Justice V. Kameswar Rao passed judgment in the case titled STCI Finance ltd. v. Sh. Shreyas Kirti Lal Doshi and anr.
Recovery suit was filed by the plaintiff for recovery of approximately 10 crore rupees. The defendants filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 for just and equitable relief deemed proper by the High Court.
The Borrower Company stopped making any payments to the plaintiff Company under Loan Accounts resulting in overdue interest outstanding. Demand Notice was issued for clearing the interest dues, failing which it was intimated that the plaintiff Company would be enforcing the security.
The High Court had put reliance on numerous judgments while passing this judgment. The Justice found that in STCI Finance the Court had distinguished the judgment of Chloro Controls by the Supreme Court of India:
“The decision in the case of Chloro Controls (I) P. Ltd. must also be understood in the context as explained by the Supreme Court. In that case, the Court had held that a non-signatory or a third party could be subjected to arbitration without their prior consent but this would only be in exceptional cases. It would be essential for the Court to ascertain that there was a clear intention of the parties - both the signatory as well as non- signatory - to resolve the disputes by arbitration. The Supreme Court further explained that the Court would examine the exceptions on the touchstone of the 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 Court had further explained that,
“a transaction would be of a composite nature where performance of a mother agreement would not be feasible without aid and performance of supplementary or ancillary agreements. Above all, the Court had emphasised that the intention of the parties to refer all disputes between all parties to the Arbitral Tribunal would be one of the determinative factors.
The question whether an arbitration clause could be extended to a non-signatory has arisen mainly in the context of a non-signatory party "claiming" through or under a signatory party. In this context, the Courts have expanded the scope of an arbitration agreement to also include non- signatories and have held that non signatories claiming through or under a signatory could compel the other signatory party to arbitrate the subject disputes. This is quite different from a signatory proceeding against a non- signatory by claiming the non-signatory to be connected with the transaction with the non-claimant signatory party. In the former case, there is no dispute that the person being proceeded against in arbitration has consented that the subject disputes be decided by the arbitration. In such cases, the Courts would stretch to ensure that such party does not avoid its contractual commitment to have the subject disputes decided by arbitration. By seeking a reference to arbitration, either under Section 45, 11 or 8 of the Act, a non-signatory party has voluntarily committed, to have the subject disputes decided by Arbitration. Thus, the fundamental condition of consent of both parties is met. However, compelling a non- signatory to subject itself to a claim in arbitration is significantly more difficult. In such cases, the Courts must come to a clear conclusion that the non-signatory party has agreed to arbitration.”
The High Court dismissed the application filed by the defendants finding it to be totally misconceived.
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