USP Studios Pvt. Ltd. Vs Ganpati Enterprises & Ors. (Bombay High Court)
Held that in a case where there exists an arbitration agreement, the court is under obligation to refer the parties to arbitration in terms of the arbitration agreement.
Facts-
The plaintiff had advanced a sum of Rs.2 Crore to the defendants. A loan agreement dated 28th July, 2016 evidencing the said transaction came to be executed. The loan was to be repaid after a period of 12 months, along with interest at the rate of 18% p.a. The plaintiff remitted the amount of Rs.2 Crore to the account of defendant no.1 through banking channels. Only an amount of Rs.30,00,000/- towards interest component was paid by the defendants. After expiry of the term of loan and upon repeated demands, the defendant issued two cheques drawn for Rs.1 Crore each payable on 29th January, 2018, towards repayment of the loan. Both the cheques were returned unencashed on presentment. Despite service of a statutory notice u/s. 138 of the Negotiable Instruments Act, 1881, the defendants committed default in payment of the amount covered by the cheque necessitating the lodging of a complaint under the N.I. Act, being CC No.1583 of 2018, before the Metropolitan Magistrate, Bandra, Mumbai. Hence, this suit based on written contract and the negotiable instruments.
The defendant have contested the tenability of the suit in view of the arbitration clause contained in the loan agreement and sought the reference of the dispute to arbitration.
Conclusion-
Held that if there is a semblance of dispute, which is covered by an arbitration agreement, the judicial authority is statutorily enjoined to refer the parties to arbitration.
Supreme Court in the case of Agri gold Exims Ltd. vs. Sri Lakhsmi Knits & Wovens and Others has held that Section 8 of the Arbitration and Conciliation Act, 1996 Act is peremptory in nature. In a case where there exists an arbitration agreement, the court is under obligation to refer the parties to arbitration in terms of the arbitration agreement.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. This commercial division summary suit is instituted for recovery of a sum of Rs.3,02,78,710/- along with further interest on the principal sum of Rs.2 Crore at the rate of 18% p.a. from the date of the institution of the suit till payment and/ or realization.
2. The plaintiff is a company incorporated under Companies Act, 1956. It deals in the business, inter alia, of production of audio visual contents – programs, which are broadcast on various digital media platforms like YouTube. Defendant no.2 – Parvinchand Narindernath Sehgal is the proprietor of Ganpati Enterprises, defendant no.1. Defendant no.3 is the karta of defendant no.2.
3. The plaintiff claims, on the request of defendant no.2, plaintiff had advanced a sum of Rs.2 Crore to the defendants. A loan agreement dated 28th July, 2016 evidencing the said transaction came to be executed. The loan was to be repaid after a period of 12 months, along with interest at the rate of 18% p.a. The plaintiff remitted the amount of Rs.2 Crore on 28th July, 2016 to the account of defendant no.1 through banking channels. Only an amount of Rs.30,00,000/- towards interest component was paid by the defendants. After expiry of the term of loan and upon repeated demands, the defendant issued two cheques drawn for Rs.1 Crore each payable on 29th January, 2018, towards repayment of the loan. Both the cheques were returned unencashed on presentment. Despite service of a statutory notice under Section 138 of the Negotiable Instruments Act, 1881 (“the N.I. Act”), the defendants committed default in payment of the amount covered by the cheque necessitating the lodging of a complaint under the N.I. Act, being CC No.1583 of 2018, before the Metropolitan Magistrate, Bandra, Mumbai. Hence, this suit based on written contract and the negotiable instruments.
4. After the plaintiff took out the Summons for Judgment, the defendants have filed an affidavit-in-reply seeking leave to defend the suit. By way of preliminary objection, the defendants have contested the tenability of the suit in view of the arbitration clause contained in the loan agreement and sought the reference of the dispute to arbitration. Clause (8) of the Loan Agreement reads as under:
“8. ARBITRATION: Any claim, controversy or dispute arising out of or in connection with this Agreement shall be referred to arbitration and will be binding on both the parties and will conducted in Mumbai, India and shall be governed by and construed in accordance with the laws of India. The language of the arbitration shall be English.”
5. The defendants contend that in view of the aforesaid arbitration clause incorporated in the loan agreement, on the strength of which the plaintiff has instituted this summary suit, the dispute is required to be mandatorily referred to arbitration.
6. I have heard Mr. Kapadia, the learned Counsel for the plaintiff, and Mr. Patil, the learned Counsel for the defendants, at some length, on the issue of reference to arbitration.
7. Patil, the learned Counsel for the defendants, submitted that in view of the clear and unambiguous arbitration clause (extracted above), there is no other go but to make an arbitral reference under Section 8 of the Arbitration and Conciliation Act, 1996 (“the Act, 1996”). Laying emphasis on the fact that there can be no dispute about the existence of arbitration agreement as the plaintiff’s claim squarely rests on the vary some loan agreement, which contains the aforesaid arbitration clause, Mr. Patil submitted that the resistance to reference cannot be countenanced.
8. Mr. Kapadia, the learned Counsel for the plaintiff, without joining the issue on the aspect of the existence of arbitration agreement, canvassed a submission that the reference under Section 8 of the Act, 1996 would only be warranted where there is a subsisting dispute, which is susceptible to arbitration. In the case at hand, since the liability is unequivocally admitted, reference to arbitration would be unwarranted. Inviting the attention of the Court to the contentions in the affidavit-in-reply, wherein the defendants have also raised defence of inadmissibility of the loan agreement on account of inadequate stamp-duty paid thereon, Mr. Kapadia would urge that this defence implies a clear admission of the execution of the loan agreement.
9.To add to this, according to Mr. Kapadia, the transfer of the amount by the plaintiff to defendant no.1 through banking channels is incontrovertible. In this backdrop, it was further urged that the defendants have not specifically denied the receipt of the said amount and, on the contrary, the defendants made a feeble attempt to contest the plaintiff’s claim for interest thereon. Implicit in this defence is an admission of the receipt of the principal loan amount, urged Mr. Kapadia. In the backdrop of the aforesaid contentions in the affidavit-in-reply, Mr. Kapadia made a strenuous effort to draw home the point that, there is no “dispute”, as such, and thus reference to arbitration is wholly unwarranted.
10.To bolster up aforesaid submission Mr. Kapadia placed a strong reliance on a judgment of a learned Single Judge of Delhi High Court in the case of Maruti Udyog Limited vs. Mahalaxmi Motors Ltd. & Anr.1, wherein the learned Single Judge observed that where the liability is admitted, arbitration clause cannot be invoked. This enunciation was based on the premise that if there is an “admitted liability” there exists no dispute which is susceptible to arbitration
11. Mr. Kapadia banked upon the following observations in the aforesaid judgment:
“3. It is settled law that the arbitration clause can be invoked only when there are differences and disputes with regard to certain payments or breach of obligations of the respective parties of the terms of the agreement. However wherever there is an admitted liability, the arbitration clause cannot be invoked. The very connotation “admitted liability” suggests that there are no disputes or differences with regard to the said admitted liability.
4. The extracts of the letter dated 5th April, 1997, the minutes of the meeting and the affidavit filed by Mr. M. C. Mehta in his capacity as Managing Director of the defendant No. 1 company leave no manner of doubt that not only the defendant No. 1 had accepted the liability of 7.63 crores towards the plaintiff but also undertook to discharge the liability by making the payment through Installments.
5. What is material for the purpose of Section 8 of the Arbitration Act is that there should be existence of difference or disputes with regard to a particular liability arising out of the terms of the agreement. If the liability is acknowledged and admitted it does not come within the meaning and ambit of disputes and differences.
6. In view of the foregoing reasons the application under Section 8(1) of the Arbitration and Conciliation Act, 1996 cannot be allowed as arbitration clause is not invokable in respect of admitted liability.”
(emphasis supplied)
12. Mr. Kapadia would further urge that the aforesaid view finds echo at home as well. Reliance was placed on an order passed by a learned Single Judge of this Court in the case of M/s. Gammon India Ltd. vs. M/s. VVR Crushers and Constructions (Arbitration Appeal No.23/2017 with Civil Application No.25/2017, decided on 14th July, 2017.), wherein the learned Single Judge declined to interfere in an appeal under Section 37 of the Act, 1996, challenging the judgment and order passed by the City Civil Court refusing to refer the parties to arbitration on the premise that there was no dispute about the liability to pay the amount claimed by the plaintiff. The learned Single Judge noted that the trial Court had referred to the aforesaid decision of the Delhi High Court in the case of Maruti Udyog (supra).
13. Reliance was also placed on an order passed by another learned Single Judge of the Delhi High Court in the case of M/s. Fenner (India) Ltd. vs. M/s. Brahmaputra Valley Fertilizer Corporation Ltd. GS (O.S.), NO.1281 of 2014, wherein the Delhi High Court followed the pronouncement in the case of Maruti Udyog (supra) and professed to enunciate the law as under:
“21. In the light of the pronouncements of the Hon’ble Supreme Court and of this High Court, it is clear that when no disputes exist between the parties, namely, what is claimed by the plaintiff is admitted by the defendant or impliedly admitted by the defendant, the same cannot be a subject matter of arbitration proceedings. The reasons for this are quite obvious. Court would normally frown upon frivolous and meaningless litigation between the parties when the facts on the face of it shows that there is not scope for any adjudication left.”
(emphasis supplied)
14. Kapadia, it must be noted, fairly pointed out that another learned Single Judge has postulated that reference to arbitration under Section 8 of the Act 1996 is peremptory and the Court has no discretion. Mr. Kapadia also brought to my notice an order passed by me in the case of Taru Meghani through his Constituted Attorney Ms. Sharaddha Khandhadia and ors. vs. Shree Tirupati Greenfield (Shree Tirupati Greenfield Developers) and others2, wherein, I had referred the parties to arbitration repelling the challenge that reference to arbitration, wherein it entails the bifurcation of the subject matter of the suit, is impermissible in law.
15. From the text of Section 8 of the Act, 1996, 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-mater 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.
16. In the case at hand, all the aforesaid conditions seem to have been made out as the existence of arbitration clause in the loan agreement is incontestible. The plaintiff, who is a party to the loan agreement, has in fact instituted the suit on the strength of the contract contained therein. There is identity of the subject matter of action as well. And the defendants have sought the reference of the dispute to arbitration.
17. The submission on behalf of the plaintiff that reference to arbitration would be uncalled for seeks to draw support and sustenance from the alleged admission of liability; implied, if not express. I have perused the affidavit-in-reply filed on behalf of the defendants. In all fairness to Mr. Kapadia, it must be recorded that the contentions on behalf of the defendants as regards the inadmissability of the instrument in question on account of insufficiency of stamp-duty are in the alternative and without prejudice to the preliminary objection to the tenability of the suit in the face of the arbitration agreement. Yet, I would deem it appropriate to proceed on the premise that the liability is impliedly admitted, at least to the extent of principal amount. As regards the interest component, the defendants have specifically contested the claim of interest at the rate of 18% p.a.
18. I have perused the aforesaid judgments, which take the view that if the liability is admitted; expressly or impliedily, reference to arbitration would be unwarranted as it can not be said that there is a subsisting arbitrable dispute. I am not persuaded to accede to the aforesaid broad proposition sough to be canvassed on behalf of the plaintiff.
19. In my view, the pronouncement in the case of ION Exchange (India) Ltd. vs. MSK Projects (India) Ltd.3 enunciates a correct position in law. In the said case, arising out of a summary suit instituted under Order XXXVII of the Code for the recovery of an ascertained sum of money, a submission was canvassed that the suit arose out of a written contract coupled with acknowledgment of liability. Thus, a suit under Order XXXVII of the Code constituted in an exception to the general procedural provisions and it was required to be determined in a summary manner and, therefore, reference of such dispute to arbitration was impermissible. A learned Single Judge of this Court did not accede to the aforesaid submissions and ruled that Section8 of the Act, 1996 would cover within its ambit suits under Order XXXVII of the Code as well. The observations in paragraphs 9 to 11 are material and hence extracted belo
“9. All that now remains to be considered is merely because the respondents have filed a suit under Order XXXVI of the Civil Procedure Code, an application under Section 8 would lie or not. The argument based upon Order XXXVII of Civil Procedure Code being salutary and therefore, out of purview of Section 8(1), is entirely misconceived. Section 8(1) in uses word/phraseology “Action”. The word “action”, according to Law Lexicon has a legal connotation. It is often defined “as a form of suit given by law for recovery of that which is one’s due; or it’s legal demand of a man’s right”. The learned author also refers to another meaning of the term as “a litigation in civil Court and for recovery of individuals rights or redress of individual wrong, inclusive, in its proper legal sense suits by the crown.” Thus, the distinction between the words “action” and “suit” is not generally observed and wherever the term “action” appears it refers to all civil actions. (See Law Lexicon by P. Ramanatha Aiyar, 1997 edition). Order XXXVII of the Civil Procedure Code is part and parcel of Civil Procedure Code, 1908. Civil Procedure Code, 1908 is an Act to consolidate and amend laws relating to the procedure of Courts of civil judicature. Order XXXVII appears in the same Code. It provides for a summary procedure. A bare perusal of Order XXXVII would show that the same applies to a class of suits which are instituted in Civil Courts by presenting a plaint.
10. It is not possible to agree with the contention of Mr. Parikh that summary procedure provided in Order XXXVII to certain suits being an exception carved out to the general procedural provisions applying Section 8 thereto would be defeating and frustrating the Legislative mandate. Admittedly, Section 8 appears in Arbitration and Conciliation Act, 1996 which is a later Enactment. The Arbitration and Conciliation Act is an Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto. The statement of objects and reasons of this enactment makes it abundantly clear that the enactment is comprehensive piece of Legislation covering international arbitration and conciliation as also domestic arbitration and conciliation. The whole purpose is to make provision for arbitration procedure which is fair, efficient and capable of application in all specific arbitration. The enactment is aimed at encouraging parties to settle their disputes by taking recourse to arbitration and conciliation. At the same time, it minimises the role, which is supervisory, of the Court in arbitration process. If the purpose of this enactment is to be achieved, then the interpretation of Section 8 as suggested cannot be accepted. Advisedly, when the Legislature has covered actions before Civil Court in Section 8(1) then it is not permissible to whittle down or dilute the same. The term “Action” must be and needs to be construed broadly to fulfill the abovementioned legislative intent. If summary suits are left out of the purview of Section 8(1) then the purpose of enacting a comprehensive Legislation such as Arbitration and Conciliation Act, 1996, cannot be achieved.
11. In my view, Section 8 would cover suits under Order XXXVII of Civil Procedure Code and it is not permissible to leave them out of it’s purview. In the light of the admitted factual position, it is clear that the petition deserves to succeed.”
The aforesaid reasoning, in my considered view, stands further fortified on account of the significant changes brought about by Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) to further minimize the interference of the Courts in the arbitration proceedings.
20.Section 8(1), pre and post Act 3 of 2016, reads as under:
