as to a matter" which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words 'a matter' indicates entire subject matter of the suit should be subject to arbitration agreement.

29. From the above judgment, it is abundantly clear that the Arbitration Act does not oust the jurisdiction of the civil Court to decide a dispute in spite of there being an arbitration agreement if no steps as contemplated under sub-Sections (1) and (2) of Section 8 of the new Act are taken. It is further made clear that there is no provision under the new Act that the subject matter in the suit and the subject matter of the arbitration agreement shall be the same.

30. In the instant case, as already noticed, the subject matter and cause of action in the suit is different from the subject matter and cause of action for filing the application under Section 8 (1) of the new Act. Therefore, the observations of the apex Court, to the extent indicated above, are in favour of the plaintiffs.

31. In B. Kamala Devi v. Mehta Builders (3 supra), a learned single Judge of this Court observed (at paragraph Nos. 8 and 9) thus:

To avoid any controversy in this regard on behalf of the petitioners a memo has been filed in the Court specifically making it clear that the suit was only in regard to the relief or restraining the defendant-Builder from constructing contrary to the Municipal permission. It is further stated in the memo that the plaintiffs-petitioners have no objection if any further construction is made by the defendant-Builder in accordance with the terms of agreement after obtaining Municipal sanction.

Considering the very limited scope of the relief sought in the suit which does not involve any dispute as to the rights of the parties under the agreement, there is no scope for invoking the clause providing for arbitration in the agreement. In this view of the matter, the order of the learned Junior Civil Judge referring the matter for arbitration in terms of clause 15 of the agreement cannot be sustained.

32. From the above judgment of the learned single Judge of this Court and the circumstances referred to in paragraph No. 8, the observations made in paragraph No. 9 are very relevant, whereby it was held that where the suit does not involve any dispute as to the rights of the parties under the agreement, invocation of arbitration clause provided under the agreement is not permissible. In other words, the subject matter of the agreement must be the subject matter of the suit.

33. In the instant case, as already pointed out, the subject matter of the suits for recovery of money is basing on the promissory notes and in the applications made under Section 8 (1) of the new Act, the subject matter is something else i.e., development of the property, in which event, as already observed, direct bearing of the agreement shall be decided only in the suits but not on the mere presentation of an agreement containing arbitration clause, which is totally for a different purpose and the context in which the suits were instituted. Hence, the said decision is applicable to the case of the plaintiffs.

34. The learned counsel appearing for the defendants places reliance on the decision of the apex Court in H.P. Corporation Ltd. v. Pinkcity Midway Petroleums 2003 AIR SCW 3558, wherein their Lordships of the apex Court observed (at paragraph Nos. 14, 15 and 16) thus:

This Court in the case of P. Anand Gajapathi Raju and Ors. v. P.V.G. Raju (Dead) and Ors. has held that the language of Section 8 is peremptory in nature. Therefore, in cases where there is an arbitration clause in the agreement, it is obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement and nothing remains to be decided in the original action after such an application is made except to refer the dispute to an arbitrator. Therefore, it is clear that if as contended by a party in an agreement between the parties before the Civil Court, there is a clause for arbitration, it is mandatory for the Civil Court to refer the dispute to an arbitrator. In the instant case the existence of an arbitral clause in the agreement is accepted by both the parties as also by the Courts below out the applicability thereof is disputed by the respondent and the said dispute is accepted by the Courts below. Be that as it may, at the cost of repetition, we may again state that the existence of the arbitration clause is admitted. If that be so, in view of the mandatory language of Section 8 of the Act, the Courts below ought to have referred the dispute to arbitration.

The question then would arise: that would be the role of the Civil Court when an argument is raised that such an arbitration clause does not apply to the facts of the case in hand? Learned counsel for the appellant contends that it is a matter which should be raised before the arbitrator who is competent to adjudicate upon the same and the Civil Court should not embark upon an inquiry in regard to the applicability of the arbitration clause to the facts of the case. While learned counsel appearing for the respondent contends that since the applicability of the arbitration clause to the facts of the case goes to the very root of the jurisdiction of the reference to arbitration, this question will have to be decided by the Civil Court before referring the matter to arbitration even in cases where there is admittedly an arbitration clause. The answer to this argument, in our opinion, is found in Section 16 of the Act itself. It has empowered the Arbitral Tribunal to rule on its own jurisdiction including rule on any. objection with respect to the existence or validity of the arbitration agreement. That apart, a Constitution Bench of this Court in Konkan Railway (supra) with reference to the power of the arbitrator under Section 16 has laid down thus:

...

35. The said decision of the apex Court though unexceptionable, is not applicable to the peculiar facts and circumstances of the present cases, as already discussed in the earlier paragraphs.

36. The findings recorded by the Court below while allowing the applications are thus:

Therefore, passing of five cheques for a total sum of Rs. 9,00,000/- was covered with the agreement, dated 9-3-1995. At this stage this Court is not competent to go into the facts of the case, but the petitioners made out a prima facie case in their favour explaining how the said five cheques were issued in favour of this respondent and other family members. As such the Supreme Court decision applies to the facts of the matter and I hold that clause-27 of the said Development Agreement dated 9-3-1995 comes into operation.

In such an event the matter has to be first resolved by an arbitrator and then only if aggrieved by the decision of arbitrator the aggrieving party has to approach the competent court. Hence I am inclined to allow this petition.

37. For the foregoing reasons and following the observations made by the apex Court in Sukanya Holdings Pvt. Ltd.'s case (2 supra) and of this Court in B. Kamala Devi's case (3 supra), particularly in the present peculiar facts and circumstances, we are of the considered view that the Court below was not right in recording the above reasoning and referring the matters to the arbitrator.

38. In the result, all the abovementioned Civil Revision Petitions are allowed and the impugned orders, dated 7-2-2005, respectively, passed by the VIII Additional Senior Civil Judge (Fast Track Court), city Civil Court, Hyderabad, in I.A. Nos. 58 of 2005, 61 of 2005,62 of 2005, 59 of 2005 and 60 of 2005 in O.S. Nos. 631 of 2001, 634 of 2001, 632 of 2001, 630 of 2001 and 629 of 2001, respectively, are set aside. Consequently, all the abovementioned applications are dismissed. The trial Court shall dispose of the suits as expeditiously as possible.

39. We make it explicitly clear that we have not expressed anything on the merits of the respective suits and that the suits shall have to be disposed of on their own merits and in accordance with law, uninfluenced by this order, as expeditiously as possible.

40. The orders of interim stay granted by this Court in all these Civil Revision Petitions shall stand vacated and that the applications, if any, pending are hereby closed.

41. However, there shall be no order as to costs.

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Andhra HC (Pre-Telangana)