Scope of Enquiry of Civil Courts Under Section 8 of the Arbitration and Conciliation Act, 1996
by M.V. Sundararaman*
Cite as : (2004) JUNE PL (Jour) 13
The scope of Section 8 of the Arbitration and Conciliation Act, 1996 and the extent of judicial intervention on its invocation have been the subject-matter of a series of pronouncements of the Supreme Court and various High Courts.
Although Section 34 of the erstwhile Arbitration Act, 1940 provided for stay of legal proceedings initiated by a party to an arbitration agreement, the language of Section 34 complicated matters. Various courts took diverse views regarding the stage at which an application for stay could be filed in legal proceedings. Questions also frequently arose regarding the fate of the legal proceedings after passing of the award or when the arbitrator held that the disputes referred to arbitration were beyond the scope of the arbitration agreement between the parties.
Section 8 of the Arbitration and Conciliation Act, 1996, inter alia, seeks to remedy the defects noticed in the working of Section 34 of the old Act. Section 8 of the 1996 Act mandates that a judicial authority before whom an action is brought, which is the subject of an arbitration agreement between the parties, shall refer the parties to arbitration. The Supreme Court, while interpreting the provisions of the Act, has held that Section 8 of the new Act is not in pari materia with Section 34 of the old Act and that the two provisions are distinct and different from each other.1 The Supreme Court has also clarified that as soon as the matter before any judicial authority is referred to arbitration, the suit/legal proceedings pending before it stand disposed of.2
What then would be the scope of enquiry before a judicial authority that considers an application under Section 8 of the Act to refer a matter pending before it to arbitration?
Under the old Act, the judicial authority, before whom such an application was moved, was empowered to stay further proceedings only if the following twin conditions were satisfied:
(i) that there is sufficient reason for referring the matter to arbitration in accordance with the arbitration agreement; and
(ii) that the applicant was, at the time when the proceedings were commenced, and still continues to be, ready and willing to do all things necessary for the proper conduct of the arbitration.
Under the new Act, the power of a judicial authority to refer the parties to arbitration has been streamlined. The scope for exercising discretion as provided for under the old Act has been taken away. The Supreme Court has consistently held that the language of Section 8 is peremptory and it is obligatory for the courts to refer the parties to arbitration in terms of their arbitration agreement.3 In contrast to the conditions for stay envisaged in Section 34 of the old Act, the conditions required to be satisfied for a court/judicial authority to refer parties to arbitration under Section 8 are:
(i) there is an arbitration agreement;
(ii) a party to the agreement brings an action against the other party to the agreement;
(iii) the subject-matter of the action is the same as the subject-matter of the arbitration agreement;
(iv) the other party moves the court for referring the parties to arbitration before it submits its first statement on the substance of the dispute.
Would this mean that the court/judicial authority acting in terms of the provisions under the new Act has no power at all to refuse relief under Section 8 assuming that the applicant has satisfied all the conditions envisaged therein?
Certain exceptions have been carved out of Section 8 when it would be permissible for the court/judicial authority to decline to refer the parties to arbitration and the arbitration agreement notwithstanding, continue adjudication of the proceedings. These exceptions, in practice, are usually applicable to proceedings/actions that arise out of building contracts/construction agreements where multifarious reliefs are claimed not only against the parties to the arbitration agreement but also against third persons, who are strangers to the arbitration agreement. In such an event, it has been held that the subject-matter of the suit ought not to be bifurcated. Any bifurcation of the subject-matter of the suit, one to be decided by the Arbitral Tribunal and the other to be decided by the court/judicial authority would lead to anomalous results. The Supreme Court noticed that this would inevitably lead to delay and increase the cost of litigation between the parties. The possibility of two fora passing conflicting orders cannot also be ruled out if such bifurcation of distinct causes of action is permitted. Said succinctly, when the subject-matter of the suit/legal proceedings includes subject-matter of the arbitration agreement as well as other disputes, the parties cannot be referred to arbitration.4
Another exception to Section 8 has been recently noticed by the Karnataka High Court. The High Court has laid down that the principles of estoppel, waiver and acquiescence are applicable to a party seeking reference of a matter to arbitration.5 The question arose whether it was permissible for a party to an arbitration agreement, who had earlier contended that the dispute is not arbitrable, to seek reference of the very same matter to arbitration by invoking Section 8. The High Court, after referring to Anand Gajapati Raju case2 has held that if parties are permitted to approbate and reprobate regarding the arbitrability of the dispute, it would work hardship against the other party and declined to refer the parties to arbitration under Section 8.
There are two other obvious situations when the court would be justified in refusing relief under Section 8. They are:
(i) when the power of the court is not invoked before submission of the first statement on the substance of the dispute; and
(ii) when the original or a duly certified copy of the arbitration agreement is not filed along with the application seeking reference to arbitration.6
It is pertinent to mention here that the Supreme Court in HPCL case3 has examined the question relating to the role of the civil court under Section 8 when a contention is raised before it that the arbitration agreement is inapplicable to the facts of the case. After referring to the decision of the Constitution Bench in Konkan Rly. case7 it has held that the answer to the question lies in Section 16 of the Act which empowers the Arbitral Tribunal to rule on its own jurisdiction including rule on any objection relating to the existence/validity/applicability of the arbitration agreement. However, the Supreme Court in Konkan Rly. case7 was concerned and decided only on the power exercised by the Chief Justice or his designate under Section 11 of the Act and not the power of a civil court under Section 8. The question whether the power exercised by the civil court under Section 8 is administrative or adjudicatory was not gone into by the Supreme Court in Konkan Rly. case7.
The Supreme Court has now in HPCL case3 held that if there is an objection before the civil court as to the applicability of the arbitration clause to the facts of the case, the same will have to be raised before the Arbitral Tribunal under Section 16 of the Act and the civil court cannot proceed to examine the applicability of the arbitration agreement to the facts of the case. (emphasis supplied) The exceptions noticed by the Supreme Court and the High Courts in their earlier rulings have neither been referred to nor adverted to in HPCL case3. It is submitted that HPCL case3 requires to be reconsidered especially in the light of the decision in Sukanya Holdings case4 and the other exceptions mentioned above.