In Haier Telecom (India) Private Ltd v. Drive India Enterprise Solutions Ltd. SLP (Civil) … Diary No(s). 25631/2018, the Supreme Court of India has issued a notice to answer a very important question of whether an application to leave to defend under Order 37 Rule 3(5) of the Indian Code of Civil Procedure, 1908 (CPC) which has to be filed by a party within a period of 10 days to disclose ‘such facts as may be sufficient to entitle him …to defend such suit should be treated as ‘first statement on Merits’ in terms of Section 8 of the Indian Arbitration Act. Detailed analysis of the notice is given below:
Parties had two separate arbitration clauses in two separate agreements. Haier Telecom (India) (HTI) filed an application before the High Court under Section 8 of the Indian Arbitration Act to refer the parties to arbitration since there is/are arbitration agreement(s) between the parties. This was rejected by the High Court on the ground that the said application was filed by HTI after it had filed its application seeking leave to defend under Order 37 Rule 3 of the CPC, in the Drive India Enterprise’s (DIE) summary suit.
Applicable Legal Principles
Section 8 of the Indian Arbitration Act
“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 sub-section (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.”
Order 37, Rule 3(5) of CPC
“ORDER XXXVII : SUMMARY PROCEDURE
3 Procedure for the appearance of defendant
(5) The defendant may, at any time within ten days from the service of such summons for judgement, by affidavit or otherwise disclosing such facts as may be deemed sufficient to entitle him to defend, apply on such summons for leave to defend such suit, and leave to defend may be granted to him unconditionally or upon such terms as may appear to the Court or Judge to be just:
Provided that leave to defend shall not be refused unless the Court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defence to raise or that the defence intended to be put up by the defendant is frivolous vexatious:
Provided further that, where a part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit shall not be granted unless the amount so admitted to be due is deposited by the defendant in Court.”
Clause in Product Purchase Agreement
“19. GOVERNING LAW AND DISPUTE RESOLUTION
19.1.1 Any and all disputes, controversies, issues or claims that may arise between the Parties have not been able to settle in accordance with the provisions herein shall be submitted to arbitration.
19.1.2 It is further agreed that the Indian Arbitration and Conciliation Act, 1996 and any statutory amendment or re-enactment thereof for the time being in force shall be applicable to such arbitration proceedings under the Agreement.”
Clause in Logistics Agreement
“This agreement shall be construed to be governed and interpreted in accordance with the laws of India. In case the parties are unable to amicably resolve disputes related to or arising out of one or more of the provisions of this agreement, the parties agree that the same shall be settled by an arbitration under arbitration and conciliation Act, 1996 and the rules framed there under and that the judgment upon the award may be entered at the court of judicature at Mumbai.”
Divergent Issues of High Courts on the Subject
Madras High Court in the case of G. Rajarajan v. AIG Consumer Financial Services (India) Ltd., 2012 SCC OnLine Mad 2717, has held,
“…Thus, for effectively filing an Application under Section 8 of the Arbitration and Conciliation Act 1996, the Petitioner should first be granted leave to defend the Suit. It is to be noted at this juncture that a defence may include questioning the jurisdiction of the Court or maintainability of the Suit also. Thus, it is not necessarily to be construed that when a person seeks permission under Order 37, Rule 3(5), to defend the Suit, he has submitted to the jurisdiction of the Court and consequently had given up his right to refer the matter to the arbitration in spite of presence of an arbitration clause in the agreement. It is also to be noted that filing a Petition under Order 37, Rule 3(5), C.P.C. does not mean filing of statement as contemplated under Section 8 of the Arbitration and Conciliation Act, 1996.”
Delhi High Court in the case of Anis Ahmad v. Hongkong & Shanghai Banking Corpn., 2005 (83) DRJ 122, wherein it was held that an application for leave to defend under Order 37 Rule 3 is the first statement on the merits by the defendant.
Bombay High Court (Nagpur Bench) vide Order dated 26.08.2008 in Stellar Industries v. M/s International Combustion (India) Ltd., WP No. 3251/2006, had held that application for leave to defend cannot be called a ‘first statement’ under Section 8 of the Arbitration Act.
Whereas Bombay High Court (Principal Bench at Mumbai) vide Order dated 30.06.2009 in M/s DC Textile Mills Pvt. Ltd. v. Mr. Keval Kishan Arora, SJ No. 343/2008 in SS No. 2066/2008, held that the reply of the defendant to the summons for judgment would be his first statement on the substance of the dispute as contemplated under Section 8.
Earlier rulings of Supreme Court on the Subject
Defiance Knitting Industries (P) Ltd. v. Jay Arts, (2006) 8 SCC 25
In this case, the Supreme Court of India has laid down the principles to be followed by a court while granting leave to defend in the following words:
“13. While giving leave to defend the suit the court shall observe the following principles:(a) If the court is of theopinion that the case raises a triable issue then leave to defend should ordinarily be granted unconditionally. SeeMilkhiram (India) (P) Ltd.v.Chamanlal Bros.[AIR 1965 SC 1698 : 68 Bom LR 36]. The question whether the defence raises a triable issue or not has to be ascertained by the court from the pleadings before it and the affidavits of parties….”
Rashtriya Ispat Nigam Ltd. v. Verma Transport Co., (2006) 7 SCC 275
In this case, the Supreme Court of India laid down the principles to determine the expression ‘first statement of the dispute’ to mean a statement which goes into the main proceedings.
The Court presumed the existence of arbitration agreement between the parties based on an earlier application filed by DIE for interim measures under Section 9 of the Indian Arbitration Act. The Court noticed that HTI, in its application seeking leave to defend, has questioned the maintainability of the DIE’s suit and thereafter, it has followed up with an application to refer the parties to arbitration under Section 8 of the Indian Arbitration Act.
Therefore, the Court had issued a notice to answer this question as to whether or not, under no circumstances, can the action of HTI of filing an application to refer the parties to arbitration, be construed to mean that HTI has acquiesced to the jurisdiction of the Court to hear DIE’s summary suit, and waived its right to invoke the arbitration clause.