Procedural Defects and Court's Power to Refer Parties to Arbitration Under Section 8

Ayushi Yelimineti*

INTRODUCTION

Section 8 of the Arbitration and Conciliation Act, 1996 (“the Act”) serves the crucial purpose of giving parties the right to be referred to arbitration in matters brought before a court where the matter is subject to an arbitration agreement. It is well established by various judgements of the Supreme Court and a reading of the Section 8 that it is mandatory and peremptory for courts to refer parties to arbitration when there is an arbitration agreement. There is no scope to exercise discretion unless it is found that, prima facie, no valid arbitration agreement exists. However, there are some requirements for a party to get this reference. If a party fails to make an application under Section 8 and continues with proceedings in the court, it would be considered to have waived its right to arbitration.

· According to Section 8(1), an application for reference must not be later than the date of submitting the first statement on the substance of the dispute.

· Section 8(2) adds that the application shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy.

In this article, we will explore how any lapses in the stated requirements affect the ability to obtain a reference to arbitration, the leeway granted to parties by courts and the need to allow for flexibility in a Section 8 application.

ABSENCE OF AGREEMENT WHILE FILING THE APPLICATION

As stated, Section 8(2) makes it mandatory for the attachment of the original arbitration agreement or a duly certified copy in the Section 8 application. In Atul Singh & Ors vs Sunil Kumar Singh & Ors, the Supreme Court had refused to refer parties to arbitration due to non-compliance of Section 8(2). The Respondents in this case contended that a copy of the partnership deed, which contained the arbitration agreement, was on the record of the case, though not filed initially. However, the Supreme Court noted that the original arbitration agreement or a duly certified copy should have been filed along with the Section 8 application and refused to refer the parties to arbitration.

However, the Supreme Court took a different stance in Ananthesh Bhakta v. Nayana S. Bhakta. Here, the Court considered whether non-filing of either original or certified copy of the retirement deed and partnership deed that contained the arbitration agreement along with the application under Section 8(1) entailed dismissal of the application. The Court observed that Section 8(2) uses the term “shall not be entertained” and analysed the meaning of the term “entertained”. When a lawsuit or legal proceeding is not dismissed at the outset but is instead accepted by the court for consideration and resolution according to the law, it is considered that the court is entertaining the suit or proceeding, regardless of the final decision.

In Hindusthan Commercial Bank Ltd. v. Punnu Sahu, the expression “entertain’’ was held to mean “adjudicate upon” or “proceed to consider on merit”. Thus, it was held that it is not of consequence if the application at the time of filing was accompanied by the original arbitration agreement or a duly certified copy but that it was so accompanied when the Court was considering the application. The Supreme Court concluded that filing the application without such original or certified copy but bringing the original arbitration agreement on record at the time when the Court is considering the application shall not entail rejection of the application under Section 8(2). This gives parties significant respite who, for any reason, fail to attach any copy of the arbitration agreement. It was rightly noted that the need for the agreement only comes at the application’s consideration stage, and mandatory attachment of the original agreement or certified copy right when the application is filed serves little to no purpose.

Moreover, in Bharat Sewa Sansthan v. U.P. Electronics Corporation Ltd., the Supreme Court held that photocopies of a lease agreement could also be taken on record under Section 8 for ascertaining the existence of an arbitration clause. Thus, if the original arbitration agreement or a certified copy is on record at the time of adjudication of the application, Section 8(1) is considered to be complied with.

A SEPARATE APPLICATION

No specified format is stipulated for the application under Section 8(1) of the Act. The Supreme Court in P. Anand Gajapathi Raju v. P.V.G. Raju held that 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 of an arbitration agreement. The Hon’ble Delhi High Court in Madhu Sudan Sharma & Ors. v. Omaxe Ltd. examined the requirement of filing a separate application under Section 8 at length. The court held that when a party raises an objection in its written statement regarding the jurisdiction of the court to hear a case due to the existence of an arbitration agreement between the parties, there is sufficient compliance with Section 8 of the Act. The court explained that if a party includes the arbitration clause in its written statement to challenge its jurisdiction, there is no need to reproduce the entire contents of the arbitration clause. Requiring a separate request to refer the dispute between the parties to arbitration would be overly technical and of little consequence. The court also noted that the lack of framing an issue about whether the dispute should be referred to arbitration does not bar the court from directing the parties to arbitration. It was further observed that the legislative intent behind the Act of minimal intervention warrants a wide interpretation of Section 8. Determining that reference to arbitration would not be made if a separate application is not simultaneously filed with the written statement would take away the right to have the disputes adjudicated by the agreed mode of arbitration.

Moreover, in Sharad P.Jagtiani v. M/S.Edelweiss Securities Ltd., the Delhi High Court held that it is not mandatory to include a specific prayer to refer parties to arbitration in the written statement, where a preliminary objection has been taken that the suit is barred in view of the arbitration agreement. Therefore, as established by the above-mentioned judgements, it is not necessary to file a separate application under Section 8. A preliminary objection raised in the written statement would suffice to meet the section's compliance requirements.

WHAT IS CONSIDERED AS THE FIRST STATEMENT?

Section 8(2) mentions that the application should not be made later than the “date of submitting the first statement on the substance of the dispute”. The question of what is to be construed as a “first statement” has been considered by courts several times. Typically, it is assumed that the “first statement” in a civil suit means the written statement submitted by the defendant. However, Courts have highlighted that what is of utmost importance is to examine if the Defendant has submitted itself to the jurisdiction of the Court and has waived its right to invoke the arbitration clause.

In the case of Booz Allen and Hamilton Inc.V. Sbi Home Finance Ltd., the Supreme Court ruled that the act of filing a written statement in a lawsuit, as well as the submission of any statement, application, or affidavit by a defendant prior to submitting the written statement, will be regarded as a submission of a statement on the substance of the dispute. This is true if the defendant demonstrates their intention to submit to the court's jurisdiction and waives their right to seek a reference to arbitration by filing such documents. However, if a defendant files a reply to an application for a temporary injunction, attachment before judgment, or appointment of a receiver, this cannot be considered a submission on the substance of the dispute. Such a reply is intended to prevent an interim order from being issued against the defendant. In Drive India Enterprise Solutions Ltd. v. Haier Telecom (India) Pvt. Ltd., the Bombay High Court explained that in an ordinary suit, defence is a matter of right, and a written statement is the defendant's first statement on the substance of the dispute.

However, a summary suit is a special procedure prescribed under the Code of Civil Procedure, 1908, (“CPC”) under Order XXXVII, where defence is not a right but can be raised only subject to leave of the Court. If the affidavit opposing the summons for judgment, while seeking leave to defend, challenges the Court's jurisdiction to hear the case and states that the defendant prefers a domestic forum to resolve their rights or liabilities, then simply filing a reply to the summons for judgment does not amount to making a “first statement on the substance of the dispute.” This holds true even if the affidavit includes various other defences. In all other cases, the affidavit can indeed be regarded as the “first statement on the substance of the dispute” as per the meaning established in Section 8. In Parasramka Holdings Pvt Ltd. V/s Ambience Private Ltd. (“Parasramka Holdings”), the Delhi High Court held that an application under Order VII, Rule 11 of the CPC, filed before the first statement on the substance of the dispute cannot be said to be a waiver under Section 8.

WAY FORWARD: A WIDE INTERPRETATION

While there are rulings in which courts have taken a technical stance and not allowed Section 8 applications where any of the requirements laid under the Section are not strictly met, courts majorly have inclined to allow for the application if the essence and the broad purpose of the section are fulfilled. It was highlighted by the Delhi High Court in Parasramka Holdings that India lags behind many countries when it comes to contract enforcement. It is vital to take steps that enable quick enforcement of contracts, facilitate the easy recovery of monetary claims, and ensure just compensation for damages incurred. Reducing the backlog of court cases and accelerating dispute resolution through arbitration is essential to encourage investment and boost economic activity.

By allowing for procedural flexibility, courts can ensure minimal judicial intervention, give due cadence to the arbitration agreement and uphold party autonomy. This would also facilitate arbitration as an expeditious, less expensive mode of dispute resolution and ensure minimal judicial intervention. A technical stance on the applications serves no substantial use and can discourage parties from opting for arbitration. It is suggested that in order to fulfil the object of the Act, courts maintain a uniform stance on Section 8 applications and opt for a broad interpretation to refer parties to arbitration when an arbitration agreement exists.

* Ayushi is a penultimate-year law student at RMLNLU with a keen interest in arbitration. She is actively exploring other areas of law to broaden her expertise.