Arbitration reference may be refused when the clause becomes inoperative and the dispute includes non-signatories.

Section 45 of the Arbitration and Conciliation Act, 1996 permits refusal of reference where the arbitration agreement is proved null and void, inoperative, or incapable of performance. The clause here was not shown to be void on any recognised contractual ground, and severability prevented attack on the arbitration clause merely because the main joint venture agreement was challenged. The court treated the clause as inoperative because the parties' conduct, including multiple proceedings and prior relief before the Company Law Board, had substantially overtaken the dispute. Reference was also refused because the claim extended to non-signatories who could not be compelled to arbitrate, making bifurcation impracticable.

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Issues: (i) Whether the arbitration agreement was null and void, inoperative, or incapable of being performed so as to justify of reference under Section 45 of the Arbitration and Conciliation Act, 1996. (ii) Whether reference to arbitration could be refused when reliefs were sought against parties who were not bound by the arbitration agreement.

Issue (i): Whether the arbitration agreement was null and void, inoperative, or incapable of being performed so as to justify refusal of reference under Section 45 of the Arbitration and Conciliation Act, 1996.

Analysis: The expression in Section 45 was tested against the principles of voidness, frustration, waiver, abandonment, and inoperability. The challenge that the arbitration clause was null and void was not supported by specific foundational pleadings showing any recognised ground of voidness under the Contract Act. The underlying attack by the parties was directed mainly against the joint venture agreement, not the arbitration agreement itself, and the doctrine of severability prevented the arbitration clause from being invalidated merely because the main contract was said to be void or voidable. The Court further held that the agreement had become inoperative by reason of the conduct of the parties, especially the defendants' resort to multiple proceedings and the relief already granted by the Company Law Board, which substantially eclipsed the dispute sought to be referred. The Court also held that the arbitration agreement was not incapable of performance, since the arbitration clause remained workable even if the underlying joint venture arrangement had become unworkable.

Conclusion: The arbitration agreement was not shown to be null and void or incapable of being performed, but it was held to be inoperative; therefore the request for reference to arbitration was rejected.

Issue (ii): Whether reference to arbitration could be refused when reliefs were sought against parties who were not bound by the arbitration agreement.

Analysis: The arbitral claim was not confined to the signatories to the joint venture agreement and arbitration clause, but extended to persons who were not parties to that agreement. Since such persons could not be compelled to arbitrate, and their presence was necessary for the effective adjudication of the dispute as framed, the principle against bifurcation applied.

Conclusion: Reference to arbitration was not permissible against non-signatory parties, and this furnished an additional ground for refusing the prayer for referral.

Final Conclusion: The applications by the plaintiffs for injunction and for stay of the arbitration clause were allowed, while the application seeking reference to arbitration and the connected application to vacate injunction were dismissed.

Ratio Decidendi: Under Section 45, a court may refuse reference to arbitration where the arbitration agreement has been rendered inoperative by waiver or abandonment, and an arbitral reference cannot be compelled where the dispute, as framed, substantially involves persons who are not bound by the arbitration agreement.

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