In the case of M/S Sobha Limited v. M/S Nava Vishwa Shashi Vijaya and others, C.M.P. No. 24 of 2022 dated 10.06.2022, the Karnataka High Court held that where the precondition of Conciliation laid down by the parties in the Agreement is not fulfilled, the application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred as “the Act”) will be considered as premature.
FACTS
A Work Order dated 15.01.2014 was entered into between M/s Sobha Limited (hereinafter referred to as “the Petitioner”) and M/s Nava Vishwa Shashi Vijaya (hereinafter referred to as “the Respondent”). The Petitioner was entrusted with the work of designing and constructing a residential building for the Respondent in Bangalore.
The Respondent further alleged that the Petitioner was also entrusted with the construction work of the Respondent in Hyderabad. These construction works were completed by the Petitioner between 2014 to 2018.
After completion, the possession of the buildings was handed over back to the Respondent and the same was accepted by the Respondent without any demur. However, the Respondent failed to pay back the balance amount for the construction work done by the Petitioner.
The Petitioner, after making several requests to the Respondent for payment of the balance amount, issued a Notice dated 14.07.2020 to the Respondent to nominate the Sole Arbitrator by invoking Clause 11 of the Work Order.
The said Clause requires the parties to first resort to Conciliation on the occurrence of any dispute, and if such resolution fails, the dispute is to be resolved through Arbitration by a Sole Arbitrator.
Thereafter, the Respondent denied the claim raised by the Petitioner in its Notice. Thus, the Petitioner being left with no other option, filed the present petition before the High Court under Section 11(6) of the Act for the appointment of an Arbitrator.
ISSUE BEFORE THE HIGH COURT
Whether the present petition of the Petitioner under Section 11(6) of the Act is maintainable with respect to Clause 11 of Work Order?
CONTENTIONS OF THE PARTIES
The Petitioner contended that it was denied balance payment for the work done by it pursuant to the Work Orders, and the Respondent failed to make payment of the balance amount or respond to the Petitioner’s multiple requests for payments.
The Petitioner submitted that a valid Arbitration agreement existed between the parties, and relied on the Supreme Court’s decision in MTNL v. Canara Bank (2020) 12 SCC 767 and Punjab State v. Dina Nath (2007) 5 SCC 28 to establish the same.
The Petitioner, relying upon the decisions of the Supreme Court in Mohd. Masroor Shaikh v. Bharat Bhushan Gupta, Civil Appeal No. 874 of 2022 and Sanjiv Prakash v. Seema Kukreja, Civil Appeal No. 975 of 2021, argued that in an application under Section 11 of the Act, the Court only has a limited scope of interference to examine the presence of Arbitration agreement amongst the parties and it cannot delve further into the review of law or facts.
The Respondent did not present themselves due to certain office objections, and thus, no contentions were raised by the Respondent.
DECISION AND FINDINGS
The High Court observed that there exists a dispute between the parties with respect to the construction work done by the Petitioner at Respondent’s property situated in Bangalore.
Further, the High Court noted that as per Clause 11 of the Work Order, it was agreed by the parties that whenever a dispute shall arise between them, first reference would be made to Conciliation, and thereafter if the dispute remains unresolved, the parties would resort to Arbitration.
The High Court stated that to refer the dispute to Conciliation, a written invitation must be sent by a party to the opponent, and upon acceptance of such invitation by the opponent, the Conciliation proceedings would commence as per Section 62 of the Act.
The High Court observed that in the present case, the language of Clause 11 of the Work Order has made it a precondition for the parties to refer the dispute to Conciliation before any reference is made to Arbitration. However, the Petitioner failed to take any such steps for commencement of conciliation proceedings and directly issued the Notice for invocation of Arbitration.
The High Court noted that an attempt to avoid the precondition of referring to Conciliation was made by the Petitioner by filing the present petition under Section 11(6) of the Act for appointment of Arbitrator, thus rendering the essence of Clause 11 of the Work Order useless.
The High Court relied on the Supreme Court’s decision in M.K. Shah Engineers & Contractors v. The State of M.P., (1999) 2 SCC 594, wherein the principle was laid down that the procedures leading up to Arbitration are of essential nature, and the same must not be avoided or bypassed by the parties. Thus, the High Court held that:
“where an agreed procedure of dispute resolution has been made a condition precedent for invoking the arbitration clause, the same is required to be followed.”
Further, regarding the contention of the Petitioner on the limited scope of interference of this Court Section 11 of the Act, the High Court observed that no question of review of law or fact is being entertained by the Court. The only concern of the High Court is to ensure that a prima facie arbitrable case is made out by the Petitioner at the referral stage under Section 11(6) of the Act.
The High Court noted that a similar view has been reiterated by the Supreme Court in DLF Home Developers Limited v. Rajapura Homes (P) Ltd., 2021 SCC Online SC 781 wherein the Supreme Court stated that even within the limited jurisdiction under Section 11 of the Act, “[this] Court is not denuded of its judicial function to look beyond the bare existence of an arbitration clause to cut the dead wood.”
Further, the High Court relied on the clarification given by the Supreme Court in Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1, wherein it was held that:
“the court may for legitimate reasons, to prevent wastage of public resources, can exercise judicial discretion to conduct an intense yet summary prima facie review while remaining conscious that it is to assist the arbitration procedure and not usurp the jurisdiction of the Arbitral Tribunal.”
Thus, relying upon the aforesaid decisions of the Supreme Court, the High Court held that the petition under Section 11(6) of the Act is premature and liable to be dismissed, as the precondition of Conciliation before invoking the Arbitration clause under the Work Order was not fulfilled by the Petitioner.
The High Court further made two cursory observations as obiter dicta, that firstly, the Work Order through which the Arbitration agreement came into existence was only with regards to the Bangalore property and not for the Hyderabad property; and secondly, the Petitioner’s claim was time-barred as three years had already lapsed from the date of receipt of last payment to the date of filing the instant petition.
AMLEGALS REMARKS
The existence of a valid Arbitration agreement is essential for invocation of Arbitration proceedings under Section 8 as well as Section 11 of the Act. However, even when the Arbitration agreement exists beyond doubt, if certain steps for resolving a dispute before referring to Arbitration have been agreed to between the parties, the same must be followed by the parties strictly before invoking Arbitration.
Such pre-conditions stipulated in the Arbitration agreement indicate the parties’ willingness and intention to resolve the dispute through a conciliatory medium prior to initiating any legal action. Thus, the essence of such a pre-condition is to ensure the dispute gets resolved without the involvement of unnecessary legal mechanisms.
Hence, the ruling of the High Court effectively directs parties to attempt at settling the dispute through other alternate dispute mechanisms agreed upon between the parties, prior to referring the same to Arbitration. The High Court’s decision is in tune with the objective of the Act, i.e., is to provide speedy dispute resolution with minimal judicial intervention.
– Team AMLEGALS, assisted by Ms. Surbhi Jhanwar (Intern)
For any queries or feedback, please feel free to get in touch with chaitali.sadayet@amlegals.com or riddhi.dutta@amlegals.com.
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