Case Note & Summary
The petitioner, Escorts Limited (defendant No.1), filed a Civil Revision Application challenging the order of the 3rd Joint C.J.S.D., Aurangabad, dated 14.12.2010, rejecting its application under Section 8 of the Arbitration and Conciliation Act, 1996 in Special Civil Suit No. 410 of 2010. The respondent No.1, Subhash Zambad (plaintiff), proprietor of Sohamm Distributors, had filed the suit seeking a declaration that the defendant No.1 had no right to invoke a bank guarantee issued by respondent No.2 bank, and for a perpetual injunction restraining the defendants from dealing with the bank guarantee. The plaintiff had been appointed as a non-exclusive distributor of the defendant No.1's products under a dealership agreement dated 17.9.2007, which was renewed up to 16.9.2011. The agreement contained an arbitration clause. The defendant No.1 invoked the bank guarantee, leading to the suit. The trial court rejected the Section 8 application on the ground that the bank guarantee was an independent contract and not covered by the arbitration agreement. The High Court allowed the revision, holding that the dispute arose out of the dealership agreement and the bank guarantee was a security furnished under that agreement. The court emphasized that under Section 8, the judicial authority must refer the parties to arbitration if an arbitration agreement exists, without examining the merits or scope of the dispute. The order of the trial court was set aside, and the parties were directed to appear before the arbitrator. The court also noted that the plaintiff could seek interim relief under Section 9 of the Act.
Headnote
A) Arbitration Law - Reference to Arbitration - Section 8 of the Arbitration and Conciliation Act, 1996 - Mandatory Reference - The court held that once the existence of an arbitration agreement is prima facie established, the judicial authority is bound to refer the parties to arbitration and has no discretion to refuse. The trial court erred in examining the merits of the dispute or the scope of the arbitration clause at the stage of Section 8 application. (Paras 7-10) B) Arbitration Law - Bank Guarantee - Subject Matter of Arbitration - Section 8 of the Arbitration and Conciliation Act, 1996 - The dispute regarding invocation of bank guarantee arose out of the dealership agreement containing an arbitration clause. The court held that the bank guarantee is not an independent contract but a security furnished under the dealership agreement, and therefore the dispute is covered by the arbitration agreement. (Paras 5-6) C) Civil Procedure - Interim Relief - Section 9 of the Arbitration and Conciliation Act, 1996 - The court clarified that the plaintiff is not left remediless as it can seek interim relief under Section 9 of the Act before the arbitrator or the court. The rejection of the Section 8 application does not affect the plaintiff's right to seek appropriate interim measures. (Para 10)
Issue of Consideration
Whether the trial court was justified in rejecting the application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking reference of the dispute to arbitration, on the ground that the subject matter of the suit (bank guarantee) is not covered by the arbitration agreement.
Final Decision
The Civil Revision Application is allowed. The order dated 14.12.2010 passed by the 3rd Joint C.J.S.D., Aurangabad below Exh.27 in Special Civil Suit No. 410 of 2010 is set aside. The application tendered by the defendant No.1 under Section 8 of the Arbitration and Conciliation Act, 1996 is allowed. The parties are directed to appear before the arbitrator in accordance with the arbitration clause. The plaintiff is at liberty to seek interim relief under Section 9 of the Act. No order as to costs.
Law Points
- Section 8 of the Arbitration and Conciliation Act
- 1996
- mandatory reference to arbitration if arbitration agreement exists
- court cannot refuse reference even if subject matter involves bank guarantee
- prima facie existence of arbitration agreement sufficient
- no discretion to refuse once conditions of Section 8 are satisfied
