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Shourav Lahiri

Shourav Lahiri considers the implications of a Supreme Court’s decision on the construction industry and on arbitration practice in general

It is a short point: if an arbitration clause is valid, and it covers the dispute in question, should a court proceedings brought by one of the parties be stayed to arbitration? The answer, one would expect, should be ‘yes’. But ‘no’ was the answer of the Supreme Court of India in last October’s decision in the case of N Radhakrishnan and M/s Maestro Engineers. Let us consider the implications of this Supreme Court decision on the construction industry and on arbitration practice in general.

No one seems to have told the Supreme Court of India that the growth of India’s economy, with a construction market worth US$50 billion per annum alone, is a major draw for foreign investment and domestic up-skilling alike. I say that because, much like a cranky traffic policeman on an off-day, the Supreme Court seems to be busy directing traffic in the wrong direction.

It all stems from recent ruling of the Supreme Court in India in N Radhakrishnan (‘NR’) and M/S Maestro Engineers and others (‘Maestro’).

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The facts

NR, an Indian engineer, entered into a partnership agreement with others to form Maestro. The partnership agreement contained an arbitration agreement.

A dispute arose between the parties when NR alleged that Maestro had misappropriated funds from the partnership accounts and had forged the books. NR offered to resign from the partnership, subject to payment of outstanding salary and profit share from Maestro. Maestro’s response was to begin a civil suit against NR requesting a declaration that NR had effectively resigned from the partnership and for an injunction to stop NR from interfering with the partnership.

NR’s response was to seek an application under Section 8 of the Arbitration Act for the civil proceedings to be stayed because there was an arbitration clause in the partnership agreement. Two sets of lower courts rejected NR’s application, and NR moved the Supreme Court on appeal. The Supreme Court was of the same view as the lower courts, and it is to the ‘why’ that I now turn.

The issues

The starting position is that any action brought in the courts, in breach of an arbitration agreement that covers the dispute in question, should be stayed. Despite argument between the parties as to whether there was a valid arbitration agreement in this case, and whether that agreement covered the present dispute, the Supreme Court held that the arbitration agreement was valid and the dispute between the parties fell within its scope.

However, the Supreme Court held that, given the allegations of forgery and misappropriation of funds, the level of enquiry into material evidence that would be needed made it inappropriate for an arbitrator to carry out that enquiry; only the court was in a position to do so. Accordingly, there would be no stay of the civil proceedings and Maestro could continue in the courts.

The Supreme Court said this: “The facts of the present case do not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter.”