Party Cannot Invoke Arbitration After Voluntarily Submitting To Court's Jurisdiction During Proceedings: Gujarat High Court

However, the bench held that the legal principle remains that an application under Section 8(1) of the Arbitration and Conciliation Act, 1996, must be filed before the first statement on the substance of the dispute is submitted.

It held that a party that willingly participates in the court proceedings and submits to the Court's jurisdiction cannot later reverse their position and request that the dispute be referred to arbitration based on an existing arbitration agreement.

Brief Facts:

The facts of the case revolve around three Special Civil Applications where Prabhudas Jesangbhai Patel (Petitioner) sought the cancellation of various legal instruments before the City Civil Court. In Special Civil Application No. 10188 of 2023, the Petitioner filed a Regular Civil Suit for the cancellation of a registered Power of Attorney executed in favor of Vinodbhai Mohanbhai Togadiya (Respondent). The Respondent contested this by filing a written statement and an application under Order 7 Rule 11 of the Code of Civil Procedure, 1908 (CPC) seeking to reject the plaint. After the Petitioner's reply and the production of a Partnership Deed, the Trial Court rejected the Respondent's application. The Respondent then withdrew a subsequent Civil Revision Application before the Court and filed a new application under Order 14 of the CPC for framing a preliminary issue. The Respondent also filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 which was allowed by the City Civil Court which led to the dismissal of the suit based on the arbitration clause in the Partnership Deed.

In Special Civil Application No. 9972 of 2023, the Petitioner initiated a Regular Civil Suit and sought to cancel a registered Sale Deed executed by Respondent No. 1 in favor of Respondents Nos. 2 to 7. Similar to the first case, the Respondent filed an application under Order 7 Rule 11 of CPC which was rejected by the Trial Court. The Respondent withdrew a subsequent Civil Revision Application and later moved another application under Order 14 of CPC for framing a preliminary issue. The Respondent also filed an application under Section 8 of the Arbitration Act which was granted by the City Civil Court.

The Petitioner contended that the City Civil Court exceeded its jurisdiction by referring the matters to arbitration after the Respondent filed his first statements on the substance of the dispute which he argued amounted to submission to the court's jurisdiction. He contended that the application under Section 8 of the Arbitration Act should have been made before filing the first statement on the substance of the dispute and once this threshold was crossed, the Respondent could not later invoke the arbitration clause.

On the other hand, the Respondent contended that the disputes arose from the Partnership Deed executed between the parties which contained an arbitration clause. He argued that the Petitioner suppressed material facts and that the investment in the property was actually a capital investment of the partnership firm. The Respondent maintained that under Section 8 of the Arbitration Act the court was bound to refer the matter to arbitration when a valid arbitration agreement existed.

Observations by the High Court:

The High Court referred to Section 5 of the Arbitration Act which restricts judicial intervention in matters governed by the Act except where expressly provided. It also referred to Section 8 which allows a judicial authority to refer parties to arbitration. It noted that for Section 8 to apply, several conditions must be met: the dispute must be subject to an arbitration agreement, an application for arbitration must be made by one of the parties, and the application must be filed before submitting the first statement on the substance of the dispute. The application should also be accompanied by the original arbitration agreement or a certified copy thereof.

The High Court observed that prior to the amendment of Section 8 in 2015, the provision required that an application under Section 8 be made "not later than when submitting the first statement on the substance of the dispute." The amendment changed this wording to "not later than the date of submitting the first statement on the substance of the dispute," noting that the application for arbitration must be presented before the defendant submits their first statement on the dispute's substance.

The bench held that:

“Noticeably, as a result of the amendment in Section 8, three key changes are introduced in Sub-section (1) of Section 8. It is now permissible for person claiming through or under defendant to claim benefit of arbitration clause. The amendment waters down the effect of any judgment or order or decree to the contrary and the third effect of the amendment pertains to cut off date by which application under Section 8(1) of Act of 1996 may be presented. In prior to amendment, the cut off date was indicated by words 'not later than when submitting (his first statement on substance of dispute)'. By amendment the words used are 'not later than the date of submitting his first statement on the substance of dispute'. The amendment indicates that party resisting the suit proceedings is permitted to apply for reference to arbitration even while submitting his reply or written statement. Plainly reading, the word 'when submitting' would ordinarily imply that such a move under Section 8(1) could come simultaneously to the filing of the written statement. Meaning thereby that if the written statement was filed, yet simultaneously defendant was seeking party to refer the dispute to the arbitration, the submission of the written statement could not be construed as a waiver of the right to do so or surrender or acquisition of the jurisdiction of the Civil Court where the dispute was brought.

By amendment, the words 'not later than when submitting' have been substituted by 'not later than the date of submitting' are replaced which are of some importance and in view of that now the defendant is required to invoke the arbitration clause and apply to the Court for reference thereunder by moving an application but not required to file written statement or any answer to set his statement on the substance of dispute. Rather it could be interpreted that submission of the written statement or reply indicating his first statement on the substance of dispute may be construed as his waiver of right to seek reference to arbitration or even as submission to acquisition of jurisdiction of the Court where the action has been brought by the claimant/plaintiff. By employing the words 'not later than the date of submitting', a time limit is also set to the period within which the said arbitration agreement must be presented.”

The High. Court referred to the Supreme Court's decision in Ravi Prakash Goel v. Chandra Prakash Goel which held that if a dispute is subject to arbitration, the party cannot be compelled to seek relief in a civil court. The language of Section 8 was held to be peremptory meaning that the civil court must refer the matter to arbitration if an arbitration agreement exists.

However, the High Court also acknowledged that the mere existence of an arbitration clause does not automatically oust the civil court's jurisdiction. The civil court must still determine the appropriateness of referring the matter to arbitration under Section 8 of the Act. It held that the amendment to Section 8 clarified that even if a written statement is filed, the defendant could still request a reference to arbitration provided the request is made simultaneously or before the submission of the first statement.

The High Court noted the significance of the timing of the application under Section 8 and held that it must be made before submitting the first statement on the substance of the dispute. If the application is filed later, it could be interpreted as a waiver of the right to seek arbitration or as an acquiescence to the jurisdiction of the civil court.

The High Court also referred to several precedents, including the Supreme Court's decision in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited, which clarified that filing any statement or application showing an intention to submit to the court's jurisdiction could be considered as waiving the right to arbitration. However, the High Court distinguished between main proceedings and incidental proceedings and held that that actions taken in interlocutory proceedings do not necessarily indicate submission to the court's jurisdiction in the main dispute.

Therefore, the High Court held that right to seek arbitration must be invoked before the submission of the first statement on the substance of the dispute in a suit. It noted that this legal position is consistent with the established principle that once a party willingly submits itself to the jurisdiction of the Court and actively participates in the proceedings without raising the arbitration clause, it cannot later claim the right to arbitrate the dispute.

The bench held that:

“whether party has waived his right in a manner to seek arbitration and submitted himself to the jurisdiction of the Court would depend upon the conduct of such party in the suit but the proposition of law remains that the application under Section 8 (1) of the Act of 1996 should be filed before submission of the first statement on substance of dispute. The party who willingly participated in the proceedings in the suit and subjects himself to the jurisdiction of the Court cannot subsequently turn around and take somersault to say that now party should be referred to arbitration in view of existence of an arbitration agreement.”

The High Court noted that the Respondent in the suit filed a detailed written statement on June 22, 2022 denying all the allegations made by the Petitioner. This written statement was comprehensive which extended over 22 pages yet conspicuously absent was any mention of an arbitration clause or an assertion that the subject matter of the dispute was covered by such a clause in the partnership deed. Despite various legal contentions being raised by the Respondent, the issue of arbitration was never brought up during this stage of the proceedings.

It was only on April 7, 2023, nearly ten months after filing the written statement, that the Respondent filed an application under Section 8 of the Arbitration Act. The Respondent argued that this delay was due to the arbitration clause being discovered later when the partnership deed was produced by the Petitioner. However, the High Court found this explanation unconvincing.

The High Court further held that the Respondent's subsequent actions, including engaging in incidental proceedings and filing an application for the rejection of the plaint under Order 7 Rule 11 of the CPC, further demonstrated that he had accepted the jurisdiction of the Civil Court. The High Court noted that the Respondent's belated attempt to invoke the arbitration clause after filing a comprehensive written statement amounted to a waiver of the right to arbitration.

The High Court referred to a similar case, Krishna Dairy Farm and Coldrinks and others vs. Rasikbhai Khodidas Patel, where a coordinate bench of the High Court held that a party could not invoke Section 8 of the Act after actively participating in court proceedings and denying the existence of the arbitration clause. The bench in that case held that waiver is a question of fact, determined by the conduct of the parties. Accepting an application for arbitration after the filing of the first statement on the substance of the dispute would contradict the express provisions of the law and undermine the purpose of requiring such applications to be filed at the earliest stage.

Therefore, the High Court found that the City Civil Court committed a serious jurisdictional error by entertaining and allowing the application under Section 8 after ten months of filing the first statement. Consequently, the High Court corrected this error under its supervisory jurisdiction under Article 227 of the Constitution of India and allowed the petitions.

Case Title: Prabhudas Jesangbhai Patel Versus Vinodbhai Mohanbhai Togadiya

LL Citation: 2024 LiveLaw (Guj) 110

Case Number: R/SPECIAL CIVIL APPLICATION NO. 10188 of 2023 With R/SPECIAL CIVIL APPLICATION NO. 9972 of 2023 With CIVIL APPLICATION (FOR INTERIM RELIEF) NO. 1 of 2024 In R/SPECIAL CIVIL APPLICATION NO. 9972 of 2023 With CIVIL APPLICATION (FOR JOINING PARTY) NO. 1 of 2023 In R/SPECIAL CIVIL APPLICATION NO. 9972 of 2023 With R/SPECIAL CIVIL APPLICATION NO. 9673 of 2023 With CIVIL APPLICATION (FOR INTERIM RELIEF) NO. 1 of 2024 In R/SPECIAL CIVIL APPLICATION NO. 9673 of 2023 With CIVIL APPLICATION (FOR JOINING PARTY) NO. 1 of 2023 In R/SPECIAL CIVIL APPLICATION NO. 9673 of 2023

Advocate for the Petitioner: Mr Shalin Mehta, Senior Advocate With Mr Mj Parikh and Ms Dimple M Parikh

Advocate for the Respondent: Mr BJ Trivedi and Ms Jignasa B Trivedi

Date of Judgment: 08/08/2024

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