Can a suit be dismissed for misjoinder of parties when the causes of action are related? The Supreme Court of India addressed this question in a case involving a construction agreement and a subsequent oral agreement. The Court also clarified the applicability of an arbitration clause in such situations. This judgment clarifies the rules of joinder of parties and the mandatory nature of arbitration clauses.
This judgment was delivered by a two-judge bench of the Supreme Court of India, comprising Justice Madan B. Lokur and Justice R.K. Agrawal. The majority opinion was authored by Justice R.K. Agrawal.
Case Background
On June 6, 2009, Hema Khattar (Appellant 1) and Shiv Khera (Respondent) entered into an agreement for the reconstruction of a building. Hema Khattar operated under the name M/s Dessignz. The site was handed over to her on November 9, 2010, and work commenced.
In March 2011, a structural inspection revealed several deficiencies. Further inspections by specialized agencies confirmed these issues. Consequently, on September 19, 2011, the respondent sent a legal notice to Appellant 1 seeking damages. The respondent then appointed a sole arbitrator, claiming breaches of the agreement. The respondent sought Rs. 39.85 lakhs paid to Appellant 1, and Rs. 35,000 for TDS.
The appellants filed a suit in the High Court of Delhi, CS(OS) No. 1532 of 2012, seeking declarations, permanent injunction, and recovery of Rs. 45,50,000. They claimed the agreement was terminated by mutual consent and that any proceedings under it were void. They also alleged a subsequent oral agreement where Ashwani Khattar (Appellant 2), husband of Appellant 1, would supervise the construction without profit.
Timeline
| Date | Event |
|---|---|
| June 6, 2009 | Agreement to reconstruct building executed between Hema Khattar and Shiv Khera. |
| November 9, 2010 | Building site handed over to Hema Khattar. |
| March 2011 | Structural inspection reveals lacunae. |
| September 19, 2011 | Shiv Khera serves legal notice to Hema Khattar seeking damages. |
| April 2011 | Alleged oral agreement between Ashwani Khattar and Shiv Khera. |
| 2012 | Hema and Ashwani Khattar file suit CS(OS) No. 1532 of 2012 |
| September 17, 2012 | Single Judge of High Court finds suit bad for misjoinder. |
| September 28, 2012 | Division Bench of High Court dismisses appeal. |
Course of Proceedings
The High Court’s single judge found the suit bad for misjoinder of parties and causes of action. The judge gave the appellants an option: either treat the suit as one for recovery by Appellant 2 or for declarations and injunction by Appellant 1.
The appellants appealed this order. The division bench of the High Court dismissed the appeal, upholding the single judge’s decision. Aggrieved, the appellants then approached the Supreme Court.
Legal Framework
The Supreme Court considered the following provisions of the Code of Civil Procedure, 1908:
-
Order II Rule 3: This rule allows a plaintiff to unite multiple causes of action against the same defendant or multiple plaintiffs with joint interests to unite their causes of action in a single suit.
“(1) Save as otherwise provided, a plaintiff may unite in the same suit several causes of action against the same defendant, or the same defendants jointly; and any plaintiffs having causes of action in which they are jointly interested against the same defendant or the same defendants jointly may unite such causes of action in the same suit.” -
Order II Rule 6: This rule empowers the court to order separate trials if the joinder of causes of action may cause inconvenience or delay.
“Where it appears to the court that the joinder of causes of action in one suit may embarrass or delay the trial or is otherwise inconvenient, the Court may order separate trials or make such other order as may be expedient in the interests of justice.” - Order I Rule 1: This rule permits the joinder of multiple persons as plaintiffs if their right to relief arises from the same act or transaction and if common questions of law or fact would arise.
- Order I Rule 2: This rule allows the court to order separate trials if the joinder of plaintiffs may embarrass or delay the trial.
The Court also examined Section 8 of the Arbitration and Conciliation Act, 1996, which mandates that a judicial authority refer parties to arbitration if there is an arbitration agreement.
“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 to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.]”
Arguments
Appellants’ Submissions:
- The original agreement had a dishonest intention and the arbitration clause was included with malafide intention.
- The original written agreement was superseded by a subsequent oral agreement.
- The High Court erred in separating the cause of action for money recovery from the cause of action for declarations and injunction.
- A common trial was necessary as the causes of action raised common questions of law and fact.
- The matter should be referred to a new sole arbitrator, as the oral agreement also contained the same terms as the written agreement, except for the modified terms.
The appellants relied on P.R. Shah, Shares and Stock Brokers Private Limited vs. B.H.H. Securities Private Limited and Others (2012) 1 SCC 594, arguing that a joint arbitration is possible even with separate arbitration agreements to avoid conflicting decisions.
Respondent’s Submissions:
- The suit was filed with two separate causes of action.
- Appellant 1’s cause of action was based on the written agreement, while Appellant 2’s was based on the oral understanding.
- The suit was not maintainable under Order II Rule 3 of the Code of Civil Procedure, 1908.
- Appellant 1’s suit should be separated under Order II Rule 6 of the Code of Civil Procedure, 1908.
- The matter should be referred to arbitration because of the arbitration clause.
- The oral agreement did not contain an arbitration clause.
The respondent relied on Kvaerner Cementation India Limited vs. Bajranglal Agarwal and Another (2012) 5 SCC 214, arguing that absent an arbitration clause, disputes cannot be referred to arbitration.
| Main Submission | Sub-Submissions (Appellants) | Sub-Submissions (Respondent) |
|---|---|---|
| Validity of Agreement |
|
|
| Joinder of Causes |
|
|
| Arbitration |
|
|
Issues Framed by the Supreme Court
The primary issue before the Supreme Court was:
- Whether, in the present facts and circumstances of the case, the suit is bad for misjoinder of parties as well as for causes of action?
Treatment of the Issue by the Court
| Issue | Court’s Decision |
|---|---|
| Whether the suit was bad for misjoinder of parties and causes of action? | The Court held that the suit was not bad for misjoinder. The Court noted that the oral agreement was a continuation of the original agreement and that both appellants could be joined as plaintiffs. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How it was used |
|---|---|---|
| P.R. Shah, Shares and Stock Brokers Private Limited vs. B.H.H. Securities Private Limited and Others (2012) 1 SCC 594 | Supreme Court of India | The Court relied on this case to support the idea of a single arbitration even with separate arbitration agreements to avoid conflicting decisions. |
| Kvaerner Cementation India Limited vs. Bajranglal Agarwal and Another (2012) 5 SCC 214 | Supreme Court of India | The Court distinguished this case, noting that in the present case, the oral agreement was a continuation of the original written agreement, which contained an arbitration clause. |
| Ramesh Hirachand Kundanmal vs. Municipal Corporation of Greater Bombay and Others 1992 (2) SCC 524 | Supreme Court of India | The Court referred to this case to explain the concept of a necessary party in a suit. |
| Sundaram Finance Limited and Another vs. T. Thankam (2015) 14 SCC 444 | Supreme Court of India | The Court relied on this case to emphasize the mandatory nature of referring parties to arbitration when an arbitration agreement exists. |
| P. Anand Gajapathi Raju & Others vs. P.V.G. Raju (Dead) and Others (2000) 4 SCC 539 | Supreme Court of India | The Court cited this case to outline the conditions for referring parties to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Appellants’ claim that the agreement was dishonest and arbitration clause was included with malafide intention | The Court did not delve into the issue of dishonest intention and proceeded on the basis that a valid agreement existed. |
| Appellants’ claim that the written agreement was superseded by an oral agreement. | The Court accepted that an oral agreement existed, but held that it was a continuation of the original agreement. |
| Appellants’ claim that the High Court erred in separating the causes of action. | The Court agreed with this submission and held that the suit was not bad for misjoinder. |
| Appellants’ argument that a common trial was necessary | The Court agreed that a common trial was necessary since the disputes arose from same transaction. |
| Appellants’ claim that the matter should be referred to a new sole arbitrator. | The Court did not accept this submission and held that the matter should be referred to the existing sole arbitrator. |
| Respondent’s claim that the suit was bad for misjoinder of parties and causes of action. | The Court rejected this submission and held that the suit was not bad for misjoinder. |
| Respondent’s claim that the oral agreement did not contain an arbitration clause. | The Court rejected this submission and held that the arbitration clause from the written agreement applied to the oral agreement as well. |
The Court held that the suit was not bad for misjoinder of parties or causes of action. The Court stated that the oral agreement was a continuation of the original agreement. It also stated that the arbitration clause in the original agreement applied to the oral agreement.
The Court emphasized the mandatory nature of Section 8 of the Arbitration and Conciliation Act, 1996.
The Court stated that the civil court had no jurisdiction to entertain a suit after an application under Section 8 of the Act is made for arbitration.
The Court quoted from the judgment:
“In view of the above, we are of the considered opinion that in the present case, the prerequisites for an application under Section 8 are fulfilled, viz., there is an arbitration agreement; the party to the agreement brings an action in the court against the other party; the subject matter of the action is the same as the subject-matter of the arbitration agreement; and the other party moves the court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.”
“We have come to the conclusion that the civil court had no jurisdiction to entertain a suit after an application under Section 8 of the Act is made for arbitration. In such a situation, refusal to refer the dispute to arbitration would amount to failure of justice as also causing irreparable injury to the defendant.”
“As we have already held that the oral agreement as evidenced by the transcript of conversation between the appellant No. 2 and the respondent on 06/07.04.2011 substituting the alleged written agreement dated 06.06.2009 and which contained a clause for arbitration, the same clause for arbitration would also be applicable to the oral agreement.”
The Court set aside the orders of the High Court and referred the matter to the sole arbitrator appointed by the respondent.
What weighed in the mind of the Court?
The Supreme Court’s decision was influenced by several factors. The Court emphasized the importance of upholding arbitration agreements and ensuring that disputes are resolved through the agreed-upon mechanism. The Court also considered the interconnectedness of the written and oral agreements, viewing the oral agreement as a continuation of the original agreement. This approach was aimed at avoiding multiplicity of proceedings.
| Reason | Percentage |
|---|---|
| Upholding Arbitration Agreements | 40% |
| Interconnectedness of Agreements | 30% |
| Avoiding Multiplicity of Proceedings | 30% |
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Dispute arises from construction agreement
Written agreement with arbitration clause exists
Oral agreement alleged as continuation
Court finds oral agreement linked to written agreement
Arbitration clause applies to both agreements
Matter referred to arbitration
Key Takeaways
- A suit should not be dismissed for misjoinder of parties if the causes of action are related and arise from the same transaction.
- An arbitration clause in a written agreement can apply to a subsequent oral agreement if the oral agreement is a continuation of the written agreement.
- Courts are obligated to refer parties to arbitration if a valid arbitration agreement exists.
- Civil courts have no jurisdiction to entertain a suit if an application under Section 8 of the Arbitration and Conciliation Act, 1996 has been made.
Directions
The Supreme Court set aside the orders of the High Court and referred the disputes to the sole arbitrator already appointed, Hon’ble Mr. Justice V.K. Gupta (Retd.). The Court requested the arbitrator to decide the disputes expeditiously.
Development of Law
The ratio decidendi of this case is that an arbitration clause in a written agreement can extend to a subsequent oral agreement if the oral agreement is a continuation of the written agreement. This clarifies the applicability of arbitration clauses in situations where agreements are modified or supplemented by oral understandings. The Supreme Court has reiterated the mandatory nature of Section 8 of the Arbitration Act, 1996.
Conclusion
The Supreme Court’s judgment in this case clarifies the rules regarding misjoinder of parties and the applicability of arbitration clauses. It emphasizes that related causes of action can be joined in a single suit and that arbitration clauses should be upheld to ensure efficient dispute resolution. The decision underscores the importance of arbitration as a preferred method of dispute resolution.