The Hon’ble Delhi High Court in Madhu Sudan Sharma & Ors. v. Omaxe Ltd.[1]recently held that once a party has taken objection in its written statement to the jurisdiction of the Court to entertain the suit due to the presence of the arbitration clause between the parties, it would amount to sufficient compliance of Section 8 of the Arbitration & Conciliation Act, 1996 (“the Act”). The Court also held that once a party extracts an arbitration clause in its written submission to object to the jurisdiction of the Court, a separate application under Section 8 of the Act would not be necessary.
The implication here is that when a party takes such an objection to the maintainability of the suit, it need not file a separate application under Section 8 of the Act to convince the Court regarding the non-maintainability of the suit because of a binding arbitration clause between the parties.
Brief Background
In the Madhu Sudan Sharma case, the appellants and the respondent executed a Memorandum of Understanding (“MoU”) dated May 2, 2005, in which the appellants were to acquire 29 bighas of the respondent’s land. The MoU contained provisions permitting the respondent to terminate it if the appellants failed to get the required land clearances. In such an instance, the appellants would have to reimburse respondent’s payment and all related charges.
Allegedly, with obligations under the MoU remaining unfulfilled, the respondent filed a civil suit against the appellants under Order XXXVII of the Civil Procedure Code, 1908 (“CPC”) to recover INR 87,42,500 paid to the appellants along with interest. The appellants applied for leave to defend the suit, contending that several issues needed consideration, including the maintainability of the suit because of an arbitration clause in the MoU. The respondent, however, contended that the suit was maintainable under the Act. The Court granted conditional leave to the appellants to defend the suit, with specific conditions.
Throughout the legal proceedings before the subordinate court as well as the Delhi High Court, the appellants persistently invoked Section 8 of the Act and submitted that the suit was not maintainable because of the arbitration clause contained in the MoU. The Court didn’t consider the appellants’ objection to the maintainability of the suit and proceeded to decree the suit vide the impugned judgment dated July 15, 2019. The aggrieved appellants then challenged the impugned order/decree under Section 96 of the CPC, leading to the passing of the present judgment.
Party deliberations before the Hon’ble Court
The Court had to determine whether the learned ADJ was erroneous in proceeding to decide the suit on merits in view of the appellants’ objection raised under Section 8 of the Act.
The appellants challenged the impugned order/decree on the basis that a Section 8 of the Act mandates that the party request arbitration “not later than when submitting the first statement of the substance of the dispute,” which the appellants had complied with. The appellants contended that they had raised a Section 8 objection once in the written statement filed consequent to the liberty granted and next in a previous application under Order XXXVII Rules 3(5) of the CPC, whereby they had sought leave to defend the suit. The appellants also argued in the rejoinder that the plea of waiver was unfounded. The impugned order acknowledged their objection to the suit’s continuation despite the arbitration agreement in the MoU, which they had also raised in their written statement.
Counter to the appellants’ contentions, the respondent submitted that the appellants’ objections to the maintainability of the suit predicated on Section 8 of the Act were belated as they had not raised these before the submission of the first statement on the merits of the case. The respondent argued that the mere raising of an objection regarding the maintainability of the suit in the written statement could not amount to compliance with the requirements of Section 8 of the Act, as the provision necessarily envisages making of a separate application. Additionally, by granting conditional leave to defend, the Judge had considered the appellants’ objections under Section 8 of the Act and rightly rejected them while proceeding to decree the suit. Further, the respondent contended that in the event the appellants’ initial objection sufficed, the appellants’ subsequent conduct in contesting the suit and allowing it to proceed to trial and judgment constituted a waiver and abandonment of their right to invoke Section 8.
Findings of the Hon’ble Delhi High Court
At the outset, the High Court rejected the respondent’s contention that the appellants’ objection was belated. The Court quoted the Section 8 of the Act to emphasise that an application to refer the dispute to arbitration could not be submitted after the first statement on the substance of the dispute, i.e., the written statement. Thus, it was acceptable to submit a Section 8 application with or before the filing of the written submission. The Court noted that, in the present case, the appellant had made the Section 8 objection not just in the written statement, but even earlier, in the application under Order XXXVII Rule 3(5) CPC for grant of leave to defend the suit. The Court, therefore, observed that the Commercial Court had erred in holding that the Section 8 objection was raised belatedly.
On the requirement of a separate application under Section 8 of the Act, the Court held that once an arbitration clause was extracted in the written submission, it would be too hypertechnical to hold that the objection was not made until the filing of a separate application contesting to the maintainability of the suit.
The Court observed that it was bound by the judgment of the Division Bench of this Court in Sharad P. Jagtiani v. Edelweiss Securities Ltd. [2] The Division Bench had held that in the absence of a specific request to refer the dispute between the parties to arbitration, raising objection stating that the suit was not maintainable because of the arbitration clause could be interpreted as an implied request to refer the dispute to arbitration. The Court, therefore, held that a specific application or even a request to refer the parties to arbitration was not a non-negotiable pre-requisite for making a Section 8 objection when the objection was contained in the written statement itself. The court also noted the Hon’ble Supreme Court’s judgment in Sukanya Holdings Pvt. Ltd v. Jayesh H. Pandya,[3] where the Apex Court had held that Section 8 of the Act mandated requesting for a referral of the dispute to arbitration to divest the civil court of its jurisdiction to decide the dispute. In doing so, the court explicitly clarified that its judgment in Sharad (Supra) merely supplemented the principle enshrined in Sukanya Holdings (Supra) and did not, in any manner, supplant or rule contrary to it. The Court also referred to the Supreme Court judgment in SBP & Co. v. Patel Engineering Ltd.,[4] which unequivocally held that where a suit is instituted, in ignorance of the arbitration agreement between the parties, and the opposite party raises an objection based on Section 8 of the Act, the Court is bound to refer the parties to arbitration if the objection is found to be sustainable.
Concluding remarks
The court supplemented the Supreme Court’s ratio in Sukanya Holdings (Supra) by clarifying that a separate application under Section 8 of the Act would not be required if the objection was made in the written statement filed before a court. This fairly settled that if the written statement included an objection to the maintainability of the suit, it is not necessary to file a separate application making such an objection or requesting the court to refer the parties to arbitration in lieu of Section 8 of the Act. The court is thus duty-bound to refer parties to arbitration without requiring a separate application if it has already received a written statement contained an objection to the maintainability of the suit, as per Section 8 of the Act.
For further information, please contact:
Gauhar Mirza, Partner, Cyril Amarchand Mangaldas
gauhar.mirza@cyrilshroff.com
[1] RFA 823/2019 and CM 41007/2019, Delhi High Court; Judgment dated 06.11.2023.
[2] 2014 SCC OnLine Del 4015; paras 14-17.
[3] (2003) 5 SCC 531, para 12.
[4] (2005) 8 SCC 618; para 16.
