Delhi High Court.
Arbitration Clause No Automatic Bar to Civil Suits Unless Timely Section 8 Plea Filed: Delhi High Court: New Delhi – The mere presence of an arbitration clause in a contract does not automatically strip a civil court of its jurisdiction over a dispute, the Delhi High Court has recently affirmed. The Court clarified that a civil court’s power to hear a case remains intact unless a valid and timely application is filed under Section 8 of the Arbitration and Conciliation Act, 1996, seeking to refer the parties to arbitration.
Justice Ravinder Dudeja delivered this significant ruling in the case of Din Dayal Agrawal HUF Vs Caprisio Finance Ltd. The case arose from an attempt by the defendant, Din Dayal Agrawal HUF, to have a suit rejected under Order VII Rule 11 of the Code of Civil Procedure (CPC), arguing that the loan agreement contained an arbitration clause.
The High Court decisively ruled that an application under Order VII Rule 11 CPC, which seeks rejection of a plaint on specified grounds, cannot be construed as a composite application under Section 8 of the Arbitration Act. Justice Dudeja emphasized that while Section 8 empowers a court to refer parties to arbitration, it does not provide for the outright rejection of a plaint.
“Since in the present case, no application was filed by the petitioner under Section 8 of the Act and no prayer was made to refer the matter to the arbitration, mere existence of arbitration clause would not constitute a ground to reject the plaint,” the Court held.
The judgment further clarified that Section 8 of the Arbitration Act does not inherently bar civil courts from entertaining applications under Order VII Rule 11 CPC. Instead, it offers an alternative to a defendant against whom a civil suit is initiated: they can either submit to the civil court’s jurisdiction or file a specific application under Section 8 to seek a referral to arbitration.
The Case in Detail
The dispute originated from a loan of ₹35 lakh availed by Din Dayal Agrawal HUF from Caprisio Finance Limited in March 2019, secured by a pledge of 13,113 shares of Trishul Dream Homes Limited. When Caprisio initiated recovery proceedings in September 2022, Agrawal responded with an application under Order VII Rule 11 CPC, asserting that the civil court lacked jurisdiction due to the arbitration clause in their loan agreement.
Agrawal also contended that the suit was not maintainable because the board resolution filed by Caprisio at the time of instituting the suit authorized action against Trishul Dream Homes, not specifically against Agrawal.
During the proceedings, Caprisio addressed this defect by filing a fresh board resolution dated September 27, 2023, which ratified the earlier resolution and explicitly authorized its director to pursue action against Agrawal. The trial court permitted this ratification and subsequently dismissed Agrawal’s Order VII Rule 11 application, also closing his right to file a written statement. Agrawal then approached the High Court challenging this order.
High Court’s Findings on Procedural Issues
On the issue of the defective board resolution, the High Court held that such an irregularity was “curable” and did not strike at the root of the matter. The Court reasoned that since the suit was signed by a company director, a mere irregularity in the board resolution would not adversely affect the company’s substantive rights, especially when such a defect can be rectified at any stage of the suit through a subsequent ratifying resolution.
Regarding the closure of Agrawal’s right to file a written statement, the High Court noted that while the case was initially filed as a commercial suit, it was later treated as an ordinary civil suit. In ordinary civil suits, the time limit for filing a written statement is generally considered “directory” rather than “mandatory,” allowing for some flexibility.
However, the Court found that Agrawal had failed to provide any satisfactory explanation for the delay or file an application seeking condonation for it. The Court firmly stated that the mere pendency of an Order VII Rule 11 application could not be used as an excuse to avoid filing the written statement within the stipulated period. “Once the period prescribed for filing the written statement lapses, even though the provision being directory, the defendant needs to furnish satisfactory explanation… which in the present case, petitioner failed to do,” the Court observed.
Consequently, the High Court concluded that there was no “manifest illegality or perversity” in the trial court’s order and dismissed Agrawal’s petition.
Advocates Manpreet Kaur and Jaya Goyal represented Din Dayal Agrawal HUF, while Advocate Gaurav Pachauri appeared for Capriso Finance. This judgment reinforces the principle that parties intending to invoke an arbitration clause must do so proactively through a proper and timely application under the Arbitration and Conciliation Act, rather than relying on other procedural challenges.
