Case Name

Taru Meghani & Ors. v/s Shree Tirupati Greenfield Developers & Ors.

Provisions/Acts referred to

Section 8 of Arbitration and Conciliation Act, 1996
Order II Rule 6 of Code of Civil Procedure, 1908

Facts of the Case

Basis the representation made by the Defendants that a handsome return could be earned if an investment was made in the projects being developed by Defendant No. 1, the Plaintiffs collectively advanced a sum of Rs. 54 lakhs to the Defendants in two tranches. The initial investment was of Rs. 35 lakhs regarding which a Memorandum of Understanding dated 22nd July 2014 (“MOU”) was executed. The terms of the MOU bore assurance by the Defendants that the said amount of Rs. 35 lakhs would be repaid to the Plaintiffs along with interest @ 33% per annum at quarterly rest. The Defendants paid interest @ 33% per annum to the Plaintiffs as agreed, till December 2015. Thereafter, Plaintiff Nos. 2 and 3 advanced a further sum of Rs. 19 lakhs to the Defendants for which the Defendants drew bills of exchange in favour of Plaintiff Nos. 2 and 3. The Defendants had drawn cheques towards the repayment of the said total amount of Rs. 54 lakhs to the Plaintiffs. However, the cheques were returned on presentment, upon which the commercial summary suit for recovery of the total sum advanced along with interest amounting to Rs. 1,24,08,764.54/-, was filed against the Defendants in the Hon’ble High Court at Bombay.

The Defendants filed an Interim Application seeking the reference of the dispute forming the cause of action in the commercial summary suit, to arbitration, in view of an arbitration clause in the MOU. The defendants contended that the transaction between the parties was of an investment in the project being developed by the defendants, which was encaptured under the MOU bearing the following arbitration clause:

“If at any time, any dispute, difference or question shall arise, between the parties hereto, touching, pertaining, affecting concerning or relating to the terms of this MOU or meaning of these presents or the rights or liabilities, hereunder, which cannot be resolved by or between the parties themselves, then, every such dispute, difference or question shall be referred to an arbitrator to be appointed by the parties under the provisions of Arbitration and Conciliation Act, 1996 or any statutory amendment or re-enactment thereof.”

The Plaintiffs resisted the application contending that there were a series of transactions between the Plaintiffs and the Defendants and some of the transactions were not covered by the MOU, though forming part of one and the same bargain. In the case at hand, the subsequent loan of Rs. 19 lakhs is not covered by the MOU. The said advance is against the bills of exchange, which falls out of the purview of the dispute covered by the arbitration clause in the MOU. Thus, the subject matter of the suit cannot be bifurcated and the application under section 8 of the Act, therefore, becomes untenable. It was further contended that the plaintiffs are the senior citizens and in the event of reference of the dispute to arbitration, the plaintiffs would be required to wait for an indefinite period for an admitted claim.

Submissions made by the Advocate for the Plaintiffs

1. The Advocate for the Plaintiffs, without disputing the execution of the MOU and the arbitration clause therein, submitted that as regards the first tranche of Rs. 35 lakhs, in the peculiar facts of the case when there were multiple transactions between the parties, resulting in as many as five suits (being total no. of suits filed by the Plaintiffs and other investors against the Defendants impleaded in the present case), the reference of the dispute to arbitration would result into conflicting decisions in diverse proceedings.



2. It was further submitted by the Advocate for the Plaintiffs that the present case involved a legal challenge regarding impermissibility of bifurcation of the subject matter of the dispute, for referring a part of the dispute to arbitration and adjudicating the rest by the Court. It was submitted that in the present suit the Plaintiffs sought to recover an amount which was not advanced under the MOU, i.e. sum of Rs. 19 lakhs, along with the amount paid as a part of the transaction encapsulated in the MOU bearing the arbitration clause and thus, the dispute in respect of repayment of the said amount of Rs. 19 lakhs advanced against the bills of exchange was not governed by the arbitration clause in the MOU. The referral of the entire dispute to arbitration would necessarily involve the reference of such a dispute to arbitration which is not covered by the arbitration clause in the MOU. Strong reliance was placed by the Advocate for Plaintiffs on the judgment of the Supreme Court in the case of Sukanya Holdings (P) Ltd. Vs. Jayesh H. Pandya & Anr to support his submissions.

Submissions made by the Advocate for the Defendants

The Advocate for the Defendants submitted that the arbitration clause in the MOU is required to be given effect to and that there was no dispute about the existence of the arbitration clause in the MOU dated 22nd July 2014 under which the sum of Rs. 35 lakhs was initially advanced. In the backdrop of the undisputed contract between the parties, there is no other go but to make an arbitral reference under section 8 of the Act.

Question arising in the Dispute/ Issues involved in the Dispute

1. Whether the effect and force of the arbitration clause gets diluted on account of inclusion in the suit, a claim in respect of a dispute which is not governed the arbitration clause / by adding a claim over and above the claim in respect of the matter which is squarely covered by arbitration agreement?



2. Whether, in the facts of the present case, there would be splitting of cause of action in the event the arbitration agreement in the MOU is given effect to and whether such splitting is permissible and plausible?

Observations by the Court

1. The arbitration clause in the MOU was comprehensive and covered all the disputes including the failure on the part of the Defendants to repay the amount, as agreed, so far as the first transaction of disbursement of Rs. 35 lakhs was concerned. Further, all the conditions necessary to exist for the Hon’ble Court to exercise its powers under Section 8 of the Act, appear to have been satisfied with respect to the transaction of payment of first tranche of advance amount of Rs. 35 lakhs.



2. The Plaintiffs were within their rights in joining multiple causes of action against the Defendants as per the provisions of Order II Rule 3 of the Code of Civil Procedure (“CPC”) but alongside, Order II Rule 6 of the CPC authorizes the Court to order separate trials or make other order as may be expedient in the interest of justice, where the joinder of causes of action in one suit, though permissible under Rule (3)(1), would result in embarrassment, inconvenience or delay. Therefore, 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, the Court cannot be said to be divested of its authority to direct separation of causes of action if the joinder of causes of action in pursuance of an enabling provision like Order II Rule 3 has the effect of defeating the provisions of a special law like section 8 of the Act. The question posed by the facts of the case is required to be considered from the perspective of the legislative object contained in section 8 of the Act



3. Reference to the case of Sundaram Finance Limited & Another Vs. T. Thankam was drawn by the Hon’ble Court wherein the Supreme Court delineated the approach expected of the Civil Court in dealing with an application under section 8 of the Act. Following the legal position laid down in the aforesaid judgment, the Hon’ble Court opined that the submission on behalf of the plaintiffs that the reference of the dispute to arbitration as regards the first transaction, would entail the bifurcation of the subject matter of the suit and, thus, it is impermissible in law, could not be accepted in an unqualified manner. Consideration of such a submission was accompanied with a grave peril of an arbitration agreement being defeated by simply adding a cause of action that the plaintiff may have against the defendants which is not covered by the arbitration agreement.



4. The Hon’ble Court pertinently observed: “If such a course is readily accepted, it has the propensity to give a long leash to the plaintiff to circumvent the arbitration agreement by uniting a cause of action which is beyond the purview of the arbitration agreement. It would have the effect of denuding section 8 of the Act of its force and vigour. Such an interpretation would also derogate from the object which the Arbitration and Conciliation Act, 1996 is intended to achieve; of minimum judicial intervention where parties have agreed to arbitrate the dispute.”

Held

The Hon’ble Court partly allowed the Interim Application and in exercise of its power under Order II Rule 6 of CPC, referred the dispute in the present suit to the extent of the first transaction of Rs. 35 lakhs was concerned to arbitration, as it was squarely covered by the arbitration clause and all the conditions of section 8 of the Act were fulfilled. With respect to recovery of the remainder amount of Rs. 19 lakhs along with interest, liberty was granted to the Plaintiffs to institute a fresh suit in the Court of competent jurisdiction. The commercial suit was accordingly disposed of.

Conclusion

Through the present judgment, the Bombay High Court once again outlines the prevalence of arbitration clause and agreement once parties decide to include the same in a contract/agreement executed between them. It is reaffirmed that once the Court finds all conditions of a valid arbitration clause or agreement to be existing in a contract, the Court shall uphold such an arbitration clause or agreement. Further, parties cannot circumvent or escape the enforceability of an arbitration clause or agreement by merging a dispute arising under such a contract, with a cause of action lying beyond the scope of the said arbitration clause or agreement. The present judgment also firmly elucidates that though the Arbitration and Conciliation Act, 1996 provides for a very restricted scope of application of Code of Civil Procedure, 1908 in conduct of arbitral proceedings, the Courts can exercise powers under the Code of Civil Procedure, 1908 in dealing with matters where intervention by Courts is permitted under the Arbitration and Conciliation Act, 1996 and the narrow scope of application of the Code does not stand in absolute terms. The present judgment clarifies that whenever there are multiple actions performed in continuation of a particular transaction, it is not necessary for all such actions to be merged and tried as a joint cause of action. Under no circumstances can any action defeating or attempting to defeat the arbitration clause or agreement, be entertained and the Courts shall not hesitate from taking a step further to segregate such a merged cause of action in the manner prescribed under the Code of Civil Procedure to ensure non-divergence from the ambit of the arbitration clause or agreement.