Arbitration In IndiaRight to refer Dispute to Arbitration cannot be kept in the Sleeve and used at Will

The High Court of Karnataka, in the case of Y Harish and Anr. v. Y Satish and Ors., Writ Petition Number 10716 of 2022 decided on 01.07.2022, held that once a party waives off the right to refer the dispute to Arbitration, it cannot be reclaimed by such party at a later stage.

FACTS

Dispute arose between Mr. Y Satish (hereinafter referred to as “the Respondent”) and Mr. Y Harish (hereinafter referred to as “the Petitioner”) and the Respondent served a Legal Notice to the Petitioner to refer the dispute to Arbitration.

The Petitioner subsequently objected to the reference to Arbitration and appointment of Arbitrator thereof vide its Reply Notice, on the ground that the dispute between the parties did not fall within the ambit of the Arbitration Clause.

Thereafter, the Respondent filed a suit before the Commercial Court for the recovery of a sum of Rs.7,34,12,647/- from the Petitioner. Following the receipt of summons, the Petitioner filed the present application under Order 7 Rule 11(d) read with Section 151 of the Code of Civil Procedure, 1908 (“CPC”) before the Commercial Court, seeking rejection of the Respondent’s suit as being not maintainable due to the fact that the Respondent had already referred the dispute to Arbitration.

The Commercial Court rejected the Petitioner’s application as the Petitioner had previously objected to the appointment of Arbitrator on the ground that dispute does not fall within the Arbitration Clause, and he could not later turn around and claim that the Respondent’s suit is not maintainable. The Commercial Court further observed that the Petitioner had waived off its right to Arbitration, and could not at a later date insist the Respondent to adopt the recourse of Arbitration.

Aggrieved, the Petitioner filed the present Writ Petition before the Hon’ble High Court of Karnataka to set aside the impugned order passed by the Commercial Court.

ISSUES BEFORE THE HIGH COURT

1. Whether the Commercial Court possesses the jurisdiction under per Section 11 of the Commercial Courts Act, 2015?
2. Can the right to refer the dispute to Arbitration be claimed after waiving it off?

CONTENTIONS OF THE PARTIES

The Petitioner contended that the Respondent issued a legal notice invoking the Arbitration clause and to commence the Arbitration proceedings. As a result, the Respondent’s suit before the Commercial Court is precluded under Section 11 of the Commercial Courts Act, 2015.

The Petitioner further submitted that the Respondent’s only recourse at this junction is to make an application for the appointment of an Arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”).

The Petitioner relied on the Supreme Court’s decision in Mohammed Masroor Shaikh v. Bharat Bhushan Gupta and others, Civil Appeal No. 874 of 2022, and argued that the first authority to determine and decide the question of non-arbitrability shall be the Arbitral Tribunal.

Further, reliance was also placed on the Supreme Court’s decision in Kvaener Cementation India Limited v. Bajranglal Agarwal and Another, (2012) 5 SCC 214, wherein it was held that Section 16 of the Act expressly states that the Arbitral Tribunal has the authority to rule on its own jurisdiction even if an objection is raised regarding the presence or legality of the Arbitration agreement.

The Petitioner stated that once the Arbitral proceedings begin, they can be terminated only in the manner prescribed by law under Section 32 of the Act, and thus, the Petitioner argued that the present suit was wholly without jurisdiction.

Further, the Petitioner contended that Section 11 of the Commercial Courts Act, 2015 prohibits a Commercial Court from considering or determining any suit pertaining to commercial issues over which the jurisdiction of a Civil Court is expressly or implicitly limited by law.

The Respondent referred to the principles laid down by the High Court of Madhya Pradesh in the case of Dhulabhai etc. v. State of Madhya Pradesh and Anr., AIR 1969 SC 78 and contended that the exclusive jurisdiction of a Civil Court should not be readily inferred.

The Respondent further placed reliance on the decision of the High Court of Karnataka in P. Tarachand v. Seshamal M. Jain and Ors., 2019 SCC Online Kar 2768 and contended that Section 8 of the Act only seeks to nullify the jurisdiction of the Civil Court. Thus, the Respondent stated that the Civil Court’s jurisdiction is ousted only after the dispute is referred to Arbitration, and a party is deemed to waive off its right to seek reference to Arbitration if it does not comply with the requirements under Section 8 of the Act by filing an application within time.

The Respondent argued that the Petitioner cannot claim that the Commercial Court lacks jurisdiction without filing a separate application under Section 8 of the Act, and the Commercial Court is under a duty to determine whether its jurisdiction has been ousted.

DECISION AND FINDINGS

The High Court examined the contents of the Reply Notice served by the Petitioner in response to the Respondent’s Legal Notice for invocation of Arbitration, and held that the Petitioner had waived off its right to refer the dispute to Arbitration by contending that the dispute is not arbitrable as it does not fall squarely within the Arbitration Clause.

Thus, the High Court observed that the Petitioner’s stand in the Reply Notice tantamounts to waiving off the right to settle the dispute through Arbitration. The High Court stated that:

“Therefore, what emerges from the stand taken in the reply notice is that the petitioners have already waived off their right and if a right once waived cannot be allowed to be reclaimed.”

The High Court ruled that Section 8 of the Act requires a formal, independent, and specific application, made before or at the time of filing of the written statement seeking reference of the dispute to Arbitration. The High Court further noted that the Petitioner till date did not seek recourse to Section 8 of the Act, and had only filed an application under Order 7 Rule 11(d) of the CPC seeking rejection of the Respondent’s plaint on the ground that it was barred by law.

Thus, the High Court held that the order of the Commercial Court does not warrant any interference by the High Court, and observed that the Petitioner’s “rights cannot be kept in the sleeve and used at will.” As the Petitioner previously disputed the existence of Arbitration agreement insofar as the present dispute is concerned, the High Court inferred that the Petitioner waived their right to resolve the said dispute by Arbitration. Resultantly, the High Court dismissed the Writ Petition.

AMLEGALS REMARKS

In the instant case, the Petitioner contested and denied the existence of the Arbitration agreement in relation to the dispute raised by the Respondent in its Reply Notice. As a result, the High Court held that the Petitioner renounced its right to have the dispute resolved through Arbitration.

Taking into consideration the Petitioner’s position in his Reply Notice, the High Court opined that the Petitioner could not argue at a later stage that the Arbitral proceedings had already commenced and thus, the Respondent’s claim was barred by law.

Through this decision, the High Court emphasized on the principle of Arbitration law that once the right to refer the dispute to Arbitration is waived off by a party, it cannot be reclaimed by that party at a later stage. Thus, a party to an Arbitration agreement cannot keep the right to Arbitrate in its sleeve and use it at will.

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