ARBITRATION CLAUSE IN THE MOA OF A COMPANY and JURISDICTION OF CIVIL COURT
In C.L. Athnagar & others v. Hiraman Lal Sahu (2017) SCC Online Chh 321 the Chhattisgarh High Court dealt with the issue that whether the jurisdiction of the Civil Court is expressly or impliedly barred under Section 9 of Code of Civil Procedure if an arbitration clause is stated in the Memorandum of Association of a company.
The appellants/plaintiffs and the respondent/defendant were directors in the company named "Om Bhoo Vikas & Insurance Pvt. Ltd." and the defendant who was the President resigned from the Company in December 2014. Subsequently, in May 2015 the defendant executed an agreement with the plaintiffs for sale of his share certificate and obtained Rs. 5 lacs in advance. The defendant also obtained three cheques of Rs. 33 lacs each, on account of security for sale amount of his shares. Thereafter, the defendant failed to submit the sale certificate and refused to comply with the agreement. Subsequently, the plaintiff filed a suit for cancellation of the agreement and for the refund of Rs. 99 lacs and Rs 5 lacs that were paid in advance along with 18% interest.
On being summoned, the defendant did not submit a written statement, instead filed an application under Order 7 Rule 11 of the CPC on the ground that the suit is not maintainable, since the Memorandum of Association of the company contains a provision stating that the parties should resolve the disputes through arbitration. Hence, the defendant contended that the jurisdiction of the Civil Court is barred and the suit is liable to be rejected. The plaintiff opposed the said application stating that the dispute is not between the directors of the said company but the suit is filed for recovery of the amount obtained illegally by the defendant.
The Trial Court held that the jurisdiction of the Civil Court is barred since the dispute can be resolved through arbitration. Since the dispute is between the current and the former directors of the said company and the subject- matter of the dispute is related to the company, the dispute should be resolved through arbitration.
Dissatisfied with the decision of the Trial Court, an appeal was filed in the High Court.
VIEW OF THE HIGH COURT
The High Court of Chhattisgarh was of the opinion that though it is obligatory for the Courts to refer the parties to arbitration as per the arbitration agreement, the jurisdiction of the Civil Courts cannot be ousted because of the fact that there exists an arbitration clause in the Memorandum of Association of a Company. The High Court stated that in order to take the benefit of the arbitration clause the parties need to file a separate application under Section 8(1) of the Arbitration and Conciliation Act, 1996, for resolution of disputes through arbitration. The said application should be filed within a stipulated time period. In the present case, it was concluded that the decision of the Trial Court was not justified.
Thus, it can be concluded that the jurisdiction of the Civil Courts cannot be completely ousted if an arbitration clause is present on the MOA of a company.