2003 (7) TMI 493 - SC - Companies Law

Whether the courts below were justified in coming to the conclusion that they could go into the question of the existence or validity of the arbitration agreement? Held that - Appeal allowed. The trial court failed to exercise its jurisdiction vested in it under section 115 of the CPC when it rejected the application of the appellant filed under sections 8 and 5 of the Act. In such situation, refusal to refer the dispute to arbitration would amount to failure of justice as also causing irreparable injury to the appellant. For the said reason, we are of the opinion that the High Court has erred in coming to the conclusion that the appellant was not entitled to the relief under section 115 CPC.

Issues Involved:
1. Applicability of the arbitration clause in the Dealership Agreement.
2. Jurisdiction of the Civil Court to decide on the applicability of the arbitration clause.
3. Legal authority of the appellant to investigate and take action against the respondent for alleged misconduct.
4. Maintainability of the revision petition under section 115 of the CPC.

Issue-wise Detailed Analysis:

1. Applicability of the arbitration clause in the Dealership Agreement:
The appellant argued that Clause 40 of the Dealership Agreement mandated that any dispute arising out of or in relation to the agreement should be referred to arbitration. The High Court and the Civil Judge, however, concluded that the arbitration clause did not apply to the dispute concerning short-delivery of petroleum products and tampering with seals, as these issues had penal consequences and were to be adjudicated under the Standards of Weights and Measures (Enforcement) Act, 1985. The Supreme Court disagreed, stating that the language of Section 8 of the Arbitration and Conciliation Act, 1996, is peremptory, requiring the court to refer the dispute to arbitration if an arbitration clause exists in the agreement. The Court emphasized that the applicability of the arbitration clause should be determined by the arbitrator as per Section 16 of the Act.

2. Jurisdiction of the Civil Court to decide on the applicability of the arbitration clause:
The Supreme Court held that the Civil Court should not have examined the applicability of the arbitration clause to the facts of the case. This determination should be made by the arbitrator, as empowered by Section 16 of the Arbitration and Conciliation Act, 1996. The Court referenced the Constitution Bench judgment in Konkan Railway Corpn. Ltd. v. Rani Construction (P.) Ltd., which affirmed that the Arbitral Tribunal has the authority to rule on its own jurisdiction, including any objections to the existence or validity of the arbitration agreement.

3. Legal authority of the appellant to investigate and take action against the respondent for alleged misconduct:
The appellant argued that it had the contractual right to suspend the supply of petroleum products to the respondent under Clause 30 of the Dealership Agreement for any breach of the agreement. The Supreme Court agreed, stating that the appellant's right to take action under the agreement was independent of any statutory proceedings under the Standards of Weights and Measures (Enforcement) Act, 1985. The Court clarified that the appellant's actions were contractual and did not conflict with statutory provisions. The Court also noted that dual procedures (contractual and statutory) are a well-accepted legal phenomenon in Indian jurisprudence.

4. Maintainability of the revision petition under section 115 of the CPC:
The High Court had dismissed the revision petition, stating that it would only entertain such petitions if the impugned order caused a failure of justice or irreparable injury. The Supreme Court found that the Civil Court had no jurisdiction to entertain the suit once an application under Section 8 of the Arbitration and Conciliation Act, 1996, was made. Therefore, the refusal to refer the dispute to arbitration amounted to a failure of justice and caused irreparable injury to the appellant. The Supreme Court concluded that the High Court erred in dismissing the revision petition and should have referred the dispute to arbitration.

Conclusion:
The Supreme Court set aside the orders of the High Court and the Civil Judge, directing the trial court to refer the dispute to arbitration as per the Dealership Agreement. The appeal was allowed with costs, and the interim order passed by the High Court was vacated.

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