Dispute Resolution With A Sense Of Business Efficacy

In what is considered to be yet another significant addition to the recent streak of arbitration-friendly pronouncements by the Courts in India, the Supreme Court of India, on May 03, 2018 in Ameet Lalchand Shah and Ors. vs. Rishabh Enterprises and Anr. (Ameet Lalchand) clarified the scope and ambit of Section 8 of The Arbitration & Conciliation Act 1996 (Act), as amended on October 23, 2015.

The Supreme Court of India held that in cases where several parties are involved in a single commercial project/transaction executed through several agreements, then, notwithstanding the absence of an arbitration clause in any and/or some of those several agreements, all parties, including non-signatories can be covered by the arbitration clause in the main agreement.

Proceedings in brief:

  • In this case, A had entered into a total of four contracts. Two contracts with B, one with C and another with D, all for an ultimate objective of operating a solar plant in Jhansi, Uttar Pradesh. The two contracts with B and the one with D contained an arbitration clause whereas the contract with C did not.
  • Certain disputes arose between A and D leading to D invoking arbitration against A. Consequently, A filed a suit for declaration and recovery, jointly and severally against B, C and D claiming multiple reliefs. In response to the said suit, B, C and D filed applications under Section 8 of the Act seeking a reference to arbitration of all the parties to the suit by contending that all four agreements were inter-connected.
  • The Ld. Single Judge dismissed the said applications by holding that each agreement was to be treated independently and moreover, there were allegations of fraud against B, C and D and accordingly refused to refer the matter to arbitration.
  • The appeal preferred by B, C and D was also dismissed. The Division Bench, by relying on the ratio laid down under Sukanya Holdings Pvt. Ltd vs. Jayesh H. Pandya & Anr, (Sukanya Holdings) held that since one of the agreements did not contain an arbitration clause, the matter could not be referred to arbitration.
  • 2018 SCC Online SC 487
  • 2003 5 Supreme Court Cases 531
  • Finally, it was the Supreme Court, which overturned the concurrent findings of the lower Courts by holding that commercial transactions between parties ought to be examined with a “sense of business efficacy” and went on to observe that all the four agreements were interconnected as the object, in the furtherance of which they were executed was common and accordingly referred all four parties to arbitration.

Proceedings in brief:

Section 8 of the Act vests a judicial authority, before which an action is brought in a matter, which is the subject of an arbitration agreement, to refer such matter to arbitration. A pre-condition for such reference is that the party seeking the same must apply to the judicial authority before the submission of its first statement on the substance of the dispute (i.e. a written statement in case of suits). Upon receipt of the application for such reference, the judicial authority is bound to refer the parties to arbitration unless it comes to a conclusion that prima facie no valid arbitration agreement exists.

Whilst the mandate under Section 8 is quite clear in cases where the parties to a civil suit are also the contracting parties in an arbitration agreement, which forms the subject matter of the civil suit, there was much left to be desired in cases where civil suit is filed against several parties involving a single commercial project/transaction executed through several agreements where one/some of the several agreements did not contain an arbitration clause.

Illustration 1: A files a civil suit against B for recovery of money against non-payment of dues under a service agreement which contains an arbitration clause. The judicial authority in this case is bound to refer the matter to arbitration unless it prima facie finds that no valid arbitration agreement exists.

Illustration 2: A being the owner of an industrial plot files a suit for joint and several damages against his contractors B, C and D wherein A has an independent contract with each of B, C and D and an arbitration clause is present in only two of the three contracts. However, all three contracts in question arise out of or come under the umbrella of the main construction contract between A and B. Illustration 2 still constitutes a grey area in this jurisprudence especially in light of the judgment laid down in Sukanya Holdings (explained below).

The Supreme Court in Sukanya Holdings, had held that in cases where in a suit some of the defendants are non-contracting parties to the arbitration agreement, the matter could not be referred to arbitration. The court held that the term “matter” used in Section 8 means the entire subject matter of the suit. It further held that the language given to Section 8 of the Act cannot be construed so as to bifurcate the cause of action between those parties who are party to the agreements and others. This led to a situation wherein a party/parties were constrained to litigate against a party with whom it had contracted to arbitrate.

It was in light of the judgment in Sukanya Holdings that the Law Commission had recommended certain amendments to Section 8 so as to make the same in line with its counter-part under Part II of the Act. The Hon’ble Supreme Court in Chloro Controls (I) P. Ltd vs. Severn Trent Water Purification (Chloro Controls) held that the expression “claiming through or under” as provided under Section 45 of the Act would mean and take within its ambit multiple and multi-party agreements and hence even non-signatory parties to some of the agreements in a transaction could be referred to arbitration. Since the abovementioned judgments were applicable to separate verticals, i.e., Chloro Controls to international arbitrations and Sukanya Holdings to domestic arbitrations, the former could not overrule the latter. However, Chloro Controls did affirm the notion that severability of causes of action was permissible, especially, since the legislative intent of the Act was that arbitration has to receive primacy over other remedies.

The conflicting ratios laid down in Chloro Controls and Sukanya Holdings, despite not operating in the same strata, did not reflect a sustainable model for a nation thriving to be a premier destination for arbitration. It was is this light, that the 246th Report of the Law Commission recommended the following amendments:

  • The word “party” entitled to apply to be expanded so as to include persons claiming “through or under” such party.
  • Scope of examination by a judicial authority to be restricted to ascertaining whether or not “a valid arbitration agreement exists”. The nature of such examination to be “prima facie”.
  • The cut off date for making the application for reference to arbitration to be the date of submission of the first statement on the substance of the dispute.
  • A judicial authority may refuse a reference only if it finds that prima facie, no valid arbitration agreement exists.
  • The amendments to apply notwithstanding judicial precedents.

Despite absorbing most recommendations of the Law Commission to Section 8 of the Act, there are numerous cases wherein the plaintiff, in a civil proceeding, under the garb of being dominus litis arraigns a legal stranger(s) as a party(ies) to a civil suit. These legal strangers are not even proper parties to the suit, let alone being necessary parties and are added just to circumvent the arbitration agreement covering the main parties to the dispute. This constitutes a major stumbling block in our pursuit towards becoming a business-savvy jurisdiction.

Arush Khanna