Supreme Court of India: Whether an application seeking leave to defend in a summary suit is a ‘first statement on Merits’ under Section 8 of the Indian Arbitration Act?

Supreme-Court-of-India-1_85138_730x419

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:

Factual Matrix

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.”

Arbitration Clauses

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.

Analysis

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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s