Arbitration In IndiaCommercial Agreements & Contracts In IndiaNo Addition of Cause of Action to Defeat the Arbitration Clause

August 10, 20200
Tarun Meghani Vs. Shree Tirupati Greenfield
 Commercial Summary suit no. 111/2019 | Decided on 10.01.2020
The Plaintiff and the Defendant had entered into an MoU. On execution of the MoU, the Plaintiff had initially advanced a sum of Rs. 35 Lakhs for a projects that was being developed by the Defendant. In order to attract Plaintiffs confidence in the project, the Defendant paid the agreed interest rate for certain period. Thereafter, the Plaintiff further advanced a sum of Rs. 19 Lakhs to the Defendant.
Cheques drawn by the Defendant for repayment got bounced. Hence, this summary suit had been filed for recovery of amount.Thereby, the Defendant had filed the interim application pleading that the dispute be referred to arbitration pursuant to the arbitration clause in the MoU.
Five suits had already been filed against the Defendant by the Plaintiff and other investors for the transactions not governed by the MoU but for same purpose i.e. the project. The second advancement of Rs. 19 Lakhs was also not governed by the MoU. The Plaintiff defied the application to refer the dispute to arbitration on the ground that the subject matter of the suit cannot be bifurcated.
The following issue was considered by the Supreme Court:
Whether the effect and force of the arbitration clause gets diluted on account of inclusion in the suit, of a claim in respect of a dispute which is not governed by the arbitration clause?
The Plaintiff’s averments were twofold. First, that incase of multiples transactions leading to multiple suits between same parties, reference to arbitration would result in conflicting decisions. Second, that it is legally not valid to bifurcate the subject matter by referring a part of dispute to arbitration and other before the Court. The second advancement was done against the bills of exchange and thus is beyond the scope of the MoU and the arbitration clause incorporated therein.
Thus, the dispute regarding second advancement cannot be refereed to arbitration as it is not covered by the arbitration clause and the dispute regarding amount governed by arbitration clause also cannot be referred to arbitration as that would lead to bifurcation of subject matter that is legally not valid.
The Plaintiff premised its case on the decision of the Supreme Court in the case of Sukanya Holdings (P) Ltd. Vs. Jayesh H. Pandya & Anr., (2003) 5 SCC 531 wherein it has been held that a dispute cannot be referred to arbitration when a suit is filed for claims that are not the subject matter of arbitration clause and by person not party to the arbitration agreement. The Arbitration and Conciliation Act, 1996 (“the Act”) does not permit for splitting of cause to refer the subject matter of suit to arbitration.
The Court inferred from a holistic reading of the provisions of the MoU that the MoU was amply clear about advancements and the terms of repayment including the terms of interest and consequences of the default. Further, the arbitration clause also explicitly covered all and any dispute arising therein including default in repayments. 
The Court further observed that “the language of Section 8 of the Act is peremptory in nature” and thus needs to be interpreted considering the legislative intent. The objective of the provision is to refer the dispute to arbitration pursuant to a valid arbitration agreement and exclude Courts jurisdiction. Thereby, allowing addition of claim over the subject matter covered by the arbitration clause would be against the constructive object of the provision. 
Furthermore, it was observed that there is a significant difference between splitting a cause of action and then each part being made subject matter of different proceedings as against the separation of cause of action that were joined together under the Code of Civil Procedure (CPC).
In the instant case, the Plaintiff has joined multiple cause of action against the same Defendant as permissible under Rule 3 Order II of CPC. On the contrary,  in accordance to Rule 6 Order II of CPC, if the Court is of the finding that the joinder of cause of action would lead to inconvenience and delay, then it is empowered to direct separate trials.
With regards to the first advancement, the Court held that the it cannot be disputed that all the ingredients to refer the dispute to arbitration has been satisfied as there is a valid arbitration clause in the MoU.This led the parties to the agreement to invoke the arbitration clause and subject matter is covered by the arbitration clause.
With regards to the second advancement, the Court rejected the Plaintiffs submission by holding that such submission cannot be sustained as it would lead to frustrating the arbitration agreement by merely making additional of a cause of action. Such an act cannot be permitted as it would defeat the Section 8 of the Act and also the entire objective of the Act.
The Court elucidated that –
“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.”
Conclusively, the Court exercised its power under Order II Rule 6 of the CPC and separate the claims of Rs. 19 Lakhs and directed the first claim of Rs. 35 Lakhs be referred to arbitration.
The Hon’ble Bombay High Court through the judgment has yet again taken a pro arbitration approach and rejected Court intervention attempted through forced joinder of claims. The legislative intent of the Section 8 of the Act of minimising any judicial intervention has been aptly upheld.
This precedent has again resulted into shutting of the gate for flood of cases around these issues at large.The Court has remarkably interpreted Order II Rule 2 and 6 of CPC and identified the strategic joinder to safeguard the objective of the Act.
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