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TMI Blog2023 (5) TMI 179X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 whom the cognate appeal is filed). The first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain, 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 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. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Court would be pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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, 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 challen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmercial 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 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 whereund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siderations 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asions 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration 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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 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. 07.04.2005 Gujarat 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. 07.04.2005 Gujarat 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. 06.07.2006 Petitioner and Respondent No. 1 and 2. Respo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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