- Bookmark
- Share
- CaseIQ
Ardy International (P) Ltd. And Another v. Inspiration Clothes & U And Another
Factual and Procedural Background
The respondent (plaintiff before the trial court) filed a money-claim suit against the appellant and two other parties in the City Civil Court, Calcutta. The appellant asserted that the supplies in question were covered by invoices containing an arbitration clause, thereby mandating that all disputes be resolved through arbitration. The respondent denied the existence of any arbitration agreement.
While the suit was pending, Bharat Merchants Chamber issued a notice to the respondent to appoint an arbitrator and indicated its intention to commence arbitration. In response, the respondent sought an injunction under Order 39 Rules 1 and 2 of the Code of Civil Procedure (CPC) to restrain the appellants from acting on the notice. The civil court refused ad-interim relief, prompting an appeal.
The appellate court directed that the injunction application be treated as one under Section 8 of the Arbitration and Conciliation Act, 1996 (“the 1996 Act”) and disposed of promptly. On remand, the civil court dismissed the application, holding that a valid arbitration agreement existed (Sections 5 and 7 of the 1996 Act) and that the parties had to proceed to arbitration (Section 8). The respondent again appealed, and the High Court reversed the civil court, ruling that the endorsement on the invoices did not constitute a valid arbitration agreement. Consequently, the injunction restraining arbitration was effectively granted. The present appeal challenges that High Court judgment.
Legal Issues Presented
- Whether the endorsement on the invoices amounted to a valid arbitration agreement within the meaning of Section 7 of the Arbitration and Conciliation Act, 1996.
- Whether a court, acting under Section 8 of the 1996 Act, can grant an injunction restraining the commencement or continuation of arbitral proceedings.
Arguments of the Parties
Appellant's Arguments
- The invoices contained an arbitration clause, creating a binding arbitration agreement that required all disputes to be referred to arbitration.
- The civil court, once apprised of the arbitration agreement, was bound under Sections 5 and 8 of the 1996 Act to refer the matter to arbitration and could not restrain arbitral proceedings.
Respondent's Arguments
- No valid arbitration agreement existed; the endorsement on the invoices could not meet the statutory requirements of Section 7.
- An injunction was necessary to prevent the appellants from proceeding with arbitration and to protect the respondent’s right to pursue the civil suit.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court found that the proceedings below had proceeded under a fundamental misconception of law:
- Scope of Section 8: Section 8 is designed to enable a defendant in a judicial proceeding, or the court suo motu, to refer the dispute to arbitration when an arbitration agreement exists. It is not a mechanism to restrain arbitration.
- Mischaracterisation of the Application: The respondent, as plaintiff, filed an application seeking to restrain arbitration. Such relief could only be tested under Order 39 Rules 1 and 2 CPC. Once the existence of an arbitration agreement was invoked by the appellants, any further inquiry had to stay within Section 8, which cannot culminate in restraining arbitration.
- Error of the High Court: By treating the invoice endorsement as insufficient to constitute an arbitration agreement and by effectively granting an injunction, the High Court misapplied Section 8 and frustrated its legislative purpose.
Holding and Implications
Holding: Appeal Allowed; High Court judgment set aside.
The Supreme Court directed:
- The appellants may file, within two weeks, a fresh Section 8 application before the trial court seeking reference to arbitration.
- The respondent may oppose the application on all available grounds.
- The City Civil Court is to decide the application within six weeks of filing.
- Bharat Merchants Chamber shall take no further steps toward arbitration until the trial court’s decision.
Implications: The decision restores the primacy of arbitration where a prima facie arbitration agreement exists and clarifies that Section 8 cannot be invoked to restrain arbitral proceedings. The ruling affects only the immediate parties and does not establish new precedent beyond reinforcing the statutory intent of the 1996 Act.
Order
1. The respondent filed a suit for money claim against the appellant and two other parties before the City Civil Court in Calcutta. It is the case of the appellant that goods were supplied to the respondent under certain invoices which contained an arbitration clause and, therefore, any dispute touching the said transaction was required to be subject to arbitration. The respondent, however, denies that there is an arbitration agreement so as to amount to an impediment to its money suit pending before the City Civil Court at Calcutta.
2. When Bharat Merchants Chamber issued a notice to the respondent calling upon it to appoint its arbitrator and indicated its intention to commence arbitral proceedings, the respondent moved an application for interim relief before the civil court in the pending suit under Order 39 Rules 1 and 2 CPC. The interim relief sought therein was an injunction restraining the respondents to the suit (the present appellants) from taking any steps or further steps in terms of the notice dated 5-12-2003, which had been issued by Bharat Merchants Chamber. The civil court declined to grant any ad interim relief. An appeal was moved thereagainst by the respondent in which the appeal court took the view that the application made by the respondent under Order 39 Rules 1 and 2 should be treated as one made under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the 1996 Act”) and be disposed of within a specific time-frame. After the application came back, the civil court made an order dismissing the application holding that there existed a valid arbitration agreement under Section 7 of the 1996 Act and that the parties were required to go for arbitration by reason of Sections 5 and 8 of the 1996 Act. The respondent once again appealed against the said order which has resulted in the impugned judgment of the High Court.
3. By the impugned judgment the High Court allowed the appeal of the respondent by holding that the endorsement at the foot of the invoice could not have been construed to be an arbitration agreement within the meaning of the 1996 Act. Since the appeal has been allowed, it would mean that the interim relief sought for in the application under Order 39 Rules 1 and 2 was granted, this judgment has been impugned before us.
4. We have extensively heard the learned counsel for both the sides and at the end of the day we are satisfied that the whole proceedings were started, continued and concluded under misconception of law. In the first place, Section 8 is not intended to restrain arbitration proceedings before an Arbitral Tribunal. The situation contemplated by Section 8 can arise only at the first instance of an opponent and defendant in a judicial proceeding, or, at the highest, suo motu at the instance of the judicial authority, when the judicial authority comes to know of the existence of an arbitration agreement. In either event, there is no question of the court under Section 8 of the 1996 Act restraining the arbitral proceedings from commencing or continuing. In fact, Section 8 is intended to achieve, so to say, the converse result. Unfortunately, in this case the application for interim relief was made by the respondent who was the plaintiff before the civil court. The relief sought therein is the restraint of arbitral proceedings. It could only have been decided as an application under Order 39 Rules 1 and 2 for whatever it was worth. Once the objection to this application was filed by the appellant bringing to the notice of the court the existence of an arbitration agreement, thereafter the proceedings could have been continued only within the parameters of Section 8 of the 1996 Act. A proceeding under Section 8 could never result in an order restraining the arbitral proceedings, which is what finally the impugned order before us does.
5. Considering all the complications that have arisen in this case because of an erroneous order, and keeping in mind the fact that no prejudice should be caused to any of the parties before us, we propose to dispose of this appeal by the following order:
The impugned judgment of the High Court is set aside. Mr Mukul Rohatgi, learned Senior Counsel, appearing for the appellant requests that the appellant would make an application under Section 8 invoking the provisions of the 1996 Act seeking an order of reference for arbitration. Such an application shall be filed within a period of two weeks from today. It shall be open to the respondent to oppose such application on whatever grounds that are available in law including the ones urged and noticed in the impugned judgment. The civil court shall thereafter hear the parties and dispose of such application in accordance with law, preferably within a period of six weeks from the day such an application is made. In the fairness of things, no further steps will be taken by Bharat Merchants Chamber till the order of the City Civil Court.
6. The appeal is allowed in the above terms with no order as to costs.
Alert