In FAO-COM-3-2021 (O&M)-PUNJ HC- Parties not bound by claim based upon agreement which does not include arbitration clause: P&H HC
Justices Augustine George Masih & Sandeep Moudgil [04-11-2022]

Read Order: M/s Soben Contract and Commercial Ltd. v. M/s Qonquests Technical Solutions Pvt. Ltd. and Others

Monika Rahar

Chandigarh, November 7, 2022: Recently, the High Court of Punjab and Haryana has held that the claim which is based upon an agreement, which does not include an arbitration clause, would not bound the parties.

In this appeal before the Bench of Justices Augustine George Masih and Sandeep Moudgil, the order of the Additional District Judge-cum-Presiding Judge, Exclusive Commercial Court rejecting the the first defendant’s (appellant) application under Order VII Rule 11 (d) of the CPC read with Section 8 of the Arbitration & conciliation Act, 1996 ('Arbitration Act') for rejection of the plaint in terms of Clause 16 in the Consulting Agreement, was challenged. 

It was the case of the appellant’s counsel that the Court below misread the provisions of the agreements entered into between the parties. The Counsel argued that the Court proceeded on the assumption of the existence of general Memorandum of Understanding whereby the broad terms of engagement were reduced into writing between the parties without considering the fact that separate Purchase Orders were secured between the parties by signing and stamping each and every Consulting Agreement before the commencement of the work. 

Further, the Counsel submitted that the majority of the reliefs claimed in the commercial suit filed by the plaintiff alleged breach of Memorandum of Understanding, when in fact majority of the reliefs claimed him (plaintiff) in the civil suit flew from the Purchase Orders and Consulting Agreements. 

The Counsel added that the plaintiff intentionally withheld from placing on record the factum of existence of separate Purchase Orders and Consulting Agreement of each project before the Court below due to existence of the arbitration clause in all such agreements providing for the resolution of dispute by way of arbitration and applicable laws of Scotland only. 

The Counsel categorically argued that the Lower Court ignored the admission of the plaintiff regarding the existence of the Consulting Agreements along with the Purchase Orders, therefore, when the majority of claims were based upon these Consulting Agreements and the Purchase Orders, the terms and conditions thereof would have full application. 

Clause 16 of the Consulting Agreement related to 'Dispute Resolution' and stated that any dispute arising out of or in connection with the agreement, the parties will attempt to resolve the matter through friendly arbitration. Furthermore, in clause 18 it was agreed upon that in such a dispute arising out of the subject, matter shall be governed and construed in accordance with the laws of Scotland. 

As per the counsel, these Clauses were ignored by the Court below. The Counsel lastly, argued that the provisions of Order VII Rule 11 of CPC read with Section 8 of the Arbitration Act would be attracted and therefore, the suit for recovery of outstanding amount ought to be dismissed. 

After hearing the parties, the Court observed that the working relationship of the parties was governed by the Memorandum of Understanding which was the basic document on which and from where the long term relationship initiated.

“The said agreement became the substratum for the relationship between the parties although they have earlier also, off and on, having worked for each other”, the Court added. 

It was noted by the Court that the Memorandum of Understanding was to form a long term, exclusive, strategic alliance wherein the plaintiff was to support the first defendant on their quantity surveying business in the United Kingdom. It was for a period of five years and was renewable in march, 2022. In their working relationship, there was no Purchase Order accompanying the Consulting Agreement issued to the plaintiff. Irrespective of the purchase order accompanied by the Consulting Agreement, the project was given effect to and triggered by email confirmation, meaning thereby that the parties were not dependent upon the Purchase Orders accompanied by the Consulting Agreement.

Further, the Court also observed that in 2018, a request was received from the first defendant by the plaintiff to send a signed Purchase Order accompanied by a Consulting Agreement. When a clarification was sought by the plaintiff, it was stated through an email that it was due to a recent audit which necessitated signing of Purchase Order and accompanying Consulting Agreement for internal records of the appellant.

From the pleadings, therefore, the Court observed that the basis for working relationship governing the conduct between the parties was the Memorandum of Understanding and not the Purchase Orders. 

“The pleadings also make it clear that the claims as have been projected in the suit and the basis for the same arise out of breach of the terms of Memorandum of Understanding by the appellant”, the Court opined while also adding, 

“It is not in dispute that under the Memorandum of Understanding, there is no clause for arbitration. The clause, if any, is in the Consulting Agreements which would not be applicable in the case as the claim of respondent No.1 – plaintiff is based exclusively on the Memorandum of Understanding.”

Thus, the Court held that the dispute and the claims which were made in the civil suit, did not flow from the Purchase Orders or Consulting Agreements, thus, the same could not be made the basis for rejection of the suit and similarly, the question of separation of the claims does not arise. 

“The claim which is based upon an agreement, which does not include an arbitration clause, would not bound the parties. The plea of the appellant that the suit deserves to be dismissed as there is an arbitration clause, therefore, cannot sustain”, the Court held. 

The appeal was thus dismissed.