Holding

A party may invoke Section 8 of the Arbitration and Conciliation Act, 1996 before filing its first statement on the substance of the dispute; filing a reply to an interim injunction does not waive the arbitration right, and service of notice under the arbitration agreement is not mandatory, so the application is maintainable and the matter must be referred to arbitration.

Summary

Rastriya Spat Nigam Ltd. entered into a consignment agency contract with Verma Transport Company that contained an arbitration clause. The appellant terminated the contract and issued a show‑cause notice to blacklist the respondent. The respondent filed a suit for a permanent injunction against termination and blacklisting. The trial court rejected the appellant's application under Section 8 of the Arbitration and Conciliation Act, 1996, holding that filing a reply to the interim injunction amounted to waiver of the arbitration right and that notice under the arbitration agreement was required. The High Court affirmed the rejection. The Supreme Court held that the existence of a valid arbitration agreement was admitted, that filing a reply to an interlocutory injunction does not constitute a first statement on the substance of the dispute, and that service of notice under the agreement is not a condition precedent. Consequently, the Section 8 application was maintainable and the matter must be referred to arbitration. The Court also clarified that termination and blacklisting are disputes arising out of the contract and therefore arbitrable, and that the lower courts erred in deeming the respondent already blacklisted without notice. The appeals were allowed, setting aside the lower courts' orders.

Issues considered

The applicability of Section 8 of the Arbitration and Conciliation Act, 1996 when a party has filed a reply to an interim injunction but not yet filed its first statement on the substance of the dispute.
Whether filing a reply to an interlocutory injunction amounts to a waiver of the right to refer the dispute to arbitration.
Whether service of notice under the arbitration agreement is a mandatory condition precedent for a Section 8 application.
Whether the termination of the contract and the alleged blacklisting constitute disputes arising out of the contract and are thus arbitrable.
Whether the High Court erred in holding that the respondent was already blacklisted without notice.

Legislation cited

Subjects

ArbitrationSection 8Arbitration agreementWaiverInterim injunctionBlacklistingContract terminationJurisdictionNotice requirementSupreme Court

Judgment

A RASHTRIYA !SPAT NIGAM LIMITED AND ANR.
v.
M/S VERMA TRANSPORT COMPANY

AUGUST 8, 2006
B
[S.B. SINHA AND DALVEER BHANDARI, JJ.]

Arbitration and Conciliation Act 1966-Section 8.

C Contract with arbitration clause for reference of matter relating to
contract-Termination of contract-Reference to arbitration by judicial
authority-Held Where existence of arbitration agreement is admitted, matter
relating to termination ofcontract are dispute arising out ofcontract attracting
arbitration agreement-Jn such circumstances judicial authority is statutorily
mandated to refer the matter to arbitration.
D
First statement on substance of dispute-Meaning of-Held-it is to be
contra-distinguished with 'written statement'-lt employs submission of party
to jurisdiction ofjudicial authority and waive offtheir right to invoke arbitration
clause-This cannot be implied by filing of application before filing of such
E first statement-What is necessary is disclosure of entire substance in main
proceeding itself and not taking part in supplemental proceeding-In/acts of
the case, held that by filing reply to prayer for interim injunction restriction
of Section 8(1) was not attracted-It was especially so as it questioned
mainatainability of injunction and the party was bound to file it since court
had already passed an ad interim ex parte injunction against them-Section
F 94 of the Code of Civil Procedure.

Notice in terms of arbitration agreement-Necessity of-Held-For
maintaining application under Section 8 of the Act I 966 Act, service of notice
under arbitration agreement is not mandatory especially if that stage was yet
to be reached-What is necessary is existence of an arbitration agreement.
G
Contract-Blacklisting of vendor-Notice to show cause-Effect of--
Held-Mere issuance of show cause notice would not mean that vendor has
been blacklisted-At this stage, no final decision is taken and vendor can file
its reply and satisfj; ;Jendee that no case has been made out of their blacklisting.

H
332
RASHTRIY A !SPAT NIGAM LTD. v. VERMA TRANSPORT COMPANY J 33
Appellant entered into a consignmen,t agency contract with A
respondent, a partnership firm. The contract had an arbitration clause
whereby, inter alia, matter in relation to the contract were to be referred
to arbitration. Appellant alleged that AV, a partner of respondents,
conspired with some of their officials to obtain payments at inflated rates
on a false plea of a levy of fee by transport union. They also alleged that B
with a view to avoid termination of contract, AV resigned from the
respondent firm, but was replaced by his family members and continued
to be in complete control. Appellants terminated contract of respondent
and issued a show cause notice to AV as to why he and his firm should
not be black listed.

Respondent-firm filed a suit for grant of permanent injunction
c
restraining appellants from blacklisting them or terminating the contract.
On an application for injunction trial court directed the parties to maintain
status quo in regard to the termination of the contract as also the order of
blacklisting. Application of appellant under Section 8 of the Arbitration
and Conciliation Act 1996 was rejected by the trial court on the grounds D
that (i) they had filed a reply to injunction application and sought time to
file written statement, which showed that they entered their defence of
suit and thereby subjected themselves to its jurisdiction (ii) appellants
black listed the respondent without giving them any notice regarding any
dispute or difference, which was mandatory Against this, revision E
application of appellants before High Court was dismissed as non-
maintainable.

Appellants contended that filing an opposition to the interim
injunction would not preclude a defendant from filing an application under
Section 8 of the 1996 Act. F
Allowing the appeals, the Court

HELD: 1. The application filed by the appellants under Section 8 of
the Arbitrational and Conciliation Act 1996 was maintainable. (352-C)
G
2.1. The existence of a valid arbitration agreement between the
parties stands admitted. There cannot also be any dispute that the matter
relating to termination of the contract would be a dispute arising out of a
contract and, thus, the arbitration agreement contained in the contract
would be squarely attracted. Once the conditions precedent contained in
the said proceedings are satisfied, the judicial authority mandated to refer H
334 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A the matter to arbitration. What is necessary to be looked into therefor,
inter alia, would be as to whether the subject matter of the dispute is
covered by the arbitration clause or not. (343-D-E-F(

P. Anand Gajapathi Raju and Ors. v. P. V.G. Raju (Dead) and Ors.,
(20001 4 SCC 539; Smt. Ka/pana Kothari v. Smt. Sudha Yadav and Ors., AIR
B (2002) SC 404 and Hindustan Petroleum Corporation Ltd v. Pinkcity Midway
Petroleums, (2003( 6 SCC 503, relied on.

Union of India v. Bir/a Cotton Spinning and Weaving Mills Ltd., AIR
(1967) AIR SC 688, distinguished.

C Heyman and Anr. v. Darwins, [19421 1 All ER 337, referred to.

O.P. Ma/htora 's The Law and Practice of Arbitration and Conciliation,
2nd Ed, referred to.

2.2. What was necessary was to consider the substance of the dispute.
D Once it is found that the dispute between the parties arose out of the
contract, Section 8 of the 1996 Act would be attracted. (350-CJ

3.1. The expression 'first statement on the substance of the dispute'
contained in Section 8(1) of the 1996 Act must be contra-distinguished with
the expression 'written statement'. It employs submission of the party to
E the jurisdiction of the judicial authority. What is, therefore, needed is a
finding on the part of the judicial authority that the party has waived his
right to invoke the arbitration clause. If an application is filed before
actually filing the first statement on the substance of the dispute, the party
c:rnnot be said to have waived his right or acquiesced himself to the court.
F What is, therefore, material is as to whether the petitioner has filed his
first statement on the substance of the dispute or not, his application under
Section 8 of the 1996 Act, may not be held wholly unmaintainable.
f348-D-E-F)

3.3. By opposing the prayer for interim injunction, the restriction
G contained the sub-section (1) of Section 8 was not attracted. Disclosure of
a defence for the purpose of opposing a prayer for injunction would not
necessarily mean that substance of the dispute has already been disclosed
in the main proceeding. Supplemental and incidental proceeding are not
part of the main i:roceeding. They are dealt with separately in the Code
of Civil Procedure itself. Section 94 of the Code of Civil Procedure deals
H
RASHTRIY A !SPAT NIGAM LTD. v. VERMA TRANSPORT COMPANY 335
with supplemental proceedings. Incidental proceedings are those which A
arise out of the main proceeding. 1349-8-C]

Food Corporation of India and Anr. v. Yadav Engineer and Contractor,
(1983] I SCR 95, Vareed Jacobb v. Sosamma Geevarghese and Ors., 12004]
6 SCC 378 and Sadhu Singh Ghuman v. Food Corporation of India and Ors.,
[19901 2 sec 68, retied on. B
State of Uttar Pradesh and Anr. v. Mis. Janki Saran Kai/ash Chandra
and Anr., 11973) 2 SCC 96, held inapplicable.

3.4. In its reply to injunction application, the appellant questioned
its maintainability. Thus, they did not submit themselves to the jurisdiction C
of the court. They did not waive their right. They in effect and substance
questioned the jurisdiction of the court in proceeding with the matter.
[347-C-E]
3.5. Waiver of a right on the part of a defendant to the /is must be
gathered from the fact situation obtaining in each case. In the instant case, D
the court had already passed an ad interim ex pare injunction. The
Appellants were bound to respond to the notice issued by the Court.
(349-H; 350-A]
4. The High Court refused to interfere in the matter opining that no
notice had been served by the Chairman of the appellant in terms of the E
arbitration agreement. For maintaining an application under Section 8 of
the 1996 Act, service of not•ce under the arbitration agreement was not
mandatory. The said stage was yet to be reached. What was necessary was
existence of an arbitration agreement. (346-8-C]
5. The High Court committed a manifest error in holding that the
Respondent-Firm had been blacklisted without any notice as only a notice F
to show cause in that behalf had been issued. A final decision in regard to
blacklisting of the Respondent-Firm was yet to be taken. The Respondents
could file their show cause and could have satisfied the authorities of the
Appellant No. 1 that no case has been made out of blacklisting. (350-C-DI
Sukanya Holdings (P) Ltd. v. Jayesh H Pandya and Anr., (2003] 5 SCC G
531, distinguished.
6. AV was also acting on behalf of the partnership firm. It has not
been found that he had no authority to represent the firm. His subsequent
resignation as a partner was irrelevant for the purpose of consideration
in regard to the maintainability of the application under Section 8 of the H
336 SUPREME COURT REPORTS [20061SUPP.4 S.C.R.

A 1996 Act. 1347-B-CI
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 3420 of 2006.

From the Judgment and Order dated I 0.2.2003 in Civil Revision No.
5398/2002 and dated 15.9.2004 in Review Application No. 36-C-II of 2003
B in Civil Revision No. 5398/2002 of the High Court of Punjab and Haryana
at Chandigarh.

R.F. Nariman, Pratap, Venugopal, Surekha Raman and Harshard V.
Hameed (K.J. John & Co.) for the Appellants.

C Nagendra Rai, Yunus Malik, A. Rai, Arnita Narayan and Prashant
Chaudhary for the Respondents.

The Judgment of the Court was delivered by

S.B. SINHA, J. Leave granted.

D Interpretation and application of Section 8 of the Arbitration and
Conciliation Act, 1996 (for short, 'the 1996' Act) is in question in these
appeals which arise out of a judgment and order dated I 0.02.2003 passed by
a learned Single Judge of the High Court of Punjab & Haryana, dismissing
the Civil Revision Application filed by the Appellants herein from a judgment
and order dated 03.10.2002 passed by the Civil Judge (Junior Division),
E Jalandhar and order dated 15.09.2004 refusing to review the said order.

FACTS:

The Appellant No. I is a Public Sector Undertaking. It is engaged, inter
alia, in the business of manufacturing and marketing of iron and steel products.
p The Respondent is a partnership firm. It is engaged in the business of
consignment agents. It has its office at Jalandhar. A contract was entered into
by and between the parties hereto in regard to the handling and storage of
iron and steel materials of the Appellant at Ludhiana. The Appellants contend
that one Shri Anil Verma, Partner of the Respondent-Firm had constituted
various firms and companies and obtained several consignment agency
G contracts from the Appellant pertaining to Delhi, Faridabad, Chandigarh and
Ludhiana etc. who conspired with certain officials of the Appellants and
obtained payments@ Rs.140/- per M.T. in place of Rs.36/- per M.T. on a
false plea that the Transport Union at Bahadurgarh did not permit transportation
of goods without levy of a fee of Rs. I 00/- per M.T. on transportation of such
H goods. An investigation was conducted by the Central Bureau of Investigation
RASHTRIYA !SPAT NIGAMLTD. v. VERMA TRANSPORTCOMPANY[SINHA,J.] 337
and a criminal case was initiated against Shri Anil Verma and the concerned A
officials of the Appellants. Allegedly, with the object of presenting a clean
image to the Appellants and with a view to avoid termination of all the
contracts by them, a plea. was put forth that Shri Anil Verma had resigned
from the partnership firm as also from his other firms/companies. According
to the Appellants, the said Shri Anil Verma was replaced by his family B
members as a partner of the said firm but he continued to be in complete
control over the firms/companies. The contract of the Respondent was
terminated by the Appellants on 23.05.2002. On the same day, a show cause
notice was also issued to Shri Anil Verma as to why he and his firms/
companies should not be black listed.

The Respondent-Firm, however, filed a suit being Suit No.122 of 2002
c
for grant of permanent injunction restraining the Appellants herein from in
any manner blacklisting the Respondent-Firm or terminating the consignment
agency contract. On an application for injunction having been filed, the Civil
Judge, Junior Division, directed the parties to maintain status quo in regard
to the status of the Respondent-Plaintiff herein qua termination of the contract D
as also the order of blacklisting. The Appellants appeared to have sought for
time to file written statement. They also filed a rejoinder to the counter
affidavit to the application for injunction wherein it took a specific plea that
the subject-matter of the suit being covered by the arbitration agreement
entered into by and between the parties, it was not maintainable. On E
07.06.2002, they filed an application under Section 8 of the 1996 Act, which
was rejected by the Civil Judge, Junior Division by an order dated 03. I 0.2002,
holding :

"The applicants/defendants have already filed a reply to application
u/o 39 Rules I and 2 read with Section 151 CPC and sought 15 days p
time to file written statement clearly proves that the process of the
suit has already begun and the defendants have already entered into
a defence of the suit meaning thereby they have subjected themselves
to the jurisdiction of the Civil Court. The defendants have not spelt
out as to what is the dispute or difference between the parties. Rather,
they have straightaway black listed the plaintiff firm, without giving G
them any notice regarding any dispute or difference, which was
mandatory. From the perusal of the record, it is very much clear that
there is no dispute or difference between the present firm and the
company with regard to any of the transactions in the business between
both of them. Rather, the company is at a dispute with a person, who H
338 SUPREME COURT REPORTS (20061 SUPP. 4 S.C.R.

A no more exists as a partner in the plaintiff firm. The company also
wrote appreciation letter to the Plaintiff firm for their cooperation for
achieving the desired targets for the year 2001-02. The same was
made possible because of untiring efforts made by the plaintiff of the
present case. In the present case, the straightaway of black listing the
firm is not justified, even the principal of natural justice goes in
B favour of the respondent/plaintiff'

A Revision Application filed by the Appellants before the High Court
thereagainst was dismissed by the impugned judgment, inter alia, on the
premise that the application filed by them being not accompanied by the
C original arbitration agreement or a duly certified copy thereof, the same was
not maintainable. A Review Application filed thereagainst pointing out that
such certified copy had in fact been filed, however, was not entertained.

Mr. R.F. Nariman, the learned Senior Counsel appearing on behalf of
the Appellants, inter alia, would submit that the learned Civil Judge and the
D High Court committed a serious error in construing the provisions of Section
8 of the 1996 Act, insofar as they failed to take into consideration that :

(I) Section 8 of the 1996 Act cannot be equated with Section 34 of
the Arbitration Act, 1940, (for short, 'the 1940 Act) having been
made in terms of UNCITRAL Model Rules and having undergone
E a thorough change.
(2) Filing an opposition to the interim injunction would not preclude
a defendant from filing an application under Section 8 of the
1996 Act.

(3) The High Court committed a serious error in entertaining the
F plea raised by the Respondent for the first time before it in
holding that the application filed by the Appellants was not
accompanied by a certified copy of the arbitration agreement.
(4) Despite the fact that attention of the High Court was specifically
drawn that the said finding was factually incorrect in the review
G application, the High Court did not address itself on the said
question.

Mr. Nagendra Rai, the learned Senior Counsel appearing on behalf of
the Respondent, on the other hand, submitted that :

H (I) The premise on which the contract was terminated being de 'hors
RASHTRIYA !SPAT NIGAM LTD. v. VERMA TRANSPORTCOMPANY[SINHA,J.] 339
the conditions of the contract, the same would not be arbitrable. A
(2) The suit having been filed questioning both blacklisting as also
termination of contract being outside the purview of arbitration,
the application under Section 8 of the 1996 Act was not
maintainable.

(3) The Appellants in their rejoinder having disclosed the substance B
of the dispute were not entitled to file the said application.

(4) An application for time having been filed to file written statement,
the impugned orders do not suffer from any infirmity.

The High Court in its judgment, inter alia, held : c
(I) No notice having been served upon the Respondent before passing
an order of blacklisting, the same was bad in law.

(2) The Chairman of the First Appellant having not nominated an
arbitrator in terms of the arbitration agreement, the application
under Section 8 of the 1996 Act was not maintainable. D
(3) The Appellants having filed the reply to the interim application
of the Respondent and their counsel having made a specific
statement that he wanted to argue on both the applications together
i.e. application under Order 39, Rules I and 2 read with Section
151 of the Code of Civil Procedure as also the application under E
Section 8 of the 1996 Act, joined the process of the suit in their
defence and subjected themselves to the jurisdiction of the Civil
Court.

(4) The Appellants have not spelt out the dispute and differences
between the parties and have straightaway blacklisted the F
Respondent-Firm.

(5) Anil Verma against whom the allegations had been made having
resigned, the application under Section 8 was not maintainable.

(6) The original arbitration agreement or the certified copy of the

-
G
agreement having not been annexed with the application, the
same was not maintainable.

The 1996 Act makes a radical departure from the 1940 Act. It has
embodied the relevant rules of the modem law but does not contain all the
,..., provisions thereof. The 1996 Act, however, is hot as extensive as the English H
340 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A Arbitration Act.
The 1996 Act was enacted by the Parliament in the light of the
UNCITRAL Model Rules. In certain respects, the Parliament of India while
enacting the said Act has gone beyond the scope of the said Rules.

B With a view to appreciate the said question, we may at the outset notice
the provisions of Section 4 of the English Arbitration Act, 1899, which was
bodily lifted in enacting Section 34 of the 1940 Act, in the following terms:

"4. Power to stay proceedings where there is a submission.-!f any
party to a submission, or any person claiming through or under him,
c commences any legal proceedings in any Court against any other
party to the submission, or any person claiming through or under
him, in respect of any matter agreed to be referred, any party to such
legal proceedings may at any time after appearance, and before
delivering any pleadings or taking any other steps in the proceedings,
apply to that Court to stay the proceedings, and that Court or a judge
D thereof, if satisfied that there is not sufficient reason why the matter
should not be referred in accordance with the submission, and that
the applicant was at the time when the proceedings were commenced,
and still remains, ready and willing to do all things necessary to the
proper conduct of the arbitration, may make an order staying the
E proceedings."

Section 34 of the 1940 Act reads as under :

"34. Power to stay legal proceedings where there is an arbitration
agreement.n - Where any party to an arbitration agreement or any
F person claiming under him commences any legal proceedings against
any other party to the agreement or any person claiming under him
in respect of any matter agreed to be referred, any party to such legal
proceedings may, at any time before filing a written statement or
taking any other steps in the proceedings, apply to the judicial authority
before which the proceedings are pending to stay the proceedings;

-
G and if satisfied that there is no sufficient reason why the matter should
not be referred in accordance with the arbitration agreement and that
the applicant was, at the time when the proceedings were commenced,
and still remains, ready and willing to do all things necessary to the
proper conduct of the arbitration, such authority may make an order
H staying the proceedings."
RASHTRNA JSPAT INGAMLTD. v. VERMA TRANSPORTCOMPANY(SINHA,J.] 341
We may furthermore notice that Section 3 of the Arbitration (Protocol A
and Convention) Act, 1937 and Section 3 of the Foreign Awards (Recognition
and Enforcement) Act, 1961 contained similar provisions.

The expression 'steps in the proceedings', however, used in Article 8
of the Rules and Section 8 of the 1996 Act in contrast to the aforementioned
provisions and in particular Section 34 of the 1940 Act, may be noticed : B
Article 8 of the Model Rules is as under :

"(I) A court before which an action is brought in a matter which
is the subject of an arbitration agreement shall, if a party requests not
later than when submitting his first statement on the substance of the C
dispute, refer the parties to arbitration unless it finds that the agreement
is null and void, inoperative or incapable of being performed.

(2) Where, in such case, arbitra! proceedings have already
commenced, the arbitral tribunal may continue the proceedings while
the issue of its jurisdiction is pending with the court." D
Section 8 of the 1996 Act reads as follows :

"8. Power to refer parties to arbitration where there is an arbitration
agreement. • (I) A judicial authority before which an action is brought
in a matter which is the subject of an arbitration agreement shall, if E
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. F
(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."
G
Section 8 of the 1996 Act, however, although lifted the first part of the
Ir
said Article 8 did not contain the expression contained in the second part
therein. The Indian Parliament has gone beyond the recommendations made
by the UNCITRAL Model Rules in enacting Sections 8 and 16 of the 1996
Act.
H
342 SUPREME COURT REPORTS [2006) SUPP. 4 S.C.R.

A The provisions of Sections 8 and 16 of the 1996 Act may be compared
with Sections 45 and 54 thereof. Section 45 deals with New York Convention,
whereas Section 54 deals with Geneva Convention Awards. The difference
can be immediately noticed. Whereas under Sections 45 and 54, the Court
exercises its supervisory jurisdiction in relation to arbitration proceedings, in
terms of Section 16 of the 1996 Act, the arbitrator is entitled to determine his
B own jurisdiction. We, however, do not mean to suggest that Part II of the
1996 Act does not contemplate determination of his own jurisdiction by the
arbitral tribunal as we are not called upon to determine the said question. We
have referred to the aforementioned provisions only for the purpose of
comparing the difference in the language used by the Indian Parliament while
C dealing with the domestic arbitration vis-a-vis the International arbitration.
Section 8 confers a power on the judicial authority. He must refer the
dispute which is the subject-matter of an arbitration agreement if an action
is pending before him, subject to the fulfillment of the conditions precedent.
The said power, however, shall be exercised if a party so applies not later
D than when submitting his first statement on the substance of the dispute.

What is the scope and effect of the expression 'substance of the dispute'
is also in question to which we shall advert to a little later.

The arbitration agreement is contained in clause 44(a) of the contract
E entered into by and between the parties which reads as under :-

"If at any time any question, dispute or difference whatsoever
shall arise between the company and the Consignment Agent upon or
in relation to or in connection with the contract, either party may
forthwith give to the other notice in writing of the existence of such
F question, dispute or difference and the same shall be referred to the
adjudication of an arbitrator to be nominated by the Chief Executive
of the Company. The award of the arbitrator shall be final and binding
on both the parties and the provisions of the Indian Arbitrator Act,
1940 and the rules thereunder and any statutory modification thereof
G shall be deemed to apply to and be incorporated in this contract."

The scope and purport of such a clause was considered in Heyman and
Anr. v. Darwins Ltd.. [1942] I All ER 337 and it was stated :

"The answer to the question whether a dispute falls within an
arbitration clause in a contract must depend on (a) what is the dispute,
H '
RASHTR!YA !SPAT !NGAMLTD. v. VERMA TRANSPORTCOMPANY[S!NHA,J.] 343

and (b) what disputes the arbitration clause covers. To take (b) first, A
the language of the arbitration clause in this agreement is as broad as
can well be imagined. It embraces any dispute between the parties "in
respect of' the agreement or in respect of any provision in the
agreement or in respect of anything arising out of it. If the parties are
at one on the point that they did enter into a binding agreement in B
terms which are not in dispute, and the difference that has arisen
between them is as to their respective rights under the admitted
agreement in the events that have hampered - e.g. as to whether the
agreement has. been broken by either of them; or as to the damage
resulting from such breach; or as to whether the breach by one of
them goes to the root of the contract and entitles the other party to C
claim to be discharged from further performance; or as to whether
events supervening since the agreement was made have brought the
contract to an end so that neither party is required to perform further
in all such cases it seems to me that the difference is within such an
arbitration clause as this. In view, however, of phrases to be found in
the report of some earlier decisions, the availability of the arbitration D
clause when "frustration" is alleged to have occurred will require
closer consideration."

In the instant case, the existence of a valid agreement stands admitted.
There cannot also be any dispute that the matter relating to termination of the E
contract would be a dispute arising out of a contract and, thus, the arbitration
agreement contained in clause 44 of the contract would be squarely attracted.
Once the conditions precedent contained in the said.proceedings are satisfied,
the _iudicial authority is statutorily mandated to refer the matter to arbitration.
What is necessary to be looked into therefor, inter a/ia, would be as to
whether the subject-matter of the dispute is covered by the arbitration F
agreement or not.

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 G
the dispute to an arbitral 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.

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 H
344 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A 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 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
B of Arbitration and Conciliation', 2nd .Edition, pp. 346-347]

Scope of the said provision fell for consideration before a Division
Bench of this Court in P. Anand Gajapathi Raju and Ors. v. P. V.G. Raju
(Dead) and Ors., [2000] 4 SCC 539, wherein this Court held :

c "In the matter before us, the arbitration agreement covers all the
disputes between the parties in the proceedings before us and even
more than that. As already noted, the arbitration agreement satisfies
the requirements of Section 7 of the new Act. The language of Section
8 is peremptory. It is, therefore, obligatory for the Court to refer the
parties to arbitration in tem1s of their arbitration agreement. Nothing
D
remains to be decided in the original action or the appeal arising
therefrom. There is no question of stay of the proceedings till the
arbitration proceedings conclude and the award becomes final in terms
of the provisions of the new Act. All the rights, obligations and
remedies of the parties would now be governed by the n::w Act
E including the right to challenge the award. The court to which the
party shall have recourse to challenge the award would be the court
as defined in clause (e) of Section 2 of the new Act and not the court
to which an application under Section 8 of the new Act is made. An
application before a court under Section 8 merely brings to the court's
notice that the subject-matter of the action before it is the subject-
F matter of an arbitration agreement. This would not be such an
application as contemplated under Section 42 of the Act as the court
trying the action may or may not have had jurisdiction to try the suit
to start with or be the competent court within the meaning of Section
2( e) of the new Act."
G
In Smt. Kalpana Kothari v. Smt. Sudha Yadav and Ors., AIR (2002) SC
404, this Court observed :
,...
·• ....... No doubt, at the appellate stage, after filing a written application
for dismissal of the applications filed by the appellants under Section
H 34 of the Arbitration Act, 1940, as not pressed in view of the repeal
RASHTRIYA !SPAT INGAMLTD. v. VERMA TRANSPORTCOMPANY[SINHA,J.] 345
of the 1940 Act and coming into force of the 1996 Act and getting A
orders thereon, the appellants herein have once again moved the High
Court under Section 8 of the Act, with a request for stay of proceedings
before the High Court as well as the trial court, but the application
came to be rejected by the learned Judge in the High Court that no
such application could be filed, once the application earlier filed B
under the 1940 Act was got dismissed as not pressed and also on the
ground of estoppel, based on the very fact. We are of the view that
the High Court did not properly appreciate the relevant and respective
scope, object and purpose as also the considerations necessary for
dealing with and disposing of the respective applications envisaged
under Section 34 of the 1940 Act and Section 8 of the 1996 Act. C
Section 34 of the 1940 Act provided for filing an application to stay
legal proceedings instituted by any party to an arbitration agreement
against any other party to such agreement, in derogation of the
arbitration clause and attempts for settlement of disputes otherwise
than in accordance with the arbitration clause by substantiating the
existence of an arbitration clause and the judicial authority concerned D
may stay such proceedings on being satisfied that there is no sufficient
reason as to why the matter should not be referred to for decision in
accordance with the arbitration agreement, and that the applicant
seeking for stay was at the time when the proceedings were
commenced and still remained ready and willing to do all things E
necessary to the proper conduct of the arbitration. This provision
under the 1940 Act had nothing to do with actual reference to the
arbitration of the disputes and that was left to be taken care of under
Sections 8 and 20 of the 1940 Act. In striking contrast to the said
scheme underlying the provisions of the 1940 Act, in· the new 1996
Act, there is no provision corresponding to Section 34 of the old Act F
and Section 8 of the 1996 Act mandates that the judicial authority
before which an action has been brought in respect of a matter, which
is the subjed-matter of an arbitration agreement, shall refer the parties
to arbitration if a party to such an agreement applies not later than
when submitting his first statement. The provisions of the 1996 Act G
do not envisage the specific obtaining of any stay as under the 1940
Act, for the reason that not only the direction to make reference is
mandatory but notwithstanding the pend ency of the proceedings before
the judicial authority or the making of an application under Section
8( I) of the 1996 Act, the arbitration proceedings are enabled, under
Section 8(3) of the 1996 Act to be commenced or continued and an H
346 SUPREME COURT REPORTS (2006] SUPP. 4 S.C.R.

A arbitral award also made unhampered by such pendency. We have to
test the order under appeal on this basis."

See also Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway
Petroleums, [2003] 6 SCC 503.

B The High Court, in our opinion, proceeded on a wrong premise. It
posed unto itself wrong question. It refused to interfere in the matter opining
that no notice had been served by the Chairman of the First Appellant in
terms of the arbitration agreement. For maintaining an application under
Section 8 of the 1996 Act, service of notice under the arbitration agreement
was not mandatory. The said stage was yet to be reached. What was necessary
C was existence of an arbitration agreement.

So far as the question of blacklisting is concerned, an error was
committed by the High Court in opining that the Respondent-Firm had been
blacklisted without issuing any notice. In fact, from a perusal of the notice
D dated 23.05.2002, it appears, upon recital of the relevant facts, it was stated:

"6. In view of the above, before taking a final decision on black
listing you and debarring you from participating in tenders floated by
RINL, VSP or entering into any agreement with RINL, VSP, you are
hereby calling upon to explain as to why you should not be black
E listed and debarred as mentioned above. You may submit your
explanation within seven days of receipt of this notice. In case we do
not receive your explanation within the above mentioned period, it
will be presumed that you have nothing to say in the matter and
decision on further suitable action will be taken accordingly."

F No final decision had, therefore, been taken. The basic question was
whether there had been breaches of contract on the part of the Respondents.
The contention of the Respondent before the trial court had been that the
order of blacklisting had arisen from the terms of the contract itself, as would
appear from the following averments :

G "14. That the plaintiff have learnt that the defendants without following
the basic principles of natural justice are intending to terminate the
consignment agency contract of the plaintiff and to blacklist the
plaintiff on alleged ground that one of Ex-partner of the plaintiff is
claimed to be guilty of misrepresentation of overcharging the freight
by misrepresentation from the different company. Anyhow this is no
H
RASHTRIYA !SPAT NIGAMLTD. v. VERMA TRANSPORTCOMPANY[SINHA,J.] 347

ground to do so." A
The principal grievance of the Plaintiff-Respondent was the action on
the part of the Appellants tenn inating the contract. Grounds on which the
order of termination were based, had been questioned in the plaint. Such
contentions could well be raised before the Arbitrator.
B
Shri Anil Venna was also acting on behalf of the partnership firm. It
has not been found that he had no authority to represent the firm. His
subsequent resignation as a partner was irrelevant for the purpose of
consideration in regard to the maintainability of the application under Section
8 of the 1996 Act.
c
Filing of a reply to the injunction application could also not have been
a ground to refuse to entertain the plea taken by the Appellants that the suit
should be referred to arbitral tribunal particularly when in its reply to injunction
application, the appellant categorically stated :

"I. That the present application under Order 39 Rules 1 and 2 D
read with Section 151 CPC is liable to be dismissed on the short
ground that the plaintiff has himself admitted the existence of the
arbitration clause and therefore, the present application under Order
39 Rules 1 and 2 read with Section 151 CPC is not maintainable and
consequently the order of this Hon'ble Court is liable to be vacated." E
Thus, they did not submit themselves to the jurisdiction of the court.
They did not waive their right. They in effect and substance questioned the
jurisdiction of the court in proceeding with the matter. In fact, in its application
filed under Section 8 of the 1996 Act, the Appellant raised a contention that
the suit was liable to be dismissed and the order of injunction vacated in view F
of the arbitration clause.

This aspect of the matter was considered by this Court in Food
Corporation of India & Anr. v. Yadav Enginner & Contractor, (1983] l SCR
95. Therein this Court opined that interlocutory proceedings are only incidental G
proceedings to the main proceedings and, thus, any step taken in the
interloc:utory proceedings does not come within the purview of main
proceed.ings, stating :

" ... When ex parte orders are made at the back of the party the other
party is forced to come to the court to vindicate its right. Such H
compulsion cannot disclose an unambiguous intention to give up the
348 SUPREME COURT REPORTS [2006] SUPP. 4 S.C.R.

A benefit of the arbitration agreement. Therefore, taking any other steps
in the proceedings must be confined to taking steps in the proceedings
for resolution of the substantial dispute in the suit. Appearing and
contesting the interlocutory applications by seeking either vacation
thereof or modification thereof cannot be said to be displaying an
unambiguous intention to acquiesce in the suit and to waive the benefit
B of the arbitration agreement. Any other view would both be harsh
and inequitous and contrary to the underlying intendment of the Act.
The first party which approaches the court and seeks an ex parte
interim order has obviously come to the court in breach of the
arbitration agreement. By obtaining an ex parte order if it forces the
c other party to the agreement to suffer the order, or by merely contesting
be imputed the intention of waiving the benefit of arbitration
agreement, it would enjoy an undeserved advantage. Such could not
be the underlying purpose of Section 34. Therefore, in our opinion,
to effectuate the purpose underlying Section 34 the narrow construction
of the expression "taking any other steps in the proceedings" as
D
herelnabove set out appears to advance the object and purpose
underlying Section 34 and the purpose for which the Act was enacted.

The expression 'first statement on the substance of the dispute' contained
in Section 8( I) of the 1996 Act must be contra-distinguished with the
E expression 'written statement'. It employs submission of the party to the
jurisdiction of the judicial authClrity. What is, therefore, is needed is a finding
on the part of the judicial authority that the party has waived his right to
invoke the arbitration clause. If an application is filed before actually filing
the first statement on the substance of the dispute, in our opinion, the party
cannot be said to have waived his right or acquiesced himself to the jurisdiction
F of the court. What is, therefore, material is as to whether the petitioner has
filed his first statement on the substance of the dispute or not, if not, his
application under Section 8 of the 1996 Act, may not be held wholly
unmaintainable. We would deal with this question at some details, a little
later.
G
Our attention, however, was drawn by the learned counsel for the
Respondent to The State of Uttar Pradesh and Anr. v. Mis. Janki Saran
Kai/ash Chandra and Anr., [1973] 2 SCC 96, which was distinguished in
Food Corporation of India (supra), inter alia, stating that the view taken
therein did riot run counter to the view the court had taken.
H
In Janki Saran Kai/ash Chandra (supra), an application for time to file
RASHTRIYA !SPAT NIGAM LTD. v. VERMA TRANSPORT COMPANY [SINHA, J.] 349
written statement was considered to be a step in the proceedings. We have A
noticed hereinbefore the respective scope of Section 34 of the 1940 Act vis-
a-vis the scope of Section 8 of the 1996 Act. In view of the changes brought
about by the 1996 Act, we are of the opinion that what is necessary is
disclosure of the entire substance in the main proceeding itself and not taking
part in the supplemental proceeding.
B
By opposing the prayer for interim injunction, the restriction contained
in sub-section (I) of Section 8 was not attracted. Disclosure of a defence for
the purpose of opposing a prayer for injunction would not necessarily mean
that substance of the dispute has already been disclosed in the main proceeding.
,, Supplemental and incidental proceeding are not part of the main proceeding. C
They are dealt with separately in the Code of Civil Procedure itself. Section
94 of the Code of Civil Procedure deals with supplemental proceedings.
Incidental proceedings are those which arise out of the main proceeding. In
view of the decision of this Court in Food Corporation of India (supra), the
distinction between the main proceeding and supplemental proceeding must
be borne in mind. D
We may notice that a distinction has been made between supplemental
proceedings and incidental proceedings by one of us in Vareed Jacob v.
Sosamma Geevarghese and Ors., [2004] 6 SCC 378.

This aspect of the matter came up for consideration before this Court E
again in Sadhu Singh Ghuman v. Food Corporation of India & Ors., [1990]
2 sec 68, wherein it was categorically stated that seeking a direction to the
plaintiff to produce the original agreement does not amount to submit to the
jurisdiction of the court, which decides the case on merits, opining :
F
" .... The right to have the dispute settled by arbitration has been
conferred by agreement of parties and that right should not be deprived
of by technical pleas. The court must go into the circumstances and
intention of the party in the step taken. The court must examine
whether the party has abandoned his right under the agreement. In
the light of these principles and looking to the substance of the G
application dated January 4, 1985, we cannot form an opinion that
the defendants have abandoned their right to have the suit stayed and
took a step in the suit to file the written statement."

Waiver of a right on the part of a defendant to the /is must be gathered
from the fact situation obtaining in each case. In the instant case, the court H
350 SUPREME COURT REPORTS (2006] SUPP. 4 S.C.R.

A had already passed an ad interim ex pare injunction. The Appellants were
bound to respond to the notice issued by the Court. While doing so, they
raised a specific plea of bar of the suit in view of the existence of an arbitration
a~reement. Having regard to the provisions of the Act, they had, thus, shown
their unequivocal intention to question the maintainability of the suit on the
B aforementioned ground.

The submission of the learned counsel for the Respondents that the two
different causes of action having been raised, namely, illegal termination of
contract and blacklisting of the firm, Section 8 of the 1996 Act was not
attracted is devoid of merit; inasmuch as according to the Respondents
C themselves, both the causes of action arose out of the terms of the contract.
What was necessary was to consider the substance of the dispute. Once it is
found that the dispute between the parties arose out of the contract, Section
8 of the 1996 Act would be attracted.

Furthermore, as noticed hereinbefore, the High Court committed a
D manifest error in holding that the Respondent-Firm had been blacklisted
without any notice as only a notice to show cause in that behalf had been
issued. A final decision in regard to blacklisting of the Respondent-Firm was
yet to be taken. The Respondents could file their show cause and could have
satisfied the authorities of the Appellant No. I that no case has been made out
E for blacklisting.

Reliance placed by the learned counsel on Sukanya Holdings (P) Ltd.
v. Jayesh H. Pandya and Anr., (2003] 5 SCC 531 is misplaced .. Therein, not
only a suit for dissolution of the firm was filed, but a different cause of action
had arisen in relation whereto apart from parties to the arbitration agreeme11t,
F other parties had also been impleaded. In the aforementioned fact situation,
this Court held :

"Secondly, there is no provision in the Act that when the subject-
matter of the suit includes subject-matter cf the arbitration agreement
as well as other disputes, the matter is required to be referred to
G arbitration. There is also no provision for splitting the cause or parties
and referring the subject-matter of the suit to the arbitrators.

It was further stated :

"The next question which requires consideration is - even if .there is
H no provision for partly referring the dispute to arbitration, whether
RASHTRIYA !SPAT NIGAMLTD. v. VERMATRANSPORTCOMPANY[SINHA,J.] 35 J
such a course is possible under Section 8 of the Act. In our view, it A
would be difficult to give an interpretation to Section 8 under which
bifurcation of the cause of action, that is to say, the subject-matter of
the suit or in some cases bifurcation of the suit between parties who
are parties to the arbitration agreement and others· is possible. This
would be la_Ying down a totally new procedure not contemplated
under the Act. If bifurcation of the subject-matter of a suit was B
contemplated, the legislature would have used appropriate language
to permit such a course. Since there is no such indication in the
language, it follows that bifurcation of the subject-matter of an action
brought before a judicial authority is not allowed.

Secondly, such bifurcation of suit io two parts, one to be decided
c
by the Arbitral Tribunal and the other to be decided by the civil court
would inevitably delay the proceedings. The whole purpose of speedy
disposal of dispute and decreasing the cost of litigation would be
frustrated by such procedure. It would also increase the cost of
litigation and harassment to the parties and on occasions there is D
possibility of conflicting judgments and orders by two different
forums."·

Such a question does not arise herein as the parties herein are parties
to the arbitration agreement and the question in regard to the jurisdiction of
the arbitrator, if any, can be determined by the arbitrator himself in terms of E
Section 16 of the 1996 Act.

Strong reliance has been placed by Mr. Rai on a decision of this Court
in Union of India v. Bir/a Cotton Spinning and Weaving Mills Ltd., AIR
(1967) SC 688 contending that when the dispute arises de' hors the agreement,
Section 8 of the 1996 Act would not be applicable. The said decision has no F
application in the instant case as a finding of fact was arrived at therein that
the Union of India had withheld payment of a large sum of money on the
specious plea that some amount in relation to another contract was due to it.
:rhe submission of the respondent therein was that no such contract had been
executed by it. In the fact situation obtaining therein, this Court held : G
"The evidence recorded by the Trial Court discloses that there was no
dispute between the Company and the Union arising under the contract
on which the suit was filed. The Union accepted liability to pay the
amount claimed by the Company in the suit. The Union still declined
to pay the amount asserting that an amount was due from the Company H
352 SUPREME COURT REPORTS (20061 SUPP. 4 S.C.R.

A to the Union under a distinct contract. This amount was not sought
to be set-off under any term of the contract under which the Company
made the claim. The dispute raised by the Union was therefore not in
respect of the liability under the terms of the contract which included
the arbitration clause, but in respect of an alleged liability of the
Company under another contract which it may be noted had already
B been referred to arbitration. The Union had no defence to the action
filed by the Company : it was not contended that the amount of Rs.
I0,625/- was not due to the Company under the contract relied upon
by the Company. For enforcement of the arbitration clause there must
exist a dispute : in the absence of a dispute between the parties to the
c arbitration agreement, there can be no reference."

Such is not the case here.

For the foregoing reasons, we are of the opinion that the application
filed by the Appellants under Section 8 of the 1996 Act was maintainable.
D
Before parting with the case, we may notice a disturbing state of affairs.
Mr. Nariman made a statement before us that in view of the order of status
quo passed by the learned Civil Judge, the Respondents have not only been
working for the full term of five years contemplated under the agreement but
also for the extended the period of ten years, to which they were not entitled.
E The order of injunction passed by the learned Trial Judge is not before us.
The contention raised by Mr. Nariman if correct, we are sure that corrective
measures shall immediately be taken by the court concerned.

For the reasons aforementioned, the impugned judgments cannot be
sustained which are set aside. The appeals are allowed with costs. Counsel
F fee is quantified at Rs.15,000/-.

v.s. Appeal allowed.

•