Position of law in arbitral reference in case of multiple, multi-party agreements with interlinked causes of action
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.
The present judgment acknowledged the expanding need for international arbitration and divergent schools of thought providing new dimensions to the arbitration jurisprudence in the international field. This case dealt with the issue of invocation of arbitral reference in multiple, multi-party agreements with intrinsically interlinked causes of action, more so, where performance of ancillary agreements was substantially dependent upon effective execution of the principal agreement.
The questions before the court were:
(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?
There were two counter contentions, one stating that Part I and Part II of the 1996 Act operate in different fields and no interchange or interplay is permissible whereas the other view was that that provisions of Part I have to be construed with Part II.
It was observed that 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. 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. 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.
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?
If the above questions are answered in the affirmative, then the parties must be referred to arbitration. 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. 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.
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 a binding award.
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. 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. 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 from any obligations/limitations.
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.
This evolves the principle that a non-signatory party could be subjected to arbitration provided the 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. 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.
The Court would also 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.
Accordingly, 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 factors.
The above doctrine though does not have universal acceptance. 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 intermingled 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. In India, the law has been construed more liberally, towards accepting incorporation by reference.
On the issue of whether the courts are empowered to review the existence and validity of the arbitration agreement prior to reference, in Indian context, it was observed that Section 45 is a legislative mandate and does not admit of any ambiguity. 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.
Further, where there is multi-party 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. 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. 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.
On the issue of determining correctness of Law stated in ‘Sukanya’, it was held that ‘Sukanya’ was a judgment in a case arising under Section 8 Part I of the 1996 Act while the present case relate to Section 45 Part II of the Act and as such that case might have no application to the present case. Secondly, in that case the Court was concerned with the disputes of a partnership concern whereas in the case in hand, there was a mother agreement and there were other ancillary agreements to the mother agreement – 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 the judgment of ‘Sukanya’ would not apply to the present case and thirdly, on facts, the judgment in ‘Sukanya’s’ case, has no application to the case in hand.
The Court accordingly on the issues before it, mentioned as above, held that 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.
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 non-signatory parties. However, the discretion of the Court has to be exercised in exceptional, limiting, befitting and cases of necessity and very cautiously.
[Chloro Controls (I) P. Ltd. vs. Severn Trent Water Purification Inc. & Ors.]
(SC, 28.09.2012 – Civil Appeal No. 7134 of 2012)