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Punjab State Co-Oper... v. Shiv Rice And Genera...
Summary of the Opinion
Factual and Procedural Background
This order disposes of two revision petitions that raise common questions of law and fact; the opinion sets out the facts of Civil Revision No. 29 of 1999 for convenience. M/s. Shiv Rice and General Mills (plaintiff) filed a civil suit for declaration and injunction against Punjab State Co-operative Supply and Marketing Federation Limited and another (defendants), challenging a recovery notice dated 8-9-1995 and seeking to restrain the defendants from recovering the disputed amount. By an order dated 10-11-1996 the trial Court restrained the defendants from recovering the suit amount during the pendency of the suit.
The defendants referred the matter to an Arbitrator by an order dated 22-11-1996 and the Arbitrator summoned the plaintiff to appear and file a claim. The plaintiff applied to restrain the defendants from proceeding with the arbitration during the pendency of the suit. The defendants contested that application, raising preliminary objections including maintainability and asserting that initiating arbitration during pendency of the suit was not a bar. The trial Court, by order dated 16-5-1997, allowed the plaintiff's application and granted ad-interim injunction restraining the defendants from proceeding with arbitration. On appeal, the Additional District Judge dismissed the appeal by judgment dated 22-9-1998. Defendant No. 1 challenged those orders by filing the present revision petition in this Court. Notice was issued, counsel were heard, and the record was perused.
Legal Issues Presented
- Whether the Arbitration and Conciliation Act, 1996 ("the 1996 Act") applies to the dispute or whether the Arbitration Act, 1940 ("the 1940 Act") governs, given that the arbitration reference occurred after the 1996 Act came into force.
- Whether a civil Court has jurisdiction to restrain arbitration proceedings or to stay an arbitral process once arbitration proceedings have been initiated under the 1996 Act, while a civil suit is pending.
- Whether objections to the jurisdiction of an arbitrator must be decided by the arbitrator and, if rejected, whether the aggrieved party's remedy is confined to an application under Section 34 of the 1996 Act after an award is made.
Arguments of the Parties
Defendant-Petitioner's Arguments
- The arbitration proceedings were initiated by appointing an Arbitrator vide letter dated 22-11-1996 and are governed by the provisions of the Arbitration and Conciliation Act, 1996 which came into force on 25-1-1996.
- Under the 1996 Act, the civil Court has no jurisdiction to stay arbitration proceedings pending before the Arbitrator; challenges to arbitration-related matters should be made to the Arbitrator and any award can be challenged only under Section 34 of the 1996 Act.
- Relied on the Division Bench decision in Herike Rice Mills, Mehalkalan, District Sangrur v. State of Punjab (1998) 118 Pun LR 395 to support the submission that judicial intervention is limited.
Plaintiff-Respondent's Arguments
- The provisions of the Arbitration Act, 1940 would apply to the dispute (relying on Shetty's Constructions Co. Pvt. Ltd. v. Konkan Railway Construction, AIR 1999 SC 1535).
- The defendants failed to raise an objection to the civil Court's jurisdiction in the civil suit and, having joined the proceedings by filing a written statement, were debarred from subsequently referring the matter to arbitration; hence the arbitration proceedings ought to be stayed.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Herike Rice Mills, Mehalkalan, District Sangrur v. State of Punjab, 1998 (118) Pun LR 395 | Limits on interim judicial intervention under the 1996 Act; where appointment of arbitrator is challenged, such objections are to be decided in proceedings where the award is challenged; an unsuccessful party cannot challenge the arbitrator's order rejecting a challenge to his appointment before an award is made; Article 226 would not lie prior to award. | The Court relied on this Division Bench precedent to support the proposition that the civil Court below erred in restraining the Arbitrator or staying arbitration proceedings prior to the making of an award; objections must be addressed in proceedings under Section 34 after an award. |
| Shetty's Constructions Co. Pvt. Ltd. v. Konkan Railway Construction, AIR 1999 SC 1535 | Application of the 1940 Act where the demand for reference to arbitration was made prior to the coming into force of the 1996 Act (i.e., transitional application of the repealed Act in certain circumstances). | The Court distinguished this authority: it held Shetty's case inapplicable because in the present record there was no claim for arbitration made by either side prior to 25-1-1996; therefore the 1996 Act governs the present case, not the 1940 Act. |
| Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan, AIR 1999 SC 2102 | Under Section 34 of the 1996 Act, a Court may set aside an arbitral award if it deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or if it contains decisions beyond the scope of the submission. | The Court cited this Supreme Court authority to explain the post-award remedy available to a party aggrieved by an arbitral award and to justify that judicial recourse is available by way of Section 34 rather than by interim injunction preventing arbitration. |
Court's Reasoning and Analysis
The Court first addressed which statute governed the dispute. It noted that the Arbitration and Conciliation Act, 1996 came into force on 25-1-1996 and repealed the Arbitration Act, 1940. The Court observed that because there was nothing on the record to show any claim or demand for arbitration having been made prior to 25-1-1996, the 1940 Act could not apply; the 1940 Act would have applied only if a claim regarding arbitration had been made by either party prior to the effective date of the 1996 Act. Mere filing of the civil suit before 25-1-1996 was irrelevant absent an arbitration demand before that date. Consequently, the Court concluded that the 1996 Act governs the present case.
The Court then analyzed key provisions of the 1996 Act relied upon by the defendant-petitioner:
- Section 5: Where the Act governs, no judicial authority shall intervene except as provided in the Act.
- Section 8(3): Even where an issue is pending before a judicial authority, arbitration may be commenced or continued and an arbitral award made.
- Section 16: The arbitral tribunal may rule on its own jurisdiction, including objections to the existence or validity of the arbitration agreement; where the tribunal rejects such an objection it may continue with proceedings and make an award.
- Section 34: Provides the post-award remedy whereby an aggrieved party may apply for setting-aside an arbitral award in specified circumstances (e.g., where the award deals with a dispute not contemplated by or beyond the terms of submission).
The Court combined statutory interpretation with precedent: it relied on the Division Bench decision in Herike Rice Mills to show that challenges to arbitrator appointment or jurisdiction are to be dealt with in the context of award challenge proceedings and that interim judicial interference (including petitions under Article 226) is inappropriate before an award is rendered. It further relied on Olympus Superstructures to describe the scope of Section 34 as the correct remedy after an award. Applying these principles, the Court held that the civil Courts below had no basis to restrain the arbitrator or the defendants from proceeding with arbitration once arbitration was properly initiated under the 1996 Act.
Thus, the Court concluded that the appropriate course for a party disputing the arbitrator's jurisdiction was to raise the objection before the arbitrator; if the arbitrator rejected the plea and proceeded to make an award adverse to that party, the party's remedy would be to apply under Section 34 to set aside the award on the limited grounds provided in the Act. Interim restraint on arbitration by the civil Court was inconsistent with Sections 5, 8(3), 16, and the scheme of the 1996 Act as interpreted by the cited decisions.
Holding and Implications
Holding: The Court allowed both revision petitions and set aside the orders passed by the Courts below. The Court dismissed the plaintiffs' applications for restraining the defendants and the arbitrator from proceeding with arbitration during the pendency of the suit, but with no order as to costs.
Implications:
- Direct effect on the parties: The defendants and the arbitrator are no longer restrained and may proceed with arbitration; the plaintiffs retain the statutory remedy of challenging any adverse arbitral award under Section 34 of the 1996 Act.
- Scope of judicial intervention: The decision reinforces the limited scope for interim judicial intervention in arbitration matters governed by the 1996 Act — objections to arbitrator jurisdiction should be addressed by the arbitrator and, if necessary, in a post-award application under Section 34.
- Precedential effect: The opinion applies established principles from the 1996 Act and existing authorities cited; the judgment resolves the parties' dispute on those facts but does not purport to create a novel legal principle beyond the cited statutory scheme and precedents.
1. This order shall dispose of the above mentioned two revision petitions, having common questions of law and fact. For the purpose of convenience, the facts of Civil Revision No. 29 of 1999 being given below.
2. This is a revision petition against the orders dated 22-9-1998 and 16-5-1997 passed by the Courts below restraining the defendants form proceeding with the arbitration proceedings with the Arbitrator and staying the proceedings before the arbitrator till the decision of the suit.
3. The facts which are relevant for the decision of the present revision petition are that M/s. Shiv Rice and General Mills (plaintiff) had filed a suit for declaration and injunction against the defendants (Punjab State Co-operative Supply and Marketing Federation Limited and another), challenging the recovery notice dated 8-9-1995 issued by the defendant-Federation and for restraining the defendants from recovering the disputed amount during the pendency of the suit and order dated 10-11-1996 was passed restraining the defendants from recovering the suit amount from the plaintiff during the pendency of the suit. It was alleged that in order to make the suit infructuous, the defendants had referred the matter in dispute to the Arbitrator vide order dated 22-11-1996 and the Arbitrator had summoned the plaintiff to appear before him and to file a claim. It was accordingly prayed that the defendants be restrained from proceeding with the arbitration proceedings during the pendency of the suit. The said application was contested by the defendants, taking up various preliminary objections, including the maintainability of the said application, alleging therein that initiating arbitration proceedings even during the pendency of the suit was not a bar, especially when there was no stay in referring the matter to the Arbitrator and it was prayed that the application be dismissed. The learned trial Court, after hearing both sides, vide order dated 16-5-1997, allowed the application of the plaintiff and granted ad-interim injunction, restraining the defendants from proceeding with the arbitration proceedings. Aggrieved against this order of the trial Court, the defendants filed an appeal, which was dismissed by the Additional District Judge vide judgment dated 22-9-1998. Aggrieved against these orders of the Courts below, defendant No. 1 has filed the present revision petition in this Court.
4. Notice of motion was issued. Counsel for the parties have been heard and record perused.
5. The learned counsel appearing for the defendant-petitioner submitted before me that the arbitration proceedings were initiated while appointing the Arbitrator vide letter dated 22-11-1996 and these arbitration proceedings were covered under the provisions of the Arbitration and Conciliation Act, 1996 (for short, "the 1996 Act") which came into force with effect from 25-1-1996. It was submitted that under the provisions of this Act, the Civil Court has no jurisdiction to stay the arbitration proceedings pending before the Arbitrator. It was submitted that only an application to the arbitrator was competent in this regard and even his decision could not be challenged except by way of an application under Section 34 of the 1996 Act. Reliance has been placed on the law laid down by a Division Bench of this Court in the case reported as Herike Rice Mills, Mehalkalan, District Sangrur v. State of Punjab, (1998) 118 Pun LR 395. On the other hand, learned counsel appearing for plaintiff-respondent No. 1 submitted before me that in the present case, the provisions of the Arbitration Act, 1940 (hereinafter referred to as "the 1940 Act") would apply. Reliance was placed on Shetty's Constructions Co. Pvt. Ltd. v.
Konkan Railway Construction, AIR 1999 SC 1535. It was further submitted that since the defendants had failed to raise the objection regarding the jurisdiction of the civil Court in the civil suit filed by the plaintiff and the defendants had joined the proceedings by filing written statement etc., the defendants were debarred from referring the matter to the Arbitrator and that being so, the proceedings before the arbitrator were liable to be stayed.
6. After hearing both sides and perusing the record, in my opinion, the revision petition must be allowed and the order passed by the Courts below must be set-aside.
7. The 1996 Act had come into force with effect from 25-1-1996 whereby the 1940 Act stood repealed. Since no proceedings under the 1940 Act were pending in this case at the time when the 1996 Act came into force, there would be no question of the provisions of 1940 Act being applicable to the facts of the present case. M/s. Shetty's Constructions Co. Pvt. Ltd.'s case (supra) relied upon by the learned counsel for plaintiff-respondent No. 1, in my opinion, would have no application to the facts of the present case. In the reported case, the demand for referring the dispute to the arbitrator was made by the petitioners prior to the date when the 1996 Act had come into force and it was under those circumstances that it was held by their Lordships of the Supreme Court that in those cases the 1940 Act would apply and not 1996 Act. In the present case, there is nothing on the record to show that by the time when 1996 Act had come into force on 25-1-1996, any plea regarding arbitration had been raised before the trial Court either by the plaintiff or by the defendants. The provisions of 1940 Act would have applied to the present case only if any claim regarding arbitration had been made by either side prior to 25-1-1996, the date on which the 1996 Act came into force. As referred to above, in the present case, there is nothing to show that either side had made any claim for arbitration proceedings before 25-1-1996. That being so, there would be no question of 1940 Act being applicable to the present case. Mere filing of the civil suit by the plaintiff prior to 25-1-1996 would be of no relevance unless it is shown that any reference to the arbitration was made by either side prior to 25-1-1996. Under these circumstances, the provisions of 1996 Act would apply to the present case and not the provisions of 1940 Act.
8. Under Section 5 of the 1996 Act, it is provided that in the matters governed by the said Act, no judicial authority shall intervene except where so provided in this Act. Section 8(3) of the 1996 Act provides that even where the issue is pending before the judicial authority (Courts), an arbitration may be commenced or continued and an arbitral award made. Section 16 of 1996 Act provides that the arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement and a party is competent to raise the plea before the arbitral tribunal that it did not have the jurisdiction or was exceeding the scope of its authority and where the arbitral tribunal takes a decision, rejecting any such plea, it would continue with the arbitral proceedings and make the arbitral award. It is further provided therein that a party aggrieved by such an arbitral award may make an application for setting-aside such an arbitral award, in accordance with Section 34 of the said Act.
9. In M/s. Herike Rice Mills's case (1998 (118) Pun LR 395) (supra), after noticing various provisions of the 1996 Act, it was held by a Division Bench of this Court that even if the appointment of an arbitrator was invalid, the same will have to be decided by the Court before which the validity of the award would be challenged and an unsuccessful party cannot challenge the order of the arbitrator, rejecting the challenge to his appointment, even before the civil Court before the award is made and even a petition under Article 226 of the Constitution of India, challenging the order of Arbitrator, would not lie, when the award is yet to be made. In Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan, AIR 1999 SC 2102, it was held by their Lordships of the Supreme Court that under Section 34 of the 1996 Act, arbitral award may be set-aside by the Court if the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration or if it contains decision on matters beyond the scope of the submission to arbitration.
10. In view of the law laid down by a Division Bench of this Court and by their Lordships of the Supreme Court, in the cases referred to above, in my opinion, no case was made out for the Courts below to have restrained the Arbitrator from proceeding with the arbitration proceedings or to have restrained the defendants from proceeding with the arbitration proceedings before the arbitration The plea regarding the jurisdiction of the arbitrator could be raised before the arbitrator and if the arbitrator did not agree with the plea raised before him and an award was given against the plaintiff, then the plaintiff was competent to challenge the same under Section 34 of the 1996 Act and the Court was competent to set-aside the award if it dealt with a dispute not contemplated by or not falling within the terms of the arbitration clause. However, the civil Court could not restrain the defendants or the arbitrator to proceed with the arbitration proceedings. As referred to above. Section 8(3) of the 1996 Act contemplates a situation where the matter may be pending before the Courts and still the arbitration may be commenced or continued and an arbitral award made. Thus, even if the civil suit in question was pending in the civil Court, yet the matter could be referred to the arbitrator and the arbitrator could proceed with the arbitration proceedings and the aggrieved party had the remedy to challenge the award under Section 34 of the 1996 Act.
11. For the reasons recorded above, both the Civil Revisions referred to above are allowed, the orders passed by the Courts below are set-aside and the applications filed by the plaintiffs for restraining the defendants and the arbitrator from proceeding with the arbitration proceedings during the pendency, of the suit are dismissed but with no order as to costs.
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