Section 8 Of A&C Act Can't Be Invoked Based On A Non-Binding Arbitration Agreement: Karnataka High Court

The Single Bench of Justice Sachin Shankar Magadum held that since under the relevant clause in the agreement, the parties were at a liberty to initiate litigation before the Civil Court, therefore, the said clause clearly detracted from an arbitration agreement and hence, the recovery suit instituted by the petitioner before the lower Court was very much maintainable, and the lower court could not invoke Section 8 of the Arbitration and Conciliation Act, 1996 (A&C Act).

The petitioner Masters Management Consultants entered into a project management and construction management agreement with the respondent Nitesh Estates Limited. Certain invoices were raised by the petitioner for the services rendered by it under the agreement. Subsequently, a suit for recovery was instituted by the petitioner before the District Court, Bangalore seeking recovery of the amounts due to the petitioner under the agreement. The respondent filed an application under Section 8 of the A&C Act and requested the District Court to refer the disputes between the parties to arbitration by invoking the arbitration clause provided in the agreement. The District Court allowed the application filed under Section 8 of the A&C Act and returned the plaint filed by the petitioner. Against this, the petitioner filed a writ petition before the Karnataka High Court.

The petitioner Masters Management Consultants submitted before the Karnataka High Court that as per the relevant clause of the agreement, the parties had agreed to refer the disputes to a non-binding arbitration. The petitioner added that the said agreement to refer the dispute to non-binding arbitration is not an arbitration as contemplated under Section 7 of the A&C Act and therefore, the respondent was not entitled to invoke Section 8 of the A&C Act.

The petitioner averred that the mere use of words "arbitration" or "arbitrator" in a clause will not in itself make an arbitration agreement and that the words used in the arbitration clause should disclose a determination. The petitioner added that the clause in the agreement should clearly demonstrate that the parties have agreed that the decision of the arbitral tribunal in respect of the disputes would be binding on them.

The petitioner submitted that if a clause in the agreement gives an indication that a party who is not satisfied with the decision of the arbitral tribunal may seek redressal of its grievance before the Civil Court, then it cannot be termed as an arbitration agreement.

The respondent Nitesh Estates Limited objected to the maintainability of the writ petition before the High Court. The respondent submitted that since the District Court had returned the plaint filed by the petitioner, therefore, the order passed by the District Court was appealable under the provisions of Order 43 of the Code of Civil Procedure, 1908 (CPC). The respondent contended that the petitioner had an efficacious remedy by way of a miscellaneous appeal under the provisions of Order 43 of the CPC and hence, the writ petition before the High Court was not maintainable.

The Court noted that the Supreme Court in the case of Jagdish Chander versus Ramesh Chander and Ors. (2007) had observed that where an application filed under Section 8 of the A&C Act is rejected, no appeal is provided under the A&C Act and therefore, the aggrieved party is entitled to seek redressal of its grievances before a writ Court under Article 227 of the Constitution of India. Hence, the Court ruled that a writ petition was very much maintainable before the Court.

The Court observed that the relevant clause contained in the agreement between the parties provided for the reference of the dispute to a non-binding arbitration under the A&C Act.

The Court noted that the term 'non-binding', as defined in the Advanced Law Lexicon, means a document that carries no formal legal obligations, but which may carry moral obligations.

Hence, the Court ruled that there was absolutely no intention of the parties to enter into an arbitration agreement. Therefore, the Court held that since there was no intention of the parties to refer the disputes to arbitration and there was no willingness to be bound by the decision of the Arbitral Tribunal, the suit instituted by the petitioner before the lower Court was very much maintainable.

The Court observed that the Supreme Court in the case of Jagdish Chander versus Ramesh Chander and Ors. (2007) had held that a mere clause in an agreement would not make it an arbitration agreement, if a further clause in the said agreement indicates the requirement of obtaining a further fresh consent of the parties for referring the dispute to arbitration. The Supreme Court had ruled that the main attribute of an arbitration agreement is the consensus of the parties to refer the dispute to arbitration.

The Court noted that the relevant clause in the said agreement between the parties provided that if the parties were unable to satisfactorily resolve the disputes pursuant to a non-binding arbitration, either party may initiate litigation. Hence, the Court ruled that the said agreement could not be termed as an arbitration agreement.

The Court held that since the relevant clause clearly demonstrated that the parties were at a liberty to initiate litigation before the Civil Court, therefore, the said clause clearly detracted from an arbitration agreement. Thus, the Court ruled that the said agreement which is the subject matter of the suit before the District Court could not be treated as an arbitration agreement.

The Court, thus, ruled that there was no arbitration agreement between the parties and that the relevant clause incorporated in the said agreement did not contain the attributes required to be present for an agreement to be considered as an arbitration agreement.

Hence, the Court held that the District Court had grossly erred in returning the plaint filed by the petitioner by invoking Section 8 of the A&C Act.

The Court thus set aside the order passed by the District Court and restored the plaint filed by the petitioner to the file of the Additional City Civil and Sessions Judge, Bangalore.

Case Title: Masters Management Consultants (India) Private Ltd. versus Nitesh Estates Limited

Dated: 01.07.2022 (Karnataka High Court)

Citation: 2022 LiveLaw (Kar) 254

Counsel for the Petitioner: Mr. Aditya Vikram Bhat

Counsel for the Respondent: Mr. Chinmay J Mirji, Mr. Kiran J

Click Here To Read/Download Order