If Remedy For Cause Of Action Falls Within Scope Of Arbitration Agreement, Counter Party Cannot Be Compelled To Defend It In A Suit: Delhi HC

Additionally, the court noted that if a remedy for a cause of action falls within the scope of an arbitration agreement, the counter party cannot be compelled to defend the same in a suit. It is entitled to insist that the matter be referred to arbitration.

Brief Facts:

The appellant filed an appeal under Section 37(1)(a) of the Arbitration and Conciliation Act, 1996 impugning an order passed by the Commercial Court, whereby the appellant's application under Section 8 of the Act for referring the parties to arbitration, was rejected. The appellant hired the respondent for completing certain interior works in its project site. After some dispute arose between them with respect to delay in payments. The respondent contended that he had completed 80% of the work 21.01.2020 and even as on that date, the payment towards the first running bill dated 16.12.2019 was pending. However, the appellant contended that there was an inordinate delay by the respondent in completing the work. Meanwhile, respondent's contractor (M/s Regus Paradigm Offices Pvt. Ltd.) also resiled from its agreement and proposed a new set of commercial terms. Also, the appellant terminated the agreement because of misconduct and excess payments.

Then, the respondent filed against the appellant for the recovery of a sum of ₹81,73,378.15/-. Since there was an arbitration clause mentioned in the Work Order. So, the appellant filed an application under Section 8 of the Act to refer the dispute to arbitration. However, the respondent contended that there is no dispute between the parties. Therefore, the parties were not required to be referred to arbitration. Then, the Commercial Court accepted the contention advanced by the respondent and rejected the appellant's application under Section 8 on the ground that there was no dispute that is required to be adjudicated.

Observation of the court:

The court observed that the parties had agreed that if they are unable to resolve their disputes, it would be referred to arbitration. The respondent's contention that there is no dispute to refer to arbitration is plainly erroneous. The very import of an arbitration agreement is that the parties will not take recourse to instituting an action in court but refer their disputes to arbitration. It is erroneous to suggest that a party to an arbitration agreement can avoid the contractual forum and maintain a suit in respect of the subject matter which is covered under the arbitration agreement. If a remedy for a cause of action falls within the scope of an arbitration agreement, the counter party cannot be compelled to defend the same in a suit. It is entitled to insist that the matter be referred to arbitration.

Then, the court noted that in a case where a party declines to satisfy the demand raised by the claimant, the matter is required to be adjudicated by an Arbitral Tribunal. If the arbitration agreement covers a dispute regarding any contractual payment, the question whether such payment is admittedly due is also required to be considered by an Arbitral Tribunal appointed in accordance with the agreement between the parties, and not in a suit unless the non-claimant consents otherwise.

Further, the court held that the observation of the Commercial Court is erroneous and is not supported by the plain language of Section 8 of the Act. Also, the judicial authority before whom an action is brought in a matter, which is the subject matter of arbitration, does not refer “the matter” to the arbitrator but only refers the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

Moreover, the court held that the scope of examination in an application under Section 8 of the Act is limited to prima facie examining the validity and existence of the arbitration agreement. Once it is accepted that a valid arbitration agreement exists between the parties, the court is necessarily required to allow the application under Section 8 of the Act and refer the parties to arbitration. Finally, the court referred the dispute to the Delhi International Arbitration Centre (DIAC) for constitution of the Arbitral Tribunal.

Case Title: M/S GRANDSLAM DEVELOPERS PVT LTD v. AKSHAY GANDHI PROPRIETOR OF PRAXIS DESIGN SOLUTIONS

Case Number: FAO (COMM) 236/2024 and CM APPL. 71659/2024

Counsel for the Appellant: Mr. Gautam Narayan, Sr. Advocate with Mr. Madhu Sudan, Ms. Sonal Sarda, Mr. Ankit Kakkar, Mr. Tushar Nair and Ms. Shreya Mehra, Advocates

Counsel for the Respondent: Mr. Nishit Kush, Mr. Siddharath Sikri and Ms. Kirti Singh, Advocates

Date of Judgment: 10.12.2024

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