November 17 2009
In Radhakrisnan v Maestro Engineers the Supreme Court of India addressed the question of whether courts are bound to refer a dispute to arbitration where there is an express provision to that effect.(1) It concluded that a civil court's power to refuse to stay a suit in light of an arbitration clause and on the existence of certain grounds is within the purview of the Arbitration and Conciliation Act 1996. Further, the court ruled that a civil court is not prevented from proceeding with a suit, despite an arbitration clause, if the dispute involves serious questions of law or complicated questions of fact adjudication which would depend on detailed oral and documentary evidence.
Radhakrisnan (the appellant) had entered into a partnership with Maestro Engineers and others (the respondents) to constitute a partnership firm for the purpose of carrying out engineering works under the name 'Maestro Engineers'. The appellant took an active part in setting up the firm and was instrumental in its construction. However, differences arose between the appellant and the respondents. The appellant sent a notice to the respondents stating that he was dissatisfied with their conduct and asserting that malpractices were rife in the firm, which enjoyed their support. There were also allegations of collusion among the respondents to drive out the appellant's clients and forge the firm's accounts. The appellant offered his retirement from the firm and asked for his share of the salary and profits incurred by the firm.
In response, the respondents admitted the factum of partnership, but denied the rest of the allegations. The appellant then sent a notice stating that the respondents were responsible for the problems that had arisen between the parties, and that it was their responsibility to resolve the disputes amicably between them. Further, through a notice dated November 3 2005 the appellant called upon the respondents to settle the arrears within 15 days and make arrangements for his retirement, failing which he would refer the matter to arbitration.
The respondents subsequently filed for a declaration that the appellant was not a partner of the firm from November 18 2005 (ie, 15 days after November 3 2005), and a permanent injunction to prevent him from disturbing the peaceful running of the firm.
Aggrieved, the appellant filed an application under Section 8 of the Arbitration and Conciliation Act requesting that the court refer the matter to arbitration.(2) This request was rejected by the trial court and in turn by the high court. The high court's decision was challenged before the Supreme Court.
The appellant submitted that in case of any disputes arising between parties, where there is an express provision to that effect (ie, the existence of an arbitration agreement), the civil courts are bound to refer the matter to an arbitrator.
The Supreme Court ruled that since the case related to allegations of fraud and serious malpractice on the part of the respondents, such a situation could be settled only in court through furtherance of detailed evidence by either party. Such a situation could not be properly investigated by an arbitrator.
The Supreme Court was of the opinion that Section 8(1) of the act postulates that only disputes or matters which an arbitrator is competent or empowered to decide can be referred to an arbitrator. In support, it quoted Oomor Sait HG v Asiam Sait,(3) wherein it was held that a civil court can refuse to refer a matter to arbitration if complicated questions of fact or law are involved or where an allegation of fraud has been made. Allegations regarding clandestine business operations under another name, the issuance of bogus bills, accounts manipulation and carrying on similar business without the other partner's consent constitute serious allegations of fraud and misrepresentation; therefore, an application for reference to an arbitrator would be liable to be rejected.
This decision seems to expand the scope of Section 8 of the act insofar as it seeks to widen the power of the courts to refer a matter to arbitration. To date, the established principle of law has been that if there is an arbitration clause in an agreement between parties before the civil court, it is mandatory that the civil court refer the dispute to an arbitrator. However, this judgment seeks to qualify this absolute mandate by introducing certain criteria (eg, the existence of complicated questions of law or fact and allegations of clandestine business operations or the issuance of bogus bills), which would give the court the power to refuse to refer the dispute to arbitration.
For further information on this topic please contact Bishwajit Dubey or Tamal Mandal at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 4159 0700), fax (+91 11 2692 4900) or email (email@example.com or firstname.lastname@example.org).
"Power to refer parties to arbitration where there is an arbitration agreement.
8. (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, and arbitration may be commenced or continued and an arbitral award made."
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