Plaint Can't Be Rejected Under O.VII R.11 Of CPC Due To Arbitration Clause Unless Application U/S 8 Of A&C Act Is Filed: Delhi High Court

The Delhi High Court bench of Justice Ravinder Dudeja has held that if a proper application is filed under Section 8 of the Arbitration and Conciliation Act, 1996, the Court must refer the parties to arbitration and may reject the plaint under Order VII Rule 11(d) of the Civil Procedure Code, 1908 (CPC) as barred by law. However, if no such application is filed and no prayer is made for reference to arbitration, the mere existence of an arbitration clause is not sufficient to reject the plaint under Order VII Rule 11 CPC. Brief Facts: This is a petition under Article 227 of the Constitution of India read with Section 151 Code of Civil Procedure, 1908, seeking to set aside the order dated 19.01.2024 passed by the learned District Judge, Commercial Courts-01, Tis Hazari Courts in CS (Comm) No. 2242/2022, whereby the petitioner's application under Order VII Rule 11 CPC was dismissed and right to file the written statement was closed. The petitioner took a ₹35,00,000 loan from the respondent on 18.03.2019, pledging 13,113 shares of M/s Trishul Dream Homes Ltd. The respondent filed CS (Comm) No. 2242/2022 for recovery without a valid board resolution against the petitioner—initially authorizing action only against Trishul Dream Homes Ltd. The petitioner filed an application under Order VII Rule 11 CPC, citing an arbitration clause in the loan agreement and lack of court jurisdiction. To cure the defect, the respondent later submitted a ratifying board resolution dated 27.09.2023. The trial court accepted the new resolution, dismissed the petitioner's application, and closed his right to file a written statement. The Petitioner submitted that the trial court's order dated 19.01.2024 is legally flawed, as the suit (CS (Comm) No. 2242/2022) was filed without a valid board resolution authorizing proceedings against the petitioner-HUF. The initial resolution pertained only to M/s Trishul Dream Homes Ltd., a separate entity, and the subsequent resolution dated 27.09.2023 came post-filing. Further, Clause 10 of the Loan Agreement mandated pre-litigation negotiation and arbitration, which was bypassed. It was further submitted that order closing the right of the petitioner to file the written statement and dismissal of application under Order VII Rule 11 CPC has been passed in a mechanical manner. In reply, the Respondent submitted that referring to Order XXIX CPC, the respondent argued that suits by corporations can be instituted by authorized officers capable of deposing to the facts. Relying on the judgments in United Bank of India v. Naresh Kumar, Mahanagar Telephone Ltd. v. Suman Sharma, and Palm View Investment v. Ravi Arya, it was submitted that defects like a defective board resolution are curable and not fatal. The trial court rightly allowed rectification under Order VI Rule 14 CPC, as no prejudice was caused. Moreover, the objection to authorization was not pleaded in the Order VII Rule 11 application but raised belatedly during arguments, and thus, should be disregarded. Observations: The court noted that the Supreme Court in Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. (2011) laid down a five-factor test for courts to determine whether to refer parties to arbitration under Section 8 of the Arbitration Act. These include confirming the existence of a valid arbitration agreement, whether all parties to the suit are parties to the agreement, if the disputes fall within the agreement's scope, and whether the application under Section 8 was made before the first statement on the substance of the dispute. Section 8 mandates referral to arbitration unless the court finds no valid agreement exists. It further observed that in the present case, since the petitioner did not file an application under Section 8 of the Arbitration Act, but only invoked Order VII Rule 11 CPC citing the arbitration clause, the court must independently assess whether the plaint discloses a cause of action or is barred by any law. Merely pointing to the existence of an arbitration clause, without invoking the statutory remedy under Section 8, is insufficient to seek dismissal of the plaint on grounds of lack of jurisdiction. Based on the above, it held that since the petitioner did not invoke Section 8 of the Arbitration Act in the prescribed manner—i.e., by filing an application with the original or certified copy of the arbitration agreement—the mere reliance on the arbitration clause within an application under Order VII Rule 11 CPC cannot justify rejection of the plaint. Section 8 only enables the court to refer parties to arbitration; it does not act as a legal bar that would warrant plaint rejection under Order VII Rule 11(d). Similarly, the Andhra Pradesh High Court in Chundru Visalakshi vs. Chunduru Rajendra Prasad held that If a proper application is filed under Section 8 of the Arbitration Act, the Court must...

Plaint Can't Be Rejected Under O.VII R.11 Of CPC Due To Arbitration Clause Unless Application U/S 8 Of A&C Act Is Filed: Delhi High Court

Mohd Malik Chauhan

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