Arbitration In IndiaJurisdiction of Civil Courts in spite existence of an Arbitration Clause – Legal Tug of War

INTRODUCTION

Arbitration is a type of Alternative Dispute Resolution (hereinafter referred to as “ADR”) where both the parties mutually agrees to resolve their dispute by a neutral third person, known as an ‘arbitrator’, instead of going to traditional court for litigation. It is mostly used in commercial disputes. Since litigation is a lengthy and costly process which may cause unnecessary delays in attaining justice as well as over-burdens the Judiciary. To avoid all these issues and to ensure quicker and more affordable justice, people prefer ADR mechanisms  such as arbitration, conciliation, and mediation-of which arbitration is the most widely used.

The arbitration clause becomes one of the most important clauses in an agreement that describes that any dispute will be resolved outside the court with help of an arbitrator, enabling efficient and effective dispute resolution specifying all the components such as whether the  arbitrator’s decision is binding, the number of arbitrators, and the method of their appointment, etc.

Arbitration is based on the idea that both parties have the freedom to choose how they want to settle their disputes and the presence of the arbitration clause in agreement shows their choice. However, civil courts retain inherent jurisdiction under Section 9 of the Civil Procedure Code, 1908 (hereinafter referred to as “CPC”), and  a constitutional duty to ensure justice.

This leads to an important legal question-“Can civil courts still entertain a dispute if the parties have contractually agreed to arbitration and an arbitration clause exists in a contract?” This begs the question, evaluating both scenarios –  when are the civil courts permitted and when can they be prevented from hearing a case, taking reference from recent court judgements.

LEGAL FRAMEWORKS GOVERNING ARBITRATION AND CIVIL COURT’S JURISDICTION

To properly analyse when civil courts can intervene in the presence of an arbitration clause, it is essential to  understand the legal foundation laid down under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”). The Act governs arbitration proceedings in India and reflects the legislative intent to promote arbitration as an effective alternative to traditional litigation.

The Section 5 of the Act provides that no judicial authority shall intervene except where so provided in this part of the Act and Section 8 deals with the power to refer parties to arbitration where there is an arbitration agreement stating that “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.”

Hence, when a valid arbitration agreement exists between the parties and a dispute arises over a subject covered by the agreement, it becomes mandatory for the civil court to refer the matter to arbitration. This Section lays down the basic principle and objective that is to limit the role of civil courts by enforcing the minimum court interference. However, these Sections do not completely exclude the jurisdiction of civil courts and the parties can in fact refer to the court in certain circumstances.

At the same time, CPC lays a general rule by defining the jurisdiction of civil court under sec 9 which states that “civil courts have the authority to adjudicate all suits of civil nature unless their cognizance is either expressly or impliedly barred” based on various aspects such as nature of suit, pecuniary limits, territories, subject matter of suit, etc. It preserves the right of individuals to approach civil court. Under this Section civil court can hear all civil cases unless barred and Section 8 of the Act put a bar in certain situations. Once a party invokes the arbitration clause and asks for reference to arbitration under Section 8 of the Act, the court on basis of the specific terms of the arbitration agreement and Sec 9 of CPC has to decide whether the dispute is barred from the jurisdiction of civil court by virtue of the arbitration agreement or not.

WHEN CIVIL COURTS CANNOT ENTERTAIN A DISPUTE

The general principle, as reflected in both legislation and judicial interpretation, is that once the parties have agreed to resolve their disputes through arbitration, civil courts must stay their hands subject to certain conditions. This pro-arbitration approach is aimed at promoting party autonomy, reducing the burden on courts, and ensuring faster dispute resolution. Sec. 8 of the Act restricts the jurisdiction of civil courts in matters covered by an arbitration agreement with certain conditions.

As per the interpretation of the Act and the judgement in Vidya Drolia v. Durga Trading Corporation (2020) 2 SCC 1, the Supreme Court has laid down the prima facie test for referring a dispute to arbitration mentioning when the following conditions are met, the civil court must refer the dispute to arbitration and cannot proceed with the civil suit:

• There is a valid and enforceable arbitration agreement.
• The dispute raised in the case comes within the scope of the arbitration clause.
• A party applies for reference to arbitration before submitting its first statement on the merits.
• The subject matter of the dispute is arbitral in nature.

Furthermore, the Delhi High Court in ANR International Pvt Ltd v. Mahavir Singhal FAO (COMM) 164/2023 & CM APPL. 40580/2023, observed that the appellant had initially denied the existence of an arbitration agreement in response to a  notice, leading to the Commercial Court to dismiss the application for reference to arbitration.

However, the Court held that that Section 8 of the Act is mandatory in nature and that the Court is bound to refer the disputes to arbitration when a valid arbitration agreement exists between the parties and the respondent makes an application for reference to arbitration before submitting its written statement before the Court.

The Court held that the “Court cannot refuse to refer the dispute to arbitration just on the ground that the defendant had initially while replying to the notice u/s 21, denied the existence of the arbitration agreement”. The Court held that the arbitration clause does not cease to exist with a party’s denial and such a denial would not stop that party from later submitting an application under Section 8 of the Act for referring the dispute to arbitration. The Court held that the doctrine of approbation and reprobation cannot be invoked against the respondent to decline reference to arbitration when the plaintiff does not dispute the existence of the arbitration agreement.

Under the Section 8 of the Act the phrase “notwithstanding any judgment, decree or order of the Supreme Court or any Court” creates an overriding effect over the sec 9 of CPC where the phrase states “expressly or impliedly barred”. Hence, Section 8 of the Arbitration Act is considered a statutory bar that overrides the general jurisdiction under CPC.

Section 16 of the Act, recognizes the doctrine of “Kompetenz-Kompetenz”, which means that the arbitral tribunal is competent to rule on its own jurisdiction. This doctrine restricts the role of civil courts in determining whether a dispute comes within the scope of the arbitration agreement. The court’s role is limited to a prima facie check under Section 8, leaving the detailed examination of arbitrability and jurisdiction to the arbitrator.

Thus, based on the Act’s interpretation and judicial rulings, it is inferred that where a valid arbitration agreement exists and the statutory requirements are met, civil courts are bound to refer the dispute to arbitration. The court’s jurisdiction is effectively ousted, except for a limited prima facie review of the agreement’s validity and the arbitrability of the dispute.

WHEN CIVIL COURTS CAN ENTERTAIN A DISPUTE

Although the Act specifically under Section 5 encourages minimal judicial intervention and mandates referral to arbitration under Section 8, civil courts are not completely ousted of their jurisdiction. Indian Courts have recognized several important exceptions where civil courts can lawfully entertain disputes, even when a valid arbitration clause exists.

These exceptions are drawn from judicial interpretation of the Act, primarily from landmark rulings of the Supreme Court of India, and focus on arbitrability, validity, and public interest.

The Gujarat High Court in  Devshibhai Govindbhai Limbani & Ors. Versus Dhavalbhai Bhogilal Vyas & Ors., R/Civil Revision Application No. 123 of 2019 held that just because there is an arbitration clause which provides for referring the dispute and the claim to the arbitration, the civil court’s jurisdiction is not barred but it is subjected to Section 8 of the  Act.

Further the disputes that are not arbitrable can come under the jurisdiction of civil court. The Supreme Court in  Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors., (2011) 5 SCC 532, clearly held that “only disputes concerning rights in personam i.e., private rights enforceable against a particular individual are arbitrable. And the disputes involving rights in rem i.e., rights enforceable against the world at large are not arbitrable and must be decided by courts”.

When the Arbitration Agreement is invalid or vague, void under law, etc. or inoperative due to expiry or incapable of being performed, the civil court can assume its jurisdiction over such cases and all in such circumstances mentioned in case of Vidya Drolia v. Durga Trading Corporation (Supra). These circumstances are:

• There is not a valid and enforceable arbitration agreement.
• The dispute raised in the suit does not falls within the scope of the arbitration clause.
• A party applies for reference to arbitration after submitting its first statement on the merits.
• The subject matter of the case which is dispute is not arbitral in nature.

In  Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760, the Court clarifies that a party with an interest in the outcome of a dispute cannot unilaterally appoint a sole arbitrator as such a situation raises justifiable doubts about the arbitrator’s independence and impartiality making the arbitration agreement void and relying on sec 12(5) of the Act, the appointment of arbitrator is deemed invalid. Later on, the Supreme Court affirmed that in such cases, the competent court under Section 11 of the Act should intervene and appoint an impartial and independent arbitrator.

Section 8 of the Act, states that “the application for reference to arbitration must be made before the party submits its first statement on the substance of the dispute in the civil court” and if the application is made after filling the written statement, the civil court is not bound to refer the matter to the arbitration.

AMLEGALS REMARKS

The interplay between arbitration clauses and the jurisdiction of civil courts reflects a delicate balance between party autonomy and suprevisory role of the judiciary. While the Act clearly promotes minimal judicial intervention through provisions like Sections 5, 8, and 16, these laws are not absolute. Civil courts retain jurisdiction in certain situations and exceptional cases such as non-arbitral disputes, invalid arbitration agreements, or delays in invoking arbitration to ensure justice is not sacrificed at the altar of procedural technicality.

Judicial decisions, especially those of the Supreme Court and various High Courts have consistently uphold this balance, favouring arbitration where appropriate but guarding against its misuse or wrongful application. The recent rulings affirm that Section 8 of the act operates as a mandatory bar to civil court proceedings, but only when all statutory conditions are met.

Ultimately, the goal of the legal framework is not to oust civil courts entirely, but to encourage arbitration as an efficient and party-driven mechanism, while preserving the supervisory jurisdiction of courts where necessary.

– Team AMLEGALS assisted by Ms. Khushi Jain (Intern).

For any queries or feedback, feel free to reach out to rohit.lalwani@amlegals.com