Sunday, 15 July 2018

When court should not refer dispute to arbitration if defendant takes all objections on merits of case?

Having thus answered the question in law, let us now see if the affidavit of the Defendant in reply to the summons for judgment amounts to such 'first statement'. The affidavit in reply takes all objections on merits of the case, and does not object to the jurisdiction of the Court on the ground of existence of the arbitration agreement. It is thus a 'first statement' on the substance of the dispute within the meaning of Section 8 of the Act. Learned Counsel for the Applicant-Defendant submits that the Defendant has averred that the Court has no jurisdiction. That is immaterial. What the affidavit does not indicate is the Defendant's objection to the Court exercising its jurisdiction in the matter in view of the arbitration agreement. The Defendant does not make it clear that he "does not want the Civil Court to adjudicate upon his rights or liabilities, but he wants the domestic forum to decide that." Here, the Defendant has made it amply clear that he intends to defend the matter in this Court; he indicates his defences, may be including a defence of jurisdiction; and based on these defences, seeks leave of the Court to defend the suit. That is clearly making a 'first statement' on the substance of the dispute. The stage for making an application under Section 8 is clearly crossed.

IN THE HIGH COURT OF BOMBAY

Summons for Judgment No. 51 of 2017 in Commercial Suit No. 243 of 2017 and Notice of Motion No. 126 of 2018 in Commercial Suit No. 243 of 2017

Decided On: 12.03.2018

Drive India Enterprise Solutions Ltd. Vs. Haier Telecom (India) Pvt. Ltd.

Hon'ble Judges/Coram:
S.C. Gupte, J.

Citation: 2018(3) MHLJ 60


1. This summons for judgment is taken out in a summary suit praying for a money decree in the sum of about Rs. 54.46 crores by way of principal amount and over Rs. 40 crores towards interest. Simultaneously with its application for leave to defend, the Defendant has taken out an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("the Act") for reference of the parties to arbitration. This application is on the ground that the subject matter of the present summary suit is covered by an arbitration agreement between the parties.

2. Since the Court has before it two proceedings, namely, a summons for judgment seeking a decree against the Defendant and an application for reference of the parties to arbitration under Section 8 of the Act, the latter application will have to be taken up first. The application for decree in the form of summons for judgment can only be considered if the Court rejects the application under Section 8. Let me, therefore, take up Notice of Motion No. 126 of 2018.

3. It is the case of the Applicant-Defendant in this notice of motion that the disputes between the parties arise out of two agreements, namely, (i) the agreement dated 05 February 2010 (Exhibit - C to the plaint) described otherwise in the plaint as 'Logistics Agreement' read with the Addendum dated 17 September 2010 (Exhibit - D to the plaint), and (ii) 'Product Purchase Agreement' dated 15 April 2010 (Exhibit - F to the plaint). It is submitted that these two are overarching agreements under which the Plaintiff-Respondent placed various purchase orders on the Defendant and pursuant to which goods were sold and delivered by the latter to the former, for the value of which the present commercial suit is filed. It is submitted both these agreements have an arbitration clause contained in them and accordingly the subject matter of the present suit is covered by arbitration agreement.

4. The application is objected to by the Plaintiff-Respondent on a number of grounds. Learned Counsel for the Plaintiff-Respondent, in the first place, submits that the application does not comply with the requirements of Section 8(1) of the Act inasmuch as it is not filed before submitting the first statement of defence. Learned Counsel submits that the present suit being a summary suit, filed before the Commercial Division, the Defendant's application for leave to defend must be considered as its first statement of defence. Learned Counsel also submits that the application does not comply with the requirements of Sub-Section (2) of Section 8 inasmuch as there is failure on the part of the Applicant-Defendant to file original or certified copy of the arbitration agreement along with the application. Learned Counsel further submits that even on merits, the subject matter of the present suit is not covered by the arbitration agreements as alleged by the Applicant-Defendant. Learned Counsel submits that the suit is not based on a liability arising out of the underlying contracts, which contain the arbitration agreement, but on an express balance reconciliation statement jointly signed by the parties. Learned Counsel submits that such a statement by itself furnishes a cause of action on which a suit could be founded.

5. Let us first dispose of the two minor objections to the present application. The first is on account of non-filing of either the original or certified copy of the arbitration agreement along with the application. It is submitted that for that reason the application cannot be entertained, by virtue of the mandate of sub-section (2) of Section 8 of the Act. The Supreme Court has explained the meaning of the expression "shall not be entertained" used in sub-section (2) of Section 8 in the case of Ananthesh Bhakta v. Nayana S. Bhakta MANU/SC/1480/2016 : (2017) 5 SCC 185. As explained by the Supreme Court, the original arbitration agreement, or its duly certified copy, can be brought on record, if not originally filed with the application, when the Court is considering the application. If the original or copy is so brought on record, the application cannot be rejected under sub-section (2) of Section 8 on the ground that it was not originally accompanied by the arbitration agreement, either original or copy, when filed.

6. The other objection is on the ground that the suit being based on a reconciliation statement jointly signed by the parties and not on a liability arising out of the underlying contracts, i.e. the agreements containing the arbitration clause, the subject matter of the suit cannot be said to be covered by arbitration agreement. Learned Counsel cites the case of Hiralal v. Badkulal MANU/SC/0004/1953 : AIR 1953 SC 225, which was followed by our Court in the case of Sun N Sand Hotel Limited v. V.V. Kamat, HUF MANU/MH/0841/2002 : 2003(3) Mh.L.J. 932. There is no quarrel with the propositions laid down in these cases. An unconditional acknowledgement of liability does imply a promise to pay and a balance struck and accepted in a statement of account does amount to "accounts stated" between the parties. Such acknowledgment or accounts stated can form the basis of a suit. The present case, however, is not one which can be said to be solely based on such acknowledgment or accounts stated. In the present case, after referring to the underlying contracts and purchase orders placed by the Plaintiff on the Defendant thereunder, the Plaintiff has, in terms, relied on the Defendant's obligation to pay the Plaintiff monies under the two contracts, namely, the logistic agreement and the product purchase agreement. Though the plaint does recite the fact of the parties having signed the balance reconciliation statement, in the crucial averments made for the purposes of maintaining the present suit under Order 37, the Plaintiff has submitted that "the debt due and payable to the Plaintiff arises on a written instrument, being the balance reconciliation statements signed by the parties and/or the written agreements, on the basis on which the business was carried on between the parties". Even for the territorial jurisdiction of this Court, the Plaintiff relies on making of the two contracts in Mumbai. In the premises, it cannot be suggested that the present suit is exclusively based on a balance reconciliation statement and does not seek to recover any liability arising under the underlying contracts. For the purpose of deciding the present suit, a reference does have to be made to the underlying contracts and since these contracts contain an arbitration agreement, the subject matter of the suit can very well be said to be covered by such arbitration agreement.

7. Let us now consider the main objection to this application. It is submitted that the present application does not comply with the mandate of Sub-Section (1) of Section 8 of the Act, which requires a party to an arbitration agreement, or a person claiming through or under him, to apply for a reference "not later than the date of submitting his first statement on the substance of the dispute". A question which directly arises, is, whether an application for leave to defend or a reply to the summons for judgment filed by the Defendant is his first statement on the substance of the dispute, for if it is, the Defendant's application under Section 8 in the present case is not maintainable, since the same has been filed after filing of its application for leave to defend.

8. Learned Counsel on both sides took me through various judgments not only of our Court but also of the Supreme Court as well as Delhi and Madras High Courts in support of their rival cases. We do not have a direct authority of the Supreme Court on the point as to whether an application for leave to defend amounts to a statement on the substance of the dispute within the meaning of sub-section (1) of Section 8. The case of Booz Allen And Hamilton Inc. v. SBI Home Finance Limited And Others MANU/SC/0533/2011 : 2011-5-SCC-532 deals with a notice of motion seeking appointment of a receiver and grant of a temporary injunction, in which the Defendant offered a defence. The Supreme Court said that resisting such motion, even if such resistance is offered by detailed objections, does not amount to submission of a statement on the substance of the dispute.

9. The authorities of Delhi and Madras, though directly on the point, take diametrically opposite views. Delhi High Court holds in the case of Anis Ahmad v. Hongkong & Shanghai Banking Corpn. MANU/DE/0924/2005 : 2005 (83) DRJ 122 that the first submission of the Defendant of the substance of the dispute takes place in a suit under Order XXXVII of the Code of Civil Procedure, when application for leave to defend is filed. Madras High Court, on the other hand, in the case of G. Rajarajan v. AIG Consumer Financial Services (India) Ltd. MANU/TN/2645/2012 holds that when a person seeks permission under Order XXXVII Rule 3(5) to defend the suit, it is not necessarily to be construed as his first statement on the substance of the dispute.

10. When it comes to our Court, we again find two different views. A learned Single Judge of our Court in the case of M/s. D.C. Textile Mills Pvt. Ltd. v. Mr. Keval Kishan Arora1 has observed that ordinarily, the reply of the Defendant to the summons for judgment would be his first statement on the substance of the dispute as contemplated under Section 8. Another learned single Judge of our Court in the case of Stellar Industries v. M/s. International Combustion (India) Ltd.2, on the other hand, has held that the application for leave to defend cannot be called such 'first statement'.

11. Learned Counsel for the Applicant/Defendant submits that the later case of D.C. Textile Mills Pvt. Ltd. should be considered per incuriam, since that case does not take into account the judgment in the case of Stellar Industries which was rendered prior in point of time. On the other hand, it is submitted by learned Counsel for the Plaintiff-Respondent that the facts of the case in Stellar Industries must be distinguished and the law laid down in the case of D.C. Textile Mills should be taken as the correct proposition of law. Learned Counsel relies on judgments of the Supreme Court and of our Court, which indirectly have a bearing on this question, and submits that in the light of law laid down by these judgments, this Court must accept the view expressed in D.C. Textile Mills (supra) as the correct view of law.

12. Before we reflect on the law of Section 8 and the principles which it enunciates, we may consider the two judgments of our Court noticed above. The first case, the Stellar Industries' case, was a summary suit based on a written contract. The Defendant appeared and applied for leave to defend. Though leave was granted, no written statement was filed. The suit thereafter proceeded without written statement. At that stage, an application was moved by the Defendant under Section 8 of the Act for referring the subject matter of the suit to arbitration. One of the submissions on which that application was opposed, and which submission was considered and dealt with by the Court, was that an application for leave to defend was nothing but a 'first statement' on the substance of the dispute and since the application under Section 8 was not filed before seeking such leave, the Defendant was barred from making such application under Section 8. Though the learned Judge did say that he was inclined to reject the submission and proceeded to hold that the application for leave to defend cannot at all be called a 'first statement', he also noted that the affidavit filed for seeking leave, in clear terms, had raised the issue of jurisdiction of the Court in particular reference to the arbitration clause. In view of this latter observation, the observations of the learned Judge on the 'first statement' may not be considered a general statement of law on the point. On the other hand, in D.C. Textile Mills case (supra), the Court was not really concerned with the question as to whether an application under Section 8 can be filed after seeking leave to defend. In D.C. Textile Mills case (supra) there was in fact no application under Section 8. What was submitted before the Court for seeking leave to defend was that the Court had no jurisdiction to go ahead with the suit on account of existence of an arbitration agreement. The learned Judge held that though the arbitration clause in the contract stood admitted, the Defendant had failed to file any application under Section 8 and it was not possible to accept the contention of the Defendants that the Court was nevertheless obliged to refer the dispute to arbitration and not adjudicate upon the summons for judgment. Secondly, the Court also noticed that the Defendant had not filed the arbitration agreement or duly certified copy thereof before a Court as contemplated under Section 8(2) of the Act. On both these counts, the Court held against the defendant. The Court thereafter went on to observe that since leave to defend was granted in the suit and the occasion of filing of written statement was still to arise, the Defendant would still have an opportunity to make an application under Section 8 of the Act before he files his written statement in the suit. This really puts paid to the argument that Section 8 application must always precede the application for leave to defend. Yet, the learned single Judge appears to have made further observation that "ordinarily, the reply of the Defendant to the summons for judgment would be his first statement on the substance of the dispute as contemplated under Section 8 of the Arbitration and Conciliation Act 1996". This observation can clearly be called orbiter. The learned Judge was not required to decide whether making of an application for leave to defend amounted to submitting a 'first statement' on the substance of the dispute and Section 8 application filed thereafter would not comply with the requirements of Section 8(1) of the Act. This is particularly so, since the learned Single Judge in fact permitted the Defendant to make an application under Section 8 after the leave was granted.

13. Since there is no direct authority of either our Court or the Supreme Court and we have two conflicting views of Delhi and Madras High Courts on the point, it is necessary to consider the matter on principle. It cannot be gainsaid that in an ordinary suit, defence is a matter of right and a written statement is the defendant's first statement on the substance of the dispute. But summary suit is a special procedure prescribed under the Code of Civil Procedure under Order XXXVII, where defence is not as of right, but can be raised only subject to leave of the Court. The Court, on an application for such leave, considers whether the defendant has a 'genuine or bonafide' and 'probable', or at least a 'plausible', defence. If the Court finds this in the affirmative, the defendant is then allowed to file his written statement. Is such written statement his first statement on the substance of the dispute? Or is it his leave application where he needs to indicate that he has a genuine or bonafide and a probable, or at least a plausible, defence?

14. Before we answer this, it is important to ask why the stage of submitting a first statement on the substance of the dispute is a watershed or crucial stage here. The obvious answer which suggests itself is that because it amounts to submission of the defendant to the jurisdiction of the Court. The defendant unequivocally submits himself to joining issues with the plaintiff and having the matter decided by the Court. (Such decision, of course, may be sought not merely on merits, but even on the ground that the Court lacks either subject matter or territorial or pecuniary jurisdiction.) In the context of a Section 8 application, this is crucial, because in such application the defendant implores the Court not to at all commence the hearing of the suit, and that on the ground that the parties have chosen to have the matter decided by a private forum as opposed to the ordinary Courts of law. If such be the nature of a Section 8 application, it makes perfect sense that submission of a statement on the substance of the dispute before making any such application ought not to be allowed, for such submission can be seen only as a waiver to have the dispute adjudicated upon by the private tribunal.

15. This view on the importance of the stage of 'first statement' is in keeping with the way the law on this point has developed. The old law, Arbitration Act, 1940, had a similar provision, namely, Section 34. That Section of course referred to the crucial events of "filing of a written statement or taking any other step in the proceedings." The defendant could file an application under Section 34 for stay of proceedings, where there was an arbitration agreement, at any time before such filing or taking of a step. One of the early judgments under this law on whether the defendant's affidavit in reply to a summons for judgment, setting out his defence and asking for leave to defend, amounts to such filing or taking of a step, was the decision of our Division Bench in the case of Jadavji Narsidas Sha & Co. v. Hirachand Chaturbhai MANU/MH/0047/1954 : 1954 Indian Law Reports 348. The Division Bench held that it indeed amounted to taking such step. Chagla C.J, speaking for the Bench, in his characteristically lucid language, put the matter thus :

"The substance of the matter is that when the summons for judgment comes up before the Court it is the defendant who has to obtain leave to defend and on that leave being granted he becomes entitled to defend. Therefore it is clear that by filing this affidavit the defendants expressed an unequivocal intention that the matter should be heard by the Civil Court and gave clear effect to that intention by asking the Court to give them leave to defend so that they should resist the plaintiff's claim."
The English case of Pitchers, Ltd. v. Plaza, Ltd. [1940] 1 All. E.R. 151 was cited before the learned Judges. In that case, simultaneously with filing of an affidavit to show cause against the summons for judgment, an application was made by the defendant for stay of suit on account of an arbitration agreement and the suit was stayed. The argument before our Division Bench, based on this case, was that filing of an affidavit may not after all, by itself, be a step in the proceedings. The case of Pitchers, Ltd. and its principle was explained by our Division Bench in the following words:

"What the learned Judges there point out is that if at the same time as the affidavit is filed to show cause against the summons for judgment, an application is made by the defendant for stay, or if in the affidavit itself the arbitration clause is set out and an application is made for stay under s. 34, then the filing of the affidavit would not be a step in the proceedings. Now that judgment is perfectly understandable on the principle already stated. When the defendant goes to Court to show cause against the summons for judgment and he makes his intention clear that he does not want the Civil Court to adjudicate upon his rights or liabilities, but he wants the domestic forum to decide that, then clearly the mere fact that he has filed an affidavit in reply to the summons cannot be relied upon as a step in the proceedings."
16. Even the Supreme Court judgment in the case of Booz Allen And Hamilton Inc. (supra) makes the point clear. The learned judges in this case have observed as follows :-

"25. Not only filing of the written statement in a suit, but filing of any statement, application, affidavit by a defendant prior to the filing of the written statement will be construed as 'submission of a statement on the substance of the dispute', if by filing such statement/application/affidavit, the defendant shows his intention to submit himself to the jurisdiction of the court and waives his right to seek reference to arbitration. But filing of a reply by a defendant, to an application for temporary injunction/attachment before judgment/appointment of Receiver, cannot be considered as submission of a statement on the substance of the dispute, as that is done to avoid an interim order being made against him.

26. In Rashtriya Ispat Nigam Ltd. v. Verma Transport Company-MANU/SC/3491/2006 : 2006 (7) SCC 275, this Court held that the expression 'first statement on the substance of the dispute' contained in Section 8(1) of the Act is different from the expression 'written statement', and refers to a submission of the party making the application under Section 8 of the Act, to the jurisdiction of the judicial authority; and what should be decided by the court is whether the party seeking reference to arbitration has waived his right to invoke the arbitration clause.

27. This Court in Rashtriya Ispat Nigam Ltd. case then proceeded to consider whether contesting an application for temporary injunction by filing a counter, would amount to subjecting oneself to the jurisdiction of the court. This Court observed :(SCC P. 290, paras 39 & 42)

"39. By opposing the prayer for interim injunction, the restriction contained in sub-section (1) of Section 8 was not attracted. Disclosure of a defence for the purpose of opposing a prayer for injunction would not necessarily mean that substance of the dispute has already been disclosed in the main proceeding. Supplemental and incidental proceedings are not part of the main proceeding. They are dealt with separately in the Code of Civil Procedure itself. Section 94 of the Code of Civil Procedure deals with supplemental proceedings. Incidental proceedings are those which arise out of the main proceeding. In view of the decision of this Court in Food Corporation of India v. Yadav Engineer & Contractor - MANU/SC/0533/1982 : 1982 (2) SCC 499, the distinction between the main proceeding and supplemental proceeding must be borne in mind.

42. Waiver of a right on the part of a defendant to the lis must be gathered from the fact situation obtaining in each case. In the instant case, the court had already passed an ad interim ex parte injunction. The Appellants were bound to respond to the notice issued by the Court."

17. It is clear from the foregoing discussion that the expression "first statement on the substance of the dispute" refers to the submission of the party to the jurisdiction of the judicial authority by offering to defend the suit and thereby, waiving his right to invoke the arbitration clause. If the affidavit opposing the summons for judgment and seeking leave to defend objects to the jurisdiction of the Court to hear the suit and indicates that the defendant does not want the Civil Court to adjudicate upon his rights or liabilities, but wants the domestic forum to decide that, then mere filing of a reply to the summons for judgment does not amount to making a "first statement on the substance of the dispute," even if such affidavit contains various other defences. In every other case, the affidavit can well be said to be the "first statement on the substance of the dispute" within the meaning of Section 8. In such other case, what the defendant essentially wants is to have the matter heard by the Civil Court and to that end, after indicating the bonafides and probability or plausibility of his defence, seeks leave of the Court, so that he may resist the plaintiff's claim before it. No application can be moved under Section 8 after filing of such affidavit seeking leave.

18. Having thus answered the question in law, let us now see if the affidavit of the Defendant in reply to the summons for judgment amounts to such 'first statement'. The affidavit in reply takes all objections on merits of the case, and does not object to the jurisdiction of the Court on the ground of existence of the arbitration agreement. It is thus a 'first statement' on the substance of the dispute within the meaning of Section 8 of the Act. Learned Counsel for the Applicant-Defendant submits that the Defendant has averred that the Court has no jurisdiction. That is immaterial. What the affidavit does not indicate is the Defendant's objection to the Court exercising its jurisdiction in the matter in view of the arbitration agreement. The Defendant does not make it clear that he "does not want the Civil Court to adjudicate upon his rights or liabilities, but he wants the domestic forum to decide that." Here, the Defendant has made it amply clear that he intends to defend the matter in this Court; he indicates his defences, may be including a defence of jurisdiction; and based on these defences, seeks leave of the Court to defend the suit. That is clearly making a 'first statement' on the substance of the dispute. The stage for making an application under Section 8 is clearly crossed.

19. The Notice of Motion, thus, has no merit and is dismissed. Costs to be costs in the cause.



1SJ No. 343 of 2008 in SS No. 2066 of 2008 decided on 30 June 2009

2WP No. 3251 of 2006 of Nagpur Bench decided on 26 September 2008




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