Arbitration Clause Cannot Be Defeated By Adding A Cause Of Action Which Is Beyond Its Scope : Bombay HC [Read Judgment]

The Bombay High Court has held that a litigant cannot be permitted to defeat an arbitration agreement by adding a cause of action in the suit which is not covered by the arbitration clause.

"If such a course is readily accepted, it has the propensity to give a long leash to the plaintiff to circumvent the arbitration agreement by uniting a cause of action which is beyond the purview of the arbitration agreement. It would have the effect of denuding section 8 of the Act of its force and vigour. Such an interpretation would also derogate from the object which the Arbitration and Conciliation Act, 1996 is intended to achieve; of minimum judicial intervention where parties have agreed to arbitrate the dispute", the Court held.

The Court also held that it can exercise the power under Order II Rule 6 of the Code of Civil Procedure to separate the claim which is not covered under the arbitration clause, and direct the plaintiff to file suit with respect to the same.

FACTS OF THE CASE

A commercial division summary suit had been filed before the Bombay High Court for the recovery of a sum of Rs. 1,24,08,764.54/- on the basis of a Memorandum of Understanding (MoU) and certain negotiable instruments.

The Plaintiffs had collectively advanced a sum of Rs. 54 lakhs on the representation by the Defendants that handsome return could be earned on making an investment in projects of Defendant No. 1. The initial investment was of Rs. 35 lakhs.

On 22nd July, 2014, the Defendants executed an MoU and assured the repayment of the amount along with interest @33% per annum at quarterly rest. Till December, 2015, the Defendants paid the amount to instill a sense of confidence and security, and accordingly, Plaintiff Nos. 2 and 3 further advanced a sum of Rs. 19 lakhs.

When the cheques drawn by the Defendants towards the repayment were returned unencashed on presentment, the suit was filed by the Plaintiffs. The Defendants preferred an interim application seeking for the reference of the dispute to arbitration in view of the arbitration clause in the MoU.

The Plaintiffs had opposed the application on the grounds that a series of transactions have taken place between the Plaintiffs and the Defendants, and five suits have been instituted against the Defendants against the Plaintiffs and other investors. Some of the transactions are not covered by the MoU, though forming part of one and the same bargain.

The Plaintiffs further contended that the subject matter of the suit cannot be bifurcated and therefore, the application under Section 8 of the Arbitration and Conciliation Act would not be untenable.

Mr. Narayan Sahu, counsel for the Plaintiffs, presented a two-fold submission. With regard to the first tranch of Rs. 35 lakhs, the counsel submitted that despite the existence of an arbitration clause, the peculiar facts of the case wherein multiple transactions had taken place, the reference of the dispute to arbitration would lead to conflicting decisions in diverse proceedings.

Mr. Sahu also submitted there was a legal challenge based on the impermissibility of bifurcation of the subject matter of the dispute by referring a part of it to arbitration and adjudicating the rest by the Court.

Reliance was placed by Sahu on Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya & Anr. In this case, the Supreme Court had rejected the submission that a dispute which is covered by an arbitration agreement between the parties, can be referred to arbitration, despite the suit having been filed claiming certain reliefs in respect of a dispute, which was not a subject matter of arbitration, and it having been instituted against persons who were not parties to the arbitration agreement.

HELD

A Single Judge Bench of Justice N.J. Jamadar considered the submissions as well as the clauses of the MoU to reach a conclusion that the "arbitration clause is comprehensive and covers all the disputes including the failure on the part of the Defendants to repay the amount, as agreed".

CONDITIONS FOR REFERRAL UNDER SECTION 8 OF ACT

Justice Jamadar invoked the text of Section 8 of the Act and noted that the referral of the parties to arbitration becomes imperative if the following conditions are satisfied:

"(i) there is an arbitration agreement;

(ii) a party to the agreement brings an action in the court against the other party;

(iii) subject-matter of the action is the same as the subject-matter of the arbitration agreement;

(iv) the opposite party applies to the judicial authority for referring the parties to arbitration before it submits his first statement on the substance of the dispute."

The Judge noted that in the first transaction of advance of Rs. 35 lakhs, all the conditions had been satisfied. However, the crucial question remained about whether the effect and force of the arbitration clause was diluted on account of inclusion of a claim which was not governed by the clause.

To determine the same, the Judge inspected the Sukanya Holdings judgement on the scope of Section 8. Then he applied the same to the facts of the case wherein he observed that the case had to be considered from the perspective of the legislative object contained in Section 8 of the Act.

"It is trite that the language of section 8 is peremptory in nature. In the cases where there is an arbitration clause in the agreement, the Court is enjoined to refer the dispute to arbitration in terms of the arbitration agreement and the Court would have no jurisdiction to adjudicate the dispute after such an application seeking a reference under section 8 of the Act. Can this salutary object of the Act be defeated by adding a claim over and above the claim in respect of the matter which is squarely covered by arbitration agreement ?"

SPLITTING UP OF CAUSE OF ACTION

It was further noted that there was a fine distinction between splitting of a single cause of action into parts, each being made a subject matter of a distinct proceedings and the separation of causes of action which were joined together, albeit in conformity with the provisions of the Code of Civil Procedure, 1908.

By referring to Rules 3 and 6 of Order II of the Code, the Learned Judge observed that:

"A conjoint reading of the aforesaid provisions would indicate that Rule 3 provides for joinder of causes of action and permits the plaintiffs to unite in the same suit, several causes of action against the same defendants. The remedy for any possible embarrassment, delay or inconvenience on account of the joinder of causes of action in one suit is provided in Rule 6. It authorizes the Court to order separate trials or make other order as may be expedient in the interest of justice, where the joinder of causes of action in one suit, though permissible under Rule (3)(1), would result in embarrassment, inconvenience or delay."

Therefore, the Judge further observed that:

"The plaintiffs are within their rights in joining multiple causes of action against the defendants. In fact, the provisions contained in the Code envisage such joining of several causes of action by the plaintiffs against the defendants".

The Judge also asserted that there was a duality within the Code as on one hand , the Plaintiff was permitted to unite multiple causes of action against the same defendants in one suit, and on the other hand, in the event of possibility of embarrassment, delay or inconvenience, the Court was empowered to direct separate trials or pass any such order that would advance the cause of justice.

"If a Court is empowered to order separate trial when it finds that the joinder of causes of action would embarrass or delay the trial or it is otherwise inconvenient, a fortiori a Court cannot be said to be divested of the authority to direct separation of causes of action when the joinder of causes of action, in pursuance of an enabling provision like Rule 3 has the effect of defeating the provisions of a special law, like section 8 of the Act."

The case of Sundaram Finance Limited & Another v. T. Thankam was referred to, wherein the Supreme Court had delineated the approach of the Civil Court in dealing with an application under Section 8 of the Act.

It was finally held that:

"In the light of the aforesaid exposition of the legal position, I am of the considered view that the broad submission on behalf of the plaintiffs that the reference of the dispute to arbitration as regards the first transaction, would entail the bifurcation of the subject matter of the suit and, thus, it is impermissible in law, cannot accepted in an unqualified manner. The submission is fraught with the danger of defeating an arbitration agreement by simply adding a cause of action the plaintiff may have against the defendants, which is not covered by the arbitration agreement. If such a course is readily accepted, it has the propensity to give a long leash to the plaintiff to circumvent the arbitration agreement by uniting a cause of action which is beyond the purview of the arbitration agreement. It would have the effect of denuding section 8 of the Act of its force and vigour. Such an interpretation would also derogate from the object which the Arbitration and Conciliation Act, 1996 is intended to achieve; of minimum judicial intervention where parties have agreed to arbitrate the dispute."

Therefore, while the first transaction was held to be governed by the arbitration clause and referred to arbitration accordingly, the Plaintiffs were granted liberty to institute a fresh suit in the Court of competent jurisdiction with regard to the second transaction.  

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