Scope of inquiry by court under S.8 widened

by Rohit Bhat | May 15, 2011

Justice R.V. Raveendran has, on April 15, 2011, delivered a judgment which has not only discussed in detail the scope of Section 8 of the Arbitration and Conciliation Act, 1996 (“the Act”), but has also expanded the scope of the provision. Section 8 is reproduced below:

“8. Power to refer parties to arbitration where there is an arbitration agreement.

“(1) 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.

“(2) The application referred to in subsection (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

“(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”

Through its judgment in Booz Allen and Hamilton Inc. v. S.B.I. Home Finance Limited and Others, 2011 (5) SCALE 147, the Supreme Court has essentially held that:

(a) Filing a detailed objection to an application for temporary injunction cannot be considered to be a submission of a statement on the substance of the dispute resulting in submitting oneself to the jurisdiction of the court;

(b) Section 8 does not prescribe any time limit, and in the event that there is a considerable delay in filing the application under Section 8, then the court must proceed on the basis of whether the party has waived his right to seek arbitration and subjected himself to the jurisdiction of the court; and

(c) That the nature and scope of issues arising for consideration in an application under Section 8 is much wider than one under Section 11 and that where the issue of arbitrability arises in the context of an application under Section 8 of the Act in a pending suit, all aspects of arbitrability have to be decided by the court seized of the suit, and cannot be left to the decision of the arbitrator.

While the finding of the court on points (a) and (b) above follow established principles laid down previously by the Supreme Court, the decision on (c) above raises a lot of questions as to the scope of Section 8 and as to whether the Act contemplates a ‘judicial authority’ going into, in detail, the question of the arbitrability of disputes.

Facts of the case

Capstone Investment Company Limited (“Capstone”) and Real Value Appliances Private Limited (“RV”) had each borrowed loans for the purchase of two flats from SBI Home Finance Limited (“SBI”). Under a leave and licence agreement, Capstone and RV permitted the appellant, Booz Allen and Hamilton (“Booz Allen”) to use these flats. Thereafter, a tripartite deposit agreement was entered into between Capstone and RV as the first party, Booz Allen as the second party, and SBI as the third party. Under this agreement certain refundable security deposits were made by Booz Allen to Capstone and RV who in turn paid a portion of the sum to SBI due to which the loan in respect of the flat owned by Capstone was cleared, but the loan in respect of the other flat that RV owned remained due and outstanding. Therefore, Capstone became a guarantor for repayment of the amount due from RV, and the flat owned by it was secured in favour of SBI; a charge was created in favour of SBI. As the loan amount due from RV to SBI was not repaid, SBI, on October 28, 1999, filed a mortgage suit in the High Court of Bombay against Capstone, Booz Allen, and RV with regard to the mortgaged property and claimed various reliefs. SBI also took out a notice of motion, seeking interim relief, and the High Court on November 25, 1999 granted certain interim reliefs. Booz Allen filed a detailed reply to the notice of motion.

On October 10, 2001, Booz Allen filed an application under Section 8 praying that the parties to the suit be referred to arbitration as provided in Clause 16 of the deposit agreement dated April 5, 1996.

High Court order

The High Court on March 7, 2002 dismissed the application holding that:

a. The arbitration agreement did not cover the dispute that was the subject matter of SBI’s claim.

b. The counter affidavit to the notice of motion for temporary injunction amounted to submission of the first statement on the substance of the dispute before having filed the application under Section 8, of the Act and therefore the appellant had lost the right to seek reference to arbitration.

c. The application under Section 8 was filed nearly twenty months after filing the application opposing temporary injunction, during which period the appellant had subjected itself to the jurisdiction of the High Court and in view of the inordinate delay, the appellant was not entitled to the relief under Section 8 of the Act.

All roads, even the arbitration route, eventually lead to this gate.

Issues before the Supreme Court

On the above facts and circumstances, the Supreme Court framed the following four questions for consideration:

(i) Whether the subject matter of the suit fell within the scope of the arbitration agreement;

(ii) Whether the appellant had submitted his first statement on the substance of the dispute before filing the application under Section 8 of the Act;

(iii) Whether the application under Section 8 was liable to be rejected as it was filed after a delay of nearly twenty months; and

(iv) Whether the subject matter of the suit is arbitrable, that is, capable of being adjudicated by a private forum (arbitral tribunal) and whether the High Court ought to have referred the parties to the suit to arbitration under Section 8 of the Act.

Judgment of the Court

As regards the first question, the Supreme Court held that all the parties to the suit were parties to the arbitration agreement and that the reliefs SBI claimed are matters that have been specifically mentioned in the arbitration clause.

In answering the second question, the Court proceeded on the basis that under Section 8 of the Act, not only the filing of the written statement in a suit, but also the filing of any statement, application, or affidavit prior to the filing of the written statement would be construed as the ‘submission of a statement on the substance of the dispute’, only if by filing such statement or application or affidavit, the defendant shows his intention to submit himself to the jurisdiction of the court and waive his right to seek reference to arbitration. Therefore, applying this principle, it was held that filing a reply to an application for temporary injunction could not be considered as the submission of a statement on the substance of the dispute as that is done to avoid an interim order being made.

The third question was also answered in favour of the appellant and the court was of the view that as regards delay, one must proceed on the basis of whether a party had waived his right to seek arbitration and subjected himself to the jurisdiction of the court. It was expressly held that if supplemental proceedings like applications for temporary injunctions have been pending for a considerable time and a defendant has been contesting such supplemental proceedings, it could not be said that the defendant had lost the right to seek reference to arbitration.

Justice Raveendran 

Image above from the Supreme Court of India's website here.

The fourth question

Despite answering the first three questions in the appellant’s favour, the Court still refused to refer the parties to arbitration because it was of the view that the mortgage suit that SBI filed was not arbitrable. The discussion of the Court on the issue of arbitrability was quite detailed, and after having examined the different aspects of arbitrability, it was held that even if there is an arbitration agreement between the parties and even if the dispute is covered by the arbitration agreement, the court where the civil suit is pending will refuse an application under Section 8 of the Act to refer the parties to arbitration, if the subject matter of the suit is capable of adjudication only by a public forum or if the relief claimed can only be granted by a special court or tribunal. It was emphasised that “the adjudication of certain categories of proceedings are reserved by the legislature exclusively for public fora as a matter of public policy and certain other categories of cases, though not expressly reserved for adjudication by a public fora may, by necessary implication, stand excluded from the purview of private fora.”

As regards the categories of proceedings, it was held that:

“…the well recognized examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.”

The Court noticed that all the above proceedings related to actions in rem and that “generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration.”

Applying the above principles to the facts of the present case, the Court finally held that a mortgage is a transfer of a right in rem and a mortgage suit for sale of the mortgaged property is an action in rem, for enforcement of a right in rem and therefore a suit for enforcement of a mortgage, being the enforcement of a right in rem, will have to be decided by courts of law and not by arbitral tribunals.

Expanding the scope of Section 8?

The judgment of the Court, in my view, has severely expanded the scope of Section 8 of the Act and has gone beyond the Act’s original contemplation. This is why:

a. The Act itself provides for minimal intervention by the courts and it is well established that Section 8 of the Act is peremptory in nature and if the parameters for exercise of Section 8 of the Act are satisfied, then the court shall refer the parties to arbitration.

b. The parameters for exercise of Section 8 are contained in the Section itself. However, by way of the present judgment, the Court has stated that a judicial authority deciding an application under Section 8 has to necessarily decide the issue of arbitrability.

c. The consequence of deciding the issue of arbitrability would be that Section 16 of the Act would be rendered otiose.

d. The Act itself does not specifically exclude any category of disputes as being not arbitrable. In the event that a dispute is not arbitrable and yet an arbitral tribunal makes an award, then the procedure the Act contemplates is to challenge the award on the ground that the dispute was not arbitrable. In this regard, Sections 34(2)(b) and 48(2) of the Act make it clear that an arbitral award will be set aside if the court finds that ‘the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force’.

Apart from the above, the basis for the conclusions arrived at by the Court itself seems to be incorrect inasmuch as the Court has held that the scope of Section 8 is far wider than that of Section 11, and, therefore, the Court while deciding an application under Section 8 must decide whether the dispute is capable of being adjudicated by an arbitral tribunal. In this regard, it must be noted that the scope of Section 11 was enlarged by seven judges of the Supreme Court in SBP v. Patel Engineering, (2005) 8 SCC 618, and in the very same judgment, as regards Section 8, the Supreme Court merely observed that a judicial authority has to necessarily decide whether, in fact, there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it, is covered by the arbitration clause. While it might be argued that looking into whether the dispute that is sought to be raised is covered by the arbitration clause or not is a facet of arbitrability, the present judgment does seem to have gone a step further in stating that the ‘judicial authority’ must also decide whether the matter is capable of being adjudicated by an arbitrator, which, I think, should not be done under Section 8.

The Supreme Court, by expanding the scope of Section 8, has ensured that the jurisdiction of the arbitral tribunal is further curtailed and the jurisdiction of the courts is further enlarged, thereby leading to a situation, which is against the basic object of the Act. However, until the judgment is overruled by a larger bench of the Supreme Court, the principles mentioned in Booz Allen v. SBI Home Finance will have to be followed and the courts, while deciding an application under Section 8, will necessarily have to decide the issue of whether the arbitral tribunal is capable of adjudicating the issues contemplated in the arbitration agreement.

Rohit Bhat is an advocate at the Supreme Court of India.