(The following post is contributed by Sumit Rai, who is an associate with Economic Laws Practice, Mumbai since 2007 and has been on a long study leave pursuing his LLM, Masters in International Dispute Settlement at Geneva)
In Arti Jethani v. Daeshan Trading (India) Pvt. Ltd. (decision dated 16.05.2011), the Delhi High Court held that a Section 8 application under the Arbitration & Conciliation Act, 1996 (Arbitration Act) was not maintainable if brought after the filing of written statement, even if the written statement raised jurisdictional objections on grounds of existence of an arbitration agreement. While there is authority to support this conclusion, it suggests a formalistic bias in the court’s approach to interpretation. An extremely formalistic approach to interpretation of the Arbitration Act, defeating an arbitration agreement, is the very anti-thesis of the policy that led to the new law in 1996. This decision also fails to take into account the negative effect of an arbitration agreement.
The Court was hearing a petition under section 8 of the Act in a suit filed by one Ms. Arti Jethani (Applicant) against M/s. Daeshan Trading (India) Pvt. Ltd (Defendant). The Defendant appearing on summons on 04.01.2011 was ordered to file a written statement within 30 days. It did so on 25.01.2011, wherein a defense against the jurisdiction of the court was raised on grounds of existence of an arbitration agreement. The Plaintiff in its reply stated that having filed the written statement and not an application under Section 8 of the Act, there was no requirement to refer parties to arbitration. The Defendant filed the application on 22.02.2011.
The Court held that Section 8 of the Act clearly lays down that an application must be made “not later than when submitting …first statement on the substance of the dispute”. Since this was not done, Court held that one of the pre-conditions under the provision was not met.
The Court rejected Defendant’s contention that disputing jurisdiction on grounds of existence of an arbitration agreement in the written statement should amount to sufficient compliance under Section 8. It noted that “[m]ere disclosure of arbitration agreement in the Written Statement and claiming that Civil Court has no jurisdiction to try the suit would be of no consequences unless the Written Statement itself contains a prayer for referring the dispute to arbitration”. The Court also held that the jurisdiction of the Civil Court is not ousted on account of an arbitration agreement between the parties.
Form over Spirit
This is not the first time that a court has refused to consider a jurisdictional objection taken in the written statement as sufficient. This decision relies on some of them.
The Delhi High Court, however, recognized that an application in strict sense is not required under Section 8. It also agreed that such application could be made in the written statement itself. However, it held that such application cannot be read from a mere objection to jurisdiction based on the existence of an arbitration agreement and must be supplemented by a prayer to refer the parties to arbitration.
It seems pedantic to negate an arbitration agreement merely on grounds that a prayer for reference was not made. Further, a prayer to dismiss the suit must be sufficient for a defendant seeking enforcement of an arbitration agreement under the text of Section 8. Why should it be required of a defendant that may have no counter-claim or interests in pursuing a dispute to compulsorily seek a reference to arbitration? A meaningful construction would suggest that reference to arbitration would be the result of an objection to jurisdiction citing existence of an arbitration agreement, when read together with the plaint seeking adjudication of a dispute.
Civil Courts Retain Jurisdiction?
The real hurdle in a purposive interpretation of Section 8 lies in the conceptual rejection of the negative effect of arbitration agreement. An arbitration agreement necessarily implies the exclusion of jurisdiction of civil courts from adjudicating disputes subject to such agreement. It is a consequence of the positive effect, i.e. the transfer of right of adjudication from courts to an arbitral tribunal. This must also follow from the exception for arbitration agreements contained in Section 28 of the Indian Contract Act.
The Supreme Court in Sukanya Holdings Pvt. Ltd. v. Jayesh Pandya rejected this concept. It laid down three conditions that Section 8 requires to be met before a matter can be referred to arbitration, and concluded from it that until such conditions are met, civil court jurisdiction is not excluded. This interpretation hoists Section 8 by its own petard. What was meant to be a safeguard provision to mandate reference to arbitration on an application has now become the enabling provision for civil courts to usurp arbitral jurisdiction unless strict compliance of Section 8 is met.
Arbitration agreement, by force of pacta sunt servanda read with Section 28 of the Contract Act, leads to the obvious conclusion of exclusion of civil court jurisdiction. Section 8 is essentially an acknowledgment of the fact that parties can waive an arbitration agreement. Conditions under Section 8 are meant to provide for reading such waiver by conduct. When a suit is filed despite an arbitration agreement, it is an offer by one party to terminate this agreement. If the other party joins the suit by contesting it on substance, it accepts such offer and the arbitration agreement comes to an end. Section 8 provides that failure to invoke the arbitration agreement within reasonable time shall also be deemed to be an acceptance.
Nothing in the text of Section 8 suggests that civil courts retain jurisdiction despite arbitration agreement, unless it is excluded by a decision of the court itself in such application. On the contrary, Section 8(3) provides that notwithstanding a pending application, an arbitration could be commenced, continued, and an award be made. If the legislative intent were to prohibit the negative effect of arbitration agreement, this provision would be inane.
The manner in which Section 8 has been interpreted over the years raises serious concerns regarding the effectiveness of the Indian arbitral regime. The Delhi High Court decision has once again necessitated focus on this issue. It is interesting to note that other significant common law jurisdictions (England and US), where arbitration regime has essentially been successful, have legislations more comprehensive than that suggested by the UNCITRAL Model Law. Probably, this is a fact that needs to be noticed by the legislature.
However, no legislation can ensure its successful application. It can only provide tools. “The success of the [legislation] will depend on these tools being skillfully used to fashion the product for which they were designed. This means, above all, that they should be knowledgeably used, with an understanding of their origin, and of why they were designed as they were” (Rt. Hon. The Lord Bingham of Cornhill, Lord Chief Justice of England).
– Sumit Rai