Application for Rejection of Plaint Based on Arbitration Clause: Sufficient Notice for Referral?

Arbitration is mostly recognised in the field of commercial dispute resolution for convenience, efficiency, and its various benefits. As more and more organisations choose arbitration to settle their disputes, the Arbitration and Conciliation Act of 1996² provides a structured approach to this process. A fundamental provision of the Arbitration and Conciliation Act, Section 8³ in particular, mandates that if any dispute is governed by an arbitration agreement, then the court, if a party so requests, to such effect, shall refer the parties to arbitration.

Nonetheless, the real-world implementation of Section 8 of the Arbitration and Conciliation Act has prompted questions, particularly at the convergence of procedural laws and arbitration statutes. Recently, the High Court of Telangana at Hyderabad in Naolin Infrastructure (P) Ltd. v. Kalpana Industries⁴, scrutinised, whether submitting an application in accordance with Order 7 Rule 11⁵ of the Code of Civil Procedure, 1908 (hereinafter referred to as “the CPC”), might satisfy the stipulations outlined in Section 8 of the Arbitration and Conciliation Act.

The ratio of this judgment has sparked much debate: Can an application for rejection of a plaint under Order 7 Rule 11 CPC on the basis of the arbitration clause itself be adequate notice to the court to refer the parties to arbitration?

Section 8 of the Arbitration and Conciliation Act, however, declares that any judicial authority, on whom such award is sought to be enforced, before which an application is made for such purpose, shall, if it finds that such award relates to a matter which is within the scope of the arbitration agreement, refer the parties to arbitration. This has to be done upon the application of a party made not later than when the first statement on the substance of the dispute is filed. However, such an application is not be entertained unless a copy of the original arbitration agreement or a duly certified copy thereof is produced before the Court. Making an application under Section 8 of the Arbitration and Conciliation Act or consideration thereof pending before the judicial authority, shall not prevent any party from making an arbitration proceeding or seeking/obtaining an arbitral award. Therefore, Section 8 of the Arbitration and Conciliation Act provides protection to the arbitration agreement by prohibiting judicial interference in those matters that parties agree to refer to arbitration. When such an application arises, this provision necessitates a court to refer the dispute to arbitration and come to realise the factum that an arbitration agreement exists.

On the other hand, Order 7 Rule 11 CPC lists grounds for rejecting a plaint, such as the plaint failing to identify a cause of action, the relief claimed being underestimated, the relief claimed being barred by law, the plaint not being properly stamped, and so on. When a defendant files an application under Order 7 Rule 11 CPC, claiming that proceedings cannot be maintained due to an arbitration agreement, the defendant is essentially arguing that the court lacks jurisdiction in the matter because the dispute must be resolved through arbitration.

In Naolin Infrastructure (P) Ltd. case⁶, the Telangana High Court has dealt with the issue of a case wherein an application was moved by the defendant before the Court under Order 7 Rule 11 CPC for rejection of the plaint on the ground that the dispute was covered by an arbitration agreement. The Court was called upon to decide as to whether such an application could be held to be considered under adequate compliance with Section 8 of the Arbitration Act. The Court held that an application under Section 8 is in the nature of an intimation to the court regarding the existence of an arbitration agreement. This makes the court relieved of its assumption that there was no ousting of its jurisdiction. Besides this, the court mentioned that with special law, such as Arbitration and Conciliation Act, it has to supersede the general law, like CPC, so that delay in the dispute resolution process does not go ahead further. The Court brought into the notice the fact that an application of this type i.e. Order 7 Rule 11 CPC, bringing to the notice of the court existence of an arbitration agreement, should be construed to satisfy the provision of Section 8 of the Arbitration and Conciliation Act, namely, notice to the court that the case be referred to arbitration.

In Vidya Drolia v. Durga Trading Corpn.⁷, the Supreme Court of India, specifically indicated a requirement whereby judicial intervention under Section 8 must be restricted. In this case, the Court emphasised that the scope of civil courts at the referral stage is only to perform a prima facie review of the existence and validity of the arbitration agreement. This court held that the determination that Arbitral Tribunal is the appropriate Tribunal to try the dispute, including those issues of arbitrability, directs the courts to generally defer to arbitration except when it is “clearly” apparent that the arbitration agreement does not exist or is invalid or that the dispute is clearly non-arbitrable.

Therefore, this narration illustrates the principle that once an arbitration agreement is brought to the notice of the court — as in the case of an application under Order 7 Rule 11 CPC, the jurisdiction of the court would stand ousted, and the court is then bound to refer the parties to arbitration without entering into protracted judicial debate.

In Sundaram Finance Ltd. v. T. Thankam,⁸ the Supreme Court of India analysed one of the important principles of civil court proceedings where the arbitration agreement exists. The Court held that once an application is filed under Section 8 of the Arbitration Act, the focus of the civil court would shift from whether it has jurisdiction to whether its jurisdiction has been ousted by the arbitration agreement. This is necessary, for whilst researches on jurisdiction are generally found, the specific question here posed is whether the court’s jurisdiction over the case has been taken away by a statute, in this case, by the Arbitration and Conciliation Act. The rule of “generalia specialibus non derogant”, that special legislation takes precedence over general statutes-forms the basis of this approach. Thus, civil courts should prioritise the provisions of the Arbitration and Conciliation Act to avoid unnecessary delays and complications, thereby, streamlining dispute resolution and reducing case pendency.

The Delhi High Court in Madhu Sudan Sharma v. Omaxe Ltd.⁹ held that that the law concerning the need to refer disputes to arbitration under the Arbitration and Conciliation Act, as incorporated by Section 8(1), is crystal clear and leaves no scope for any ambiguity. The Court explained that this requirement is more procedural than substantive in nature. The basic condition required under Section 8 is an arbitration agreement in existence between the parties. Once there is a valid and existing arbitration agreement, the court’s jurisdiction to adjudicate the dispute has been ousted by its recognition of such an arbitration agreement. The formalities of requesting a reference to arbitration are secondary; what is crucial is that the court is informed of the arbitration agreement. This principle leads to the fact that once the arbitration agreement is brought to the notice of the court, the court becomes coram non judice meaning thereby there is lack of jurisdiction to continue entertaining the suit. Any further action on the case by the court would be without jurisdiction.

A conspectus of the above narration would reveal that whenever an application is filed for the rejection of a plaint on account of a subsisting arbitration agreement, that in itself, would be sufficient notice to the court to refer the dispute to arbitration and the court would lack jurisdiction to entertain the matter, any time after such a disclosure. This is vital to save the time of the courts as their jurisdiction is ousted as soon as an arbitration agreement comes into the picture and an application for rejection of plaint is sufficient notice to the court regarding its lack of jurisdiction. This is also important for lesser court interference in arbitration matters, ultimately reducing the courts’ docket explosion.

While the judiciary plays an indispensable role in the maintenance of the rule of law, the judiciary should show judicial restraint in curbing interference with arbitral jurisprudence. Courts must adopt a hands-off approach and should intervene only when absolutely necessary, as in cases where it becomes manifestly non-arbitrable or patent invalidity of the arbitration agreement itself. By adopting this practice, the parties can have the benefits of arbitration while respecting their autonomy to resolve their disputes in whatever way they mutually decide. It is also a guarantee that, in these times when efficiency and expertise have been accorded greater importance, arbitration will remain a viable and efficacious method of dispute settlement with no more judicial interference than strictly necessary.