REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7134 OF 2012
(Arising out of SLP (C) No.8950 of 2010)
Chloro Controls (I) P. Ltd. … Appellant
Versus
Severn Trent Water Purification Inc. & Ors. … Respondents
WITH
CIVIL APPEAL NOS. 7135-7136 OF 2012
(Arising out of SLP (C) No.26514-26515 of 2011)
J U D G M E N T
Swatanter Kumar, J.
1. Leave granted.
2. The expanding need for international arbitration and divergent
schools of thought, have provided new dimensions to the arbitration
jurisprudence in the international field. The present case is an
ideal example of invocation of arbitral reference in multiple, multi-
party agreements with intrinsically interlinked causes of action, more
so, where performance of ancillary agreements is substantially
dependent upon effective execution of the principal agreement. The
distinguished learned counsel appearing for the parties have raised
critical questions of law relatable to the facts of the present case
which in the opinion of the Court are as follows :
(1) What is the ambit and scope of Section 45 of the Arbitration and
Conciliation Act, 1996 (for short ‘the 1996 Act’)?
(2) Whether the principles enunciated in the case of Sukanya
Holdings Pvt. Ltd. v. Jayesh H. Pandya [(2003) 5 SCC 531], is
the correct exposition of law?
(3) 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?
(4) Whether bifurcation or splitting of parties or causes of action
would be permissible, in absence of any specific provision for
the same, in the 1996 Act?
3. Chloro Controls (India) Private Ltd., the appellant herein,
filed a suit on the original side of the High Court of Bombay being
Suit No.233 of 2004, for declaration that the joint venture agreements
and supplementary collaboration agreement entered into between some of
the parties are valid, subsisting and binding. It also sought a
direction that the scope of business of the joint venture company,
Respondent No. 5, set up under the said agreements includes the
manufacture, sale, distribution and service of the entire range of
chlorination equipments including the electro-chlorination equipment
and claimed certain other reliefs as well, against the defendants in
that suit. The said parties took out two notices of motion, being
Notice of Motion No.553 of 2004 prior to and Notice of Motion No.2382
of 2004 subsequent to the amendment of the plaint. In these notices
of motion, the principal question that fell for consideration of the
learned Single Judge of the High Court was whether the joint venture
agreements between the parties related only to gas chlorination
equipment or whether they included electro-chlorination equipment as
well. The applicant had prayed for an order of restraint, preventing
Respondent Nos. 1 and 2, the foreign collaborators, from acting upon
their notice dated 23rd January, 2004, indicating termination of the
joint venture agreements and the supplementary collaboration
agreement. A further prayer was made for grant of injunction against
committing breach of contract by directly or indirectly dealing with
any person other than the Respondent No.5, in any manner whatsoever,
for the manufacture, sale, distribution or services of the
chlorination equipment, machinery parts, accessories and related
equipments including electro-chlorination equipment, in India and
other countries covered by the agreement. The defendants in that suit
had taken out another Notice of Motion No.778 of 2004, under Section 8
read with Section 5 of the1996 claiming that arbitration clauses in
some of the agreements governed all the joint venture agreements and,
therefore, the suit should be referred to an appropriate arbitral
tribunal for final disposal and until a final award was made by an
arbitral tribunal, the proceedings in the suit should be stayed. The
learned Single Judge, vide order dated 28th December, 2004, allowed
Notice of Motion No.553 of 2004 and consequently disposed of Notice of
Motion No.2382 of 2004 as not surviving. Against this order, an appeal
was preferred, which came to be registered as Appeal No.24 of 2005 and
vide a detailed judgment dated 28th July, 2011, a Division Bench of
the High Court of Bombay set aside the order of the learned Single
Judge and dismissed both the notices of motion taken out by the
plaintiff in the suit.
4. Notice of Motion No.778 of 2004 was dismissed by another learned
Single Judge of the High Court of Bombay, declining the reference of
the suit to an arbitral tribunal vide order dated 8th April, 2004.
This order was again assailed in appeal by the defendants in the suit
and another Division Bench of the Bombay High Court, vide its judgment
dated 4th March, 2010, allowed the Notice of Motion No.778 of 2004 and
made reference to arbitration under Section 45 of the 1996 Act.
5. The judgments of the Division Benches, dated 4th March, 2010 and
28th July, 2011, respectively, have been assailed by the respective
parties before this Court in the present Special Leave Petitions,
being SLP(C) No.8950/2010 and SLP(C) No.26514-15/2011, respectively.
Thus, both these appeals shall be disposed of by this common judgment.
6. Before we notice in detail the factual matrix giving rise to the
present appeals and the contentions raised, it would be appropriate to
illustrate the corporate structure of the companies and the scope of
the agreements that were executed between the parties to these
proceedings.
Corporate Structure of the Companies who are parties to lis
7. In order to describe the corporate structure with precision we
will explain it diagrammatically as follows:
SEVERN TRENT (DEL) INC.
Formerly known as SEVEREN TRENT U.S. INC.; Name Changed in May 1992
SEVERN TRENT SERVICES (DEL) INC.
R-1 – CAPITAL CONTROL CO. INC.
Acquired 80% on 15.05.1990 and 20% on 31.03.1994.
NAME CHANGED ON 1.4.2002 TO
SEVERN TRENT WATER PURIFICATION INC.
(GAS CHLO. & HYPOGEN Product Lines)
R-2 - CAPITAL CONTROL
(DELAWARE) CO. INC.
Formed on 21.09.94
EXCEL TECHNOLOGIES
INT’L CORP.
Acquired in 1998
Original OMNIPURE and
SANILEC Manufacturer
Appellant
CHLORO CONTROL
INDIA PVT. LTD.
MERGED INTO
ON 31.03.2003
Shareholders Agreement JV
CAPITAL CONTROL (INDIA) PVT LTD.
(ON 14.11.1995 a new Joint Venture)
R-5 - GAS CHLORINATORS & HYPOGEN
Distributorship
and Knowhow
Agreement
ODN,
B.V.
DENORA NORTH AMERICA, INC.
GROUPO DE NORA
Original Seaclor and Seaclor Mac Manufacturer
JV
SERVEN TRENT DE NORA LLC – SEPT, 2001
PRODUCTS CURRENTLY OFFERED ARE OMNIPURE,
SANILE 7 SEACLOR
R-3 – TITANOR
COMPONENTS LTD.
Distributes SEACLOR MAC
Product Line
R-4 – HI POINT SERVICES PVT LTD
OMNIPURE, SANILEC
Before 1998
Independent Distributor of EXCEL TECHNOLOGIES since prior to Severn Trent’s
Acquisition of EXCEL TECHNOLOGIES
Currently, Independent Distributor for SEVERN TRENT DENORA
Distributes Omnipure and Sanilec Products in India
8. Severn Trent, U.S., Inc. was a company existing under the laws
of the State of Pennsylvania, United States of America (for short,
‘U.S.A.’). This name came to be changed, in 1992, to Severn Trent
(Delaware) Inc., which is the principal parent company. This company
owned a 100 per cent subsidiary, Severn Trent Services (Delaware)
Inc., U.S.A. Severn Trent Services (Delaware) Inc. owned Capital
Control (Delaware) Co. Inc. which was formed on 21st September, 1994.
On or about 14th May, 1990, Severn Trent Services PLC, U.K., an
erstwhile state-owned water authority, privatized in 1989, expanded
its business into the U.S.A. by acquiring 80 per cent shares in
Capital Control Co. Inc. on 15th May 1990 and a further 20 per cent
on 31st March 1994. It is in this period that the joint venture
agreements with the appellant were negotiated, with the consent of the
Severn Trent group, which was, by that time, a majority shareholder in
Capital Control Co. Inc. Subsequently, the name of Capital Control
Co. Inc., was changed to Severn Trent Water Purification, Inc.
(Respondent No.1), with effect from 1st April, 2002. The Severn Trent
Water Purification Inc./Capital Control Co. Inc. then came to be
merged with Capital Control (Delaware) Co. Inc. (Respondent No. 2), on
31st March, 2003. As a result thereof, Capital Control (Delaware)
Co. Inc. ceased to exist. As per the pleadings of the parties,
reference to Capital Control Co. Inc. includes reference to Capital
Control Co. Inc. as well as Capital Control (Delaware) Co. Inc.
9. The appellant is a company carrying on business under that name
and style for the manufacture of chlorination equipments and
incorporated under the Indian laws by Madhusudan Kocha (Respondent
No.9 herein) and his group (for short, the “Kocha Group”). This
company had been negotiating with Respondent No. 1 for entering into a
joint venture agreement, to deal with the manufacture, distribution
and sale of gas chlorination equipment and “Hypogen” electro-
chlorination equipment Series 3300, etc. This led to the execution
of joint venture agreements between the appellant and Respondent No.
1. The joint venture agreements were signed between these companies
for constituting a joint venture company under the name and style of
Capital Control (India) Pvt. Ltd., with 1,50,000 equity shares of Rs.
10 each and 50 per cent shareholding with each party. These agreements
being prior to the merger of Capital Control (Delaware) Co. Inc. with
Capital Control Co. Inc. and also prior to the change of name of
Capital Control Co. Inc. to Severn Trent Water Purification Inc., 50
per cent of the shares allotted to the foreign collaborators were to
be equally divided between Capital Control (Delaware) Co. Inc. and
Capital Control Co. Inc. These joint venture agreements were executed
between the parties on 16th November, 1995, as already noticed.
However, the joint venture company had been incorporated on 14th
November, 1995 itself.
10. In the year 1998, Excel Technologies International Corporation
came to be acquired by Severn Trent Services (Delaware) Inc. This
company was dealing in the manufacture of “Omnipure” and “Sanilec”,
distinct brands of chlorination products. Later, Excel Technologies
entered into a joint venture agreement with De Nora North America Inc.
and floated another joint venture company, Severn Trent De Nora LLC in
September, 2001 for dealing in the products “Omnipure”, “Sanilec” and
“Seaclor Mac”. It may be noticed that “Seaclor Mac” was a product
dealt with and distributed by Titanor Components Ltd., Respondent
no.3, and whose original manufacturer was Groupo De Nora; the latter
is the parent company of the De nora North America Inc. The
distribution rights in respect of all these three products were given
by the joint venture company Severn Trent De Nora LLC to Hi Point
Services Pvt. Ltd., Respondent No. 4, for independent distribution of
the products for Severn Trent De nora LLC, in India.
11. This corporate structure clearly indicates that Severn Trent
Services (Del.) Inc. is the holding company of the companies which
have entered into the joint venture agreements, for floating both the
companies Capital Controls (India) Pvt. Ltd., as well as “Severn Trent
De Nora LLC”. The disputes have actually arisen between Chloro
Controls (India) Pvt. Ltd. and the Kocha Group on the one hand, and
Severn Trent Water Purification Inc., the erstwhile Capital Control
(Delaware) Co. Inc. and Capital Control Co. Inc. on the other.
Details of Agreements
|S. |Date of |Details of |Parties to the Agreement |Whether |
|No |Agreement |Agreement | |contains |
| | | | |arbitratio|
| | | | |n clause |
|1. |16.11.1995 |Shareholders |1. Capital Controls |Yes |
| | |Agreement |(Delware) Company, Inc. | |
| | | |(Respondent No.2) | |
| | | |2. Chloro Controls India | |
| | | |Pvt. Ltd. (Appellant) | |
| | | |3. Mr. M.B. Kocha | |
| | | |(Respondent No.9) | |
|2. |16.11.1995 |International |1. Capital Controls |No |
| | |Distributor |Company Inc., (Colmar) now| |
| | |Agreement |Severn Trent Water | |
| | | |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|3. |16.11.1995 |Managing |1. Capital Controls |No |
| | |Directors’ |(India) Private Ltd. | |
| | |Agreement |(Respondent No.5) | |
| | | |2. Mr. M.B. Kocha | |
| | | |(Respondent No.9) | |
|4. |16.11.1995 |Financial & |1. Capital Controls |Yes |
| | |Technical |Company Inc., (Colmar) now| |
| | |Know-how |Severn Trent Water | |
| | |License |Purification Inc. | |
| | |Agreement |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|5. |16.11.1995 |Export Sales |1. Capital Controls |Yes |
| | |Agreement |Company Inc., (Colmar) now| |
| | | |Severn Trent Water | |
| | | |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|6. |16.11.1995 |Trademark |1. Capital Controls |No |
| | |Registered |Company Inc., (Colmar) now| |
| | |User License |Severn Trent Water | |
| | |Agreement |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|7. |August 1997|Suppleme-ntary|1. Capital Controls | |
| | |Collaboration |Company Inc., (Colmar) now| |
| | |Agreement |Severn Trent Water | |
| | | |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
Facts
12. Prior to the formation of the joint venture company, the Chloro
Controls Group carried on the business of manufacture and sale of gas
chlorination equipments and from 1980 onwards, it developed and
commenced the manufacturing of electro-chlorination equipment also.
The business was done in the name of “Chloro Controls Equipments
Company”, a sole proprietary concern of Respondent No.9, Mr. M.B.
Kocha and it was the distributor in India for the products of the
Capital Controls group for more than a decade prior to the formation
of the joint venture. On 1st December, 1988, a letter of intent and a
letter of understanding were executed between Capital Controls Company
Inc., Colmar, Pennsylvania, U.S.A (which name was subsequently changed
in the year 2002 to ‘Severn Trent Water Purification Inc., respondent
No.1) and respondent no.9 to form a new, jointly-owned company in
India, to be called “Capital Controls (India) Pvt. Ltd.”, the
respondent No.5 in the present appeals, for the purposes of
manufacture, sale and export of chlorination equipments on the terms
and conditions as agreed between the parties. The formation of the
joint venture company got delayed for some time, because Respondent
No.1 informed the appellant that Severn Trent, U.K. and the officers
of the Capital Controls Company Inc., Colmar, Pennsylvania, U.S.A. had
acquired all the shares of the Capital Controls Company Inc. and this
share acquisition permitted them to support their representatives and
distributers with continuity. On 14th November, 1995, the joint
venture company, Capital Controls (India) Private Ltd., Respondent No.
5, was incorporated and registered under the Companies Act, 1956 (for
short, the ‘Companies Act’).
13. To examine the factual matrix of the case in its correct
perspective, reference to pleadings of the parties would be
appropriate.
14. The petitioner is a Private Limited Company and its shares are
entirely held by Respondent/Defendant Nos.9 to 11 (Kocha/Chloro
Control Group). Respondent No.1–Company was earlier known as “Capital
Control Company Inc.” and in or about the year 1990 the Capital
Controls Group came to be acquired by Severn Trent Services PLC (UK),
originally a State owned water authority and following privatization
from the UK Government in 1989, it proceeded to build a product and
services business from the US beginning with the acquisition of the
Capital Controls Group. The name of the first respondent was changed
to Severn Trent Water Purification Inc. with effect from 1st April,
2002. Thus, Respondent Nos.1 and 2 became the group companies and
were earlier part of “the Capital Controls Group” (hereinafter
referred to as the Capital Controls/Severn Trent Group). Till January
1999, the respondent Nos.1 and 2 developed and sold electro-
chlorination equipment under the brand name “Hypogen” and from January
1999 onwards, the said brand was replaced by the brands “Sanilec” and
“Omnipure”. Respondent Nos.1 and 2 carried on the business of
manufacture, supply, sale and distribution of chlorination equipments,
including gas and electro-chlorination equipments. Respondent No.3 is
a company incorporated under the Companies Act and engaged in the
business of manufacture and marketing of electro-chlorination
equipment. In or about the year 1989-90, the said Respondent no.3 was
floated as a joint venture in technical and financial collaboration
with the De Nora group of Italy which held 51% of the equity share
capital of the said respondent. Respondent No.4 is a Private Limited
Company incorporated under the Companies Act and carried on business
in electro-chlorination equipments. It had a tie-up with an American
Company called “Excel Technologies International Inc.” which was
engaged in the business of electrolytic disinfection equipment.
15. Respondent No.5, i.e., Capital Controls (India) Private Ltd. is
a Company incorporated under the Companies Act pursuant to the joint
venture agreements dated 16th November, 1995 executed between the
appellant and respondent no.9 on the one hand and the respondent nos.1
and 2 on the other. 50 per cent of the share capital of Respondent
No.5 is held by the appellant and balance of 50 per cent is held by
Respondent No.2. Thus, the appellant and Respondent No.2 are the
joint venture partners who have together incorporated the Respondent
No.5 – company.
16. Respondent Nos.6 and 8 are the Directors of the Respondent No.5
Company, appointed as such by the Capital Controls Group. Respondent
No.7 is the Chairman also appointed by the Capital Controls Group, but
has no casting vote. Respondent Nos.9 to 11 are the Directors of the
Respondent no.5 company, nominated by the Kocha Group/Chloro Controls
Group and Respondent No.9 is the Managing Director of the said joint
venture.
17. It appears that the joint venture company, Respondent no.5, was
incorporated on 14th November, 1995. As discussed above, the joint
venture agreements were primarily a project between Respondent Nos. 1
and 2 on the one hand and the appellant company along with its
proprietor, Respondent No. 9, on the other. The purpose of these
joint venture agreements as indicated in the Memorandum of Association
of this joint venture company was to design, manufacture, import,
export, act as agent, marketing etc. of gas and electro-chlorination
equipments. In order to achieve this object, the parties had decided
to execute various agreements. It needs to be emphasized at this
stage itself that, as is clear from the above narrated chart, the
agreements had been signed between different parties, each agreement
containing somewhat different clauses. Therefore, there is a need to
examine the content and effect of each of the seven agreements that
are stated to have been signed between different parties.
Content, scope and purpose of the agreements subject matter of the
present appeals
18. The parties to the proceedings, except respondent Nos. 3 and 4,
were parties to one or more of the seven agreements entered into
between the parties. This includes the Principal Agreement, i.e., the
Shareholders Agreement, the Financial and Technical Know-how License
Agreement, the International Distributor Agreement, Exports Sales
Agreement, Trademark Registered User License Agreement and Managing
Director’s Agreement, all dated 16th November, 1995. Lastly, the
parties also entered into and executed a Supplementary Collaboration
Agreement in August, 1997. We have already noticed that except
respondent Nos.3 and 4 who were not signatory to any agreement, all
other parties were not parties to all the agreements but had signed
one or more agreement(s) keeping in mind the content and purpose of
that agreement.
19. Now we shall proceed to discuss each of these agreements.
Share Holders Agreement
20. The Shareholders Agreement dated 16th November, 1995 was entered
into and executed between the Capital Control (Delaware) Co. Inc.,
respondent No. 2, on the one hand and Chloro Controls (India) Private
Ltd., the appellant company run by the Kocha/ Capital Controls group
and Mr. M.B. Kocha, respondent No. 9, on the other. As is apparent
from the pleadings on record, these two groups had negotiated for
starting a joint venture company in India and for this purpose they
had entered into the Shareholders Agreement. The main object of this
agreement was to float a joint venture company which would be
responsible for manufacture, sale and services of the products as
defined in the Financial & Technical Know-How License Agreement, in
terms of clause 1 of the Agreement. The Agreement was subject to
obtaining all necessary approvals, licenses and authorization from the
Government of India, as the joint venture company under the name and
style of Capital Control India Pvt. Ltd. was to be registered as a
company with its office located in India at Bombay and to carry on its
business in India. The plant was to be taken on lease. As already
noticed, the authorized capital of the company was Rs.5 million,
consisting of equity shares of Rs.10 each. In terms of clause 7,
Capital Controls, which was the short form for Capital Control
(Delaware) Co. Inc., appointed the joint venture company as a
distributor in India of the products manufactured by it, subject to
the terms and conditions of the International Distributor Agreement
attached to that Agreement as Appendix II. Directors to the joint
venture company were to be nominated for a period of three years in
accordance with clause 8 of the Agreement. Clause 14 made it
obligatory for the parties to ensure that the joint venture company
entered into the Financial and Technical Know-How License Agreement
with Capital Controls, subject to which, as mentioned above, the joint
venture company was to have the right and license to manufacture the
specified products in India. The Financial and Technical Know-How
License Agreement, which was annexed to the Principal Agreement as
Appendix IV, was to be executed relating to sale and purchase of
chlorination equipment assets. This Agreement had to be construed and
interpreted in accordance with the laws of the Union of India in terms
of clause 29. Further clause 21 related to termination of this
Principal Agreement. In terms of this clause, it was agreed that the
Agreement was to continue in force and effect for so long as each
party held not less than twenty-six per cent (26%) of the total paid-
up equity shares of the company or in the event that the company
failed to achieve a cumulative sales volume of Rs.120 million over
three years and cumulative profit of fifteen per cent (15%) over three
years from signing of the Agreement. Either party had the option to
terminate the agreement and dispose of the shares as provided in the
terms thereof. Material breach of the Agreement or a deadlock
regarding the management of the Company were, inter alia, the
contemplated grounds for termination of the Agreement, whereby the
party not in default could terminate the Agreement by giving notice in
writing to the other party. The period of notice in the event of a
material breach was 90 days from the date of such notice. Clause 21.3
provided that in the event of the termination of the Agreement, the
joint venture company would be wound up and all obligations undertaken
by Chloro Controls under different agreements would cease with
immediate effect. In such an eventuality, even the name of the joint
venture company was required to be changed and the word ‘Capital’,
either individually or in combination with other words, was to be
removed.
21. Two other very material clauses of this Agreement, which require
the attention of this Court, are clauses 4 and 30. In terms of clause
4.5, the Kocha Group and their company Chloro Controls were bound not
to engage themselves, directly or indirectly, or even have financial
interest in the manufacture, sale or distribution of chlorination
equipment which were similar to those manufactured by the joint
venture company during the term of the Agreement. In terms of clause
30, all or any disputes or differences arising under or in connection
with the Agreement between the parties were liable to be settled by
arbitration, in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce (for short, the
‘ICC’), by three arbitrators designated in conformity with those
Rules. The arbitration proceedings were to be held in London, England
and were to be governed by and subject to English laws.
22. As is clear from the above terms and conditions of this
Agreement, it was treated as a principal agreement executed between
the parties and other agreements, like the Financial & Technical Know-
How License Agreement, Trademark Registered User License Agreement,
International Distributor Agreement, Managing Directors’ Agreement and
Export Sales Agreements were not the only anticipated agreements to
be executed between the parties, but their drafts and necessary
details had been annexed as Appendix I to VII of the shareholder
agreement. The other Agreements were only required to be signed by
the parties who, as per the Shareholders Agreement, were required to
sign such agreement. The Arbitration Clause of the Shareholders
Agreement reads as under:
“Any dispute or difference arising under or in connection
with this Agreement, or any breach thereof, which cannot be
settled by friendly negotiation and agreement between the
parties, shall be finally settled by arbitration conducted
in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce by
three arbitrators designated in conformity with those
Rules. The arbitration proceedings shall be held in
London, England and shall be governed by and subject to
English law. Judgment upon the award rendered may be
entered in any court of competent jurisdiction.”
International Distributor Agreement
23. The International Distributor Agreement has been mentioned as
Appendix II to the Shareholders Agreement. The International
Distributor Agreement was executed on the same day and entered into
between Capital Controls Company Inc., respondent No.1 and the joint
venture company Capital Controls India Pvt. Ltd., respondent no.5.
Under this Agreement, the joint venture company was appointed as the
exclusive distributor of products in the “territory” and for the term
provided under clause 10 of that Agreement. The specified territory
was India, Afghanistan, Nepal and Bhutan but the agreement also stated
that exports to other countries were not permissible except with the
specific authorization by respondent No.1. Besides providing the
rights and duties of the Distributors, this Agreement also stated the
schedule for delivery of products/orders, the prices payable,
commissions and inspection. It also provided for the terms of
payment. Distributor’s orders of products were subject to acceptance
by the seller at its offices and the seller reserved his right, at any
time, to cease manufacture as well as offering for sale any product
and to change the design of product.
24. This distributorship right was non-assignable and was
exclusively between the distributor and the seller. The
relationship between the parties was agreed to be that of a seller and
purchaser. Clause 11 of the Agreement then clearly postulated that
the distributor was an independent contractor and not joint venture or
partner with an agent or employee of the seller. Clause 13 provided
that the Agreement contained the entire understanding between the
parties with respect to that subject matter and superseded all
negotiations, discussions, promises or agreements, prior to or
contemporaneous with this Agreement.
25. Further, this Agreement contained the confidentiality clause as
well as the non-competition clause being clauses 16 and 18,
respectively. The latter specified that the distributor shall not,
directly or indirectly, sell, manufacture or supply products similar
to any of the products or engage, directly or indirectly, in any
business the same as or similar to that of seller, except subject to
the conditions of the Agreement.
26. In terms of clause 20, the agreement between the parties was to
remain confidential and not to be discussed, shown to or filed with
any Government agencies without the prior consent of the seller in
writing. This Agreement did not contain any arbitration clause, but it
did provide a jurisdiction clause i.e. clause 21, which read as under:
“The construction, interpretation and performance of this
Agreement and all transactions under it shall be governed
by and interpreted under the laws of the State of
Pennsylvania, U.S.A., and the parties hereto agree that
each shall be subject to the jurisdiction of, and any
litigation hereunder shall be brought in, any federal or
state court located in the Eastern District of the
Commonwealth of Pennsylvania, and that the resolution of
such litigation by such court shall be binding upon the
parties.”
27. We may notice here that the International Distributor Agreement
was not only executed in furtherance to Clause 7 of the Shareholders
Agreement but in that clause itself it was also stated to be annexed
thereto as Appendix II. The Distributor Agreement was liable to be
renewed as long as the Distributor i.e. Capital Controls, held at
least twenty-six per cent (26%) of the shares in the joint venture
company.
Managing Directors Agreement
28. Clause 8.6 of the Shareholders Agreement had provided for
appointment or reappointment of the Managing Director or whole time
Director by mutual consent. Subject to the provisions of the
Companies Act, it was agreed that Mr. Kocha would be appointed as the
first Managing Director of the Company for an initial period of 3
years and on such terms and conditions as were specified in Appendix
III, i.e., the Managing Directors Agreement of the same date. In
other words, the Managing Directors Agreement had been executed
between joint venture company, Capital Control India Pvt. Ltd. and Mr.
M.B. Kocha, on terms already agreed to between the parties to the
Shareholders’ Agreement.
29. The joint venture company, which is stated to have been
incorporated on 14th November, 1995, held Board Meeting on 16th
November, 1995 and as contemplated under Clause 8.6 of the
Shareholders Agreement, appointed Mr. Kocha as the Managing Director
of the Company for three years commencing from 1st April, 1996. This
Managing Directors Agreement spelt out the powers which the Managing
Director could exercise and more specifically, under Clause 3, the
powers which the Managing Director could exercise only with the prior
approval of the Board of Directors of the Joint Venture Company. For
instance, under Clause 3 (k), the Managing Director was not entitled
to undertake any new business or substantially expand the business
contemplated thereunder except with the approval of the Board of
Directors. Further, clause 6 contained a non-compete clause requiring
Mr. Kocha not to run any similar business for two years after the date
of termination of the Agreement.
30. This Agreement also did not contain any arbitration agreement
and provided no terms which were not within the contemplation of
clause 8.7 of the Shareholders Agreement.
Export Sales Agreement
31. Export Sales Agreement was again singed between the Chloro
Control India Pvt. Ltd. and Capital Control Co. Inc., the foreign
partner to the joint venture. This Agreement, on its bare reading,
presupposes the existence and working of the joint venture company.
The products required to be manufactured by the joint venture company
under the Shareholders Agreement as well as those stated in Exhibit 1
of this Agreement were to be exported to different countries by
Capital Control Company Inc. which was required to export those goods
and execute such orders as per the terms and conditions of this
Agreement, except in countries specified in Exhibit 2 to the
Agreement. It is noteworthy that the export could be effected to all
countries covered under the ‘Territory’ excluding the countries
specified in Ext. 2 of the agreement which was completely in
consonance with the execution and performance of Shareholder Agreement
and the International Distributor Agreement executed between the
parties. This Agreement stipulated distinct terms and conditions
which had to be adhered to by the parties while the Capital Control
Company Inc. was to act as sole and exclusive agent for sale of the
products. The products under the Agreement meant design, supply,
installation commissioning and after-sale services of chlorination
systems and equipment related products manufactured by the Joint
Venture Company. The services under the Agreement could be performed
by Capital control Co. Inc. itself or through its affiliated
corporation or duly appointed sales agents and distributors. In terms
of Clause 17 of the Agreement, it was to be construed and interpreted
in accordance with the laws in the State of Pennsylvania, U.S.A. It
specifically contained an arbitration clause (clause 18) that read as
under:
“Any dispute of difference arising under or in connection
with this Agreement, or any breach thereof, which cannot be
settled by friendly negotiation and agreement between the
parties shall be finally settled by arbitration conducted
in accordance with the Rules of American Arbitration
Association. The arbitration proceedings shall be held in
Pennsylvania, U.S.A. Judgment upon the award rendered may
be rendered may be entered in any court of competent
jurisdiction.”
Financial and Technical Know-how License Agreement and Trademark
Registered User Agreement
32. Now, we shall deal with both these agreements together as both
these agreements are inter-dependent and one finds elaborate reference
to one in the other. Furthermore, both these agreements have been
entered into and executed between Capital Control Co. Inc. on the one
hand and the joint venture company on the other.
33. Under clause 14 of the Shareholders Agreement, it was required
of the parties to cause the joint venture company to enter into the
Financial and Technical Know-How License Agreement with the Capital
Controls under which the latter was to grant the joint venture company
the right and license to manufacture the products in India in
accordance with the Technical Know-How and other technical information
possessed by Capital Controls. Clause 18 of the Principal Agreement
also referred to this agreement and postulated that if the Government
of India did not grant permission for the terms of foreign
collaboration contained in this agreement, even the Principal
Agreement, i.e. the Shareholder’s Agreement would be liable to be
terminated without giving rise to any claim for damages. Both these
clauses provided that this Agreement was attached to the Principal
Agreement itself and had been referred to as the ‘License Agreement’,
for short.
34. We may refer to certain terms of this agreement which would
indicate that the terms and conditions of the Principal Agreement were
to be implemented through this Agreement. Besides providing the
obligations of the Capital Controls (respondent no.5), it also
stipulated that the licensee, i.e. the joint venture company would be
free to manufacture the products under the said patent even after the
expiry of the Agreement. Under clauses 9 and 10 of the Agreement,
obligations of the licensee were stated and it required the licensee
to maintain quality comparable to corresponding products made by
Capital Controls in USA and to allow free access and information to
Capital Controls. The products manufactured by the licensee whose
quality was approved by Capital Controls could be marked with the
legend, ‘Manufactured in India under license from Capitals Control
Company Inc. Colmar, Pennsylvania, USA”. However, if the agreement
was terminated, the licensee was not to use the trademark and legend.
35. As stated, the purpose of this Agreement was that the licensee
desired to obtain the right and license to manufacture the products in
accordance with the Technical Know-How owned or acquired by Capital
Controls and for which that company was willing to grant license on
the terms and conditions stated in that Agreement. The first and
foremost restriction was that the rights under the agreement were non-
transferable and the right was restricted to sell the products
exclusively in India and the countries listed in the Appendix to the
Agreement. The Agreement also contained a non-competing clause
providing that the licensee must not manufacture or have manufactured
for it, sell or offer for sale or be financially interested in similar
products without prior written permission of Capital Controls.
Respondent no.1 had also agreed that its affiliated companies would
sell the product in India only through the licensee. The Agreement
provided for payment of royalties under clause 11.
36. Another very significant clause of this Agreement was the Term
and Termination clause. The agreement was to continue in force for
ten years from the date it was filed with the Reserve Bank of India,
subject to earlier termination in terms of clause 15.2. Clause 14.2
provided practically for the conditions of termination of this
Agreement similar to those contemplated for the Share Holders
Agreement. Neither any modification/amendment of this Agreement nor
any waiver of its terms and conditions was to be binding upon the
parties unless made in writing and duly executed by both the parties.
Appendix I to this agreement recorded the products which the joint
venture company was to manufacture. In the event of dispute, the
parties were expected to settle it by friendly negotiations, failing
which it was to be referred to the ICC, by three Arbitrators
designated in conformity with the relevant Rules. Clause 26, the
Arbitration clause, read as under:-
“Any dispute or difference arising under or in connection
with this Agreement, or any breach thereof, which cannot be
settled by friendly negotiation and agreement between the
parties shall be finally settled by arbitration conducted
in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce by
three arbitrators designated in conformity with those
Rules. The Arbitration proceedings shall be held in
London, England and shall be governed by and subject to
English Law. Judgment upon the award rendered may be
entered in any court of competent jurisdiction.”
37. Clauses 15.1 and 15.2 of the Principal Agreement referred to the
Trademark Registered User License Agreement. Firstly, it is provided
that respondent no.9, Mr. Kocha and Chloro Controls acknowledged that
Capital Controls was the sole owner of certain trademarks and trade-
names used by Capital Controls in connection with the sale of the
products. Besides agreeing that they would not adopt, use or register
as a trademark or tradename any word or symbol, which in the opinion
of Capital Controls is confusingly similar to their trademarks, there
the joint venture company was required to enter into a Trademark
Registered User License Agreement for obtaining the right to use
certain trademarks and tradenames and it was further specifically
provided that the said agreement formed part of the Financial and
Technical Know-How License Agreement.
38. The Trademark Registered User Agreement, as already noticed, was
executed between the respondent no.1 and respondent no.5, the joint
venture company. The relationship between the parties under this
agreement was contractual and respondent no.1 had agreed to grant user
permission to use the trademarks, subject to the terms and conditions
specified in the agreement. The agreement was executed with the clear
intention that the license owner (respondent No. 1) would provide its
secret drawings, plans, specifications, test data, formulae and other
manufacturing procedures and as well as technical know-how for
assembly, manufacture, quality control and testing of goods to the
licensee, the joint venture company. The agreement dealt with various
aspects including grant of non-exclusive right to use the trademarks
in relation to the goods in the territory as the registered user of
the trademarks. In terms of clause 10 of the agreement, the joint
venture company was not to acquire any ownership interest in the
trademarks or registrations thereof by virtue of use of trademark and
it was specifically agreed that every permitted use of trademarks by
the user would enure to the benefit of the licensor company. This
Agreement was to terminate automatically in the event the License
Agreement i.e. the Financial and Technical Know-How License Agreement,
was terminated for any reason. Clause 13 also provided that the
permitted use of the trademarks did not involve the payment of any
royalty or other consideration, other than the royalties payable under
the Financial and Technical Know-How License Agreement by joint
venture company to the licensor company. This agreement was
terminable on the conditions stipulated in clause 16, which again were
similar to the termination clause provided in other agreements. This
Agreement did not contain an arbitration clause.
Supplementary Collaboration Agreement
39. The last of the documents in this series which requires to be
mentioned by the Court is the Supplementary Collaboration Agreement.
Any joint venture agreement in India which is in collaboration with a
foreign partner can be commenced only after obtaining the permission
of the Government of India. The parties herein had already executed a
joint venture agreement dated 16th November, 1995. The company
obtained the permission of the Government of India vide its letter No.
FC-II 830(96)245(96) dated 11th October, 1996 amended on 21st April,
1997. The company then commenced the operation and business of the
joint venture company with effect from 1st April, 1997.
40. In the letter by the Government of India dated 11th October,
1996, besides noticing the items of manufacture activity covered by
the foreign collaboration agreement, foreign equity participation
being 50% and other conditions which had been specifically postulated,
under clause 7 of the letter it was specified that the approval letter
was made a part of the foreign collaboration agreement executed
between the parties and only those provisions of the agreement which
were covered by the said letter or which were not at variance with the
said letter would be binding on the Government of India or the Reserve
Bank of India. Thus, the parties were directed to proceed to finalize
the agreement.
41. Vide its letter dated 21st December, 1996, the joint venture
company had written to the Ministry of Industry, Department of
Industrial Policy and Promotion, Government of India, requesting to
amend point No. 2 of the above-mentioned approval letter. The request
was to widen the scope of the manufacture activities covered by the
foreign collaboration agreement. The company wished to add the
manufacture of gas and electro-chlorination equipments, amongst other
stated items. The other amendment that was sought for was increase in
the authorized share capital from Rs.25 lakhs to paid-up capital of 50
lakhs in the joint venture company. Both these requests of the joint
venture company were accepted by the Government of India vide their
letter dated 21st April, 1997 and clauses (2), (3) and (4) of the
earlier approval letter dated 11th October, 1996 were modified. All
other terms and conditions of the approval letter remained the same.
The Government of India had asked for acknowledgement of the said
letter.
42. In furtherance to this letter of the Government of India, the
joint venture company and the respondent no.2 executed this
Supplementary Collaboration Agreement. The important part of this one-
page agreement is ‘we hereby conform that we shall adhere to the terms
and conditions as stipulated by the Government of India. Letter No.
FC.II: 830(96) 295(96) dated 11.10.1996, amended 21.04.1997.’ It also
stated that the companies had entered into the joint venture agreement
dated 16th November, 1995 and had commenced their operation with
effect from 1st April, 1997. In other words, the Supplementary
Collaboration Agreement was a mere confirmation of the previous joint
venture agreement. By this time i.e., somewhere in August 1997, all
other agreements had been executed, the joint venture company had come
into existence and, in furtherance to those agreements, it had
commenced its business.
43. As we have already noticed under the head ‘Corporate Structure’,
the name of Respondent No. 1, Capital Control Co. Inc. was changed to
Severn Trent Water Purification Inc. with effect from 1st April, 2002.
Later on, respondent no.2, Capital Control (Delaware) Co. Inc. was
merged with the respondent no.1 on 31st March, 2003. Thus, for all
purposes and intents, in fact and in law, interest of respondent no.1
and 2 was controlled and given effect to by Severn Trent.
44. On this issue, version of the respondents had been disputed in
the earlier round of litigation between the parties where respondent
No. 1, Severn Trent Water Purification Co. Inc., USA, had filed a
petition for winding up respondent No. 5-Chloro Controls India Pvt.
Ltd., the joint venture company, on just and equitable ground under
Section 433(j) of the Companies Act. In this petition, specific issue
was raised that merger of Capital Controls (Delaware) Co. with Severn
Trent was not intimated to the respondent No. 5 company prior to the
filing of the arbitration petition by Severn Trent under Section 9 of
the 1996 Act as well as that Severn Trent was not a share holder of
the joint venture company and thus had no locus standi to file the
petition. This Court vide its judgment dated 18th February, 2008 in
Civil Appeal No. 1351 of 2008 titled Severn Trent Water Purification
Inc. v. Chloro Control (India) Pvt. Ltd. and Anr. held that the
winding up petition by Severn Trent Water Purification Inc. was not
maintainable as it was not a contributory. But the question whether
that company was a creditor of the joint venture company was left
open.
45. At this very stage, we may make it clear that we do not propose
to deal with any of the contentions raised in that petition whether
decided or left open, as the judgment has already attained finality.
In terms of the settled position of law, the said judgment cannot be
brought in challenge in the present proceedings, collaterally or
otherwise.
46. Certain disputes had already arisen between the parties that
resulted in termination of the joint venture agreements. Vide letter
dated 21st July, 2004, Severn Trent Services informed respondent no.9,
respondent no.5 and Chloro Controls India Pvt. Ltd., the present
appellant, that they had failed to remedy the issues and grievances
communicated to them in their previous correspondences and meetings
and also failed to engage in any productive negotiation in this
connection and therefore, they were terminating from that very day,
the joint venture agreements executed between them and the appellant
company, which included agreements stated in that letter i.e. the
Shareholders Agreement, the International Distributor Agreement, the
Financial and Technical Know-How License Agreement, the Export Sales
Agreement and the Trademark Registered User Agreement, all dated 16th
November, 1995 and requested them to commence the winding up
proceedings of the joint venture company, respondent No. 5. They were
also called upon to act in accordance with the terms of the agreement
in the event of such termination. It may be noticed here itself that
prior to the serving of the notice of termination, a suit had been
instituted by the appellant in which application under Section 8/45 of
the 1996 Act was filed.
Contentions of the learned Counsel appearing for the parties in the
backdrop of above detailed facts
47. The appellant had filed a derivative suit being Suit No. 233 of
2004 praying, inter alia, for a decree of declaration that the joint
venture agreements and the supplementary collaboration agreement are
valid, subsisting and binding and that the scope of business of the
joint venture company included the manufacture, sale, distribution and
service of entire range of chlorination equipments including electro-
chlorination equipment. An order of injunction was also obtained
restraining respondent Nos. 1 and 2 from interfering in any way and/or
preventing respondent No.5 from conducting its business of sale of
chlorination equipments including electro-chlorination equipment and
that they be not permitted to sell their products in India save and
except through the joint venture company, in compliance of clause 2.5
of the Financial and Technical Know-How License Agreement read with
the Supplementary Collaboration Agreement. Besides this, certain
other reliefs have also been prayed for.
48. After the institution of the suit, as already noticed, the
respondent Nos.1 and 2 had terminated the joint-venture agreements
vide notices dated 23rd January, 2004 and 21st July, 2004.
Resultantly, in the amended plaint, specific prayer was made that both
these notices were wrong, illegal and invalid; in breach of the joint
venture agreements and of no effect; and the joint venture agreements
were binding and subsisting. To be precise, the appellant had claimed
damages, declaration and injunction in the suit primarily relying upon
the agreements entered into between the parties. In this suit,
earlier interim injunction had been granted in favour of the
appellant, which was subsequently vacated at the appellate stage. The
respondent Nos.1 and 2 filed an application under Section 8 of the
Act, praying for reference of the suit to the arbitral tribunal in
accordance with the agreement between the parties. This application
was contested and finally decided by the High Court in favour of
respondent Nos.1 and 2, vide order dated 4th March, 2010 making a
reference of the suit to arbitration.
49. It is this Order of the Division Bench of the High Court of
Bombay that has given rise to the present appeals before this Court.
While raising a challenge, both on facts and in law, to the judgment
of the Division Bench of the Bombay High Court making a reference of
the entire suit to arbitration, Mr. Fali S. Nariman, learned senior
counsel appearing for the appellant, has raised the following
contentions :
1. There is inherent right conferred on every person by Section 9 of
the Code of Civil Procedure, 1908, (for short ‘CPC’) to bring a
suit of a civil nature unless it is barred by a statute or there
was no agreement restricting the exercise of such right. Even if
such clause was there (is invoked), the same would be hit by
Section 27 of the Indian Contract Act, 1872 and under Indian law,
arbitration is only an exception to a suit and not an alternative
to it. The appellant, in exercise of such right, had instituted a
suit before the Court of competent jurisdiction, at Bombay and
there being no bar under any statute to such suit. The Court could
not have sent the suit for arbitration under the provisions of the
1996 Act.
2. The appellant, being dominus litus to the suit, had included
respondent Nos.3 and 4, who were necessary parties. The
appellant had claimed different and distinct reliefs. These
respondents had not been added as parties to the suit merely to
avoid the arbitration clause but there were substantive reliefs
prayed for against these respondents. Unless the Court, in
exercise of its power under Order I, Rule 10(2) of the CPC,
struck out the name of these parties as being improperly joined,
the decision of the High Court would be vitiated in law as these
parties admittedly were not parties to the arbitration
agreement.
3. On its plain terms, Section 45 of the 1996 Act provides that a
judicial authority, when seized of an action in a matter in
respect of which the parties have made an agreement referred to
in Section 44, shall, at the request of one of the parties or
any person claiming through or under him, refer the parties to
arbitration. The expression ‘party’ refers to parties to the
action or suit. The request for arbitration, thus, has to come
from one of the parties to the suit or action or any person
claiming through or under him. The Court then can refer those
parties to arbitration. The expression ‘parties’ used under
Section 45 would necessarily mean all the parties and not some
or any one of them. If the expression ‘parties’ is not
construed to mean all parties to the action and the agreement,
it will result in multiplicity of proceedings, frustration of
the intended one-stop remedy and may cause further mischief.
Judgment of the High Court in referring the entire suit,
including the parties who were not parties to the arbitration
agreement as well as against whom the cause of action did not
arise from arbitration agreement, suffers from error of law.
4. The 1996 Act is an amending and consolidating Act being an
enactment setting out in one statute the law relating to
arbitration, international commercial arbitration and
enforcement of foreign arbitral awards. Further, the 1996 Act
has no provision like Section 34 of the Arbitration Act, 1940
(for short “1940 Act”). In Section 3 of the Foreign Awards
(Recognition and Enforcement) Act, 1961 (for short ‘1961 Act’),
there existed a mandate only to stay the proceedings and not to
actually refer the parties to arbitration. Thus, the position
before 1996 in India, as in England, permitted a partial stay of
the suit, both as regards matters and parties. But after coming
into force of the 1996 Act, it is no longer possible to contend
that some parties and/or some matters in a suit can be referred
to arbitration leaving the rest to be decided by another forum.
5. Bifurcation of matters/cause of action and parties is not
permissible under the provisions of the 1996 Act. Such procedure
is unknown to the law of arbitration in India. The judgment of
this Court in the case of Sukanya Holdings Pvt. Ltd. (supra) is
a judgment in support of this contention. This judgment of the
Court is holding the field even now. In the alternative, it is
submitted that bifurcation, if permitted, would lead to
conflicting decisions by two different forums and under two
different systems of law. In such situations, reference would
not be permissible.
6. In the alternative, reference to arbitral tribunal is not
possible in the facts and circumstances of the present case.
Where three major agreements, i.e., Managing Director Agreement,
Trademark Registered User Agreement and Supplementary
Collaboration Agreement do not have any arbitration clause,
there the International Distributor Agreement exclusively
provides the jurisdiction for resolution of dispute to the
federal or state courts in the Eastern District of the
Commonwealth of Pennsylvania, USA. This latter agreement, thus,
provided for resolution of disputes under a specific law and by
a specific forum. Thus, for uncertainty and indefiniteness, the
alleged arbitration clause is unenforceable.
Thus, in the present case, out of all the agreements signed
between different parties, four agreements, i.e., Managing
Director Agreement, International Distributor Agreement,
Trademark Registered User Agreement and the Supplementary
Collaboration Agreement, have no arbitration clause.
Furthermore, different agreements have been signed by different
parties and respondent No.9 is not a party to some of the
agreements containing/not containing an arbitration clause. In
any case, respondent Nos.3 and 4 are not party to any of the
Agreements and the cause of action of the appellant against them
is limited to the scope of International Distributor Agreement
vis-à-vis the products covered under the joint-venture
agreement.
On these contentions, it is submitted that the judgment of
the High Court is liable to be set aside and no reference to
arbitral tribunal is possible. Also, the submission is that,
within the ambit and scope of Section 45 of the 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 the parties to
refer the dispute to arbitration.
50. Mr. Harish Salve, learned senior counsel, while supporting the
judgment of the High Court for the reasons stated therein, argued in
addition that the submissions made by Mr. F.S. Nariman, learned senior
counsel, cannot be accepted in law and on the facts of the case. He
contended that :
i) Under the provisions of the 1996 Act, particularly in Part II,
the Right of Reference to Arbitration is indefeasible and
therefore, an interpretation in favour of such reference should
be given primacy over any other interpretation.
ii) In substance, the suit and the reliefs claimed therein relate to
the dispute with regard to the agreed scope of business of the
joint venture company as regards gas based chlorination or
electro based chlorination. This major dispute in the present
suit being relatable to joint venture agreement therefore,
execution of multiple agreements would not make any difference.
The reference of the suit to arbitral Tribunal by the High Court
is correct on facts and in law.
iii) The filing of the suit as a derivative action and even the
joinder of respondent Nos.3 and 4 to the suit were primarily
attempts to escape the impact of the arbitration clause in the
joint venture agreements. Respondent Nos. 3 and 4 were neither
necessary nor appropriate parties to the suit. In the facts of
the case the party should be held to the bargain of arbitration
and even the plaint should yield in favour of the arbitration
clause.
iv) All agreements executed between the parties are in furtherance
to the Shareholders Agreement and were intended to achieve only
one object, i.e., constitution and carrying on of business of
chlorination products by the joint venture company in India and
the specified countries. The parties having signed the various
agreements, some containing an arbitration clause and others
not, performance of the latter being dependent upon the
Principal Agreement and in face of clause 21.3 of the Principal
Agreement, no relief could be granted on the bare reading of the
plaint and reference to arbitration of the complete stated cause
of action was inevitable.
v) The judgment of this Court in the case of Sukanya (supra) does
not enunciate the correct law. Severability of cause of action
and parties is permissible in law, particularly, when the
legislative intent is that arbitration has to receive primacy
over the other remedies. Sukanya being a judgment relatable to
Part 1 (Section 8) of the 1996 Act, would not be applicable to
the facts of the present case which exclusively is covered under
Part II of the 1996 Act.
vi) The 1996 Act does not contain any restriction or limitation on
reference to arbitration as contained under Section 34 of the
1940 Act and therefore, the Court would be competent to pass any
orders as it may deem fit and proper, in the circumstances of a
given case particularly with the aid of Section 151 of the CPC.
vii) A bare reading of the provisions of Section 3 of the 1961 Act on
the one hand and Section 45 of the 1996 Act on the other clearly
suggests that change has been brought in the structure and not
in the substance of the provisions. Section 3 of the 1961 Act,
of course, primarily relates to stay of proceedings but
demonstrates that the plaintiff claiming through or under any
other person who is a party to the arbitration agreement would
be subject to the applications under the arbitration agreement.
Thus, the absence of equivalent words in Section 45 of 1996 Act
would not make much difference. Under Section 45, the applicant
seeking reference can either be a party to the arbitration
agreement or a person claiming through or under such party. It
is also the contention that a defendant who is neither of these,
if cannot be referred to arbitration, then such person equally
cannot seek reference of others to arbitration. Such an
approach would be consistent with the development of arbitration
law.
51. The contention raised before us is that Part I and Part II of
the 1996 Act operate in different fields and no interchange or
interplay is permissible. To the contra, the submission is that
provisions of Part I have to be construed with Part II. On behalf of
the appellant, reliance has been placed upon the judgment of this
Court in the case Bhatia International v. Bulk Trading S.A. and Anr.
[(2002) 4 SCC 105]. The propositions stated in the case of Bhatia
International (supra) do not directly arise for consideration of this
Court in the facts of the present case. Thus, we are not dealing with
the dictum of the Court in Bhatia International’s case and application
of its principles in this judgment.
It is appropriate for us to deal with the interpretation, scope
and ambit of Section 45 of the 1996 Act particularly relating to an
international arbitration covered under the Convention on Recognition
and Enforcement of Foreign Arbitral Awards (for short, ‘the New York
Convention’).
52. Now, we shall proceed to discuss the width of Section 45 of the
1996 Act.
Interpretation of Section 45 of the 1996 Act
53. In order to invoke jurisdiction of the Court under Section 45,
the applicant should satisfy the pre-requisites stated in Section 44
of the 1996 Act.
54. Chapter I, Part II deals with enforcement of certain foreign
awards in accordance with the New York Convention, annexed as Schedule
I to the 1996 Act. As per Section 44, there has to be an arbitration
agreement in writing. To such arbitration agreement the conditions
stated in Schedule I would apply. In other words, it must satisfy
the requirements of Article II of Schedule I. Each contracting State
shall recognize an agreement in writing under which the parties
undertake to submit to arbitration their disputes in respect of a
defined legal relationship, whether contractual or not, concerning a
subject matter capable of settlement by arbitration. The arbitration
agreement shall include an arbitration clause in a contract or an
arbitration agreement signed by the parties or entered in any of the
specified modes. Subject to the exceptions stated therein, the
reference shall be made.
55. The language of Section 45 read with Schedule I of the 1996 Act
is worded in favour of making a reference to arbitration when a party
or any person claiming through or under him approaches the Court and
the Court is satisfied that the agreement is valid, enforceable and
operative. Because of the legislative intent, the mandate and
purpose of the provisions of Section 45 being in favour of
arbitration, the relevant provisions would have to be construed
liberally to achieve that object. The question that immediately
follows is as to what are the aspects which the Court should consider
while dealing with an application for reference to arbitration under
this provision.
56. The 1996 Act makes it abundantly clear that Part I of the Act
has been amended to bring these provisions completely in line with the
UNCITRAL Model Law on International Commercial Arbitration (for short,
the ‘UNCITRAL Mode Law’), while Chapter I of Part II is meant to
encourage international commercial arbitration by incorporating in
India, the provisions of the New York Convention. Further, the
protocol on Arbitration Clauses (for short ‘Geneva Convention’) was
also incorporated as part of Chapter II of Part II.
57. For proper interpretation and application of Chapter I of Part
II, it is necessary that those provisions are read in conjunction with
Schedule I of the Act. To examine the provisions of Section 45
without the aid of Schedule I would not be appropriate as that is the
very foundation of Section 45 of the Act. The International Council
for Commercial Arbitration prepared a Guide to the Interpretation of
1958 New York Convention, which lays/contains the Road Map to Article
II. Section 45 is enacted materially on the lines of Article II of
this Convention. When the Court is seized with a challenge to the
validity of an arbitration agreement, it would be desirable to examine
the following aspects :
“1. Does the arbitration agreement fall under the scope
of the Convention?
2. Is the arbitration agreement evidenced in writing?
3. Does the arbitration agreement exist and is it
substantively valid?
4. Is there a dispute, does it arise out of a defined
legal relationship, whether contractual or not, and did the
parties intend to have this particular dispute settled by
arbitration?
5. Is the arbitration agreement binding on the parties
to the dispute that is before the Court?
6. Is this dispute arbitrable?”
58. According to this Guide, if these questions are answered in the
affirmative, then the parties must be referred to arbitration. Of
course, in addition to the above, the Court will have to adjudicate
any plea, if taken by a non-applicant that the arbitration agreement
is null and void, inoperative or incapable of being performed. In
these three situations, if the Court answers such plea in favour of
the non-applicant, the question of making a reference to arbitration
would not arise and that would put the matter at rest.
59. If the parties are referred to arbitration and award is made
under these provisions of the Convention, then it shall be binding and
enforceable in accordance with the provisions of Sections 46 to 49 of
the 1996 Act. The procedure prescribed under Chapter I of Part II is
to take precedence and would not be affected by the provisions
contained under Part I and/or Chapter II of Part II in terms of
Section 52. This is the extent of priority that the Legislature had
intended to accord to this Chapter 1 of Part II.
60. Amongst the initial steps, the Court is required to enquire
whether the dispute at issue is covered by the arbitration agreement.
Stress has normally been placed upon three characteristics of
arbitrations which are as follows –
(1) arbitration is consensual. It is based on the parties’
agreement;
(2) arbitration leads to a final and binding resolution of the
dispute; and
(3) arbitration is regarded as substitute for the court litigation
and results in the passing of an binding award.
61. Mr. Nariman, learned senior counsel appearing on behalf of the
appellant, contended that in terms of Section 45 of the 1996 Act,
parties to the agreement shall essentially be the parties to the suit.
A stranger or a third party cannot ask for arbitration. They have to
be essentially the same. Further, the parties should have a clear
intention, at the time of the contract, to submit any disputes or
differences as may arise, to arbitration and then alone the reference
contemplated under Section 45 can be enforced.
62. To the contra, Mr. Salve, the learned senior counsel appearing
for respondent No. 1, submitted that the phrase “at the request of one
of the parties or any person claiming through or under him” is capable
of liberal construction primarily for the reason that under the 1996
Act, there is a greater obligation to refer the matters to
arbitration. In fact, the 1996 Act is the recognition of an
indefeasible Right to Arbitration. Even a party which is not a
signatory to the arbitration agreement can claim through the main
party. Particularly, in cases of composite transactions, the approach
of the Courts should be to hold the parties to the bargain of
arbitration rather than permitting them to escape the reference on
such pleas.
63. At this stage itself, we would make it clear that we are
primarily discussing these submissions purely on a legal basis and not
with regard to the merits of the case, which we shall shortly revert
to.
64. We have already noticed that the language of Section 45 is at a
substantial variance to the language of Section 8 in this regard. In
Section 45, the expression ‘any person’ clearly refers to the
legislative intent of enlarging the scope of the words beyond ‘the
parties’ who are signatory to the arbitration agreement. Of course,
such applicant should claim through or under the signatory party.
Once this link is established, then the Court shall refer them to
arbitration. The use of the word ‘shall’ would have to be given its
proper meaning and cannot be equated with the word ‘may’, as liberally
understood in its common parlance. The expression ‘shall’ in the
language of the Section 45 is intended to require the Court to
necessarily make a reference to arbitration, if the conditions of this
provision are satisfied. To that extent, we find merit in the
submission that there is a greater obligation upon the judicial
authority to make such reference, than it was in comparison to the
1940 Act. However, the right to reference cannot be construed
strictly as an indefeasible right. One can claim the reference only
upon satisfaction of the pre-requisites stated under Sections 44 and
45 read with Schedule I of the 1996 Act. Thus, it is a legal right
which has its own contours and is not an absolute right, free of any
obligations/limitations.
65. Normally, arbitration takes place between the persons who have,
from the outset, been parties to both the arbitration agreement as
well as the substantive contract underlining that agreement. But, it
does occasionally happen that the 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/the arbitration agreement. Arbitration, thus,
could be possible between a signatory to an arbitration agreement and
a third party. Of course, heavy onus lies on that party to show that,
in fact and in law, it is claiming ‘through’ or ‘under’ the signatory
party as contemplated under Section 45 of the 1996 Act. Just to deal
with such situations illustratively, reference can be made to the
following examples in Law and Practice of Commercial Arbitration in
England (Second Edn.) by Sir Michael J. Mustill:
“1. The claimant was in reality always a party to the
contract, although not named in it.
2. The claimant has succeeded by operation of law to the
rights of the named party.
3. The claimant has become a part to the contract in
substitution for the named party by virtue of a
statutory or consensual novation.
4. The original party has assigned to the claimant
either the underlying contract, together with the
agreement to arbitrate which it incorporates, or the
benefit of a claim which has already come into
existence.”
66. Though the scope of an arbitration agreement is limited to the
parties who entered into it and those claiming under or through them,
the Courts under the English Law have, in certain cases, also applied
the “Group of Companies Doctrine”. This doctrine has developed in the
international context, whereby an arbitration agreement entered into
by a company, being one within a group of companies, can bind its non-
signatory affiliates or sister or parent concerns, if the
circumstances demonstrate that the mutual intention of all the parties
was to bind both the signatories and the non-signatory affiliates.
This theory has been applied in a number of arbitrations so as to
justify a tribunal taking jurisdiction over a party who is not a
signatory to the contract containing the arbitration agreement.
[‘Russell on Arbitration’ (Twenty Third Edition)].
67. This evolves the principle that a non-signatory party could be
subjected to arbitration provided these transactions were with group
of companies and there was a clear intention of the parties to bind
both, the signatory as well as the non-signatory parties. In other
words, ‘intention of the parties’ is a very significant feature which
must be established before the scope of arbitration can be said to
include the signatory as well as the non-signatory parties.
68. A non-signatory or third party could be subjected to arbitration
without their prior consent, but this would only be in exceptional
cases. The Court will examine these exceptions from the touchstone of
direct relationship to the party signatory to the arbitration
agreement, direct commonality of the subject matter and the agreement
between the parties being a composite transaction. The transaction
should be of a composite nature where performance of mother agreement
may not be feasible without aid, execution and performance of the
supplementary or ancillary agreements, for achieving the common object
and collectively having bearing on the dispute. Besides all this, the
Court would have to examine whether a composite reference of such
parties would serve the ends of justice. Once this exercise is
completed and the Court answers the same in the affirmative, the
reference of even non-signatory parties would fall within the
exception afore-discussed.
69. In a case like the present one, where origin and end of all is
with the Mother or the Principal Agreement, the fact that a party was
non-signatory to one or other agreement may not be of much
significance. The performance of any one of such agreements may be
quite irrelevant without the performance and fulfillment of the
Principal or the Mother Agreement. Besides designing the corporate
management to successfully complete the joint ventures, where the
parties execute different agreements but all with one primary object
in mind, the Court would normally hold the parties to the bargain of
arbitration and not encourage its avoidance. In cases involving
execution of such multiple agreements, two essential features exist;
firstly, all ancillary agreements are relatable to the mother
agreement and secondly, performance of one is so intrinsically inter-
linked with the other agreements that they are incapable of being
beneficially performed without performance of the others or severed
from the rest. The intention of the parties to refer all the disputes
between all the parties to the arbitral tribunal is one of the
determinative factor.
70. We may notice that this doctrine does not have universal
acceptance. Some jurisdictions, for example, Switzerland, have
refused to recognize the doctrine, while others have been equivocal.
The doctrine has found favourable consideration in the United States
and French jurisdictions. The US Supreme Court in Ruhrgos AG v
Marathon Oil Co. [526 US 574 (1999)] discussed this doctrine at some
length and relied on more traditional principles, such as, the non-
signatory being an alter ego, estoppel, agency and third party
beneficiaries to find jurisdiction over the non-signatories.
71. The Court will have to examine such pleas with greater caution
and by definite reference to the language of the contract and
intention of the parties. In the case of composite transactions and
multiple agreements, it may again be possible to invoke such principle
in accepting the pleas of non-signatory parties for reference to
arbitration. Where the agreements are consequential and in the nature
of a follow-up to the principal or mother agreement, the latter
containing the arbitration agreement and such agreements being so
intrinsically inter-mingled or inter-dependent that it is their
composite performance which shall discharge the parties of their
respective mutual obligations and performances, this would be a
sufficient indicator of intent of the parties to refer signatory as
well as non-signatory parties to arbitration. The principle of
‘composite performance’ would have to be gathered from the conjoint
reading of the principal and supplementary agreements on the one hand
and the explicit intention of the parties and the attendant
circumstances on the other.
72. As already noticed, an arbitration agreement, under Section 45
of the 1996 Act, should be evidenced in writing and in terms of
Article II of Schedule 1, an agreement in writing shall include an
arbitral clause in a contract or an arbitration agreement signed by
the parties or contained in an exchange of letters or telegrams.
Thus, the requirement that an arbitration agreement be in writing is
an expression incapable of strict construction and requires to be
construed liberally, as the words of this Article provide. Even in a
given circumstance, it may be possible and permissible to construe the
arbitration agreement with the aid and principle of ‘incorporation by
reference’. Though the New York Convention is silent on this matter,
in common practice, the main contractual document may refer to
standard terms and conditions or other standard forms and documents
which may contain an arbitration clause and, therefore, these terms
would become part of the contract between the parties by reference.
The solution to such issue should be case-specific. The relevant
considerations to determine incorporation would be the status of
parties, usages within the specific industry, etc. Cases where the
main documents explicitly refer to arbitration clause included in
standard terms and conditions would be more easily found in compliance
with the formal requirements set out in the Article II of the New York
Convention than those cases in which the main contract simply refers
to the application of standard forms without any express reference to
the arbitration clause. For instance, under the American Law, where
standard terms and conditions referred to in a purchase order provided
that the standard terms would have been attached to or form part of
the purchase order, this was considered to be an incorporation of the
arbitration agreement by reference. Even in other countries, the
recommended criterion for incorporation is whether the parties were or
should have been aware of the arbitration agreement. If the Bill of
Lading, for example, specifically mentions the arbitration clause in
the Charter Party Agreement, it is generally considered sufficient for
incorporation. Two different approaches in its interpretation have
been adopted, namely, (a) interpretation of documents approach; and
(b) conflict of laws approach. Under the latter, the Court could
apply either its own national law or the law governing the
arbitration.
73. In India, the law has been construed more liberally, towards
accepting incorporation by reference. In the case of Owners and
Parties Interested in the Vessel M.V. “Baltic Confidence” & Anr. v.
State Trading Corporation of India Ltd. & Anr. [(2001) 7 SCC 473],
the Court was considering the question as to whether the arbitration
clause in a Charter Party Agreement was incorporated by reference in
the Bill of Lading and what the intention of the parties to the Bill
of Lading was. The primary document was the Bill of Lading, which,
if read in the manner provided in the incorporation clause thereof,
would include the arbitration clause of the Charter Party Agreement.
The Court observed that while ascertaining the intention of the
parties, attempt should be made to give meaning and effect to the
incorporation clause and not to invalidate or frustrate it by giving
it a literal, pedantic and technical reading. This Court, after
considering the judgments of the courts in various other countries,
held as under :
“19. From the conspectus of the views expressed by courts
in England and also in India, it is clear that in
considering the question, whether the arbitration clause in
a Charter Party Agreement was incorporated by reference in
the Bill of Lading, the principal question is, what was the
intention of the parties to the Bill of Lading? For this
purpose the primary document is the Bill of Lading into
which the arbitration clause in the Charter Party Agreement
is to be read in the manner provided in the incorporation
clause of the Bill of Lading. While ascertaining the
intention of the parties, attempt should be made to give
meaning to the incorporation clause and to give effect to
the same and not to invalidate or frustrate it giving a
literal, pedantic and technical reading of the clause. If
on a construction of the arbitration clause of the Charter
Party Agreement as incorporated in the Bill of Lading it
does not lead to inconsistency or insensibility or
absurdity then effect should be given to the intention of
the parties and the arbitration clause as agreed should be
made binding on parties to the Bill of Lading. If the
parties to the Bill of Lading being aware of the
arbitration clause in the Charter Party Agreement have
specifically incorporated the same in the conditions of the
Bill of Lading then the intention of the parties to abide
by the arbitration clause is clear. Whether a particular
dispute arising between the parties comes within the
purview of the arbitration clause as incorporated in the
Bill of Lading is a matter to be decided by the arbitrator
or the court. But that does not mean that despite
incorporation of the arbitration clause in the Bill of
Lading by specific reference the parties had not intended
that the disputes arising on the Bill of Lading should be
resolved by an arbitrator.”
74. Reference can also be made to the judgment of this Court in the
case of Olympus Superstructure Pvt. Ltd. v. Meena Vijay Khetan & Ors.
[(1999) 5 SCC 651], where the parties had entered into a purchase
agreement for the purchase of flats. The main agreement contained the
arbitration clause (clause 39). The parties also entered into three
different Interior Design Agreements, which also contained arbitration
clauses. The main agreement was terminated due to disputes about
payment and non-grant of possession. These disputes were referred to
arbitration. A sole arbitrator was appointed to make awards in this
respect. Inter alia, the question was raised as to whether the
disputes under the Interior Design Agreements were subject to their
independent arbitration clauses or whether one and the same reference
was permissible under the main agreement. It was argued that the
reference under clause 39 of the main agreement could not permit the
arbitrator to deal with the disputes relating to Interior Design
Agreements and the award was void. The Court, however, took the view
that parties had entered into multiple agreements for a common object
and the expression ‘other matters…connected with’ appearing in clause
39 would permit such a reference. The Court held as under :
“30. If there is a situation where there are disputes and
differences in connection with the main agreement and also
disputes in regard to “other matters” “connected” with the
subject-matter of the main agreement then in such a situation,
in our view, we are governed by the general arbitration clause
39 of the main agreement under which disputes under the main
agreement and disputes connected therewith can be referred to
the same arbitral tribunal. This clause 39 no doubt does not
refer to any named arbitrators. So far as clause 5 of the
Interior Design Agreement is concerned, it refers to disputes
and differences arising from that agreement which can be
referred to named arbitrators and the said clause 5, in our
opinion, comes into play only in a situation where there are no
disputes and differences in relation to the main agreement and
the disputes and differences are solely confined to the Interior
Design Agreement. That, in our view, is the true intention of
the parties and that is the only way by which the general
arbitration provision in clause 39 of the main agreement and the
arbitration provision for a named arbitrator contained in clause
5 of the Interior Design Agreement can be harmonised or
reconciled. Therefore, in a case like the present where the
disputes and differences cover the main agreement as well as the
Interior Design Agreement, — (that there are disputes arising
under the main agreement and the Interior Design Agreement is
not in dispute) — it is the general arbitration clause 39 in the
main agreement that governs because the questions arise also in
regard to disputes relating to the overlapping items in the
schedule to the main agreement and the Interior Design
Agreement, as detailed earlier. There cannot be conflicting
awards in regard to items which overlap in the two agreements.
Such a situation was never contemplated by the parties. The
intention of the parties when they incorporated clause 39 in the
main agreement and clause 5 in the Interior Design Agreement was
that the former clause was to apply to situations when there
were disputes arising under both agreements and the latter was
to apply to a situation where there were no disputes or
differences arising under the main contract but the disputes and
differences were confined only to the Interior Design Agreement.
A case containing two agreements with arbitration clauses arose
before this Court in Agarwal Engg. Co. v. Technoimpex Hungarian
Machine Industries Foreign Trade Co. There were arbitration
clauses in two contracts, one for sale of two machines to the
appellant and the other appointing the appellant as sales
representative. On the facts of the case, it was held that both
the clauses operated separately and this conclusion was based on
the specific clause in the sale contract that it was the “sole
repository” of the sale transaction of the two machines. Krishna
Iyer, J. held that if that were so, then there was no
jurisdiction for travelling beyond the sale contract. The
language of the other agreement appointing the appellant as
sales representative was prospective and related to a sales
agency and “later purchases”, other than the purchases of these
two machines. There was therefore no overlapping. The case
before us and the above case exemplify contrary situations. In
one case the disputes are connected and in the other they are
distinct and not connected. Thus, in the present case, clause 39
of the main agreement applies. Points 1 and 2 are decided
accordingly in favour of the respondents.”
75. The Court also took the view that a dispute relating to specific
performance of a contract in relation to immoveable property could be
referred to arbitration and Section 34(2)(b)(i) of the 1996 Act was
not attracted. This finding of the Court clearly supports the view
that where the law does not prohibit the exercise of a particular
power, either the Arbitral Tribunal or the Court could exercise such
power. The Court, while taking this view, has obviously rejected the
contention that a contract for specific performance was not capable of
settlement by arbitration under the Indian law in view of the
statutory provisions. Such contention having been rejected, supports
the view that we have taken.
THRESHOLD REVIEW
76. Where the Court which, on its judicial side, is seized of an
action in a matter in respect of which the parties have made an
arbitration agreement, once the required ingredients are satisfied, it
would refer the parties to arbitration but for the situation where it
comes to the conclusion that the agreement is null and void,
inoperative or incapable of being performed. These expressions have
to be construed somewhat strictly so as to ensure that the Court
returns a finding with certainty and on the correct premise of law and
fact as it has the effect of depriving the party of its right of
reference to arbitration. But once the Court finds that the agreement
is valid then it must make the reference, without any further exercise
of discretion {refer General Electric Co. v. Renusagar Power Co.
[(1987) 4 SCC 137]}. These are the issues which go to the root of the
matter and their determination at the threshold would prevent
multiplicity of litigation and would even prevent futile exercise of
proceedings before the arbitral tribunal.
77. The issue of whether the courts are empowered to review the
existence and validity of the arbitration agreement prior to reference
is more controversial. A majority of the countries admit to the
positive effect of kompetenz kompetenz principle, which requires that
the arbitral tribunal must exercise jurisdiction over the dispute
under the arbitration agreement. Thus, challenge to the existence or
validity of the arbitration agreement will not prevent the arbitral
tribunal from proceeding with hearing and ruling upon its
jurisdiction. If it retains jurisdiction, making of an award on the
substance of the dispute would be permissible without waiting for the
outcome of any court action aimed at deciding the issue of the
jurisdiction. The negative effect of the kompetenz kompetenz
principle is that arbitrators are entitled to be the first to
determine their jurisdiction which is later reviewable by the court,
when there is action to enforce or set aside the arbitral award.
Where the dispute is not before an arbitral tribunal, the Court must
also decline jurisdiction unless the arbitration agreement is patently
void, inoperative or incapable of being performed.
78. This is the position of law in France and in some other
countries, but as far as the Indian Law is concerned, Section 45 is a
legislative mandate and does not admit of any ambiguity. We must take
note of the aspect of Indian law that Chapter I of Part II of the 1996
Act does not contain any provision analogous to Section 8(3) under
Part I of the Act. In other words, under the Indian Law, greater
obligation is cast upon the Courts to determine whether the agreement
is valid, operative and capable of being performed at the threshold
itself. Such challenge has to be a serious challenge to the
substantive contract or to the agreement, as in the absence of such
challenge, it has to be found that the agreement was valid, operative
and capable of being performed; the dispute would be referred to
arbitration. [State of Orissa v. Klockner and Company & Ors. (AIR
1996 SC 2140)].
79. Alan Redfern and Martin Hunter in Law and Practice of
International Commercial Arbitration, (Fourth Edition) have opined
that when several parties are involved in a dispute, it is usually
considered desirable that the dispute should be dealt with in the same
proceedings rather than in a series of separate proceedings. In
general terms, this saves time, money, multiplicity of litigation and
more importantly, avoids the possibility of conflicting decisions on
the same issues of fact and law since all issues are determined by the
same arbitral tribunal at the same time. In proceedings before
national courts, it is generally possible to join additional parties
or to consolidate separate sets of proceedings. In arbitration,
however, this is difficult, sometimes impossible, to achieve this
because the arbitral process is based upon the agreement of the
parties.
80. Where there is multi-party arbitration, it may be because there
are several parties to one contract or it may be because there are
several contracts with different parties that have a bearing on the
matter in dispute. It is helpful to distinguish between the two.
Where there are several parties to one contract, like a joint venture
or some other legal relationship of similar kind and the contract
contains an arbitration clause, when a dispute arises, the members of
the consortium or the joint venture may decide that they would each
like to appoint an arbitrator. In distinction thereto, in cases
involving several contracts with different parties, a different
problem arises. They may have different issues in dispute. Each one
of them will be operating under different contracts often with
different choice of law and arbitration clauses and yet, any dispute
between say the employer and the main contractor is likely to involve
or affect one or more of the suppliers or sub-contractors, even under
other contracts. What happens when the dispute between an employer
and the main contractor is referred to arbitration, and the main
contractor wishes to join the sub-contractor in the proceedings, on
the basis that if there is any liability established, the main
contractor is entitled to pass on such liability to the sub-
contractor? This was the issue raised in the Adgas case {Abu Dhabi
Gas Liquefaction Co. Ltd. v. Eastern Bechtel Corp. [1982] 2 Lloyd’s
Rep. 425, CA}. Adgas was the owner of a plant that produced liquefied
natural gas in the Arabian Gulf. The company started arbitration in
England against the main contractors under an international
construction contract, alleging that one of the huge tanks that had
been constructed to store the gas was defective. The main contractor
denied liability but added that, if the tank was defective, it was the
fault of the Japanese sub-contractor. Adgas brought ad hoc
arbitration proceedings against the main contractor before a sole
arbitrator in London. The main contractor then brought separate
arbitration proceedings, also in London, against the Japanese sub-
contractor.
81. There is little doubt that if the matter had been litigated in
an English court, the Japanese company would have been joined as a
party to the action. However, Adgas did not agree that the Japanese
sub-contractor should be brought into its arbitration with the main
contractor, since this would have lengthened and complicated the
proceedings. The Japanese sub-contractor also did not agree to be
joined. It preferred to await the outcome of the main arbitration, to
see whether or not there was a case to answer.
82. Lord Denning, giving judgment in the English
Court of Appeal, plainly wished that an order could be made
consolidating the two sets of arbitral proceedings so as to save time
and money and to avoid the risk of inconsistent awards:
“As we have often pointed out, there is a danger in having
two separate arbitrations in a case like this. You might
get inconsistent findings if there were two separate
arbitrators. This has been said in many cases…it is most
undesirable that there should be inconsistent findings by
two separate arbitrators on virtually the self-same
question, such as causation. It is very desirable that
everything should be done to avoid such a circumstance [Abu
Dhabi Gas, op.cit.at 427]”
83. We have already referred to the contention of Mr. Fali S.
Nariman, the learned senior counsel appearing for the appellant, that
the provisions of Section 45 of the 1996 Act are somewhat similar to
Article II(3) of the New York Convention and the expression ‘parties’
in that Section would mean that ‘all parties to the action’ before the
Court have to be the parties to the arbitration agreement. If some of
them are parties to the agreement, while the others are not, Section
45 does not contemplate the applicable procedure and the status of the
non-signatories. The consequences of all parties not being common to
the action and arbitration proceedings are, as illustrated above,
multiplicity of proceedings and frustration of the intended ‘one stop
action’. The Rule of Mischief would support such interpretation.
Even if some unnecessary parties are added to the action, the Court
can always strike out such parties and even the cause of action in
terms of the provisions of the CPC. However, where such parties cannot
be struck off, there the proceedings must continue only before the
Court.
84. Thus, the provisions of Section 45 cannot be effectively applied
or even invoked. Unlike Section 24 of the 1940 Act, under the 1996
Act the Court has not been given the power to refer to arbitration
some of the parties from amongst the parties to the suit. Section 24
of 1940 Act vested the Court with the discretion that where the Court
thought fit, it could refer such matters and parties to arbitration
provided the same could be separated from the rest of the subject
matter of the suit. Absence of such provision in the 1996 Act clearly
suggests that the Legislature intended not to permit bifurcated or
partial references of dispute or parties to arbitration. Without
prejudice to this contention, it was also the argument that it would
not be appropriate and even permissible to make reference to
arbitration when the issues and parties in action are not covered by
the arbitration agreement. Referring to the consequences of all
parties not being common to the action before the Court and
arbitration, the disadvantages are:
a) There would be multiplicity of litigation;
b) Application of principle of one stop action would not be
possible; and
c) It will frustrate the application of the Rule of Mischief. The
Court can prevent the mischief by striking out unnecessary
parties or causes of action.
85. It would, thus, imply that a stranger or a third party cannot
ask for arbitration. The expression ‘claiming through or under’ will
have to be construed strictly and restricted to the parties to the
arbitration agreement.
86. Another issue raised before the Court is that there is
possibility of the arbitration proceedings going on simultaneously
with the suit, which would result in rendering passing of conflicting
orders possible. This would be contrary to the public policy of India
that Indian courts can give effect to the foreign awards which are in
conflict with judgment of the Indian courts.
87. To the contra, Mr. Salve, learned senior counsel appearing for
respondent No.1, contended that the expressions ‘parties to
arbitration’, ‘any person claiming through or under him’ and ‘at the
request of one of the party’ appearing in Section 45 are wide enough
to include some or all the parties and even non-signatory parties for
the purposes of making a reference to arbitration. It is also the
contention that on the true construction of Sections 44, 45 and 46 of
the 1996 Act, it is not possible to accept the contention of the
appellant that all the parties to an action have to be parties to the
arbitration agreement as well as the Court proceedings. This would be
opposed to the principle that parties should be held to their bargain
of arbitration. The Court always has the choice to make appropriate
orders in exercise of inherent powers to bifurcate the reference or
even stay the proceedings in a suit pending before it till the
conclusion of the arbitration proceedings or otherwise. According to
Mr. Salve, if the interpretation advanced by Mr. Nariman is accepted,
then mischief will be encouraged which would frustrate the arbitration
agreement because a party not desirous of going to arbitration would
initiate civil proceedings and add non-signatory as well as
unnecessary parties to the suit with a view to avoid arbitration.
This would completely frustrate the legislative object underlining the
1996 Act. Non-signatory parties can even be deemed to be parties to
the arbitration agreement and may successfully pray for referral to
arbitration.
88. As noticed above, the legislative intent and essence of the 1996
Act was to bring domestic as well as international commercial
arbitration in consonance with the UNCITRAL Model Rules, the New York
Convention and the Geneva Convention. The New York Convention was
physically before the Legislature and available for its consideration
when it enacted the 1996 Act. Article II of the Convention provides
that each contracting State shall recognise an agreement and submit to
arbitration all or any differences which have arisen or which may
arise between them in respect of a defined legal relationship, whether
contractual or not concerning a subject matter capable of settlement
by arbitration. Once the agreement is there and the Court is seized
of an action in relation to such subject matter, then on the request
of one of the parties, it would refer the parties to arbitration
unless the agreement is null and void, inoperative or incapable of
performance.
89. Still, the legislature opted to word Section 45 somewhat
dissimilarly. Section 8 of the 1996 Act also uses the expression
‘parties’ simpliciter without any extension. In significant contra-
distinction, Section 45 uses the expression ‘one of the parties or any
person claiming through or under him’ and ‘refer the parties to
arbitration’, whereas the rest of the language of Section 45 is
similar to that of Article II(3) of the New York Contention. The
Court cannot ignore this aspect and has to give due weightage to the
legislative intent. It is a settled rule of interpretation that
every word used by the Legislature in a provision should be given its
due meaning. To us, it appears that the Legislature intended to give a
liberal meaning to this expression.
90. The language of Section 45 has wider import. It refers to the
request of a party and then refers to an arbitral tribunal, while
under Section 8(3) it is upon the application of one of the parties
that the court may refer the parties to arbitration. There is some
element of similarity in the language of Section 8 and Section 45 read
with Article II(3). The language and expressions used in Section 45,
‘any person claiming through or under him’ including in legal
proceedings may seek reference of all parties to arbitration. Once
the words used by the Legislature are of wider connotation or the very
language of section is structured with liberal protection then such
provision should normally be construed liberally.
91. Examined from the point of view of the legislative object and
the intent of the framers of the statute, i.e., the necessity to
encourage arbitration, the Court is required to exercise its
jurisdiction in a pending action, to hold the parties to the
arbitration clause and not to permit them to avoid their bargain of
arbitration by bringing civil action involving multifarious cause of
action, parties and prayers.
Legal Relationship
92. Now, we should examine the scope of concept of ‘legal
relationship’ as incorporated in Article II(1) of the New York
Convention vis-à-vis the expression ‘any person claiming through or
under him’ appearing in Section 45 of the 1996 Act. Article II(1)
and (3) have to be read in conjunction with Section 45 of the Act.
Both these expressions have to be read in harmony with each other.
Once they are so read, it will be evident that the expression “legal
relationship” connotes the relationship of the party with the person
claiming through or under him. A person may not be signatory to an
arbitration agreement, but his cause of action may be directly
relatable to that contract and thus, he may be claiming through or
under one of those parties. It is also stated in the Law and Practice
of International Commercial Arbitration, Alan Redfern and Martin
Hunter (supra), that for the purposes of both the New York Convention
and the UNCITRAL Model Law, it is sufficient that there should be a
defined “legal relationship” between the parties, whether contractual
or not. Plainly there has to be some contractual relationship between
the parties, since there must be some arbitration agreement to form
the basis of the arbitral proceedings. Given the existence of such
an agreement, the dispute submitted to arbitration may be governed by
the principles of delictual or tortuous liability rather than by the
law of contract.
93. In the case of Roussel - Uclaf v. G.D. Searle & Co. Ltd. And
G.D. Searle & Co. [1978 Vol. 1 LLR 225], the Court held:
“The argument does not admit of much elaboration, but I see
no reason why these words in the Act should be construed so
narrowly as to exclude a wholly-owned subsidiary company
claiming, as here, a right to sell patented articles which
it has obtained from and been ordered to sell by its
parent. Of course, if the arbitration proceedings so
decide, it may eventually turn out that the parent company
is at fault and not entitled to sell the articles in
question at all; and, if so, the subsidiary will be equally
at fault. But, if the parent is blameless, it seems only
common sense that the subsidiary should be equally
blameless. The two parties and their actions are, in my
judgment, so closely related on the facts in this case that
it would be right to hold that the subsidiary can establish
that it is within the purview of the arbitration clause, on
the basis that it is “claiming through or under” the parent
to do what it is in fact doing whether ultimately held to
be wrongful or not.”
94. However, the view expressed by the Court in the above case does
not find approval in the decision of the Court of Appeal in the case
of City of London v. Sancheti [(2009) 1 Lloyds Law Reports 116]. In
paragraph 34, it was held that the view in the case of Roussel Uclaf
need not be followed and stay could not be obtained against a party to
an arbitration agreement or a person claiming through or under such a
party, as mere local or commercial connection is not sufficient. But
the Court of Appeal hastened to add that, in cases such as the one of
Mr. Sancheti, the Corporation of London was not party to the
arbitration agreement, but the relevant party is the United Kingdom
Government. The fact that in certain circumstances, the State may be
responsible under international law for the acts of one of its local
authorities, or may have to take steps to redress wrongs committed by
one of the local authorities, does not make the local authority a
party to the arbitration agreement.
95. Having examined both the above-stated views, we are of the
considered opinion that it will be the facts of a given case that
would act as precept to the jurisdictional forum as to whether any of
the stated principles should be adopted or not. If in the facts of a
given case, it is not possible to construe that the person approaching
the forum is a party to the arbitration agreement or a person claiming
through or under such party, then the case would not fall within the
ambit and scope of the provisions of the section and it may not be
possible for the Court to permit reference to arbitration at the
behest of or against such party.
96. We have already referred to the judgments of various courts,
that state that arbitration could be possible between a signatory to
an agreement and a third party. Of course, heavy onus lies on that
party to show that in fact and in law, it is claiming under or through
a signatory party, as contemplated under Section 45 of the 1996 Act.
97. Michael J. Mustill and Stewart C. Boyd in The Law and Practice
of Commercial Arbitration in England have observed that the applicant
must show that the person whose claim he seeks to stay is either a
party to the arbitration agreement or a person claiming through or
under such a party. It is further noticed that it occasionally
happens that the plaintiff is not himself a party to the arbitration
agreement on which the application is founded. This may arise in the
following situations :
i) The plaintiff has acquired the rights, which the action is
brought to enforce, from someone who is a party to an
arbitration agreement with the defendant;
ii) The plaintiff is bringing the action on behalf of someone else,
who is a party to an arbitration agreement with the defendant.
iii) When the expression used in the provision, the words ‘claiming
under plaintiff’ relate to substantive right which is being
asserted.
98. The requirements can scarcely be interpreted in their literal
sense, this would mean that a person could claim a stay even though
not a party to the arbitration agreement. However, the applicant
must be party to the agreement against whom legal proceedings have
been initiated rather than a party as intervenor.
99. Joinder of non signatory parties to arbitration is not unknown
to the arbitration jurisprudence. Even the ICCA’s Guide to the
Interpretation of the 1958 New York Convention also provides for such
situation, stating that when the question arises as to whether binding
a non-signatory to an arbitration agreement could be read as being in
conflict with the requirement of written agreement under Article I of
the Convention, the most compelling answer is “no” and the same is
supported by a number of reasons.
100. Various legal basis may be applied to bind a non-signatory to an
arbitration agreement. The first theory is that of implied consent,
third party beneficiaries, guarantors, assignment and other transfer
mechanisms of contractual rights. This theory relies on the
discernible intentions of the parties and, to a large extent, on good
faith principle. They apply to private as well as public legal
entities. The second theory includes the legal doctrines of agent-
principal relations, apparent authority, piercing of veil (also called
the “alter ego”), joint venture relations, succession and estoppel.
They do not rely on the parties’ intention but rather on the force of
the applicable law.
101. We may also notice the Canadian case of The City of Prince
George v. A.L. Sims & Sons Ltd. [YCA XXIII (1998), 223] wherein the
Court took the view that an arbitration agreement is neither
inoperative nor incapable of being performed if a multi-party dispute
arises and not all parties are bound by the arbitration agreement: the
parties bound by the arbitration agreement are to be referred to
arbitration and court proceedings may continue with respect to the
other parties, even if this creates a risk of conflicting decisions.
102. We have already discussed that under the Group of Companies
Doctrine, an arbitration agreement entered into by a company within a
group of companies can bind its non-signatory affiliates, if the
circumstances demonstrate that the mutual intention of the parties was
to bind both the signatory as well as the non-signatory parties.
103. The question of formal validity of the arbitration agreement is
independent of the nature of parties to the agreement, which is a
matter that belongs to the merits and is not subject to substantive
assessment. Once it is determined that a valid arbitration agreement
exists, it is a different step to establish which parties are bound by
it. Third parties, who are not explicitly mentioned in an
arbitration agreement made in writing, may enter into its ratione
personae scope. Furthermore, the Convention does not prevent consent
to arbitrate from being provided by a person on behalf of another, a
notion which is at the root of the theory of implied consent.
104. If one analyses the above cases and the authors’ views, it
becomes abundantly clear that reference of even non-signatory parties
to arbitration agreement can be made. It may be the result of
implied or specific consent or judicial determination. Normally, the
parties to the arbitration agreement calling for arbitral reference
should be the same as those to the an action. But this general
concept is subject to exceptions which are that when a third party,
i.e. non-signatory party, is claiming or is sued as being directly
affected through a party to the arbitration agreement and there are
principal and subsidiary agreements, and such third party is signatory
to a subsidiary agreement and not to the mother or principal agreement
which contains the arbitration clause, then depending upon the facts
and circumstances of the given case, it may be possible to say that
even such third party can be referred to arbitration.
105. In the present case, the corporate structure of the respondent
companies as well as that of the appellant companies clearly
demonstrates a legal relationship which not only is inter-legal
relationship but also intra-legal relationship between the parties to
the lis or persons claiming under them. They have contractual
relationship which arises out of the various contracts that spell out
the terms, obligations and roles of the respective parties which they
were expected to perform for attaining the object of successful
completion of the joint venture agreement. This joint venture
project was not dependant on any single agreement but was capable of
being achieved only upon fulfillment of all these agreements. If
one floats a joint venture company, one must essentially know-how to
manage it and what shall be the methodology adopted for its
management. If one manages it well, one must know what goods the
said company is to produce and with what technical knowhow. Even if
these requisites are satisfied, then also one is required to know, how
to create market, distribute and export such goods. It is nothing but
one single chain consisting of different components. The parties may
choose to sign different agreements to effectively implement various
aforementioned facets right from managing to making profits in a joint
venture company. A party may not be signatory to an agreement but its
execution may directly be relatable to the main contract even though
he claims through or under one of the main party to the agreement. In
such situations, the parties would aim at achieving the object of
making their bargain successful, by execution of various agreements,
like in the present case.
106. The New York Convention clearly postulates that there should be
a defined legal relationship between the parties, whether contractual
or not, in relation to the differences that may have arisen concerning
the subject matter capable of settlement of arbitration. We have
referred to a number of judgments of the various courts to emphasize
that in given circumstances, if the ingredients above-noted exist,
reference to arbitration of a signatory and even a third party is
possible. Though heavy onus lies on the person seeking such
reference, multiple and multi-party agreements between the parties to
the arbitration agreement or persons claiming through or under such
parties is neither impracticable nor impermissible.
107. Next, we are to examine the issue whether the cause of action in
a suit can be bifurcated and a partial reference may be made by the
Court. Whatever be the answer to this question, a necessary corollary
is as to whether the Court should or should not stay the proceedings
in the suit? Further, this may give rise to three different
situations. Firstly, while making reference of the subject matter to
arbitration, whether the suit may still survive, partially or
otherwise; secondly, whether the suit, still pending before the Court,
should be stayed completely; and lastly, whether both the arbitration
and the suit proceedings could be permitted to proceed simultaneously
in accordance with law.
108. Mr. Nariman, the learned senior counsel, while relying upon the
judgments in the cases of Turnock v. Sartoris [1888 (43) Chancery
Division, 1955 SCR 862], Taunton-Collins v. Cromie & Anr., [1964 Vol.1
Weekly Law Reports 633] and Sumitomo Corporation v. CDS Financial
Services (Mauritius) Ltd. and Others [(2008) 4 SCC 91] again
emphasized that the parties to the agreement have to be parties to the
suit and also that the cause of action cannot be bifurcated unless
there was a specific provision in the 1996 Act itself permitting such
bifurcation or splitting of cause of action. He also contended that
there is no provision like Sections 21 and 24 of the 1940 Act in the
1996 Act and thus, it supports the view that bifurcation of cause of
action is impermissible and such reference to arbitration is not
permissible.
109. In the case of Turnock (supra), the Court had stated that it was
not right to cut up that litigation into two actions, one to be tried
before the arbitrator and the other to be tried elsewhere, as in that
case matters in respect of which the damages were claimed by the
plaintiff could not be referred to arbitration because questions
arising as to the construction of the agreement and provisions in the
lease deed were involved and they did not fall within the power of the
arbitrator in face of the arbitration agreement. In the case of
Taunton-Collins (supra), the Court again expressed the view that it
was undesirable that there should be two proceedings before two
different tribunals, i.e., the official referee and an Arbitrator, as
they may reach inconsistent findings.
110. This Court dealt with the provisions of the 1940 Act, in the
case of Anderson Wright Ltd. v. Moran & Company [1955 SCR 862], and
described the conditions to be satisfied before a stay can be granted
in terms of Section 34 of the 1940 Act. The Court also held that it
was within the jurisdiction of the Court to determine a question
whether the plaintiff was a party to the contract containing the
arbitration clause or not. Still in the case of Sumitomo Corporation
(supra), this Court primarily declined the reference to arbitration
for the reason that the disputes stated in the petition did not fall
within the ambit of the arbitration clause contained in the agreement
between the parties and also that the Joint Venture Agreement did not
itself contain a specific arbitration clause. An observation was also
made in paragraph 20 of the judgment that the ‘party’ would mean ‘the
party to the judicial proceeding should be a party to the arbitration
agreement.
111. It will be appropriate to refer to the contentions of Mr. Salve,
the learned senior counsel. According to him, reference, even of the
non-signatory party, could be made to arbitration and upon such
reference the proceedings in an action before the Court should be
stayed. The principle of bifurcation of cause of action, as
contemplated under the CPC, cannot stricto sensu apply to Section 45
of the 1996 Act in view of the non-obstante language of the Section.
He also contended that parties or issues, even if outside the scope of
the arbitration agreement, would not per se render the arbitration
clause inoperative. Even if there is no specific provision for
staying the proceedings in the suit under the 1996 Act, still in
exercise of its inherent powers, the Court can direct stay of the suit
proceedings or pass such other appropriate orders as the court may
deem fit.
112. We would prefer to first deal with the precedents of this Court
cited before us. As far as Sumitomo Corporation (supra) is concerned,
it was a case dealing with the matter where the proceedings under
Section 397-398 of the Companies Act had been initiated and the
Company Law Board had passed an order. Whether the appeal against
such order would lie to the High Court was the principal question
involved in that case. The denial of arbitration reference, as
already noticed, was based upon the reasoning that disputes related to
the joint venture agreement to which the parties were not signatory
and the said agreement did not even contain the arbitration clause.
On the other hand, it was the other agreement entered into by
different parties which contained the arbitration clause. As already
noticed, in paragraph 20, the Court had observed that a party to an
arbitration agreement has to be a party to the judicial proceedings
and then alone it will fall within the ambit of Section 2(h) of the
1996 Act. As far as the first issue is concerned, we shall shortly
proceed to discuss it when we discuss the merits of this case, in
light of the principles stated in this judgment. However, the
observations made by the learned Bench in the case of Sumitomo
Corporation (supra) do not appear to be correct. Section 2(h) only
says that ‘party’ means a party to an arbitration agreement. This
expression falls in the Chapter dealing with definitions and would
have to be construed along with the other relevant provisions of the
Act. When we read Section 45 in light of Section 2(h), the
interpretation given by the Court in the case of Sumitomo Corporation
(supra) does not stand to the test of reasoning. Section 45 in
explicit language permits the parties who are claiming through or
under a main party to the arbitration agreement to seek reference to
arbitration. This is so, by fiction of law, contemplated in the
provision of Section 45 of the 1996 Act.
113. We have already discussed above that the language of Section 45
is incapable of being construed narrowly and must be given expanded
meaning to achieve the twin objects of arbitration, i.e., firstly, the
parties should be held to their bargain of arbitration and secondly,
the legislative intent behind incorporating the New York Convention as
part of Section 44 of the Act must be protected. Moreover, paragraph
20 of the judgment of Sumitomo Corporation (supra) does not state any
principle of law and in any event it records no reasons for arriving
at such a conclusion. In fact, that was not even directly the issue
before the Court so as to operate as a binding precedent. For these
reasons, respectfully but without hesitation, we are constrained to
hold that the conclusion or the statement made in paragraph 20 of this
judgment does not enunciate the correct law.
Scope of jurisdiction while referring the parties to arbitration
114. An application for appointment of arbitral tribunal under
Section 45 of the 1996 Act would also be governed by the provisions of
Section 11(6) of the Act. This question is no more res integra and
has been settled by decision of a Constitution Bench of seven Judges
of this Court in the case of SBP and Co. v. Patel Engineering Ltd. and
Anr. [(2005) 8 SCC 618], wherein this Court held that power exercised
by the Chief Justice is not an administrative power. It is a judicial
power. It is a settled principle that the Chief Justice or his
designate Judge will decide preliminary aspects which would attain
finality unless otherwise directed to be decided by the arbitral
tribunal. In para 39 of the judgment, the Court held as under :
“39. It is necessary to define what exactly the Chief
Justice, approached with an application under Section 11 of
the Act, is to decide at that stage. Obviously, he has to
decide his own jurisdiction in the sense whether the party
making the motion has approached the right High Court. He
has to decide whether there is an arbitration agreement, as
defined in the Act and whether the person who has made the
request before him, is a party to such an agreement. It is
necessary to indicate that he can also decide the question
whether the claim was a dead one; or a long-barred claim
that was sought to be resurrected and whether the parties
have concluded the transaction by recording satisfaction of
their mutual rights and obligations or by receiving the
final payment without objection. It may not be possible at
that stage, to decide whether a live claim made, is one
which comes within the purview of the arbitration clause.
It will be appropriate to leave that question to be decided
by the Arbitral Tribunal on taking evidence, along with the
merits of the claims involved in the arbitration. The Chief
Justice has to decide whether the applicant has satisfied
the conditions for appointing an arbitrator under Section
11(6) of the Act. For the purpose of taking a decision on
these aspects, the Chief Justice can either proceed on the
basis of affidavits and the documents produced or take such
evidence or get such evidence recorded, as may be
necessary. We think that adoption of this procedure in the
context of the Act would best serve the purpose sought to
be achieved by the Act of expediting the process of
arbitration, without too many approaches to the court at
various stages of the proceedings before the Arbitral
Tribunal.”
115. This aspect of the arbitration law was explained by a two Judge
Bench of this Court in the case of Shree Ram Mills Ltd. v. Utility
Premises (P) Ltd. [(2007) 4 SCC 599] wherein, while referring to the
judgment in SBP & Co. (supra) particularly the above paragraph, this
Court held that the scope of order under Section 11 of the 1996 Act
would take in its ambit the issue regarding territorial jurisdiction
and the existence of the arbitration agreement. The Court noticed
that if these issues are not decided by the Chief Justice or his
designate, there would be no question of proceeding with the
arbitration. It held as under:
“27…Thus, the Chief Justice has to decide about the
territorial jurisdiction and also whether there exists an
arbitration agreement between the parties and whether such
party has approached the court for appointment of the
arbitrator. The Chief Justice has to examine as to whether
the claim is a dead one or in the sense whether the parties
have already concluded the transaction and have recorded
satisfaction of their mutual rights and obligations or
whether the parties concerned have recorded their
satisfaction regarding the financial claims. In examining
this if the parties have recorded their satisfaction
regarding the financial claims, there will be no question
of any issue remaining. It is in this sense that the Chief
Justice has to examine as to whether there remains anything
to be decided between the parties in respect of the
agreement and whether the parties are still at issue on any
such matter. If the Chief Justice does not, in the strict
sense, decide the issue, in that event it is for him to
locate such issue and record his satisfaction that such
issue exists between the parties. It is only in that sense
that the finding on a live issue is given. Even at the cost
of repetition we must state that it is only for the purpose
of finding out whether the arbitral procedure has to be
started that the Chief Justice has to record satisfaction
that there remains a live issue in between the parties. The
same thing is about the limitation which is always a mixed
question of law and fact. The Chief Justice only has to
record his satisfaction that prima facie the issue has not
become dead by the lapse of time or that any party to the
agreement has not slept over its rights beyond the time
permitted by law to agitate those issues covered by the
agreement. It is for this reason that it was pointed out in
the above para that it would be appropriate sometimes to
leave the question regarding the live claim to be decided
by the Arbitral Tribunal. All that he has to do is to
record his satisfaction that the parties have not closed
their rights and the matter has not been barred by
limitation. Thus, where the Chief Justice comes to a
finding that there exists a live issue, then naturally this
finding would include a finding that the respective claims
of the parties have not become barred by limitation.
(emphasis supplied)”
116. Thus, the Bench while explaining the judgment of this Court in
SBP & Co. (supra) has stated that the Chief Justice may not decide
certain issues finally and upon recording satisfaction that prima
facie the issue has not become dead even leave it for the arbitral
tribunal to decide.
117. In National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.
[(2009) 1 SCC 267], another equi-bench of this Court after discussing
various judgments of this Court, explained SBP & Co. (supra) in
relation to scope of powers of the Chief Justice and/or his designate
while exercising jurisdiction under Section 11(6), held as follows :
“22. Where the intervention of the court is sought for
appointment of an Arbitral Tribunal under Section 11, the
duty of the Chief Justice or his designate is defined in
SBP & Co. This Court identified and segregated the
preliminary issues that may arise for consideration in an
application under Section 11 of the Act into three
categories, that is, (i) issues which the Chief Justice or
his designate is bound to decide; (ii) issues which he can
also decide, that is, issues which he may choose to decide;
and (iii) issues which should be left to the Arbitral
Tribunal to decide.
22.1. The issues (first category) which the Chief
Justice/his designate will have to decide are:
(a) Whether the party making the application has
approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether
the party who has applied under Section 11 of the
Act, is a party to such an agreement.
22.2. The issues (second category) which the Chief
Justice/his designate may choose to decide (or leave them
to the decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long-barred) claim or a
live claim.
(b) Whether the parties have concluded the
contract/transaction by recording satisfaction of
their mutual rights and obligation or by receiving
the final payment without objection.
22.3. The issues (third category) which the Chief
Justice/his designate should leave exclusively to the
Arbitral Tribunal are:
(i) Whether a claim made falls within the arbitration
clause (as for example, a matter which is reserved
for final decision of a departmental authority and
excepted or excluded from arbitration).
(ii) Merits or any claim involved in the arbitration.”
118. We may notice that at first blush, the judgment in the case of
Shree Ram Mills (supra) is at some variance with the judgment in the
case of National Insurance Co. Ltd. (supra) but when examined in
depth, keeping in view the judgment in the case of SBP & Co. (supra)
and provisions of Section 11(6) of the 1996 Act, both these judgments
are found to be free from contradiction and capable of being read in
harmony in order to bring them in line with the statutory law declared
by the larger Bench in SBP & Co. (supra). The expressions “Chief
Justice does not in strict sense decide the issue” or “is prima facie
satisfied”, will have to be construed in the facts and circumstances
of a given case. Where the Chief Justice or his designate actually
decides the issue, then it can no longer be prima facie, but would be
a decision binding in law. On such an issue, the Arbitral Tribunal
will have no jurisdiction to re-determine the issue. In the case of
Shree Ram Mills (supra), the Court held that the Chief Justice could
record a finding where the issue between the parties was still alive
or was dead by lapse of time. Where it prima facie found the issue to
be alive, the Court could leave the question of limitation and also
open to be decided by the arbitral tribunal.
119. The above expressions are mere observations of the Court and do
not fit into the contours of the principle of ratio decidendi of the
judgment. The issues in regard to validity or existence of the
arbitration agreement, the application not satisfying the ingredients
of Section 11(6) of the 1996 Act and claims being barred by time etc.
are the matters which can be adjudicated by the Chief Justice or his
designate. Once the parties are heard on such issues and the matter
is determined in accordance with law, then such a finding can only be
disturbed by the Court of competent jurisdiction and cannot be
reopened before the arbitral tribunal. In SBP & Co. (supra), the
Seven Judge Bench clearly stated, “the finality given to the order of
the Chief Justice on the matters within his competence under Section
11 of the Act are incapable of being reopened before the arbitral
tribunal”. Certainly the Bench dealing with the case of Shree Ram
Mills (supra) did not intend to lay down any law in direct conflict
with the Seven Judge Bench judgment in SBP & Co. (supra). In the
reasoning given in Shree Ram Mills’ case, the Court has clearly stated
that matters of existence and binding nature of arbitration agreement
and other matters mentioned therein are to be decided by the Chief
Justice or his designate and the same is in line with the judgment of
this Court in the case of SBP & Co. (supra). It will neither be
permissible nor in consonance with the doctrine of precedent that
passing observations by the Bench should be construed as the law while
completely ignoring the ratio decidendi of that very judgment. We may
also notice that the judgment in Shree Ram Mills (supra) was not
brought to the notice of the Bench which pronounced the judgment in
the case of National Insurance Co. Ltd. (supra).
120. As far as the classification carved out by the Court in the case
of National Insurance Co. Ltd. (supra) are concerned, it draws its
origin from paragraph 39 of the judgment in the case of SBP & Co.
(supra) wherein the Constitution Bench of the Court had observed that
“it may not be possible at that stage to decide whether a live claim
made is one which comes within the purview of the arbitration clause.
It will be more appropriate to leave the seriously disputed questions
to be decided by the Arbitral Tribunal on taking evidence along with
the merits of the claim, subject matter of the arbitration.”
121. The foundation for category (2) in para 22 of the National
Insurance Company Ltd. (supra) is directly relatable to para 39 of the
judgment of this court in SBP & Co. (supra) and matters falling in
that category are those which, depending on the facts and
circumstances of a given case, could be decided by the Chief Justice
or his designate or even may be left for the decision of the
arbitrator, provided there exists a binding arbitration agreement
between the parties. Similar is the approach of the Bench in the case
of Shree Ram Mills (supra) and that is why in paragraph 27 thereof,
the Court has recorded that it would be appropriate sometimes to leave
the question regarding the claim being alive to be decided by the
arbitral tribunal and the Chief Justice may record his satisfaction
that parties have not closed their rights and the matter has not been
barred by limitation.
122. As already noticed, the observations made by the Court have to
be construed and read to support the ratio decidendi of the judgment.
Observations in a judgment which are stared upon by the judgment of a
larger bench would not constitute valid precedent as it will be hit by
the doctrine of staire decisis. In the case of the Shri Ram Mills
(supra) surely the Bench did not intend to lay down the law or state a
proposition which is directly in conflict with the judgment of the
Constitution Bench of this Court in the case of SBP & Co. (supra).
123. We have no reason to differ with the classification carved out
in the case of National Insurance Co. (supra) as it is very much in
conformity with the judgment of the Constitution Bench in the case of
SBP (supra). The question that follows from the above discussion is
as to whether the views recorded by the judicial forum at the
threshold would be final and binding on the parties or would they
constitute the prima facie view. This again has been a matter of some
debate before this Court. A three Judge Bench of this Court in the
case of Shin-Etsu Chemical Co. Ltd. v. M/s. Aksh Optifibre Ltd. & Anr.
[(2005) 7 SCC 234] was dealing with an application for reference under
Section 45 of the 1996 Act and consequently, determination of validity
of arbitration agreement which contained the arbitration clause
governed by the ICC Rules in Tokyo, Japan. The appellant before this
Court had terminated the agreement in that case. The respondent filed
a suit claiming a decree of declaration and injunction against the
appellant for cancellation of the agreement which contained the
arbitration clause. In that very suit, the appellant also prayed that
this long term sale and purchase agreement, which included the
arbitration clause be declared void ab initio, inoperative and
incapable of being performed on the ground that the said agreement
contained unconscionable, unfair and unreasonable terms; was against
public policy and was entered into under undue influence. The
appellant had also filed an application under Section 8 of the 1996
Act for reference to arbitration. Some controversy arose before the
Trial Court as well as before the High Court as to whether the
application was one under Section 8 or Section 45 but when the matter
came up before this Court, the counsel appearing for both the parties
rightly took the stand that only Section 45 was applicable and Section
8 had no application. In this case, the Court was primarily concerned
and dwelled upon the question whether an order refusing reference to
arbitration was appealable under Section 50 of the 1996 Act and what
would be its effect.
124. We are not really concerned with the merits of that case but
certainly are required to deal with the limited question whether the
findings recorded by the referring Court are of final nature, or are
merely prima facie and thus, capable of being re-adjudicated by the
arbitral tribunal. Where the Court records a finding that the
agreement containing the arbitration clause or the arbitration clause
itself is null and void, inoperative or incapable of being performed
on merits of the case, it would decline the reference. Then the
channel of legal remedy available to the party against whom the
reference has been declined would be to take recourse to an appeal
under Section 50(1)(a) of the 1996 Act. The Arbitral Tribunal in such
situations does not deliver any determination on the issues in the
case. However, in the event that the referring Court deals with such
an issue and returns a finding that objections to reference were not
tenable, thus rejecting, the plea on merits, then the issue arises as
to whether the arbitral tribunal can re-examine the question of the
agreement being null and void, inoperative or incapable of
performance, all over again. Sabharwal, J., after deliberating upon
the approaches of different courts under the English and the American
legal systems, stated that both the approaches have their own
advantages and disadvantages. The approach whereby the courts finally
decide on merits in relation to the issue of existence and validity of
the arbitration agreement would result to a large extent in avoiding
delay and increased cost. It would not be for the parties to wait for
months or years before knowing the final outcome of the disputes
regarding jurisdiction alone. Then, he held as follows :
“56. I am of the view that the Indian Legislature has
consciously adopted a conventional approach so as to save
the huge expense involved in international commercial
arbitration as compared to domestic arbitration.
57. In view of the aforesaid discussion, I am of the view
that under Section 45 of the Act, the determination has to
be on merits, final and binding and not prima facie.”
125. However, Srikrishna, J. took a somewhat different view and
noticing the truth that there is nothing in Section 45 to suggest that
a finding as to the nature of the arbitration agreement has to be ex
facie or prima facie, observed that if it were to be held that the
finding of the court under Section 45 should be a final, determinative
conclusion, then it is obvious that until such a pronouncement is
made, the arbitral proceedings would have to be in limbo. So, he held
as follows :
“105. I fully agree with my learned Brother's view that the
object of dispute resolution through arbitration, including
international commercial arbitration, is expedition and
that the object of the Act would be defeated if proceedings
remain pending in the court even after commencing of the
arbitration. It is precisely for this reason that I am
inclined to the view that at the pre-reference stage
contemplated by Section 45, the court is required to take
only a prima facie view for making the reference, leaving
the parties to a full trial either before the Arbitral
Tribunal or before the court at the post-award stage.”
126. Dharmadhikari, J., the third member of the Bench, while agreeing
with the view of Srikrishna, J. and noticing, “Where a judicial
authority or the court refuses to make a reference on the grounds
available under Section 45 of the Act, it is necessary for the
judicial authority or the court which is seized of the matter to pass
a reasoned order as the same is subject to appeal to the appellate
court under Section 50(1)(a) of the Act and further appeal to this
Court under sub-section (2) of the said section.” expressed no view on
the issue of prima facie or finality of the finding recorded on the
pre-reference stage, he left the question open in the following
paragraph :
“112. Whether such a decision of the judicial authority or
the court, of refusal to make a reference on grounds
permissible under Section 45 of the Act would be subjected
to further re-examination before the Arbitral Tribunal or
the court in which eventually the award comes up for
enforcement in accordance with Section 48(1)(a) of the Act,
is a legal question of sufficient complexity and in my
considered opinion since that question does not directly
arise on the facts of the present case, it should be left
open for consideration in an appropriate case where such a
question is directly raised and decided by the court.”
127. The judgment of this Court in Shin-Etsu Chemical Co. Ltd.
(supra) preceded the judgment of this Court in the case of SBP & Co.
(supra). Though the Constitution Bench in the latter case referred to
this judgment in paragraph 89 of the judgment but did not discuss the
merits or otherwise of the case presumably for absence of any
conflict. However, as already noticed, the Court clearly took the view
that the findings returned by the Chief Justice while exercising his
judicial powers under Section 11 relatable to Section 8 are final and
not open to be questioned by the arbitral tribunal. Sections 8 and 45
of the 1996 Act are provisions independent of each other. But for the
purposes of reference to arbitration, in both cases, the applicant has
to pray for a reference before the Chief Justice or his designate in
terms of Section 11 of the 1996 Act. We may refer to the exact
terminology used by the larger Bench in SBP & Co. (supra) in relation
to the finality of such matters, as reflected in para 12 of the
judgment which reads as under :
“12. Section 16 of the Act only makes explicit what is even
otherwise implicit, namely, that the Arbitral Tribunal
constituted under the Act has the jurisdiction to rule on
its own jurisdiction, including ruling on objections with
respect to the existence or validity of the arbitration
agreement. Sub-section (1) also directs that an arbitration
clause which forms part of a contract shall be treated as
an agreement independent of the other terms of the
contract. It also clarifies that a decision by the Arbitral
Tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.
Sub-section (2) of Section 16 enjoins that a party wanting
to raise a plea that the Arbitral Tribunal does not have
jurisdiction, has to raise that objection not later than
the submission of the statement of defence, and that the
party shall not be precluded from raising the plea of
jurisdiction merely because he has appointed or
participated in the appointment of an arbitrator. Sub-
section (3) lays down that a plea that the Arbitral
Tribunal is exceeding the scope of its authority, shall be
raised as soon as the matter alleged to be beyond the scope
of its authority is raised during the arbitral proceedings.
When the Tribunal decides these two questions, namely, the
question of jurisdiction and the question of exceeding the
scope of authority or either of them, the same is open to
immediate challenge in an appeal, when the objection is
upheld and only in an appeal against the final award, when
the objection is overruled. Sub-section (5) enjoins that if
the Arbitral Tribunal overrules the objections under sub-
section (2) or (3), it should continue with the arbitral
proceedings and make an arbitral award. Sub-section (6)
provides that a party aggrieved by such an arbitral award
overruling the plea on lack of jurisdiction and the
exceeding of the scope of authority, may make an
application on these grounds for setting aside the award in
accordance with Section 34 of the Act. The question, in the
context of sub-section (7) of Section 11 is, what is the
scope of the right conferred on the Arbitral Tribunal to
rule upon its own jurisdiction and the existence of the
arbitration clause, envisaged by Section 16(1), once the
Chief Justice or the person designated by him had appointed
an arbitrator after satisfying himself that the conditions
for the exercise of power to appoint an arbitrator are
present in the case. Prima facie, it would be difficult to
say that in spite of the finality conferred by sub-section
(7) of Section 11 of the Act, to such a decision of the
Chief Justice, the Arbitral Tribunal can still go behind
that decision and rule on its own jurisdiction or on the
existence of an arbitration clause. It also appears to us
to be incongruous to say that after the Chief Justice had
appointed an Arbitral Tribunal, the Arbitral Tribunal can
turn round and say that the Chief Justice had no
jurisdiction or authority to appoint the Tribunal, the very
creature brought into existence by the exercise of power by
its creator, the Chief Justice. The argument of the learned
Senior Counsel, Mr K.K. Venugopal that Section 16 has full
play only when an Arbitral Tribunal is constituted without
intervention under Section 11(6) of the Act, is one way of
reconciling that provision with Section 11 of the Act,
especially in the context of sub-section (7) thereof. We
are inclined to the view that the decision of the Chief
Justice on the issue of jurisdiction and the existence of a
valid arbitration agreement would be binding on the parties
when the matter goes to the Arbitral Tribunal and at
subsequent stages of the proceeding except in an appeal in
the Supreme Court in the case of the decision being by the
Chief Justice of the High Court or by a Judge of the High
Court designated by him.”
(Emphasis supplied)
128. We are conscious of the fact that the above dictum of the Court
is in relation to the scope and application of Section 11 of the 1996
Act. It has been held in various judgments of this Court but more
particularly in the case of SBP (supra) which is binding on us that
before making a reference, the Court has to dispose of the objections
as contemplated under Section 8 or Section 45, as the case may be, and
wherever needed upon filing of affidavits. Thus, to an extent, the
law laid down by this Court on Section 11 shall be attracted to an
international arbitration which takes place in India as well as
domestic arbitration. This, of course, would be applicable at pre-
award stage. Thus, there exists a direct legal link, limited to that
extent.
129. We are not oblivious of the principle ‘Kompetenz kompetenz’. It
requires the arbitral tribunal to rule on its own jurisdiction and at
the first instance. One school of thought propagates that it has duly
the positive effect as it enables the arbitrator to rule on its own
jurisdiction as it widely recognized international arbitration.
However, the negative effect is equally important, that the Courts are
deprived of their jurisdiction. The arbitrators are to be not the
sole judge but first judge, of their jurisdiction. In other words, it
is to allow them to come to a decision on their own jurisdiction prior
to any court or other judicial authority and thereby limit the
jurisdiction of the national courts to review the award. The
kompetenz kompetenz rule, thus, concerned not only is the positive but
also the negative effect of the arbitration agreement. [refer
Fouchard Gaillard Goldman on International Commercial Arbitration]
130. This policy has found a favourable mention with reference to the
New York Convention in some of the countries. This is one aspect.
The more important aspect as far as Chapter I of Part II of the 1996
Act is concerned, is the absence of any provision like Section 16
appearing in Part I of the same Act. Section 16 contemplates that the
arbitrator may determine its own jurisdiction. Absence of such a
provision in Part II, Chapter I is suggestive of the requirement for
the Court to determine the ingredients of Section 45, at the threshold
itself. It is expected of the Court to answer the question of
validity of the arbitration agreement, if a plea is raised that the
agreement containing the arbitration clause or the arbitration clause
itself is null and void, inoperative or incapable of being performed.
Such determination by the Court in accordance with law would certainly
attain finality and would not be open to question by the arbitral
tribunal, even as per the principle of prudence. It will prevent
multiplicity to litigation and re-agitating of same issues over and
over again. The underlining principle of finality in Section 11(7)
would be applicable with equal force while dealing with the
interpretation of Sections 8 and 45. Further, it may be noted that
even the judgment of this Court in SBP & Co. (supra) takes a view in
favour of finality of determination by the Court despite the language
of Section 16 in Part I of the 1996 Act. Thus, there could hardly be
any possibility for the Court to take any other view in relation to
an application under Section 45 of the 1996 Act. Since, the
categorization referred to by this Court in the case of National
Insurance Company Ltd. (supra) is founded on the decision by the
larger Bench of the Court in the case of SBP & Co. (supra), we see no
reason to express any different view. The categorization falling
under para 22.1 of the National Insurance Company case (supra) would
certainly be answered by the Court before it makes a reference while
under para 22.2 of that case, the Court may exercise its discretion
and decide the dispute itself or refer the dispute to the arbitral
tribunal. Still, under the cases falling under para 22.3, the Court
is expected to leave the determination of such dispute upon the
arbitral tribunal itself. But wherever the Court decides in terms of
categories mentioned in paras 22.1 and 22.2, the decision of the Court
is unreviewable by the arbitral tribunal.
131. Another very significant aspect of adjudicating the matters
initiated with reference to Section 45 of the 1996 Act, at the
threshold of judicial proceedings, is that the finality of the
decision in regard to the fundamental issues stated under Section 45
would further the cause of justice and interest of the parties as
well. To illustratively demonstrate it, we may give an example.
Where party ‘A’ is seeking reference to arbitration and party ‘B’
raises objections going to the very root of the matter that the
arbitration agreement is null and void, inoperative and incapable of
being performed, such objections, if left open and not decided
finally at the threshold itself may result in not only parties being
compelled to pursue arbitration proceedings by spending time, money
and efforts but even the arbitral tribunal would have to spend
valuable time in adjudicating the complex issues relating to the
dispute between the parties, that may finally prove to be in vain and
futile. Such adjudication by the arbitral tribunal may be rendered
ineffective or even a nullity in the event the courts upon filing of
an award and at execution stage held that agreement between the
parties was null and void inoperative and incapable of being
performed. The Court may also hold that the arbitral tribunal had no
jurisdiction to entertain and decide the issues between the parties.
The issue of jurisdiction normally is a mixed question of law and
facts. Occasionally, it may also be a question of law alone. It will
be appropriate to decide such questions at the beginning of the
proceedings itself and they should have finality. Even when the
arbitration law in India contained the provision like Section 34 of
the 1940 Act which was somewhat similar to Section 4 of the English
Arbitration Act, 1889, this Court in the case of Anderson Wright Ltd.
(supra) took the view that while dealing with the question of grant or
refusal of stay as contemplated under Section 34 of the 1940 Act, it
would be incumbent upon the Court to decide first of all whether there
is a binding agreement for arbitration between the parties to the suit
or not. Applying the analogy thereof will fortify the view that
determination of fundamental issues as contemplated under Section 45
of the 1996 Act at the very first instance by the judicial forum is
not only appropriate but is also the legislative intent. Even, the
language of Section 45 of the 1996 Act suggests that unless the Court
finds that an agreement is null and void, inoperative and incapable of
being performed, it shall refer the parties to arbitration.
Correctness of Law stated in Sukanya
132. Though rival contentions have been raised before us on the
correctness of the judgment of this Court in Sukanya Holdings Pvt.
Ltd. (supra), Mr. Salve vehemently tried to persuade us to hold that
this judgment does not state the correct exposition of law and to that
effect it needs to be clarified by this Court in the present case. On
the contrary, Mr. Nariman argued that this judgment states the correct
law and, in fact, the principles stated should be applied to the
present case.
133. The ambit and scope of Section 45 of the 1996 Act, we shall be
discussing shortly but at this stage itself, we would make it clear
that it is not necessary for us to examine the correctness or
otherwise of the judgment in the case of Sukanya (supra). This we say
for varied reasons. Firstly, Sukanya was a judgment of this Court in
a case arising under Section 8 Part I of the 1996 Act while the
present case relates to Section 45 Part II of the Act. As such that
case may have no application to the present case. Secondly, in that
case the Court was concerned with the disputes of a partnership
concern. A suit had been filed for dissolution of partnership firm
and accounts also challenging the conveyance deed executed by the
partnership firm in favour of one of the parties to the suit. The
Court noticing the facts of the case emphasized that where the subject
matter of the suit includes subject matter for arbitration agreement
as well as other disputes, the Court did not refer the matter to
arbitration in terms of Section 8 of the Act. In the case in hand,
there is a mother agreement and there are other ancillary agreements
to the mother agreement. It is a case of composite transaction
between the same parties or the parties claiming through or under them
falling under Section 45 of the Act. Thus, the dictum stated in para
13 of the judgment of Sukanya would not apply to the present case.
Thirdly, on facts, the judgment in Sukanya’s case, has no application
to the case in hand.
134. Thus, we decline to examine the merit or otherwise of this
contention.
On Merits
135. The Corporate structure of the companies in the present case has
already been stated by us in paragraph 7 which we need not refer here
again in detail. Suffice it to note that Kocha group had floated a
company and incorporated the same under the Indian laws, which was
carrying on the business of manufacture of chlorination equipment
under the name and style ‘Chloro Control India Private Limited’. They
were negotiating with Severn Trent Water Purification Inc. for an
international joint venture agreement to deal with the manufacture,
distribution and sale of gas chlorination equipment and electro-
chlorination equipment, “Hypogen Series 3300” etc. On this basis,
they had entered into a joint venture agreement which was signed
between them. The joint venture agreement contemplated that the
business shall be carried on under the name and style of Capital
Controls India Ltd. Private Limited. The agreements gave 50 per cent
shareholding to the foreign collaborators which were to be equally
divided between Capital Control (Del) Company Inc. and Capital Control
Company Inc. These joint venture agreements were executed between the
parties on 16th November, 1995 but the joint venture company had been
incorporated on 14th November, 1995 itself. Severn Trent Services
(Del) Inc. is the holding company of the companies which have entered
into the joint venture agreement for floating both, the Capital
Control India Ltd. as well as Severn Trent De Nora LLC. The disputes
had arisen actually between the Kocha Group on the one hand and Severn
Trent Water Purification Inc. on the other, and the disputes were
mainly with regard to Capital Control (India) Pvt. Ltd. Inc. Now, we
must note, even at the cost of repetition, the parties signatory to
each of these agreements and we must also note which of these
agreements did not contain arbitration clause. Shareholders Agreement
dated 16th November, 1995 was executed between the Capital Control
(Delaware) Company Inc. and Chloro Control India Private Ltd. Capital
Control Delaware Company Inc. was a subsidiary of Severn Trent
Services (Delaware) Inc. and was formed on 21st September, 1994.
Capital Control Company Inc. came to be merged with Capital Control
(Delaware) Company Inc. in March 1994. As a result the Capital
Control Delaware Company was no more in existence. Thus, the
reference to Capital Control Company Inc. includes reference to
Capital Control Company Inc. as well as Capital Control (Delaware)
Company Inc.
136. The corporate structure of the Companies involved in the present
litigation clearly shows that name of Capital Control Company Inc.,
incorporated in the year 1994, was changed to Severn Trent Water
Purification Inc. with effect from April, 2002. Thus, both these
companies together were subsidiaries of the holding company Severn
Trent Services (Delaware) Inc. The joint venture agreement was
executed between Chloro Control (India) Pvt. Ltd. and the erstwhile
Capital Control Company Inc. resulting into creation of the joint
venture company, Capital Control (India) Pvt. Ltd. This is the basic
structure which one has to make clear before examining the agreements
and their impact. The negotiations between the appellant and the
respondent nos.1 and 2 or their holding companies were going on since
1990 and ultimately culminated into execution of the joint venture
agreement. In terms of the Shareholders Agreement, the authorized
share capital of the company was five million rupees consisting of
equity shares of Rs.10/- each. Initially the parties had decided to
issue equity capital of 1,50,000 equity shares of Rs.10/- each with
50% of the initial equity to Capital Controls and the remaining 50% to
Chloro Controls. It is necessary to refer in some detail the relevant
clauses of this Agreement as this agreement is the ‘Principal or the
Mother Agreement’. All other agreements were executed in furtherance
to and for achieving the purpose of this Agreement. This agreement
notices that Capital Control was engaged in the design, manufacture,
import, marketing, export etc. of gas and electro-chlorination
equipments. The company was to be registered and as is evident, in
furtherance to the negotiations, steps for registration of the said
company had been taken and finally it came to be incorporated on 14th
November, 1995. The main object of the joint venture company was the
manufacture, service and sale of the products. In terms of the
Principal Agreement, establishment of a plant, management of the
company, appointment of Directors, implementation of decisions of the
Board of Directors, appointment or re-appointment of the Managing
Director, dividend policy, loans, financial information, trademarks,
transfer of shares, sale-purchase of chlorination equipment, assets,
government approvals, performance of Chloro Controls, trademark,
service of notices, modifications, severability and arbitration,
settlement of disputes by arbitration etc. were the matters
specifically provided for under this agreement. A very significant
feature of this contract was that the Kocha Group was put under an
injunction to not engage directly or indirectly or be financially
interested in the manufacture, sale or distribution of chlorination
equipment and related products, which is similar to those manufactured
or sold by the company during the term of the agreement. Similarly, a
restriction was also placed upon Capital Controls and even its holding
companies to not directly or indirectly engage in or to be financially
interested in the manufacture, sale or distribution in India of
products manufactured or sold by the company, during the term of the
agreement.
137. The Principal Agreement specifically referred to various
agreements or even terms and conditions thereof. Clause 7 of the
agreement provided for execution of the International Distributor
Agreement which was Appendix II to this Agreement. The Financial and
Technical Know-how Licence Agreement was executed in furtherance to
clause 14 thereof. Similarly, the Trademark Registered User License
Agreement was required to be executed between the parties in terms of
clause 15 of this Agreement. Other terms and conditions of the
Principal Agreement referred to management of the company by
appointment or reappointment of Directors or Managing Directors
inasmuch as Clause 8.6 contemplated execution of the agreement which
was appended as Appendix III. Still, certain other clauses of the
Principal Agreement specifically dealt with the sale of goods
manufactured by the joint venture company, nationally and
internationally. This resulted in signing of the International
Distribution and Export Sales Agreement between the parties.
138. All the five agreements signed by the parties were primarily to
fulfill their obligations and ensure performance of this Principal
Agreement. The Supplementary Collaboration Agreement executed in
August 1997 was only to comply with the conditions of the Government
Approval which were granted vide letter dated 11th October, 1996, as
amended by letter dated 21st April, 1997. The companies which
executed the various agreements were the companies signatory to the
Principal Agreement or their holding companies or the companies
belonging to the respondent group in which they had got merged for the
purposes of attaining effective designing, manufacturing, import,
export and marketing of the agreed chlorinated products.
139. All the subsequent agreements were, therefore, ancillary or
incidental agreements to the Principal Agreement. Thus, the joint
venture entered between the parties had different facets. Its
foundation was provided under the Principal Agreement but all the
agreed terms could only be fulfilled by performance of the ancillary
agreements. If one segregates the Principal Agreement from the rest,
the subsequent agreements would be rendered ineffective. If the
agreed goods were not manufactured in India with the technical know-
how of the respondent No. 1 company and the joint venture company was
not incorporated, the question of the Distribution Agreement, Managing
Director Agreement, Financial and Technical Know-How License Agreement
or the Export Sales Agreement would not have even arisen, in any
event. Conversely, if the ancillary agreements were not performed in
a collective manner, the Principal Agreement would be of no
consequence. In other words, it was one composite transaction for
attaining the purpose of business of the joint venture company. All
these agreements are so intrinsically connected to each other that it
is neither possible nor probable to imagine the execution and
implementation of one without the collective performance of all the
other agreements. The intention of the parties was clear that all
these agreements were being executed as integral parts of a composite
transaction. It can safely be covered under the principle of
‘agreements within an agreement’. For instance, the Financial and
Technical Know-How License Agreement not only finds a specific mention
in the Principal Agreement but its contents also are referable to the
clauses of the Principal Agreement. The Financial and Technical Know-
How License Agreement was Appendix III to the Principal Agreement and
the details of the goods which were contemplated to be manufactured,
distributed and sold under the Principal Agreement had been specified
in Appendix I of the Financial and Technical Know-How Agreement. If
the latter agreement was not there, the Principal Agreement between
the parties would have remained incomplete and the parties would have
been at a disadvantage to know as to what goods were to be
manufactured and what goods could not have been manufactured. The
Principal Agreement referred either specifically or by necessary
implication to all other agreements. They were inter-dependent for
their performance and one could not be read and understood completely
without the aid of the other.
140. Having held that all these other agreements as well as the
mother/ principal agreement were part of a composite transaction to
facilitate implementation of the principal agreement and that was in
reality the intention of the parties, now, we will deal with the
question of parties to the principal agreement. When the mother
agreement dated 16th November, 1995 was executed between the parties,
presumably the Certificate of Incorporation of Capital Control India
Private Ltd. had not been issued to the parties though it had been
incorporated on 14th November, 1995. If the company had been duly
incorporated and the Certificate of Incorporation was available to the
parties, then there could be no reason for the parties to propose in
the Principal Agreement that the joint venture company would be in the
name of Capital Controls India Private Ltd. or any other name which
would be mutually agreed between the parties. The reference to joint
venture company, thus, was not by a specific name. Both the parties
have signed this agreement with the clear intention that the company,
Capital Control India Pvt. Ltd., will be the joint venture company.
Thus, non-mentioning of the name of the joint venture company in the
principal agreement, though it had been incorporated on 14th November,
1995, is immaterial and inconsequential in face of intention of the
parties appearing from the written documents on record. Once the
Principal Agreement was signed, all other agreements had to be
executed by or in favour of the joint venture company. That is how
to all these other agreements the joint venture company i.e. Capital
Control India Pvt. Ltd. is a party. It further completely supports
the view that non-mentioning of the name of Capital Control India Pvt.
Ltd. can hardly affect the findings of the Court. With regard to the
management of the joint venture company and implementation of the
Principal Agreement, the parties had entered into the Managing
Director Agreement dated 16th November, 1995. This agreement was
signed by each of the concerned partners i.e. by Capital Control India
Pvt. Ltd., respondent No. 5 and the Kocha Group, respondent No. 9.
This agreement provided as to how the Managing Directors were to be
appointed or reappointed and how the meeting of the Board of Directors
of the company were to be conducted in accordance with law and the
terms of the Mother Agreement. This agreement came to be signed
between the joint venture company and the Kocha Group.
141. Other aspect of performance of the Principal Agreement was the
Financial and Technical Know-How License Agreement. This agreement
had been signed between the Capital Control Company Inc., subsequently
known as Severn Trent Water Purification, respondent No. 1, one the
one hand and the joint venture company, respondent No. 5. Severn
Trent Water Purification Inc. is the holding company of the joint
venture to the extent of its share holding and is the company into
which Capital Control (Del.) Co. Inc. had merged. Severn Trent
Water Purification Inc. is thus, the resultant product of Capital
Control (Del.) Company Inc. being merged into Capital Control Company
Inc. and its name was changed with effect from 1st April, 2002. All
these three companies had at the relevant time been or when came into
existence were and are subsidiaries of Severn Trent (Del.) Inc. The
requisite technical know-how was possessed by these companies and was
agreed to be imparted in favour of the joint venture company, in
furtherance to and as per the terms and conditions contained in the
Principal Agreement.
142. Similarly, Severn Trent Water Purification Inc. had entered into
an International Distributor Agreement and an Export Sales Agreement
with the joint venture to facilitate the sale, marketing and export of
goods, under these two different agreements. Thus, it is crystal
clear that all the six material agreements had been signed by some
parties or their holding companies or the companies into which the
signatory company had merged. None of these companies is either
stranger to the transaction or not an appropriate party. The parties
who have signed the agreements could alone give rights or benefits to
the joint venture company and they, in turn, were the companies
descendants in interest or the subsidiaries of Severn Trent Services
Del. Inc.
143. May be all the parties to the lis are not signatory to all the
agreements in question, but still they would be covered under the
expression ‘claiming through or under’ the parties to the agreement.
The interests of these companies are not adverse to the interest of
the principal company and/or the joint venture company. On the
contrary, they derive their basic interest and enforceability from the
Mother Agreement and performance of all the other agreements by
respective parties had to fall in line with the contents of the
Principal Agreement. In view of the settled position of law that we
have indicated above, we will have no hesitation in holding that these
companies claim their interest and invoke the terms of the agreement
or defend the action in the capacity of a ‘party claiming through or
under’ the parties to the agreement.
ARBITRATION
144. When we refer to all the six relevant agreements in relation to
the arbitration clause, the Shareholders Agreement, the Financial and
Technical Know-How License Agreement and the Export Sales Agreement
contained the arbitration clause while the other three agreements,
i.e., International Distributor Agreement, the Managing Director’s
Agreement and the Trademark Registered User License Agreement did not
contain any such arbitration clause. The arbitration clause contained
in the Principal Agreement in clause 30 has been reproduced above. It
requires that any dispute or difference arising under or in connection
with that agreement which could not be settled by friendly negotiation
and agreement between the parties, would be finally settled by
arbitration conducted in accordance with the Rules of ICC. This
clause is widely worded. It is comprehensive enough to include the
disputes arising ‘under and in connection with’ the agreement. The
word ‘connection’ has been added by the parties to expand the scope of
the disputes under the agreements. The intention to make it more
comprehensive is writ large from the language of the agreement and
particularly clause 30 of the Mother Agreement. It is useful to notice
that the agreement has to be construed and interpreted in accordance
with laws of the Union of India, as consented by the parties.
145. The expression ‘connection’ means a link or relationship between
people or things or the people with whom one has contact (Concise
Oxford Dictionary (Indian Edition). ‘Connection’ means act of
uniting; state of being united; a relative; relation between things
one of which is bound up with (Law Lexicon 2nd Edn. 1997).
146. Thus, even the dictionary meaning of this expression is
liberally worded. It implies expansion in its operation and effect
both. Connection can be direct or remote but it should not be
fanciful or marginal. In other words, there should be relevant
connection between the dispute and the agreement by specific words or
by necessary implication like reference to all other agreements in one
(principal) agreement. The expression appearing in clause 30 has to
be given a meaningful interpretation particularly when the Principal
Agreement itself, by specific words or by necessary implication,
refers to all other agreements. This would imply that the other
agreements originate from the Principal Agreement and hence, its terms
and conditions would be applicable to those agreements. There are
three agreements, as already noticed, which do not contain any
specific arbitration clause. Both the Managing Director Agreement and
the International Distributor Agreement directly relate to the
Principal Agreement stating the manner in which the affairs would be
managed and the Managing Directors be appointed. At the same time,
the International Distributor Agreement is executed between the Severn
Trent Water Purification Inc. the erstwhile Capital Control Company
Inc. and the Capital Control India Private Ltd., the joint venture
company. Firstly, the chances of dispute between the same group of
companies were remote and secondly these were the companies which were
held by the same management. The parties had also agreed to have
relationship as that of seller and distributor to make the joint
venture company a success. The interest of Capital Controls Company
Inc. and that of the Capital Control India Private Ltd., to the extent
of the former’s share, were common. Furthermore, this being an
integral part of the Principal Agreement would, in our opinion, be
squarely covered by the arbitration clause contained in the
Mother/Shareholders Agreement. This agreement has been specifically
referred in clause 7 of the Mother/Shareholders Agreement. Not only
that there is incorporation by reference of International Distribution
Agreement in the Mother/Shareholders Agreement but, in fact, it is an
integral part thereof.
147. Another aspect of the case is that all these agreements were
executed simultaneously on 16th November, 1995 which fact fully
supports the view that the parties intended to have all these
agreements as a composite transaction. Furthermore, when the parties
signed the Supplementary Collaboration Agreement in August 1997, by
that time all these agreements had not only been signed and understood
by the parties but, in fact, had also been acted upon.
148. In the Supplementary Collaboration Agreement, the parties re-
confirmed the existence of the joint venture agreement dated 16th
November, 1995 and made a specific stipulation that both the parties
confirmed to adhere by the terms and conditions stipulated by the
Government of India in its letters dated 11th October, 1996, amended
on 21st April, 1997. This was signed by Madhusudan B. Kocha, member
of the Kocha group on behalf of the joint venture company and Capital
Controls (Delaware) Inc. The necessity for executing this agreement
was in face of the condition of Government approval as well as the
subsequent amendment of clause 2, 3 and 4 of the approval letter dated
11th October, 1996 i.e. items of manufacture, proposed location and
foreign equity.
149. The conduct of the parties and even the subsequent events leave
no doubt in the mind of the Court that the parties had executed,
intended and actually implemented the composite transaction contained
in the Principal Agreement. The Courts have also applied the Group
of Companies Doctrine in such cases. As already noticed, this
Court in the case of Olympus Superstructure Pvt. Ltd. (supra)
permitted reference to arbitration where there were multiple contracts
between the parties, interpreting the words ‘in connection with’ and
‘disputes relating to connected matters’.
150. Besides making the reference, the Court also held that making of
two awards which may be conflicting in relation to the items which are
likely to overlap in two agreements could not be permitted. The
courts have also accepted and more so in group company cases that the
fact that a party being non-signatory to one or other agreement may
not be of much significance, the performance of one may be quite
irrelevant with the performance and fulfillment of the principal or
the mother agreement. That, in fact, is the situation in the present
case.
151. One of the arguments advanced was that the International
Distributor Agreement had specifically provided for construction,
interpretation and performance of the agreement and for the
transaction under that agreement to be governed by and interpreted by
the laws of State of Pennysylvania, USA and parties thereto agreed
that any litigation thereunder shall be brought in any federal or
state court in the Eastern District of the Commonwealth of
Pennysylvania which fact would oust the possibility of reference to
arbitration in terms of clause 30 of the Principal Agreement, as the
parties had chosen a specific forum of the court system. Discussion
on this argument may not be greatly relevant in view of the above
discussion in this judgment. This being a composite transaction, the
parties could opt for any remedy.
152. In the present case, we have already noticed, that some
agreements contain the arbitration clause, while others don’t. The
Shareholders Agreement, Financial and Technical Knowhow Licence
Agreement and Export Sales Agreement contain the arbitration clause,
while the International Distributor Agreement, Managing Directors
Agreement and Trade Mark Registered User Agreement do not contain the
arbitration clause. The arbitration clause contained under clause 30
of the Shareholders Agreement and that under clause 26 of the
Financial and Technical Knowhow Licence Agreement are identical. They
both require the disputes to be referred to arbitration in London as
per the ICC Rules. However, the arbitration clause contained in
clause 18 of the Export Sales Agreement provides for reference of the
disputes to arbitration at Pennsylvania, USA, in accordance with rules
of American Arbitration Association. It also provides that the
judgment upon the Award rendered could be entered in any court of
competent jurisdiction. Still, clause 21 of the International
Distributor Agreement required the construction, interpretation and
performance of the agreement to be governed by and interpreted under
the laws of the State of Pennsylvania, USA. Any litigation
thereunder was to be brought in any federal or State Court located in
the Eastern District of the Commonwealth of Pennsylvania, which was to
be binding upon the parties.
153. As already noticed, two of the agreements did not contain any
arbitration clause, but they also did not subject the parties even for
litigative jurisdiction. They are the Managing Directors Agreement
and the Trademark Registered User Agreement. These two agreements
had been executed in furtherance to and for compliance of the terms
and conditions of the mother agreement which contained the arbitration
clause. They were, thus, intrinsically inter-connected with the
mother agreement.
154. All these agreements were signed on the same day and in
furtherance to the mother agreement. None of the parties have invoked
the jurisdiction of the Court at Pennsylvania, USA. Thus, it was an
alternative remedy that too restricted to the disputes, if any arising
from that agreement. Where different agreements between the parties
provide for alternative remedies, it does not necessarily mean that
the other remedy or jurisdiction stands ousted. Where the parties to
such composite transaction provide for different alternative forums,
including arbitration, it has to be taken that real intention of the
parties was to give effect to the purpose of agreement and refer the
entire subject matter to arbitration and not to frustrate the remedy
in law. It was for the parties to chose either to institute a suit
qua the International Distributor Agreement at Pennsylvania or to
invoke the arbitration agreement in terms of clause 30 of the mother
agreement. They have chosen the latter remedy. The question,
therefore, does not arise as to which law would apply since the only
litigation taken out by the parties is the suit instituted by the
appellant before the original side of the Bombay High Court and the
subsequent application for reference to arbitration filed by the
Respondent No. 1 under Section 45 of the 1996 Act.
155. The effect of execution of multiple agreements has been
discussed by us in some elaboration above. The real intention of
the parties was not only to refer all their disputes arising under the
agreement which could not be settled despite friendly negotiations to
arbitration, but even the disputes which arose in connection with the
shareholder/mother agreement to arbitration.
156. Thus, a composite reference was well within the comprehension
of the parties to various agreements which were executed on the same
day and for the same purpose. There cannot be any doubt to the
contention that in terms of Section 9 of the CPC, the courts in India
shall have jurisdiction to try all suits of civil nature. Further,
this section gives a right to a person to institute a suit before the
court of competent jurisdiction. However, the language of Section 9
itself makes it clear that the civil courts have jurisdiction to try
all suits of civil nature except the suits of which taking cognizance
is either expressly or impliedly barred. In other words, the
jurisdiction of the court and the right to a party emerging from
Section 9 of the CPC is not an absolute right, but contains inbuilt
restrictions. It is an accepted principle that jurisdiction of the
court can be excluded. In the case of Dhulabhai v. State of M.P. and
Anr. [AIR 1969 SC 78], this Court has settled the principle that
jurisdiction of the Civil Court is all embracing, except to the extent
it is excluded by law or by clear intendment arising from such law.
In Nahar Industrial Enterprises Ltd. v. Hong Kong & Shanghai Banking
Corporation [(2009) 8 SCC 646], this Court has even stated the
conditions for exclusion of jurisdiction. They are, (a) whether the
legislative intent to exclude is expressed explicitly or by necessary
implication, and (b) whether the statute in question provides for an
adequate and satisfactory alternative remedy to a party aggrieved by
an order made under it.
157. The provisions of Section 45 of the 1996 Act are to prevail over
the provisions of the CPC and when the Court is satisfied that an
agreement is enforceable, operative and is not null and void, it is
obligatory upon the court to make a reference to arbitration and pass
appropriate orders in relation to the legal proceedings before the
court, in exercise of its inherent powers.
158. In the present case, the court can safely gather definite
intention on behalf of the parties to have their disputes collectively
resolved by the process of arbitration. Even if different forums are
provided, recourse to one of them which is capable of resolving all
their issues should be preferred over a refusal of reference to
arbitration. There appears to be no uncertainty in the minds of the
parties in that regard, rather the intention of the parties is
fortified and clearly referable to the mother agreement.
159. It is not the case of any of the parties before us that any of
the parties to the present litigation had taken steps before that
Court or had invoked the jurisdiction of that court under that system.
There is no apparent conflict of interest as of now. The
arbitration clause would stand incorporated into the International
Distributor Agreement as this agreement itself was Appendix II to the
Principal Agreement. This Court in the case of M.R. Engineers and
Contractors Pvt. Ltd. v. Som Datt Builders Ltd. [(2009) 7 SCC 696] has
stated that firstly the subject of reference be enacted by mutual
intention, secondly a mere reference to a document may not be
sufficient and the reference should be sufficient to bring out the
terms and conditions of the referred document and also that the
arbitration clause should be capable of application in respect of a
dispute under the contract and not repugnant to any term thereof.
All these three conditions are satisfied in the present case.
160. The terms and conditions of the International Distribution
Agreement were an integral part of the Principal Agreement as Appendix
II and the Principal Agreement had an arbitration clause which was
wide enough to cover disputes in all the ancillary agreements. It is
not necessary for us to examine the choice of forum or legal
enforceability of legal system in the present case, as we find no
repugnancy even where the main contract is governed by law of some
other country and the arbitration clause by Indian law. They both
could be invoked, neither party having invoked the former will be no
bar for invocation of the latter in view of arbitration clause 30 of
the mother agreement.
161. Reliance was also placed on the judgment of this Court in the
case of Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar [AIR
2011 SC 1899] where the Court had declined reference of multiple and
multi party agreement. That case is of no help to the appellant
before us. In that case, there were four parties, the seller of the
land, the builder, purchaser of the flat and the bank. The bank had
signed an agreement with the purchaser of the flat to finance the
flat, but it referred to other agreement stating that it would provide
funds directly to the builder. There was an agreement between the
builder and the owner of the land and the purchaser of the land to
sell the undivided share and that contained an arbitration clause.
The question before the Court was whether while referring the disputes
to the arbitration, the disputes between the bank on the one hand, and
the purchaser of the flat on the other could be referred to
arbitration. The Court, in reference to Section 8 of the 1996 Act,
held that the bank was a non-party to the arbitration agreement,
therefore, neither the reference was permissible nor they could be
impleaded at a subsequent stage. This judgment on facts has no
application. The distinction between Section 8 and Section 45 has
elaborately been dealt with by us above and in view of that, we have
no hesitation in holding that this judgment, on facts and law, is not
applicable to the present case.
162. Thus, in view of the above, we hold that the disputes referred
to and arising from the multi-party agreements are capable of being
referred to arbitral tribunal in accordance with the agreement between
the parties.
163. Another argument advanced with some vehemence on behalf of the
appellant was that respondent Nos.3 and 4 were not party to any of the
agreements entered into between the parties and their cause of action
is totally different and distinct, and their rights were controlled by
the agreement of distribution executed by respondent Nos.1 and 2 in
their favour for distribution of products of gas and electro-
chlorination. It was contended that there cannot be splitting of
parties, splitting of cause of action and remedy by the Court.
164. On the other hand, it was contended on behalf of the respondent
No.1 that it is permissible to split cause of action, parties and
disputes. The mater referable to arbitration could be segregated
from the civil action. The court could pass appropriate orders
referring the disputes covered under the arbitration agreement between
the signatory party to arbitration and proceed with the claim of
respondent Nos. 3 and 4 in accordance with law.
165. As far as this question of law is concerned, we have already
answered the same. On facts, there is no occasion for us to
deliberate on this issue, because respondent Nos. 3 and 4 had already
consented for arbitration. In light of that fact, we do not wish to
decide this question on the facts of the present case.
166. Having dealt with all the relevant issues in law, now we would
provide answer to the questions framed by us in the beginning of the
judgment as follows :
Answer
167. Section 45 is a provision falling under Chapter I of Part II of
the 1996 Act which is a self-contained Code. The expression ‘person
claiming through or under’ would mean and take within its ambit
multiple and multi-party agreements, though in exceptional case. Even
non-signatory parties to some of the agreements can pray and be
referred to arbitration provided they satisfy the pre-requisites under
Sections 44 and 45 read with Schedule I. Reference of non-signatory
parties is neither unknown to arbitration jurisprudence nor is it
impermissible.
168. In the facts of a given case, the Court is always vested with
the power to delete the name of the parties who are neither necessary
nor proper to the proceedings before the Court. In the 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 the
Mother Agreement, the court may have to make reference to arbitration
even of the disputes existing between signatory or even non-signatory
parties. However, the discretion of the Court has to be exercised in
exceptional, limiting, befitting and cases of necessity and very
cautiously.
169. Having answered these questions, we do not see any reason to
interfere with the judgment of the Division Bench of the Bombay High
Court under appeal. We direct all the disputes arise in the suit and
from the agreement between the parties to be referred to arbitral
tribunal and be decided in accordance with the Rules of ICC.
170. The appeals are dismissed. However, in the facts and
circumstances of the present case, we do not award costs.
….………….....................CJI.
(S.H. Kapadia)
…….………….....................J.
(A.K. Patnaik)
...….………….....................J.
(Swatanter Kumar)
New Delhi;
September 28, 2012
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7134 OF 2012
(arising out of SLP(C)No. 8950 of 2010)
Chloro Controls (I) P.Ltd. ... Appellant
Versus
Severn Trent Water Purification Inc. & Ors. ...Respondents
WITH
CIVIL APPEAL NOS. 7135-7136 OF 2012
(Arising out of SLP(C)Nos. 26514-26515 of 2011)
O R D E R
Upon pronouncement of the judgment Mr. F.S. Nariman,
learned senior counsel appearing for the petitioner, mentioned
that the petitioner had filed an application for injunction in
the suit before the High Court. The same was dismissed. Appeal
against the order dismissing the application had been filed
before this Court and was ordered to be listed along with SLP (C)
No. 8950 of 2010 (which is an appeal against the order of the
High Court making reference to arbitral tribunal). However, the
Court had not heard arguments on that appeal.
Learned senior counsel appearing for the respondents,
Mr. K.V. Vishwanathan, submitted that the special leave
petitions were listed but they were not admitted.
-2-
In view of the common stand taken by the counsel for
the parties, we permit the petitioner to move an independent
application praying for hearing for those special leave petitions
i.e. SLP(C)Nos.26514-26515 of 2011 (listed along with SLP(C)No.
8950/2010) pending for admission.
..............CJI
(S.H.Kapadia)
................J.
(A.K.Patnaik)
................J.
(Swatanter Kumar)
New Delhi;
September 28, 2012.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7134 OF 2012
(Arising out of SLP (C) No.8950 of 2010)
Chloro Controls (I) P. Ltd. … Appellant
Versus
Severn Trent Water Purification Inc. & Ors. … Respondents
WITH
CIVIL APPEAL NOS. 7135-7136 OF 2012
(Arising out of SLP (C) No.26514-26515 of 2011)
J U D G M E N T
Swatanter Kumar, J.
1. Leave granted.
2. The expanding need for international arbitration and divergent
schools of thought, have provided new dimensions to the arbitration
jurisprudence in the international field. The present case is an
ideal example of invocation of arbitral reference in multiple, multi-
party agreements with intrinsically interlinked causes of action, more
so, where performance of ancillary agreements is substantially
dependent upon effective execution of the principal agreement. The
distinguished learned counsel appearing for the parties have raised
critical questions of law relatable to the facts of the present case
which in the opinion of the Court are as follows :
(1) What is the ambit and scope of Section 45 of the Arbitration and
Conciliation Act, 1996 (for short ‘the 1996 Act’)?
(2) Whether the principles enunciated in the case of Sukanya
Holdings Pvt. Ltd. v. Jayesh H. Pandya [(2003) 5 SCC 531], is
the correct exposition of law?
(3) 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?
(4) Whether bifurcation or splitting of parties or causes of action
would be permissible, in absence of any specific provision for
the same, in the 1996 Act?
3. Chloro Controls (India) Private Ltd., the appellant herein,
filed a suit on the original side of the High Court of Bombay being
Suit No.233 of 2004, for declaration that the joint venture agreements
and supplementary collaboration agreement entered into between some of
the parties are valid, subsisting and binding. It also sought a
direction that the scope of business of the joint venture company,
Respondent No. 5, set up under the said agreements includes the
manufacture, sale, distribution and service of the entire range of
chlorination equipments including the electro-chlorination equipment
and claimed certain other reliefs as well, against the defendants in
that suit. The said parties took out two notices of motion, being
Notice of Motion No.553 of 2004 prior to and Notice of Motion No.2382
of 2004 subsequent to the amendment of the plaint. In these notices
of motion, the principal question that fell for consideration of the
learned Single Judge of the High Court was whether the joint venture
agreements between the parties related only to gas chlorination
equipment or whether they included electro-chlorination equipment as
well. The applicant had prayed for an order of restraint, preventing
Respondent Nos. 1 and 2, the foreign collaborators, from acting upon
their notice dated 23rd January, 2004, indicating termination of the
joint venture agreements and the supplementary collaboration
agreement. A further prayer was made for grant of injunction against
committing breach of contract by directly or indirectly dealing with
any person other than the Respondent No.5, in any manner whatsoever,
for the manufacture, sale, distribution or services of the
chlorination equipment, machinery parts, accessories and related
equipments including electro-chlorination equipment, in India and
other countries covered by the agreement. The defendants in that suit
had taken out another Notice of Motion No.778 of 2004, under Section 8
read with Section 5 of the1996 claiming that arbitration clauses in
some of the agreements governed all the joint venture agreements and,
therefore, the suit should be referred to an appropriate arbitral
tribunal for final disposal and until a final award was made by an
arbitral tribunal, the proceedings in the suit should be stayed. The
learned Single Judge, vide order dated 28th December, 2004, allowed
Notice of Motion No.553 of 2004 and consequently disposed of Notice of
Motion No.2382 of 2004 as not surviving. Against this order, an appeal
was preferred, which came to be registered as Appeal No.24 of 2005 and
vide a detailed judgment dated 28th July, 2011, a Division Bench of
the High Court of Bombay set aside the order of the learned Single
Judge and dismissed both the notices of motion taken out by the
plaintiff in the suit.
4. Notice of Motion No.778 of 2004 was dismissed by another learned
Single Judge of the High Court of Bombay, declining the reference of
the suit to an arbitral tribunal vide order dated 8th April, 2004.
This order was again assailed in appeal by the defendants in the suit
and another Division Bench of the Bombay High Court, vide its judgment
dated 4th March, 2010, allowed the Notice of Motion No.778 of 2004 and
made reference to arbitration under Section 45 of the 1996 Act.
5. The judgments of the Division Benches, dated 4th March, 2010 and
28th July, 2011, respectively, have been assailed by the respective
parties before this Court in the present Special Leave Petitions,
being SLP(C) No.8950/2010 and SLP(C) No.26514-15/2011, respectively.
Thus, both these appeals shall be disposed of by this common judgment.
6. Before we notice in detail the factual matrix giving rise to the
present appeals and the contentions raised, it would be appropriate to
illustrate the corporate structure of the companies and the scope of
the agreements that were executed between the parties to these
proceedings.
Corporate Structure of the Companies who are parties to lis
7. In order to describe the corporate structure with precision we
will explain it diagrammatically as follows:
SEVERN TRENT (DEL) INC.
Formerly known as SEVEREN TRENT U.S. INC.; Name Changed in May 1992
SEVERN TRENT SERVICES (DEL) INC.
R-1 – CAPITAL CONTROL CO. INC.
Acquired 80% on 15.05.1990 and 20% on 31.03.1994.
NAME CHANGED ON 1.4.2002 TO
SEVERN TRENT WATER PURIFICATION INC.
(GAS CHLO. & HYPOGEN Product Lines)
R-2 - CAPITAL CONTROL
(DELAWARE) CO. INC.
Formed on 21.09.94
EXCEL TECHNOLOGIES
INT’L CORP.
Acquired in 1998
Original OMNIPURE and
SANILEC Manufacturer
Appellant
CHLORO CONTROL
INDIA PVT. LTD.
MERGED INTO
ON 31.03.2003
Shareholders Agreement JV
CAPITAL CONTROL (INDIA) PVT LTD.
(ON 14.11.1995 a new Joint Venture)
R-5 - GAS CHLORINATORS & HYPOGEN
Distributorship
and Knowhow
Agreement
ODN,
B.V.
DENORA NORTH AMERICA, INC.
GROUPO DE NORA
Original Seaclor and Seaclor Mac Manufacturer
JV
SERVEN TRENT DE NORA LLC – SEPT, 2001
PRODUCTS CURRENTLY OFFERED ARE OMNIPURE,
SANILE 7 SEACLOR
R-3 – TITANOR
COMPONENTS LTD.
Distributes SEACLOR MAC
Product Line
R-4 – HI POINT SERVICES PVT LTD
OMNIPURE, SANILEC
Before 1998
Independent Distributor of EXCEL TECHNOLOGIES since prior to Severn Trent’s
Acquisition of EXCEL TECHNOLOGIES
Currently, Independent Distributor for SEVERN TRENT DENORA
Distributes Omnipure and Sanilec Products in India
8. Severn Trent, U.S., Inc. was a company existing under the laws
of the State of Pennsylvania, United States of America (for short,
‘U.S.A.’). This name came to be changed, in 1992, to Severn Trent
(Delaware) Inc., which is the principal parent company. This company
owned a 100 per cent subsidiary, Severn Trent Services (Delaware)
Inc., U.S.A. Severn Trent Services (Delaware) Inc. owned Capital
Control (Delaware) Co. Inc. which was formed on 21st September, 1994.
On or about 14th May, 1990, Severn Trent Services PLC, U.K., an
erstwhile state-owned water authority, privatized in 1989, expanded
its business into the U.S.A. by acquiring 80 per cent shares in
Capital Control Co. Inc. on 15th May 1990 and a further 20 per cent
on 31st March 1994. It is in this period that the joint venture
agreements with the appellant were negotiated, with the consent of the
Severn Trent group, which was, by that time, a majority shareholder in
Capital Control Co. Inc. Subsequently, the name of Capital Control
Co. Inc., was changed to Severn Trent Water Purification, Inc.
(Respondent No.1), with effect from 1st April, 2002. The Severn Trent
Water Purification Inc./Capital Control Co. Inc. then came to be
merged with Capital Control (Delaware) Co. Inc. (Respondent No. 2), on
31st March, 2003. As a result thereof, Capital Control (Delaware)
Co. Inc. ceased to exist. As per the pleadings of the parties,
reference to Capital Control Co. Inc. includes reference to Capital
Control Co. Inc. as well as Capital Control (Delaware) Co. Inc.
9. The appellant is a company carrying on business under that name
and style for the manufacture of chlorination equipments and
incorporated under the Indian laws by Madhusudan Kocha (Respondent
No.9 herein) and his group (for short, the “Kocha Group”). This
company had been negotiating with Respondent No. 1 for entering into a
joint venture agreement, to deal with the manufacture, distribution
and sale of gas chlorination equipment and “Hypogen” electro-
chlorination equipment Series 3300, etc. This led to the execution
of joint venture agreements between the appellant and Respondent No.
1. The joint venture agreements were signed between these companies
for constituting a joint venture company under the name and style of
Capital Control (India) Pvt. Ltd., with 1,50,000 equity shares of Rs.
10 each and 50 per cent shareholding with each party. These agreements
being prior to the merger of Capital Control (Delaware) Co. Inc. with
Capital Control Co. Inc. and also prior to the change of name of
Capital Control Co. Inc. to Severn Trent Water Purification Inc., 50
per cent of the shares allotted to the foreign collaborators were to
be equally divided between Capital Control (Delaware) Co. Inc. and
Capital Control Co. Inc. These joint venture agreements were executed
between the parties on 16th November, 1995, as already noticed.
However, the joint venture company had been incorporated on 14th
November, 1995 itself.
10. In the year 1998, Excel Technologies International Corporation
came to be acquired by Severn Trent Services (Delaware) Inc. This
company was dealing in the manufacture of “Omnipure” and “Sanilec”,
distinct brands of chlorination products. Later, Excel Technologies
entered into a joint venture agreement with De Nora North America Inc.
and floated another joint venture company, Severn Trent De Nora LLC in
September, 2001 for dealing in the products “Omnipure”, “Sanilec” and
“Seaclor Mac”. It may be noticed that “Seaclor Mac” was a product
dealt with and distributed by Titanor Components Ltd., Respondent
no.3, and whose original manufacturer was Groupo De Nora; the latter
is the parent company of the De nora North America Inc. The
distribution rights in respect of all these three products were given
by the joint venture company Severn Trent De Nora LLC to Hi Point
Services Pvt. Ltd., Respondent No. 4, for independent distribution of
the products for Severn Trent De nora LLC, in India.
11. This corporate structure clearly indicates that Severn Trent
Services (Del.) Inc. is the holding company of the companies which
have entered into the joint venture agreements, for floating both the
companies Capital Controls (India) Pvt. Ltd., as well as “Severn Trent
De Nora LLC”. The disputes have actually arisen between Chloro
Controls (India) Pvt. Ltd. and the Kocha Group on the one hand, and
Severn Trent Water Purification Inc., the erstwhile Capital Control
(Delaware) Co. Inc. and Capital Control Co. Inc. on the other.
Details of Agreements
|S. |Date of |Details of |Parties to the Agreement |Whether |
|No |Agreement |Agreement | |contains |
| | | | |arbitratio|
| | | | |n clause |
|1. |16.11.1995 |Shareholders |1. Capital Controls |Yes |
| | |Agreement |(Delware) Company, Inc. | |
| | | |(Respondent No.2) | |
| | | |2. Chloro Controls India | |
| | | |Pvt. Ltd. (Appellant) | |
| | | |3. Mr. M.B. Kocha | |
| | | |(Respondent No.9) | |
|2. |16.11.1995 |International |1. Capital Controls |No |
| | |Distributor |Company Inc., (Colmar) now| |
| | |Agreement |Severn Trent Water | |
| | | |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|3. |16.11.1995 |Managing |1. Capital Controls |No |
| | |Directors’ |(India) Private Ltd. | |
| | |Agreement |(Respondent No.5) | |
| | | |2. Mr. M.B. Kocha | |
| | | |(Respondent No.9) | |
|4. |16.11.1995 |Financial & |1. Capital Controls |Yes |
| | |Technical |Company Inc., (Colmar) now| |
| | |Know-how |Severn Trent Water | |
| | |License |Purification Inc. | |
| | |Agreement |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|5. |16.11.1995 |Export Sales |1. Capital Controls |Yes |
| | |Agreement |Company Inc., (Colmar) now| |
| | | |Severn Trent Water | |
| | | |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|6. |16.11.1995 |Trademark |1. Capital Controls |No |
| | |Registered |Company Inc., (Colmar) now| |
| | |User License |Severn Trent Water | |
| | |Agreement |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
|7. |August 1997|Suppleme-ntary|1. Capital Controls | |
| | |Collaboration |Company Inc., (Colmar) now| |
| | |Agreement |Severn Trent Water | |
| | | |Purification Inc. | |
| | | |(Respondent No.1) | |
| | | |2. Capital Controls | |
| | | |(India) Private Ltd. | |
| | | |(Respondent No.5) | |
Facts
12. Prior to the formation of the joint venture company, the Chloro
Controls Group carried on the business of manufacture and sale of gas
chlorination equipments and from 1980 onwards, it developed and
commenced the manufacturing of electro-chlorination equipment also.
The business was done in the name of “Chloro Controls Equipments
Company”, a sole proprietary concern of Respondent No.9, Mr. M.B.
Kocha and it was the distributor in India for the products of the
Capital Controls group for more than a decade prior to the formation
of the joint venture. On 1st December, 1988, a letter of intent and a
letter of understanding were executed between Capital Controls Company
Inc., Colmar, Pennsylvania, U.S.A (which name was subsequently changed
in the year 2002 to ‘Severn Trent Water Purification Inc., respondent
No.1) and respondent no.9 to form a new, jointly-owned company in
India, to be called “Capital Controls (India) Pvt. Ltd.”, the
respondent No.5 in the present appeals, for the purposes of
manufacture, sale and export of chlorination equipments on the terms
and conditions as agreed between the parties. The formation of the
joint venture company got delayed for some time, because Respondent
No.1 informed the appellant that Severn Trent, U.K. and the officers
of the Capital Controls Company Inc., Colmar, Pennsylvania, U.S.A. had
acquired all the shares of the Capital Controls Company Inc. and this
share acquisition permitted them to support their representatives and
distributers with continuity. On 14th November, 1995, the joint
venture company, Capital Controls (India) Private Ltd., Respondent No.
5, was incorporated and registered under the Companies Act, 1956 (for
short, the ‘Companies Act’).
13. To examine the factual matrix of the case in its correct
perspective, reference to pleadings of the parties would be
appropriate.
14. The petitioner is a Private Limited Company and its shares are
entirely held by Respondent/Defendant Nos.9 to 11 (Kocha/Chloro
Control Group). Respondent No.1–Company was earlier known as “Capital
Control Company Inc.” and in or about the year 1990 the Capital
Controls Group came to be acquired by Severn Trent Services PLC (UK),
originally a State owned water authority and following privatization
from the UK Government in 1989, it proceeded to build a product and
services business from the US beginning with the acquisition of the
Capital Controls Group. The name of the first respondent was changed
to Severn Trent Water Purification Inc. with effect from 1st April,
2002. Thus, Respondent Nos.1 and 2 became the group companies and
were earlier part of “the Capital Controls Group” (hereinafter
referred to as the Capital Controls/Severn Trent Group). Till January
1999, the respondent Nos.1 and 2 developed and sold electro-
chlorination equipment under the brand name “Hypogen” and from January
1999 onwards, the said brand was replaced by the brands “Sanilec” and
“Omnipure”. Respondent Nos.1 and 2 carried on the business of
manufacture, supply, sale and distribution of chlorination equipments,
including gas and electro-chlorination equipments. Respondent No.3 is
a company incorporated under the Companies Act and engaged in the
business of manufacture and marketing of electro-chlorination
equipment. In or about the year 1989-90, the said Respondent no.3 was
floated as a joint venture in technical and financial collaboration
with the De Nora group of Italy which held 51% of the equity share
capital of the said respondent. Respondent No.4 is a Private Limited
Company incorporated under the Companies Act and carried on business
in electro-chlorination equipments. It had a tie-up with an American
Company called “Excel Technologies International Inc.” which was
engaged in the business of electrolytic disinfection equipment.
15. Respondent No.5, i.e., Capital Controls (India) Private Ltd. is
a Company incorporated under the Companies Act pursuant to the joint
venture agreements dated 16th November, 1995 executed between the
appellant and respondent no.9 on the one hand and the respondent nos.1
and 2 on the other. 50 per cent of the share capital of Respondent
No.5 is held by the appellant and balance of 50 per cent is held by
Respondent No.2. Thus, the appellant and Respondent No.2 are the
joint venture partners who have together incorporated the Respondent
No.5 – company.
16. Respondent Nos.6 and 8 are the Directors of the Respondent No.5
Company, appointed as such by the Capital Controls Group. Respondent
No.7 is the Chairman also appointed by the Capital Controls Group, but
has no casting vote. Respondent Nos.9 to 11 are the Directors of the
Respondent no.5 company, nominated by the Kocha Group/Chloro Controls
Group and Respondent No.9 is the Managing Director of the said joint
venture.
17. It appears that the joint venture company, Respondent no.5, was
incorporated on 14th November, 1995. As discussed above, the joint
venture agreements were primarily a project between Respondent Nos. 1
and 2 on the one hand and the appellant company along with its
proprietor, Respondent No. 9, on the other. The purpose of these
joint venture agreements as indicated in the Memorandum of Association
of this joint venture company was to design, manufacture, import,
export, act as agent, marketing etc. of gas and electro-chlorination
equipments. In order to achieve this object, the parties had decided
to execute various agreements. It needs to be emphasized at this
stage itself that, as is clear from the above narrated chart, the
agreements had been signed between different parties, each agreement
containing somewhat different clauses. Therefore, there is a need to
examine the content and effect of each of the seven agreements that
are stated to have been signed between different parties.
Content, scope and purpose of the agreements subject matter of the
present appeals
18. The parties to the proceedings, except respondent Nos. 3 and 4,
were parties to one or more of the seven agreements entered into
between the parties. This includes the Principal Agreement, i.e., the
Shareholders Agreement, the Financial and Technical Know-how License
Agreement, the International Distributor Agreement, Exports Sales
Agreement, Trademark Registered User License Agreement and Managing
Director’s Agreement, all dated 16th November, 1995. Lastly, the
parties also entered into and executed a Supplementary Collaboration
Agreement in August, 1997. We have already noticed that except
respondent Nos.3 and 4 who were not signatory to any agreement, all
other parties were not parties to all the agreements but had signed
one or more agreement(s) keeping in mind the content and purpose of
that agreement.
19. Now we shall proceed to discuss each of these agreements.
Share Holders Agreement
20. The Shareholders Agreement dated 16th November, 1995 was entered
into and executed between the Capital Control (Delaware) Co. Inc.,
respondent No. 2, on the one hand and Chloro Controls (India) Private
Ltd., the appellant company run by the Kocha/ Capital Controls group
and Mr. M.B. Kocha, respondent No. 9, on the other. As is apparent
from the pleadings on record, these two groups had negotiated for
starting a joint venture company in India and for this purpose they
had entered into the Shareholders Agreement. The main object of this
agreement was to float a joint venture company which would be
responsible for manufacture, sale and services of the products as
defined in the Financial & Technical Know-How License Agreement, in
terms of clause 1 of the Agreement. The Agreement was subject to
obtaining all necessary approvals, licenses and authorization from the
Government of India, as the joint venture company under the name and
style of Capital Control India Pvt. Ltd. was to be registered as a
company with its office located in India at Bombay and to carry on its
business in India. The plant was to be taken on lease. As already
noticed, the authorized capital of the company was Rs.5 million,
consisting of equity shares of Rs.10 each. In terms of clause 7,
Capital Controls, which was the short form for Capital Control
(Delaware) Co. Inc., appointed the joint venture company as a
distributor in India of the products manufactured by it, subject to
the terms and conditions of the International Distributor Agreement
attached to that Agreement as Appendix II. Directors to the joint
venture company were to be nominated for a period of three years in
accordance with clause 8 of the Agreement. Clause 14 made it
obligatory for the parties to ensure that the joint venture company
entered into the Financial and Technical Know-How License Agreement
with Capital Controls, subject to which, as mentioned above, the joint
venture company was to have the right and license to manufacture the
specified products in India. The Financial and Technical Know-How
License Agreement, which was annexed to the Principal Agreement as
Appendix IV, was to be executed relating to sale and purchase of
chlorination equipment assets. This Agreement had to be construed and
interpreted in accordance with the laws of the Union of India in terms
of clause 29. Further clause 21 related to termination of this
Principal Agreement. In terms of this clause, it was agreed that the
Agreement was to continue in force and effect for so long as each
party held not less than twenty-six per cent (26%) of the total paid-
up equity shares of the company or in the event that the company
failed to achieve a cumulative sales volume of Rs.120 million over
three years and cumulative profit of fifteen per cent (15%) over three
years from signing of the Agreement. Either party had the option to
terminate the agreement and dispose of the shares as provided in the
terms thereof. Material breach of the Agreement or a deadlock
regarding the management of the Company were, inter alia, the
contemplated grounds for termination of the Agreement, whereby the
party not in default could terminate the Agreement by giving notice in
writing to the other party. The period of notice in the event of a
material breach was 90 days from the date of such notice. Clause 21.3
provided that in the event of the termination of the Agreement, the
joint venture company would be wound up and all obligations undertaken
by Chloro Controls under different agreements would cease with
immediate effect. In such an eventuality, even the name of the joint
venture company was required to be changed and the word ‘Capital’,
either individually or in combination with other words, was to be
removed.
21. Two other very material clauses of this Agreement, which require
the attention of this Court, are clauses 4 and 30. In terms of clause
4.5, the Kocha Group and their company Chloro Controls were bound not
to engage themselves, directly or indirectly, or even have financial
interest in the manufacture, sale or distribution of chlorination
equipment which were similar to those manufactured by the joint
venture company during the term of the Agreement. In terms of clause
30, all or any disputes or differences arising under or in connection
with the Agreement between the parties were liable to be settled by
arbitration, in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce (for short, the
‘ICC’), by three arbitrators designated in conformity with those
Rules. The arbitration proceedings were to be held in London, England
and were to be governed by and subject to English laws.
22. As is clear from the above terms and conditions of this
Agreement, it was treated as a principal agreement executed between
the parties and other agreements, like the Financial & Technical Know-
How License Agreement, Trademark Registered User License Agreement,
International Distributor Agreement, Managing Directors’ Agreement and
Export Sales Agreements were not the only anticipated agreements to
be executed between the parties, but their drafts and necessary
details had been annexed as Appendix I to VII of the shareholder
agreement. The other Agreements were only required to be signed by
the parties who, as per the Shareholders Agreement, were required to
sign such agreement. The Arbitration Clause of the Shareholders
Agreement reads as under:
“Any dispute or difference arising under or in connection
with this Agreement, or any breach thereof, which cannot be
settled by friendly negotiation and agreement between the
parties, shall be finally settled by arbitration conducted
in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce by
three arbitrators designated in conformity with those
Rules. The arbitration proceedings shall be held in
London, England and shall be governed by and subject to
English law. Judgment upon the award rendered may be
entered in any court of competent jurisdiction.”
International Distributor Agreement
23. The International Distributor Agreement has been mentioned as
Appendix II to the Shareholders Agreement. The International
Distributor Agreement was executed on the same day and entered into
between Capital Controls Company Inc., respondent No.1 and the joint
venture company Capital Controls India Pvt. Ltd., respondent no.5.
Under this Agreement, the joint venture company was appointed as the
exclusive distributor of products in the “territory” and for the term
provided under clause 10 of that Agreement. The specified territory
was India, Afghanistan, Nepal and Bhutan but the agreement also stated
that exports to other countries were not permissible except with the
specific authorization by respondent No.1. Besides providing the
rights and duties of the Distributors, this Agreement also stated the
schedule for delivery of products/orders, the prices payable,
commissions and inspection. It also provided for the terms of
payment. Distributor’s orders of products were subject to acceptance
by the seller at its offices and the seller reserved his right, at any
time, to cease manufacture as well as offering for sale any product
and to change the design of product.
24. This distributorship right was non-assignable and was
exclusively between the distributor and the seller. The
relationship between the parties was agreed to be that of a seller and
purchaser. Clause 11 of the Agreement then clearly postulated that
the distributor was an independent contractor and not joint venture or
partner with an agent or employee of the seller. Clause 13 provided
that the Agreement contained the entire understanding between the
parties with respect to that subject matter and superseded all
negotiations, discussions, promises or agreements, prior to or
contemporaneous with this Agreement.
25. Further, this Agreement contained the confidentiality clause as
well as the non-competition clause being clauses 16 and 18,
respectively. The latter specified that the distributor shall not,
directly or indirectly, sell, manufacture or supply products similar
to any of the products or engage, directly or indirectly, in any
business the same as or similar to that of seller, except subject to
the conditions of the Agreement.
26. In terms of clause 20, the agreement between the parties was to
remain confidential and not to be discussed, shown to or filed with
any Government agencies without the prior consent of the seller in
writing. This Agreement did not contain any arbitration clause, but it
did provide a jurisdiction clause i.e. clause 21, which read as under:
“The construction, interpretation and performance of this
Agreement and all transactions under it shall be governed
by and interpreted under the laws of the State of
Pennsylvania, U.S.A., and the parties hereto agree that
each shall be subject to the jurisdiction of, and any
litigation hereunder shall be brought in, any federal or
state court located in the Eastern District of the
Commonwealth of Pennsylvania, and that the resolution of
such litigation by such court shall be binding upon the
parties.”
27. We may notice here that the International Distributor Agreement
was not only executed in furtherance to Clause 7 of the Shareholders
Agreement but in that clause itself it was also stated to be annexed
thereto as Appendix II. The Distributor Agreement was liable to be
renewed as long as the Distributor i.e. Capital Controls, held at
least twenty-six per cent (26%) of the shares in the joint venture
company.
Managing Directors Agreement
28. Clause 8.6 of the Shareholders Agreement had provided for
appointment or reappointment of the Managing Director or whole time
Director by mutual consent. Subject to the provisions of the
Companies Act, it was agreed that Mr. Kocha would be appointed as the
first Managing Director of the Company for an initial period of 3
years and on such terms and conditions as were specified in Appendix
III, i.e., the Managing Directors Agreement of the same date. In
other words, the Managing Directors Agreement had been executed
between joint venture company, Capital Control India Pvt. Ltd. and Mr.
M.B. Kocha, on terms already agreed to between the parties to the
Shareholders’ Agreement.
29. The joint venture company, which is stated to have been
incorporated on 14th November, 1995, held Board Meeting on 16th
November, 1995 and as contemplated under Clause 8.6 of the
Shareholders Agreement, appointed Mr. Kocha as the Managing Director
of the Company for three years commencing from 1st April, 1996. This
Managing Directors Agreement spelt out the powers which the Managing
Director could exercise and more specifically, under Clause 3, the
powers which the Managing Director could exercise only with the prior
approval of the Board of Directors of the Joint Venture Company. For
instance, under Clause 3 (k), the Managing Director was not entitled
to undertake any new business or substantially expand the business
contemplated thereunder except with the approval of the Board of
Directors. Further, clause 6 contained a non-compete clause requiring
Mr. Kocha not to run any similar business for two years after the date
of termination of the Agreement.
30. This Agreement also did not contain any arbitration agreement
and provided no terms which were not within the contemplation of
clause 8.7 of the Shareholders Agreement.
Export Sales Agreement
31. Export Sales Agreement was again singed between the Chloro
Control India Pvt. Ltd. and Capital Control Co. Inc., the foreign
partner to the joint venture. This Agreement, on its bare reading,
presupposes the existence and working of the joint venture company.
The products required to be manufactured by the joint venture company
under the Shareholders Agreement as well as those stated in Exhibit 1
of this Agreement were to be exported to different countries by
Capital Control Company Inc. which was required to export those goods
and execute such orders as per the terms and conditions of this
Agreement, except in countries specified in Exhibit 2 to the
Agreement. It is noteworthy that the export could be effected to all
countries covered under the ‘Territory’ excluding the countries
specified in Ext. 2 of the agreement which was completely in
consonance with the execution and performance of Shareholder Agreement
and the International Distributor Agreement executed between the
parties. This Agreement stipulated distinct terms and conditions
which had to be adhered to by the parties while the Capital Control
Company Inc. was to act as sole and exclusive agent for sale of the
products. The products under the Agreement meant design, supply,
installation commissioning and after-sale services of chlorination
systems and equipment related products manufactured by the Joint
Venture Company. The services under the Agreement could be performed
by Capital control Co. Inc. itself or through its affiliated
corporation or duly appointed sales agents and distributors. In terms
of Clause 17 of the Agreement, it was to be construed and interpreted
in accordance with the laws in the State of Pennsylvania, U.S.A. It
specifically contained an arbitration clause (clause 18) that read as
under:
“Any dispute of difference arising under or in connection
with this Agreement, or any breach thereof, which cannot be
settled by friendly negotiation and agreement between the
parties shall be finally settled by arbitration conducted
in accordance with the Rules of American Arbitration
Association. The arbitration proceedings shall be held in
Pennsylvania, U.S.A. Judgment upon the award rendered may
be rendered may be entered in any court of competent
jurisdiction.”
Financial and Technical Know-how License Agreement and Trademark
Registered User Agreement
32. Now, we shall deal with both these agreements together as both
these agreements are inter-dependent and one finds elaborate reference
to one in the other. Furthermore, both these agreements have been
entered into and executed between Capital Control Co. Inc. on the one
hand and the joint venture company on the other.
33. Under clause 14 of the Shareholders Agreement, it was required
of the parties to cause the joint venture company to enter into the
Financial and Technical Know-How License Agreement with the Capital
Controls under which the latter was to grant the joint venture company
the right and license to manufacture the products in India in
accordance with the Technical Know-How and other technical information
possessed by Capital Controls. Clause 18 of the Principal Agreement
also referred to this agreement and postulated that if the Government
of India did not grant permission for the terms of foreign
collaboration contained in this agreement, even the Principal
Agreement, i.e. the Shareholder’s Agreement would be liable to be
terminated without giving rise to any claim for damages. Both these
clauses provided that this Agreement was attached to the Principal
Agreement itself and had been referred to as the ‘License Agreement’,
for short.
34. We may refer to certain terms of this agreement which would
indicate that the terms and conditions of the Principal Agreement were
to be implemented through this Agreement. Besides providing the
obligations of the Capital Controls (respondent no.5), it also
stipulated that the licensee, i.e. the joint venture company would be
free to manufacture the products under the said patent even after the
expiry of the Agreement. Under clauses 9 and 10 of the Agreement,
obligations of the licensee were stated and it required the licensee
to maintain quality comparable to corresponding products made by
Capital Controls in USA and to allow free access and information to
Capital Controls. The products manufactured by the licensee whose
quality was approved by Capital Controls could be marked with the
legend, ‘Manufactured in India under license from Capitals Control
Company Inc. Colmar, Pennsylvania, USA”. However, if the agreement
was terminated, the licensee was not to use the trademark and legend.
35. As stated, the purpose of this Agreement was that the licensee
desired to obtain the right and license to manufacture the products in
accordance with the Technical Know-How owned or acquired by Capital
Controls and for which that company was willing to grant license on
the terms and conditions stated in that Agreement. The first and
foremost restriction was that the rights under the agreement were non-
transferable and the right was restricted to sell the products
exclusively in India and the countries listed in the Appendix to the
Agreement. The Agreement also contained a non-competing clause
providing that the licensee must not manufacture or have manufactured
for it, sell or offer for sale or be financially interested in similar
products without prior written permission of Capital Controls.
Respondent no.1 had also agreed that its affiliated companies would
sell the product in India only through the licensee. The Agreement
provided for payment of royalties under clause 11.
36. Another very significant clause of this Agreement was the Term
and Termination clause. The agreement was to continue in force for
ten years from the date it was filed with the Reserve Bank of India,
subject to earlier termination in terms of clause 15.2. Clause 14.2
provided practically for the conditions of termination of this
Agreement similar to those contemplated for the Share Holders
Agreement. Neither any modification/amendment of this Agreement nor
any waiver of its terms and conditions was to be binding upon the
parties unless made in writing and duly executed by both the parties.
Appendix I to this agreement recorded the products which the joint
venture company was to manufacture. In the event of dispute, the
parties were expected to settle it by friendly negotiations, failing
which it was to be referred to the ICC, by three Arbitrators
designated in conformity with the relevant Rules. Clause 26, the
Arbitration clause, read as under:-
“Any dispute or difference arising under or in connection
with this Agreement, or any breach thereof, which cannot be
settled by friendly negotiation and agreement between the
parties shall be finally settled by arbitration conducted
in accordance with the Rules of Conciliation and
Arbitration of the International Chamber of Commerce by
three arbitrators designated in conformity with those
Rules. The Arbitration proceedings shall be held in
London, England and shall be governed by and subject to
English Law. Judgment upon the award rendered may be
entered in any court of competent jurisdiction.”
37. Clauses 15.1 and 15.2 of the Principal Agreement referred to the
Trademark Registered User License Agreement. Firstly, it is provided
that respondent no.9, Mr. Kocha and Chloro Controls acknowledged that
Capital Controls was the sole owner of certain trademarks and trade-
names used by Capital Controls in connection with the sale of the
products. Besides agreeing that they would not adopt, use or register
as a trademark or tradename any word or symbol, which in the opinion
of Capital Controls is confusingly similar to their trademarks, there
the joint venture company was required to enter into a Trademark
Registered User License Agreement for obtaining the right to use
certain trademarks and tradenames and it was further specifically
provided that the said agreement formed part of the Financial and
Technical Know-How License Agreement.
38. The Trademark Registered User Agreement, as already noticed, was
executed between the respondent no.1 and respondent no.5, the joint
venture company. The relationship between the parties under this
agreement was contractual and respondent no.1 had agreed to grant user
permission to use the trademarks, subject to the terms and conditions
specified in the agreement. The agreement was executed with the clear
intention that the license owner (respondent No. 1) would provide its
secret drawings, plans, specifications, test data, formulae and other
manufacturing procedures and as well as technical know-how for
assembly, manufacture, quality control and testing of goods to the
licensee, the joint venture company. The agreement dealt with various
aspects including grant of non-exclusive right to use the trademarks
in relation to the goods in the territory as the registered user of
the trademarks. In terms of clause 10 of the agreement, the joint
venture company was not to acquire any ownership interest in the
trademarks or registrations thereof by virtue of use of trademark and
it was specifically agreed that every permitted use of trademarks by
the user would enure to the benefit of the licensor company. This
Agreement was to terminate automatically in the event the License
Agreement i.e. the Financial and Technical Know-How License Agreement,
was terminated for any reason. Clause 13 also provided that the
permitted use of the trademarks did not involve the payment of any
royalty or other consideration, other than the royalties payable under
the Financial and Technical Know-How License Agreement by joint
venture company to the licensor company. This agreement was
terminable on the conditions stipulated in clause 16, which again were
similar to the termination clause provided in other agreements. This
Agreement did not contain an arbitration clause.
Supplementary Collaboration Agreement
39. The last of the documents in this series which requires to be
mentioned by the Court is the Supplementary Collaboration Agreement.
Any joint venture agreement in India which is in collaboration with a
foreign partner can be commenced only after obtaining the permission
of the Government of India. The parties herein had already executed a
joint venture agreement dated 16th November, 1995. The company
obtained the permission of the Government of India vide its letter No.
FC-II 830(96)245(96) dated 11th October, 1996 amended on 21st April,
1997. The company then commenced the operation and business of the
joint venture company with effect from 1st April, 1997.
40. In the letter by the Government of India dated 11th October,
1996, besides noticing the items of manufacture activity covered by
the foreign collaboration agreement, foreign equity participation
being 50% and other conditions which had been specifically postulated,
under clause 7 of the letter it was specified that the approval letter
was made a part of the foreign collaboration agreement executed
between the parties and only those provisions of the agreement which
were covered by the said letter or which were not at variance with the
said letter would be binding on the Government of India or the Reserve
Bank of India. Thus, the parties were directed to proceed to finalize
the agreement.
41. Vide its letter dated 21st December, 1996, the joint venture
company had written to the Ministry of Industry, Department of
Industrial Policy and Promotion, Government of India, requesting to
amend point No. 2 of the above-mentioned approval letter. The request
was to widen the scope of the manufacture activities covered by the
foreign collaboration agreement. The company wished to add the
manufacture of gas and electro-chlorination equipments, amongst other
stated items. The other amendment that was sought for was increase in
the authorized share capital from Rs.25 lakhs to paid-up capital of 50
lakhs in the joint venture company. Both these requests of the joint
venture company were accepted by the Government of India vide their
letter dated 21st April, 1997 and clauses (2), (3) and (4) of the
earlier approval letter dated 11th October, 1996 were modified. All
other terms and conditions of the approval letter remained the same.
The Government of India had asked for acknowledgement of the said
letter.
42. In furtherance to this letter of the Government of India, the
joint venture company and the respondent no.2 executed this
Supplementary Collaboration Agreement. The important part of this one-
page agreement is ‘we hereby conform that we shall adhere to the terms
and conditions as stipulated by the Government of India. Letter No.
FC.II: 830(96) 295(96) dated 11.10.1996, amended 21.04.1997.’ It also
stated that the companies had entered into the joint venture agreement
dated 16th November, 1995 and had commenced their operation with
effect from 1st April, 1997. In other words, the Supplementary
Collaboration Agreement was a mere confirmation of the previous joint
venture agreement. By this time i.e., somewhere in August 1997, all
other agreements had been executed, the joint venture company had come
into existence and, in furtherance to those agreements, it had
commenced its business.
43. As we have already noticed under the head ‘Corporate Structure’,
the name of Respondent No. 1, Capital Control Co. Inc. was changed to
Severn Trent Water Purification Inc. with effect from 1st April, 2002.
Later on, respondent no.2, Capital Control (Delaware) Co. Inc. was
merged with the respondent no.1 on 31st March, 2003. Thus, for all
purposes and intents, in fact and in law, interest of respondent no.1
and 2 was controlled and given effect to by Severn Trent.
44. On this issue, version of the respondents had been disputed in
the earlier round of litigation between the parties where respondent
No. 1, Severn Trent Water Purification Co. Inc., USA, had filed a
petition for winding up respondent No. 5-Chloro Controls India Pvt.
Ltd., the joint venture company, on just and equitable ground under
Section 433(j) of the Companies Act. In this petition, specific issue
was raised that merger of Capital Controls (Delaware) Co. with Severn
Trent was not intimated to the respondent No. 5 company prior to the
filing of the arbitration petition by Severn Trent under Section 9 of
the 1996 Act as well as that Severn Trent was not a share holder of
the joint venture company and thus had no locus standi to file the
petition. This Court vide its judgment dated 18th February, 2008 in
Civil Appeal No. 1351 of 2008 titled Severn Trent Water Purification
Inc. v. Chloro Control (India) Pvt. Ltd. and Anr. held that the
winding up petition by Severn Trent Water Purification Inc. was not
maintainable as it was not a contributory. But the question whether
that company was a creditor of the joint venture company was left
open.
45. At this very stage, we may make it clear that we do not propose
to deal with any of the contentions raised in that petition whether
decided or left open, as the judgment has already attained finality.
In terms of the settled position of law, the said judgment cannot be
brought in challenge in the present proceedings, collaterally or
otherwise.
46. Certain disputes had already arisen between the parties that
resulted in termination of the joint venture agreements. Vide letter
dated 21st July, 2004, Severn Trent Services informed respondent no.9,
respondent no.5 and Chloro Controls India Pvt. Ltd., the present
appellant, that they had failed to remedy the issues and grievances
communicated to them in their previous correspondences and meetings
and also failed to engage in any productive negotiation in this
connection and therefore, they were terminating from that very day,
the joint venture agreements executed between them and the appellant
company, which included agreements stated in that letter i.e. the
Shareholders Agreement, the International Distributor Agreement, the
Financial and Technical Know-How License Agreement, the Export Sales
Agreement and the Trademark Registered User Agreement, all dated 16th
November, 1995 and requested them to commence the winding up
proceedings of the joint venture company, respondent No. 5. They were
also called upon to act in accordance with the terms of the agreement
in the event of such termination. It may be noticed here itself that
prior to the serving of the notice of termination, a suit had been
instituted by the appellant in which application under Section 8/45 of
the 1996 Act was filed.
Contentions of the learned Counsel appearing for the parties in the
backdrop of above detailed facts
47. The appellant had filed a derivative suit being Suit No. 233 of
2004 praying, inter alia, for a decree of declaration that the joint
venture agreements and the supplementary collaboration agreement are
valid, subsisting and binding and that the scope of business of the
joint venture company included the manufacture, sale, distribution and
service of entire range of chlorination equipments including electro-
chlorination equipment. An order of injunction was also obtained
restraining respondent Nos. 1 and 2 from interfering in any way and/or
preventing respondent No.5 from conducting its business of sale of
chlorination equipments including electro-chlorination equipment and
that they be not permitted to sell their products in India save and
except through the joint venture company, in compliance of clause 2.5
of the Financial and Technical Know-How License Agreement read with
the Supplementary Collaboration Agreement. Besides this, certain
other reliefs have also been prayed for.
48. After the institution of the suit, as already noticed, the
respondent Nos.1 and 2 had terminated the joint-venture agreements
vide notices dated 23rd January, 2004 and 21st July, 2004.
Resultantly, in the amended plaint, specific prayer was made that both
these notices were wrong, illegal and invalid; in breach of the joint
venture agreements and of no effect; and the joint venture agreements
were binding and subsisting. To be precise, the appellant had claimed
damages, declaration and injunction in the suit primarily relying upon
the agreements entered into between the parties. In this suit,
earlier interim injunction had been granted in favour of the
appellant, which was subsequently vacated at the appellate stage. The
respondent Nos.1 and 2 filed an application under Section 8 of the
Act, praying for reference of the suit to the arbitral tribunal in
accordance with the agreement between the parties. This application
was contested and finally decided by the High Court in favour of
respondent Nos.1 and 2, vide order dated 4th March, 2010 making a
reference of the suit to arbitration.
49. It is this Order of the Division Bench of the High Court of
Bombay that has given rise to the present appeals before this Court.
While raising a challenge, both on facts and in law, to the judgment
of the Division Bench of the Bombay High Court making a reference of
the entire suit to arbitration, Mr. Fali S. Nariman, learned senior
counsel appearing for the appellant, has raised the following
contentions :
1. There is inherent right conferred on every person by Section 9 of
the Code of Civil Procedure, 1908, (for short ‘CPC’) to bring a
suit of a civil nature unless it is barred by a statute or there
was no agreement restricting the exercise of such right. Even if
such clause was there (is invoked), the same would be hit by
Section 27 of the Indian Contract Act, 1872 and under Indian law,
arbitration is only an exception to a suit and not an alternative
to it. The appellant, in exercise of such right, had instituted a
suit before the Court of competent jurisdiction, at Bombay and
there being no bar under any statute to such suit. The Court could
not have sent the suit for arbitration under the provisions of the
1996 Act.
2. The appellant, being dominus litus to the suit, had included
respondent Nos.3 and 4, who were necessary parties. The
appellant had claimed different and distinct reliefs. These
respondents had not been added as parties to the suit merely to
avoid the arbitration clause but there were substantive reliefs
prayed for against these respondents. Unless the Court, in
exercise of its power under Order I, Rule 10(2) of the CPC,
struck out the name of these parties as being improperly joined,
the decision of the High Court would be vitiated in law as these
parties admittedly were not parties to the arbitration
agreement.
3. On its plain terms, Section 45 of the 1996 Act provides that a
judicial authority, when seized of an action in a matter in
respect of which the parties have made an agreement referred to
in Section 44, shall, at the request of one of the parties or
any person claiming through or under him, refer the parties to
arbitration. The expression ‘party’ refers to parties to the
action or suit. The request for arbitration, thus, has to come
from one of the parties to the suit or action or any person
claiming through or under him. The Court then can refer those
parties to arbitration. The expression ‘parties’ used under
Section 45 would necessarily mean all the parties and not some
or any one of them. If the expression ‘parties’ is not
construed to mean all parties to the action and the agreement,
it will result in multiplicity of proceedings, frustration of
the intended one-stop remedy and may cause further mischief.
Judgment of the High Court in referring the entire suit,
including the parties who were not parties to the arbitration
agreement as well as against whom the cause of action did not
arise from arbitration agreement, suffers from error of law.
4. The 1996 Act is an amending and consolidating Act being an
enactment setting out in one statute the law relating to
arbitration, international commercial arbitration and
enforcement of foreign arbitral awards. Further, the 1996 Act
has no provision like Section 34 of the Arbitration Act, 1940
(for short “1940 Act”). In Section 3 of the Foreign Awards
(Recognition and Enforcement) Act, 1961 (for short ‘1961 Act’),
there existed a mandate only to stay the proceedings and not to
actually refer the parties to arbitration. Thus, the position
before 1996 in India, as in England, permitted a partial stay of
the suit, both as regards matters and parties. But after coming
into force of the 1996 Act, it is no longer possible to contend
that some parties and/or some matters in a suit can be referred
to arbitration leaving the rest to be decided by another forum.
5. Bifurcation of matters/cause of action and parties is not
permissible under the provisions of the 1996 Act. Such procedure
is unknown to the law of arbitration in India. The judgment of
this Court in the case of Sukanya Holdings Pvt. Ltd. (supra) is
a judgment in support of this contention. This judgment of the
Court is holding the field even now. In the alternative, it is
submitted that bifurcation, if permitted, would lead to
conflicting decisions by two different forums and under two
different systems of law. In such situations, reference would
not be permissible.
6. In the alternative, reference to arbitral tribunal is not
possible in the facts and circumstances of the present case.
Where three major agreements, i.e., Managing Director Agreement,
Trademark Registered User Agreement and Supplementary
Collaboration Agreement do not have any arbitration clause,
there the International Distributor Agreement exclusively
provides the jurisdiction for resolution of dispute to the
federal or state courts in the Eastern District of the
Commonwealth of Pennsylvania, USA. This latter agreement, thus,
provided for resolution of disputes under a specific law and by
a specific forum. Thus, for uncertainty and indefiniteness, the
alleged arbitration clause is unenforceable.
Thus, in the present case, out of all the agreements signed
between different parties, four agreements, i.e., Managing
Director Agreement, International Distributor Agreement,
Trademark Registered User Agreement and the Supplementary
Collaboration Agreement, have no arbitration clause.
Furthermore, different agreements have been signed by different
parties and respondent No.9 is not a party to some of the
agreements containing/not containing an arbitration clause. In
any case, respondent Nos.3 and 4 are not party to any of the
Agreements and the cause of action of the appellant against them
is limited to the scope of International Distributor Agreement
vis-à-vis the products covered under the joint-venture
agreement.
On these contentions, it is submitted that the judgment of
the High Court is liable to be set aside and no reference to
arbitral tribunal is possible. Also, the submission is that,
within the ambit and scope of Section 45 of the 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 the parties to
refer the dispute to arbitration.
50. Mr. Harish Salve, learned senior counsel, while supporting the
judgment of the High Court for the reasons stated therein, argued in
addition that the submissions made by Mr. F.S. Nariman, learned senior
counsel, cannot be accepted in law and on the facts of the case. He
contended that :
i) Under the provisions of the 1996 Act, particularly in Part II,
the Right of Reference to Arbitration is indefeasible and
therefore, an interpretation in favour of such reference should
be given primacy over any other interpretation.
ii) In substance, the suit and the reliefs claimed therein relate to
the dispute with regard to the agreed scope of business of the
joint venture company as regards gas based chlorination or
electro based chlorination. This major dispute in the present
suit being relatable to joint venture agreement therefore,
execution of multiple agreements would not make any difference.
The reference of the suit to arbitral Tribunal by the High Court
is correct on facts and in law.
iii) The filing of the suit as a derivative action and even the
joinder of respondent Nos.3 and 4 to the suit were primarily
attempts to escape the impact of the arbitration clause in the
joint venture agreements. Respondent Nos. 3 and 4 were neither
necessary nor appropriate parties to the suit. In the facts of
the case the party should be held to the bargain of arbitration
and even the plaint should yield in favour of the arbitration
clause.
iv) All agreements executed between the parties are in furtherance
to the Shareholders Agreement and were intended to achieve only
one object, i.e., constitution and carrying on of business of
chlorination products by the joint venture company in India and
the specified countries. The parties having signed the various
agreements, some containing an arbitration clause and others
not, performance of the latter being dependent upon the
Principal Agreement and in face of clause 21.3 of the Principal
Agreement, no relief could be granted on the bare reading of the
plaint and reference to arbitration of the complete stated cause
of action was inevitable.
v) The judgment of this Court in the case of Sukanya (supra) does
not enunciate the correct law. Severability of cause of action
and parties is permissible in law, particularly, when the
legislative intent is that arbitration has to receive primacy
over the other remedies. Sukanya being a judgment relatable to
Part 1 (Section 8) of the 1996 Act, would not be applicable to
the facts of the present case which exclusively is covered under
Part II of the 1996 Act.
vi) The 1996 Act does not contain any restriction or limitation on
reference to arbitration as contained under Section 34 of the
1940 Act and therefore, the Court would be competent to pass any
orders as it may deem fit and proper, in the circumstances of a
given case particularly with the aid of Section 151 of the CPC.
vii) A bare reading of the provisions of Section 3 of the 1961 Act on
the one hand and Section 45 of the 1996 Act on the other clearly
suggests that change has been brought in the structure and not
in the substance of the provisions. Section 3 of the 1961 Act,
of course, primarily relates to stay of proceedings but
demonstrates that the plaintiff claiming through or under any
other person who is a party to the arbitration agreement would
be subject to the applications under the arbitration agreement.
Thus, the absence of equivalent words in Section 45 of 1996 Act
would not make much difference. Under Section 45, the applicant
seeking reference can either be a party to the arbitration
agreement or a person claiming through or under such party. It
is also the contention that a defendant who is neither of these,
if cannot be referred to arbitration, then such person equally
cannot seek reference of others to arbitration. Such an
approach would be consistent with the development of arbitration
law.
51. The contention raised before us is that Part I and Part II of
the 1996 Act operate in different fields and no interchange or
interplay is permissible. To the contra, the submission is that
provisions of Part I have to be construed with Part II. On behalf of
the appellant, reliance has been placed upon the judgment of this
Court in the case Bhatia International v. Bulk Trading S.A. and Anr.
[(2002) 4 SCC 105]. The propositions stated in the case of Bhatia
International (supra) do not directly arise for consideration of this
Court in the facts of the present case. Thus, we are not dealing with
the dictum of the Court in Bhatia International’s case and application
of its principles in this judgment.
It is appropriate for us to deal with the interpretation, scope
and ambit of Section 45 of the 1996 Act particularly relating to an
international arbitration covered under the Convention on Recognition
and Enforcement of Foreign Arbitral Awards (for short, ‘the New York
Convention’).
52. Now, we shall proceed to discuss the width of Section 45 of the
1996 Act.
Interpretation of Section 45 of the 1996 Act
53. In order to invoke jurisdiction of the Court under Section 45,
the applicant should satisfy the pre-requisites stated in Section 44
of the 1996 Act.
54. Chapter I, Part II deals with enforcement of certain foreign
awards in accordance with the New York Convention, annexed as Schedule
I to the 1996 Act. As per Section 44, there has to be an arbitration
agreement in writing. To such arbitration agreement the conditions
stated in Schedule I would apply. In other words, it must satisfy
the requirements of Article II of Schedule I. Each contracting State
shall recognize an agreement in writing under which the parties
undertake to submit to arbitration their disputes in respect of a
defined legal relationship, whether contractual or not, concerning a
subject matter capable of settlement by arbitration. The arbitration
agreement shall include an arbitration clause in a contract or an
arbitration agreement signed by the parties or entered in any of the
specified modes. Subject to the exceptions stated therein, the
reference shall be made.
55. The language of Section 45 read with Schedule I of the 1996 Act
is worded in favour of making a reference to arbitration when a party
or any person claiming through or under him approaches the Court and
the Court is satisfied that the agreement is valid, enforceable and
operative. Because of the legislative intent, the mandate and
purpose of the provisions of Section 45 being in favour of
arbitration, the relevant provisions would have to be construed
liberally to achieve that object. The question that immediately
follows is as to what are the aspects which the Court should consider
while dealing with an application for reference to arbitration under
this provision.
56. The 1996 Act makes it abundantly clear that Part I of the Act
has been amended to bring these provisions completely in line with the
UNCITRAL Model Law on International Commercial Arbitration (for short,
the ‘UNCITRAL Mode Law’), while Chapter I of Part II is meant to
encourage international commercial arbitration by incorporating in
India, the provisions of the New York Convention. Further, the
protocol on Arbitration Clauses (for short ‘Geneva Convention’) was
also incorporated as part of Chapter II of Part II.
57. For proper interpretation and application of Chapter I of Part
II, it is necessary that those provisions are read in conjunction with
Schedule I of the Act. To examine the provisions of Section 45
without the aid of Schedule I would not be appropriate as that is the
very foundation of Section 45 of the Act. The International Council
for Commercial Arbitration prepared a Guide to the Interpretation of
1958 New York Convention, which lays/contains the Road Map to Article
II. Section 45 is enacted materially on the lines of Article II of
this Convention. When the Court is seized with a challenge to the
validity of an arbitration agreement, it would be desirable to examine
the following aspects :
“1. Does the arbitration agreement fall under the scope
of the Convention?
2. Is the arbitration agreement evidenced in writing?
3. Does the arbitration agreement exist and is it
substantively valid?
4. Is there a dispute, does it arise out of a defined
legal relationship, whether contractual or not, and did the
parties intend to have this particular dispute settled by
arbitration?
5. Is the arbitration agreement binding on the parties
to the dispute that is before the Court?
6. Is this dispute arbitrable?”
58. According to this Guide, if these questions are answered in the
affirmative, then the parties must be referred to arbitration. Of
course, in addition to the above, the Court will have to adjudicate
any plea, if taken by a non-applicant that the arbitration agreement
is null and void, inoperative or incapable of being performed. In
these three situations, if the Court answers such plea in favour of
the non-applicant, the question of making a reference to arbitration
would not arise and that would put the matter at rest.
59. If the parties are referred to arbitration and award is made
under these provisions of the Convention, then it shall be binding and
enforceable in accordance with the provisions of Sections 46 to 49 of
the 1996 Act. The procedure prescribed under Chapter I of Part II is
to take precedence and would not be affected by the provisions
contained under Part I and/or Chapter II of Part II in terms of
Section 52. This is the extent of priority that the Legislature had
intended to accord to this Chapter 1 of Part II.
60. Amongst the initial steps, the Court is required to enquire
whether the dispute at issue is covered by the arbitration agreement.
Stress has normally been placed upon three characteristics of
arbitrations which are as follows –
(1) arbitration is consensual. It is based on the parties’
agreement;
(2) arbitration leads to a final and binding resolution of the
dispute; and
(3) arbitration is regarded as substitute for the court litigation
and results in the passing of an binding award.
61. Mr. Nariman, learned senior counsel appearing on behalf of the
appellant, contended that in terms of Section 45 of the 1996 Act,
parties to the agreement shall essentially be the parties to the suit.
A stranger or a third party cannot ask for arbitration. They have to
be essentially the same. Further, the parties should have a clear
intention, at the time of the contract, to submit any disputes or
differences as may arise, to arbitration and then alone the reference
contemplated under Section 45 can be enforced.
62. To the contra, Mr. Salve, the learned senior counsel appearing
for respondent No. 1, submitted that the phrase “at the request of one
of the parties or any person claiming through or under him” is capable
of liberal construction primarily for the reason that under the 1996
Act, there is a greater obligation to refer the matters to
arbitration. In fact, the 1996 Act is the recognition of an
indefeasible Right to Arbitration. Even a party which is not a
signatory to the arbitration agreement can claim through the main
party. Particularly, in cases of composite transactions, the approach
of the Courts should be to hold the parties to the bargain of
arbitration rather than permitting them to escape the reference on
such pleas.
63. At this stage itself, we would make it clear that we are
primarily discussing these submissions purely on a legal basis and not
with regard to the merits of the case, which we shall shortly revert
to.
64. We have already noticed that the language of Section 45 is at a
substantial variance to the language of Section 8 in this regard. In
Section 45, the expression ‘any person’ clearly refers to the
legislative intent of enlarging the scope of the words beyond ‘the
parties’ who are signatory to the arbitration agreement. Of course,
such applicant should claim through or under the signatory party.
Once this link is established, then the Court shall refer them to
arbitration. The use of the word ‘shall’ would have to be given its
proper meaning and cannot be equated with the word ‘may’, as liberally
understood in its common parlance. The expression ‘shall’ in the
language of the Section 45 is intended to require the Court to
necessarily make a reference to arbitration, if the conditions of this
provision are satisfied. To that extent, we find merit in the
submission that there is a greater obligation upon the judicial
authority to make such reference, than it was in comparison to the
1940 Act. However, the right to reference cannot be construed
strictly as an indefeasible right. One can claim the reference only
upon satisfaction of the pre-requisites stated under Sections 44 and
45 read with Schedule I of the 1996 Act. Thus, it is a legal right
which has its own contours and is not an absolute right, free of any
obligations/limitations.
65. Normally, arbitration takes place between the persons who have,
from the outset, been parties to both the arbitration agreement as
well as the substantive contract underlining that agreement. But, it
does occasionally happen that the 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/the arbitration agreement. Arbitration, thus,
could be possible between a signatory to an arbitration agreement and
a third party. Of course, heavy onus lies on that party to show that,
in fact and in law, it is claiming ‘through’ or ‘under’ the signatory
party as contemplated under Section 45 of the 1996 Act. Just to deal
with such situations illustratively, reference can be made to the
following examples in Law and Practice of Commercial Arbitration in
England (Second Edn.) by Sir Michael J. Mustill:
“1. The claimant was in reality always a party to the
contract, although not named in it.
2. The claimant has succeeded by operation of law to the
rights of the named party.
3. The claimant has become a part to the contract in
substitution for the named party by virtue of a
statutory or consensual novation.
4. The original party has assigned to the claimant
either the underlying contract, together with the
agreement to arbitrate which it incorporates, or the
benefit of a claim which has already come into
existence.”
66. Though the scope of an arbitration agreement is limited to the
parties who entered into it and those claiming under or through them,
the Courts under the English Law have, in certain cases, also applied
the “Group of Companies Doctrine”. This doctrine has developed in the
international context, whereby an arbitration agreement entered into
by a company, being one within a group of companies, can bind its non-
signatory affiliates or sister or parent concerns, if the
circumstances demonstrate that the mutual intention of all the parties
was to bind both the signatories and the non-signatory affiliates.
This theory has been applied in a number of arbitrations so as to
justify a tribunal taking jurisdiction over a party who is not a
signatory to the contract containing the arbitration agreement.
[‘Russell on Arbitration’ (Twenty Third Edition)].
67. This evolves the principle that a non-signatory party could be
subjected to arbitration provided these transactions were with group
of companies and there was a clear intention of the parties to bind
both, the signatory as well as the non-signatory parties. In other
words, ‘intention of the parties’ is a very significant feature which
must be established before the scope of arbitration can be said to
include the signatory as well as the non-signatory parties.
68. A non-signatory or third party could be subjected to arbitration
without their prior consent, but this would only be in exceptional
cases. The Court will examine these exceptions from the touchstone of
direct relationship to the party signatory to the arbitration
agreement, direct commonality of the subject matter and the agreement
between the parties being a composite transaction. The transaction
should be of a composite nature where performance of mother agreement
may not be feasible without aid, execution and performance of the
supplementary or ancillary agreements, for achieving the common object
and collectively having bearing on the dispute. Besides all this, the
Court would have to examine whether a composite reference of such
parties would serve the ends of justice. Once this exercise is
completed and the Court answers the same in the affirmative, the
reference of even non-signatory parties would fall within the
exception afore-discussed.
69. In a case like the present one, where origin and end of all is
with the Mother or the Principal Agreement, the fact that a party was
non-signatory to one or other agreement may not be of much
significance. The performance of any one of such agreements may be
quite irrelevant without the performance and fulfillment of the
Principal or the Mother Agreement. Besides designing the corporate
management to successfully complete the joint ventures, where the
parties execute different agreements but all with one primary object
in mind, the Court would normally hold the parties to the bargain of
arbitration and not encourage its avoidance. In cases involving
execution of such multiple agreements, two essential features exist;
firstly, all ancillary agreements are relatable to the mother
agreement and secondly, performance of one is so intrinsically inter-
linked with the other agreements that they are incapable of being
beneficially performed without performance of the others or severed
from the rest. The intention of the parties to refer all the disputes
between all the parties to the arbitral tribunal is one of the
determinative factor.
70. We may notice that this doctrine does not have universal
acceptance. Some jurisdictions, for example, Switzerland, have
refused to recognize the doctrine, while others have been equivocal.
The doctrine has found favourable consideration in the United States
and French jurisdictions. The US Supreme Court in Ruhrgos AG v
Marathon Oil Co. [526 US 574 (1999)] discussed this doctrine at some
length and relied on more traditional principles, such as, the non-
signatory being an alter ego, estoppel, agency and third party
beneficiaries to find jurisdiction over the non-signatories.
71. The Court will have to examine such pleas with greater caution
and by definite reference to the language of the contract and
intention of the parties. In the case of composite transactions and
multiple agreements, it may again be possible to invoke such principle
in accepting the pleas of non-signatory parties for reference to
arbitration. Where the agreements are consequential and in the nature
of a follow-up to the principal or mother agreement, the latter
containing the arbitration agreement and such agreements being so
intrinsically inter-mingled or inter-dependent that it is their
composite performance which shall discharge the parties of their
respective mutual obligations and performances, this would be a
sufficient indicator of intent of the parties to refer signatory as
well as non-signatory parties to arbitration. The principle of
‘composite performance’ would have to be gathered from the conjoint
reading of the principal and supplementary agreements on the one hand
and the explicit intention of the parties and the attendant
circumstances on the other.
72. As already noticed, an arbitration agreement, under Section 45
of the 1996 Act, should be evidenced in writing and in terms of
Article II of Schedule 1, an agreement in writing shall include an
arbitral clause in a contract or an arbitration agreement signed by
the parties or contained in an exchange of letters or telegrams.
Thus, the requirement that an arbitration agreement be in writing is
an expression incapable of strict construction and requires to be
construed liberally, as the words of this Article provide. Even in a
given circumstance, it may be possible and permissible to construe the
arbitration agreement with the aid and principle of ‘incorporation by
reference’. Though the New York Convention is silent on this matter,
in common practice, the main contractual document may refer to
standard terms and conditions or other standard forms and documents
which may contain an arbitration clause and, therefore, these terms
would become part of the contract between the parties by reference.
The solution to such issue should be case-specific. The relevant
considerations to determine incorporation would be the status of
parties, usages within the specific industry, etc. Cases where the
main documents explicitly refer to arbitration clause included in
standard terms and conditions would be more easily found in compliance
with the formal requirements set out in the Article II of the New York
Convention than those cases in which the main contract simply refers
to the application of standard forms without any express reference to
the arbitration clause. For instance, under the American Law, where
standard terms and conditions referred to in a purchase order provided
that the standard terms would have been attached to or form part of
the purchase order, this was considered to be an incorporation of the
arbitration agreement by reference. Even in other countries, the
recommended criterion for incorporation is whether the parties were or
should have been aware of the arbitration agreement. If the Bill of
Lading, for example, specifically mentions the arbitration clause in
the Charter Party Agreement, it is generally considered sufficient for
incorporation. Two different approaches in its interpretation have
been adopted, namely, (a) interpretation of documents approach; and
(b) conflict of laws approach. Under the latter, the Court could
apply either its own national law or the law governing the
arbitration.
73. In India, the law has been construed more liberally, towards
accepting incorporation by reference. In the case of Owners and
Parties Interested in the Vessel M.V. “Baltic Confidence” & Anr. v.
State Trading Corporation of India Ltd. & Anr. [(2001) 7 SCC 473],
the Court was considering the question as to whether the arbitration
clause in a Charter Party Agreement was incorporated by reference in
the Bill of Lading and what the intention of the parties to the Bill
of Lading was. The primary document was the Bill of Lading, which,
if read in the manner provided in the incorporation clause thereof,
would include the arbitration clause of the Charter Party Agreement.
The Court observed that while ascertaining the intention of the
parties, attempt should be made to give meaning and effect to the
incorporation clause and not to invalidate or frustrate it by giving
it a literal, pedantic and technical reading. This Court, after
considering the judgments of the courts in various other countries,
held as under :
“19. From the conspectus of the views expressed by courts
in England and also in India, it is clear that in
considering the question, whether the arbitration clause in
a Charter Party Agreement was incorporated by reference in
the Bill of Lading, the principal question is, what was the
intention of the parties to the Bill of Lading? For this
purpose the primary document is the Bill of Lading into
which the arbitration clause in the Charter Party Agreement
is to be read in the manner provided in the incorporation
clause of the Bill of Lading. While ascertaining the
intention of the parties, attempt should be made to give
meaning to the incorporation clause and to give effect to
the same and not to invalidate or frustrate it giving a
literal, pedantic and technical reading of the clause. If
on a construction of the arbitration clause of the Charter
Party Agreement as incorporated in the Bill of Lading it
does not lead to inconsistency or insensibility or
absurdity then effect should be given to the intention of
the parties and the arbitration clause as agreed should be
made binding on parties to the Bill of Lading. If the
parties to the Bill of Lading being aware of the
arbitration clause in the Charter Party Agreement have
specifically incorporated the same in the conditions of the
Bill of Lading then the intention of the parties to abide
by the arbitration clause is clear. Whether a particular
dispute arising between the parties comes within the
purview of the arbitration clause as incorporated in the
Bill of Lading is a matter to be decided by the arbitrator
or the court. But that does not mean that despite
incorporation of the arbitration clause in the Bill of
Lading by specific reference the parties had not intended
that the disputes arising on the Bill of Lading should be
resolved by an arbitrator.”
74. Reference can also be made to the judgment of this Court in the
case of Olympus Superstructure Pvt. Ltd. v. Meena Vijay Khetan & Ors.
[(1999) 5 SCC 651], where the parties had entered into a purchase
agreement for the purchase of flats. The main agreement contained the
arbitration clause (clause 39). The parties also entered into three
different Interior Design Agreements, which also contained arbitration
clauses. The main agreement was terminated due to disputes about
payment and non-grant of possession. These disputes were referred to
arbitration. A sole arbitrator was appointed to make awards in this
respect. Inter alia, the question was raised as to whether the
disputes under the Interior Design Agreements were subject to their
independent arbitration clauses or whether one and the same reference
was permissible under the main agreement. It was argued that the
reference under clause 39 of the main agreement could not permit the
arbitrator to deal with the disputes relating to Interior Design
Agreements and the award was void. The Court, however, took the view
that parties had entered into multiple agreements for a common object
and the expression ‘other matters…connected with’ appearing in clause
39 would permit such a reference. The Court held as under :
“30. If there is a situation where there are disputes and
differences in connection with the main agreement and also
disputes in regard to “other matters” “connected” with the
subject-matter of the main agreement then in such a situation,
in our view, we are governed by the general arbitration clause
39 of the main agreement under which disputes under the main
agreement and disputes connected therewith can be referred to
the same arbitral tribunal. This clause 39 no doubt does not
refer to any named arbitrators. So far as clause 5 of the
Interior Design Agreement is concerned, it refers to disputes
and differences arising from that agreement which can be
referred to named arbitrators and the said clause 5, in our
opinion, comes into play only in a situation where there are no
disputes and differences in relation to the main agreement and
the disputes and differences are solely confined to the Interior
Design Agreement. That, in our view, is the true intention of
the parties and that is the only way by which the general
arbitration provision in clause 39 of the main agreement and the
arbitration provision for a named arbitrator contained in clause
5 of the Interior Design Agreement can be harmonised or
reconciled. Therefore, in a case like the present where the
disputes and differences cover the main agreement as well as the
Interior Design Agreement, — (that there are disputes arising
under the main agreement and the Interior Design Agreement is
not in dispute) — it is the general arbitration clause 39 in the
main agreement that governs because the questions arise also in
regard to disputes relating to the overlapping items in the
schedule to the main agreement and the Interior Design
Agreement, as detailed earlier. There cannot be conflicting
awards in regard to items which overlap in the two agreements.
Such a situation was never contemplated by the parties. The
intention of the parties when they incorporated clause 39 in the
main agreement and clause 5 in the Interior Design Agreement was
that the former clause was to apply to situations when there
were disputes arising under both agreements and the latter was
to apply to a situation where there were no disputes or
differences arising under the main contract but the disputes and
differences were confined only to the Interior Design Agreement.
A case containing two agreements with arbitration clauses arose
before this Court in Agarwal Engg. Co. v. Technoimpex Hungarian
Machine Industries Foreign Trade Co. There were arbitration
clauses in two contracts, one for sale of two machines to the
appellant and the other appointing the appellant as sales
representative. On the facts of the case, it was held that both
the clauses operated separately and this conclusion was based on
the specific clause in the sale contract that it was the “sole
repository” of the sale transaction of the two machines. Krishna
Iyer, J. held that if that were so, then there was no
jurisdiction for travelling beyond the sale contract. The
language of the other agreement appointing the appellant as
sales representative was prospective and related to a sales
agency and “later purchases”, other than the purchases of these
two machines. There was therefore no overlapping. The case
before us and the above case exemplify contrary situations. In
one case the disputes are connected and in the other they are
distinct and not connected. Thus, in the present case, clause 39
of the main agreement applies. Points 1 and 2 are decided
accordingly in favour of the respondents.”
75. The Court also took the view that a dispute relating to specific
performance of a contract in relation to immoveable property could be
referred to arbitration and Section 34(2)(b)(i) of the 1996 Act was
not attracted. This finding of the Court clearly supports the view
that where the law does not prohibit the exercise of a particular
power, either the Arbitral Tribunal or the Court could exercise such
power. The Court, while taking this view, has obviously rejected the
contention that a contract for specific performance was not capable of
settlement by arbitration under the Indian law in view of the
statutory provisions. Such contention having been rejected, supports
the view that we have taken.
THRESHOLD REVIEW
76. Where the Court which, on its judicial side, is seized of an
action in a matter in respect of which the parties have made an
arbitration agreement, once the required ingredients are satisfied, it
would refer the parties to arbitration but for the situation where it
comes to the conclusion that the agreement is null and void,
inoperative or incapable of being performed. These expressions have
to be construed somewhat strictly so as to ensure that the Court
returns a finding with certainty and on the correct premise of law and
fact as it has the effect of depriving the party of its right of
reference to arbitration. But once the Court finds that the agreement
is valid then it must make the reference, without any further exercise
of discretion {refer General Electric Co. v. Renusagar Power Co.
[(1987) 4 SCC 137]}. These are the issues which go to the root of the
matter and their determination at the threshold would prevent
multiplicity of litigation and would even prevent futile exercise of
proceedings before the arbitral tribunal.
77. The issue of whether the courts are empowered to review the
existence and validity of the arbitration agreement prior to reference
is more controversial. A majority of the countries admit to the
positive effect of kompetenz kompetenz principle, which requires that
the arbitral tribunal must exercise jurisdiction over the dispute
under the arbitration agreement. Thus, challenge to the existence or
validity of the arbitration agreement will not prevent the arbitral
tribunal from proceeding with hearing and ruling upon its
jurisdiction. If it retains jurisdiction, making of an award on the
substance of the dispute would be permissible without waiting for the
outcome of any court action aimed at deciding the issue of the
jurisdiction. The negative effect of the kompetenz kompetenz
principle is that arbitrators are entitled to be the first to
determine their jurisdiction which is later reviewable by the court,
when there is action to enforce or set aside the arbitral award.
Where the dispute is not before an arbitral tribunal, the Court must
also decline jurisdiction unless the arbitration agreement is patently
void, inoperative or incapable of being performed.
78. This is the position of law in France and in some other
countries, but as far as the Indian Law is concerned, Section 45 is a
legislative mandate and does not admit of any ambiguity. We must take
note of the aspect of Indian law that Chapter I of Part II of the 1996
Act does not contain any provision analogous to Section 8(3) under
Part I of the Act. In other words, under the Indian Law, greater
obligation is cast upon the Courts to determine whether the agreement
is valid, operative and capable of being performed at the threshold
itself. Such challenge has to be a serious challenge to the
substantive contract or to the agreement, as in the absence of such
challenge, it has to be found that the agreement was valid, operative
and capable of being performed; the dispute would be referred to
arbitration. [State of Orissa v. Klockner and Company & Ors. (AIR
1996 SC 2140)].
79. Alan Redfern and Martin Hunter in Law and Practice of
International Commercial Arbitration, (Fourth Edition) have opined
that when several parties are involved in a dispute, it is usually
considered desirable that the dispute should be dealt with in the same
proceedings rather than in a series of separate proceedings. In
general terms, this saves time, money, multiplicity of litigation and
more importantly, avoids the possibility of conflicting decisions on
the same issues of fact and law since all issues are determined by the
same arbitral tribunal at the same time. In proceedings before
national courts, it is generally possible to join additional parties
or to consolidate separate sets of proceedings. In arbitration,
however, this is difficult, sometimes impossible, to achieve this
because the arbitral process is based upon the agreement of the
parties.
80. Where there is multi-party arbitration, it may be because there
are several parties to one contract or it may be because there are
several contracts with different parties that have a bearing on the
matter in dispute. It is helpful to distinguish between the two.
Where there are several parties to one contract, like a joint venture
or some other legal relationship of similar kind and the contract
contains an arbitration clause, when a dispute arises, the members of
the consortium or the joint venture may decide that they would each
like to appoint an arbitrator. In distinction thereto, in cases
involving several contracts with different parties, a different
problem arises. They may have different issues in dispute. Each one
of them will be operating under different contracts often with
different choice of law and arbitration clauses and yet, any dispute
between say the employer and the main contractor is likely to involve
or affect one or more of the suppliers or sub-contractors, even under
other contracts. What happens when the dispute between an employer
and the main contractor is referred to arbitration, and the main
contractor wishes to join the sub-contractor in the proceedings, on
the basis that if there is any liability established, the main
contractor is entitled to pass on such liability to the sub-
contractor? This was the issue raised in the Adgas case {Abu Dhabi
Gas Liquefaction Co. Ltd. v. Eastern Bechtel Corp. [1982] 2 Lloyd’s
Rep. 425, CA}. Adgas was the owner of a plant that produced liquefied
natural gas in the Arabian Gulf. The company started arbitration in
England against the main contractors under an international
construction contract, alleging that one of the huge tanks that had
been constructed to store the gas was defective. The main contractor
denied liability but added that, if the tank was defective, it was the
fault of the Japanese sub-contractor. Adgas brought ad hoc
arbitration proceedings against the main contractor before a sole
arbitrator in London. The main contractor then brought separate
arbitration proceedings, also in London, against the Japanese sub-
contractor.
81. There is little doubt that if the matter had been litigated in
an English court, the Japanese company would have been joined as a
party to the action. However, Adgas did not agree that the Japanese
sub-contractor should be brought into its arbitration with the main
contractor, since this would have lengthened and complicated the
proceedings. The Japanese sub-contractor also did not agree to be
joined. It preferred to await the outcome of the main arbitration, to
see whether or not there was a case to answer.
82. Lord Denning, giving judgment in the English
Court of Appeal, plainly wished that an order could be made
consolidating the two sets of arbitral proceedings so as to save time
and money and to avoid the risk of inconsistent awards:
“As we have often pointed out, there is a danger in having
two separate arbitrations in a case like this. You might
get inconsistent findings if there were two separate
arbitrators. This has been said in many cases…it is most
undesirable that there should be inconsistent findings by
two separate arbitrators on virtually the self-same
question, such as causation. It is very desirable that
everything should be done to avoid such a circumstance [Abu
Dhabi Gas, op.cit.at 427]”
83. We have already referred to the contention of Mr. Fali S.
Nariman, the learned senior counsel appearing for the appellant, that
the provisions of Section 45 of the 1996 Act are somewhat similar to
Article II(3) of the New York Convention and the expression ‘parties’
in that Section would mean that ‘all parties to the action’ before the
Court have to be the parties to the arbitration agreement. If some of
them are parties to the agreement, while the others are not, Section
45 does not contemplate the applicable procedure and the status of the
non-signatories. The consequences of all parties not being common to
the action and arbitration proceedings are, as illustrated above,
multiplicity of proceedings and frustration of the intended ‘one stop
action’. The Rule of Mischief would support such interpretation.
Even if some unnecessary parties are added to the action, the Court
can always strike out such parties and even the cause of action in
terms of the provisions of the CPC. However, where such parties cannot
be struck off, there the proceedings must continue only before the
Court.
84. Thus, the provisions of Section 45 cannot be effectively applied
or even invoked. Unlike Section 24 of the 1940 Act, under the 1996
Act the Court has not been given the power to refer to arbitration
some of the parties from amongst the parties to the suit. Section 24
of 1940 Act vested the Court with the discretion that where the Court
thought fit, it could refer such matters and parties to arbitration
provided the same could be separated from the rest of the subject
matter of the suit. Absence of such provision in the 1996 Act clearly
suggests that the Legislature intended not to permit bifurcated or
partial references of dispute or parties to arbitration. Without
prejudice to this contention, it was also the argument that it would
not be appropriate and even permissible to make reference to
arbitration when the issues and parties in action are not covered by
the arbitration agreement. Referring to the consequences of all
parties not being common to the action before the Court and
arbitration, the disadvantages are:
a) There would be multiplicity of litigation;
b) Application of principle of one stop action would not be
possible; and
c) It will frustrate the application of the Rule of Mischief. The
Court can prevent the mischief by striking out unnecessary
parties or causes of action.
85. It would, thus, imply that a stranger or a third party cannot
ask for arbitration. The expression ‘claiming through or under’ will
have to be construed strictly and restricted to the parties to the
arbitration agreement.
86. Another issue raised before the Court is that there is
possibility of the arbitration proceedings going on simultaneously
with the suit, which would result in rendering passing of conflicting
orders possible. This would be contrary to the public policy of India
that Indian courts can give effect to the foreign awards which are in
conflict with judgment of the Indian courts.
87. To the contra, Mr. Salve, learned senior counsel appearing for
respondent No.1, contended that the expressions ‘parties to
arbitration’, ‘any person claiming through or under him’ and ‘at the
request of one of the party’ appearing in Section 45 are wide enough
to include some or all the parties and even non-signatory parties for
the purposes of making a reference to arbitration. It is also the
contention that on the true construction of Sections 44, 45 and 46 of
the 1996 Act, it is not possible to accept the contention of the
appellant that all the parties to an action have to be parties to the
arbitration agreement as well as the Court proceedings. This would be
opposed to the principle that parties should be held to their bargain
of arbitration. The Court always has the choice to make appropriate
orders in exercise of inherent powers to bifurcate the reference or
even stay the proceedings in a suit pending before it till the
conclusion of the arbitration proceedings or otherwise. According to
Mr. Salve, if the interpretation advanced by Mr. Nariman is accepted,
then mischief will be encouraged which would frustrate the arbitration
agreement because a party not desirous of going to arbitration would
initiate civil proceedings and add non-signatory as well as
unnecessary parties to the suit with a view to avoid arbitration.
This would completely frustrate the legislative object underlining the
1996 Act. Non-signatory parties can even be deemed to be parties to
the arbitration agreement and may successfully pray for referral to
arbitration.
88. As noticed above, the legislative intent and essence of the 1996
Act was to bring domestic as well as international commercial
arbitration in consonance with the UNCITRAL Model Rules, the New York
Convention and the Geneva Convention. The New York Convention was
physically before the Legislature and available for its consideration
when it enacted the 1996 Act. Article II of the Convention provides
that each contracting State shall recognise an agreement and submit to
arbitration all or any differences which have arisen or which may
arise between them in respect of a defined legal relationship, whether
contractual or not concerning a subject matter capable of settlement
by arbitration. Once the agreement is there and the Court is seized
of an action in relation to such subject matter, then on the request
of one of the parties, it would refer the parties to arbitration
unless the agreement is null and void, inoperative or incapable of
performance.
89. Still, the legislature opted to word Section 45 somewhat
dissimilarly. Section 8 of the 1996 Act also uses the expression
‘parties’ simpliciter without any extension. In significant contra-
distinction, Section 45 uses the expression ‘one of the parties or any
person claiming through or under him’ and ‘refer the parties to
arbitration’, whereas the rest of the language of Section 45 is
similar to that of Article II(3) of the New York Contention. The
Court cannot ignore this aspect and has to give due weightage to the
legislative intent. It is a settled rule of interpretation that
every word used by the Legislature in a provision should be given its
due meaning. To us, it appears that the Legislature intended to give a
liberal meaning to this expression.
90. The language of Section 45 has wider import. It refers to the
request of a party and then refers to an arbitral tribunal, while
under Section 8(3) it is upon the application of one of the parties
that the court may refer the parties to arbitration. There is some
element of similarity in the language of Section 8 and Section 45 read
with Article II(3). The language and expressions used in Section 45,
‘any person claiming through or under him’ including in legal
proceedings may seek reference of all parties to arbitration. Once
the words used by the Legislature are of wider connotation or the very
language of section is structured with liberal protection then such
provision should normally be construed liberally.
91. Examined from the point of view of the legislative object and
the intent of the framers of the statute, i.e., the necessity to
encourage arbitration, the Court is required to exercise its
jurisdiction in a pending action, to hold the parties to the
arbitration clause and not to permit them to avoid their bargain of
arbitration by bringing civil action involving multifarious cause of
action, parties and prayers.
Legal Relationship
92. Now, we should examine the scope of concept of ‘legal
relationship’ as incorporated in Article II(1) of the New York
Convention vis-à-vis the expression ‘any person claiming through or
under him’ appearing in Section 45 of the 1996 Act. Article II(1)
and (3) have to be read in conjunction with Section 45 of the Act.
Both these expressions have to be read in harmony with each other.
Once they are so read, it will be evident that the expression “legal
relationship” connotes the relationship of the party with the person
claiming through or under him. A person may not be signatory to an
arbitration agreement, but his cause of action may be directly
relatable to that contract and thus, he may be claiming through or
under one of those parties. It is also stated in the Law and Practice
of International Commercial Arbitration, Alan Redfern and Martin
Hunter (supra), that for the purposes of both the New York Convention
and the UNCITRAL Model Law, it is sufficient that there should be a
defined “legal relationship” between the parties, whether contractual
or not. Plainly there has to be some contractual relationship between
the parties, since there must be some arbitration agreement to form
the basis of the arbitral proceedings. Given the existence of such
an agreement, the dispute submitted to arbitration may be governed by
the principles of delictual or tortuous liability rather than by the
law of contract.
93. In the case of Roussel - Uclaf v. G.D. Searle & Co. Ltd. And
G.D. Searle & Co. [1978 Vol. 1 LLR 225], the Court held:
“The argument does not admit of much elaboration, but I see
no reason why these words in the Act should be construed so
narrowly as to exclude a wholly-owned subsidiary company
claiming, as here, a right to sell patented articles which
it has obtained from and been ordered to sell by its
parent. Of course, if the arbitration proceedings so
decide, it may eventually turn out that the parent company
is at fault and not entitled to sell the articles in
question at all; and, if so, the subsidiary will be equally
at fault. But, if the parent is blameless, it seems only
common sense that the subsidiary should be equally
blameless. The two parties and their actions are, in my
judgment, so closely related on the facts in this case that
it would be right to hold that the subsidiary can establish
that it is within the purview of the arbitration clause, on
the basis that it is “claiming through or under” the parent
to do what it is in fact doing whether ultimately held to
be wrongful or not.”
94. However, the view expressed by the Court in the above case does
not find approval in the decision of the Court of Appeal in the case
of City of London v. Sancheti [(2009) 1 Lloyds Law Reports 116]. In
paragraph 34, it was held that the view in the case of Roussel Uclaf
need not be followed and stay could not be obtained against a party to
an arbitration agreement or a person claiming through or under such a
party, as mere local or commercial connection is not sufficient. But
the Court of Appeal hastened to add that, in cases such as the one of
Mr. Sancheti, the Corporation of London was not party to the
arbitration agreement, but the relevant party is the United Kingdom
Government. The fact that in certain circumstances, the State may be
responsible under international law for the acts of one of its local
authorities, or may have to take steps to redress wrongs committed by
one of the local authorities, does not make the local authority a
party to the arbitration agreement.
95. Having examined both the above-stated views, we are of the
considered opinion that it will be the facts of a given case that
would act as precept to the jurisdictional forum as to whether any of
the stated principles should be adopted or not. If in the facts of a
given case, it is not possible to construe that the person approaching
the forum is a party to the arbitration agreement or a person claiming
through or under such party, then the case would not fall within the
ambit and scope of the provisions of the section and it may not be
possible for the Court to permit reference to arbitration at the
behest of or against such party.
96. We have already referred to the judgments of various courts,
that state that arbitration could be possible between a signatory to
an agreement and a third party. Of course, heavy onus lies on that
party to show that in fact and in law, it is claiming under or through
a signatory party, as contemplated under Section 45 of the 1996 Act.
97. Michael J. Mustill and Stewart C. Boyd in The Law and Practice
of Commercial Arbitration in England have observed that the applicant
must show that the person whose claim he seeks to stay is either a
party to the arbitration agreement or a person claiming through or
under such a party. It is further noticed that it occasionally
happens that the plaintiff is not himself a party to the arbitration
agreement on which the application is founded. This may arise in the
following situations :
i) The plaintiff has acquired the rights, which the action is
brought to enforce, from someone who is a party to an
arbitration agreement with the defendant;
ii) The plaintiff is bringing the action on behalf of someone else,
who is a party to an arbitration agreement with the defendant.
iii) When the expression used in the provision, the words ‘claiming
under plaintiff’ relate to substantive right which is being
asserted.
98. The requirements can scarcely be interpreted in their literal
sense, this would mean that a person could claim a stay even though
not a party to the arbitration agreement. However, the applicant
must be party to the agreement against whom legal proceedings have
been initiated rather than a party as intervenor.
99. Joinder of non signatory parties to arbitration is not unknown
to the arbitration jurisprudence. Even the ICCA’s Guide to the
Interpretation of the 1958 New York Convention also provides for such
situation, stating that when the question arises as to whether binding
a non-signatory to an arbitration agreement could be read as being in
conflict with the requirement of written agreement under Article I of
the Convention, the most compelling answer is “no” and the same is
supported by a number of reasons.
100. Various legal basis may be applied to bind a non-signatory to an
arbitration agreement. The first theory is that of implied consent,
third party beneficiaries, guarantors, assignment and other transfer
mechanisms of contractual rights. This theory relies on the
discernible intentions of the parties and, to a large extent, on good
faith principle. They apply to private as well as public legal
entities. The second theory includes the legal doctrines of agent-
principal relations, apparent authority, piercing of veil (also called
the “alter ego”), joint venture relations, succession and estoppel.
They do not rely on the parties’ intention but rather on the force of
the applicable law.
101. We may also notice the Canadian case of The City of Prince
George v. A.L. Sims & Sons Ltd. [YCA XXIII (1998), 223] wherein the
Court took the view that an arbitration agreement is neither
inoperative nor incapable of being performed if a multi-party dispute
arises and not all parties are bound by the arbitration agreement: the
parties bound by the arbitration agreement are to be referred to
arbitration and court proceedings may continue with respect to the
other parties, even if this creates a risk of conflicting decisions.
102. We have already discussed that under the Group of Companies
Doctrine, an arbitration agreement entered into by a company within a
group of companies can bind its non-signatory affiliates, if the
circumstances demonstrate that the mutual intention of the parties was
to bind both the signatory as well as the non-signatory parties.
103. The question of formal validity of the arbitration agreement is
independent of the nature of parties to the agreement, which is a
matter that belongs to the merits and is not subject to substantive
assessment. Once it is determined that a valid arbitration agreement
exists, it is a different step to establish which parties are bound by
it. Third parties, who are not explicitly mentioned in an
arbitration agreement made in writing, may enter into its ratione
personae scope. Furthermore, the Convention does not prevent consent
to arbitrate from being provided by a person on behalf of another, a
notion which is at the root of the theory of implied consent.
104. If one analyses the above cases and the authors’ views, it
becomes abundantly clear that reference of even non-signatory parties
to arbitration agreement can be made. It may be the result of
implied or specific consent or judicial determination. Normally, the
parties to the arbitration agreement calling for arbitral reference
should be the same as those to the an action. But this general
concept is subject to exceptions which are that when a third party,
i.e. non-signatory party, is claiming or is sued as being directly
affected through a party to the arbitration agreement and there are
principal and subsidiary agreements, and such third party is signatory
to a subsidiary agreement and not to the mother or principal agreement
which contains the arbitration clause, then depending upon the facts
and circumstances of the given case, it may be possible to say that
even such third party can be referred to arbitration.
105. In the present case, the corporate structure of the respondent
companies as well as that of the appellant companies clearly
demonstrates a legal relationship which not only is inter-legal
relationship but also intra-legal relationship between the parties to
the lis or persons claiming under them. They have contractual
relationship which arises out of the various contracts that spell out
the terms, obligations and roles of the respective parties which they
were expected to perform for attaining the object of successful
completion of the joint venture agreement. This joint venture
project was not dependant on any single agreement but was capable of
being achieved only upon fulfillment of all these agreements. If
one floats a joint venture company, one must essentially know-how to
manage it and what shall be the methodology adopted for its
management. If one manages it well, one must know what goods the
said company is to produce and with what technical knowhow. Even if
these requisites are satisfied, then also one is required to know, how
to create market, distribute and export such goods. It is nothing but
one single chain consisting of different components. The parties may
choose to sign different agreements to effectively implement various
aforementioned facets right from managing to making profits in a joint
venture company. A party may not be signatory to an agreement but its
execution may directly be relatable to the main contract even though
he claims through or under one of the main party to the agreement. In
such situations, the parties would aim at achieving the object of
making their bargain successful, by execution of various agreements,
like in the present case.
106. The New York Convention clearly postulates that there should be
a defined legal relationship between the parties, whether contractual
or not, in relation to the differences that may have arisen concerning
the subject matter capable of settlement of arbitration. We have
referred to a number of judgments of the various courts to emphasize
that in given circumstances, if the ingredients above-noted exist,
reference to arbitration of a signatory and even a third party is
possible. Though heavy onus lies on the person seeking such
reference, multiple and multi-party agreements between the parties to
the arbitration agreement or persons claiming through or under such
parties is neither impracticable nor impermissible.
107. Next, we are to examine the issue whether the cause of action in
a suit can be bifurcated and a partial reference may be made by the
Court. Whatever be the answer to this question, a necessary corollary
is as to whether the Court should or should not stay the proceedings
in the suit? Further, this may give rise to three different
situations. Firstly, while making reference of the subject matter to
arbitration, whether the suit may still survive, partially or
otherwise; secondly, whether the suit, still pending before the Court,
should be stayed completely; and lastly, whether both the arbitration
and the suit proceedings could be permitted to proceed simultaneously
in accordance with law.
108. Mr. Nariman, the learned senior counsel, while relying upon the
judgments in the cases of Turnock v. Sartoris [1888 (43) Chancery
Division, 1955 SCR 862], Taunton-Collins v. Cromie & Anr., [1964 Vol.1
Weekly Law Reports 633] and Sumitomo Corporation v. CDS Financial
Services (Mauritius) Ltd. and Others [(2008) 4 SCC 91] again
emphasized that the parties to the agreement have to be parties to the
suit and also that the cause of action cannot be bifurcated unless
there was a specific provision in the 1996 Act itself permitting such
bifurcation or splitting of cause of action. He also contended that
there is no provision like Sections 21 and 24 of the 1940 Act in the
1996 Act and thus, it supports the view that bifurcation of cause of
action is impermissible and such reference to arbitration is not
permissible.
109. In the case of Turnock (supra), the Court had stated that it was
not right to cut up that litigation into two actions, one to be tried
before the arbitrator and the other to be tried elsewhere, as in that
case matters in respect of which the damages were claimed by the
plaintiff could not be referred to arbitration because questions
arising as to the construction of the agreement and provisions in the
lease deed were involved and they did not fall within the power of the
arbitrator in face of the arbitration agreement. In the case of
Taunton-Collins (supra), the Court again expressed the view that it
was undesirable that there should be two proceedings before two
different tribunals, i.e., the official referee and an Arbitrator, as
they may reach inconsistent findings.
110. This Court dealt with the provisions of the 1940 Act, in the
case of Anderson Wright Ltd. v. Moran & Company [1955 SCR 862], and
described the conditions to be satisfied before a stay can be granted
in terms of Section 34 of the 1940 Act. The Court also held that it
was within the jurisdiction of the Court to determine a question
whether the plaintiff was a party to the contract containing the
arbitration clause or not. Still in the case of Sumitomo Corporation
(supra), this Court primarily declined the reference to arbitration
for the reason that the disputes stated in the petition did not fall
within the ambit of the arbitration clause contained in the agreement
between the parties and also that the Joint Venture Agreement did not
itself contain a specific arbitration clause. An observation was also
made in paragraph 20 of the judgment that the ‘party’ would mean ‘the
party to the judicial proceeding should be a party to the arbitration
agreement.
111. It will be appropriate to refer to the contentions of Mr. Salve,
the learned senior counsel. According to him, reference, even of the
non-signatory party, could be made to arbitration and upon such
reference the proceedings in an action before the Court should be
stayed. The principle of bifurcation of cause of action, as
contemplated under the CPC, cannot stricto sensu apply to Section 45
of the 1996 Act in view of the non-obstante language of the Section.
He also contended that parties or issues, even if outside the scope of
the arbitration agreement, would not per se render the arbitration
clause inoperative. Even if there is no specific provision for
staying the proceedings in the suit under the 1996 Act, still in
exercise of its inherent powers, the Court can direct stay of the suit
proceedings or pass such other appropriate orders as the court may
deem fit.
112. We would prefer to first deal with the precedents of this Court
cited before us. As far as Sumitomo Corporation (supra) is concerned,
it was a case dealing with the matter where the proceedings under
Section 397-398 of the Companies Act had been initiated and the
Company Law Board had passed an order. Whether the appeal against
such order would lie to the High Court was the principal question
involved in that case. The denial of arbitration reference, as
already noticed, was based upon the reasoning that disputes related to
the joint venture agreement to which the parties were not signatory
and the said agreement did not even contain the arbitration clause.
On the other hand, it was the other agreement entered into by
different parties which contained the arbitration clause. As already
noticed, in paragraph 20, the Court had observed that a party to an
arbitration agreement has to be a party to the judicial proceedings
and then alone it will fall within the ambit of Section 2(h) of the
1996 Act. As far as the first issue is concerned, we shall shortly
proceed to discuss it when we discuss the merits of this case, in
light of the principles stated in this judgment. However, the
observations made by the learned Bench in the case of Sumitomo
Corporation (supra) do not appear to be correct. Section 2(h) only
says that ‘party’ means a party to an arbitration agreement. This
expression falls in the Chapter dealing with definitions and would
have to be construed along with the other relevant provisions of the
Act. When we read Section 45 in light of Section 2(h), the
interpretation given by the Court in the case of Sumitomo Corporation
(supra) does not stand to the test of reasoning. Section 45 in
explicit language permits the parties who are claiming through or
under a main party to the arbitration agreement to seek reference to
arbitration. This is so, by fiction of law, contemplated in the
provision of Section 45 of the 1996 Act.
113. We have already discussed above that the language of Section 45
is incapable of being construed narrowly and must be given expanded
meaning to achieve the twin objects of arbitration, i.e., firstly, the
parties should be held to their bargain of arbitration and secondly,
the legislative intent behind incorporating the New York Convention as
part of Section 44 of the Act must be protected. Moreover, paragraph
20 of the judgment of Sumitomo Corporation (supra) does not state any
principle of law and in any event it records no reasons for arriving
at such a conclusion. In fact, that was not even directly the issue
before the Court so as to operate as a binding precedent. For these
reasons, respectfully but without hesitation, we are constrained to
hold that the conclusion or the statement made in paragraph 20 of this
judgment does not enunciate the correct law.
Scope of jurisdiction while referring the parties to arbitration
114. An application for appointment of arbitral tribunal under
Section 45 of the 1996 Act would also be governed by the provisions of
Section 11(6) of the Act. This question is no more res integra and
has been settled by decision of a Constitution Bench of seven Judges
of this Court in the case of SBP and Co. v. Patel Engineering Ltd. and
Anr. [(2005) 8 SCC 618], wherein this Court held that power exercised
by the Chief Justice is not an administrative power. It is a judicial
power. It is a settled principle that the Chief Justice or his
designate Judge will decide preliminary aspects which would attain
finality unless otherwise directed to be decided by the arbitral
tribunal. In para 39 of the judgment, the Court held as under :
“39. It is necessary to define what exactly the Chief
Justice, approached with an application under Section 11 of
the Act, is to decide at that stage. Obviously, he has to
decide his own jurisdiction in the sense whether the party
making the motion has approached the right High Court. He
has to decide whether there is an arbitration agreement, as
defined in the Act and whether the person who has made the
request before him, is a party to such an agreement. It is
necessary to indicate that he can also decide the question
whether the claim was a dead one; or a long-barred claim
that was sought to be resurrected and whether the parties
have concluded the transaction by recording satisfaction of
their mutual rights and obligations or by receiving the
final payment without objection. It may not be possible at
that stage, to decide whether a live claim made, is one
which comes within the purview of the arbitration clause.
It will be appropriate to leave that question to be decided
by the Arbitral Tribunal on taking evidence, along with the
merits of the claims involved in the arbitration. The Chief
Justice has to decide whether the applicant has satisfied
the conditions for appointing an arbitrator under Section
11(6) of the Act. For the purpose of taking a decision on
these aspects, the Chief Justice can either proceed on the
basis of affidavits and the documents produced or take such
evidence or get such evidence recorded, as may be
necessary. We think that adoption of this procedure in the
context of the Act would best serve the purpose sought to
be achieved by the Act of expediting the process of
arbitration, without too many approaches to the court at
various stages of the proceedings before the Arbitral
Tribunal.”
115. This aspect of the arbitration law was explained by a two Judge
Bench of this Court in the case of Shree Ram Mills Ltd. v. Utility
Premises (P) Ltd. [(2007) 4 SCC 599] wherein, while referring to the
judgment in SBP & Co. (supra) particularly the above paragraph, this
Court held that the scope of order under Section 11 of the 1996 Act
would take in its ambit the issue regarding territorial jurisdiction
and the existence of the arbitration agreement. The Court noticed
that if these issues are not decided by the Chief Justice or his
designate, there would be no question of proceeding with the
arbitration. It held as under:
“27…Thus, the Chief Justice has to decide about the
territorial jurisdiction and also whether there exists an
arbitration agreement between the parties and whether such
party has approached the court for appointment of the
arbitrator. The Chief Justice has to examine as to whether
the claim is a dead one or in the sense whether the parties
have already concluded the transaction and have recorded
satisfaction of their mutual rights and obligations or
whether the parties concerned have recorded their
satisfaction regarding the financial claims. In examining
this if the parties have recorded their satisfaction
regarding the financial claims, there will be no question
of any issue remaining. It is in this sense that the Chief
Justice has to examine as to whether there remains anything
to be decided between the parties in respect of the
agreement and whether the parties are still at issue on any
such matter. If the Chief Justice does not, in the strict
sense, decide the issue, in that event it is for him to
locate such issue and record his satisfaction that such
issue exists between the parties. It is only in that sense
that the finding on a live issue is given. Even at the cost
of repetition we must state that it is only for the purpose
of finding out whether the arbitral procedure has to be
started that the Chief Justice has to record satisfaction
that there remains a live issue in between the parties. The
same thing is about the limitation which is always a mixed
question of law and fact. The Chief Justice only has to
record his satisfaction that prima facie the issue has not
become dead by the lapse of time or that any party to the
agreement has not slept over its rights beyond the time
permitted by law to agitate those issues covered by the
agreement. It is for this reason that it was pointed out in
the above para that it would be appropriate sometimes to
leave the question regarding the live claim to be decided
by the Arbitral Tribunal. All that he has to do is to
record his satisfaction that the parties have not closed
their rights and the matter has not been barred by
limitation. Thus, where the Chief Justice comes to a
finding that there exists a live issue, then naturally this
finding would include a finding that the respective claims
of the parties have not become barred by limitation.
(emphasis supplied)”
116. Thus, the Bench while explaining the judgment of this Court in
SBP & Co. (supra) has stated that the Chief Justice may not decide
certain issues finally and upon recording satisfaction that prima
facie the issue has not become dead even leave it for the arbitral
tribunal to decide.
117. In National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.
[(2009) 1 SCC 267], another equi-bench of this Court after discussing
various judgments of this Court, explained SBP & Co. (supra) in
relation to scope of powers of the Chief Justice and/or his designate
while exercising jurisdiction under Section 11(6), held as follows :
“22. Where the intervention of the court is sought for
appointment of an Arbitral Tribunal under Section 11, the
duty of the Chief Justice or his designate is defined in
SBP & Co. This Court identified and segregated the
preliminary issues that may arise for consideration in an
application under Section 11 of the Act into three
categories, that is, (i) issues which the Chief Justice or
his designate is bound to decide; (ii) issues which he can
also decide, that is, issues which he may choose to decide;
and (iii) issues which should be left to the Arbitral
Tribunal to decide.
22.1. The issues (first category) which the Chief
Justice/his designate will have to decide are:
(a) Whether the party making the application has
approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether
the party who has applied under Section 11 of the
Act, is a party to such an agreement.
22.2. The issues (second category) which the Chief
Justice/his designate may choose to decide (or leave them
to the decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long-barred) claim or a
live claim.
(b) Whether the parties have concluded the
contract/transaction by recording satisfaction of
their mutual rights and obligation or by receiving
the final payment without objection.
22.3. The issues (third category) which the Chief
Justice/his designate should leave exclusively to the
Arbitral Tribunal are:
(i) Whether a claim made falls within the arbitration
clause (as for example, a matter which is reserved
for final decision of a departmental authority and
excepted or excluded from arbitration).
(ii) Merits or any claim involved in the arbitration.”
118. We may notice that at first blush, the judgment in the case of
Shree Ram Mills (supra) is at some variance with the judgment in the
case of National Insurance Co. Ltd. (supra) but when examined in
depth, keeping in view the judgment in the case of SBP & Co. (supra)
and provisions of Section 11(6) of the 1996 Act, both these judgments
are found to be free from contradiction and capable of being read in
harmony in order to bring them in line with the statutory law declared
by the larger Bench in SBP & Co. (supra). The expressions “Chief
Justice does not in strict sense decide the issue” or “is prima facie
satisfied”, will have to be construed in the facts and circumstances
of a given case. Where the Chief Justice or his designate actually
decides the issue, then it can no longer be prima facie, but would be
a decision binding in law. On such an issue, the Arbitral Tribunal
will have no jurisdiction to re-determine the issue. In the case of
Shree Ram Mills (supra), the Court held that the Chief Justice could
record a finding where the issue between the parties was still alive
or was dead by lapse of time. Where it prima facie found the issue to
be alive, the Court could leave the question of limitation and also
open to be decided by the arbitral tribunal.
119. The above expressions are mere observations of the Court and do
not fit into the contours of the principle of ratio decidendi of the
judgment. The issues in regard to validity or existence of the
arbitration agreement, the application not satisfying the ingredients
of Section 11(6) of the 1996 Act and claims being barred by time etc.
are the matters which can be adjudicated by the Chief Justice or his
designate. Once the parties are heard on such issues and the matter
is determined in accordance with law, then such a finding can only be
disturbed by the Court of competent jurisdiction and cannot be
reopened before the arbitral tribunal. In SBP & Co. (supra), the
Seven Judge Bench clearly stated, “the finality given to the order of
the Chief Justice on the matters within his competence under Section
11 of the Act are incapable of being reopened before the arbitral
tribunal”. Certainly the Bench dealing with the case of Shree Ram
Mills (supra) did not intend to lay down any law in direct conflict
with the Seven Judge Bench judgment in SBP & Co. (supra). In the
reasoning given in Shree Ram Mills’ case, the Court has clearly stated
that matters of existence and binding nature of arbitration agreement
and other matters mentioned therein are to be decided by the Chief
Justice or his designate and the same is in line with the judgment of
this Court in the case of SBP & Co. (supra). It will neither be
permissible nor in consonance with the doctrine of precedent that
passing observations by the Bench should be construed as the law while
completely ignoring the ratio decidendi of that very judgment. We may
also notice that the judgment in Shree Ram Mills (supra) was not
brought to the notice of the Bench which pronounced the judgment in
the case of National Insurance Co. Ltd. (supra).
120. As far as the classification carved out by the Court in the case
of National Insurance Co. Ltd. (supra) are concerned, it draws its
origin from paragraph 39 of the judgment in the case of SBP & Co.
(supra) wherein the Constitution Bench of the Court had observed that
“it may not be possible at that stage to decide whether a live claim
made is one which comes within the purview of the arbitration clause.
It will be more appropriate to leave the seriously disputed questions
to be decided by the Arbitral Tribunal on taking evidence along with
the merits of the claim, subject matter of the arbitration.”
121. The foundation for category (2) in para 22 of the National
Insurance Company Ltd. (supra) is directly relatable to para 39 of the
judgment of this court in SBP & Co. (supra) and matters falling in
that category are those which, depending on the facts and
circumstances of a given case, could be decided by the Chief Justice
or his designate or even may be left for the decision of the
arbitrator, provided there exists a binding arbitration agreement
between the parties. Similar is the approach of the Bench in the case
of Shree Ram Mills (supra) and that is why in paragraph 27 thereof,
the Court has recorded that it would be appropriate sometimes to leave
the question regarding the claim being alive to be decided by the
arbitral tribunal and the Chief Justice may record his satisfaction
that parties have not closed their rights and the matter has not been
barred by limitation.
122. As already noticed, the observations made by the Court have to
be construed and read to support the ratio decidendi of the judgment.
Observations in a judgment which are stared upon by the judgment of a
larger bench would not constitute valid precedent as it will be hit by
the doctrine of staire decisis. In the case of the Shri Ram Mills
(supra) surely the Bench did not intend to lay down the law or state a
proposition which is directly in conflict with the judgment of the
Constitution Bench of this Court in the case of SBP & Co. (supra).
123. We have no reason to differ with the classification carved out
in the case of National Insurance Co. (supra) as it is very much in
conformity with the judgment of the Constitution Bench in the case of
SBP (supra). The question that follows from the above discussion is
as to whether the views recorded by the judicial forum at the
threshold would be final and binding on the parties or would they
constitute the prima facie view. This again has been a matter of some
debate before this Court. A three Judge Bench of this Court in the
case of Shin-Etsu Chemical Co. Ltd. v. M/s. Aksh Optifibre Ltd. & Anr.
[(2005) 7 SCC 234] was dealing with an application for reference under
Section 45 of the 1996 Act and consequently, determination of validity
of arbitration agreement which contained the arbitration clause
governed by the ICC Rules in Tokyo, Japan. The appellant before this
Court had terminated the agreement in that case. The respondent filed
a suit claiming a decree of declaration and injunction against the
appellant for cancellation of the agreement which contained the
arbitration clause. In that very suit, the appellant also prayed that
this long term sale and purchase agreement, which included the
arbitration clause be declared void ab initio, inoperative and
incapable of being performed on the ground that the said agreement
contained unconscionable, unfair and unreasonable terms; was against
public policy and was entered into under undue influence. The
appellant had also filed an application under Section 8 of the 1996
Act for reference to arbitration. Some controversy arose before the
Trial Court as well as before the High Court as to whether the
application was one under Section 8 or Section 45 but when the matter
came up before this Court, the counsel appearing for both the parties
rightly took the stand that only Section 45 was applicable and Section
8 had no application. In this case, the Court was primarily concerned
and dwelled upon the question whether an order refusing reference to
arbitration was appealable under Section 50 of the 1996 Act and what
would be its effect.
124. We are not really concerned with the merits of that case but
certainly are required to deal with the limited question whether the
findings recorded by the referring Court are of final nature, or are
merely prima facie and thus, capable of being re-adjudicated by the
arbitral tribunal. Where the Court records a finding that the
agreement containing the arbitration clause or the arbitration clause
itself is null and void, inoperative or incapable of being performed
on merits of the case, it would decline the reference. Then the
channel of legal remedy available to the party against whom the
reference has been declined would be to take recourse to an appeal
under Section 50(1)(a) of the 1996 Act. The Arbitral Tribunal in such
situations does not deliver any determination on the issues in the
case. However, in the event that the referring Court deals with such
an issue and returns a finding that objections to reference were not
tenable, thus rejecting, the plea on merits, then the issue arises as
to whether the arbitral tribunal can re-examine the question of the
agreement being null and void, inoperative or incapable of
performance, all over again. Sabharwal, J., after deliberating upon
the approaches of different courts under the English and the American
legal systems, stated that both the approaches have their own
advantages and disadvantages. The approach whereby the courts finally
decide on merits in relation to the issue of existence and validity of
the arbitration agreement would result to a large extent in avoiding
delay and increased cost. It would not be for the parties to wait for
months or years before knowing the final outcome of the disputes
regarding jurisdiction alone. Then, he held as follows :
“56. I am of the view that the Indian Legislature has
consciously adopted a conventional approach so as to save
the huge expense involved in international commercial
arbitration as compared to domestic arbitration.
57. In view of the aforesaid discussion, I am of the view
that under Section 45 of the Act, the determination has to
be on merits, final and binding and not prima facie.”
125. However, Srikrishna, J. took a somewhat different view and
noticing the truth that there is nothing in Section 45 to suggest that
a finding as to the nature of the arbitration agreement has to be ex
facie or prima facie, observed that if it were to be held that the
finding of the court under Section 45 should be a final, determinative
conclusion, then it is obvious that until such a pronouncement is
made, the arbitral proceedings would have to be in limbo. So, he held
as follows :
“105. I fully agree with my learned Brother's view that the
object of dispute resolution through arbitration, including
international commercial arbitration, is expedition and
that the object of the Act would be defeated if proceedings
remain pending in the court even after commencing of the
arbitration. It is precisely for this reason that I am
inclined to the view that at the pre-reference stage
contemplated by Section 45, the court is required to take
only a prima facie view for making the reference, leaving
the parties to a full trial either before the Arbitral
Tribunal or before the court at the post-award stage.”
126. Dharmadhikari, J., the third member of the Bench, while agreeing
with the view of Srikrishna, J. and noticing, “Where a judicial
authority or the court refuses to make a reference on the grounds
available under Section 45 of the Act, it is necessary for the
judicial authority or the court which is seized of the matter to pass
a reasoned order as the same is subject to appeal to the appellate
court under Section 50(1)(a) of the Act and further appeal to this
Court under sub-section (2) of the said section.” expressed no view on
the issue of prima facie or finality of the finding recorded on the
pre-reference stage, he left the question open in the following
paragraph :
“112. Whether such a decision of the judicial authority or
the court, of refusal to make a reference on grounds
permissible under Section 45 of the Act would be subjected
to further re-examination before the Arbitral Tribunal or
the court in which eventually the award comes up for
enforcement in accordance with Section 48(1)(a) of the Act,
is a legal question of sufficient complexity and in my
considered opinion since that question does not directly
arise on the facts of the present case, it should be left
open for consideration in an appropriate case where such a
question is directly raised and decided by the court.”
127. The judgment of this Court in Shin-Etsu Chemical Co. Ltd.
(supra) preceded the judgment of this Court in the case of SBP & Co.
(supra). Though the Constitution Bench in the latter case referred to
this judgment in paragraph 89 of the judgment but did not discuss the
merits or otherwise of the case presumably for absence of any
conflict. However, as already noticed, the Court clearly took the view
that the findings returned by the Chief Justice while exercising his
judicial powers under Section 11 relatable to Section 8 are final and
not open to be questioned by the arbitral tribunal. Sections 8 and 45
of the 1996 Act are provisions independent of each other. But for the
purposes of reference to arbitration, in both cases, the applicant has
to pray for a reference before the Chief Justice or his designate in
terms of Section 11 of the 1996 Act. We may refer to the exact
terminology used by the larger Bench in SBP & Co. (supra) in relation
to the finality of such matters, as reflected in para 12 of the
judgment which reads as under :
“12. Section 16 of the Act only makes explicit what is even
otherwise implicit, namely, that the Arbitral Tribunal
constituted under the Act has the jurisdiction to rule on
its own jurisdiction, including ruling on objections with
respect to the existence or validity of the arbitration
agreement. Sub-section (1) also directs that an arbitration
clause which forms part of a contract shall be treated as
an agreement independent of the other terms of the
contract. It also clarifies that a decision by the Arbitral
Tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.
Sub-section (2) of Section 16 enjoins that a party wanting
to raise a plea that the Arbitral Tribunal does not have
jurisdiction, has to raise that objection not later than
the submission of the statement of defence, and that the
party shall not be precluded from raising the plea of
jurisdiction merely because he has appointed or
participated in the appointment of an arbitrator. Sub-
section (3) lays down that a plea that the Arbitral
Tribunal is exceeding the scope of its authority, shall be
raised as soon as the matter alleged to be beyond the scope
of its authority is raised during the arbitral proceedings.
When the Tribunal decides these two questions, namely, the
question of jurisdiction and the question of exceeding the
scope of authority or either of them, the same is open to
immediate challenge in an appeal, when the objection is
upheld and only in an appeal against the final award, when
the objection is overruled. Sub-section (5) enjoins that if
the Arbitral Tribunal overrules the objections under sub-
section (2) or (3), it should continue with the arbitral
proceedings and make an arbitral award. Sub-section (6)
provides that a party aggrieved by such an arbitral award
overruling the plea on lack of jurisdiction and the
exceeding of the scope of authority, may make an
application on these grounds for setting aside the award in
accordance with Section 34 of the Act. The question, in the
context of sub-section (7) of Section 11 is, what is the
scope of the right conferred on the Arbitral Tribunal to
rule upon its own jurisdiction and the existence of the
arbitration clause, envisaged by Section 16(1), once the
Chief Justice or the person designated by him had appointed
an arbitrator after satisfying himself that the conditions
for the exercise of power to appoint an arbitrator are
present in the case. Prima facie, it would be difficult to
say that in spite of the finality conferred by sub-section
(7) of Section 11 of the Act, to such a decision of the
Chief Justice, the Arbitral Tribunal can still go behind
that decision and rule on its own jurisdiction or on the
existence of an arbitration clause. It also appears to us
to be incongruous to say that after the Chief Justice had
appointed an Arbitral Tribunal, the Arbitral Tribunal can
turn round and say that the Chief Justice had no
jurisdiction or authority to appoint the Tribunal, the very
creature brought into existence by the exercise of power by
its creator, the Chief Justice. The argument of the learned
Senior Counsel, Mr K.K. Venugopal that Section 16 has full
play only when an Arbitral Tribunal is constituted without
intervention under Section 11(6) of the Act, is one way of
reconciling that provision with Section 11 of the Act,
especially in the context of sub-section (7) thereof. We
are inclined to the view that the decision of the Chief
Justice on the issue of jurisdiction and the existence of a
valid arbitration agreement would be binding on the parties
when the matter goes to the Arbitral Tribunal and at
subsequent stages of the proceeding except in an appeal in
the Supreme Court in the case of the decision being by the
Chief Justice of the High Court or by a Judge of the High
Court designated by him.”
(Emphasis supplied)
128. We are conscious of the fact that the above dictum of the Court
is in relation to the scope and application of Section 11 of the 1996
Act. It has been held in various judgments of this Court but more
particularly in the case of SBP (supra) which is binding on us that
before making a reference, the Court has to dispose of the objections
as contemplated under Section 8 or Section 45, as the case may be, and
wherever needed upon filing of affidavits. Thus, to an extent, the
law laid down by this Court on Section 11 shall be attracted to an
international arbitration which takes place in India as well as
domestic arbitration. This, of course, would be applicable at pre-
award stage. Thus, there exists a direct legal link, limited to that
extent.
129. We are not oblivious of the principle ‘Kompetenz kompetenz’. It
requires the arbitral tribunal to rule on its own jurisdiction and at
the first instance. One school of thought propagates that it has duly
the positive effect as it enables the arbitrator to rule on its own
jurisdiction as it widely recognized international arbitration.
However, the negative effect is equally important, that the Courts are
deprived of their jurisdiction. The arbitrators are to be not the
sole judge but first judge, of their jurisdiction. In other words, it
is to allow them to come to a decision on their own jurisdiction prior
to any court or other judicial authority and thereby limit the
jurisdiction of the national courts to review the award. The
kompetenz kompetenz rule, thus, concerned not only is the positive but
also the negative effect of the arbitration agreement. [refer
Fouchard Gaillard Goldman on International Commercial Arbitration]
130. This policy has found a favourable mention with reference to the
New York Convention in some of the countries. This is one aspect.
The more important aspect as far as Chapter I of Part II of the 1996
Act is concerned, is the absence of any provision like Section 16
appearing in Part I of the same Act. Section 16 contemplates that the
arbitrator may determine its own jurisdiction. Absence of such a
provision in Part II, Chapter I is suggestive of the requirement for
the Court to determine the ingredients of Section 45, at the threshold
itself. It is expected of the Court to answer the question of
validity of the arbitration agreement, if a plea is raised that the
agreement containing the arbitration clause or the arbitration clause
itself is null and void, inoperative or incapable of being performed.
Such determination by the Court in accordance with law would certainly
attain finality and would not be open to question by the arbitral
tribunal, even as per the principle of prudence. It will prevent
multiplicity to litigation and re-agitating of same issues over and
over again. The underlining principle of finality in Section 11(7)
would be applicable with equal force while dealing with the
interpretation of Sections 8 and 45. Further, it may be noted that
even the judgment of this Court in SBP & Co. (supra) takes a view in
favour of finality of determination by the Court despite the language
of Section 16 in Part I of the 1996 Act. Thus, there could hardly be
any possibility for the Court to take any other view in relation to
an application under Section 45 of the 1996 Act. Since, the
categorization referred to by this Court in the case of National
Insurance Company Ltd. (supra) is founded on the decision by the
larger Bench of the Court in the case of SBP & Co. (supra), we see no
reason to express any different view. The categorization falling
under para 22.1 of the National Insurance Company case (supra) would
certainly be answered by the Court before it makes a reference while
under para 22.2 of that case, the Court may exercise its discretion
and decide the dispute itself or refer the dispute to the arbitral
tribunal. Still, under the cases falling under para 22.3, the Court
is expected to leave the determination of such dispute upon the
arbitral tribunal itself. But wherever the Court decides in terms of
categories mentioned in paras 22.1 and 22.2, the decision of the Court
is unreviewable by the arbitral tribunal.
131. Another very significant aspect of adjudicating the matters
initiated with reference to Section 45 of the 1996 Act, at the
threshold of judicial proceedings, is that the finality of the
decision in regard to the fundamental issues stated under Section 45
would further the cause of justice and interest of the parties as
well. To illustratively demonstrate it, we may give an example.
Where party ‘A’ is seeking reference to arbitration and party ‘B’
raises objections going to the very root of the matter that the
arbitration agreement is null and void, inoperative and incapable of
being performed, such objections, if left open and not decided
finally at the threshold itself may result in not only parties being
compelled to pursue arbitration proceedings by spending time, money
and efforts but even the arbitral tribunal would have to spend
valuable time in adjudicating the complex issues relating to the
dispute between the parties, that may finally prove to be in vain and
futile. Such adjudication by the arbitral tribunal may be rendered
ineffective or even a nullity in the event the courts upon filing of
an award and at execution stage held that agreement between the
parties was null and void inoperative and incapable of being
performed. The Court may also hold that the arbitral tribunal had no
jurisdiction to entertain and decide the issues between the parties.
The issue of jurisdiction normally is a mixed question of law and
facts. Occasionally, it may also be a question of law alone. It will
be appropriate to decide such questions at the beginning of the
proceedings itself and they should have finality. Even when the
arbitration law in India contained the provision like Section 34 of
the 1940 Act which was somewhat similar to Section 4 of the English
Arbitration Act, 1889, this Court in the case of Anderson Wright Ltd.
(supra) took the view that while dealing with the question of grant or
refusal of stay as contemplated under Section 34 of the 1940 Act, it
would be incumbent upon the Court to decide first of all whether there
is a binding agreement for arbitration between the parties to the suit
or not. Applying the analogy thereof will fortify the view that
determination of fundamental issues as contemplated under Section 45
of the 1996 Act at the very first instance by the judicial forum is
not only appropriate but is also the legislative intent. Even, the
language of Section 45 of the 1996 Act suggests that unless the Court
finds that an agreement is null and void, inoperative and incapable of
being performed, it shall refer the parties to arbitration.
Correctness of Law stated in Sukanya
132. Though rival contentions have been raised before us on the
correctness of the judgment of this Court in Sukanya Holdings Pvt.
Ltd. (supra), Mr. Salve vehemently tried to persuade us to hold that
this judgment does not state the correct exposition of law and to that
effect it needs to be clarified by this Court in the present case. On
the contrary, Mr. Nariman argued that this judgment states the correct
law and, in fact, the principles stated should be applied to the
present case.
133. The ambit and scope of Section 45 of the 1996 Act, we shall be
discussing shortly but at this stage itself, we would make it clear
that it is not necessary for us to examine the correctness or
otherwise of the judgment in the case of Sukanya (supra). This we say
for varied reasons. Firstly, Sukanya was a judgment of this Court in
a case arising under Section 8 Part I of the 1996 Act while the
present case relates to Section 45 Part II of the Act. As such that
case may have no application to the present case. Secondly, in that
case the Court was concerned with the disputes of a partnership
concern. A suit had been filed for dissolution of partnership firm
and accounts also challenging the conveyance deed executed by the
partnership firm in favour of one of the parties to the suit. The
Court noticing the facts of the case emphasized that where the subject
matter of the suit includes subject matter for arbitration agreement
as well as other disputes, the Court did not refer the matter to
arbitration in terms of Section 8 of the Act. In the case in hand,
there is a mother agreement and there are other ancillary agreements
to the mother agreement. It is a case of composite transaction
between the same parties or the parties claiming through or under them
falling under Section 45 of the Act. Thus, the dictum stated in para
13 of the judgment of Sukanya would not apply to the present case.
Thirdly, on facts, the judgment in Sukanya’s case, has no application
to the case in hand.
134. Thus, we decline to examine the merit or otherwise of this
contention.
On Merits
135. The Corporate structure of the companies in the present case has
already been stated by us in paragraph 7 which we need not refer here
again in detail. Suffice it to note that Kocha group had floated a
company and incorporated the same under the Indian laws, which was
carrying on the business of manufacture of chlorination equipment
under the name and style ‘Chloro Control India Private Limited’. They
were negotiating with Severn Trent Water Purification Inc. for an
international joint venture agreement to deal with the manufacture,
distribution and sale of gas chlorination equipment and electro-
chlorination equipment, “Hypogen Series 3300” etc. On this basis,
they had entered into a joint venture agreement which was signed
between them. The joint venture agreement contemplated that the
business shall be carried on under the name and style of Capital
Controls India Ltd. Private Limited. The agreements gave 50 per cent
shareholding to the foreign collaborators which were to be equally
divided between Capital Control (Del) Company Inc. and Capital Control
Company Inc. These joint venture agreements were executed between the
parties on 16th November, 1995 but the joint venture company had been
incorporated on 14th November, 1995 itself. Severn Trent Services
(Del) Inc. is the holding company of the companies which have entered
into the joint venture agreement for floating both, the Capital
Control India Ltd. as well as Severn Trent De Nora LLC. The disputes
had arisen actually between the Kocha Group on the one hand and Severn
Trent Water Purification Inc. on the other, and the disputes were
mainly with regard to Capital Control (India) Pvt. Ltd. Inc. Now, we
must note, even at the cost of repetition, the parties signatory to
each of these agreements and we must also note which of these
agreements did not contain arbitration clause. Shareholders Agreement
dated 16th November, 1995 was executed between the Capital Control
(Delaware) Company Inc. and Chloro Control India Private Ltd. Capital
Control Delaware Company Inc. was a subsidiary of Severn Trent
Services (Delaware) Inc. and was formed on 21st September, 1994.
Capital Control Company Inc. came to be merged with Capital Control
(Delaware) Company Inc. in March 1994. As a result the Capital
Control Delaware Company was no more in existence. Thus, the
reference to Capital Control Company Inc. includes reference to
Capital Control Company Inc. as well as Capital Control (Delaware)
Company Inc.
136. The corporate structure of the Companies involved in the present
litigation clearly shows that name of Capital Control Company Inc.,
incorporated in the year 1994, was changed to Severn Trent Water
Purification Inc. with effect from April, 2002. Thus, both these
companies together were subsidiaries of the holding company Severn
Trent Services (Delaware) Inc. The joint venture agreement was
executed between Chloro Control (India) Pvt. Ltd. and the erstwhile
Capital Control Company Inc. resulting into creation of the joint
venture company, Capital Control (India) Pvt. Ltd. This is the basic
structure which one has to make clear before examining the agreements
and their impact. The negotiations between the appellant and the
respondent nos.1 and 2 or their holding companies were going on since
1990 and ultimately culminated into execution of the joint venture
agreement. In terms of the Shareholders Agreement, the authorized
share capital of the company was five million rupees consisting of
equity shares of Rs.10/- each. Initially the parties had decided to
issue equity capital of 1,50,000 equity shares of Rs.10/- each with
50% of the initial equity to Capital Controls and the remaining 50% to
Chloro Controls. It is necessary to refer in some detail the relevant
clauses of this Agreement as this agreement is the ‘Principal or the
Mother Agreement’. All other agreements were executed in furtherance
to and for achieving the purpose of this Agreement. This agreement
notices that Capital Control was engaged in the design, manufacture,
import, marketing, export etc. of gas and electro-chlorination
equipments. The company was to be registered and as is evident, in
furtherance to the negotiations, steps for registration of the said
company had been taken and finally it came to be incorporated on 14th
November, 1995. The main object of the joint venture company was the
manufacture, service and sale of the products. In terms of the
Principal Agreement, establishment of a plant, management of the
company, appointment of Directors, implementation of decisions of the
Board of Directors, appointment or re-appointment of the Managing
Director, dividend policy, loans, financial information, trademarks,
transfer of shares, sale-purchase of chlorination equipment, assets,
government approvals, performance of Chloro Controls, trademark,
service of notices, modifications, severability and arbitration,
settlement of disputes by arbitration etc. were the matters
specifically provided for under this agreement. A very significant
feature of this contract was that the Kocha Group was put under an
injunction to not engage directly or indirectly or be financially
interested in the manufacture, sale or distribution of chlorination
equipment and related products, which is similar to those manufactured
or sold by the company during the term of the agreement. Similarly, a
restriction was also placed upon Capital Controls and even its holding
companies to not directly or indirectly engage in or to be financially
interested in the manufacture, sale or distribution in India of
products manufactured or sold by the company, during the term of the
agreement.
137. The Principal Agreement specifically referred to various
agreements or even terms and conditions thereof. Clause 7 of the
agreement provided for execution of the International Distributor
Agreement which was Appendix II to this Agreement. The Financial and
Technical Know-how Licence Agreement was executed in furtherance to
clause 14 thereof. Similarly, the Trademark Registered User License
Agreement was required to be executed between the parties in terms of
clause 15 of this Agreement. Other terms and conditions of the
Principal Agreement referred to management of the company by
appointment or reappointment of Directors or Managing Directors
inasmuch as Clause 8.6 contemplated execution of the agreement which
was appended as Appendix III. Still, certain other clauses of the
Principal Agreement specifically dealt with the sale of goods
manufactured by the joint venture company, nationally and
internationally. This resulted in signing of the International
Distribution and Export Sales Agreement between the parties.
138. All the five agreements signed by the parties were primarily to
fulfill their obligations and ensure performance of this Principal
Agreement. The Supplementary Collaboration Agreement executed in
August 1997 was only to comply with the conditions of the Government
Approval which were granted vide letter dated 11th October, 1996, as
amended by letter dated 21st April, 1997. The companies which
executed the various agreements were the companies signatory to the
Principal Agreement or their holding companies or the companies
belonging to the respondent group in which they had got merged for the
purposes of attaining effective designing, manufacturing, import,
export and marketing of the agreed chlorinated products.
139. All the subsequent agreements were, therefore, ancillary or
incidental agreements to the Principal Agreement. Thus, the joint
venture entered between the parties had different facets. Its
foundation was provided under the Principal Agreement but all the
agreed terms could only be fulfilled by performance of the ancillary
agreements. If one segregates the Principal Agreement from the rest,
the subsequent agreements would be rendered ineffective. If the
agreed goods were not manufactured in India with the technical know-
how of the respondent No. 1 company and the joint venture company was
not incorporated, the question of the Distribution Agreement, Managing
Director Agreement, Financial and Technical Know-How License Agreement
or the Export Sales Agreement would not have even arisen, in any
event. Conversely, if the ancillary agreements were not performed in
a collective manner, the Principal Agreement would be of no
consequence. In other words, it was one composite transaction for
attaining the purpose of business of the joint venture company. All
these agreements are so intrinsically connected to each other that it
is neither possible nor probable to imagine the execution and
implementation of one without the collective performance of all the
other agreements. The intention of the parties was clear that all
these agreements were being executed as integral parts of a composite
transaction. It can safely be covered under the principle of
‘agreements within an agreement’. For instance, the Financial and
Technical Know-How License Agreement not only finds a specific mention
in the Principal Agreement but its contents also are referable to the
clauses of the Principal Agreement. The Financial and Technical Know-
How License Agreement was Appendix III to the Principal Agreement and
the details of the goods which were contemplated to be manufactured,
distributed and sold under the Principal Agreement had been specified
in Appendix I of the Financial and Technical Know-How Agreement. If
the latter agreement was not there, the Principal Agreement between
the parties would have remained incomplete and the parties would have
been at a disadvantage to know as to what goods were to be
manufactured and what goods could not have been manufactured. The
Principal Agreement referred either specifically or by necessary
implication to all other agreements. They were inter-dependent for
their performance and one could not be read and understood completely
without the aid of the other.
140. Having held that all these other agreements as well as the
mother/ principal agreement were part of a composite transaction to
facilitate implementation of the principal agreement and that was in
reality the intention of the parties, now, we will deal with the
question of parties to the principal agreement. When the mother
agreement dated 16th November, 1995 was executed between the parties,
presumably the Certificate of Incorporation of Capital Control India
Private Ltd. had not been issued to the parties though it had been
incorporated on 14th November, 1995. If the company had been duly
incorporated and the Certificate of Incorporation was available to the
parties, then there could be no reason for the parties to propose in
the Principal Agreement that the joint venture company would be in the
name of Capital Controls India Private Ltd. or any other name which
would be mutually agreed between the parties. The reference to joint
venture company, thus, was not by a specific name. Both the parties
have signed this agreement with the clear intention that the company,
Capital Control India Pvt. Ltd., will be the joint venture company.
Thus, non-mentioning of the name of the joint venture company in the
principal agreement, though it had been incorporated on 14th November,
1995, is immaterial and inconsequential in face of intention of the
parties appearing from the written documents on record. Once the
Principal Agreement was signed, all other agreements had to be
executed by or in favour of the joint venture company. That is how
to all these other agreements the joint venture company i.e. Capital
Control India Pvt. Ltd. is a party. It further completely supports
the view that non-mentioning of the name of Capital Control India Pvt.
Ltd. can hardly affect the findings of the Court. With regard to the
management of the joint venture company and implementation of the
Principal Agreement, the parties had entered into the Managing
Director Agreement dated 16th November, 1995. This agreement was
signed by each of the concerned partners i.e. by Capital Control India
Pvt. Ltd., respondent No. 5 and the Kocha Group, respondent No. 9.
This agreement provided as to how the Managing Directors were to be
appointed or reappointed and how the meeting of the Board of Directors
of the company were to be conducted in accordance with law and the
terms of the Mother Agreement. This agreement came to be signed
between the joint venture company and the Kocha Group.
141. Other aspect of performance of the Principal Agreement was the
Financial and Technical Know-How License Agreement. This agreement
had been signed between the Capital Control Company Inc., subsequently
known as Severn Trent Water Purification, respondent No. 1, one the
one hand and the joint venture company, respondent No. 5. Severn
Trent Water Purification Inc. is the holding company of the joint
venture to the extent of its share holding and is the company into
which Capital Control (Del.) Co. Inc. had merged. Severn Trent
Water Purification Inc. is thus, the resultant product of Capital
Control (Del.) Company Inc. being merged into Capital Control Company
Inc. and its name was changed with effect from 1st April, 2002. All
these three companies had at the relevant time been or when came into
existence were and are subsidiaries of Severn Trent (Del.) Inc. The
requisite technical know-how was possessed by these companies and was
agreed to be imparted in favour of the joint venture company, in
furtherance to and as per the terms and conditions contained in the
Principal Agreement.
142. Similarly, Severn Trent Water Purification Inc. had entered into
an International Distributor Agreement and an Export Sales Agreement
with the joint venture to facilitate the sale, marketing and export of
goods, under these two different agreements. Thus, it is crystal
clear that all the six material agreements had been signed by some
parties or their holding companies or the companies into which the
signatory company had merged. None of these companies is either
stranger to the transaction or not an appropriate party. The parties
who have signed the agreements could alone give rights or benefits to
the joint venture company and they, in turn, were the companies
descendants in interest or the subsidiaries of Severn Trent Services
Del. Inc.
143. May be all the parties to the lis are not signatory to all the
agreements in question, but still they would be covered under the
expression ‘claiming through or under’ the parties to the agreement.
The interests of these companies are not adverse to the interest of
the principal company and/or the joint venture company. On the
contrary, they derive their basic interest and enforceability from the
Mother Agreement and performance of all the other agreements by
respective parties had to fall in line with the contents of the
Principal Agreement. In view of the settled position of law that we
have indicated above, we will have no hesitation in holding that these
companies claim their interest and invoke the terms of the agreement
or defend the action in the capacity of a ‘party claiming through or
under’ the parties to the agreement.
ARBITRATION
144. When we refer to all the six relevant agreements in relation to
the arbitration clause, the Shareholders Agreement, the Financial and
Technical Know-How License Agreement and the Export Sales Agreement
contained the arbitration clause while the other three agreements,
i.e., International Distributor Agreement, the Managing Director’s
Agreement and the Trademark Registered User License Agreement did not
contain any such arbitration clause. The arbitration clause contained
in the Principal Agreement in clause 30 has been reproduced above. It
requires that any dispute or difference arising under or in connection
with that agreement which could not be settled by friendly negotiation
and agreement between the parties, would be finally settled by
arbitration conducted in accordance with the Rules of ICC. This
clause is widely worded. It is comprehensive enough to include the
disputes arising ‘under and in connection with’ the agreement. The
word ‘connection’ has been added by the parties to expand the scope of
the disputes under the agreements. The intention to make it more
comprehensive is writ large from the language of the agreement and
particularly clause 30 of the Mother Agreement. It is useful to notice
that the agreement has to be construed and interpreted in accordance
with laws of the Union of India, as consented by the parties.
145. The expression ‘connection’ means a link or relationship between
people or things or the people with whom one has contact (Concise
Oxford Dictionary (Indian Edition). ‘Connection’ means act of
uniting; state of being united; a relative; relation between things
one of which is bound up with (Law Lexicon 2nd Edn. 1997).
146. Thus, even the dictionary meaning of this expression is
liberally worded. It implies expansion in its operation and effect
both. Connection can be direct or remote but it should not be
fanciful or marginal. In other words, there should be relevant
connection between the dispute and the agreement by specific words or
by necessary implication like reference to all other agreements in one
(principal) agreement. The expression appearing in clause 30 has to
be given a meaningful interpretation particularly when the Principal
Agreement itself, by specific words or by necessary implication,
refers to all other agreements. This would imply that the other
agreements originate from the Principal Agreement and hence, its terms
and conditions would be applicable to those agreements. There are
three agreements, as already noticed, which do not contain any
specific arbitration clause. Both the Managing Director Agreement and
the International Distributor Agreement directly relate to the
Principal Agreement stating the manner in which the affairs would be
managed and the Managing Directors be appointed. At the same time,
the International Distributor Agreement is executed between the Severn
Trent Water Purification Inc. the erstwhile Capital Control Company
Inc. and the Capital Control India Private Ltd., the joint venture
company. Firstly, the chances of dispute between the same group of
companies were remote and secondly these were the companies which were
held by the same management. The parties had also agreed to have
relationship as that of seller and distributor to make the joint
venture company a success. The interest of Capital Controls Company
Inc. and that of the Capital Control India Private Ltd., to the extent
of the former’s share, were common. Furthermore, this being an
integral part of the Principal Agreement would, in our opinion, be
squarely covered by the arbitration clause contained in the
Mother/Shareholders Agreement. This agreement has been specifically
referred in clause 7 of the Mother/Shareholders Agreement. Not only
that there is incorporation by reference of International Distribution
Agreement in the Mother/Shareholders Agreement but, in fact, it is an
integral part thereof.
147. Another aspect of the case is that all these agreements were
executed simultaneously on 16th November, 1995 which fact fully
supports the view that the parties intended to have all these
agreements as a composite transaction. Furthermore, when the parties
signed the Supplementary Collaboration Agreement in August 1997, by
that time all these agreements had not only been signed and understood
by the parties but, in fact, had also been acted upon.
148. In the Supplementary Collaboration Agreement, the parties re-
confirmed the existence of the joint venture agreement dated 16th
November, 1995 and made a specific stipulation that both the parties
confirmed to adhere by the terms and conditions stipulated by the
Government of India in its letters dated 11th October, 1996, amended
on 21st April, 1997. This was signed by Madhusudan B. Kocha, member
of the Kocha group on behalf of the joint venture company and Capital
Controls (Delaware) Inc. The necessity for executing this agreement
was in face of the condition of Government approval as well as the
subsequent amendment of clause 2, 3 and 4 of the approval letter dated
11th October, 1996 i.e. items of manufacture, proposed location and
foreign equity.
149. The conduct of the parties and even the subsequent events leave
no doubt in the mind of the Court that the parties had executed,
intended and actually implemented the composite transaction contained
in the Principal Agreement. The Courts have also applied the Group
of Companies Doctrine in such cases. As already noticed, this
Court in the case of Olympus Superstructure Pvt. Ltd. (supra)
permitted reference to arbitration where there were multiple contracts
between the parties, interpreting the words ‘in connection with’ and
‘disputes relating to connected matters’.
150. Besides making the reference, the Court also held that making of
two awards which may be conflicting in relation to the items which are
likely to overlap in two agreements could not be permitted. The
courts have also accepted and more so in group company cases that the
fact that a party being non-signatory to one or other agreement may
not be of much significance, the performance of one may be quite
irrelevant with the performance and fulfillment of the principal or
the mother agreement. That, in fact, is the situation in the present
case.
151. One of the arguments advanced was that the International
Distributor Agreement had specifically provided for construction,
interpretation and performance of the agreement and for the
transaction under that agreement to be governed by and interpreted by
the laws of State of Pennysylvania, USA and parties thereto agreed
that any litigation thereunder shall be brought in any federal or
state court in the Eastern District of the Commonwealth of
Pennysylvania which fact would oust the possibility of reference to
arbitration in terms of clause 30 of the Principal Agreement, as the
parties had chosen a specific forum of the court system. Discussion
on this argument may not be greatly relevant in view of the above
discussion in this judgment. This being a composite transaction, the
parties could opt for any remedy.
152. In the present case, we have already noticed, that some
agreements contain the arbitration clause, while others don’t. The
Shareholders Agreement, Financial and Technical Knowhow Licence
Agreement and Export Sales Agreement contain the arbitration clause,
while the International Distributor Agreement, Managing Directors
Agreement and Trade Mark Registered User Agreement do not contain the
arbitration clause. The arbitration clause contained under clause 30
of the Shareholders Agreement and that under clause 26 of the
Financial and Technical Knowhow Licence Agreement are identical. They
both require the disputes to be referred to arbitration in London as
per the ICC Rules. However, the arbitration clause contained in
clause 18 of the Export Sales Agreement provides for reference of the
disputes to arbitration at Pennsylvania, USA, in accordance with rules
of American Arbitration Association. It also provides that the
judgment upon the Award rendered could be entered in any court of
competent jurisdiction. Still, clause 21 of the International
Distributor Agreement required the construction, interpretation and
performance of the agreement to be governed by and interpreted under
the laws of the State of Pennsylvania, USA. Any litigation
thereunder was to be brought in any federal or State Court located in
the Eastern District of the Commonwealth of Pennsylvania, which was to
be binding upon the parties.
153. As already noticed, two of the agreements did not contain any
arbitration clause, but they also did not subject the parties even for
litigative jurisdiction. They are the Managing Directors Agreement
and the Trademark Registered User Agreement. These two agreements
had been executed in furtherance to and for compliance of the terms
and conditions of the mother agreement which contained the arbitration
clause. They were, thus, intrinsically inter-connected with the
mother agreement.
154. All these agreements were signed on the same day and in
furtherance to the mother agreement. None of the parties have invoked
the jurisdiction of the Court at Pennsylvania, USA. Thus, it was an
alternative remedy that too restricted to the disputes, if any arising
from that agreement. Where different agreements between the parties
provide for alternative remedies, it does not necessarily mean that
the other remedy or jurisdiction stands ousted. Where the parties to
such composite transaction provide for different alternative forums,
including arbitration, it has to be taken that real intention of the
parties was to give effect to the purpose of agreement and refer the
entire subject matter to arbitration and not to frustrate the remedy
in law. It was for the parties to chose either to institute a suit
qua the International Distributor Agreement at Pennsylvania or to
invoke the arbitration agreement in terms of clause 30 of the mother
agreement. They have chosen the latter remedy. The question,
therefore, does not arise as to which law would apply since the only
litigation taken out by the parties is the suit instituted by the
appellant before the original side of the Bombay High Court and the
subsequent application for reference to arbitration filed by the
Respondent No. 1 under Section 45 of the 1996 Act.
155. The effect of execution of multiple agreements has been
discussed by us in some elaboration above. The real intention of
the parties was not only to refer all their disputes arising under the
agreement which could not be settled despite friendly negotiations to
arbitration, but even the disputes which arose in connection with the
shareholder/mother agreement to arbitration.
156. Thus, a composite reference was well within the comprehension
of the parties to various agreements which were executed on the same
day and for the same purpose. There cannot be any doubt to the
contention that in terms of Section 9 of the CPC, the courts in India
shall have jurisdiction to try all suits of civil nature. Further,
this section gives a right to a person to institute a suit before the
court of competent jurisdiction. However, the language of Section 9
itself makes it clear that the civil courts have jurisdiction to try
all suits of civil nature except the suits of which taking cognizance
is either expressly or impliedly barred. In other words, the
jurisdiction of the court and the right to a party emerging from
Section 9 of the CPC is not an absolute right, but contains inbuilt
restrictions. It is an accepted principle that jurisdiction of the
court can be excluded. In the case of Dhulabhai v. State of M.P. and
Anr. [AIR 1969 SC 78], this Court has settled the principle that
jurisdiction of the Civil Court is all embracing, except to the extent
it is excluded by law or by clear intendment arising from such law.
In Nahar Industrial Enterprises Ltd. v. Hong Kong & Shanghai Banking
Corporation [(2009) 8 SCC 646], this Court has even stated the
conditions for exclusion of jurisdiction. They are, (a) whether the
legislative intent to exclude is expressed explicitly or by necessary
implication, and (b) whether the statute in question provides for an
adequate and satisfactory alternative remedy to a party aggrieved by
an order made under it.
157. The provisions of Section 45 of the 1996 Act are to prevail over
the provisions of the CPC and when the Court is satisfied that an
agreement is enforceable, operative and is not null and void, it is
obligatory upon the court to make a reference to arbitration and pass
appropriate orders in relation to the legal proceedings before the
court, in exercise of its inherent powers.
158. In the present case, the court can safely gather definite
intention on behalf of the parties to have their disputes collectively
resolved by the process of arbitration. Even if different forums are
provided, recourse to one of them which is capable of resolving all
their issues should be preferred over a refusal of reference to
arbitration. There appears to be no uncertainty in the minds of the
parties in that regard, rather the intention of the parties is
fortified and clearly referable to the mother agreement.
159. It is not the case of any of the parties before us that any of
the parties to the present litigation had taken steps before that
Court or had invoked the jurisdiction of that court under that system.
There is no apparent conflict of interest as of now. The
arbitration clause would stand incorporated into the International
Distributor Agreement as this agreement itself was Appendix II to the
Principal Agreement. This Court in the case of M.R. Engineers and
Contractors Pvt. Ltd. v. Som Datt Builders Ltd. [(2009) 7 SCC 696] has
stated that firstly the subject of reference be enacted by mutual
intention, secondly a mere reference to a document may not be
sufficient and the reference should be sufficient to bring out the
terms and conditions of the referred document and also that the
arbitration clause should be capable of application in respect of a
dispute under the contract and not repugnant to any term thereof.
All these three conditions are satisfied in the present case.
160. The terms and conditions of the International Distribution
Agreement were an integral part of the Principal Agreement as Appendix
II and the Principal Agreement had an arbitration clause which was
wide enough to cover disputes in all the ancillary agreements. It is
not necessary for us to examine the choice of forum or legal
enforceability of legal system in the present case, as we find no
repugnancy even where the main contract is governed by law of some
other country and the arbitration clause by Indian law. They both
could be invoked, neither party having invoked the former will be no
bar for invocation of the latter in view of arbitration clause 30 of
the mother agreement.
161. Reliance was also placed on the judgment of this Court in the
case of Deutsche Post Bank Home Finance Ltd. v. Taduri Sridhar [AIR
2011 SC 1899] where the Court had declined reference of multiple and
multi party agreement. That case is of no help to the appellant
before us. In that case, there were four parties, the seller of the
land, the builder, purchaser of the flat and the bank. The bank had
signed an agreement with the purchaser of the flat to finance the
flat, but it referred to other agreement stating that it would provide
funds directly to the builder. There was an agreement between the
builder and the owner of the land and the purchaser of the land to
sell the undivided share and that contained an arbitration clause.
The question before the Court was whether while referring the disputes
to the arbitration, the disputes between the bank on the one hand, and
the purchaser of the flat on the other could be referred to
arbitration. The Court, in reference to Section 8 of the 1996 Act,
held that the bank was a non-party to the arbitration agreement,
therefore, neither the reference was permissible nor they could be
impleaded at a subsequent stage. This judgment on facts has no
application. The distinction between Section 8 and Section 45 has
elaborately been dealt with by us above and in view of that, we have
no hesitation in holding that this judgment, on facts and law, is not
applicable to the present case.
162. Thus, in view of the above, we hold that the disputes referred
to and arising from the multi-party agreements are capable of being
referred to arbitral tribunal in accordance with the agreement between
the parties.
163. Another argument advanced with some vehemence on behalf of the
appellant was that respondent Nos.3 and 4 were not party to any of the
agreements entered into between the parties and their cause of action
is totally different and distinct, and their rights were controlled by
the agreement of distribution executed by respondent Nos.1 and 2 in
their favour for distribution of products of gas and electro-
chlorination. It was contended that there cannot be splitting of
parties, splitting of cause of action and remedy by the Court.
164. On the other hand, it was contended on behalf of the respondent
No.1 that it is permissible to split cause of action, parties and
disputes. The mater referable to arbitration could be segregated
from the civil action. The court could pass appropriate orders
referring the disputes covered under the arbitration agreement between
the signatory party to arbitration and proceed with the claim of
respondent Nos. 3 and 4 in accordance with law.
165. As far as this question of law is concerned, we have already
answered the same. On facts, there is no occasion for us to
deliberate on this issue, because respondent Nos. 3 and 4 had already
consented for arbitration. In light of that fact, we do not wish to
decide this question on the facts of the present case.
166. Having dealt with all the relevant issues in law, now we would
provide answer to the questions framed by us in the beginning of the
judgment as follows :
Answer
167. Section 45 is a provision falling under Chapter I of Part II of
the 1996 Act which is a self-contained Code. The expression ‘person
claiming through or under’ would mean and take within its ambit
multiple and multi-party agreements, though in exceptional case. Even
non-signatory parties to some of the agreements can pray and be
referred to arbitration provided they satisfy the pre-requisites under
Sections 44 and 45 read with Schedule I. Reference of non-signatory
parties is neither unknown to arbitration jurisprudence nor is it
impermissible.
168. In the facts of a given case, the Court is always vested with
the power to delete the name of the parties who are neither necessary
nor proper to the proceedings before the Court. In the 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 the
Mother Agreement, the court may have to make reference to arbitration
even of the disputes existing between signatory or even non-signatory
parties. However, the discretion of the Court has to be exercised in
exceptional, limiting, befitting and cases of necessity and very
cautiously.
169. Having answered these questions, we do not see any reason to
interfere with the judgment of the Division Bench of the Bombay High
Court under appeal. We direct all the disputes arise in the suit and
from the agreement between the parties to be referred to arbitral
tribunal and be decided in accordance with the Rules of ICC.
170. The appeals are dismissed. However, in the facts and
circumstances of the present case, we do not award costs.
….………….....................CJI.
(S.H. Kapadia)
…….………….....................J.
(A.K. Patnaik)
...….………….....................J.
(Swatanter Kumar)
New Delhi;
September 28, 2012
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7134 OF 2012
(arising out of SLP(C)No. 8950 of 2010)
Chloro Controls (I) P.Ltd. ... Appellant
Versus
Severn Trent Water Purification Inc. & Ors. ...Respondents
WITH
CIVIL APPEAL NOS. 7135-7136 OF 2012
(Arising out of SLP(C)Nos. 26514-26515 of 2011)
O R D E R
Upon pronouncement of the judgment Mr. F.S. Nariman,
learned senior counsel appearing for the petitioner, mentioned
that the petitioner had filed an application for injunction in
the suit before the High Court. The same was dismissed. Appeal
against the order dismissing the application had been filed
before this Court and was ordered to be listed along with SLP (C)
No. 8950 of 2010 (which is an appeal against the order of the
High Court making reference to arbitral tribunal). However, the
Court had not heard arguments on that appeal.
Learned senior counsel appearing for the respondents,
Mr. K.V. Vishwanathan, submitted that the special leave
petitions were listed but they were not admitted.
-2-
In view of the common stand taken by the counsel for
the parties, we permit the petitioner to move an independent
application praying for hearing for those special leave petitions
i.e. SLP(C)Nos.26514-26515 of 2011 (listed along with SLP(C)No.
8950/2010) pending for admission.
..............CJI
(S.H.Kapadia)
................J.
(A.K.Patnaik)
................J.
(Swatanter Kumar)
New Delhi;
September 28, 2012.
