Section 8 reference upheld in commercial dispute

Justice Somasekhar Sundaresan of the Bombay High Court dealt with a Section 8 application in a commercial dispute arising out of a memorandum of understanding dated 23 November 2016 and a share subscription cum shareholder agreement dated 21 December 2016.

The plaintiffs had sought declarations that both documents were illegal, void, non est and not binding. They also asked for cancellation of the documents, a money claim of Rs. 3 crores with interest, and interim restraint against the defendant acting under the MOU and the agreement.

The defendant relied on Clause 25 of the agreement, which provided for arbitration by a sole arbitrator, and Clause 21, which stated that the agreement was the entire agreement between the parties on the subject matter. The Section 8 application was filed on the footing that the disputes in the suit were covered by the arbitration clause.

The plaintiffs resisted reference to arbitration by contending that there was no concluded contract, that the agreement in the defendant’s possession had been obtained by fraud or misrepresentation, and that the plaintiffs were not ad idem on the final terms. The pleadings also referred to SMS exchanges and the parties’ competing versions of the transaction.

The Court noted that the dispute revolved around the transaction originally contemplated in the MOU and carried into the agreement. On that basis, the Court accepted the request for reference to arbitration. The order also records that the parties had earlier been asked to consider resolving their disputes through arbitration, and the matter was taken up for final hearing by consent.

The operative directions required the parties to appear before the learned sole arbitrator, furnish contact details, and proceed with the arbitration. The arbitrator was requested to make the statutory disclosure under Section 11(8) read with Section 12(1) of the Arbitration and Conciliation Act, 1996. The parties were directed to share arbitral costs and fees equally in the first instance, subject to the final award on costs.

The connected commercial suit was disposed of as withdrawn, and refund of court fees was permitted in accordance with the rules.

Practical takeaway: where the commercial suit is anchored in an agreement containing a broad arbitration clause, the Court may refer the dispute to arbitration even if the plaintiff disputes the contract’s validity.