Allowed

Rathi Steel and Power Limited v. Shri Ram Lime Products Pvt. Ltd.

Rajasthan HC10 Mar 2021CMA/250/2019

Case brief

AI extract

What is this about?

The High Court allowed an appeal against the rejection of a Section 8 application for arbitration. The court held that the Commercial Court erred by not deciding the existence of a valid arbitration agreement prima facie at the referral stage and instead postponing the decision to a later date for evidence, rendering the lower court order to be set aside and remanded.

What did the court decide?

The order dated 15/11/2018 passed by the Commercial Court, Jodhpur is set aside and the matter remanded to the Commercial Court for re-determining the application on merits.

Rathi Steel and Power Limited Vs Shri Ram Lime Products Pvt… — Arbitration | Rajasthan HC (2021)

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HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR

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D.B. Civil Misc. Appeal No. 250/2019

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Rathi Steel And Power Limited, A-3, Industrial Area, South Of G.t. Road, Ghaziabad - 201009 (U.p.)

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----Appellant

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Versus

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Shri Ram Lime Products Pvt. Ltd., Having Office At 39-A, Shree - Kunj, Dharam Narayan Ji Ka Hatta, Paota, Jodhpur. Rajasthan - 342006

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----Respondent

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For Appellant(s) : Mr. Ashish Khurana through V.C. Mr. P.S.Chundawat. For Respondent(s) : Mr. Prateek Gattani. Mr. Falgun Buch.

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HON'BLE MR. JUSTICE SANGEET LODHA HON'BLE MR. JUSTICE ARUN BHANSALI Judgment

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PER HON’BLE ARUN BHANSALI, J.

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10/03/2021

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REPORTABLE

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This appeal under Section 37 (a) of the Arbitration and Conciliation Act, 1996 (‘the Act’) read with Section 13 of the Commercial Courts Act, 2015 (‘the Act, 2015’) is directed against the order dated 15/11/2018 passed by the Commercial Court, Jodhpur, whereby, the application filed by the appellant under Section 8 of the Act has been rejected.

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The suit was filed by the respondent against the appellant and its Directors for recovery of sum of Rs.71,26,096/- before the District Judge, Jodhpur (Metro), which was initially transferred to the court of Addl. District Judge No.2, Jodhpur (Metro).

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(2 of 8)

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[CMA-250/2019]

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On being served with the summons in the suit, an application was filed by the appellant – company under Section 8 of the Act seeking reference of the parties to arbitration in view of existence of arbitration clause between the parties.

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Reply to the application was filed by the respondent-plaintiff contesting the application filed by the appellant-defendant. It was alleged that the documents filed with the application were concocted and no such purchase orders were issued to the defendant company. Along with the reply, original purchase orders were produced and it was claimed that on the back of said purchase orders, there were no conditions printed including the arbitration clause.

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Further submissions have been made that there was huge difference between the purchase orders produced by the appellant and those produced by the respondent and as such, in absence of any arbitration clause between the parties, the matter cannot be referred to the arbitrator.

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Later on, suit came to be transferred to the Commercial Court, Jodhpur by order of the District Judge, Jodhpur (Metro) dated 12/9/2018. After hearing the parties, the Commercial Court by its impugned order dated 15/11/2018 rejected the application under Section 8 of the Act.

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Learned counsel for the appellant submitted that the Commercial Court was not justified in rejecting the application. Submissions were made that as the purchase orders produced by the appellant contain the arbitration clause between the parties, in view of the mandatory provisions of Section 8 of the Act, it was incumbent on the Commercial Court to refer the parties to

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(3 of 8)

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[CMA-250/2019]

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arbitration, failure to refer the parties, is contrary to the mandate of law and, therefore, the order impugned deserves to be quashed and set aside.

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Further submissions were made that the Commercial Court on the one hand observed that the defendant must take all its objections in the written statement and, thereafter, after framing of the issues the same would be decided on merits after evidence is led by the parties and on the other hand rejected the application, which is contradictory in nature and, therefore, the order impugned deserves to be set aside.

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Learned counsel for the respondent vehemently opposed the submissions. It was submitted that the Commercial Court rightly rejected the application inasmuch as absolutely incorrect averments were made in the application filed under Section 8 of the Act accompanied with concocted documents. The original purchase orders did not indicate any conditions as claimed, which purchase orders were produced before the court and in absence of any arbitration clause between the parties, the application was liable to be rejected and, therefore, no interference is called for in the order impugned and the appeal deserves to be dismissed.

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We have considered the submissions made by learned counsel for the parties and have perused the material available on record as well as the record, which was summoned from the Commercial Court.

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The plaintiff filed the suit for recovery in which the present application under Section 8 of the Act was filed along with the copies of purchase orders inter alia indicating that the terms and conditions of purchase includes arbitration clause between the

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(4 of 8)

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[CMA-250/2019]

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parties and, therefore, the dispute raised by the plaintiff in the suit deserves to be referred to arbitration.

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As noticed hereinbefore, the respondent-plaintiff filed reply to the application and made allegations that the purchase orders annexed with the application were concocted and that the original purchase orders issued to the plaintiff did not contain any terms and conditions of purchase, as alleged, and in absence of any arbitration clause between the parties the matter cannot be referred to the arbitrator and, therefore, the application deserves dismissal. The Commercial Court, in its impugned order came to the conclusion that at the stage of considering the application, this fact cannot be decided as to whether the terms and conditions as indicated in the purchase orders relied on by the defendant exist or not and in case the said aspect is decided, the same would affect the final outcome of the suit and, therefore, indicated as under:

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“,slh fLFkfr esa bl izkjfEHkd Lrj ij ;g vkns”k fn;k tkrk gS fd izfroknh i{k tokcnkok ds tfj;s viuh leLr vkifÙk;ka j[kdj izdV djsaA rRi”pkr U;k;ky; }kjk fook|d cuk;k tkdj fof/kuqlkj mudk xq.kkoxq.k ij ckn lk{; fuLrkj.k djsxkA”

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Whereafter, after making a passing reference to the

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judgments cited by the parties passed the following order:

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“mi;qZDr foospu ds ifjizs{; esa bl Lrj ij izfroknh@izkFkhZ i{k dk ;g izkFkZuki= vkns”k 8 ¼1½ e/;LFkrk ,oa lqyg vf/kfu;e] 1996 [kkfjt fd;k tkrk gSA”

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The provisions of Section 8 of the Act, insofar as relevant for the present controversy, reads as under:

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“8. Power to refer parties to arbitration where there is an arbitration agreement.—(1) 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

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(5 of 8)

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[CMA-250/2019]

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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.”

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(emphasis supplied)

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A perusal of the above provision reveals that in case if a party to the arbitration agreement applies not later than the date of submitting his first statement on the substance of the dispute, the judicial authority before which an action is brought, shall refer the parties to arbitration. The only exception provided is if the authority finds that prima facie no valid arbitration agreement exists.

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Recently, the larger bench of Hon’ble Supreme Court in Vijay Drolia & Ors. Vs. Durga Trading Corporation : 2020 (4) DNJ (SC) 1368 , while dealing with the said provision, inter alia observed as under:

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“86. The courts at the referral stage do not perform ministerial functions. They exercise and perform judicial functions when they decide objections in terms of Sections 8 and 11 of the Arbitration Act. Section 8 prescribes the courts to refer the parties to arbitration, if the action brought is the subject of an arbitration agreement, unless it finds that prima facie no valid arbitration agreement exists. Examining the term ‘ prima facie ’, in Nirmala J. Jhala v. State of Gujarat and Another , (2013) 4 SCC 301, this Court had noted:

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“48. A prima facie case does not mean a case proved to the hilt but a case which can be said to be established if the evidence which is led in support of the case were to be believed. While determining whether a prima facie case had been made out or not the relevant consideration is whether on the evidence led it was possible to arrive at the conclusion in question and not whether that was the only conclusion which could be arrived at on that evidence.”

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Prima facie case in the context of Section 8 is not to be confused with the merits of the case put up by the parties which has to be established before the arbitral tribunal. It is restricted to the subject matter of the suit

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(6 of 8)

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[CMA-250/2019]

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being prima facie arbitrable under a valid arbitration agreement. Prima facie case means that the assertions on these aspects are bona fide. When read with the principles of separation and competence-competence and Section 34 of the Arbitration Act, referral court without getting bogged-down would compel the parties to abide unless there are good and substantial reasons to the contrary.

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Prima facie examination is not full review but a primary first review to weed out manifestly and ex facie non-existent and invalid arbitration agreements and nonarbitrable disputes. The prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced and pellucid and when on the facts and law the litigation must stop at the first stage. Only when the court is certain that no valid arbitration agreement exists or the disputes/subject matter are not arbitrable, the application under Section 8 would be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts…….”

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The Court dealt with the aspect of ‘ prima facie’ and laid down that the ‘ prima facie’ case means that assertions on these aspects are bona fide and that the purpose of prima facie review at the reference stage is to cut the deadwood and trim off the side branches in straight forward cases where dismissal is barefaced when on the facts and law the litigation must stop at the first stage.

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It was further observed that only when the court is certain that no valid arbitration agreement exists or the dispute/subject matter are not arbitrable, the application under Section 8 would be rejected.

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Once the application under Section 8 of the Act has been filed and the same is contested, the decision on the said application cannot be postponed to a future date for the court to frame issues, seek evidence along with other issues and decide the same at the final stage inasmuch as the provisions requiring reference to arbitration are mandatory in nature with the

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(7 of 8)

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[CMA-250/2019]

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exception where prima facie no valid arbitration agreement exists, therefore, at the stage of application under Section 8 of the Act itself the judicial authority is required to determine the existence of a valid arbitration agreement.

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It may be noticed at this stage that the exercise of power under Section 8 of the Act and its determination cannot be compared with decision/determination of an application under Order VII Rule 11 CPC, wherein, only the plaint averments/documents filed with the plaint can be looked into. While determining the application under Section 8 of the Act, the reply to the application and the documents tagged therewith can very well be looked into by the court for making the requisite determination and as the determination is required to be made ‘ prima facie’ and as has been laid down by Hon’ble Supreme Court the prima facie examination is not full review but a primary first review to weed out manifestly and ex-facie non-existent and invalid arbitration agreements and non-arbitrable disputes, the Commercial Court fell in error in not determining the issue prima facie and leaving it to a future date, after the parties lead evidence.

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Besides the above, while on the one hand the court postpone the decision on the issue to a future date, in almost same breath rejected the application filed by the defendant-appellant, which action also cannot be countenanced.

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In view of the above discussion, the appeal is allowed. The order dated 15/11/2018 passed by the Commercial Court, Jodhpur is set aside. The matter is remanded back to the said court for re-

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(8 of 8)

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[CMA-250/2019]

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determining the application on merits in view of the observations made hereinbefore.

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The parties shall appear before the Commercial Court, Jodhpur on the date already fixed by it.

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It is expected of the Commercial Court, Jodhpur to hear and decide the application expeditiously.

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No order as to costs.