Taru Meghani v. Shree Tirupathi: Separating Causes of Action in Suit for Reference to Arbitration

[This guest post is authored by Harshvardhan Tripathi. He is currently studying in the 3rd year of the BA. LLB (Hons.) course at NALSAR University of Law, Hyderabad.]

Taru Meghani v. Shree Tirupathi: Separating Causes of Action in Suit for Reference to Arbitration

In its recent decision dated 10 January 2020, the Bombay High Court ruled in Taru Meghani v. Shree Tirupati Greenfield [1] that the arbitration clause in an agreement cannot be defeated by adding a cause of action beyond its scope. Faced with a peculiar set of facts, the Court refused to interpret Section 8 of the Arbitration and Conciliation Act 1996 (Arbitration Act) in a manner that would allow circumvent the parties’ intention to arbitrate.

Factual background

The plaintiff had invested monies, through multiple transactions, in the housing project being developed by the defendants. One set of the investments was promised to be repaid by executing an MOU, whereas the remaining amount was to be paid by cheques. Since the cheque drawn by defendants for repayment was returned uncashed on being presented, the plaintiff filed a commercial summary suit before the Bombay High court for the recovery of monies invested.

In response, the defendants filed an application under Section 8 of the Arbitration Act seeking referral of the dispute to arbitration in accordance with the arbitration clause in the MOU.

The plaintiffs contended that for the referral under Section 8 of the Act, the entirety of the dispute should be covered by the arbitration clause. The disputed transaction did not arise only out of the MOU. It was argued, therefore, that referral to arbitration would result in the bifurcation of the subject matter of dispute. This, in turn, could lead to conflicting decisions for different transactions in the of the same bargain, which would be against the intention of Section 8.

The defendants, on the other hand, argued that given the undisputed existence of an arbitration clause in the agreement, it must be given effect without failure.

The ratio

The High Court was required to examine whether the Court is bound to refuse a reference to arbitration under Section 8 when the dispute at hand also includes a claim that is not covered by the arbitration clause.

Pursuant to Section 8 of the Arbitration Act, ‘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 arbitration agreement or any person claiming through or under him, so applies …  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 (emphasis supplied).

In Sukanya Holdings (P) Ltd. Vs. Jayesh H. Pandya & Anr.[2] (Sukanya) the Supreme Court examined the scope of a court’s power under Section 8. The underlying suit in Sukanya involved a cause of action which affected (i) parties having an arbitration agreement with the plaintiff; and (ii) those who were not signatory to any arbitration agreement. Refusing to refer the dispute to arbitration, the Supreme Court observed that the Arbitration Act does not provide for splitting or bifurcating a cause of action into a part that can be referred to arbitration, and another to civil courts. For a reference to arbitration, the suit should be in respect of ‘a matter’ which the parties have agreed to refer and which comes within the ambit of arbitration agreement The words ‘a matter’ indicates the entire subject matter of the suit should be subject to the arbitration agreement’. Accordingly, the plaintiff relied on Sukanya to argue that there can be no reference to arbitration. Instead, the entire broader dispute must be resolved by litigation in civil courts.

The Court analyzed the terms of the MOU to conclude that the terms of repayment, interest at which the amount was to be repaid, and the consequences in the event of default in repayment were all covered by the arbitration clause included in the MOU. Therefore, it was observed that the present suit did involve ‘a matter’ squarely falling within the subject matter of the arbitration clause.

The Court clarified that there are two separate causes of action in the present suit. The first cause of action is with regards to the first set of transaction which is squarely covered by the arbitration clause in the MoU. The second cause of action (i.e. demand for repayment of the amounts agreed outside the MoU) was not governed by the arbitration clause; but had been clubbed by the plaintiffs with the first cause of action in the same suit.

The Court held that such joinder of causes of action under Order II Rule 3 of the Civil Procedure Code 1908 (CPC) cannot be allowed in the suit, since the purpose of such joinder is to exclude arbitration even with respect to the first cause of action; which is definitively within the scope of the arbitration clause. This goes against the legislative intent of Section 8 and defeats the purpose of incorporating arbitration clauses in agreements.

Order II Rule 6 of the CPC empowers a court to order the separation of causes of action in one suit if their joinder – although permissible under Rule (3)(1) – would result, in Court’s opinion, in embarrassment, inconvenience or delay. Accordingly, the Bombay High Court disallowed the joinder as it would otherwise result in defeating the provision of a special law i.e. Section 8 of the Arbitration Act.

That said, the Court also clarified that the plaintiff could file a fresh suit in respect of the transactions which lay outside the MOU. Only the overreaching and legally unsound contention of the plaintiff demanding the entire dispute to be ousted from arbitration – was rejected.

Comment

The Court in Taru Meghani has reinforced the judicial mandate of giving effect to the arbitration clause as far as possible by refusing the attempted joinder of causes of action.

The Court has rightly considered the peculiar facts of the case in light of the legislative object encapsulated in Section 8 of the Act, i.e. minimum judicial intervention in cases of party agreeing on arbitration. The language of section 8 is peremptory; to the effect that if an exists arbitration agreement and is prima facie valid, the Court has no jurisdiction over the dispute. The Court must compulsorily refer such dispute to arbitration. Therefore, an application under Section 8 effectively constitutes a plea for the statutory exclusion of jurisdiction of the court.

In Sundaram Finance Ltd. v. T. Thankam[3]  the Supreme Court had observed that a Court dealing a Section 8 application should not go on searching for an opportunity to assert its jurisdiction. This is because “it would only delay the resolution of disputes and complicate the redressal of grievance and of course unnecessarily increase the pendency in the court.” The referral of the parties to arbitration becomes imperative if the following conditions are satisfied:

(i) there is an arbitration agreement;

(ii) a party to the agreement brings an action in the court against the other party;

(iii) the subject-matter of the action is the same as the subject-matter of the arbitration agreement;

(iv) the opposite party applies to the judicial authority for referring the parties to arbitration before it submits his first statement on the substance of the dispute.

This spirit of keeping minimum judicial interference with respect to referral to arbitration has been upheld in Taru Meghani.

If the plaintiffs had been allowed to rely on a hyper-technical interpretation of Section 8, it would have opened a flood gate of similar cases, where either of the parties would simply add unrelated causes of actions for avoiding a reference to arbitration. This would defeat the purpose of including an arbitration clause in the agreement in the first place. The Court prudently saw through the tactical joinder and prevented a precedent which would be deleterious to the objective of the Arbitration Act.

This decision is expected to go a long way in fostering sincerity among litigants to keep alive the spirit and purpose of including arbitration clauses into contractual agreements and not adopt tactics to frustrate the purpose.

[1] 2020 SCC OnLine Bom 110

[2] (2003) 5 SCC 531

[3] (2015) 14 SCC 444

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