SC: Courts cannot admit suits in arbitration agreements

NEW DELHI: A civil suit cannot be entertained by courts in disputes which are covered by an arbitration agreement between the two parties, the Supreme Court has ruled.

Any such disputes covered under the arbitration agreement has to be mandatorily referred to the arbitrator for adjudication, Justices SB Sinha and Markandeya Katju said while upholding a decision of the Andhra Pradesh High Court.

The apex court passed the ruling while dismissing an appeal filed by Agri Gold Exims Ltd challenging the high court order which ruled that courts cannot entertain a dispute if there was an arbitration agreement between the contending parties.

The appellant company had filed a suit in a civil court against Sri Lakshmi Knits and Wovens before a civil court for recovery of Rs 36,14,887.

Lakshmi Knits submitted that it had paid the disputed amount and challenged the suit on the ground that courts cannot entertain the same since there was a pre-existing arbitration treaty between the two parties.

While the civil court rejected the arguments, the high court ruled that when there was an arbitration agreement the civil court was wrong in entertaining the suit.

Concurring with the reasoning, the apex court held that Section 8 of the 1996 Act mandates a reference to the arbitration tribunal.

Exercise of discretion by the judicial authority which was the  hallmark of Section 34 of the 1940 Act under which the judge was empowered to either admit a suit or refer it to an arbitration tribunal had been taken away by Section 9 which was incorporated in the amended Act of 1996, the Bench said.

"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 issue, therefore would remain to be decided in a suit," the Bench said while rejecting the appeal.