Holding

Section 8 of the Arbitration and Conciliation Act, 1996 is peremptory; where an arbitration agreement exists, the court must refer the parties to arbitration, rendering the suit non‑maintainable.

Summary

The appellant and respondents entered into a Memorandum of Understanding containing an arbitration clause. Disputes arose over post‑dated cheques, two of which were dishonoured, and the appellant filed a money decree suit. The respondents moved to refer the matter to arbitration; the trial court dismissed the application, but the Andhra Pradesh High Court reversed and directed arbitration, holding the suit non‑maintainable. On appeal, the Supreme Court held that Section 8 of the Arbitration and Conciliation Act, 1996 is peremptory: where an arbitration agreement exists, courts must refer the parties to arbitration, and no issue can be decided in a suit. Consequently, the appeal was dismissed and the suit remained barred.

Issues considered

Whether a suit filed in breach of an arbitration agreement is maintainable under the Arbitration and Conciliation Act, 1996.
Whether Section 8 of the Arbitration and Conciliation Act, 1996 is peremptory and obliges courts to refer disputes to arbitration.
What constitutes a 'dispute' under the 1996 Act when parties have made payments without prejudice to their rights.
Whether partial payments and acceptance of liability extinguish the existence of a dispute.

Legislation cited

Subjects

ArbitrationSection 8Preemptory provisionDispute definitionCivil suit maintainabilityArbitration agreementPost‑dated cheques

Judgment

i-

M/S.AGRI GOLD EXIMS LTD. A
v.
MIS. SRI LAKSHMI KNITS & WOVENS AND ORS.

JANUARY23, 2007

[S.B. SINHAAND MARKANDEY KATJU, JJ.] B

Arbitration and Conciliation Act, 1996-S.8-Held, is pre-emptory in
nature-Where arbitration agreement exists, Court under obligation to
refer parties to arbitration in terms of arbitration agreement-Jn such case
civil suit would not be maintainable-Arbitration Act, 1940-Section 34. C

The Appellant and the Respondents had entered into a Memorandum
of Understanding (MOU) which contained an arbitration clause. Respondents
issued five post-dated cheques in relation to the amount due to Appellant.
However two cheques were dishonoured, pursuant to which Respondents
made certain payments vide demand draft. Before receipt of the said
D
payments, Appellant filed suit for money decree before the District Court.
Respondents challenged maintainability of the suit and filed application
praying for reference of the disputes to the arbitral tribunal in terms of
the arbitration clause contained in the said MOU. The application was
dismissed. On revision, however, the High Court held that the suit filed by E
the Appellant was not maintainable and accordingly directed the parties to
take recourse to the provisions of the Arbitration and Conciliation Act,
1996. Hence the present appeal.

Dismissing the appeal, the Court
F
HELD: 1. The 1996 Act was enacted in the light ofUNCITRAL Model
Rules. Section 8 of the 1996 Act makes a radical departure from Section
34 of the Arbitration Act, 1940. Difference between Section 34 of the 1940
Act and Section 8 of the 1996 Act is distinct and apparent.
[Para 16] [1166-B-C] G
Rashtriya /spat Nigam Limited v. Mis. Verma Transport Company
(2006) 7 SCALE 565, referred to.

2.1. Respondents had not filed any written statement in the suit. They
had not disclosed their defence. They indisputably had raised a dispute in H
1161
1162 SUPREME COURT REPORTS [2007] 1 S.C.R.
--
A regard to the claim of the appellant. The arbitration agreement entered into -!
by and between the parties is of wide amplitude. The arbitration agreement '(

brings within its fold dispute of any nature whatsoever. It is in broadest
term. The term 'dispute' must be given its general meaning under the 1996
Act. [Paras 18 & 19) [1167-A-B, DJ

B P. Ramanatha Aiyar's Advanced Law Lexicon, 3rd Edition, p.1431,
referred to.
-;

2.2. Admittedly, the appellant's claim is not confined to the question
regarding non-payment of the amount under the two dishonoured cheques.
C Thus, there existed a dispute between the parties. [Para 21) [1167-F]

3. Appellant evidently has taken before this Court an inconsistent
stand. _If he was satisfied with the payment of the said demand drafts, he

D
need not pursue the suit. It could have said so explicitly before the High
Court. It cannot, therefore, be permitted to approbate and reprobate.
..
[Para 22) [1167-G)

4. Section 8 of the -1996 Actis pre-emptory in· nature. In a case where
there·exists an_arbitration agreement, the Court is under obligation to
refer the parties to arbitration in terms of the arbitration agreement. No
E issue, therefore, would ,remain to -.be decided in a suit. Existence of
arbitration agreement is not disputed. The High Court; therefore, was right
in referring the dispute between the parties·to arbitration.
[Para 23) [1167-H, 1168-A-B]

F Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums,
[2003] 6 SCC 503 and Rashtriya !spat Nigam Limited v. Mis. Verma
Transport Company, [2006) 7 SCALE 565, relied on.

CIVIL APPELLATE JURISDICTIDN : Civil Appeal No. 326 of2007.

G From the Final Judgment and Order dated 16.12.2005 of the High Court
of Judicature, Andhra Pradesh at Hyderabad in C.R.P. No. 524112004.

Annam D.N. Rao and D. Pawan Kumar for the Appellant.

H Anupam Lal Das and Amit Sharma for the Respondents.
AGRI GOLD EXIMS LTD. v. SRI LAKSHMI KNITS & WOVENS [SINHA, J.] 1163

- A
The Judgment of the Court was delivered by

S.B. SINHA, J. : 1. Leave granted.

2. An order of the Andhra Pradesh High Court dated 16th December,
2005 passed in Civil Revision Petition No. 5241 of2004 directing the parties
to take recourse to the provisions of the Arbitration and Conciliation Act,
B
1996 (for short "the 1996 Act") opining that the suit filed by the appellant
herein was not maintainable, is in question before us.

3. Appellant and the predecessor-in-interest of the respondents entered
into a Memorandum of Understanding on 8.05.2002 in relation to their C
businesses of export. The same Memorandum of Understanding contained
an arbitration clause in the following terms:

"In case of any dispute between the two parties, the same
shall be referred to Arbitration, by two Arbitrators, nominated by D
each of the parties. The Award of the Arbitrators shall be binding
on both the parties."

4. Disputes and differences arose between the parties. However, the
person who was managing the affairs of the respondents firms passed away.
His daughter thereafter took over the business of the firms. By a letter dated
E
03.08.2003, it was stated:

"It is with great sorrow and regret that we write to inform you
the said demise of our beloved Mr. R. Srivatsan, Managing Director

- of our Company on the 1 August, 2003 at 20-45 hrs after a brief
illness. He suffered a massive heart attack and succumbed.
F

However the business interests of the company will be
continued to fulfil his cherished goal and vision. Our company will
strive to carry forward his legacy which will serve as a beacon light G
in all our future endeavours.

We wish to reiterate all our customers that business will be
carried on a usual and all our commitments and obligations shall be
made without any interruption.
H
1164 SUPREME COURT REPORTS [2007] 1 S.C.R.

We seek your fullest co-operation at this juncture to achieve
-·
A
and end results and fulfill Mr. R. Srivatsan's cherished dreams."

5. They entered into a purported settlement of dispute in relation to the
amount due and owing to the appellant. In terms ofa letter dated 08.0.8.2003,
it was stated:
B
"We observe that you have charged interest of Rs.827755 which
I
amount could kindly waive. Out of the principal balance amount of
Rs.17 .50 lakhs, we are in a position to pay at best Rs.5 lakhs only.
We have arrived at this figure after thoroughly analyzing our
situation. We are confident that such a large and prestigious
c Company like yours will definitely lend as your hand of friendship
and bail us out of our current situation."

6. They asked for waiver of some interest, etc. which allegedly was
accepted by it. The respondents issued five post dated cheques of Rs.
..
D 11,25,000 each, which were forwarded by a letter dated 9th January, 2003
stating:

"We are enclosing herewith five post dated cheques Bearing Nos.:
574351 TO 574355 (5 Cheques) drawn ICICI Bank Ltd., Mount Road,
Each R. 11,25,000 (Eleven Lakhs Twenty Five Thousand only)
E towards settlement of your outstanding calculated on approximate
basis.

Once the overseas bills are realized we shall arrive at the exact
amount balance. And if anything to be paid, we shall pass it on the
F same to you by a separate cheque with in 30 days time."

7. The said cheques were presented to the bank. Payments in terms of
three cheques bearing Nos. 574351 dated 21.4.2003, 574352 dated 21.5.2003
and 574353 dated 21.6.2003 were honoured whereas the· fourth cheque
bearing No. 574354 dated 21.7.2003 was dishonoured on 29.07.2003.
G
8. Admittedly, Respondents without prejudice to their rights and
contentions sent a demand draft bearing number 028881 drawn on 18.08.2003
for a sum of Rs. 11,25,000 which was accepted by the appellant. Yet again
on 12.09.2003, the respondents without prejudice to their rights sent another
H demand draft bearing number 029612 for a sum of Rs. 11,25,000.
AGRI GOLD EXIMS LTD. v. SRI LAKSHMI KNITS & WOVENS [SINHA, J.] 1165

9. Before receipt of the said payments, however, the appellant filed a A
suit in the District Court at Vijaywada for a decree for a sum of Rs. 36, 14,887,
the cause of action wherefor was stated as under:

"The cause of action has arisen on 08-05-2002 when the memorandum
of Understanding was executed between the plaintiff and the
Defendant, and on all subsequent dates when the various B
transactions took place and on 29-07-2003, when the Cheque dated
21-07-2003 issued by the 1st Defendant was dishonoured."

10. Dishonour of the cheques was not put as a cause of action for the
suit.
c
11. In the said suit, the follo}Ving prayers were made:

"(a) For the Suit amount ofRs.36, 14,887 (Rupees Thirty Six Lakhs

- )
(b)
Fourteen Thousand Eight Hundred and Eighty Seven only).

For future interest@ 24% p.a. on Rs.53,79,149 (Rupees Fifty
three Lakhs Seventy nine Thousand One Hundred and Forty
D

Nine only) from the date of the suit till the date ofrealization."

12. Respondents in the said suit filed an application praying for
reference of the dispute to the arbitral tribunal in tenns of the arbitration
clause contained in the said Memorandum cf Understanding and contended
E
that the .suit filed by the appellant was not maintainable. By reason of a letter
dated 23.08.2004, the said application was dismissed opining that no dispute
existed between the parties for reference to an arbitration.

- 13. On a revision application filed by the respondents herein, the High
Court, however, reversed the said order by the impugned judgment.

14. Mr. Annam D.N. Rao, learned counsel appearing on behalf of the
F

appellant, would submit that keeping in view of the fact that the respondents
herein had accepted their liabilities, it cannot be said that there existed a
dispute or dispute by and between the parties within the meaning of Clause G
20 of the Memorandum of Understanding dated 8.05.2002. According to the
learned counsel, as the respondents accepted their liability, pursuant whereto
and in furtherance whereof, they issued post dated cheques, a suit for
realization of the amount under the said cheques would not attract the
provisions of the 1996 Act. H
1166 SUPREME COURT REPORTS (2007] 1 S.C.R.

A 15. Mr. Anupam Lal Das, learned counsel appearing on behalf of the
respondents, on the other hand, submitted that in view of the fact that the
respondents had paid the balance amount of Rs. 22,50,000 by way of two
demand drafts dated.18.08.2003 and 12.09.2003, on its own showing, the
appellant has no subsisting cause of action and, thus, it should withdraw
the suit.
B
16. Difference between Section 34 of the Arbitration Act, 1940 and
Section 8 ofthe 1996 Act is distinct and apparent. Section 8 of the 1996 Act
makes a radical departure from Section 34 of the 1940 Act. The 1996 Act was
enacted in the light of UNCITRAL Model Rules.
c ,.
17. We need not dilate on this issue as this aspect of the matter has
been considered by this Court in Rashtriya /spat Nigam Limited & Anr. v.
Mis. Verma Transport Company, (2006] 7 SCALE 565, wherein this Court
noticed:
D
"Section 34 of the repealed 1940 Act employs the expression
'steps in the proceedings'. Only in terms of Section 21 of the 1940
Act, the dispute could be referred to arbitration provided parties
thereto agreed. Under the 1940 Act, the suit was not barred. The
Court would not automatically refer the dispute to an arbitral
E tribunal. In the event, it having arrived at satisfaction that there is
no sufficient reason that the dispute should not be referred and no
step in relation thereto was taken by the applicant, it could stay the
suit.

F Section 8 of the 1996 Act contemplates some departure from ...
Section 34 of the 1940 Act. Whereas Section 34 of the 1940 Act
contemplated stay of the suit; Section 8 of the 1996 Act mandates
a reference. Exercise of discretion by the judicial authority, which
was the hallmark of Section 34 of the 1940 Act, has been taken
away under the 1996 Act. The direction to make reference is not
G only mandatory, but the arbitration proceedings to be commenced
or continued and conclusion thereof by an arbitral award remain
unhampered by such pendency. [See O.P. Malhotra 's 'The Law
and Practice of Arbitration and Conciliation', 2nd Edition, pp. 346-
347]"
H
'r·

AGRI GOLD EXIMS LTD. v. SRI LAKSHMI KNITS & WOVENS [SINHA, J.) 1167

18. Respondents had not filed any written statement in the suit. They A
had not disclosed their defence. They indisputably had raised a dispute in
regard to the claim of the appellant. We have noticed the arbitration
-( agreement entered into by and between the parties. It is of wide amplitude.
The arbitration agreement brings within its fold dispute of any nature
whatsoever. It is in broadest term. Respondents had made payments without
prejudice to their rights and contentions. Payments were made keeping in B
view the ongoing business relationship between the parties. Out of the five
post dated cheques, two were dishonoured. But, despite pendency of the
suit, payments had been made to satisfy the claim of the appellant in respect
of the cheques which were dishonoured. Sufficient explanation has been
offered by the respondents therefor. Certain contingencies of events, as c
indicated hereinbefore, are not in dispute. If the suit was confined to the
amount in respect of those two cheques, the contention of Mr. Rao could

-
have been accepted. But it is not so.

19. The term 'dispute' must be given its general meaning under the D
1996 Act.
)

20. In P Ramanatha Aiyar 's Advanced Law Lexicon, 3rd edition, page
1431, it is stated:

"In the context of an arbitration the words "disputes" E
and "differences" should be given their ordinary meanings. Because
one man could be said to be indisputably right and the other
indisputably wrong, that did not necessarily mean that there had
never been any dispute between them... "

., 21. Admittedly, the appellant's claim is not confined to the question
F
regarding non-payment of the amount under the two dishonoured cheques.
Thus, there existed a dispute between the parties. Had the dispute between
..• the parties been confined thereto only, the same had come to an end .

22. Appellant evidently has taken before us an inconsistent stand. If G
he was satisfied with the payment of the said demand drafts, he need not
pursue the suit. It could have said so explicitly before the High Court. It
cannot, therefore, be permitted to approbate and reprobate.

23. Section 8 of the 1996 Act is peremptory in nature. In a case where H
1168 SUPREME COURT REPORTS [2007) I S.C.R

A there exists an arbitration agreement, the court is under obligation to refer
the parties to arbitration in terms of the arbitration agreement. [See Hindustan
Petroleum Corpn. Ltd v. Pinkcity Midway Petroleums, (2003) 6 SCC 503
and Rashtriya /spat Nigam Limited (supra)] No issue, therefore, would
remain to be decided :n a suit. Existence of arbitration agreement is not
disputed. The High Court, therefore, in our opinion, was right in referring
B the dispute between the parties to arbitration.

24. For the reasons aforementioned, there is no merit in this appeal
which is dismissed accordingly with costs. Counsel's fee assessed at Rs.
25,000.
c
B.B.B. Appeal dismissed.