-1-
WP No. 15830 of 2022
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 24TH DAY OF MAY, 2023
BEFORE
THE HON'BLE MR JUSTICE SREENIVAS HARISH KUMAR
WRIT PETITION NO. 15830 OF 2022 (GM-CPC)
Between:
M/s. Town Essentials Private Limited
A Company Incorporated under
The Provisions of the Companies Act 1956
Having its Registered Office at No.54/1,
Industrial Suburb, Yeshwanthpur,
Bengaluru-560022
Represented by its Director
Shrikant Patil
...Petitioner
(By Sri K.Arun Kumar, Senior Advocate for
Sri Sushal Tiwari, Advocate)
And:
Digitally signed
by VEERENDRA
KUMAR K M 1. M/s. Daily Ninja Delivery Services Private Limited
Location: HIGH A Company Incorporated under
COURT OF
KARNATAKA The Provisions of the Companies Act 2013
Having its Registered Office at Row House No.13,
Hill Garden View Society, Kokanipada,
Near Tikujiniwadi, Manpada
Thane, Maharashtra-400610
Also at No.107,
Woodstock Business Center
Nallurahalli Junction, Whitefield
Bengaluru-560066
Represented by its Director
[email protected]
-2-
WP No. 15830 of 2022
2. Supermarket Grocery Supplies Private Limited
A Company Incorporated under
The Provisions of the Companies Act, 2013
Fairway Business Park,
2nd, 7th and 8th Floor,
Challaghata Village,Behind Dell,
Domlur, Bengaluru-560071
Also at 7, Service Road, Domlur
100 Feet Road, Indiranagar
Bengaluru-560071
Represented by its Director
[email protected]
3. Innovative Retail Concepts Private Limited
A Company Incorporated under
The Provisions of the Companies Act 2013
Ranka Junction No.224, (Old Sy No.80/3)
4th Floor, Vijinapura, Old Madras Road,
K.R. Puram, Bengaluru-560016
Represented by its Director
[email protected]
4. Sagar Yarnalkar
Row House No.13,
Hill Garden View Society, Kokanipada,
Near Tikujiniwadi, Manapada
Thane, Maharashtra-400610
Also at No.107,
Woodstock Business Center
Nallurahalli Junction, Whitefield
Bengaluru-560066
[email protected]
5. Anurag Gupta
No.107, Woodstock Business Center
Nallurahalli Junction, Whitefield
Bengaluru-560066
[email protected]
-3-
WP No. 15830 of 2022
6. Hari Menon
No.20, Sena Vihar,
Kammanahalli,
Bengaluru-560043
Also at Ranka Junction No.224,
(Old Sy No.80/3)
4th Floor, Vijinapura, Old Madras Road
K.R. Puram, Bengaluru-560016
[email protected]
7. Vipul Mahendra Parekh
A-18, Diamond District
Old Airport Road, Kodihalli
Bengaluru-560008
Also at Ranka Junction No.224,
(Old Sy No.80/3)
4th Floor, Vijinapura, Old Madras Road
K.R. Puram, Bengaluru-560016
[email protected]
...Respondents
(By Sri Srinivas Raghavan, Senior Advocate for
Sri L.Srinivas, Advocate for R1;
Sri P.Chinnappa, Advocate for R2 and R3;
Sri Narasimhan Sampath, Advocate for R4 and R5;
Sri Deepak S.Sarangmath, Advocate for R6 and R7)
This Writ Petition is filed under Article 227 of the
Constitution of India praying to set aside the impugned order
dated 01.07.2022 passed by the Learned LXXXVII Additional
City Civil Judge, (Commercial Court) on the application filed by
the efendant No.1 u/s 8 of the Arbitration and Conciliation Act,
1996 r/w section 16 of the Commercial Court Act, 2015, and
section 151 of the Code of Civil Procedure, 1908 Annexure-A in
-4-
WP No. 15830 of 2022
Com.O.S.520/2021 and consequently restore the suit instituted
by the petitioner and etc.,
This Writ Petition having been heard and reserved on
30.03.2023 coming on for pronouncement this day, the
court pronounced the following:
ORDER
The question to be answered in this writ
petition filed under Article 227 of the Constitution
of India is, whether civil suit is maintainable in
view of the fact that defendants No.2 to 7 are not
parties to the agreement which provides of
resolution of the dispute between the plaintiff and
the first defendant through arbitration.
2. Shorn of the unnecessary details of a
lengthy plaint, the material facts upon which the
plaintiff has founded the reliefs are that on
29.10.2017, there came into existence a Supplier
and Service Provider Agreement between the
plaintiff and the first defendant. The terms of the
agreement provided that the plaintiff should supply -5- WP No. 15830 of 2022
the essentials such as groceries, fruits, vegetables,
bakery products, processed fruits and vegetables
to the first defendant's customers who would place
orders online. The plaintiff took over entire
backend operation of the business of the first
defendant and all was good for some time. The
first defendant was later on acquired by the second
defendant without notice to the plaintiff, however
defendant No.2 was aware of the agreement
between the plaintiff and the first defendant. After
August-2020, the defendants started to siphon of
their business violating the terms of the
agreement. The plaintiff has alleged that very
acquisition of defendant No.1 by defendant No.2
was with a view to inducing breach of the
agreement. Defendants No.4 and 5 were the
promoters and directors of defendant No.1 and
after acquisition by defendant No.2, they became
the employees of the latter. Consequent to this
change, the plaintiff started suffering loss in its -6- WP No. 15830 of 2022
business. Attributing the cause for loss in
business to the inducement caused by defendants
No.2 to 7 for breaching the agreement dated
29.10.2017, the plaintiff instituted Commercial
Original Suit No.520/2021 before the Commercial
Court, Bengaluru claiming the reliefs of permanent
injunction and a direction to defendants to pay a
sum of Rs.36,22,00,000/- with interest towards
damages.
3. The first defendant filed an application
under Section 8 of the Arbitration and Conciliation
Act, 1996 ('Act' for short) to refer the parties to
the suit to arbitration as the agreement dated
29.10.2017 provided for resolution of dispute
through arbitration. Since the Commercial Court
allowed the said application by its order dated
01.07.2022, the plaintiff has challenged the said
order.
-7-
WP No. 15830 of 2022
4. I heard the arguments of Sri K.Arun
Kumar, learned Senior Advocate for the plaintiff-
petitioner, Sri Srinivas Raghavan, learned Senior
Advocate for respondent No.1, Sri Chinnappa,
learned counsel for respondents No.2 and 3, Sri
Narasimhan Sampath, learned counsel for
respondents No.4 and 5 and Sri Deepak S
Sarangmath, learned counsel for respondents No.6
and 7.
5. The first point of argument of Sri K. Arun
Kumar was that though the agreement which
provided for arbitration was between the plaintiff
and the first defendant, the inducement caused by
defendants 2 to 7 to defendant No.1 to breach the
agreement amounted to tort, for which the plaintiff
could sue not only the first defendant but also
other defendants, who were the inducers, for
damages, and on this point he relied a decision of
THE QUEEN'S BENCH in LUMLEY V. GYE and of the -8- WP No. 15830 of 2022
High Court Of Judicature at Bombay in the case of
AASIA INDUSTRIAL TECHNOLOGIES LIMITED
AND OTHERS VS. AMBIENCE SPACE SELLERS
LIMITED AND OTHERS [1997 SCC ONLINE BOM
681]. It is not necessary to dwell on this point of
argument as it touches the merits of the dispute
which has to be decided by the court or the
arbitrator.
6. On the point that the suit is maintainable
despite the fact that the agreement contains
arbitration clause, Sri Arun Kumar argued that the
dispute is not just between the plaintiff and the
first defendant so that arbitration clause can be
invoked; there are allegations against defendants
2 to 7. The cause of action stated in the plaint is
composite and joint against all the defendants.
Defendants 2 to 7 cannot be driven to arbitration
as they are not parties to agreement. Referring to
the judgment of the Supreme Court in the case of -9- WP No. 15830 of 2022
SUKANYA HOLDINGS (P) LTD., VS. JAYESH H
PANDYA AND ANOTHER [(2003)5 SCC 531], he
argued that splitting up of cause of action into two
parts, one against the first defendant and the
other against second defendant is not permitted,
and since the Act does not provide for adding in
the arbitration proceeding those persons who are
not parties to the arbitration agreement, suit is
very much maintainable.
7. Sri Arun Kumar made a comparison
between Section 8 as it stood before amendment
and as it stands after amendment, and argued that
after the amendment a person who acts under a
party to agreement can seek a reference to
arbitration; but in the case on hand, defendants 2
to 7 are not the parties acting under first
defendant and since the suit is filed against them
and not by them, amended section 8 is not
applicable. For all these reasons, impugned order
- 10 -
WP No. 15830 of 2022
is not sustainable, and therefore writ petition
deserves to be allowed, he argued.
8. Sri Srinivas Raghavan argued that
notwithstanding the fact that defendants 2 to 7 are
not parties to agreement, suit is not maintainable.
The first defendant can invoke Section 8 for, as
has been held by the High Court of Calcutta in
LINDSAY INTERNATIONAL PRIVATE LIMITED
AND OTHERS VS. LAXMI NIVAS MITTAL AND
OTHERS (2022 SCC ONLINE CAL 170), since the
dispute between the parties are interlinked in such
a way as no adjudication is possible concerning
defendants 2 to 7 without reference to the
agreement, necessarily the parties must be
referred to arbitration. In support of his
argument, he also relied upon a judgment of the
Division Bench of the High Court of Gauhati in
BHARAT HEAVY ELECTRICALS LTD., VS. ASSAM
STATE ELECTRICITY BOARD [(1990) 2
- 11 -
WP No. 15830 of 2022
GAUHATI LAW REPORTS 130] and of the
Supreme Court in VIDYA DROLIA AND DURGA
TRADING CORPORATION [(2021) 2 SCC 1].
9. Analysis of facts show that existence of
arbitration clause in the agreement is not
disputed, and if the dispute were to be between
the plaintiff and the first defendant only, it is
needless to say that the plaintiff should have
sought for appointment of an arbitrator. The
anomalous situation is because of presence of
defendants 2 to 7 who are not parties to the
agreement. The plaintiff has not sought the reliefs
only against first defendant, and if it were to be
the situation, it can forcefully be said that
arbitration could be the proper forum for its
dispute with the first defendant. Since reliefs are
claimed against all the defendants, reference may
be made to Order 1 Rule 3(3) of the Code of Civil
- 12 -
WP No. 15830 of 2022
Procedure which deals with joinder of defendants.
It reads as below:
ORDER I : PARTIES OF SUITS
1. Who may be joined as plaintiffs.
Xxxxxxx
2. Power of Court to Order separate trial.
Xxxxxx
3. Who may be joined as defendants.
All persons may be joined in one suit as defendants where-
(a) any right to relief in respect of, or arising out of, the same act or transaction or series of acts or transactions is alleged to exist against such persons, whether jointly, severally or in the alternative; and
(b) if separate suits were brought against such persons, any common question of law or fact would arise.]
3A. Power to Order separate trials where joinder of defend ants may embarrass or delay trial.
- 13 -
WP No. 15830 of 2022
Where it appears to the Court that any joinder of defend ants may embarrass or delay the trial of the suit, the Court may Order separate trials or make such other Order as may be expedient in the interests of justice.]
10. Therefore it is clear that if an act or
transaction or series of acts or transactions give
rise to reliefs against several persons either jointly
or severally or in the alternative, all such persons
may be joined as defendants in a suit and another
requirement for joining several persons as
defendants in a suit is if separate suits are brought
against them, a common question of law or fact
would arise for adjudication.
11. Adjudication of a dispute through
arbitration requires existence of an agreement
between the parties. But in a situation where
there are more defendants than one, and relating
to some of them there is no arbitration agreement,
- 14 -
WP No. 15830 of 2022
it is held by the Supreme Court in Sukanya
Holdings that:
12. For interpretation of Section 8, Section 5 would have no bearing because it only contemplates that in the matters governed by Part-I of the Act, Judicial authority shall not intervene except where so provided in the Act. Except Section 8, there is no other provision in the Act that in a p ending suit, the dispute is required to be referred to the arbitrator. Further, the matter is not required to be referred to the arbitral Tribunal, if (1) the parties to the arbitration agreement hav e not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. This would, therefore, mean that Arbitration Act does not oust the jurisdiction of the Civil Court to decide the dispute in a case where parties to the Arbitration Agreement do not take appropriate steps as contemplated under
- 15 -
WP No. 15830 of 2022
sub- sections (1) & (2) of Section 8 of the Act.
13. Secondly, there is no provision in the Act that when the subject matter of the suit includes sub ject matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the sub ject matter of the suit to the arbitrators.
14. Thirdly, there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the Court may refer the same to arbitration provided that the same can be separated from the rest of the subject matter of the suit. Section also provided that the suit would continue so far as it related to parties who have not joined in such application.
- 16 -
WP No. 15830 of 2022
15. The relevant language used in Section 8 is "in a matter which is the subject matter of an arbitration agreement", Court is required to refer the parties to arbitration. Therefore, the suit should be in respect of 'a matter' which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced - "as to a matter" which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words 'a matter' indicates entire subject matter of the suit should be sub ject to arbitration agreement.
16. The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act? In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new
- 17 -
WP No. 15830 of 2022
procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.
17. Secondly, such bifurcation of suit in two parts, one to be decided by the arbitral tribunal and other to be decided by the civil court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums.
(emphasis supplied)
12. But Sri Srinivas Raghavan placed reliance
on VIDYA DROLIA AND DURGA TRADING
CORPORATION [(2021) 2 SCC 1] and argued
that Sukanya Holdings was considered in Vidya
- 18 -
WP No. 15830 of 2022
Drolia and held that if a question of arbitrability
arises, the Arbitral Tribunal is the preferred first
authority to determine and decide all questions of
non-arbitrability. He referred to paras 154.3 and
154.4 of Vidya Drolia (supra), where the
observations are as follows:
154.3 The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence is that the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of "second look" on aspects of non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.
154.4. Rarely as a demurrer the court may interfere at the Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non- existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-
- 19 -
WP No. 15830 of 2022
arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably 'non-arbitrable' and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the arbitral tribunal but to affirm and up hold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.
13. In Bharat Heavy Electricals (supra) the
High Court of Gauhati, does not actually discuss a
situation as is found in the case on hand; there the
issue related to arbitrability of a dispute tortuous
in nature.
- 20 -
WP No. 15830 of 2022
14. In Lindsay International (supra) of the
High Court of Calcutta, there is a reference to the
effect of judgment in Sukanya Holdings post
amendment. The discussion is found in Paras 29
to 36 which are extracted here:
29. Hence, this Court does not find any merit in the argument made on behalf of the plaintiffs that the disputes, if referred, would result in bifurcation of composite causes of action or split-up necessary and proper parties. This interpretation is in any event destructive of the legislative intent to promote arbitration as noticed in the earlier part of the judgment. The view of this Court is bolstered by the fact that none of the decisions cited, including Vidya Drolia, have held that an application under section 8 will only succeed if the entire suit is capable of being referred to arbitration. D. Is Sukanya Holdings relevant at the stage of reference, post-amendment?
30. The recommendation of the Law Commission of d iscouraging reference where the parties to the action, who are not the parties to the arbitration agreement, are
- 21 -
WP No. 15830 of 2022
necessary parties to the action, read with the Note referring to Sukanya Holdings, did not serve as a trailer in the final cut of the 2016 Amendment. The legislature, in fact, jettisoned the entire portion on "necessary parties" as well as Sukanya Holdings to declare, with unequivocal intent, that a judicial authority shall refer the parties to arbitration "notwithstanding any judgment, decree or order of the Supreme Court or any Court". The amended section 8 hence does not contain any remnant of the recommendation with reference to Sukanya Holdings and has thrown out any impediment in connection with the dictum in Sukanya Holdings, or any other judicial pronouncements before the amendment, in its entirety. (Ref: Emaar MGF)
31. The dictum in Sukanya Holdings that bifurcation of causes of action and parties cannot be permitted in adjudicating an application under section 8 has b een rejected in N.N. Global (see the preceding section of this judgment) . Vidya Drolia cannot also be used as a proposition to support the plaintiffs' argument that the entire cause of action in the suit must be capable of being referred to arbitration in a section 8
- 22 -
WP No. 15830 of 2022
application. In fact paragraph 225 of Vidya Drolia recognizes that judicial interference at the reference stage has been substantially curtailed and the 2015 amendment has altered the structure of the Act to make it pro-arbitration. Paragrap h 154.3 of the said judgment further reinforces the principle of severability, competence-competence and that the Arbirtal tribunal is the preferred first authority to determine all questions of non- arbitrability. In paragrap h 244.4, the advice of the Supreme Court is "when in doubt, do refer".
32. The conclusion, without a doubt, is that Sukanya Holdings is no longer a relevant factor for the Court to consider at the stage of reference in an application und er section 8 of the Act. The Court is not even under a mandate, post amendment, to adjudicate on the bifurcability of the causes of action or the presence of parties who are necessary parties to the action but not to the arbitration. The only brake in the momentum of reference is the court finding, prima facie, that no valid arbitration agreement exists.
33. The rejection of the Law Commission's recommendation in the Note to section 8 with
- 23 -
WP No. 15830 of 2022
regard to Sukany a Holdings was considered in Emaar MGF where the Supreme C ourt opined that pronouncements made prior to the amendment were not to be adhered to as the legislative intent was to move away from the conditions in P. Anand and Sukanya Holdings. The Court proceeded to explain that the object of the amendment was to minimise the scope of the judicial authority to refuse reference to arbitration.
34. Besides, the argument that Sukanya Holdings continues to hold the field would, in effect, result in the amended section 8 looking somewhat like this;
"... notwithstanding any judgment, decree or order of the Supreme Court or any Court save and except the judgment in Sukanya Holdings..." (the added bit is underlined).
35. This Court is of the view that adding to the plain and unambiguous words of the provision in the pretext of interpretation cannot be the permitted course of action.
36. It is also important to bear in mind that the issue is not whether the dictum in Sukanya Holdings is correct, as the law laid down in that decision may continue to be
- 24 -
WP No. 15830 of 2022
relevant for d eciding applications under section 8 filed prior to the amendment of 2016 but not where the suit or application is filed after 23.10.2015 when the amendment came into force (underlined for emphasis).
D1. The bar to reference under the amended Section 8 of the 1996 Act:
15. Therefore what I find is that though High
Court of Calcutta in Lindsay International holds
that Sukanya Holdings is not applicable to cases
arising post amendment, in Vidya Drolia (supra),
it is held that agreement is ineffective against non
signatories. Para 49 of the judgment in Vidya
Drolia is extracted here.
49. Exclusion of actions in rem from arbitration, exposits the intrinsic limits of arbitration as a private dispute resolution mechanism, which is only binding on 'the parties' to the arbitration agreement. The courts established by law on the other hand enjoy jurisdiction by default and do not require mutual agreement for conferring jurisdiction. The arbitral tribunals not being
- 25 -
WP No. 15830 of 2022
courts of law or established under the auspices of the State cannot act judicially so as to affect those who are not b ound by the arbitration clause. Arbitration is unsuitable when it has erga omnes effect, that is, it affects the rights and liabilities of persons who are not bound by the arbitration agreement. Equally arbitration as a decentralized mode of dispute resolution is unsuitable when the subject matter or a dispute in the factual background, requires collective adjudication before one court or forum. Certain disputes as a class, or sometimes the dispute in the given facts, can be efficiently resolved only through collective litigation proceedings. Contractual and consensual nature of arbitration underpins its ambit and scope. Authority and power being derived from an agreement cannot bind and is non-effective against non-signatories. An arbitration agreement between two or more parties would b e limpid and inexpedient in situations when the subject matter or dispute affects the rights and interests of third parties or without presence of others, an effective and enforceable award is not possible. Prime objective of arbitration to secure just, fair and effective resolution of
- 26 -
WP No. 15830 of 2022
disputes, without unnecessary delay and with least expense, is crippled and mutilated when the rights and liabilities of persons who have not consented to arbitration are affected or the collective resolution of the disputes by including non-parties is required. Arbitration agreement as an alternative to public fora should not be enforced when it is futile, ineffective, and would be a no result exercise.
(emphasis supplied)
16. Here is a case where except the plaintiff
and the first defendant, other defendants are not
parties to the arbitration agreement. Though it
can be said that because of acquisition of first
defendant by second defendant, the agreement
binds the second defendant, it is to be noted that
the other defendants are not parties. Defendants
4 and 5 might have signed the agreement, but
they did so in the capacity of directors of first
defendant and not in their individual capacity; they
are stated to be the employees of second
defendant now. This is how the suit is framed, and
- 27 -
WP No. 15830 of 2022
whether or not the first defendant was induced by
other defendants to breach the agreement and
thereby the plaintiff got a cause of action to claim
the reliefs of permanent injunction and damages
against all the defendants is a question to be
decided at a single platform. The non signatory
defendants cannot be exposed to arbitral
proceedings. Cause of action against all the
defendants is stated to be same, and it cannot be
bifurcated. In this view, I find that the order
impugned in the writ petition cannot be sustained.
Hence the following:
ORDER
Writ petition is therefore allowed
with costs.
The impugned order is set-aside and
the application filed under Section 8 of
the Arbitration and Conciliation Act is
dismissed. The suit is restored. The
- 28 -
WP No. 15830 of 2022
parties are directed to appear before the
trial court on 12.6.2023.
Sd/-
JUDGE
KMV List No.: 1 Sl No.: 5
