An Arbitration clause is designed to set out the procedure that shall govern any dispute arising from or in connection with the contract. The universally acceptable legal position is that once there is an arbitration clause in an agreement, in case of a dispute, the same shall be referred to arbitration. The Delhi High Court in a recent Judgement (Krishan Gopal v. Parveen Rajput[1]) has also reiterated the aforesaid position while deciding an issue wherein a party to a contract was allegedly trying to avoid an arbitration clause by claiming that it is seeking punitive damages under the Law of Torts and such a relief cannot be claimed before an Arbitrator. The Hon’ble Court after analyzing the law and its purpose in detail held as follows:

“Existence of a tortious claim for exemplary damages would not be a ground to permit any party to wriggle out of an arbitration clause in a contract.”

"If such a course of action is permitted, then in each and every case, the party to a contract containing an arbitration clause could escape arbitration by claiming that it is seeking damages under torts or claiming punitive damages", the Court said.

Brief Facts: The Plaintiff entered into a collaboration Agreement with the Defendant (builder) in respect of a property. The agreement was a detailed agreement wherein the Defendant had agreed to construct the slit parking on the ground floor, upper ground floor, first floor and second floor. In consideration of the said construction, the Defendant was to become the owner of only the first floor and the second floor without, roof or terrace rights. Defendant also agreed to pay to the Plaintiff a sum of Rs. 68, 80, 000/-.Furthermore, the construction of the property was to be completed within a period of 12 months with a clause that if the construction is not completed within a stipulated period, a sum of Rs.2% on the total cost of construction was to be paid as penalty per month till possession is handed over. The agreement also contained an arbitration clause as under:

“That if at any time dispute arises between the parties in connection with construction of Building or use of materials and articles in the building and any other matter of the building, the same shall be referred to Arbitrator to be appointed with the concurrence of both parties…”

Later, the construction was not completed within the stipulated time and the Plaintiff alleged that Defendant was using sub-standard material in construction and also did not make payments as agreed under the agreement. Since the Defendant did not complete the work, the Plaintiff who had moved out of his own property, got the work completed out of his own funds. The Defendant also entered into an Agreement to Sale, for sale of the 2nd floor and received a sum of Rs. 46 Lakhs from the third party. This led to a litigation being filed by the said third party against the Plaintiff.

The Plaintiff terminated the agreement with the Defendant and filed a suit before the Court claiming exemplary and punitive damages and also prayed for passing of mandatory injunction in its favour. When the matter came up for hearing, the Defendant mentioned the existence of an arbitration clause and pressed that the parties ought to be referred to arbitration. Thereafter in the written statement also the Defendant raised the same issue that the suit was not maintainable in view of the arbitration clause.

Plaintiffs’ Contentions;

· That damages being sought are in the nature of tortious claims (i.e. claiming exemplary and punitive damages) and not arising out of the agreement, hence such kind of disputes are not arbitrable. In this respect, the Plaintiff also relied on the Judgement Bougainvillea Multiplex and Entertainment Centre Pvt. Ltd. Vs Shankar Rai[2], wherein the court held that where a suit is filed by a party for damages under tort and beyond the terms and conditions of the contract, the matter cannot be referred to the Arbitrator under the terms of the agreement.

  • That the Defendant did not file an application under Section 8 of the Act for referring the parties to arbitration where there is an arbitration agreement.
  • The Defendant has failed to file the original or certified copy of the agreement as required under Section 8 of the Act.
  • As the Defendant has already filed the written statement and the affidavit of admission/denial, hence, the Defendant has waived his right to seek reference to arbitration and has submitted to the jurisdiction of this court.
  • The Plaintiff is also praying for a mandatory injunction which cannot be granted by an Arbitrator.
  • The agreement has been terminated and hence the arbitration clause does not survive.

Defendants Contentions;

  • Even if the agreement is terminated, the arbitration clause survives between the parties.
  • There is an Arbitration clause in the agreement and the dispute ought to be referred to Arbitration.
  • Unless the party has waived the right to invoke the arbitration clause, disputes are liable to be referred to Arbitration.

ISSUE- Whether such a dispute is liable to be referred to Arbitration in view of the contentions raised by the Plaintiff considering the nature of reliefs claimed by the Plaintiff?

Observation: The High Court of Delhi heard both parties at length, the Court analyzed the scope of arbitration clause in the agreement and observed that the clause is broad enough to encompass any and all disputes arising between the parties in respect of suit property. The Court dealt the controversy in the matter issue wise which is as follows;

  • Non filing of Section 8 petition seeking reference as well as the non-filing of the original or certified copy of the agreement are not valid objections, as the Plaintiff himself has filed the agreement on record. Thus, an agreement is an admitted document and the existence of the arbitration clause in it, being also admitted, the non-filing of the certified copy of the agreement does not preclude the Defendant from seeking reference to arbitration. The Hon’ble Court while referring to judgment Parasramka Holding Pvt Ltd. Vs Ambience Private Ltd. & Anr., held that a formal application under Section 8 of the Act, seeking reference of disputes to arbitration is not required.
  • With respect to the objection of the Plaintiff that the Defendant has submitted to jurisdiction by filing the written statement in the present suit was also discarded by the Court. The Court while relying on Booz Allen & Hamilton Inc. Vs SBI Hone Finance Ltd. observed that it is a settled position of law that a party expressing an intention to arbitrate is sufficient. The Court took note of a fact that that the Defendant on the very first date of hearing made its submissions with respect to referring the dispute to arbitration. Thus, the Defendant had not waived his right to seek arbitration and relied upon the same since inception.
  • With respect to the contention of the Plaintiff that the agreement has been terminated and hence arbitration clause does not survive, the Hon’ble Court while referring to the law laid down in the case of Hema Khattar and Arn. observed that even if the agreement has come to an end, the arbitration clause is not perished.
  • With respect to the objection raised by the Plaintiff that the Plaintiff is claiming a mandatory injunction and also damages under the Law of Torts which is not arbitral. On this point the Court distinguished the Judgment (Bougainvillea) relied upon by the Plaintiff. The Court observed that in that Judgement the agreement between the parties was in a form of term sheet which was quite sketchy. It did not have any detailed terms and conditions and also did not provide for the mutual obligations of the parties. That is not so in the present case. The present agreement is quite detailed, in fact the terms are very clear and categorical. The obligations of each of the parties is explicitly provided. In fact under the agreement, compensation is also dealt with. The mere fact that the compensation may have been provided for delay in construction does not itself mean that the owner- Plaintiff cannot claim any damages over and above the Penalty stipulated.
  • The court observed that the exemplary/punitive damages is an issue to be determined by the Tribunal. An arbitral tribunal has all the trappings of a civil court, including power to award all forms of injunctions and damages, where a case is made out. Even in Bougainvillea (supra), the court has held that the compensation, when provided for in contract, can be granted by an Arbitral tribunal. The court further stated that merely by arguing that there is a tortious claim for exemplary damages, the Plaintiff cannot be permitted to wriggle out of arbitration. Accordingly, the Hon’ble Court held that the plaintiff would be entitled to raise all his claims before the Arbitral Tribunal and the same shall be dealt in accordance with law. Thus the claims raised by the Plaintiff in this suit being arbitral in nature, there is no requirement to bifurcate the same.

The observations of the High Court in the case is a remarkable one as it renders comments on essential aspects of existence of tortious claims and maintainability of arbitral dispute. Thus, the Court succinctly stated that existence of tortious claims for exemplary damages cannot be a defense to escape from settlement of dispute through arbitration.