1997 (8) TMI 527 - HC - Indian Laws

Summary

Issues Involved:
1. Application for stay of suit and reference to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996.
2. Validity of the arbitration agreement and its invocation by the first defendant.
3. Interpretation of Section 8 of the Arbitration and Conciliation Act, 1996.
4. Timeliness of invoking the arbitration agreement.
5. Applicability of the arbitration agreement to the second defendant (guarantor).
6. Allegations of fraud as a defense to the arbitration application.

Issue-Wise Detailed Analysis:

1. Application for Stay of Suit and Reference to Arbitration:

The first defendant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking a stay of the suit and reference to arbitration. The plaintiff, a financial institution, had entered into five hire-purchase agreements with the first defendant, which included an arbitration clause. The plaintiff claimed that the first defendant defaulted on payments, leading to dishonored cheques and subsequent criminal proceedings. The plaintiff sought a decree for Rs. 5,00,52,810/- and possession of the wind turbine generators.

2. Validity of the Arbitration Agreement and Its Invocation:

The arbitration clause in the agreements stipulated that any disputes arising out of the agreements should be referred to arbitration. However, the first defendant had already initiated suits in the Calcutta High Court and the Madras High Court, effectively bypassing the arbitration agreement. The court noted that a party cannot "blow hot and cold" by selectively invoking the arbitration agreement after having chosen to litigate in court.

3. Interpretation of Section 8 of the Arbitration and Conciliation Act, 1996:

Section 8(1) of the Act mandates that a judicial authority must refer parties to arbitration if the matter is subject to an arbitration agreement, provided the application is made before submitting the first statement on the substance of the dispute. The court interpreted that the "party" referred to in Section 8(1) must be one who has not already chosen to litigate the matter in court. The first defendant, having filed suits in both Calcutta and Madras High Courts, was estopped from invoking the arbitration agreement.

4. Timeliness of Invoking the Arbitration Agreement:

The arbitration agreement required disputes to be referred to arbitration within six months of their arising. The dishonored cheques, which formed the basis of the dispute, occurred long before the first defendant filed the present application on April 29, 1997. The court rejected the argument that the conditional offer to return the generators extended the six-month period, as it did not constitute a new dispute.

5. Applicability of the Arbitration Agreement to the Second Defendant (Guarantor):

The second defendant, who provided a guarantee, did not sign the arbitration agreement. However, the court noted that the liabilities of the principal debtor and guarantor are joint and several. Thus, the first defendant could have invoked the arbitration agreement if it were otherwise entitled to do so.

6. Allegations of Fraud as a Defense to the Arbitration Application:

The plaintiff alleged fraud against the first and second defendants in its affidavit-in-opposition but did not include this allegation in the plaint. The court held that the allegation of fraud could not be used as a defense in the present application. The court referenced the case of "Russell v. Russell," where it was noted that the desire for public investigation of fraud must be balanced against the potential harm to the accused party's reputation.

Conclusion:

The application for stay of the suit and reference to arbitration was dismissed. The court held that the first defendant, having chosen to litigate in court, was estopped from invoking the arbitration agreement. Additionally, the application was untimely, and the arbitration agreement did not apply to the current situation where the plaintiff feared the alienation of the hired articles. The court also dismissed the allegations of fraud as a valid defense in this context. There was no order as to costs.