The Supreme Court declared that arbitration proceedings were not feasible if no arbitration clause was present in agreements other than the principal agreement. The Court upheld that the primary agreement and the other agreements had no conjunction; therefore, the arbitration clause could not apply to the other agreements.
Brief Facts of the Case:
The appellant had filed Civil Appeal before the Supreme Court, challenging the dismissal of their appeal by the High Court of Gujrat. The appellant filed the first appeal in 2018 against the order passed by the Commercial Court of Ahmedabad. The Commercial Court dismissed the applications under Section 8 of the Act, 1996 (hereinafter referred to as the “Act, 1996”).
Brief Background of the Case:
In 2005, the appellant entered into two license agreements with respondents no. 1 and 12 for seven years. The agreements required a quarterly licensing fee, with the first agreement having a licensing fee of Rs. 5 lakh and the second agreement having a licensing fee of Rs. 2 lakh. A supplementary agreement was executed in 2005 whereby respondent no. 1 advanced a sum of Rs. 5 lakh to the appellant with interest at 10% p.a. as financial assistance to arrive at a settlement with creditors, employees, and statutory authorities. The original licence agreement was amended in 2005, allowing the licensee to make necessary modifications to the fixed assets for the smooth operation of the plant. In 2006, a tripartite agreement was executed between the appellant, respondent no. 1, respondent no. 2 and the Bank of Baroda, which sanctioned a loan of Rs. 500 lakh to respondent no. 1, wherein respondent no. 2 was the guarantor.
The dispute arose when respondent no. 1 called upon the appellant to extend the license agreement term by 84 months. This extension was sought because the appellant could not pay certain dues owed to respondent no. 1 and sought time to arrange payment. In response to this representation, the appellant denied the proposal to extend the license agreement term and the projected outstanding dues. Later, in 2012, a legal notice was served by respondent No. 1 on the appellant, calling upon them to perform their obligations under the license agreement.
Procedural History:
In 2017, the appellant filed a composite arbitration petition against respondent no. 1 before the High Court of Gujrat. Respondent no. 1 filed a Commercial Civil Suit with multiple defendants. The appellant filed an application under Section 8 of the Act, 1996, for reference of the dispute to arbitration and objected to the jurisdiction of the Commercial Court in the written statement.
The High Court dismissed the appellant's applications because the Commercial Court denied their request under Section 8 of the Act, 1996. The Commercial Court had ruled that the issue could only be referred to arbitration if it was part of the agreement, as required by Section 8 of the Act, 1996. The appellant's relief sought to challenge conveyance deeds and a transaction that occurred during a stay granted by the High Court, which fell outside the scope of adjudication. The Commercial Court also held that the issue of the mortgage was not subject to arbitration. The High Court upheld the Commercial Court's decision, stating that dividing disputes into arbitrable and non-arbitrable issues was inappropriate. The High Court noted that the license agreements were only between the appellant and respondent no. 1. Respondents no. 2 to 5 were not parties to the agreement.
The High Court dismissed both the appeals and upheld the decision of the Commercial Court.
Contentions of the Appellants:
The appellants argued that the Commercial Court and the High Court made errors in law and fact in rejecting the applications under Section 8 of the Act, 1996. The appellants contended that the amended Section 8 applies to this matter since the Civil Suits and referral applications were filed after the amendment in 2015. The appellants cited recent Court decisions, which clarified that deadwood cases should not be referred to arbitration and that the correct course is to refer to arbitration whenever there is doubt. They contended that the High Court interpreted the Act, 1996 too restrictively. They further submitted that the matter has been pending for too long, and the licensees are squatting over the property without performing any work.
Contentions of the Respondents:
The respondents argued that the dispute in question should not be referred to arbitration because it involves multiple parties and transactions beyond the scope of the arbitration agreement. The respondents emphasised that the tripartite agreement between the parties and Bank of Baroda does not have an arbitration clause, and the dispute related to this agreement cannot be correlated with the arbitration agreement in the main license agreement.
The respondents also argued that the reliefs claimed in the suits go beyond the license agreement, and the disputes pertaining to different agreements and transactions fall outside the scope of the arbitration agreement. Furthermore, the respondents argued that the entire subject matter should be subject to arbitration and not just a part of the dispute. They also emphasised that the supplementary agreement is ancillary to the original agreement, but the tripartite agreement is independent and does not have an ancillary relationship with the main agreement. They also cited two cases where guarantors were not held bound by an arbitration agreement as they were not a party to the tripartite agreements having arbitration clauses.
Observations of the Court:
The Supreme Court concluded that there was no arbitration agreement in this case, as none of the agreements, except the principal agreement, contained an arbitration clause. The dispute could not be resolved through arbitration since it involved subsequent purchasers and allegations of fraud.
The Court referred to previous cases, including Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr. [(2003) 5 SCC 531] and Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. (2018) 15 SCC 678], to explain the correlation required between the subject matter of the dispute and the arbitration agreement. The Court also referred to the 246th Law Commission Report, which proposed that judicial authority should only refuse to refer parties to arbitration if no arbitration agreement exists or if it is null and void. The Court decided there was no conjunction between the original license agreement and the tripartite agreement; thus, the arbitration clause did not apply to the tripartite agreement.
The Court affirmed that the dispute could not be resolved through arbitration without involving all parties and the terms of the tripartite agreement. Since there was no connection between the original agreement and the tripartite agreement, arbitration proceedings were not feasible.
The decision of the Court:
The Supreme Court, therefore, dismissed the Civil Appeal. Thus, the Court did not grant the prayer for reference to arbitration under Section 8 of the Act, 1996.
Case Title: Gujrat Composite Ltd v A. Infrastructure Ltd. & Ors.
Case No.: Civil Appeal No. 3259 of 2023
Citation: 2023 Latest Caselaw 423 SC
Coram: Hon’ble Mr. Justice Dinesh Maheshwari and Hon’ble Mr. Justice Sudhanshu Dhulia
Advocates for Petitioner: Mr. Nikhil Goel, AOR, Mr. Aniruddha Deshmukh, Adv., Mr. Adhitya Koshy Roy, Adv., Ms. Naveen Goel, Adv.
Advocates for Respondent: Mr. Ramesh Singh, Sr. Adv., Mr. Biju Mattam, Adv., Mr. Rahul Singh, Adv., Mr. N D Kaushik, Adv., Mr. Satish Kumar, AOR, Mr. Avishkar Singhvi, Adv., Mr. Rohan Sharma, Adv., Mr. Pradhuman Gohil, Adv., Mrs. Taruna Singh Gohil, AOR, Ms. Ranu Purohit, Adv., Mr. Alapati Sahithya Krishna, Adv., Mr. Dushyant Parashar, AOR, Mr. Bhaskar, Adv., Mr. Manu Parashar, Adv., Mr. Dinesh Pandey, Adv., Mr. Harshvardhan Singh Rathore, Adv., Mr. Muthuvel Palani M, Adv.
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