The Delhi High Court held that the Application under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act”) is only to refer parties to the arbitration and as such cannot be termed as civil proceedings.
Therefore, the conclusion that the period consumed in the Section 8 application has to be excluded as per Section 14 of the Limitation Act, 1963 is ex-facie erroneous. It further opined that Section 21 and Section 8 of the Arbitration Act are different and that Section 8 is not a substitute for Section 21 notice. Both sections have separate areas. If the Section 8 application is allowed, it cannot be assumed that the Arbitral Proceedings have commenced.
Brief Facts:
The Parties entered the transaction for the purchase of an Oxygen Nitrogen Plant which was supplied by Respondent and as per terms and conditions, the Appellant was required to pay 25% of the consideration amount as advance and the remaining amount before the dispatch of goods. The Appellant did not pay the remaining amount and sought an extension for the same. It was claimed that the parties entered discussions post which Respondent issued a revised proforma invoice wherein the price of the Oxygen Plant was increased and the advance to be paid now was 50% of the consideration amount.
It was contended by the Appellant that the Plant was further sold to a customer in Iraq, but the said customer did not pay and so even the Appellant defaulted. It was argued that the revised proforma was not acceptable to the Appellant and therefore, he had sent an email rejecting the revised invoice and demanded a refund of the amount that was already paid by him.
The Respondent, on the other hand, sent a legal notice stating that the amount paid by the Appellant was non-refundable and further demanded the remaining consideration.
Thereafter, the Appellant filed a suit for recovery of the amount which was transferred to the District Court. Later, Respondent filed an application under Section 8 of the Act seeking that the matter be referred to Arbitration. The Application was allowed, and the Appellant before the Arbitral Tribunal sought a refund of the amount paid by him along with interests. Respondent filed a counterclaim and demanded the remaining consideration amount. The Tribunal rejected the Appellant’s application.
Brief Background:
The present appeal has been filed under Section 37 of the Act against the order passed by the Learned Commercial Court vide which the application under Section 34 of the Act was dismissed. The Appellant filed an application challenging the interim award passed by the Arbitral Tribunal wherein the Tribunal dismissed the contention of the Appellant that the counterclaim of the Respondent is barred by limitation.
The Arbitral Tribunal accepted that the Respondent did not give any notice as contemplated in Section 21 of the Act, however, it gave the benefit of Section 14 of the Limitation Act, 1963 to the Respondent on the ground that the time spent by Respondent on pursuing application under section 8 of the Act has to be excluded for considering the period of limitation for counterclaim.
The Learned Commercial Court accepted the findings of the Arbitral Tribunal and held that the Respondent was entitled to benefit from Section 14 of the Limitation Act, 1963. The Court however rejected the finding that the Respondent did not send a notice under Section 21 of the Act and opined that the application under Section 8 of the Act constitutes notice invoking Arbitration.
Observations of the Court:
The 2 issues that the Delhi High Court considered are first, whether the time consumed in pursuing Section 8 application is excluded for calculating the period of limitation and second whether the legal notice sent by Respondent can be construed as notice contemplated under Section 21 of the Act.
It was noted that the Respondent contended that 2 notices were issued by him and can be construed as notices under Section 21 of the Act. Another alternative contention made was that the Respondent is entitled to Section 14 of the Limitation Act as ruled by the Arbitral Tribunal.
The Court observed that the Arbitral Tribunal had only accepted the contentions that the benefit of Section 14 of the Limitation Act can be given to the Respondent. The Tribunal rejected the contention that the notice served by Respondent can be construed as notice under Section 21 of the Act. However, the Learned Commercial Court had accepted both the contentions of the Respondent.
Concerning the benefit to Respondent under Section 14 of the Limitation Act, the Court opined that the assumption that Section 8 Application related to the same matter in issue as its counterclaim is fundamentally flawed. The Court held that the Section 8 Application is only to refer parties to the arbitration and as such cannot be termed as civil proceedings. Therefore, the conclusion that the period consumed in the Section 8 application has to be excluded is ex- facie erroneous.
The Bench further opined that Section 14 benefit is available to Plaintiff and not Defendant who is resisting a claim. In case of a counterclaim which is like a suit, Defendant may be construed as Plaintiff, however, when Section 8 application is filed, that cannot be said to be a party pursuing his claim before a Court.
It was remarked that Section 21 of the Arbitration Act is relevant to determine whether claims have been raised within the period of limitation. Arbitration proceedings are commenced when notice under Section 21 is received and by legal fiction, this date is also relevant for the application of provisions of the Limitation Act. The date on which the Section 8 application is filed is irrelevant when determining whether the claim is within a period of limitation or not.
The High Court further differentiated between Section 21 and Section 8 of the Arbitration Act and held that Section 8 is not a substitute for Section 21 notice. Both sections have separate areas. If the Section 8 application is allowed, it cannot be assumed that the Arbitral Proceedings have commenced because by way of Section 8 only the parties are referred to Arbitration and action before any Judicial Authority stands terminated. It is very much possible that neither of the parties take any action to resolve disputes via Arbitration. Therefore, the Delhi High Court expounded that the application under Section 8 cannot be construed as a request for Arbitration under Section 21 of the Act.
The Bench further observed that the notices sent by the Respondent did not include a request that the claims as alleged by the Respondent be referred to Arbitration and therefore, none of the notices can be considered as a request to refer the disputes to Arbitration. The fundamental requirements of Section 21 have not been fulfilled.
The decision of the Court:
Considering the above-mentioned reasons, the Delhi High Court allowed the appeal and set aside the Arbitral Award as well as the order passed by the Learned Commercial Court.
Case Title: Web Overseas Limited v. Universal Industrial Plants Manufacturing Company Private Limited
Coram: Hon’ble Mr. Justice Vibhu Bakhru, Hon’ble Mr. Justice Amit Mahajan
Case No.: FAO (COMM) 8/2021
Advocates for Petitioner: Advs. Mr. Vivek Kohli, Mr. Nalin Talwar, Mr. Sandeep Bhuraria, Ms. Yeshi Rinchhen, Mr.Akash Yadav, Mr. Juvas Rawal
Advocates for Respondent: Advs. Mr. Ranjeev Kumar, Mr. Anshul Goel
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