Supreme Court Clarifies Interconnected Agreements in Arbitration: Ameet Lalchand Shah vs. Rishabh Enterprises (2018)

Introduction

Date of the Judgment: May 3, 2018

Citation: (2018) INSC 401

Judges: Ranjan Gogoi, J. and R. Banumathi, J.

When multiple contracts are part of a single project, can a dispute be resolved through arbitration even if not all contracts have an arbitration clause? The Supreme Court of India addressed this question in a case involving a solar power plant project. The court had to determine whether various agreements related to the project were interconnected enough to warrant arbitration, even though one key agreement lacked an arbitration clause. The judgment was delivered by a two-judge bench comprising Justice Ranjan Gogoi and Justice R. Banumathi, with Justice R. Banumathi authoring the opinion.

Case Background

The dispute arose from a series of agreements related to the establishment of a 2 MWp Photovoltaic Solar Plant at Dongri, Raksa, District Jhansi, Uttar Pradesh. Rishabh Enterprises, a sole proprietorship owned by Dr. A.M. Singhvi, entered into multiple contracts with different parties.

On February 1, 2012, Rishabh entered into two agreements with M/s Juwi India Renewable Energies Pvt. Ltd.: (i) an Equipment and Material Supply Contract for purchasing power generating equipment worth Rs. 8,89,80,730; and (ii) an Engineering, Installation, and Commissioning Contract for installing the solar plant for Rs. 2,20,19,270. Both these agreements included arbitration clauses.

On March 5, 2012, Rishabh entered into a Sale and Purchase Agreement with Astonfield Renewables Private Limited to purchase CIS Photovoltaic products worth Rs. 25,16,00,000. These products were intended to be leased to Dante Energy Pvt. Ltd. for the solar plant. Astonfield received Rs. 21,40,49,999 from Rishabh through various cheques. This particular agreement did not contain an arbitration clause.

On March 14, 2012, Rishabh entered into an Equipment Lease Agreement with Dante Energy, where Dante Energy agreed to pay Rs. 13,50,000 as lease rent for March 2012, and Rs. 28,26,000 per month from April 2012. The solar plant was commissioned on March 16, 2012.

A dispute arose when Rishabh alleged that Dante Energy defaulted on lease payments and that Astonfield committed fraud by inducing Rishabh to purchase the photovoltaic products. Rishabh also accused the appellants of misrepresentation and criminal breach of trust. A criminal complaint was filed, leading to the registration of FIR No. 30 of 2015.

Dante Energy invoked the arbitration clause in its agreement on February 13, 2016, nominating a former Supreme Court Judge as the arbitrator. Rishabh filed a civil suit on March 11, 2016, seeking a declaration that all agreements were void due to fraud, and for recovery of Rs. 32,22,80,288, along with interest and arrears of lease rent. The appellants then filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking to refer all disputes to arbitration.

Timeline

Course of Proceedings

The Single Judge of the Delhi High Court dismissed the application under Section 8 of the Arbitration and Conciliation Act, 1996, stating that the Equipment Lease Agreement could not be considered the main agreement, and that the other agreements were not ancillary. The court also noted the serious allegations of fraud and the ongoing criminal case and income tax inquiries, concluding that the disputes were not suitable for arbitration.

The Division Bench of the Delhi High Court upheld the Single Judge’s decision, emphasizing the difference between Section 8 and Section 45 of the Act. The Division Bench stated that the main agreement, the Sale and Purchase Agreement, lacked an arbitration clause, and therefore the matter could not be referred to arbitration. The court also cited serious allegations of fraud as a reason to exclude arbitration.

Legal Framework

The primary legal framework in this case is the Arbitration and Conciliation Act, 1996, specifically Section 8, which deals with the power to refer parties to arbitration when there is an arbitration agreement. The court also considered Section 45 of the Act, which pertains to arbitration agreements under Part II of the Act.

Section 8 of the Arbitration and Conciliation Act, 1996 states:


“8. Power to refer parties to arbitration where there is an arbitration agreement. – (1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than when submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

The 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, clarified that a judicial authority should refer parties to arbitration unless it finds that prima facie no valid arbitration agreement exists. This amendment was made to align Section 8 with Section 45 and to address the issues raised in the Sukanya Holdings case.

Arguments

Appellants’ Arguments:

• The appellants argued that all four agreements were interconnected and part of a single commercial project, the commissioning of the solar plant.
• They contended that the Sale and Purchase Agreement (05.03.2012) was not the main agreement, but rather the Equipment Lease Agreement (14.03.2012) was the principal agreement, and the others were ancillary.
• The appellants submitted that the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, allows for the referral of disputes to arbitration, even if all parties are not signatories to the arbitration agreement, as long as they are interconnected.
• They argued that the allegations of fraud were not serious enough to prevent referral to arbitration.
• The appellants relied on the Ayyasamy case to argue that mere allegations of fraud are insufficient to avoid arbitration.

Respondents’ Arguments:

• The respondents argued that the Sale and Purchase Agreement (05.03.2012), which lacked an arbitration clause, was the main agreement, and thus the matter could not be referred to arbitration.
• They contended that Sukanya Holdings case applied, stating that parties not signatory to an arbitration agreement cannot be referred to arbitration.
• The respondents argued that the allegations of fraud were serious and warranted a civil trial rather than arbitration.
• They submitted that the suit was based on the averments that from inception, the intention of appellants/defendants was to cheat the respondents and the respondents were made to part with large sums of money on the basis of the misrepresentation made by the appellants.
• The respondents contended that the alternative prayer in the plaint will not convert the fraud suit to a regulatory suit because of alternative prayer since alternative prayer – ‘lease rental’ has been projected only as an alternative remedy.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether all four agreements—(i) Equipment and Material Supply Contract (01.02.2012) between Rishabh and Juwi India; (ii) Engineering, Installation and Commissioning Contract (01.02.2012) between Rishabh and Juwi India; (iii) Sale and Purchase Agreement (05.03.2012) between Rishabh and Astonfield; and (iv) Equipment Lease Agreement (14.03.2012) between Rishabh and Dante Energy—are interconnected to refer the parties to arbitration, even though the Sale and Purchase Agreement (05.03.2012) between Rishabh and Astonfield does not have an arbitration clause?
2. Whether reference of the dispute between the parties to arbitration is to be refused on the ground of allegations of fraud levelled against the appellants by the respondents in the plaint, or whether the agreements ought to be taken as a commercial undertaking of the parties “with a sense of business efficacy” as held in the Ayyasamy case?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the Equipment Lease Agreement (14.03.2012) was the principal agreement, and the other three agreements were ancillary to it. The Court emphasized that all four agreements were part of a single commercial project, the commissioning of the solar plant at Dongri, Raksa, District Jhansi, Uttar Pradesh.

The Court noted that the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, allows for the referral of disputes to arbitration even if not all parties are signatories to the arbitration agreement, provided they are interconnected.

The Court also held that mere allegations of fraud were not sufficient to prevent arbitration. It emphasized the need to give commercial transactions a “sense of business efficacy.”

The Court overruled the High Court’s decision and referred all four agreements and the parties to arbitration. The Court also directed the appellants to pay the arrears of lease rent and future lease rent at the rate of Rs. 28,26,000 per month until the arbitration proceedings are completed.

Authorities Viewed by the Court:

• Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and another [CITATION]: The Court distinguished this case, stating that the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, allows for the referral of disputes to arbitration even if not all parties are signatories to the arbitration agreement, provided they are interconnected.
• Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and others [CITATION]: The Court relied upon this case to apply the principle that non-signatories can be bound by an arbitration agreement in exceptional cases, particularly when the transaction is composite.
• A. Ayyasamy v. A. Paramasivam and others [CITATION]: The Court relied upon this case to support the view that mere allegations of fraud are not sufficient to prevent arbitration.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interconnected nature of the agreements and the need to give commercial transactions a “sense of business efficacy.” The court emphasized that all four agreements were part of a single project, with the Equipment Lease Agreement being the principal one. The court also considered the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, which allows for the referral of disputes to arbitration even if not all parties are signatories to the arbitration agreement, provided they are interconnected.

The Court’s reasoning was that the agreements were not isolated transactions but part of a unified project. The court also noted that the parties had consciously engaged in commercial transactions to commission the solar plant. The court’s decision was also influenced by the need to uphold the intent of the parties to resolve disputes through arbitration.

The Court considered the argument that the Sale and Purchase Agreement (05.03.2012) was the main agreement, but rejected it, stating that the Equipment Lease Agreement (14.03.2012) was the principal agreement. The court also considered the argument that the allegations of fraud were serious enough to prevent arbitration, but rejected it, stating that the allegations were not so serious as to prevent the matter from being referred to arbitration.

The final decision was reached by considering the intent of the parties, the nature of the commercial transaction, and the need to give effect to the arbitration agreement. The Court emphasized that arbitration is a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal.

The Court held that the agreements should be interpreted with a “sense of business efficacy” and that mere allegations of fraud are not sufficient to avoid arbitration. The Court also noted that the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, allows for the referral of disputes to arbitration even if not all parties are signatories to the arbitration agreement, provided they are interconnected.

The Court quoted from the judgment:


“The commercial understanding is reflected in the terms of the agreement between the parties. The duty of the court is to impart to that commercial understanding a sense of business efficacy.”



“The language of amendment to Section 8 of the Act is clear that the amendment to Section 8(1) of the Act would apply notwithstanding any prayer, judgment, decree or order of the Supreme Court or any other Court.”



“It is only where serious questions of fraud are involved, the arbitration can be refused.”

Key Takeaways

• Multiple agreements related to a single commercial project can be referred to arbitration, even if not all agreements have an arbitration clause, provided they are interconnected.
• The Equipment Lease Agreement was deemed the main agreement, with other agreements considered ancillary.
• Mere allegations of fraud are not sufficient to prevent arbitration; there must be serious allegations of fraud to refuse arbitration.
• The 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, allows for the referral of disputes to arbitration even if not all parties are signatories to the arbitration agreement, provided they are interconnected.
• Courts must give commercial transactions a “sense of business efficacy” when interpreting agreements.

Directions

The Supreme Court directed the appellants to:

• Pay the arrears of lease rent.
• Pay the future lease rent for the equipment at the rate of Rs. 28,26,000 per month until the disposal of the arbitration proceedings.

The Court also directed that the Commercial Suit No.85 of 2017 filed by the respondents on the file of Delhi High Court shall stand disposed of.

Development of Law

The ratio decidendi of this case is that multiple agreements that are part of a single commercial project can be referred to arbitration, even if not all agreements have an arbitration clause, provided they are interconnected. The case also clarifies that mere allegations of fraud are not sufficient to prevent arbitration.

This judgment reinforces the principle that courts should interpret commercial agreements with a “sense of business efficacy.” It also emphasizes the importance of the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, which allows for the referral of disputes to arbitration even if not all parties are signatories to the arbitration agreement, provided they are interconnected. This case modifies the previous position of law as laid down in Sukanya Holdings, which held that non-signatories to an arbitration agreement could not be referred to arbitration.

Conclusion

The Supreme Court’s judgment in Ameet Lalchand Shah vs. Rishabh Enterprises clarifies that multiple agreements related to a single commercial project can be referred to arbitration, even if not all agreements contain an arbitration clause. The court emphasized the interconnected nature of the agreements and the need to give commercial transactions a “sense of business efficacy.” The decision also highlights the importance of the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, which allows for the referral of disputes to arbitration even if not all parties are signatories to the arbitration agreement, provided they are interconnected. The court set aside the High Court’s order and referred all four agreements and the parties to arbitration, directing the appellants to pay the arrears of lease rent and future lease rent until the arbitration proceedings are completed.