Full Judgment Text
2018:BHC-OS:619
This Order is modified/corrected by Speaking to Minutes Order dated 09/02/2018
sat nms 2676-2016.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION NO. 2676 OF 2016
IN
SUMMARY SUIT NO. 2062 OF 2002
MSTC Ltd. ...Plaintiff
Vs.
M/s.Omega Petro Products Pvt.Ltd. & Ors. ...Defendants/Applicants
Mr.Phiroze Colabawalla with Ms.Anamika I/b. HSA Advocates for the
Plaintiff.
Mr.Shadab S. Jan I/b. Manilal Kher Ambalal & Co. for Defendants.
CORAM : S.C. GUPTE, J.
DATE : 16 JANUARY 2018
ORAL JUDGMENT :
This notice of motion is taken out under Section 8 of the
Arbitration and Conciliation Act, 1996 (“the Act”). The case of the
Defendants in the notice of motion is that the matter in the present suit is
the subject of an arbitration agreement and the parties be accordingly
referred to arbitration. The notice of motion is taken out before submitting
the Defendants’ first statement dealing with the substance of the dispute.
2 The present suit is filed by the Plaintiff claiming to be a
creditor under an agreement dated 27 August 1998 entered into with
Defendant No.1 for purchase of goods as also a supplementary agreement
dated 16 January 1999. The Plaintiff’s case under these two agreements is
that liability is owed by Defendant No.1 to it as a principal debtor, whilst
Defendant No.3 is liable under a personal guarantee to secure those dues.
The Plaintiff’s suit is for nonpayment of its dues under the main contract
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by Defendant No.1 as also nonpayment of the dues by Defendant No.3
under the personal guarantee. Defendant No.2 is said to be the chairman
and managing director of Defendant No.1 and is purportedly sued in his
capacity as a guarantor, at whose specific request the Plaintiff agreed to
supply goods to Defendant No.1 under the main contract. There is no
written guarantee executed by Defendant No.2 in favour of the Plaintiff
agreeing to pay the dues of Defendant No.1 on default.
3 The suit was filed on 3 May 2002. The writ of summons was
issued on 1 July 2002. There is no record of service of the writ of
summons. It is, however, not in dispute that the writ of summons was
served on all the Defendants and that was sometime in 2002. No written
statement was filed by the Defendants in the suit till 2014. On 18 June
2014, the suit was dismissed for default. Neither the Plaintiff nor the
Defendants appeared on that day. On the Plaintiff’s application, on 1
October 2016, the dismissal order was recalled and the suit was restored to
file. On the same date, the Defendants were directed to file their written
statement, latest by 15 October 2016. On 20 October 2016, the Defendants
took out the present notice of motion praying for reference of the parties to
arbitration under Section 8 of the Act. After taking out the notice of
motion, the Defendants also filed their written statement. It appears that
the written statement was taken on record.
4 Learned Counsel for the Defendants submits that the main
contract between the Plaintiff and Defendant No.1 for supply of goods
contains an arbitration clause. Learned Counsel submits that since the main
claim of the Plaintiff arising under that contract is covered by an arbitration
agreement, the parties must be referred to arbitration under Section 8 of
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the Act. Learned Counsel submits that the Defendants, as guarantors of the
Plaintiff’s claim arising under the main contract, are sued as a party
claiming by or under Defendant No.1, who is the principal debtor.
Alternatively, learned Counsel submits that the agreement of guarantee is
inextricably linked to the main contract for supply of goods and also makes
a specific reference to it. Relying on the judgment of the Supreme Court in
the case of Chloro Controls India Pvt.Ltd. vs. Severn Trent Water
1
Purification Inc. and the judgment of our court in M/s.Sahyadri
2
Earthmovers vs. L & T Finance Ltd. and of Delhi High Court in the case
3
of Canbank Financial Services Ltd. vs. M/s.SFL Industries Ltd. , learned
Counsel submits that even if the guarantee executed by Defendant No.3
does not contain any arbitration agreement, such agreement must be
treated as part of the contract of guarantee on account of the inextricable
linkage of the two agreements (i.e. main contract and the contract of
guarantee) as also for the reason that there is a specific reference to the
main contract in the agreement of guarantee.
5 On the other hand, it is submitted by learned Counsel for the
Plaintiff that, in the first place, the present notice of motion does not satisfy
the requirement of Section 8 of the Act inasmuch as the application
thereunder is not made before expiry of the time stipulated for filing of the
first statement of defence on the substance of the suit. Learned Counsel
relies on the decision of Delhi High Court in the case of Krishan Radhu vs.
4
The Emmar MGF Construction Pvt.Ltd. in this behalf. Secondly, it is
submitted, the Plaintiff has filed the present suit invoking the joint and
several liability of three parties, two of whom are not party to the
1 (2013) 1 SCC 641
2 2013(2) MAH.LJ. 302
3 2004 SCC OnLine Del 362 : ILR (2004) 1 Del 430
4 2016 SCC OnLine Del 6499
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arbitration agreement. Learned Counsel submits that on the principle
5
stated in the case of Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya ,
the Plaintiff cannot be asked to split the cause of action and that the suit
cannot be stayed merely as against Defendant No.1 on the basis of the
arbitration agreement between itself and the Plaintiff. Learned Counsel
submits that the guarantee executed by Defendant No.3 is a separate and
independent contract and a mere reference to the main contract under the
agreement of guarantee does not result into incorporation of the
arbitration agreement contained in the main contract into the agreement of
guarantee. Learned Counsel relies on the Supreme Court judgments in the
6
cases of S.N. Prasad, Hitek Industries (Bihar) vs. Monnet Finance Ltd. ,
7
M.R. Engineers and Contractors Pvt.Ltd. vs. Som Datt Builders Ltd.
8
and Duro Felguera S.A. vs. Gangavaram Port Ltd. in support of his
submissions.
6 Referring to the preliminary objection raised by the Plaintiff to
the maintainability of the present notice of motion on the ground that it is
beyond the date stipulated for submitting the first statement on the
substance of the dispute, it is important to note that the present suit was
filed in the year 2002. The relevant provision of Section 8, which applied
as of that date, namely, Section 8 of the Act, as it stood before its
amendment by the Amending Act of 2015, provided for application to be
presented to any judicial authority before whom an action is brought in a
matter which is the subject of an arbitration agreement “not later than
when submitting his first statement on the substance of the dispute”. It is
this provision, which will apply to the present notice of motion and not the
5 (2003) 5 SCC 531
6 (20110 1 SCC 320
7 (2009) 7 SCC 696
8 (2017) 9 SCC 729
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amended provision of Section 8, which was brought into force with effect
from 23 October 2015. Since the writ of summons was served on the
Defendants sometime in 2002, the original date stipulated for submitting of
the written statement had long expired. It, however, had no significance
visàvis application under Section 8 which, until 23 October 2015, could
be filed “not later than the date of submitting his first statement on the
substance of the dispute”. In other words, there is no reason why the filing
of the application under Section 8, as it then stood, should be linked to the
stipulated date of submission of written statement. The provision, as it then
stood, linked the filing of the application under Section 8 to the actual date
of submission of the first statement on the substance of the dispute. The
amendment was brought into force on 23 October 2015 by which time the
suit had already stood dismissed on account of default of appearance of the
Plaintiff. The suit was restored to file on the application of the Plaintiff and
at that time, the Defendants were directed to file their written statement by
15 October 2016. The time for filing of written statement being fixed by
the court in these circumstances could always be extended by the court. In
fact, it appears that this time was indeed extended by this court, since the
written statement was accepted on 23 October 2016. The present notice of
motion is admittedly moved before filing of the written statement on that
date. Viewed from any angle, the present notice of motion is filed within
time. The judgment of Delhi High Court in the case of Krishan Radhu
(supra) cited by learned Counsel for the Plaintiff has no application to the
facts of the present case, though, I must make it clear, I have not applied
my mind to the correctness of the proposition laid down by the learned
Single Judge of Delhi High Court in the case of Krishan Radhu.
7 Coming now to the merits of the application, it is important to
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note that the present suit is a composite action against Defendant No.1, on
the one hand, for a claim arising under the main contract between the
Plaintiff and Defendant No.1, and Defendant Nos.2 and 3 herein, who are
arraigned as guarantors, on the other hand. Defendant No.3 is said to have
executed an agreement of guarantee, whereas there is no written document
executed by Defendant No.2. It is not in dispute that the agreement of
guarantee executed by Defendant No.3 does not contain any arbitration
agreement. The argument, however, is that the agreement of guarantee
being inextricably linked to the main contract for supply of goods, the
arbitration agreement in the main contract must be treated as part of the
agreement of guarantee. Reliance is placed in this behalf on the case of
Chloro Controls (supra). Secondly, it is submitted that since the
agreement of guarantee anyway makes a reference to the main contract for
supply of goods, on the principle of law stated by this court in the case of
Sahyadri Earthmovers (supra), the guarantor must be held to be bound
by the arbitration agreement contained in the main contract.
8 In the case of Sahyadri Earthmovers , the principal borrower
was sued on a loancumhypothecation agreement, whereas the guarantor
was sued on a deed of guarantee executed by him. This deed guaranteed
payment of dues under the loancumhypothecation agreement. An
application was made before a learned Single Judge of this court under
Section 9 of the Act by the claimant creditor. The application was moved
after procuring an award from the arbitral forum. The application was
opposed by the guarantor inter alia on the ground that the guarantor was
not a signatory to the loancumhypothecation agreement and the deed of
guarantee did not contain any specific arbitration clause. The learned
Single Judge of this court hearing the application was of the view that since
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the deed of guarantee referred to the loancumhypothecation agreement,
the loan agreement and its terms and conditions could be said to be part
and parcel of the deed of guarantee; the guarantee could not be dissected
or read in isolation; it was interlinked and interconnected with the loan
cumhypothecation agreement. The judgment of the Supreme Court in the
case of S.N. Prasad (supra) was cited before the learned Single Judge. The
Supreme Court in that case had held that the guarantor of a loan, who was
not a party to the main loan agreement containing an arbitration clause,
cannot be made a party to a reference to arbitration and subjected to an
arbitration award for repayment of the loan. The arbitration agreement
between the lender and the borrower cannot be deemed or construed to be
an arbitration agreement in respect of a guarantor, who was not a party to
the original loan agreement. The learned Single Judge hearing Sahyadri
Earthmovers , however, distinguished this judgment presumably on the
ground that the deed of guarantee in the case before the learned Single
Judge specifically mentioned and referred to the loan agreement between
the parties and since the loan agreement contained an arbitration
agreement, the guarantor was bound by it, though there is no clear
indication as to how the Supreme Court judgment in S.N. Prasad was
actually distinguished. The learned Single Judge held that such reference
was a permissible and recognized mode of entering into an arbitration
agreement to settle the disputes arising under the referring agreement.
9 There is a binding authority of the Supreme Court in the case
of M.R. Engineers and Contractors Pvt.Ltd. (supra), which deals with the
subject of incorporation of an arbitration clause from another document
into a contract. The Supreme Court has elaborately considered in M.R.
Engineers the condition precedent for incorporation of the arbitration
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clause in such a case. The court was concerned in that case with two
contracts, one being the main contract between the employer and the
contractor, which contained a specific arbitration agreement, and a sub
contract between the contractor and a third party, which contained a
specific stipulation that the subcontract shall be carried out on the terms
and conditions as applicable to the main contract unless otherwise
mentioned. Relying on this term and the interconnection between the two
contracts, it was contended before the Supreme Court by the employer that
the sub contractor was bound by the arbitration agreement under the
main contract. The Supreme Court negatived the contention, holding that
there was a difference between a reference to another document in a
contract and incorporation of that other document in a contract by
reference. The court noted that in the first case, what the parties intend to
do is to adopt only specific provisions or parts of the referred document for
the purpose of the contract, whereas in the second case, parties intend to
incorporate the referred document itself in its entirety into the contract.
Accordingly, whenever there is a reference to a document in a contract, the
court has to consider whether the reference to the document is with the
intention of incorporating the contents of that document in entirety into
the contract or with the intention of adopting or borrowing specific
portions of that document for application to the contract. After considering
various instances of incorporation by reference versus mere reference by
way of illustrated cases, the Supreme Court laid down the following
principle: A general reference to another contract will not be sufficient
to incorporate the arbitration clause from the referred contract into
the contract under consideration. There should be a special reference
indicating a mutual intention to incorporate the arbitration clause
from another document into the contract. The court referred to the
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scope and intent of Section 7 of the Act defining an arbitration agreement
with particular reference to subsection (5) thereof, which deals with
reference in a contract to another document containing an arbitration
clause constituting an agreement in writing under the first mentioned
contract. The court put the matter thus :
“24. The scope and intent of Section 7(5) of the Act may
therefore be summarized thus:
(i) An arbitration clause in another document, would get
incorporated into a contract by reference, if the following
conditions are fulfilled :
(1) The contract should contain a clear reference to
the documents containing arbitration clause,
(2) the reference to the other document should clearly
indicate an intention to incorporate the arbitration clause
into the contract,
(3) The arbitration clause should be appropriate, that
is capable of application in respect of disputes under the
contract and should not be repugnant to any term of the
contract.
(ii) When the parties enter into a contract, making a general
reference to another contract, such general reference would
not have the effect of incorporating the arbitration clause
from the referred document into the contract between the
parties. The arbitration clause from another contract can be
incorporated into the contract (where such reference is
made), only by a specific reference to arbitration clause.
(iii) Where a contract between the parties provides that the
execution or performance of that contract shall be in terms of
another contract (which contains the terms and conditions
relating to performance and a provision for settlement of
disputes by arbitration), then, the terms of the referred
contract in regard to execution/performance alone will
apply, and not the arbitration agreement in the referred
contract, unless there is special reference to the arbitration
clause also.
(iv) Where the contract provides that the standard form of
terms and conditions of an independent Trade or
Professional Institution (as for example the Standard Terms
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& Conditions of a Trade Association or Architects
Association) will bind them or apply to the contract, such
standard form of terms and conditions including any
provision for arbitration in such standard terms and
conditions, shall be deemed to be incorporated by reference.
Sometimes the contract may also say that the parties are
familiar with those terms and conditions or that the parties
have read and understood the said terms and conditions.
(v) Where the contract between the parties stipulates that
the conditions of contract of one of the parties to the
contract shall form a part of their contract (as for example
the general conditions of contract of the Government where
Government is a party), the arbitration clause forming part
of such general conditions of contract will apply to the
contract between the parties.”
10 The binding authority of M.R. Engineers’ case neither cited
before nor considered by the learned Single Judge in Sahyadri
Earthmovers (supra) . The law stated by the learned Single Judge in that
case, namely, having signed the deed of guarantee which specifically
mentions and refers to the loan agreement between the parties, which
contains an arbitration agreement, the guarantor is bound by the
arbitration agreement under the loan agreement, is clearly contrary to the
law stated by the Supreme Court in M.R. Engineers and is per incurim.
Every guarantee is necessarily linked to another contract, which is said to
be the main contract, and must by definition refer to the main contract.
After all, Section 126 of the Contract Act defines a ‘contract of guarantee’
as “ a contract to perform the promise, or discharge the liability, of a third
person in case of his default. ” The promise or the liability arising thereunder,
which forms part of that other contract, is the very basis of a contract of
guarantee and without making a reference to that promise or liability, it is
unthinkable that a contract of guarantee can be entered into . Every
contract of guarantee, therefore, by definition must make a reference to the
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main agreement, the promise whereunder is sought to be performed or the
liability whereunder is sought to be discharged under the contract of
guarantee. By making a mere reference to such contract, the contract of
guarantee cannot be said to either incorporate the terms of the main
contract or particularly incorporate the arbitration agreement contained
thereunder. We are bound by the decision of the Supreme Court in the case
of M.R. Engineers and unless the three conditions laid down in that case,
namely, (i) clear reference to the document contained in the arbitration
clause, (ii) such reference indicating an intention to incorporate the
arbitration clause, and (iii) the arbitration clause being appropriate or
capable of being applied in respect of all disputes under the referring
contract and not being repugnant to any term of that contract, are satisfied,
there is no warrant for treating the arbitration clause in the referred
document as having been incorporated into the referring contract. The
proposition laid down by the Supreme Court in M.R. Engineers was once
again affirmed by the Supreme Court in the case of Duro Felguera S.A.
(supra).
11 The learned Single Judge of Delhi High Court in the case of
Canbank Financial Services Ltd. can also accordingly be treated as having
been impliedly overruled and the law stated therein as not good law after
the judgment of the Supreme Court in the case of M.R. Engineers.
Anyway, Canbank case is distinguished by the Delhi High Court itself later
9
in STCI Finance Ltd. vs. Sukhmani Technologies Pvt.Ltd. This later
decision was rendered after considering the cases of Chloro Controls as
well as M.R. Engineers and S.N. Prasad (supra). The Delhi High Court in
STCI Finance held that an agreement to stand as a surety for due
9 235(2016) DLJ-150
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performance of the contract between the principal debtor and the lender,
although linked to the principal contract, is nonetheless an independent
contract and unless the arbitration agreement contained in the principal
contract is specifically incorporated in the agreement of surety by a specific
reference, the surety cannot be said to be bound by the arbitration
agreement contained in the main contract.
12 If the arbitration agreement contained in the main contract for
supply of goods is not binding on the two Defendants purportedly sued as
guarantors, there is no warrant for referring the parties to arbitration. As
stated by the Supreme Court in the case of Sukanya Holdings (P) Ltd.
(supra), the expression “ a matter which is the subject of an arbitration
agreement ” used in Section 8 of the Act, must include “ the entire subject
matter of the suit and not merely a part of it ”. When the entire subject
matter of the suit is not subject to arbitration agreement, the Plaintiff
cannot be asked to bifurcate the subject matter of the suit in two parts, one
to be decided by the arbitral tribunal and the other to be decided by
ordinary civil courts. As held by the Supreme Court, bifurcation of the
subject matter of action brought before a judicial authority is not
permissible under Section 8 for various reasons. Neither was it
contemplated nor anyway indicated in the language of the section and such
bifurcation would result inevitably in delaying the proceedings and
defeating the whole purpose of speedy disposal of a dispute with minimum
cost of litigation. In the present case, the Plaintiff, as dominus litus , is well
within its rights to choose to invoke the joint and several liability of the
principal debtor and the guarantor in one action. The Plaintiff, in such a
case, cannot be asked to prosecute his remedy separately against the
principal debtor and the guarantor. Even under the old law, namely,
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Arbitration Act, 1940, which contained a provision for stay of suit in case of
identity between the subject matters of a suit and an arbitration agreement
(Section 34), Calcutta High Court in the case of Asiatic Shipping Co.
10
(Private) Ltd. vs. P.N. Djakarta Lloyd had held that the court was
justified in refusing to stay a suit between a creditor, and his principal
debtor and guarantor under Section 34, when there was an arbitration
agreement only between the plaintiff creditor and principal debtor and the
guarantor was not a party to it. The court held that any decision upon the
liability of a guarantor necessarily involved determination of the liability of
the principal debtor and as the same issue would have to be gone into both
in the suit and the arbitration proceedings, there was every likelihood of
conflicting findings and the suit, in the premises, should not be stayed.
13 In the premises, the notice of motion has no merit. The subject
matter of the present suit, which is a composite action of a creditor against
his principal debtor and guarantors, cannot be referred to arbitration, since
the alleged guarantors are not party to the arbitration agreement between
the creditor and the principal debtor.
14 The notice of motion is, accordingly, dismissed. Costs to be
costs in the cause.
(S.C. GUPTE, J.)
10 AIR 1969 CALCUTTA 374
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION NO. 2676 OF 2016
IN
SUMMARY SUIT NO. 2062 OF 2002
MSTC Ltd. ...Plaintiff
Vs.
M/s.Omega Petro Products Pvt.Ltd. & Ors. ...Defendants/Applicants
Mr.Phiroze Colabawalla with Ms.Anamika I/b. HSA Advocates for the
Plaintiff.
Mr.Shadab S. Jan I/b. Manilal Kher Ambalal & Co. for Defendants.
CORAM : S.C. GUPTE, J.
DATE : 16 JANUARY 2018
ORAL JUDGMENT :
This notice of motion is taken out under Section 8 of the
Arbitration and Conciliation Act, 1996 (“the Act”). The case of the
Defendants in the notice of motion is that the matter in the present suit is
the subject of an arbitration agreement and the parties be accordingly
referred to arbitration. The notice of motion is taken out before submitting
the Defendants’ first statement dealing with the substance of the dispute.
2 The present suit is filed by the Plaintiff claiming to be a
creditor under an agreement dated 27 August 1998 entered into with
Defendant No.1 for purchase of goods as also a supplementary agreement
dated 16 January 1999. The Plaintiff’s case under these two agreements is
that liability is owed by Defendant No.1 to it as a principal debtor, whilst
Defendant No.3 is liable under a personal guarantee to secure those dues.
The Plaintiff’s suit is for nonpayment of its dues under the main contract
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by Defendant No.1 as also nonpayment of the dues by Defendant No.3
under the personal guarantee. Defendant No.2 is said to be the chairman
and managing director of Defendant No.1 and is purportedly sued in his
capacity as a guarantor, at whose specific request the Plaintiff agreed to
supply goods to Defendant No.1 under the main contract. There is no
written guarantee executed by Defendant No.2 in favour of the Plaintiff
agreeing to pay the dues of Defendant No.1 on default.
3 The suit was filed on 3 May 2002. The writ of summons was
issued on 1 July 2002. There is no record of service of the writ of
summons. It is, however, not in dispute that the writ of summons was
served on all the Defendants and that was sometime in 2002. No written
statement was filed by the Defendants in the suit till 2014. On 18 June
2014, the suit was dismissed for default. Neither the Plaintiff nor the
Defendants appeared on that day. On the Plaintiff’s application, on 1
October 2016, the dismissal order was recalled and the suit was restored to
file. On the same date, the Defendants were directed to file their written
statement, latest by 15 October 2016. On 20 October 2016, the Defendants
took out the present notice of motion praying for reference of the parties to
arbitration under Section 8 of the Act. After taking out the notice of
motion, the Defendants also filed their written statement. It appears that
the written statement was taken on record.
4 Learned Counsel for the Defendants submits that the main
contract between the Plaintiff and Defendant No.1 for supply of goods
contains an arbitration clause. Learned Counsel submits that since the main
claim of the Plaintiff arising under that contract is covered by an arbitration
agreement, the parties must be referred to arbitration under Section 8 of
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the Act. Learned Counsel submits that the Defendants, as guarantors of the
Plaintiff’s claim arising under the main contract, are sued as a party
claiming by or under Defendant No.1, who is the principal debtor.
Alternatively, learned Counsel submits that the agreement of guarantee is
inextricably linked to the main contract for supply of goods and also makes
a specific reference to it. Relying on the judgment of the Supreme Court in
the case of Chloro Controls India Pvt.Ltd. vs. Severn Trent Water
1
Purification Inc. and the judgment of our court in M/s.Sahyadri
2
Earthmovers vs. L & T Finance Ltd. and of Delhi High Court in the case
3
of Canbank Financial Services Ltd. vs. M/s.SFL Industries Ltd. , learned
Counsel submits that even if the guarantee executed by Defendant No.3
does not contain any arbitration agreement, such agreement must be
treated as part of the contract of guarantee on account of the inextricable
linkage of the two agreements (i.e. main contract and the contract of
guarantee) as also for the reason that there is a specific reference to the
main contract in the agreement of guarantee.
5 On the other hand, it is submitted by learned Counsel for the
Plaintiff that, in the first place, the present notice of motion does not satisfy
the requirement of Section 8 of the Act inasmuch as the application
thereunder is not made before expiry of the time stipulated for filing of the
first statement of defence on the substance of the suit. Learned Counsel
relies on the decision of Delhi High Court in the case of Krishan Radhu vs.
4
The Emmar MGF Construction Pvt.Ltd. in this behalf. Secondly, it is
submitted, the Plaintiff has filed the present suit invoking the joint and
several liability of three parties, two of whom are not party to the
1 (2013) 1 SCC 641
2 2013(2) MAH.LJ. 302
3 2004 SCC OnLine Del 362 : ILR (2004) 1 Del 430
4 2016 SCC OnLine Del 6499
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arbitration agreement. Learned Counsel submits that on the principle
5
stated in the case of Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya ,
the Plaintiff cannot be asked to split the cause of action and that the suit
cannot be stayed merely as against Defendant No.1 on the basis of the
arbitration agreement between itself and the Plaintiff. Learned Counsel
submits that the guarantee executed by Defendant No.3 is a separate and
independent contract and a mere reference to the main contract under the
agreement of guarantee does not result into incorporation of the
arbitration agreement contained in the main contract into the agreement of
guarantee. Learned Counsel relies on the Supreme Court judgments in the
6
cases of S.N. Prasad, Hitek Industries (Bihar) vs. Monnet Finance Ltd. ,
7
M.R. Engineers and Contractors Pvt.Ltd. vs. Som Datt Builders Ltd.
8
and Duro Felguera S.A. vs. Gangavaram Port Ltd. in support of his
submissions.
6 Referring to the preliminary objection raised by the Plaintiff to
the maintainability of the present notice of motion on the ground that it is
beyond the date stipulated for submitting the first statement on the
substance of the dispute, it is important to note that the present suit was
filed in the year 2002. The relevant provision of Section 8, which applied
as of that date, namely, Section 8 of the Act, as it stood before its
amendment by the Amending Act of 2015, provided for application to be
presented to any judicial authority before whom an action is brought in a
matter which is the subject of an arbitration agreement “not later than
when submitting his first statement on the substance of the dispute”. It is
this provision, which will apply to the present notice of motion and not the
5 (2003) 5 SCC 531
6 (20110 1 SCC 320
7 (2009) 7 SCC 696
8 (2017) 9 SCC 729
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amended provision of Section 8, which was brought into force with effect
from 23 October 2015. Since the writ of summons was served on the
Defendants sometime in 2002, the original date stipulated for submitting of
the written statement had long expired. It, however, had no significance
visàvis application under Section 8 which, until 23 October 2015, could
be filed “not later than the date of submitting his first statement on the
substance of the dispute”. In other words, there is no reason why the filing
of the application under Section 8, as it then stood, should be linked to the
stipulated date of submission of written statement. The provision, as it then
stood, linked the filing of the application under Section 8 to the actual date
of submission of the first statement on the substance of the dispute. The
amendment was brought into force on 23 October 2015 by which time the
suit had already stood dismissed on account of default of appearance of the
Plaintiff. The suit was restored to file on the application of the Plaintiff and
at that time, the Defendants were directed to file their written statement by
15 October 2016. The time for filing of written statement being fixed by
the court in these circumstances could always be extended by the court. In
fact, it appears that this time was indeed extended by this court, since the
written statement was accepted on 23 October 2016. The present notice of
motion is admittedly moved before filing of the written statement on that
date. Viewed from any angle, the present notice of motion is filed within
time. The judgment of Delhi High Court in the case of Krishan Radhu
(supra) cited by learned Counsel for the Plaintiff has no application to the
facts of the present case, though, I must make it clear, I have not applied
my mind to the correctness of the proposition laid down by the learned
Single Judge of Delhi High Court in the case of Krishan Radhu.
7 Coming now to the merits of the application, it is important to
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note that the present suit is a composite action against Defendant No.1, on
the one hand, for a claim arising under the main contract between the
Plaintiff and Defendant No.1, and Defendant Nos.2 and 3 herein, who are
arraigned as guarantors, on the other hand. Defendant No.3 is said to have
executed an agreement of guarantee, whereas there is no written document
executed by Defendant No.2. It is not in dispute that the agreement of
guarantee executed by Defendant No.3 does not contain any arbitration
agreement. The argument, however, is that the agreement of guarantee
being inextricably linked to the main contract for supply of goods, the
arbitration agreement in the main contract must be treated as part of the
agreement of guarantee. Reliance is placed in this behalf on the case of
Chloro Controls (supra). Secondly, it is submitted that since the
agreement of guarantee anyway makes a reference to the main contract for
supply of goods, on the principle of law stated by this court in the case of
Sahyadri Earthmovers (supra), the guarantor must be held to be bound
by the arbitration agreement contained in the main contract.
8 In the case of Sahyadri Earthmovers , the principal borrower
was sued on a loancumhypothecation agreement, whereas the guarantor
was sued on a deed of guarantee executed by him. This deed guaranteed
payment of dues under the loancumhypothecation agreement. An
application was made before a learned Single Judge of this court under
Section 9 of the Act by the claimant creditor. The application was moved
after procuring an award from the arbitral forum. The application was
opposed by the guarantor inter alia on the ground that the guarantor was
not a signatory to the loancumhypothecation agreement and the deed of
guarantee did not contain any specific arbitration clause. The learned
Single Judge of this court hearing the application was of the view that since
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the deed of guarantee referred to the loancumhypothecation agreement,
the loan agreement and its terms and conditions could be said to be part
and parcel of the deed of guarantee; the guarantee could not be dissected
or read in isolation; it was interlinked and interconnected with the loan
cumhypothecation agreement. The judgment of the Supreme Court in the
case of S.N. Prasad (supra) was cited before the learned Single Judge. The
Supreme Court in that case had held that the guarantor of a loan, who was
not a party to the main loan agreement containing an arbitration clause,
cannot be made a party to a reference to arbitration and subjected to an
arbitration award for repayment of the loan. The arbitration agreement
between the lender and the borrower cannot be deemed or construed to be
an arbitration agreement in respect of a guarantor, who was not a party to
the original loan agreement. The learned Single Judge hearing Sahyadri
Earthmovers , however, distinguished this judgment presumably on the
ground that the deed of guarantee in the case before the learned Single
Judge specifically mentioned and referred to the loan agreement between
the parties and since the loan agreement contained an arbitration
agreement, the guarantor was bound by it, though there is no clear
indication as to how the Supreme Court judgment in S.N. Prasad was
actually distinguished. The learned Single Judge held that such reference
was a permissible and recognized mode of entering into an arbitration
agreement to settle the disputes arising under the referring agreement.
9 There is a binding authority of the Supreme Court in the case
of M.R. Engineers and Contractors Pvt.Ltd. (supra), which deals with the
subject of incorporation of an arbitration clause from another document
into a contract. The Supreme Court has elaborately considered in M.R.
Engineers the condition precedent for incorporation of the arbitration
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clause in such a case. The court was concerned in that case with two
contracts, one being the main contract between the employer and the
contractor, which contained a specific arbitration agreement, and a sub
contract between the contractor and a third party, which contained a
specific stipulation that the subcontract shall be carried out on the terms
and conditions as applicable to the main contract unless otherwise
mentioned. Relying on this term and the interconnection between the two
contracts, it was contended before the Supreme Court by the employer that
the sub contractor was bound by the arbitration agreement under the
main contract. The Supreme Court negatived the contention, holding that
there was a difference between a reference to another document in a
contract and incorporation of that other document in a contract by
reference. The court noted that in the first case, what the parties intend to
do is to adopt only specific provisions or parts of the referred document for
the purpose of the contract, whereas in the second case, parties intend to
incorporate the referred document itself in its entirety into the contract.
Accordingly, whenever there is a reference to a document in a contract, the
court has to consider whether the reference to the document is with the
intention of incorporating the contents of that document in entirety into
the contract or with the intention of adopting or borrowing specific
portions of that document for application to the contract. After considering
various instances of incorporation by reference versus mere reference by
way of illustrated cases, the Supreme Court laid down the following
principle: A general reference to another contract will not be sufficient
to incorporate the arbitration clause from the referred contract into
the contract under consideration. There should be a special reference
indicating a mutual intention to incorporate the arbitration clause
from another document into the contract. The court referred to the
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scope and intent of Section 7 of the Act defining an arbitration agreement
with particular reference to subsection (5) thereof, which deals with
reference in a contract to another document containing an arbitration
clause constituting an agreement in writing under the first mentioned
contract. The court put the matter thus :
“24. The scope and intent of Section 7(5) of the Act may
therefore be summarized thus:
(i) An arbitration clause in another document, would get
incorporated into a contract by reference, if the following
conditions are fulfilled :
(1) The contract should contain a clear reference to
the documents containing arbitration clause,
(2) the reference to the other document should clearly
indicate an intention to incorporate the arbitration clause
into the contract,
(3) The arbitration clause should be appropriate, that
is capable of application in respect of disputes under the
contract and should not be repugnant to any term of the
contract.
(ii) When the parties enter into a contract, making a general
reference to another contract, such general reference would
not have the effect of incorporating the arbitration clause
from the referred document into the contract between the
parties. The arbitration clause from another contract can be
incorporated into the contract (where such reference is
made), only by a specific reference to arbitration clause.
(iii) Where a contract between the parties provides that the
execution or performance of that contract shall be in terms of
another contract (which contains the terms and conditions
relating to performance and a provision for settlement of
disputes by arbitration), then, the terms of the referred
contract in regard to execution/performance alone will
apply, and not the arbitration agreement in the referred
contract, unless there is special reference to the arbitration
clause also.
(iv) Where the contract provides that the standard form of
terms and conditions of an independent Trade or
Professional Institution (as for example the Standard Terms
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& Conditions of a Trade Association or Architects
Association) will bind them or apply to the contract, such
standard form of terms and conditions including any
provision for arbitration in such standard terms and
conditions, shall be deemed to be incorporated by reference.
Sometimes the contract may also say that the parties are
familiar with those terms and conditions or that the parties
have read and understood the said terms and conditions.
(v) Where the contract between the parties stipulates that
the conditions of contract of one of the parties to the
contract shall form a part of their contract (as for example
the general conditions of contract of the Government where
Government is a party), the arbitration clause forming part
of such general conditions of contract will apply to the
contract between the parties.”
10 The binding authority of M.R. Engineers’ case neither cited
before nor considered by the learned Single Judge in Sahyadri
Earthmovers (supra) . The law stated by the learned Single Judge in that
case, namely, having signed the deed of guarantee which specifically
mentions and refers to the loan agreement between the parties, which
contains an arbitration agreement, the guarantor is bound by the
arbitration agreement under the loan agreement, is clearly contrary to the
law stated by the Supreme Court in M.R. Engineers and is per incurim.
Every guarantee is necessarily linked to another contract, which is said to
be the main contract, and must by definition refer to the main contract.
After all, Section 126 of the Contract Act defines a ‘contract of guarantee’
as “ a contract to perform the promise, or discharge the liability, of a third
person in case of his default. ” The promise or the liability arising thereunder,
which forms part of that other contract, is the very basis of a contract of
guarantee and without making a reference to that promise or liability, it is
unthinkable that a contract of guarantee can be entered into . Every
contract of guarantee, therefore, by definition must make a reference to the
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main agreement, the promise whereunder is sought to be performed or the
liability whereunder is sought to be discharged under the contract of
guarantee. By making a mere reference to such contract, the contract of
guarantee cannot be said to either incorporate the terms of the main
contract or particularly incorporate the arbitration agreement contained
thereunder. We are bound by the decision of the Supreme Court in the case
of M.R. Engineers and unless the three conditions laid down in that case,
namely, (i) clear reference to the document contained in the arbitration
clause, (ii) such reference indicating an intention to incorporate the
arbitration clause, and (iii) the arbitration clause being appropriate or
capable of being applied in respect of all disputes under the referring
contract and not being repugnant to any term of that contract, are satisfied,
there is no warrant for treating the arbitration clause in the referred
document as having been incorporated into the referring contract. The
proposition laid down by the Supreme Court in M.R. Engineers was once
again affirmed by the Supreme Court in the case of Duro Felguera S.A.
(supra).
11 The learned Single Judge of Delhi High Court in the case of
Canbank Financial Services Ltd. can also accordingly be treated as having
been impliedly overruled and the law stated therein as not good law after
the judgment of the Supreme Court in the case of M.R. Engineers.
Anyway, Canbank case is distinguished by the Delhi High Court itself later
9
in STCI Finance Ltd. vs. Sukhmani Technologies Pvt.Ltd. This later
decision was rendered after considering the cases of Chloro Controls as
well as M.R. Engineers and S.N. Prasad (supra). The Delhi High Court in
STCI Finance held that an agreement to stand as a surety for due
9 235(2016) DLJ-150
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performance of the contract between the principal debtor and the lender,
although linked to the principal contract, is nonetheless an independent
contract and unless the arbitration agreement contained in the principal
contract is specifically incorporated in the agreement of surety by a specific
reference, the surety cannot be said to be bound by the arbitration
agreement contained in the main contract.
12 If the arbitration agreement contained in the main contract for
supply of goods is not binding on the two Defendants purportedly sued as
guarantors, there is no warrant for referring the parties to arbitration. As
stated by the Supreme Court in the case of Sukanya Holdings (P) Ltd.
(supra), the expression “ a matter which is the subject of an arbitration
agreement ” used in Section 8 of the Act, must include “ the entire subject
matter of the suit and not merely a part of it ”. When the entire subject
matter of the suit is not subject to arbitration agreement, the Plaintiff
cannot be asked to bifurcate the subject matter of the suit in two parts, one
to be decided by the arbitral tribunal and the other to be decided by
ordinary civil courts. As held by the Supreme Court, bifurcation of the
subject matter of action brought before a judicial authority is not
permissible under Section 8 for various reasons. Neither was it
contemplated nor anyway indicated in the language of the section and such
bifurcation would result inevitably in delaying the proceedings and
defeating the whole purpose of speedy disposal of a dispute with minimum
cost of litigation. In the present case, the Plaintiff, as dominus litus , is well
within its rights to choose to invoke the joint and several liability of the
principal debtor and the guarantor in one action. The Plaintiff, in such a
case, cannot be asked to prosecute his remedy separately against the
principal debtor and the guarantor. Even under the old law, namely,
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Arbitration Act, 1940, which contained a provision for stay of suit in case of
identity between the subject matters of a suit and an arbitration agreement
(Section 34), Calcutta High Court in the case of Asiatic Shipping Co.
10
(Private) Ltd. vs. P.N. Djakarta Lloyd had held that the court was
justified in refusing to stay a suit between a creditor, and his principal
debtor and guarantor under Section 34, when there was an arbitration
agreement only between the plaintiff creditor and principal debtor and the
guarantor was not a party to it. The court held that any decision upon the
liability of a guarantor necessarily involved determination of the liability of
the principal debtor and as the same issue would have to be gone into both
in the suit and the arbitration proceedings, there was every likelihood of
conflicting findings and the suit, in the premises, should not be stayed.
13 In the premises, the notice of motion has no merit. The subject
matter of the present suit, which is a composite action of a creditor against
his principal debtor and guarantors, cannot be referred to arbitration, since
the alleged guarantors are not party to the arbitration agreement between
the creditor and the principal debtor.
14 The notice of motion is, accordingly, dismissed. Costs to be
costs in the cause.
(S.C. GUPTE, J.)
10 AIR 1969 CALCUTTA 374
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