As per the case facts, Gujarat Composite Limited appealed decisions by the High Court that rejected its requests to refer a dispute to arbitration under the Arbitration and Conciliation Act. ...
No Acts & Articles mentioned in this case
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.3259 OF 2023
(ARISING OUT OF SLP (CIVIL) NO. 16932 OF 2018)
GUJARAT COMPOSITE LIMITED ….APPELLANT(S)
VERSUS
A INFRASTRUCTURE LIMITED & ORS. ….RESPONDENT(S)
WITH
CIVIL APPEAL NO.3260 OF 2023
(ARISING OUT OF SLP (CIVIL) NO. 18074 OF 2018)
JUDGMENT
DINESH MAHESHWARI, J.
Leave granted.
2. These appeals have been preferred against the common
judgment and order dated 23.04.2018 passed by the High Court of
Gujarat whereby, the High Court has dismissed First Appeal Nos. 588 of
2018 and 587 of 2018 filed by the appellant against the order passed by
the Commercial Court, Ahmedabad dismissing the applications under
Section 8 of the Arbitration and Conciliation Act, 1996
1
in Commercial
Civil Suit Nos. 90 of 2017 and 91 of 2017 respectively. Both these
appeals, involving common questions concerning arbitrability of the
dispute, have been heard together and are being taken up for disposal by
this common judgment.
3. It would be apposite to take note of the factual and background
aspects to the extent relevant for the points arising for determination in
1 Hereinafter also referred to as ‘Act of 1996’ or simply ‘the Act’.
1
the present appeals. Given the commonalities of the factual chronology, it
would be proper to accord primacy to facts of the lead matter i.e., the
appeal arising from SLP (C) No. 16932 of 2018 [relating to First Appeal
No. 588 of 2018 in the High Court, arising from the order passed in
Commercial Civil Suit No. 90 of 2017], apart from noticing a few facts that
may be of relevance in the cognate appeal.
3.1.On 07.04.2005, the appellant herein entered into two licence
agreements with respondent No. 1 and the sister concern of respondent
No. 1
2
(against whom the cognate appeal is filed). The first agreement
with respondent No. 1 was for licensing the operation of two
manufacturing units of the appellant, being A.C. Sheet and Cement
Grinding, with the licensing fee per quarter set at Rs. 5,00,000/- (Rupees
Five Lakh) for the combined use of land and building as well as factory
machinery and equipment. The second agreement with the sister concern
of respondent No. 1 was for licensing the operation of another
manufacturing unit of the appellant, being A.C. Pressure Pipe, with the
cumulative licensing fee per quarter set at Rs. 2,00,000/- (Rupees Two
Lakh). Both agreements were of the same nature and were executed for
a term of 7 years (84 months). The relevant clauses of the agreement
entered into between the appellant and respondent No. 1 could be
usefully reproduced as under: -
“3. The duration of the Licence for manufacture will be for a period
of 84 months, extendable to a further period of 84 months on
mutual consent from the date on which the LICENSEE takes over
production and manufacturing facilities after completion of the
necessary inspection and the compilation of inventories as
2 Hereinafter referred to as ‘sister concern’.
2
stipulated herein. The said takeover would be fully and duly
evidenced by acknowledgement of both the parties in writing, and
will constitute a pan of this Licence Agreement.
*** *** ***
8. LICENSEE shall pay quarterly licence fee of Rs.1,00,000
(Rupees One lakh only) per quarter towards the use of land and
building including office building and Rs.4,00,000 (Rupees Four
lakhs only) per quarter towards the use of factory machinery &
equipments. The Licence fee shall, be paid within 21 days of end
of the quarter.
*** *** ***
12. LICENSEE shall not be entitled to mortgage, assign, licence or
sublet the said Unit. However, LICENSEE shall be at liberty to
mortgage/ charge, Raw Material stock, Finished Goods book
debts and equipment brought in and belonging to LICENSEE
under this arrangement which shall be kept separately identified
and insured.
*** *** ***
15. The LICENSOR will be entitled to a Bonus, in addition to
licence fee payable under Clause 8, in consideration of the use of
its manufacturing facilities, licence, brand goodwill etc, as worked
out below:
i. 14% of the profit earned will be the retained profit in this
arrangement and balance 86% shall be distributable as
under:
a) The Bonus payable by LICENSEE to LICENSOR
under this Clause would be 43% of the divisible profit
minus the licence fee payable as per Clause 8 above.
In the event the amount of Bonus works out to be
negative, then LICENSOR shall be liable to reimburse
this amount to LICENSEE on quarter to quarter basis.
b) The retained profit shall always belongs to the
LICENSEE during the continuation or upon
determination of the licence period.
c) The computation of the Profit & Loss and its
distribution shall be done quarterly.
ii. Profit for this purpose means operating profits/losses
earned during the quarter, after deducting interest on working
capital and depreciation on the assets added by LICENSEE,
but before charging the licence fee specified in Clause 8. The
operating profit shall be worked out on the basis of Accepted
Accounting principles.
*** *** ***
17. The LICENSEE at its absolute discretion may advance some
amount to the LICENSOR on the terms/conditions/security as may
be mutually agreed to facilitate smooth operation of this
agreement.
*** *** ***
32. Disputes if any, arising out of this Agreement shall be referred
to arbitration of a Sole Arbitrator if mutually agreed, failing which
Arbitrator will be appointed as per provisions of Arbitration and
3
Conciliation Act, 1996. The venue of Arbitration will be as decided
mutually but preferably at Delhi.”
3.2.On the same date i.e., 07.04.2005, a supplementary agreement
was also executed between the appellant-licensor, respondent-licensee,
and the sister concern as confirming party. As per the terms of this
agreement, appellant requested respondent No. 1 for some financial
assistance to arrive at a settlement with its creditors, employees as well
as statutory authorities for discharging their dues. The respondent No. 1,
therefore, agreed to advance a sum of Rs. 5,30,00,000/- (Rupees Five
Crore Thirty Lakh) to the appellant with interest at 10% p.a. and as
consideration for the financial assistance rendered, it was agreed that
respondent No. 1 would be permitted to create a mortgage on the three
licensed manufacturing units in order to secure the ad hoc advance. This
advance was recoverable in ten quarterly instalments commencing from
the 90
th
day of payment of the ad hoc advance out of the licence fee and
bonus under clauses 8 and 15 of the main agreement. A few relevant
clauses of the supplementary agreement dated 07.04.2005 could also be
usefully reproduced as under: -
“NOW, THEREFORE, in consideration of the premises and the
mutual covenants set forth herein, and also in the main License
Agreement dated 7
th
April 2005 and for other good and valuable
considerations, the parties hereto hereby agrees as follows:
1. The LICENSOR requested the LICENSEE for some financial
assistance to arrive at an amicable settlement with the creditors;
employees and statutory authorities for discharging of their dues.
2. The LICENSEE, in consideration of facilitating the smooth
operation of the main agreement dated 7
th
April 2005 between
LICENSOR and CONFIRMING PARTY and main agreement dated
7
th
April 2005 between LICENSOR and LICENSEE including
smooth operation of A. C. Pipes, A. C. Sheets and Cement Units,
have agreed to advance a sum of Rs. 5,30,00,000 (Rupees Five
Crores Thirty Lakhs only) to the LICENSOR fetching interest at
4
10% per annum to be calculated at monthly rests after receipt of
the approval of LICENSOR'S secured creditors as per Clause 4 of
the main agreement and upon creation of mortgage on A.C. Sheet,
A. C. Pipe and Cement manufacturing Unit including building,
plant, and machineries in favour of LICENSEE for securing the
above adhoc advance. LICENSOR shall use the said (illegible) for
entering into a settlement with its secured creditors by making a
down payment towards their dues and for payment of balance in
an agreed manner and for obtaining their consent to the above
agreement and to pay and discharge various other pressing
liabilities of LICENSOR including payment of dues of workers,
statutory liabilities etc. This advance along with interest thereon
shall be recoverable in Ten. (10) quarterly instalments,
commencing from the 90
th
day of the payment of ad-hoc advance
amount, out of the licence fee payable as per Clause 8 and Bonus
as per Clause 15 of the main Agreement.”
3.3.Subsequently, clauses 11 and 15 of the original licence
agreement, (pertaining to repurchase of assets and entitlement of licensor
to bonus) were amended by means of execution of an amendment
agreement dated 25.06.2005 between appellant and respondent No. 1.
The amended clauses read as under: -
“Clause- 11: LICENSOR will allow LICENSEE to make necessary
modification/ addition/ changes in the machinery, building or any
other fixed assets for smooth operation of the plant. Minor
expenses to the extent of Rs.25000/- (Rupees Twenty Five
Thousand only) may be debited to P&L Account and the expenses
in excess of specified amount will be capitalized and may be
funded by both the parties in the following ratio.
i) Licensor : 43%
ii) Licensee : 57%
Such expenses to be decided mutually and duly minuted.
Depreciation on these additions to the fixed assets shall be
calculated at the rates specified in the Companies Act as per
Straight Line Method. Upon determination of the license period the
LICENSOR would be under obligation to buy these assets at the
Written Down Value.
b) Clause No.15 : The LICENSOR will be entitled to a Bonus, in
addition to license fee payable under Clause-8, in consideration of
the use of its manufacturing facilities, license, brand goodwill etc.
as worked out below.
i) The Bonus payable by LICENSEE to LICENSOR under this
Clause would be 43% of the profit. The Bonus so payable shall be
reduced by the amount of License fee payable as per Clause-8 of
the Agreement. However, in the event of loss, the LICENSOR shall
5
be liable to reimburse 43% of the total loss to LICENSEE on a
quarter-to-quarter basis.
ii) Computation of the Profit & Loss and its distribution shall be
provisionally based on the annual audited accounts.
iii) Profit/Losses for this purpose means profits/losses earned,
after deducting interest on working capital and depreciation on the
assets added by the LICENSEE but before changing the license
fee specified in Clause No. 8. The profit/loss shall be worked out
on the basis of accepted accounting principles.”
3.4.Thereafter, on 06.07.2006, a tripartite agreement was executed by
and amongst the appellant, respondent No. 1 and respondent No. 2
(Bank of Baroda
3
) upon sanctioning of a loan to the tune of Rs. 500 lakh
to respondent No. 1. The appellant agreed to create first charge on fixed
assets, which was to be released only with the consent of respondent No.
1. However, it was also stipulated that if payment of corporate loan was
made directly by the appellant to the bank, the first charge could be
released without the consent of respondent No. 1. The relevant clauses of
the tripartite agreement dated 06.07.2006 could be usefully reproduced
as follows: -
“WHEREAS Bank of Baroda has sanctioned Corporate loan of
Rs.500 lacs to M/s. A Infrastructure Limited on the terms &
conditions stipulated in the sanction letter and to secure this above
loan in addition to other conditions and corporate guarantee also
provided by M/s. Gujarat Composite Limited.
Further M/s. Gujarat Composite Limited has agreed to create first
charge on the fixed assets as stipulated in the sanctioned letter in
favour of Bank of Baroda.
Further M/s. Gujarat Composite Limited, has agreed that first
charges will be released by Bank of Baroda only with the consent
of M/s. A Infrastructure Limited even after repayment of the said
loan. Bank of Baroda further agreed to release the first charge
only with the consent of M/s. A Infrastructure Limited. However in
case M/s. Gujarat Composite Ltd. will make payment of this
corporate loan of Rs.500 lacs directly to Bank of Baroda. Bank of
Baroda will release the first charges without the consent of M/ s. A
Infrastructure Limited”
3 Hereinafter also referred to as ‘the bank’.
6
3.5.An amendment was introduced to the aforementioned tripartite
agreement on 23.01.2008, so as to restrict the transfer of title deeds of
the land of appellant during the term of licence agreements. The
amended condition reads as follows: -
“Further M/ s. Gujarat Composite Limited, has agreed that First
Charge will be released by Bank of Baroda only with the consent
of M/s. A Infrastructure Limited even after repayment of the said
loan. Bank of Baroda further agreed to release the First Charge
only with the consent of M/s. A Infrastructure Limited. However, in
case M/s. Gujarat Composite Ltd. will make payment of dues
against this corporate loan of Rs.500 lacs directly to Bank of
Baroda, Bank of Baroda will release the First Charge without the
consent of M/s. A Infrastructure Limited. But M/s Gujarat
Composite agrees that the title Deeds of the land will not be
transferred to any other party during the currency of Licence
Agreements executed between M/s. A Infrastructure Limited and
M/ s. Gujarat Composite Ltd. ”
3.6. The dispute in the present matter arose after respondent No. 1, by
means of representation dated 22.02.2012, invoked clause 3 of the
original licence agreement and called upon the appellant to extend the
term of the licence agreement by a further period of 84 months. This
extension was sought because appellant was unable to pay certain dues
owed to respondent No. 1 and sought time to arrange for payment. In
response to this representation, the appellant, through letter dated
29.02.2012, denied the proposal of respondent No. 1 to extend the term
of licence agreement as also the projected outstanding dues. Later, on
06.04.2012, which was the date of completion of tenure of the original
licence agreement, respondent No. 1 did not hand over possession and
instead, declared its intention to continue with possession. Between April
2012 and March 2015, according to the appellant, certain attempts were
7
made to resolve the dispute, but to no avail. It is also a part of the case of
respondent No. 1 that certain parcels of land were transferred to
respondent Nos. 3 to 5 in January 2015.
3.7.Then, on 07.04.2015, the appellant issued notice to respondent
No. 1 claiming recovery of possession of the manufacturing units as well
as certain monetary dues. In the notice, the appellant stated that the
licence had expired by efflux of time without any extension, hence
possession by respondent No. 1 was illegal. Further, the appellant
claimed that there was a huge outstanding payable by respondent No. 1.
In the reply dated 20.04.2015, respondent No. 1 disputed these claims
and asserted that the appellants had not cared to pay back its legitimately
claimed amounts. Yet again, between 26.08.2015 to 17.11.2016, attempts
were made to resolve the dispute but there was no positive outcome.
Seeing that the attempts to resolve the dispute had failed, on 28.02.2017,
the appellant served a notice on respondent No. 1 under Section 21 of
the Act of 1996 invoking the provision for arbitration contained in the
licence agreement (clause 32). Respondent No. 1 replied to this notice on
27.03.2017, contesting the arbitrability of the dispute since it was
inextricably interconnected with other related transactions and unresolved
issues arising therefrom. It was asserted that as the jurisdiction of the
arbitrator was derived from the agreement, adjudication of the alleged
dispute would go beyond the scope of the said agreement.
3.8.In this backdrop of events, the appellant preferred a composite
arbitration petition before the Gujarat High Court on 26.04.2017 being
8
IAAP No. 63 of 2017 against respondent No. 1 and its sister concern. On
the other hand, respondent No. 1-A Infrastructure Limited-filed a
commercial civil suit bearing No. 90 of 2017 before the Commercial Court
at Ahmedabad on 27.04.2017 with the following defendants:
1. Gujarat Composite Limited
2. Bank of Baroda
3. Real Home Corporation - a partnership firm
4. M/s. Raj Corporation (Confirming Party) - partnership firm
5. RJD Buildcon Ltd.
3.8.1.In the said suit, the respondent No. 1 (the plaintiff) made the
prayers for multiple reliefs in the following terms: -
“33) The Plaintiff therefore prays that:
(A) This Hon'ble Court may be pleased to direct the defendant
No.1 to pay to the Plaintiff herein a sum of Rs.32,66 crores with
interest @ 14% per annum from the date of suit till realization
herein under this decree and any further orders to be passed by
this Hon'ble Court;
(B) This Hon'ble Court may be pleased to hold and declare that
the Deeds of Conveyance dated 23rd January, 2015 registered
vide registration no. 742 and 750 executed by defendant No.1 in
favour of defendant Nos.3 and 5, as null and void;
(C) This Hon'ble Court may be pleased to permanently restrain the
defendant Nos.1, 3, 4 and 5 or their agent, executors, or
administrators from disturbing or obstructing the plaintiffs
occupation possession of the suit property till the discharged;
(D) This Hon'ble Court may be pleased to direct the defendant
No.2 Bank not to release original title papers and other relevant
documents in favour of defendant Nos.1, 3 and/or 4;
(E) This Hon’ble Court may be pleased to hold and declare that
the Conveyance Deed dated 23
rd
January, 2015 entered into
between the defendant No. 1 and defendant No. 3 to 5 as null and
void;
(F) This Hon’ble Court may be pleased to direct the defendant No.
2 to take over all the current assets of the plaintiff pertaining to or
in connection with the operation of A.C. Sheet and Cement.
Manufacturing unit under license agreement at their book value
and make payment to the plaintiff for the current assets available
at the time of handing over of the possession, if required.”
9
3.9. An application was preferred by the appellant under Section 8 of
the Act of 1996 in the said commercial civil suit bearing No. 90 of 2017 for
reference of the dispute to arbitration. In the written statement of the
appellant, objection was also raised against the jurisdiction of the
Commercial Court, given the arbitration clause in the licence agreement.
Respondent No. 1 filed a reply to the application and the appellant filed
an affidavit in rejoinder to the aforesaid reply on 03.07.2017.
3.10.In relation to the said application moved by the appellant in terms
of Section 8 of the Act of 1996, another material factor may also be
noticed. Two memos (pursis), came to be filed before the Commercial
Court on 06.12.2017. In one of the memos, the respondent Nos. 3 to 5
(subsequent purchasers of the property in question) purportedly stated
that they were not having any objection if the dispute concerning them
was resolved by arbitration proceedings. The appellant, by another memo
of the even date, suggested that the tripartite amended agreement was
with reference to the licence agreement and it was agreed that till the time
of the defendant No. 1 (appellant) making payment of a sum of Rs. 5
crore to the plaintiff, the title deeds of the immovable property would
remain with the bank. The appellant suggested that with a view that the
dispute between the parties should be resolved by arbitration
proceedings, keeping all contentions open, they would be depositing the
said amount of Rs. 5 crore in the Court and that in this manner ‘the
dispute with defendant No. 2 would be ended’ and then, the bank who
was handed over the title deed, would deposit the same in the Court and
10
the Court would be pleased to place the same in sealed cover till the
dispute of the other parties was not resolved by arbitration proceedings.
3.11.Before adverting to the order passed by the Commercial Court on
the prayer of the appellant for reference to arbitration in terms of Section
8 of the Act of 1996, we may complete the narration concerning the
parallel proceedings in terms of Section 11 of the Act of 1996, even while
deviating a little from the chronology. The said IAAP No. 63 of 2017 was
withdrawn on 07.07.2017, as it was a composite petition against both
respondent No. 1 and its sister concern with liberty to file fresh petitions.
Thereafter, two separate IAAPs being IAAP No. 90 of 2017 and 89 of
2017 were filed by the appellant but, the proceedings therein ultimately
culminated in the common order dated 15.12.2017. The High Court
dismissed those applications in view of the fact that the prayer of the
appellant in terms of Section 8 of the Act had been rejected by the
Commercial Court on 13.12.2017 but, with liberty to the appellant to file
afresh under Section 11 of the Act after decision on the challenge to the
order so passed by the Commercial Court. Be that as it may, this aspect
is not as such relevant for the present purpose and could be left at that.
4. The Commercial Court at Ahmedabad, in the order dated
13.12.2017, rejected the application of the appellant under Section 8 of
the Act of 1996. It was held that there was no arbitration clause in the
tripartite agreement and no reference had been made to the original or
supplementary licence agreement to give effect or consider the arbitration
clause as a part and parcel of the tripartite agreement. While referring to
11
clause 32 of the Licence Agreement dated 07.04.2005, the Court
observed that it was explicitly clear that the arbitration clause was
applicable to the appellant and respondent No. 1, specifically in reference
to the original licence agreement and supplementary licence agreement
but the same could not be extended to apply to subsequent transactions
and agreements with different parties.
4.1. In consonance with the aforementioned observations, the
Commercial Court also held that there must be a valid arbitration
agreement in order to invoke the powers of the Court to refer the parties
to arbitration under Section 8 of the Act of 1996. It was further observed
that persons who are not parties to the arbitration agreement cannot be
referred to arbitration, as the binding effect would only apply to the parties
thereto, i.e., the appellant and respondent No. 1. Hence, if the dispute
was between parties and non-parties to the arbitration agreement,
appointment of arbitrator could only be made with respect to the parties.
The relevant parts of the order passed by Commercial Court could be
usefully reproduced as under: -
“15….As such, no arbitration clause seems to have been inserted
nor any reference has been made as to the License Agreement or
Supplementary License Agreement executed between the plaintiff
and defendant No. 1 so as to give effect and to consider as a part
and parcel of the tripartite agreement executed between the
plaintiff, defendant No. 1 and defendant No. 2.
16. Even perusing item No. 32 of the Licence Agreement dated
07/04/2005 executed between the plaintiff and defendant No. 1
wherein it has been expressly agreed upon between the parties
thereto that dispute, if any, arising out of this Agreement shall be
referred to arbitration…..Thus, it is explicitly clear that the
arbitration clause is binding to the plaintiff and defendant No. 1
only and that too pertaining to the Licence
Agreement/Supplementary Licence Agreement and cannot be
12
given effect and extended and made applicable to the subsequent
transactions and/or agreements so executed between the plaintiff
and defendant No. 1 with the strangers.
ARBITRATION AGREEMENT:
17. Now the question arises is as to what is an “arbitration
agreement” and/or “a valid arbitration agreement”? To meet
with the aforesaid issue, the provisions of Section 7 of the
Arbitration Act requires to have a glance wherein the arbitration
agreement means an agreement between the parties to submit to
arbitration of or certain disputes which have arisen or which may
arise between them in respect of a definite legal relationship,
whether contractual or not.
18. It is further provided that the arbitration agreement must be in
writing and signed by the parties and also in exchange of
statement – defence in which the existence of the agreement is
alleged by one party and not denied by the other party.
19. Thus, considering the facts of the case on hand while applying
the provisions of Section 7 of the Arbitration Act, the powers of the
Court to refer the parties to arbitration are subject to fulfilment of
the required conditions i.e. there should
be an arbitration agreement and if the Court finds that no valid
arbitration agreement exists between the parties, then to invoke
the powers under Section 8 and the issue thereof does
not arise.
20. Hence, on the aforesaid account and as discussed in the
foregoing paragraphs, the clause of arbitration so inserted is
between the plaintiff and defendant No.1 as inserted in the
Licence Agreement and the same cannot be applied to the
subsequent transactions and with the persons who are not the
parties to the arbitration agreement who cannot be compelled
to or referred to arbitration. Hence, in view of the aforesaid, the
arbitration clause, the binding effect applies to the plaintiff and
defendant No.1 only and cannot be extended to the rest,
admittedly who are not the parties to the arbitration agreement.
21. Thus, the sum and substance of the aforesaid discussion is
that the reference to the arbitration is possible only if there is a
valid arbitration agreement between the parties, but if the dispute
is between the parties to an arbitration with the other parties as
also non-parties to the arbitration agreement, a reference to the
arbitration or even the appointment of the arbitrator can only be
made with respect to only the parties to the arbitration agreement
and not the non-parties.”
4.2.In terms of the requirements of Section 8 of the Act of 1996 the
Commercial Court held that the matter could be referred to arbitration
only if it were a part of the subject-matter of the agreement. The reliefs
13
sought by the plaintiff involved its challenge to the conveyance deeds as
violative of the undertaking submitted before the Industrial Tribunal as
also the fact that the transaction was entered into during the operation of
stay granted by the High Court
4
. Thus, this would not fall within the scope
of adjudication. The Commercial Court further held that the issue of
mortgage was not arbitrable. In essence, the considerations of the
Commercial Court had been that the relief sought by the plaintiff related
to several other transactions which did not provide for arbitration as a
dispute resolution mechanism. It was observed that the challenge to the
conveyance deed and also the relief sought against the bank to not
release documents in favour of appellant would only be capable of
adjudication by the Courts and could not be resolved by arbitrator.
4.3.Another ancillary observation had been that the conduct of
respondent Nos. 3 to 5 would indicate collusion with the appellant during
pendency of litigation. Thus, in substance, it was held that the issues in
question were not connected with the licence agreement and that there
was no valid arbitration agreement between the plaintiff and the rest of
the defendants apart from defendant No. 1 (appellant). The Commercial
Court further clarified that a partial reference to arbitration would not be
possible because the cause of action could not be split into separate
parts.
5. In appeal, the decision of the Commercial Court was upheld by
the High Court, after extensively taking note of the material aspects of the
4 We have not elaborated on the other litigations wherein the said orders were passed, for
being not entirely necessary in relation to the core question involved in the matter.
14
pleadings in plaint and the rival submissions as also the principles
enunciated in the cited decisions, with the finding that it would not be
proper to bifurcate the disputes in terms of arbitrable and non-arbitrable
disputes.
5.1. As regards the suit in respect of a matter which falls partly within
and partly outside the arbitration agreement, and also involves non-
parties as well as parties, it was held that Section 8 of the Act of 1996
would not be attracted, in reference to several decisions of this Court. The
High Court observed that the licence agreements were only executed
between the appellant and respondent No. 1 and respondent Nos. 2 to 5
were not party to the agreement. There was a tripartite agreement
between the appellant, respondent No. 1 and the bank, however, it was
an admitted position that no arbitration agreement existed in that regard.
Further, the tripartite agreement was an independent agreement for
mortgage by deposit of title deeds. It was further observed by the High
Court, as had also been observed by the Commercial Court, that the
appellant had breached the injunction granted by the High Court as well
as the undertaking before the Industrial Tribunal by selling some of the
properties to respondent Nos. 3 to 5. Referring to the plaint averments,
the High Court took note of the reliefs sought by respondent No. 1 and
the parties against whom reliefs were sought as also the pleadings with
respect to cause of action in the following words: -
“[8.5] In the present case as observed herein above there are
license agreements containing the arbitration clause, executed
between the plaintiff and the original defendant No.1 on one hand.
Admittedly, the original defendant Nos.2 to 5 are not party to the
15
arbitration agreement. There is a tripartite agreement between the
original plaintiff, original defendant No.1 and the original defendant
No.2 (Bank of Baroda) under which the plaintiff and the original
defendant No.2 have prayed the reliefs. It is an admitted position
that in the tripartite agreement between the original plaintiff,
original defendant No.1 and the original defendant No.2 (Bank of
Baroda), there does not exist any arbitration agreement. Under the
tripartite agreement the original defendant No.1 has placed the
title deeds and the said tripartite agreement as such can be said to
be an independent agreement and under the said tripartite
agreement there is a mortgage by deposit of title deeds in respect
of immovables and hypothecation of movables. It appears that the
said tripartite agreement was executed while sanctioning a
corporate loan of Rs.500 lakh in favour of the original plaintiff and
the charge and mortgage has been created in favour of Bank of
Baroda – original defendant No.2. It appears that during the
pendency and subsistence of the aforesaid mortgage and as
alleged by the original plaintiff surreptitiously and in breach of the
injunction granted by this Court as well as the undertaking before
the Industrial Tribunal, the original defendant No.1 has sold some
of the properties (mortgaged properties) in favour of original
defendant Nos.3 to 5. In light of the above broad facts and
averments in the plaint, pleadings on the cause of action and the
reliefs sought are required to be considered.
[8.6] In the plaint in Commercial Civil Suit No.90/2017, the plaintiff
has sought the relief against the following defendants:
1. Gujarat Composite Limited
2. Bank of Baroda
3. Real Home Corporation - a partnership firm
4. M/s. Raj Corporation (Confirming Party) - partnership firm
5. RJD Buildcon Ltd.
The suit is filed for recovery of legitimate dues, cancellation of
sale deed and for permanent injunction. In the suit the plaintiff has
prayed for the following reliefs.
“(A) This Hon'ble Court may be pleased to direct the
defendant No.1 to pay to the Plaintiff herein a sum of
Rs.32.66 Crores with interest @ 14% per annum from the
date of suit till realization herein under this decree and any
further orders to be passed by this Hon'ble Court;
(B) This Hon'ble Court may be pleased to hold and declare
that the Deeds of Conveyance dated 23
rd
January, 2015
registered vide registration no. 742 and 750 executed by
defendant No.1 in favour of defendant Nos.3 and 5, as null
and void;
(C) This Hon'ble Court may be pleased to permanently
restrain the defendant Nos.1, 3, 4 and 5 or their agent,
executors, or administrators from disturbing or obstructing
the plaintiffs occupation possession of the suit property till the
plaintiff claim made in para (a) and (b) above is fully
discharged;
16
(D) This Hon'ble Court may be pleased to direct the
defendant No. 2 Bank not to release original title papers and
other relevant documents in favour of defendant Nos.1, 3
and/or 4;
(E) This Hon’ble Court may be pleased to hold and declare
that the Conveyance Deed dated 23
rd
January, 2015 entered
into between the defendant No. 1 and defendant No. 3 to 5
as null and void;
(F) This Hon’ble Court may be pleased to direct the
defendant No. 2 to take over all the current assets of the
plaintiff pertaining to or in connection with the operation of
A.C. Sheet and Cement Manufacturing unit under license
agreement at their book value and make payment to the
plaintiff for the current assets available at the time of handing
over of the possession, if required.”
[8.7] Necessary pleadings in the plaint with respect to cause of
action are as under:
1. The cause of action has arisen when the defendant No. 1,
behind the back of the plaintiff, entered into Conveyance
Deed with defendant no. 3 and defendant No. 5.
2. Even the original title deeds and other documents partially
pertaining to the suit property are in the custody of defendant
No. 2 Bank and by suppressing the fact that the plaintiff has
absolute right over the suit property qua possession, the
defendant No. 1 has entered into Conveyance Deed with
defendant No. 3 and defendant No. 5 stating that suit
property is free from any encumbrance and/or mortgage.
3. That the cause of action for filing the suit has arisen
because the defendant No. 3 and defendant No. 5 made an
application to mutate the entry in the revenue record in
regard to the Deed of Conveyance. As the plaintiff is
legitimately in possession of the suit property by virtue of
license agreement, supplementary agreement, tripartite and
amended tripartite agreement, it vehemently opposed the
said entry and ultimately the authority concerned rejected the
application of the defendant No. 3 and defendant No. 5 for
mutation of entry in regard to Conveyance Deed. Thus the
mutation entry with regard to mortgage of the suit property
with defendant No. 2 Bank still exists and the defendant No.
2 Bank has not removed/revoked the said mortgage.
4. That though the plaintiff is in possession of the suit
property by virtue of license agreement, supplementary
agreement, tripartite agreement and amended tripartite
agreement, the defendant No. 1; behind the back of the
plaintiff, entered into Conveyance Deed with defendant No. 3
and defendant No. 5.
5. The defendant No. 1 even did not part with the sale
consideration with the plaintiff which it has received from
defendant No. 3 and defendant No. 5 for conveying the suit
property to defendant No. 3 and defendant No. 5.
17
6. That the cause of action for filing the suit has arisen also
as defendant No. 1 had defaulted in repayment to Punjab
National Bank and hence was not in a position to get any
loan whatsoever in its own capacity from any financial
institution, and as it was in need of financial assistance,
defendant No. 1 requested the plaintiff for financial help,
because of which plaintiff obtained corporate loan of Rs.
05.00 Crores on its name from defendant No. 2 and
advanced the same to defendant No. 1.
7. Even during the currency of the license agreement, plaintiff
has paid other amounts also for and on behalf of the
defendant No. 1 towards wages to the workers, revenue
taxes, electricity bills, excise duty, etc.
8. The cause of action has arisen because in lieu of all these
financial help from plaintiff, defendant No. 1 entered into
tripartite agreement and subsequently amended tripartite
agreement with plaintiff and defendant No. 2 Bank, whereby
defendant No. 1 mortgaged the suit property with defendant
No. 2 Bank and stood as guarantor towards the corporate
loan which was obtained by plaintiff in its name to help out
the defendant No. 1, wherein it has been specifically agreed
by defendant No. 1 that unless all and full legitimate dues of
the plaintiff has been paid up, plaintiff shall enjoy the
possession of the suit property.
9. That the cause of action for filing of the suit has arisen also
because the plaintiff has to recover Rs. 32.66 Crores from
the defendant No. 1 towards corporate loan and other
amount, which the plaintiff has advanced to the defendant
No. 1.”
5.2. As far as the first relief under paragraph 33(A) was concerned,
whereby respondent No. 1 sought recovery of Rs. 32.66 crore with
interest @ 14% p.a. from the date of suit till realisation, the High Court
observed that this relief would lie against the appellant who would be
bound by the arbitration clause in the licence agreement. The rest of the
prayers were against respondent No. 2 - the bank, and respondent Nos. 3
to 5 - the subsequent purchasers, who were not parties to the arbitration
agreement. In the opinion of the High Court, the fact that the reliefs were
all interconnected and on the basis of multiple causes of action, the
dispute could not be bifurcated. Thus, the High Court applied the law laid
18
down in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr.:
(2003) 5 SCC 531 and other referred decisions, to hold that there was no
error by the Commercial Court in rejecting the application under Section 8
of the Act of 1996. The relevant observations of the High Court are as
follows: -
“[8.8] Considering the above and the reliefs prayed / sought in the
suit, it can be said that the prayer in terms of para 33(A) can be
said to be against the original defendant No.1 who is a party to the
arbitration agreement contained in the license agreement. Prayer
in terms of paras 33(B), 33(C) and 33(E) can be said to be against
the original defendant No.1 and original defendant Nos.3 to 5.
Original defendant Nos.3 to 5 are not party to the arbitration
agreement and as such they are third parties who have alleged to
have purchased the properties from the original defendant No.1
during the subsistence of the license agreement as well as they
have purchased the said property surreptitiously. The prayer in
terms of paras 33(D) and 33(F) can be said to be against the
original defendant No.2 – Bank of Baroda who admittedly is not a
party to the arbitration agreement. All these reliefs are
interconnected and the reliefs sought in the plaint are on the basis
of multiple cause of actions and multiple reliefs against the
defendants and it is not possible to bifurcate the dispute in the suit
between the plaintiff and the original defendant No.1 (parties to the
arbitration agreement) and the original plaintiff and the original
defendant Nos.2 to 5 (nonparties to the arbitration agreement).
Therefore, applying the law laid down by the Hon’ble Supreme
Court in the case of Sukanya Holdings (P) Ltd. (Supra) and other
decisions referred to herein above, it cannot be said that the
learned Commercial Court has committed any error in rejecting
section 8 application and refusing to refer the matter / dispute in
the suit for arbitration.
*** *** ***
[8.13] Considering the facts and circumstances of the case
narrated herein above and the law laid down by the Hon’ble
Supreme Court in the case of Sukanya Holdings Pvt. Ltd. (Supra)
and other decisions referred to herein above, it cannot be said that
the learned Commercial Court has committed any error in rejecting
the application under Section 8 of the Arbitration Act, 1996 and
refusing to refer the dispute / matter for arbitration. On facts it is
not proper, advisable and/or possible to bifurcate the disputes viz.
arbitrable and nonarbitrable. We are in complete agreement with
the view taken by the learned Commercial Court while rejecting
the application under Section 8 of the Arbitration Act, 1996.”
19
5.3.Accordingly, the High Court proceeded to dismiss both the
appeals and thereby affirmed the order passed by the Commercial Court
in rejection of the applications moved by the appellant under Section 8 of
the Act of 1996. Hence, these appeals.
6. Learned counsel for the appellant has, after reference to the
background aspects, strenuously argued that the Commercial Court and
the High Court have erred in law as also on facts in declining the
applications moved by the appellant in terms of the amendment to
Section 8 of the Act of 1996; and with reference to the later decisions of
this Court including the 3-Judge Bench decisions, has contended that the
impugned judgment and orders deserve to be set aside and the
applications made by the appellant deserve to be allowed.
6.1.Learned counsel for the appellant has contended that the civil
suits in question and the application therein for referral to arbitration were
filed subsequent to the amendment to Section 8 of the Act of 1996 in the
year 2015, and therefore, the present matter is governed by the amended
Section 8 whereby and whereunder, there is no choice but to refer the
parties to arbitration, even for deciding the arbitrability of the dispute.
6.2.Learned counsel has argued that though the High Court relied on
the decision of this Court in Sukanya Holdings (supra) but the same has
been doubted and distinguished in various decisions of this Court
subsequently. In this regard, learned counsel has referred to various
decisions in which the said decision in Sukanya Holdings was
distinguished or clarified; and has particularly referred to the decision in
20
Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. :
(2018) 15 SCC 678 and a 3-Judge Bench decision in the case of Vidya
Drolia and Ors. v. Durga Trading Corporation: (2021) 2 SCC 1.
Learned counsel would submit that now, the law pertaining to Section 8 of
the Act of 1996 is solely interpreted keeping in view the amendment to it.
With reference to the case of Vidya Drolia (supra) learned counsel has
submitted that two major principles have been laid down therein: one, that
only those cases that are ‘deadwood’ should not be referred to arbitration;
and second, that whenever there is doubt, the correct course is to refer to
arbitration. Further placing reliance on ONGC Ltd. v. Discovery
Enterprises: (2022) 8 SCC 42 and Intercontinental Hotels v. Waterline
Hotels: (2022) 7 SCC 662 he has submitted that unless the issue before
the Court patently indicates existence of deadwood, Courts should ensure
that arbitration is carried on. Learned counsel would submit that the High
Court has adopted a rather restrictive interpretation of the Act of 1996 in
the order impugned, which deserves to be set aside.
6.3.Learned counsel for appellant has also submitted that the
mandate of Act of 1996 would have ensured the completion of
proceedings within a year, with a reduced scope of interference in the
possible Section 34 proceedings at the instance of either party, but the
matter has remained pending with only framing of issues. Learned
counsel would further submit that the licensees are squatting over the
property, under a licence agreement dating back to the year 2005, without
performing any work and have illegally and unauthorisedly prevented the
21
appellant, who is the owner of the property, from dealing with it. Learned
counsel has underscored the point that the respondent No. 1 has not
denied the existence of a dispute, but merely argues that the said
disputes cannot be resolved through arbitration due to the involvement of
the bank, an argument that cannot withstand legal scrutiny.
7. Per contra, learned counsel for the contesting respondent has
also referred to the background aspects and various transactions as also
the grievance of the plaintiff- respondent No. 1 to submit that the dispute
as involved in the suit has rightly not been referred to arbitration.
7.1.Learned counsel for the contesting respondent would submit that
the underlying civil suits are spread over various agreements/transactions
and involve various parties where except the appellant none of the other
defendants are parties to the arbitration agreement which is contained
only in the main licence agreement dated 07.04.2005. It has also been
submitted that the cause of action of the suits in question goes beyond
the transaction containing the arbitration agreement where even the case
of serious fraud has been alleged against the appellant and the dispute
also pertains to mortgage. It has been particularly emphasised that the
tripartite agreement involving the appellant, respondent No.1 and Bank of
Baroda lacks arbitration clause; and the dispute emanating from the
tripartite agreement and also pertaining to the questioned deeds of
conveyance cannot be correlated with the arbitration agreement in the
main licence agreement dated 07.04.2005.
22
7.2.Learned counsel has also argued that for a matter to be referred
to arbitration, the entire subject-matter should be subject to arbitration
and while relying on Sukanya Holdings (supra), has submitted that the
suit cannot be bifurcated partially to refer a part of the suit to arbitration
and to allow the rest of it to continue. It has further been submitted that
the reliefs claimed in the suits in question fall outside the licence
agreement and the disputes pertaining to different
agreements/transactions and causes of action arising therefrom goes
beyond the arbitration agreement.
7.3.Learned Counsel has further submitted that the supplementary
agreement dated 07.04.2005 is ancillary to original agreement dated
07.04.2005 executed between the appellant and respondent No. 1 but,
the said tripartite agreement does not have any ancillary relationship with
the main agreement and the tripartite agreement having Bank of Baroda
as a party is independent of the original agreement.
7.4.Learned counsel also highlighted the amendment in the Act of
2015, wherein Section 8 was amended envisaging that if the judicial
authority is of the opinion that prima facie the arbitration agreement
exists, then it shall refer the dispute to arbitration, and leave the existence
of the arbitration agreement to be finally determined by the arbitral
tribunal. However, if the judicial authority concludes that the agreement
does not exist, then the conclusion will be final and not prima facie. The
amendment also envisages that there shall be a conclusive determination
as to whether the arbitration agreement is null and void.
23
7.5.Learned counsel has also placed reliance on S.N. Prasad v.
Monnet Finance Ltd. and Ors.: (2011) 1 SCC 320 and Deutsche Bank
Home Finance Ltd. v. Taduri Sridhar and Anr.: (2011) 11 SCC 375
wherein guarantors were not held to be bound by arbitration agreement
as they were not party to tripartite agreements having arbitration clause.
Learned counsel would also submit that the decisions relied upon by the
appellant do not apply to the present case because of non-existence of
arbitration agreement in relation to dispute in question.
8. We have given anxious considerations to the rival submissions
and have examined the record with reference to the law applicable.
9. For dealing with the vexed question in these appeals as to
whether the parties were required to be referred to arbitration by allowing
the applications moved by the appellant under Section 8 of the Act of
1996, appropriate it would be to take note of the provisions contained in
Section 8, as existing before its amendment by Act 3 of 2016 (w.r.e.f.
23.10.2015) and as existing now.
9.1.Earlier, Section 8 of the Act of 1996 read as under: -
“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 so applies not later than when
submitting his first statement on the substance of the dispute, refer
the parties to arbitration.
(2) The application referred to in sub-section (1) shall not be
entertained unless it is accompanied by the original arbitration
agreement or a duly certified copy thereof:
(3) Notwithstanding that an application has been made under
sub-section (1) and that the issue is pending before the judicial
authority, an arbitration may be commenced or continued and an
arbitral award made.”
24
9.2 After the amendment by Act 3 of 2016, Section 8, now, reads as
under: -
“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.
(2) The application referred to in sub-section (1) shall not be
entertained unless it is accompanied by the original arbitration
agreement or a duly certified copy thereof:
Provided that where the original arbitration
agreement or a certified copy thereof is not available
with the party applying for reference to arbitration under
sub-section (1), and the said agreement or certified
copy is retained by the other party to that agreement,
then, the party so applying shall file such application
along with a copy of the arbitration agreement and a
petition praying the Court to call upon the other party to
produce the original arbitration agreement or its duly
certified copy before that Court.
(3) Notwithstanding that an application has been made under
sub-section (1) and that the issue is pending before the judicial
authority, an arbitration may be commenced or continued and an
arbitral award made.”
10. In the case of Sukanya Holdings (supra), while dealing with the
question of applicability of Section 8 of the Act, as then existing, this Court
underscored the requirements of correlation of subject-matter of the suit
and subject-matter of the arbitration agreement and, inter alia, held as
under: -
“12. For interpretation of Section 8, Section 5 would have no
bearing because it only contemplates that in the matters governed
by Part I of the Act, the judicial authority shall not intervene except
where so provided in the Act. Except Section 8, there is no other
provision in the Act that in a pending suit, the dispute is required to
be referred to the arbitrator. Further, the matter is not required to
be referred to the Arbitral Tribunal, if: (1) the parties to the
25
arbitration agreement have not filed any such application for
referring the dispute to the arbitrator; (2) in a pending suit, such
application is not filed before submitting first statement on the
substance of the dispute; or (3) such application is not
accompanied by the original arbitration agreement or duly certified
copy thereof. This would, therefore, mean that the Arbitration Act
does not oust the jurisdiction of the civil court to decide the dispute
in a case where parties to the arbitration agreement do not take
appropriate steps as contemplated under sub-sections (1) and (2)
of Section 8 of the Act.
13. Secondly, there is no provision in the Act that when the
subject-matter of the suit includes subject-matter of the arbitration
agreement as well as other disputes, the matter is required to be
referred to arbitration. There is also no provision for splitting the
cause or parties and referring the subject-matter of the suit to the
arbitrators.
14. Thirdly, there is no provision as to what is required to be done
in a case where some parties to the suit are not parties to the
arbitration agreement. As against this, under Section 24 of the
Arbitration Act, 1940, some of the parties to a suit could apply that
the matters in difference between them be referred to arbitration
and the court may refer the same to arbitration provided that the
same can be separated from the rest of the subject-matter of the
suit. The section also provided that the suit would continue so far
as it related to parties who have not joined in such application.
15. The relevant language used in Section 8 is: “in a matter which
is the subject of an arbitration agreement”. The court is required to
refer the parties to arbitration. Therefore, the suit should be in
respect of “a matter” which the parties have agreed to refer and
which comes within the ambit of arbitration agreement. Where,
however, a suit is commenced — “as to a matter” which lies
outside the arbitration agreement and is also between some of the
parties who are not parties to the arbitration agreement, there is
no question of application of Section 8. The words “a matter”
indicate that the entire subject-matter of the suit should be subject
to arbitration agreement.
16. The next question which requires consideration is — even if
there is no provision for partly referring the dispute to arbitration,
whether such a course is possible under Section 8 of the Act. In
our view, it would be difficult to give an interpretation to Section 8
under which bifurcation of the cause of action, that is to say, the
subject-matter of the suit or in some cases bifurcation of the suit
between parties who are parties to the arbitration agreement and
others is possible. This would be laying down a totally new
procedure not contemplated under the Act. If bifurcation of the
subject-matter of a suit was contemplated, the legislature would
have used appropriate language to permit such a course. Since
there is no such indication in the language, it follows that
bifurcation of the subject-matter of an action brought before a
judicial authority is not allowed.
17. Secondly, such bifurcation of suit in two parts, one to be
decided by the Arbitral Tribunal and the other to be decided by the
26
civil court would inevitably delay the proceedings. The whole
purpose of speedy disposal of dispute and decreasing the cost of
litigation would be frustrated by such procedure. It would also
increase the cost of litigation and harassment to the parties and on
occasions there is possibility of conflicting judgments and orders
by two different forums.”
11.As explained by this Court in Ameet Lalchand Shah (supra), the
amendment to Section 8 after the aforesaid decision in Sukanya
Holdings could be seen in the background of the recommendations of
246
th
Law Commission Report in which, inter alia, it was observed that as
per the proposed amendment, judicial authority would not refer the parties
to arbitration only if it finds that there does not exist an arbitration
agreement or that it is null and void. If the judicial authority is of the
opinion that prima facie the arbitration agreement exists, it would refer the
dispute to arbitration and leave the existence of arbitration agreement to
be finally determined by the Arbitral Tribunal.
12.All the relevant aspects of the matter came up for fuller exposition
by a 3-Judge Bench of this Court in the case of Vidya Drolia (supra). In
the said case, basically, the reference came to be made to the bench of
three judges when the ratio expressed in the case of Himangi
Enterprises v. Kamaljeet Singh Ahluwalia: (2017) 10 SCC 706, to the
effect that landlord-tenant disputes governed by the provisions of the
Transfer of Property Act, 1882 were not arbitrable, was doubted. While
dealing with the reference, the Court also dealt with the other
interconnected aspects as to the meaning of non-arbitrability and when
the subject-matter of the dispute would not be capable of being resolved
through arbitration; and as to whether the question of non-arbitrability
27
would be decided by the Court at the reference stage or by the Arbitral
Tribunal in the arbitration proceedings. The 3-Judge Bench of course
overruled the decision in Himangi Enterprises (supra) and in that
context, made various observations and enunciated the relevant
principles. In the process, the decision in Sukanya Holdings (supra) was
also taken into consideration. In that regard and with reference to the
reliance placed by learned counsel for the respective parties, we may
refer to the following observations and enunciations of the Court, in the
lead judgment as also in the concurring opinion in the following
passages:-
“28. Another facet, not highlighted earlier, arises from the dictum
in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya [(2003) 5 SCC
531], a decision upholding rejection of an application under Section
8, on the ground that there is no provision in the Arbitration Act to
bifurcate and divide the causes or parties, that is, the subject-matter
of the suit/judicial proceedings, and parties to the arbitration
agreement. The suit should be in respect of a “matter” which the
parties have agreed to refer and which comes within the ambit of the
arbitration agreement. The words “a matter”, it was interpreted,
would indicate that the entire subject-matter of the suit should be
subject to arbitration agreement. Bifurcation of subject-matter or
causes of action in the suit is not permissible and contemplated.
Similarly, the parties to the suit should be bound by the arbitration
agreement, as there is no provision in the Arbitration Act to compel
third persons who have not exercised the option to give up the right
to have access to courts and be bound by the arbitration clause.
This would violate party autonomy and consensual nature of
arbitration. Bifurcation in such cases would result in a suit being
divided into two parts, one being decided by the Arbitral Tribunal,
and the other by the court or judicial authorities. This would defeat
the entire purpose and inevitably delay the proceedings and
increase cost of litigation, cause harassment and on occasions give
rise to conflicting judgments and orders by two different fora. Cause
of action in relation to the subject-matter relates to the scope of the
arbitration agreement and whether the dispute can be resolved by
arbitration. Second mandate relating to common parties exposits the
inherent limitation of the arbitration process which is consensual and
mutual, an aspect we would subsequently examine.
**** **** ****
28
31. We are clearly bound by the dictum of the Constitution Bench
judgment in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005)
8 SCC 618] that the scope and ambit of court's jurisdiction under
Section 8 or 11 of the Arbitration Act is similar. An application under
Section 11 of the Arbitration Act need not set out in detail the
disputes or the claims and may briefly refer to the subject-matter or
broad contours of the dispute. However, where judicial proceedings
are initiated and pending, specific details of the claims and disputes
are normally pleaded and, therefore, the court or the judicial
authority has the advantage of these details. There is a difference
between a non-arbitrable claim and non-arbitrable subject-matter.
Former may arise on account of scope of the arbitration agreement
and also when the claim is not capable of being resolved through
arbitration. Generally non-arbitrability of the subject-matter would
relate to non-arbitrability in law. Further, the decision in Sukanya
Holdings (P) Ltd. [Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya,
(2003) 5 SCC 531] has to be read along with subsequent judgment
of this Court in Chloro Controls (India) (P) Ltd. v. Severn Trent Water
Purification Inc.(2013) 1 SCC 641.
*** *** ***
154.3. The general rule and principle, in view of the legislative
mandate clear from Act 3 of 2016 and Act 33 of 2019, and the
principle of severability and competence-competence, is that the
Arbitral Tribunal is the preferred first authority to determine and
decide all questions of non-arbitrability. The court has been
conferred power of “second look” on aspects of non-arbitrability post
the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a)
or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.
154.4. Rarely as a demurrer the court may interfere at Section 8 or
11 stage when it is manifestly and ex facie certain that the arbitration
agreement is non-existent, invalid or the disputes are non-arbitrable,
though the nature and facet of non-arbitrability would, to some
extent, determine the level and nature of judicial scrutiny. The
restricted and limited review is to check and protect parties from
being forced to arbitrate when the matter is demonstrably “non-
arbitrable” and to cut off the deadwood. The court by default would
refer the matter when contentions relating to non-arbitrability are
plainly arguable; when consideration in summary proceedings would
be insufficient and inconclusive; when facts are contested; when the
party opposing arbitration adopts delaying tactics or impairs conduct
of arbitration proceedings. This is not the stage for the court to enter
into a mini trial or elaborate review so as to usurp the jurisdiction of
the Arbitral Tribunal but to affirm and uphold integrity and efficacy of
arbitration as an alternative dispute resolution mechanism.
*** *** ***
238. At the cost of repetition, we note that Section 8 of the Act
mandates that a matter should not (sic) be referred to an arbitration
by a court of law unless it finds that prima facie there is no valid
arbitration agreement. The negative language used in the section is
required to be taken into consideration, while analysing the section.
The court should refer a matter if the validity of the arbitration
29
agreement cannot be determined on a prima facie basis, as laid
down above. Therefore, the rule for the court is “when in doubt, do
refer”.
239. Moreover, the amendment to Section 8 now rectifies the
shortcomings pointed out in Chloro Controls case [Chloro Controls
(India) (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC
641: (2013) 1 SCC (Civ) 689] with respect to domestic arbitration.
Jurisdictional issues concerning whether certain parties are bound
by a particular arbitration, under group-company doctrine or good
faith, etc., in a multi-party arbitration raises complicated factual
questions, which are best left for the tribunal to handle. The
amendment to Section 8 on this front also indicates the legislative
intention to further reduce the judicial interference at the stage of
reference.
240. Courts, while analysing a case under Section 8, may choose to
identify the issues which require adjudication pertaining to the
validity of the arbitration agreement. If the court cannot rule on the
invalidity of the arbitration agreement on a prima facie basis, then
the court should stop any further analysis and simply refer all the
issues to arbitration to be settled.
**** **** ****
244: Before we part the conclusions reached, with respect to
Question 1 are:
244.1. Sections 8 and 11 of the Act have the same ambit with
respect to judicial interference.
244.2. Usually, subject-matter arbitrability cannot be decided at the
stage of Section 8 or 11 of the Act, unless it is a clear case of
deadwood.
244.3. The court, under Sections 8 and 11, has to refer a matter to
arbitration or to appoint an arbitrator, as the case may be, unless a
party has established a prima facie (summary findings) case of non-
existence of valid arbitration agreement, by summarily portraying a
strong case that he is entitled to such a finding.
244.4. The court should refer a matter if the validity of the arbitration
agreement cannot be determined on a prima facie basis, as laid
down above i.e. “when in doubt, do refer”.
244.5. The scope of the court to examine the prima facie validity of
an arbitration agreement includes only:
244.5.1. Whether the arbitration agreement was in writing? or
244.5.2. Whether the arbitration agreement was contained in
exchange of letters, telecommunication, etc.?
244.5.3. Whether the core contractual ingredients qua the arbitration
agreement were fulfilled?
244.5.4. On rare occasions, whether the subject-matter of dispute is
arbitrable?”
13.In the case of Oil and Natural Gas Corporation (supra), another
3-Judge Bench of this Court essentially dealt with the group companies
30
doctrine and application of alter ego principle in arbitration making a party
not assenting to a contract containing arbitration clause to be
nevertheless bound by the clause if that party is ‘alter ego’ of an entity
who is a party to the arbitration agreement. The observations relied upon
by learned counsel for the appellant from that case could also be usefully
extracted as under:-
“38. Explaining the application of the alter ego principle in
arbitration, Born also notes:
“Authorities from virtually all jurisdictions hold that a party who
has not assented to a contract containing an arbitration clause
may nonetheless be bound by the clause if that party is an ‘alter
ego’ of an entity that did execute, or was otherwise a party to, the
agreement. This is a significant, but exceptional, departure from
the fundamental principle … that each company in a group of
companies (a relatively modern concept) is a separate legal entity
possessed of separate rights and liabilities.
* * *
“the group of companies doctrine is akin to principles of agency
or implied consent, whereby the corporate affiliations among
distinct legal entities provide the foundation for concluding that
they were intended to be parties to an agreement, notwithstanding
their formal status as non-signatories.”
39. Recently, John Fellas elaborated on the principle of binding a
non-signatory to an arbitration agreement from the lens of the
doctrine of estoppel. He situated the rationale behind the
application of the principle of direct estoppel against competing
considerations of party autonomy and consent in interpreting
arbitration agreements. Fellas observed that non-signatory parties
can be bound by the principle of direct estoppel to prohibit such a
party from deriving the benefits of a contract while disavowing the
obligations to arbitrate under the same:
“There are at least two distinct types of estoppel doctrine that
apply in the non-signatory context:“the direct benefits” estoppel
theory and the “intertwined” estoppel theory. The direct benefits
theory bears the hallmark of any estoppel doctrine-prohibiting a
party from taking inconsistent positions or seeking to “have it both
ways” by “rely[ing] on the contract when it works to its advantage
and ignor[ing] it when it works to its disadvantage.” Tepper Realty
Co. v. Mosaic Tile Co. [Tepper Realty Co. v. Mosaic Tile Co., 259
F Supp 688 (SDNY 1966)]. The direct benefits doctrine reflects
that core principle by preventing a party from claiming rights under
31
a contract but, at the same time, disavowing the obligation to
arbitrate in the same contract.
* * *
By contrast, the intertwined estoppel theory looks not to
whether any benefit was received by the non-signatory, but rather
at the nature of the dispute between the signatory and the non-
signatory, and, in particular whether “the issues the non-signatory
is seeking to resolve in arbitration are intertwined with the
agreement that the estoppel [signatory party] has signed….the
intertwined estoppel theory has as its central aim the
perseveration of the efficacy of the arbitration process is clear
when one looks at the typical fact pattern of an intertwined
estoppel case.” [John Fellas, “Compelling Signatories to Arbitrate
with Non-Signatories”, New York Law Journal (28-3-2022)]
(emphasis supplied)
40. In deciding whether a company within a group of companies
which is not a signatory to arbitration agreement would
nonetheless be bound by it, the law considers the following
factors:
(i) The mutual intent of the parties;
(ii) The relationship of a non-signatory to a party which is a
signatory to the agreement;
(iii) The commonality of the subject-matter;
(iv) The composite nature of the transaction; and
(v) The performance of the contract.””
14.In the case of Intercontinental Hotels Group (supra), the Court
has essentially proceeded on the enunciation in Vidya Drolia (supra)
even while accepting the requirement of constituting larger bench to settle
the jurisprudence of the implication of non-stamping or under-stamping on
the arbitration agreement. This Court, however, provided that until
decision by the larger bench, the matters at pre-appointment stage be not
kept pending. Not much of dilation is required in that regard.
15.It is at once clear that the observations and enunciations in the
aforesaid have no application to the facts of the present case.
16.As noticed, there had been multiple transactions in this matter.
Learned counsel for the contesting respondent has placed before us in
32
tabular form the relevant agreements, the contracting parties thereto, the
purpose of the agreement, and availability of arbitration clause therein.
We may reproduce the same to facilitate an eye view of the salient
features of the transactions in question as follows: -
Sr.
No.
Date of
Agreement
Contracting
Parties
Purpose of
Contract
Arbitration
Agreement
1.07.04.2005Gujarat
Composite
Limited,
Company
entered into an
agreement with
A
Infrastructure
Limited.
Lease and
License
Agreement of
one Function
unit for
manufacturing
and production
of A.C.
Pressure
Pipes.
Contains
Arbitration
Clause.
2.07.04.2005Gujarat
Composite
Limited,
Company
entered into an
agreement with
A
Infrastructure
Limited and
AVPL.
Lease and
License
Agreement of
one Function
unit for
manufacturing
and production
of A.C.
Pressure
Pipes.
Contains No
Arbitration
Clause.
3.06.07.2006Petitioner
and
Respondent
No. 1 and 2.
Respondent
No. 2
Sanctioned
loan of Rs. 500
Lacs to
Respondent
No. 1 to secure
this above loan
in addition to
other
conditions and
corporate
Guarantee.
Contains No
Arbitration
Clause.
4.23.01.2008Petitioner
and
Respondent
No. 1 and 2.
Petitioner
agrees that the
title Deeds of
the Land will
not be
transferred to
any other party
Contains No
Arbitration
Clause.
33
during the
pendency of
License
Agreements
executed
between M/s A
Infrastructure
and M/s
Gujarat
Composite Ltd.
5.23.01.2015Petitioner
and
Respondent
No. 3
Conveyance
deed between
Petitioner and
Respondent
No. 3
Contains No
Arbitration
Clause.
6.23.01.2015Petitioner
and
Respondent
No. 4 and 5.
Conveyance
deed between
Petitioner and
Respondent
No. 4 and 5
Contains No
Arbitration
Clause.
17.Thus, except the principal agreement dated 07.04.2005, none of
the other agreements contained any arbitration clause, even if they
related to the same property and also involved the appellant and the
respondent No. 1. The later transactions involved other parties too like
the tripartite agreement dated 06.07.2006 whereby the respondent No. 2
bank sanctioned loan to the respondent No. 1 and then, supplemental to
the said tripartite agreement for dealing with the deposit of title deeds.
Similarly, the other deeds of conveyance dated 23.01.2015 involve the
appellant and the other defendants.
17.1.The aforesaid position of the dealings of the parties, when
examined with reference to the reliefs claimed in the suit and the cause of
action pertaining to the said reliefs, as extensively noticed by the High
Court and extracted hereinabove, we are clearly of the view that the
submissions made by the appellant with reference to the amendment of
34
Section 8 of the Act of 1996 and the later decisions of this Court in
interpretation of the amended Section 8 do not inure to the benefit of the
appellant. This is for the simple reason that no such conjunction can be
provided to the original licence agreement dated 07.04.2005 and the
tripartite agreement involving the Bank dated 06.07.2006 and 23.01.2008,
whereby the arbitration clause could be held applicable to the tripartite
agreement too. This is apart from the fact that in the frame of the suit and
various other reliefs claimed, involving subsequent purchasers too and
the allegations of fraud, the dispute cannot be said to be arbitrable at all.
The present one cannot be said to be a case involving any “doubt” about
non-existence of arbitration agreement in relation to the dispute in
question.
17.2.There being no doubt about non-existence of arbitration
agreement in relation to the entire subject-matter of the suit, and when
the substantive reliefs claimed in the suits fall outside the arbitration
clause in the original licence agreement, the view taken by the High Court
does not appear to be suffering from any infirmity or against any principle
laid down by this Court.
18.Even if by reference to remote pedigree, the original licence
agreement is said to be the genesis of the contractual relations of the
appellant and the respondent No. 1, that does not ipso facto lead to the
availability of the arbitration agreement in relation to the dispute in
question, which emanates from the tripartite agreement and which cannot
be determined without reference to the said tripartite agreement and
35
without involving all the parties thereto. In other words, no dispute
resolution process, including arbitration, could be undertaken in relation to
the subject-matter of the suit without reference to the terms of tripartite
agreement and without involving the bank- respondent No. 2. This is
apart from the fact that the other elements of dispute pertaining to the
subsequent purchasers too cannot be resolved in any forum without
reference to the tripartite agreement and its amended clause, which did
not provide for arbitration. Thus, the ancestry of the tripartite agreement,
in the facts of the present case, does not lead to the result desired by the
appellant.
18.1.Therefore, even on the principles enunciated in Vidya Drolia
(supra), the prayer of the present appellant for reference to arbitration
under Section 8 cannot be granted.
19.So far as the propositions based on the memos before the
Commercial Court dated 06.12.2017, as filed by the respondent Nos. 3 to
5 (subsequent purchasers) and by the appellant are concerned, the
submissions made on that basis do not take the case of the appellant any
further. As noticed, in the said memos, the respondent Nos. 3 to 5
purportedly stated that if dispute concerning them was resolved by
arbitration proceedings, they were not having any objection thereto. The
appellant, on the other hand, suggested that the tripartite amended
agreement was with reference to the licence agreement and it was
agreed that till the time of the defendant No. 1 (appellant) making
payment of a sum of Rs. 5 crore to the plaintiff, the title deeds of the
36
immovable property would remain with the bank. The appellant suggested
that with a view that the dispute between the parties be resolved by
arbitration proceedings, keeping all contentions open, they would be
depositing the said sum of Rs. 5 crore in the Court and that in this
manner ‘the dispute with defendant No. 2 would be ended’ and then the
bank, who was handed over the title deed in their custody, would deposit
the same in the Court and the Court would be pleased to place the same
in sealed cover till the disputes of the other parties were resolved.
19.1.The memo submitted by the appellant was not likely to bring about
the desired legal effect. This is for the simple reason that even if the
appellant deposited the said sum of Rs. 5 crore in the Court, the bank
was not directly obliged to deposit the title deed in the Court as presumed
by the appellant; and then, there was no reason that the Court was to be
obliged to accept such a proposition and to keep the title deed in its
custody till the completion of proceedings in any other forum. In other
words, if at all the matter was to be referred to arbitration, there would not
be any justification for the Court to retain the title deed. It would appear
that the said memo dated 06.12.2017 by the appellant had only been a
desperate attempt to somehow seek arbitration despite being aware of
the fact that the core of the dispute in the civil suit related to the tripartite
agreement wherein the bank was an equal participant and no effective
award could have been made in the arbitration proceedings in the
absence of the bank. The necessity of the bank’s presence in the matter
37
could not have been obviated by such nebulous suggestion as stated in
the memo filed by the appellant on 06.12.2017.
19.2.The other memo by respondent Nos. 3 to 5 had been of no effect
whatsoever. Consent of the said respondents, the subsequent
purchasers, for reference to arbitration could not have infused an
arbitration clause in the tripartite agreement and their memo could not
have propelled the matter to arbitration, particularly looking to the core of
the dispute and its obvious non-arbitrability for the reason that it related to
the tripartite agreement.
20.For what has been discussed hereinabove, on the facts and in the
circumstances of the present case and in the nature of transactions as
also the nature of reliefs claimed in the suit, the view taken by the
Commercial Court and the High Court in declining the prayer of the
appellant for reference to arbitration cannot be faulted.
21.Accordingly, and in view of the above, these appeals fail and are,
therefore, dismissed. No costs.
……....……………………. J.
(DINESH MAHESHWARI)
……....……………………. J.
(SUDHANSHU DHULIA)
NEW DELHI;
MAY 01, 2023.
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