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2023 (5) TMI 179
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....he order passed by the Commercial Court, Ahmedabad dismissing the applications under Section 8 of the Arbitration and Conciliation Act, 1996 Hereinafter also referred to as 'Act of 1996' or simply 'the Act' 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 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 Hereinafter referred to as 'sister concern' (against ....
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....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 A....
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....n 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 90th 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 necessar....
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....partite 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" 3.5. An amendment was introduced to the aforementioned tripartite agreement on 23.01.2008, s....
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....aimed 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 IAAP No. 63 of 2017 against respondent No. 1 and its sister concer....
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....itten 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 res....
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....rent 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 dat....
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....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 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 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. Thus, thi....
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....ant 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 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 plac....
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....lly 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 23rd 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 o....
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....hese 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 agai....
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....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." 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 wit....
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....n 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 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 o....
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.... 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 ar....
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....y 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 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 ag....
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....ontemplated, 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 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 246th 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....
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....er 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. **** **** **** 31. We are clearly bound by the di....
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....able; 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 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) Lt....
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....f this Court essentially dealt with the group companies 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 affiliat....
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....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 tabular form the relevant agreements, the contracting parties....
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.... 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 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....
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....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....