Bombay High Court: Splitting A Single Cause of Action Vs Separating Multiple Causes of Action in an Application Seeking Stay Of Judicial Proceedings in Favour of Arbitration

609231-hc-mumbai-040517

In the case of Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya & Anr (2003) 5 SCC 531, the Supreme Court has inter alia held that where a suit is commenced “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of section 8 of the Arbitration & Conciliation Act, 1996 (Act) seeking mandatory stay of judicial proceedings in favour of arbitration. The words ‘a matter’ indicate that the entire subject matter of the suit should be subject to arbitration agreement. Further, there is no provision in the Act for splitting the causes or parties and referring the subject matter of the suit to arbitrators.

Pertinent portion of Section 8 of the Act which is germane for the issue in moot reads as under:-

Section 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 to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

Thus, from the perspective of the legislative object contained in section 8 of the Act, it is trite that the language of section 8 is peremptory in nature. In the cases where there is an arbitration clause in the agreement, the Court is enjoined to refer the dispute to arbitration in terms of the arbitration agreement and the Court would have no jurisdiction to adjudicate the dispute after such an application seeking a reference under section 8 of the Act.

In Taru Meghani v. Shree Tirupati Greenfield IA No. 1 of 2019 in Comm S No. 1111 of 2019 decided on 10 Jan 2020, the question posed before the Bombay High Court in a Section 8 application was whether this salutary object of the Act be defeated by adding a claim over and above the claim in respect of the matter which is squarely covered by arbitration agreement ?

Applicants/Defendants contentions

The Applicant/defendants who have preferred the application under Section 8 contended that the transaction between the parties was of an investment in the project which was being developed by the defendants which was evidenced by a Memorandum of Understanding (MOU) containing an arbitration clause. Further, the plaintiffs have approached the Court with a claim for recovery of an amount advanced thereunder and the dispute is clearly covered by the arbitration clause. Therefore, the reference under section 8 of the Act is warranted.

Plaintiff’s contention

The Plaintiffs have resisted the application and averred that there was a series of transactions between the parties which culminated into five suits instituted against the defendants by the plaintiffs and other investors. Some of the transactions are not covered by MOU, though forming part of one and the same bargain. In the case at hand, the plaintiffs had initially advanced a sum of Rs. 35 lakhs (First Trench) followed by a subsequent loan of Rs. 19 lakhs (Second Trench) against the bills of exchange, which falls out of the purview of the dispute covered by the arbitration clause in the MOU. Thus, the subject matter of the suit cannot be bifurcated and the application under section 8 of the Act, therefore, becomes untenable.

Further, the plaintiffs contended that despite there being an arbitration clause, in the peculiar facts of the case, when there are multiple transactions between the parties, resulting in as many as five suits, the reference of the dispute to arbitration would lead to conflicting decisions in diverse proceedings.

Placing reliance on Sukanya Holdings the plaintiffs mounted a legal challenge based on impermissibility of bifurcation of the subject matter of the dispute for referring a part of the dispute to arbitration and adjudicating the rest by the Court. This submission was premised on the ground that in the case at hand, the plaintiffs seek to recover an amount which was not advanced under the MOU i.e. the Second Trench. The arbitration clause thus does not govern the dispute in respect of repayment of the Second Trench, advanced against the bills of exchange. Resultantly, if the submission on behalf of the defendants of referral of the entire dispute to arbitration is accepted, it would necessarily involve the reference of the dispute to arbitration, which is not covered by the arbitration clause. Conversely, the dispute as regards the amount covered by the MOU also cannot be referred to arbitration as it would entail the consequence of the bifurcation of the subject matter of the dispute, which is legally impermissible.

Judgement

The Court observed that reading of the clauses of MOU leads to a legitimate inference that not only the amount  was advanced (the First Trench) under the MOU, but the terms of  repayment,  including  the interest at which the amount was to be repaid and the consequences, in the event of  default in repayment, were explicitly provided therein. In this backdrop, reverting to the arbitration clause contained in MOU, the Court found that it becomes crystal clear that the arbitration clause is comprehensive and covers all the disputes including the failure on the part of the defendants to repay the amount, as agreed.

Thus, in the facts of the case, the Court held that, in so far as the First Trench is concerned, all the ingredients of Section 8 appear to have been satisfied, in the sense that, there is an arbitration clause in the MOU; the plaintiffs, who are parties to the said agreement, have brought an action based thereon, the subject matter of the action is governed by the arbitration clause and the defendants have sought referral of the parties to arbitration before the defendants have submitted their first statement on the substance of the dispute.

However, the question which cropped up for consideration of the Court was whether there would be splitting of cause of action in the event the arbitration agreement in the MOU is given effect to in respect of Second Trench. The Court noticed that there appears a fine distinction between splitting of a single cause of action into parts, each being made a subject matter of a distinct proceedings and the separation of causes of action which are joined together, albeit in conformity with the provisions of the Code of Civil Procedure, 1908 (Code).

The Court observed that by virtue of Rules 3 and 6 of Order II of the Code, the plaintiffs are within their rights in joining multiple causes of action against the defendants. Rule 3 provides for joinder of causes of action and permits the plaintiffs to unite in the same suit, several causes of action against the same defendants. The remedy for any possible embarrassment, delay or inconvenience on account of the joinder of causes of action in one suit is provided in Rule 6. It authorizes the Court to order separate trials or make other order as may be expedient in the interest of justice, where the joinder of causes of action in one suit, though permissible under Rule (3)(1), would result in embarrassment, inconvenience or delay.

Thus, on the one hand, the Code permits the plaintiff to unite multiple causes of action against the same defendants in one suit. On the other hand, in the event of possibility of embarrassment, delay or inconvenience, the court is empowered to direct separate trials or pass such other order as would advance the cause of justice. If a Court is empowered to order separate trial when it finds that the joinder of causes of action would embarrass or delay the trial or it is otherwise inconvenient, a fortiori a Court cannot be said to be divested of the authority to direct separation of causes of action when the joinder of causes of action, in pursuance of an enabling provision like Rule 3 has the effect of defeating the provisions of a special law, like section  8 of the Act.

In other words, the Court held that it has power to direct separation of causes of action and order separate trial for each of such causes of action when joinder of such causes of action has the effect of defeating the purpose of Section 8 of the Act i.e. mandatory stay of judicial proceedings in favour of arbitration.

Applying the above analysis in the peculiar facts of the case, the Court held that it would be justified in referring the dispute to arbitration in respect of First Trench, as it is squarely covered by the arbitration clause provided under MOU and all the conditions of section 8 of the Act are fulfilled. In respect of Second Trench the Court exercising its power under Order II Rule 6 of the Code directed the plaintiffs to institute a separate suit.

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