Arbitration Plea Must Be Filed Before Leave-to-Defend Application In Summary Suit: Madras High Court

The Madras High Court has recently held that a defendant in a summary suit cannot seek reference of the dispute to arbitration after first filing an application for leave to defend, ruling that such an application constitutes the first statement on the substance of the dispute.

A Division Bench of Justices P. Velmurugan and K. Govindarajan Thilakavadi rendered the ruling while dismissing an appeal filed by ETA General Private Limited against an order refusing to refer a USD 19 million recovery dispute with Fujitsu General (Thailand) Company Limited to arbitration.

The bench observed, “Section 8 of the Arbitration and Conciliation Act clearly says that before submitting the first statement, the party has to invoke Section 8 and file the application for referring the matter to arbitration. As stated already, Order XXXVII of the Code is a procedural law and only general in nature. Whereas Section 8 of the Arbitration and Conciliation Act is a special law which prevails over the general law and therefore, it cannot be stated that in the suit filed under Order XXXVII, the defendant has to first file the application for leave to defend and thereafter can file the application under Section 8. Therefore, we are of the view that the application filed for leave to defend in summary suit itself is the first statement.”

The dispute arose from a long-standing commercial relationship between ETA and companies within the Fujitsu General group. ETA relied on a Master Technical License and Distribution Agreement executed in December 1999 and shareholder agreements executed in 2000 and 2010, all of which contained arbitration clauses.

Fujitsu General (Thailand) Company Limited instituted a summary suit before the Madras High Court seeking recovery of USD 19,005,310 together with interest on the basis of unpaid invoices.

After entering appearance in August 2022, ETA filed applications seeking leave to defend the suit and condonation of delay. Its application seeking reference of the dispute to arbitration was filed a month later.

ETA argued that Fujitsu General (Thailand), though not a signatory to the agreements, was bound by the arbitration clauses under the Group of Companies doctrine. Fujitsu opposed the plea, contending that ETA had already submitted to the jurisdiction of the Commercial Court by first seeking leave to defend the suit.

Agreeing with Fujitsu on that issue, the Court held that a party seeking reference to arbitration must invoke Section 8 before submitting its first statement on the substance of the dispute.

The Court further observed, “The conduct of the appellant clearly shows that the appellant failed to seek the reference to arbitration immediately after receiving the suit summons and only after the appellant failed in all the attempts, they resorted to file the application under Section 8 of the Arbitration and Conciliation Act. When the appellant chose to first file the application seeking leave to defend, that too with delay, the intention of the appellant is not to refer the matter to arbitration.”

The bench, however, disagreed with the Single Judge's conclusion that the Group of Companies doctrine could not apply to Fujitsu General (Thailand).

Referring to the Supreme Court's decisions in MTNL v. Canara Bank and Cox and Kings v. SAP India, it held that a subsidiary company may, in an appropriate case, be bound by arbitration agreements entered into by another entity within the same corporate group.

Since ETA had not invoked arbitration before filing its leave-to-defend application, the Court found no reason to interfere with the dismissal of its application seeking reference to arbitration. The appeal was consequently dismissed.

The bench, nevertheless, set aside the Single Judge's finding that Fujitsu General (Thailand) was not bound by the agreements containing arbitration clauses.

For Appellant (ETA General Private Limited): Senior Advocate V. Raghavachari, instructed by Advocate V. Ponnappa Bharathi.

For Respondent (Fujitsu General (Thailand) Company Limited): Senior Advocate R. Parthasarathy, instructed by M/s Arva Merchant.