Arbitration clause does not bar civil court jurisdiction unless Section 8 plea filed on time: Delhi High Court

The mere existence of an arbitration clause in a contract would not bar the jurisdiction of a civil court to deal with the dispute unless a valid and timely application under Section 8 of the Arbitration and Conciliation Act is filed, the Delhi High Court ruled recently [Din Dayal Agrawal HUF Vs Caprisio Finance Ltd]..Justice Ravinder Dudeja was dealing with a case in which the defendant had filed an application for rejection of the suit under Order VII Rule 11 of Code of Civil Procedure (CPC) on the ground that a clause for arbitration existed in the agreement.The Court ruled that an application under Order VII Rule 11 CPC cannot be considered as a composite application under Section 8 of the Act. It added that Section 8 of the Act only empowers the Court to refer the parties to arbitration but does not give the Court an option to reject the 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 added.It further said that the power conferred by Section 8 of the Act cannot be considered as a bar on the civil court to entertain an application under Order VII Rule 11 CPC."Section 8 of the Act does not create any bar to the Civil Courts. It merely provides an alternative to the defendant against whom civil suit is initiated, to submit to the jurisdiction of the Civil Court or file an appropriate application under Section 8 of the Act for referring the parties to arbitration.".In the present case, Din Dayal Agrawal HUF had availed a loan of ₹35 lakh from Capriso Finance Limited under a loan agreement dated March 18, 2019, pledging 13,113 shares of Trishul Dream Homes Limited.When Capriso initiated recovery proceedings in September 2022, Agrawal moved an application under Order VII Rule 11 CPC contending that the civil court lacked jurisdiction in view of arbitration clause in the loan agreement. It was also argued that the suit was not maintainable as the board resolution filed by Capriso at the time of instituting the suit authorised action against Trishul Dream Homes and not against the petitioner.During the proceedings, Capriso filed a fresh board resolution dated September 27, 2023, ratifying an earlier resolution and authorising its director to pursue action against the petitioner. The trial court allowed this ratification and dismissed the petitioner’s Order VII Rule 11 application, while also closing the right to file a written statement. Agrawal then moved the High Court. .On the defect in the board resolution, the High Court held that the irregularity was curable and did not go to the root of the matter. "The suit in the present case has been signed by the Director of the respondent-company, merely because of the irregularity of the board resolution, the substantive rights of the respondent-company will not have any adverse effect and such irregularity can be cured at any stage of the suit. The mistake in the board resolution filed with the plaint is only a procedural irregularity and, therefore, the same cannot be made a ground to reject the suit, more so when such defect is rectified by subsequent board resolution ratifying the act of filing of suit by the Director of the respondent-company," it added..On the issue of closure of the petitioner’s right to file a written statement, the Court noted that although the case had initially been filed as a commercial suit, it was later treated as an ordinary civil suit, where the time limit for filing the written statement is directory and not mandatory.However, it held that the petitioner had failed to show any cause for the delay or move an application seeking condonation. The pendency of the Order VII Rule 11 application, the Court said, could not be used as a pretext to avoid filing the written statement.“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," it added..Thus, the Court concluded that there was no manifest illegality or perversity in the trial court’s order and dismissed the petition..Advocates Manpreet Kaur and Jaya Goyal represented Din Dayal Agrawal HUF. Advocate Gaurav Pachauri represented Capriso Finance..[Read Judgment]