Hon'ble Rakesh Srivastava,J.
(Delivered by Hon'ble Sudhir Agarwal, J.)
1. This appeal under Order 43 Rule 1(a) C.P.C. has come up at the instance of plaintiffs arising from order dated 23.12.2015 passed by Miss. Sweta Verma, Additional Chief Judicial Magistrate/ Additional Civil Judge (Senior Division), Court No. 12, Allahabad, returning plaint under Order VII Rule 10 C.P.C. in Original Suit No. 889 of 2015 on the ground that there is arbitration agreement between parties and, therefore, under Section 8 of Arbitration and Conciliation Act, 1996 (hereinafter referred to as the "Act, 1996"), parties must avail their remedy before Arbitrator and suit cannot proceed.
2. The plaint case set is that plaintiffs-appellants are owners of property situated at Plot No. G-4 Civil Station, Bungalow No. 50A/40, Lal Bahadur Shastri Marg, Civil Lines, Allahabad, measuring 934.31 sq. yards (781.17 sq. meters). With an intention to raise multistory commercial building, plaintiffs executed Memorandum of Understanding (hereinafter referred to as the "MOU") on 20.09.2011 with defendant-respondent 1, i.e., Milan Developers through its Managing Director, Sardar Joginder Singh. MOU provides that plot shall remain property of owner, i.e., plaintiffs-appellants but second party, i.e., Milan Developers shall have right to share 50% in the form of saleable area of entire proposed commercial complex. Clause 5.5 of MOU provides that on completion of construction of commercial building, second party shall be entitled to constructed saleable area as demarcated below:
"A. The First Party (Land Owner) shall be entitled for 50% Constructed Saleable Area.
B. The Second Party (Builder) shall be entitled for 50% constructed Saleable Areas."
3. Clause 5.6 provides that construction work shall be completed within 24 months from the date of release of approved map by Allahabad Development Authority (hereinafter referred to as the "ADA") . However, in case of delay, both parties will not make any claim if it is due to any natural calamity and beyond control of human beings. Clause 6.3 further provides that on completion of project, Builder, i.e., second party shall be entitled for construction rights on roof and shall be duty bound to make equal and similar construction for first party as it does for itself. It also provides that both parties shall be entitled to share constructed saleable area of equal ratio 1:1, i.e., 50% each.
4. There is a clause in MOU for settling inter se dispute by arbitration i.e., Clause 6.6, which reads as under:
"6.6 That in case of any dispute arising between the parties hereto pertaining to the said terms and conditions of the agreement the same shall be referred to sole arbitrator appointed by mutual consent of both the parties or in case the parties do not agree to a particular arbitrator one arbitrator from both sides shall form the arbitration forum and the decision of the sole/forum arbitrator/s shall be final and binding on the parties hereto. The provisions of Arbitration Act 1996 shall be fully applicable to such Arbitration proceedings. The Arbitration shall be held at Allahabad."
(emphasis added)
5. The plaintiffs-appellants, pursuant to MOU dated 20.09.2011 executed a Builder Agreement dated 20.10.2011 with Milan Developers, i.e., defendant-respondent 1 which also contains similar stipulations as provided in MOU. Therein also Clause 5.6 contains provision for settling dispute by arbitration and reads as under:
"5.6 That in case of any dispute arising between the parties hereto pertaining to the said terms and conditions of the agreement the same shall be referred to sole arbitrator appointed by mutual consent of both the parties or in case the parties do not agree to a particular arbitrator one arbitrator from both sides shall form the arbitration forum and the decision of the sole/ forum arbitrator/s shall be final and binding on the parties hereto. The provisions of Arbitration Act 1996 shall be fully applicable to such Arbitration proceedings. The Arbitration shall be held at Allahabad."
(emphasis added)
6. The defendant-respondent 1 took about one year in getting map sanctioned by ADA and thereafter raised construction but with a slow pace. On 30.02.2015 defendant-respondent 1 executed a sale deed dated 13.02.2015 in favour of Carrier Coaching Allahabad Pvt. Ltd.-defendant-respondent 2 for consideration of Rs. 70 lacs. When plaintiffs-appellants came to know of aforesaid sale deed, in July, 2015, a notice dated 30.07.2015 was given to defendants-respondents 1 and 2, both, stating that work is not complete and still in an illegal manner, sale deed dated 13.02.2015 has been executed in favour of Carrier Coaching Allahabad Pvt. Ltd., which is not in accordance with agreement between plaintiffs-appellants and defendant-respondent 1, hence defendants should cancel sale deed dated 13.02.2015. Plaintiffs-appellants also cancelled Builder Agreement dated 20.10.2011 and directed defendant-respondent 1, not to execute any sale deed, lease deed etc. and also not to sale or dispose of property in dispute mentioned in sale deed dated 13.02.2015.
7. Thereafter Original Suit No. 889 of 2015 was filed by plaintiffs-appellants impleading Milan Developers through its Managing Director, Sardar Joginder Singh as defendant 1 and Carrier Coaching Allahabad Pvt. Ltd. as defendant 2, seeking following reliefs:
"A. That by decree of permanent injunction the defendant no. 1 may be restrained from alienating any portion of the incomplete multistoried commercial complex lying over portion of bungalow no. 50A/40, Lal Bahadur Shastri Marg, Allahabad City, Pargana & Tehsil Sadar, District Allahabad in any manner.
B. That by decree of permanent injunction the defendant no. 2 may be restrained from alienating the alleged portion purchased by him lying over portion of bungalow no. 50A/40, Lal Bahadur Shastri Marg, Allahabad City, Pargana & Tehsil Sadar, District Allahabad through registered sale deed dated 13.02.2015 in any manner.
C. That by declaratory decree it may be declared that the Builders Agreement dated 20.10.2011 registered in the office of Sub Registrar, Sadar, Allahabad at Bahi No. 1, Jild No. 7235 at Pages 213 to 348 at Serial No. 5219 may be declared null and void and not binding on the plaintiffs in view of breach of contract by the defendant no. 1 and also as the cancellation has been made by the plaintiffs.
D. That the cost of the suit may be awarded to the plaintiffs against the defendants.
E. That any other relief which the court may deem fit and proper may be awarded to the plaintiffs against the defendants."
(emphasis added)
8. Plaintiffs-appellants also prayed for a temporary injunction under Order 39 Rules 1 and 2 but Trial Court did not find the matter urgent justifying ex parte interim injunction and issued notice on the said application. Plaintiffs-appellants then came to this Court in Writ Petition No. 5020 of 2015 wherein this Court passed an interim order on 14.09.2015 as under:
"Heard Sri A.D. Saunders learned counsel for the petitioners.
The petitioners who are the owners of the land entered into a Memorandum of Understanding with the respondent no.1 builder for constructing a multi-storied building on the land in question.
The grievance of the petitioners is that the respondent no. 1 without completing the construction work and without the consent of the petitioners has started disposing of the flats constructed on to it, which the builder cannot do as the land belongs to the petitioners and the sale deed, if any, in respect of any of the flat so constructed has to be executed jointly by the petitioners and the builder.
Issue notice to the respondents no. 1 and 2 returnable at an early date.
List for admission/final disposal after return of notice.
In the meantime, as the interim injunction application of the petitioners is fixed for 01.10.2015, the Court of first instance may proceed and decide the same in accordance with law either on the said date, if notices are served upon the defendant/ respondents or within a period of two months thereafter and during this period the respondent no. 1 shall not create any third party rights in respect of the flats constructed over the land in dispute as the matter is subjudice.
This order shall cease to operate as and when any decision on the interim injunction application is taken by the court below."
9. On behalf of defendant 1, i.e., Milan Developers, an application dated 01.10.2015 was filed requesting court below to direct parties to refer dispute for arbitration in terms of arbitration clause in Builder Agreement dated 20.10.2011.
10. A similar application dated 12.10.2015 was filed by defendant 2, i.e., Carrier Coaching Allahabad Pvt. Ltd.. Defendant 2, besides Clause 5.6 of Builder Agreement dated 20.10.2011 also referred to Clause 6.6 of MOU and requested court below to refer matter for arbitration.
11. Aforesaid applications of defendants have been considered and decided by court below by impugned order dated 23.12.2015 and accepting preliminary objections raised by defendants-respondents, it has returned plaint under Order 7 Rule 10 C.P.C. to plaintiffs-appellants directing them to avail proper forum for settling of dispute, i.e., arbitration in terms of Builder Agreement dated 20.10.2011 and MOU dated 20.09.2011. The court below has also relied on Apex Court's decisions in Datar Switchgears Ltd. vs. Tata Finance Ltd. & Anr., 2000(8) SCC 151; C.M.C. Ltd. vs. Unit Trust of India and Ors., AIR 2007 SC 1557; National Agricultural Co-op. Marketing Federation India Ltd. vs. Gains Trading Ltd., AIR 2007 SC 2327; State of U.P. and others vs. Bridge & Roof Co. (India) Ltd., AIR 1996 SC 3515; ABL International Ltd. and Anr. vs. Export Credit Guarantee Corporation of India Ltd. and Ors., 2004(3) SCC 553; and, Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity Midway Petroleums, 2003(6) SCC 503.
12. Two questions up for consideration before this Court for deciding this appeal are, "whether clauses for arbitration, i.e., Clause 5.6 in Builder Agreement dated 20.10.2011 and Clause 6.6. in MOU dated 20.09.2011, are applicable to plaintiffs-appellants as well as defendants-respondents so as to denude jurisdiction of Civil Court to entertain and decide civil suit in respect of reliefs claimed in Original Suit No. 889 of 2015"; and, "whether court below has rightly held that plaintiffs-appellants must follow remedy by way of arbitration and suit is not liable to proceed in view of Section 8 of Act, 1996".
13. We have heard Sri A.D. Saunders, Advocate for plaintiffs-appellants and Sri U.N. Sharma, Senior Advocate, assisted by Sri Chandan Sharma, Advocate for defendant-respondents.
14. There is no dispute with respect to execution of MOU and Builder Agreement. It is also not in dispute that in Clause 6.6. in MOU dated 20.09.2011 and Clause 5.6 in Builder Agreement dated 20.10.2011, there is stipulation that in case of any dispute pertaining to terms and conditions of agreement, parties shall refer dispute for resolution by sole Arbitrator appointed by mutual consent of parties or in case parties do not agree to a particular Arbitrator, they shall form an arbitration forum and decision of said forum shall be binding on parties.
15. It is also not in dispute that both these agreements, i.e., Builder Agreement dated 20.10.2011 and MOU dated 20.09.2011, have been executed between plaintiffs-appellants and defendant-respondent 1 only. Defendant-respondent 2, i.e., Carrier Coaching Allahabad Pvt. Ltd., is admittedly not a party either to MOU dated 20.09.2011 or Builder Agreement dated 20.10.2011.
16. In fact plaintiffs-appellants as such have not entered into any agreement with defendant-respondent 2 and, therefore, there is no privity of contract between plaintiffs-appellants and defendant-respondent 2.
17. It is in these admitted facts we have to consider, whether dispute raised and cause of action stated in Original Suit No. 889 of 2015 is such which justify parties to suit to have resolution of their dispute by arbitration in terms of Clause 5.6 of Builder Agreement and Clause 6.6. of MOU and suit is barred by Section 8 of Act, 1996.
18. The term "arbitration agreement" has been defined in Section 7 of Act, 1996 and reads as under:
"7. Arbitration agreement.--(1) In this Part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in--
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract." (emphasis added)
19. In order to constitute an "arbitration agreement" it is thus an agreement between parties so as to render suit inadmissible and inoperative and relegate parties to avail remedy under arbitration agreement but if one or more party in suit against whom substantial relief is claimed is not a party to arbitration agreement, we are clearly of the opinion that in such a case Sections 7 and 8 would not be attracted.
20. Section 8 of Act, 1996 reads as under:
"8. Power to refer parties to arbitration where there is an arbitration agreement.--(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made." (emphasis added)
21. The condition precedent to attract Section 8 is that an action should have been brought before a judicial authority in a matter which is subject of an arbitration agreement. If there is no agreement or an agreement having no clause of arbitration, Section 8 would have no application.
22. The authorities cited by court below only states that provision of Section 8 and pari materia provision as existed in old Act, i.e., Arbitration Act, 1940, is mandatory and if there is an arbitration agreement between parties to suit in respect of cause of action stated in suit, parties must be relegated to avail remedy by way of arbitration and suit shall not proceed. In the old Act statute provided that suit shall be stayed directing parties to avail remedy of arbitration. The exposition of law, when there exist an arbitration agreement between parties to suit, is unexceptionable but in the present case moot question is, whether there is such an agreement between parties to suit so as to attract Section 8 read with Section 7 of Act, 1996.
23. In K.K. Modi Vs. K.N. Modi and others, 1998(3) SCC 573, Court considered essential ingredients of an arbitration clause. It held that there are two important ingredients, i.e., the agreement between parties must contemplate that substantive rights of parties will be determined by agreed Tribunal; and, that Tribunal will determine rights of parties in an impartial and judicial manner with the Tribunal owing an equal obligation of fairness towards both sides. It is further held that agreement of parties to refer their disputes to decision of Tribunal must be intended to be enforceable in law. Therein Court had an occasion to consider difference between an expert determination and arbitration and in that context aforesaid observations were made but the fact remains that Court observed about essential ingredients of an arbitration clause. It says that there must exist an agreement between parties which is intended to be enforceable in law.
24. The above dictum has been reiterated in Bharat Bhushan Bansal vs. U.P. Small Industries Corporation Ltd., Kanpur, 1999(2) SCC 166.
25. In Yogi Agarwal vs. Inspiration Clothes and U and others, 2009(1) SCC 372 a suit was filed for recovery of certain amount. Therein defendants made an application under Section 8 for referring the matter to arbitration. To show existence of arbitration agreement, defendants relied on three invoices of Yash Traders, a proprietary concern of second defendant (petitioner before Supreme Court), in regard to sale of cotton fabric by Yash Traders to plaintiff. Defendants alleged that said invoices were accepted by plaintiff thus resulting in a binding arbitration agreement. Trial Court found that there was no arbitration agreement in regard to suit transactions and defendants wanted three invoices relating to some other transactions to be treated as arbitration agreement between parties in regard to suit transactions. It held that arbitration agreement contains in invoices signed by Yash Traders cannot be read as being that of plaintiff. High Court confirmed the view taken by Trial Court. It was argued before Supreme Court that to constitute a valid arbitration agreement a document need not be signed by all parties. If an invoice signed by seller is acknowledged or accepted or acted upon by buyer, a term in invoice providing for arbitration will be an arbitration agreement between seller and buyer, irrespective of whether buyer signed document or not. Court held that suit was filed for recovery of amount allegedly due in regard to some samples supplied by plaintiff to defendants and certain supplies made to nominees of first defendant company. Three invoices relied on by defendants, relates to sale of goods by proprietary concern of second defendant to plaintiff. The invoices have nothing to do with the suit transactions. Such unconnected documents cannot be pressed into service to claim existence of an arbitration agreement. It further held that Sections 7 and 8 of Act, 1996 referred to existence of an arbitration agreement between parties. They necessarily refer to an arbitration agreement in regard to current dispute between parties or subject matter of suit. In order to constitute an arbitration agreement for the purpose of Sections 7 and 8 it should satisfy two conditions, i.e., (1) it should be between parties to dispute; and, (2) it should relate to or applicable to dispute.
26. The word 'party' under Section 8(1) means 'party' entitled to maintain application under Section 8. In Magma Leasing Limited Vs. NEPC Micon Limited and another, AIR 1998 Calcutta 94 a Single Judge of Calcutta High Court said in para 11 of the judgment as under:
"11. The "party" referred to in Section 8(1) to my mind is a party who is entitled to maintain the application thereunder."
27. Andhra Pradesh High Court also considered a similar issue in The Barium Chemicals Ltd. Vs. Bomday Industrial and Chemical Company, Bombay, AIR 1977 AP 400 and said:
"3. The impugned order cannot be sustained in law. Goods were sold by the plaintiff to the first defendant. Therefore, the amount which was due as a result of that transaction was primarily recoverable from the first defendant. The second defendant came into the picture because he was the sole selling agent of the plaintiff. There was no agreement between the plaintiff and the first defendant, secondly the first defendant was not a party to the agreement which contained the arbitration clause. It was an agreement between the plaintiff and second defendant. The first defendant is therefore not bound by that agreement and the dispute between the parties cannot be referred to arbitration so far as the first defendant is concerned."
28. A similar issue was considered by Calcutta High Court in Asiatic Shipping Co. Vs. P.N.D. Lloyd, AIR 1969 Cal 374 wherein the Court said:
"The appellant made an application in the Court below on the 2nd February, 1967 asking for stay of proceedings under Section 34 of the said Act. The learned Judge, by his order dated July 7, 1967 has refused to grant a stay. The ground upon which the stay was refused is as follows: The learned Judge has noticed that in the suit the claim is not only against the principal debtor but also against guarantor. Admittedly, there is no arbitration agreement with regard to the guarantor. Therefore, the suit will have to be decided as against defendant No.2. The learned Judge has rightly observed that a decision upon the liability of a guarantor necessarily involves the determination of the question as to whether the principal debtor was liable, for if the principal debtor was not liable no liability could be attributed to the guarantor. Now, the principal debtor wants to got to arbitration in London. Apart from the fact that nothing whatsoever has happened in London but everything happened in India and the Far East, the learned Judge has expressed an apprehension that the same issue as regards the liability of the principal debtor will have to be gone into, both in the suit and in the arbitration proceedings and there was every likelihood of conflicting findings. Therefore, by using his discretion he has held that he is not inclined to exercise his discretion in this case and on the facts of the instant case refused to stay the suit. The application was accordingly dismissed."
29. In Terry Gold (India) Ltd., Hyderabad Vs. TCI Finance Ltd, 1999(1) ALT 265=1998(6) ALD 831 a Division Bench of Andhra Pradesh High Court said that a suit in which a single claim is made against two defendants, it cannot be split up and dispute as against one cannot be referred to arbitration while it is tried against another since another is not party to arbitration agreement. In such a case, dispute cannot be referred to arbitration. Court has said:
"....the dispute between the parties cannot be referred to arbitration on account of the fact that the first defendant is not a party to the arbitration agreement. The view that the suit cannot be split up between one who is a party to the agreement and one who is not a party to it is supported by the decisions of the Calcutta High Court in Asiotic Shipping Co. Vs. P.N.D. Lloyd, (supra) and also of Nagpur High Court in C.H.O. & C.S. Co. v. Brijnath Singhji, AIR 1956 Nag. 61."
30. In order to attract provision for stay of suit if there is an arbitration agreement between parties, construing similar provision, i.e., Section 34 of Arbitration Act, 1940 (old Act) Supreme Court in Anderson Wright Ltd vs Moran And Company, AIR 1955 SC 53 said that following conditions should be fulfilled:
(1) The proceeding must have been commenced by a party to an arbitration agreement.
(2) The legal proceeding which is sought to be stayed must be in respect of a matter agreed to be referred.
(3) The applicant for stay must be a party to the legal proceeding and he must have taken no step in the proceeding after appearance. It is also necessary that he should satisfy the Court not only that he is but also was at the commencement of the proceedings ready and willing to do everything necessary for the proper conduct of the arbitration.
(4) The Court must be satisfied that there is no sufficient reason why the matter should not be referred to an arbitration in accordance with the arbitration agreement. (emphasis added)
31. A similar dispute was also considered by a Division Bench of Delhi High Court in Patanjal and another Vs. Rawalpindi Theaters (P) Ltd., AIR 1970 Delhi 19 and the Court held:
"... third persons who are not parties to the arbitration agreement or to the contract containing an arbitration clause and not claiming under such parties, are not bound by such agreement. And not being bound, they would, as a general rule, be disentitled to enforce the agreement. The language of section 20 of the Arbitration Act seems also to support this view. This section empowers the parties to an arbitration agreement, when differences have arisen, which are covered by it, to apply to a Court having jurisdiction praying that the agreement be filed in Court. Indeed, it is also the general fundamental rule that only a person who is a party to a contract can sue on it. The existence of statutory or equitable exceptions to this rule do not impinge upon its general fundamental character. Of course, if the subject-matter of the arbitration agreement is capable of assignment, then the assignee would step into the shoes of his assignor and be both bound by it and entitled to enforce it, but for this purpose, one has to look to the law relating to assignment of contractual rights and obligations and also to see whether in a given case, the assignee has exercised his right as such."
32. In the present case plaintiffs-appellants and defendant-respondent 1 are parties to both agreement, i.e., MOU dated 20.09.2011 and Builder Agreement dated 20.10.2011. The agreement is enforceable in law in respect of a dispute with regard to terms and conditions of agreement between them. So far as first relief sought in suit against defendant-respondent 1 is concerned, it relates to alleged breach of contract between plaintiffs-appellants and defendant-respondent 1, hence there is little doubt that to this extent, cause of action in suit is hit by Section 8 of Act, 1996.
33. But then prayer no. 2 is against defendant-respondent 2, who has no privity of contract or has any arbitration agreement with plaintiffs-appellants. There is no assignment of contract or agreement by defendant-respondent 1 to defendant-respondent 2 so as to bring defendant-respondent 2 in the shoes of defendant-respondent 1 to attract arbitration agreement contained in MOU dated 20.09.2011 and Builder Agreement dated 20.10.2011. Relief 3 relates to Builder Agreement dated 20.09.2011 but here there is no cause of action with respect to settlement of any dispute but a declaratory decree has been sought to declare Builder Agreement null and void and not binding on plaintiffs. To our mind even this part of relief would not be governed within the terms contained in MOU 20.09.2011 and Builder Agreement dated 20.10.2011, executed between plaintiffs-appellants and defendant-respondent 1.
34. As already said that cause of action and relief sought in suit when are interconnected, cannot be split so as to hit some part thereof by referring to Section 8 of Act, 1996 and for other part to allow suit to continue. In the present case however even that situation has not occurred since court below has returned plaint under Order VII Rule 10 CPC holding that dispute in suit is governed by arbitration agreement and parties must relegate their remedy thereunder. It has clearly committed manifest error having ignored the fact that defendant-respondent 2 is not party to either of agreement, i.e., MOU 20.09.2011 and Builder Agreement dated 20.10.2011, hence application submitted by defendant-respondent 2 under Section 8 of Act, 1996 read with Order VII Rule 11 CPC for rejection of plaint on the ground of existence of arbitration agreement was not maintainable as there was no agreement enforceable in law at the instance of defendant-respondent 2 seeking arbitration in a matter with plaintiffs-appellants. Unless there is an agreement between parties to suit Section 8 would not be attracted.
35. In the present case defendant-respondent 2 has no such agreement with plaintiffs-appellants and in that view of the matter there was no justification for court below to reject/return plaint under Order VII Rule 10 and 11 CPC by allowing application filed by defendant-respondents ignoring the fact that defendant-respondent 2 has no binding agreement with plaintiffs-appellants containing arbitration clause enforceable in law. The impugned order, therefore, cannot sustain.
36. In the result, appeal is allowed. Impugned order dated 23.12.2015 is hereby set aside. Trial Court is directed to proceed with Original Suit No. 889 of 2015 and adjudicate it on merits and in accordance with law.
Order Date :-11.02.2016 AK