2014 (1) TMI 830 - SC - Companies Law

Section 45 Limits Composite Arbitration References to Clear Intent and Strong Party Links Only

The SC held that under Section 45 of the Arbitration Act, a composite reference to arbitration involving multiple agreements-some with and some without ... Nature and scope of Section 45 of Arbitration agreement - Several agreements entered between parties - All parties to agreement are not same - Some agreement contain arbitration clause whereas some do not - Whether dispute between parties can be referred to arbitration - High Court denied to adjudicate dispute and referred it for Arbitration - expression ‘person claiming through or under’ - Correctness of Law stated in Sukanya [2003 (4) TMI 435 - SUPREME COURT] - Whether in a case where multiple agreements are signed between different parties and where some contain an arbitration clause and others don’t and further the parties are not identically common in proceedings before the Court (in a suit) and the arbitration agreement, a reference of disputes as a whole or in part can be made to the arbitral tribunal, more particularly, where the parties to an action are claiming under or through a party to the arbitration agreement? Held that:- Within ambit and scope of Section 45 of 1996 Act, multiple agreements, where some contain an arbitration clause and others don’t, a composite reference to arbitration is not permissible. There has to be clear intention of parties to refer dispute to arbitration - If parties are referred to arbitration and award is made under these provisions of Convention, then it shall be binding and enforceable in accordance with provisions of Sections 46 to 49 of 1996 Act. In Section 45, expression ‘any person’ clearly refers to legislative intent of enlarging scope of words beyond ‘parties’ who are signatory to arbitration agreement. Of course, such applicant should claim through or under signatory party. Once this link is established, then Court shall refer them to arbitration. Use of word ‘shall’ would have to be given its proper meaning and cannot be equated with word ‘may’, as liberally understood in its common parlance. Expression ‘shall’ in language of Section 45 is intended to require Court to necessarily make a reference to arbitration, if conditions of this provision are satisfied. Right to reference is a legal right which has its own contours and is not an absolute right, free of any obligations/limitations - Normally, arbitration takes place between persons who have, from outset, been parties to both arbitration agreement as well as substantive contract underlining that agreement. But, it does occasionally happen that claim is made against or by someone who is not originally named as a party. These may create some difficult situations, but certainly, they are not absolute obstructions to law/ arbitration agreement. Arbitration, thus, could be possible between a signatory to an arbitration agreement and a third party. A non-signatory or third party could be subjected to arbitration without their prior consent, but this would only be in exceptional cases. Transaction should be of a composite nature where performance of mother agreement may not be feasible without aid, execution and performance of supplementary or ancillary agreements, for achieving common object and collectively having bearing on dispute. Besides all this, Court would have to examine whether a composite reference of such parties would serve ends of justice. Once this exercise is completed and Court answers same in affirmative, reference of even non-signatory parties would fall within exception afore-discussed. Provisions of Section 45 cannot be effectively applied or even invoked. Unlike Section 24 of 1940 Act, less than 1996 Act Court has not been given power to refer to arbitration some of parties from amongst parties to suit. Section 24 of 1940 Act vested Court with discretion that where Court thought fit, it could refer such matters and parties to arbitration provided same could be separated from rest of subject matter of suit. Absence of such provision in 1996 Act clearly suggests that Legislature intended not to permit bifurcated or partial references of dispute or parties to arbitration. Without prejudice to this contention, it was also argument that it would not be appropriate and even permissible to make reference to arbitration when issues and parties in action are not covered by arbitration agreement. Corporate structure of Companies involved in present litigation clearly shows that name of Capital Control Company Inc., incorporated in year 1994, and was changed to Severn Trent Water Purification Inc. with effect from April, 2002. Thus, both these companies together were subsidiaries of holding company Severn Trent Services (Delaware) Inc. Joint venture agreement was executed between Chloro Control (India) Pvt. Ltd. and erstwhile Capital Control Company Inc. resulting into creation of joint venture company, Capital Control (India) Pvt. Ltd. Principal Agreement specifically referred to various agreements or even terms and conditions thereof. Clause 7 of agreement provided for execution of International Distributor Agreement which was Appendix II to this Agreement. Financial and Technical Know-how License Agreement was executed in furtherance to clause 14 thereof. Similarly, Trademark Registered User License Agreement was required to be executed between parties in terms of clause 15 of this Agreement. Other terms and conditions of Principal Agreement referred to management of company by appointment or reappointment of Directors or Managing Directors inasmuch as Clause 8.6 contemplated execution of agreement which was appended as Appendix III. Still, certain other clauses of Principal Agreement specifically dealt with sale of goods manufactured by joint venture Company, nationally and internationally. This resulted in signing of International Distribution and Export Sales Agreement between parties. May be all parties to lis are not signatory to all agreements in question, but still they would be covered under expression ‘claiming through or under’ parties to agreement. Interests of these companies are not adverse to interest of principal company and/or Joint Venture Company. On contrary, they derive their basic interest and enforceability from Mother Agreement and performance of all other agreements by respective parties had to fall in line with contents of Principal Agreement - some agreements contain arbitration clause, while others don’t. Shareholders Agreement, Financial and Technical Knowhow License Agreement and Export Sales Agreement contain arbitration clause, while International Distributor Agreement, Managing Directors Agreement and Trade Mark Registered User Agreement do not contain arbitration clause. Arbitration clause contained under clause 30 of Shareholders Agreement and that under clause 26 of Financial and Technical Knowhow License Agreement are identical. They both require disputes to be referred to arbitration in London as per ICC Rules. However, arbitration clause contained in clause 18 of Export Sales Agreement provides for reference of disputes to arbitration at Pennsylvania, USA, in accordance with rules of American Arbitration Association. Disputes referred to and arising from multi-party agreements are capable of being referred to arbitral tribunal in accordance with agreement between parties - Expression ‘person claiming through or under’ would mean and take within its ambit multiple and multi-party agreements, though in exceptional case. Reference of non-signatory parties is neither unknown to arbitration jurisprudence nor is it impermissible - Court is always vested with power to delete name of parties who are neither necessary nor proper to proceedings before Court. In cases of group companies or where various agreements constitute a composite transaction like mother agreement and all other agreements being ancillary to and for effective and complete implementation of Mother Agreement, court may have to make reference to arbitration even of disputes existing between signatory or even non-signatory parties. However, discretion of Court has to be exercised in exceptional, limiting, befitting and cases of necessity and very cautiously - Therefore, it is held that dispute can be referred to arbitration - Decision of High Court upheld - Decided against Appellant. Issues Involved:1. Ambit and Scope of Section 45 of the Arbitration and Conciliation Act, 1996.2. Correctness of the principles enunciated in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya.3. Reference to arbitration in cases involving multiple agreements with some containing arbitration clauses and others not.4. Permissibility of bifurcation or splitting of parties or causes of action in the absence of specific provisions in the 1996 Act.Analysis:1. Ambit and Scope of Section 45 of the Arbitration and Conciliation Act, 1996:The Court emphasized that Section 45 should be interpreted liberally to favor arbitration, aligning with the legislative intent to encourage international arbitration. The Court noted that Section 45 allows for the reference to arbitration if the arbitration agreement is valid, enforceable, and operative, even if the request for arbitration comes from a party not originally named in the agreement but claiming through or under a signatory party. The Court stated that the phrase 'any person claiming through or under him' extends the scope of Section 45 beyond the signatories to the arbitration agreement, thus allowing non-signatory parties to be referred to arbitration in certain circumstances.2. Correctness of the principles enunciated in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya:The Court clarified that the principles laid down in Sukanya Holdings, which dealt with Section 8 of the 1996 Act, do not apply to the present case under Section 45. The Court distinguished the facts and legal context of Sukanya Holdings, which involved a partnership dispute, from the present case involving multiple agreements forming a composite transaction. The Court declined to examine the correctness of Sukanya Holdings further, as it was not directly relevant to the issues at hand.3. Reference to arbitration in cases involving multiple agreements with some containing arbitration clauses and others not:The Court held that in cases involving multiple agreements forming a composite transaction, the arbitration clause in the principal agreement could extend to ancillary agreements, even if they do not contain an arbitration clause. The Court emphasized that the intention of the parties to resolve disputes through arbitration should be respected, and a composite reference to arbitration is permissible. The Court noted that the agreements in question were intrinsically inter-linked and formed part of a single transaction, thus supporting the reference to arbitration.4. Permissibility of bifurcation or splitting of parties or causes of action in the absence of specific provisions in the 1996 Act:The Court stated that bifurcation or splitting of parties or causes of action is permissible in exceptional cases where the agreements are part of a composite transaction. The Court highlighted that the judicial authority has the discretion to refer disputes to arbitration while ensuring that the intention of the parties to resolve disputes through arbitration is upheld. The Court also noted that the inherent powers of the court can be exercised to pass appropriate orders in relation to the legal proceedings before it.Conclusion:The Supreme Court upheld the judgment of the Bombay High Court, directing that all disputes arising in the suit and from the agreements between the parties be referred to arbitration in accordance with the Rules of the International Chamber of Commerce (ICC). The Court dismissed the appeals, emphasizing the importance of respecting the parties' intention to resolve disputes through arbitration and the need for a liberal interpretation of Section 45 to promote international arbitration.