Reference to Arbitration under Section 8, Arbitration and Conciliation Act, 1996

With a view to avoid traditional court system, arbitration has, over a period of time, been able to secure a unique position. Despite all of its flaws, arbitration has now become a popular means of alternative dispute resolution. To make sure that no party, having agreed to arbitrate, institutes a suit before a civil court, Section 8 was inserted in Arbitration and Conciliation Act, 1996 (“Act”).

Assume a situation where a matter or issue, falling within the scope of arbitration agreement, is adjudicated by the court. This would certainly defeat the very purpose of arbitration. As far the Part I of the Act is concerned, this situation has been taken care of under Section 8.

Substantive requirement of Section 8 of the Arbitration Act, provided in sub-section (1), can be read as:

                                  “A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.”

From a bare reading of the section, it becomes clear that judicial intervention is sought to be minimised. Let us now proceed and analyse the section. Since the Act is based on 1985 UNCITRAL Model law on International Commercial Arbitration (“Model Law”),[1] it is vital to first compare Section 8 in its light.

Section 8 of Arbitration Act and Article 8 of UNCITRAL Model Law

Section 8 of the Act has not exactly followed the language of Article 8 of Model Law. Firstly, Model Law uses the term “court”, while Section 8 of the Act uses the term “judicial authority”. Now, there can be situations when an authority, which is not a court, can nonetheless act judicially [Example: Tribunals]. Secondly, last line of Article 8 of the Model Law is not present in the Section 8 of the Act:

                            

      “................unless it finds that the agreement is null and void, inoperative or incapable of being performed”

Contrary to this, Section 8 of the Act nowhere mentions this requirement. One probable reason can be the encouragement that was sought to given to arbitration, with minimum judicial interference. In Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd,[2] Supreme Court held that (3-judge bench decision):

                                  “Unlike Section 45, the judicial authority under Section 8 has not been conferred the power to refuse reference to arbitration on the ground of invalidity of the agreement. It is evident that the object is to avoid delay and accelerate reference to arbitration leaving the parties to raise objections, if any, to the validity of the arbitration agreement before the arbitral forum and/or post-award under Section 34 of the Act.” (emphasis supplied)

Since the question of minimum judicial interference has arisen, it would be interesting to refer Section 5 of the Act which puts a limit on the judicial intervention. Though the objective of minimum judicial interference finds support in Section 5 of the Act, it has been held that the same should not be used for interpreting Section 8 of the Act.[3]

As to what is “judicial authority”, we have already analysed it in another post. However, to provide a brief overview, the term “judicial authority” has been retained especially in view of policy of least intervention, which cannot be limited only to the courts.[4]

Use of the term “judicial authority”, in Section 5 and Section 8 of the Arbitration Act, 1996, is also not a recognition by Parliament that Part I will apply to the international commercial arbitrations held outside India.[5]This point is important given the criticism of Bhatia International v. Bulk Trading S.A. judgment, which made Part I applicable to arbitrations held outside India.[6]

To know more about the term “judicial authority”, see this post -  "Judicial Authority" under Section 8 of the Arbitration and Conciliation Act, 1996

Conditions to be satisfied for the application of Section 8

For the application of Section 8 of the Act, there are certain conditions which need to be satisfied. The conditions which are required to be satisfied under sub-sections (1) and (2) of Section 8 before the court can exercise its powers are:[7]

            (1) There must be an arbitration agreement;

(2) A party to the agreement brings an action in the court against the other party;

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

(4) The other party moves the court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.

(5) Along with the application the other party tenders the original arbitration agreement or duly certified copy thereof.

(6) Whether the reliefs sought in the suit are those that can be adjudicated and granted in arbitration.[8]

(7) Whether all the parties to the suit are parties to the arbitration agreement.[9]

As far as the requirement under sub-section (2) is concerned, even a duly certified copy is acceptable.[10]Further, the photocopies of the lease agreements could be taken on record under Section 8 of the Arbitration Act for ascertaining the existence of arbitration clause.[11]

Mandatory nature of Section 8

On comprehending the language of Section 8 of the Act, it would become clear that a judicial authority is obliged to refer the parties to arbitration. The provision is not discretionary in nature but mandatory. A civil court has no jurisdiction to entertain a suit after an application under Section 8 of the Act is made for arbitration.[12] That is, if an application, having satisfied the requirement of Section 8, is made, the court has to refer the parties to arbitration.[13]Its application cannot be denied merely on a plea of estoppel.[14]

"First Statement on the Substance of the Dispute"

Under Section 8 of the Act, a party, seeking for arbitration, should so apply ‘not later than when submitting his first statement on the substance of the dispute’. In Rashtriya Ispat Nigam Ltd. v. Verma Transport Co.,[15] Supreme 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”.[16]It was held that:

                                  “The expression “first statement on the substance of the dispute” contained in Section 8(1) of the 1996 Act must be contradistinguished with the expression “written statement”. It employs submission of the party to the jurisdiction of the judicial authority. What is, therefore, needed is a finding on the part of the judicial authority that the party has waived its right to invoke the arbitration clause. If an application is filed before actually filing the first statement on the substance of the dispute, in our opinion, the party cannot be said to have waived its right or acquiesced itself to the jurisdiction of the court. What is, therefore, material is as to whether the petitioner has filed his first statement on the substance of the dispute or not, if not, his application under Section 8 of the 1996 Act, may not be held wholly unmaintainable. We would deal with this question in some detail, a little later.”[17]

Hence, reply to an interim injunction application would not deprive a person from making an application under Section 8 of the Act. It is also evident from sub-section (3) of Section 8 that the pendency of an application under Section 8 before any court will not come in the way of an arbitration being commenced or continued and an arbitral award being made.[18] Further, the judicial authority `referring the parties to arbitration' under section 8 of the Act, has no power to appoint an arbitrator.[19]

Inclusion of “Third Party” in Arbitral Reference

Arbitration agreement is based on the principle of party autonomy. Hence, under Section 8, it would be very difficult to force a non-signatory to arbitration agreement to arbitrate. In Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya,[20] Supreme Court was of the view that:

                                  “.....there is no provision in the Act that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitrators”.

Further, in this case, court held that if a matter lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement; there is no question of application of Section 8.[21]The issue of inclusion of non-signatory was once again brought before the Supreme Court in Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc.[22]Though, in this case, court was dealing with Section 45 of the Act, correctness of the law in Sunkandya Holdings (supra) was questioned. Court, however, declined to examine the correctness of Sukanya Holdings (supra) thereby stating that:

                                  “...in that case the Court was concerned with the disputes of a partnership concern. A suit had been filed for dissolution of partnership firm and accounts also challenging the conveyance deed executed by the partnership firm in favour of one of the parties to the suit. The Court noticing the facts of the case emphasised that where the subject-matter of the suit includes the subject-matter for arbitration agreement as well as other disputes, the Court did not refer the matter to arbitration in terms of Section 8 of the Act. In the case in hand, there is a mother agreement and there are other ancillary agreements to the mother agreement. It is a case of composite transaction between the same parties or the parties claiming through or under them falling under Section 45 of the Act. Thus, the dictum stated in para 13 of the judgment of Sukanya [(2003) 5 SCC 531] would not apply to the present case.” (emphasis supplied)

Unlike Chloro Controls (supra), the issue in Sukanya Holdings (supra) was not related to a composite transaction but to a partnership firm. It would be interesting to see the viewpoint of the court if an issue, related to composite transaction, comes before it under Section 8.

Above analysis contains a brief overview of Section 8 of the Arbitration and Conciliation Act, 1996

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[1] UNCITRAL Model Law on International Commercial Arbitration, 1985

[2] Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234, 248; See also India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd., (2007) 5 SCC 510, 516

[3] Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531, 535

[4] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552

[5] Id, at 622

[6] Bhatia International v. Bulk Trading S.A., (2002) 4 SCC 105

[7] P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539, 542; Magma Leasing & Finance Ltd. v. Potluri Madhavilata, (2009) 10 SCC 103, 114

[8] Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, 542

[9] Id

[10] Atul Singh v. Sunil Kumar Singh, (2008) 2 SCC 602, 609

[11] Bharat Sewa Sansthan v. U.P. Electronics Corpn. Ltd., (2007) 7 SCC 737, 747

[12] Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503, 515

[13] Kalpana Kothari v. Sudha Yadav, (2002) 1 SCC 203, 208; Magma Leasing & Finance Ltd. v. Potluri Madhavilata, (2009) 10 SCC 103, 114; P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4 SCC 539, 542; Agri Gold Exims Ltd. v. Sri Lakshmi Knits & Wovens, (2007) 3 SCC 686, 691; Rashtriya Ispat Nigam Ltd. v. Verma Transport Co., (2006) 7 SCC 275, 284; SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618, 648

[14] Id

[15] (2006) 7 SCC 275

[16] Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, 544

[17] Rashtriya Ispat Nigam Ltd. v. Verma Transport Co., (2006) 7 SCC 275, 289

[18] Vijay Kumar Sharma v. Raghunandan Sharma, (2010) 2 SCC 486, 489

[19] State Of Goa vs M/S Praveen Enterprises on 4 July, 2011

[20] Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531, 535

[21] Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531, 536

[22] Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641