Supreme Court Upholds Non-Arbitrability of Disputes Involving Multiple Agreements: Gujarat Composite Ltd. vs. A Infrastructure Ltd. (2023)

Date of the Judgment: 01 May 2023

Citation: 2023 INSC 470

Judges: Justices Dinesh Maheshwari and Sudhanshu Dhulia.

Can a dispute be referred to arbitration when it involves multiple agreements, some with arbitration clauses and some without, and also involves parties not signatory to the arbitration agreement? The Supreme Court of India recently addressed this complex question in a case concerning a license agreement and subsequent financial and property transactions. The core issue was whether the presence of an arbitration clause in the original license agreement could compel arbitration for disputes that had expanded to include other agreements and parties. The judgment was delivered by a two-judge bench comprising Justices Dinesh Maheshwari and Sudhanshu Dhulia, with Justice Maheshwari authoring the opinion.

Case Background

The case revolves around a dispute between Gujarat Composite Limited (the appellant), and A Infrastructure Limited (respondent No. 1), and other related parties. The dispute arose from a series of agreements initiated with two license agreements on April 7, 2005. The first agreement was between the appellant and respondent No. 1 for licensing the operation of two manufacturing units, with a quarterly fee of Rs. 5,00,000. The second agreement was with a sister concern of respondent No. 1 for another manufacturing unit, with a quarterly fee of Rs. 2,00,000. Both agreements were for a term of 7 years (84 months) and contained an arbitration clause.

On the same date, a supplementary agreement was executed where respondent No. 1 agreed to advance Rs. 5,30,00,000 to the appellant at 10% interest per annum, secured by a mortgage on the licensed manufacturing units. This advance was to be recovered in ten quarterly installments from the license fee and bonus. Further amendments were made to the original license agreement on June 25, 2005, pertaining to the repurchase of assets and entitlement of licensor to bonus.

On July 6, 2006, a tripartite agreement was executed between the appellant, respondent No. 1, and Bank of Baroda (respondent No. 2), where the appellant agreed to create a first charge on fixed assets for a loan of Rs. 500 lakh sanctioned to respondent No. 1. An amendment to this tripartite agreement on January 23, 2008, restricted the transfer of title deeds during the term of the license agreements. The dispute arose when respondent No. 1 sought an extension of the license agreement, which the appellant denied. Subsequently, the appellant claimed recovery of possession and monetary dues, which respondent No. 1 disputed. The appellant then invoked the arbitration clause in the original license agreement, which respondent No. 1 contested, leading to the present litigation.

Timeline:

Course of Proceedings

The appellant initially filed a composite arbitration petition before the Gujarat High Court, which was later withdrawn. Subsequently, the appellant filed two separate applications, which were dismissed by the High Court, as the Commercial Court had already rejected the appellant’s application under Section 8 of the Arbitration and Conciliation Act, 1996. The Commercial Court rejected the application under Section 8, holding that the arbitration clause in the original license agreement could not be extended to apply to subsequent transactions and agreements with different parties. The Commercial Court also held that the reliefs sought by the plaintiff in the civil suit involved multiple transactions and parties, making it impossible to refer the matter to arbitration.

The High Court upheld the decision of the Commercial Court, stating that the license agreements were only between the appellant and respondent No. 1, while the tripartite agreement involved the bank, which was not party to the arbitration agreement. The High Court also noted that the reliefs sought were interconnected and could not be bifurcated into arbitrable and non-arbitrable disputes. The High Court observed that the appellant had breached the injunction granted by the High Court as well as the undertaking before the Industrial Tribunal by selling some of the properties to respondent Nos. 3 to 5. The High Court concluded that Section 8 of the Act of 1996 would not be attracted as the suit involved multiple parties and causes of action, and it was not possible to bifurcate the dispute.

Legal Framework

The primary legal provision in question is Section 8 of the Arbitration and Conciliation Act, 1996. This section deals with the power of a judicial authority to refer parties to arbitration when there is an arbitration agreement. Before its amendment in 2015, Section 8 stated that a judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies, refer the parties to arbitration. The amended Section 8, which applies to this case, states that the judicial authority shall refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists. The amendment aimed to reduce judicial interference and promote arbitration as an effective dispute resolution mechanism.

The Supreme Court also considered the implications of multiple agreements and parties, as well as the principle of severability, which allows for the separation of arbitrable and non-arbitrable issues. The Court also considered the principle of “competence-competence”, which means the arbitral tribunal has the first right to determine its own jurisdiction. The Court referred to the 246th Law Commission Report which recommended the amendment to Section 8 to reduce judicial intervention at the pre-reference stage.

Arguments

Appellant’s Submissions:

• The appellant argued that the Commercial Court and the High Court erred in declining the applications under Section 8 of the Arbitration and Conciliation Act, 1996, as amended in 2015.
• The appellant contended that the amended Section 8 mandates referral to arbitration, even for deciding the arbitrability of the dispute.
• The appellant submitted that the decision in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr. : (2003) 5 SCC 531, relied upon by the High Court, has been doubted and distinguished in subsequent decisions.
• The appellant referred to Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. : (2018) 15 SCC 678 and Vidya Drolia and Ors. v. Durga Trading Corporation : (2021) 2 SCC 1, arguing that the law now favors arbitration unless the case is a “deadwood” dispute.
• The appellant argued that whenever there is doubt, the correct course is to refer to arbitration.
• The appellant relied on ONGC Ltd. v. Discovery Enterprises: (2022) 8 SCC 42 and Intercontinental Hotels v. Waterline Hotels: (2022) 7 SCC 662, submitting that unless the issue patently indicates “deadwood,” courts should ensure arbitration is carried out.
• The appellant argued that the respondent No. 1 has not denied the existence of a dispute, but merely argues that the said disputes cannot be resolved through arbitration due to the involvement of the bank.

Respondent’s Submissions:

• The respondent argued that the underlying civil suits involve various agreements and parties, with only the appellant being a party to the arbitration agreement in the original license agreement.
• The respondent contended that the cause of action goes beyond the transaction containing the arbitration agreement, including allegations of fraud and disputes relating to mortgage.
• The respondent emphasized that the tripartite agreement involving the appellant, respondent No. 1, and Bank of Baroda lacks an arbitration clause.
• The respondent argued that the dispute arising from the tripartite agreement and the questioned deeds of conveyance cannot be correlated with the arbitration agreement in the main license agreement.
• The respondent relied on Sukanya Holdings (supra), submitting that the entire subject matter should be subject to arbitration and the suit cannot be bifurcated.
• The respondent submitted that the reliefs claimed fall outside the license agreement and that the disputes pertain to different agreements and causes of action.
• The respondent argued that the tripartite agreement is an independent agreement and does not have an ancillary relationship with the main agreement.
• The respondent highlighted the amendment to Section 8 of the Act of 2015, arguing that it envisages that if the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally determined by the arbitral tribunal.
• The respondent placed reliance on S.N. Prasad v. Monnet Finance Ltd. and Ors. : (2011) 1 SCC 320 and Deutsche Bank Home Finance Ltd. v. Taduri Sridhar and Anr. : (2011) 11 SCC 375, wherein guarantors were not held to be bound by arbitration agreement as they were not party to tripartite agreements having arbitration clause.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the parties were required to be referred to arbitration by allowing the applications moved by the appellant under Section 8 of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

Authorities

Cases Considered by the Court:

• Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr. : (2003) 5 SCC 531 – Supreme Court of India: This case was considered regarding the interpretation of Section 8 of the Arbitration and Conciliation Act, 1996, and the requirement that the entire subject matter of the suit must be subject to the arbitration agreement.
• Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. : (2018) 15 SCC 678 – Supreme Court of India: This case was considered in relation to the amendment to Section 8 of the Arbitration and Conciliation Act, 1996, and the principle that the arbitral tribunal has the first right to determine its own jurisdiction.
• Vidya Drolia and Ors. v. Durga Trading Corporation : (2021) 2 SCC 1 – Supreme Court of India: This three-judge bench decision was considered for its exposition on the meaning of non-arbitrability and when a subject matter would not be capable of being resolved through arbitration.
• ONGC Ltd. v. Discovery Enterprises: (2022) 8 SCC 42 – Supreme Court of India: This case was considered for its discussion of the group of companies doctrine and the application of the alter ego principle in arbitration.
• Intercontinental Hotels v. Waterline Hotels: (2022) 7 SCC 662 – Supreme Court of India: This case was considered for its application of the principles in Vidya Drolia (supra).
• S.N. Prasad v. Monnet Finance Ltd. and Ors. : (2011) 1 SCC 320 – Supreme Court of India: This case was considered for the principle that guarantors are not bound by an arbitration agreement to which they are not a party.
• Deutsche Bank Home Finance Ltd. v. Taduri Sridhar and Anr. : (2011) 11 SCC 375 – Supreme Court of India: This case was also considered for the principle that guarantors are not bound by an arbitration agreement to which they are not a party.

Legal Provisions Considered by the Court:

• Section 8 of the Arbitration and Conciliation Act, 1996: The Court considered both the original and amended versions of this section, which deals with the power of a judicial authority to refer parties to arbitration when there is an arbitration agreement.

Authorities Considered by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed the principles laid down in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr. : (2003) 5 SCC 531* regarding the requirement that the entire subject matter of the suit must be subject to the arbitration agreement.
• The Court considered Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. : (2018) 15 SCC 678*, Vidya Drolia and Ors. v. Durga Trading Corporation : (2021) 2 SCC 1*, ONGC Ltd. v. Discovery Enterprises: (2022) 8 SCC 42*, and Intercontinental Hotels v. Waterline Hotels: (2022) 7 SCC 662* in relation to the interpretation of the amended Section 8 of the Arbitration and Conciliation Act, 1996, and the principle that the arbitral tribunal has the first right to determine its own jurisdiction, but found them inapplicable to the facts of the case.
• The Court followed the principle laid down in S.N. Prasad v. Monnet Finance Ltd. and Ors. : (2011) 1 SCC 320* and Deutsche Bank Home Finance Ltd. v. Taduri Sridhar and Anr. : (2011) 11 SCC 375* that guarantors are not bound by an arbitration agreement to which they are not a party.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the dispute involved multiple agreements, parties, and causes of action, with only the original license agreement containing an arbitration clause. The Court found that the subsequent tripartite agreement and other transactions were independent of the original license agreement and did not incorporate the arbitration clause. The Court also emphasized that the reliefs sought in the civil suit fell outside the scope of the arbitration agreement, and the dispute could not be bifurcated into arbitrable and non-arbitrable parts. The Court was also influenced by the fact that the matter involved subsequent purchasers of the property, who were not party to the original arbitration agreement.

The Court also highlighted that the amended Section 8 of the Arbitration and Conciliation Act, 1996, mandates referral to arbitration unless a prima facie case of non-existence of a valid arbitration agreement is made out. In this case, the court held that there was a clear absence of an arbitration agreement in relation to the entire subject matter of the suit, and as such, the matter was not arbitrable. The Court also noted that the dispute involved allegations of fraud and disputes relating to mortgage, which further complicated the matter.

Ranking of Reasons:

Ratio of Fact to Law:

The judgment heavily relied on the specific facts of the case, with the Court emphasizing the unique circumstances of the multiple agreements, parties, and causes of action. While the Court considered the legal principles and authorities, the factual matrix played a crucial role in its decision. Therefore, the ratio of fact to law in this judgment is approximately 70:30, with a greater emphasis on the factual analysis.

Decision

The Supreme Court dismissed the appeals filed by the appellant, upholding the decisions of the Commercial Court and the Gujarat High Court. The Court held that the arbitration clause in the original license agreement could not be extended to the subsequent tripartite agreement and other transactions involving different parties. The Court concluded that the dispute was not arbitrable due to the involvement of multiple agreements, parties, and causes of action, and the reliefs sought in the civil suit fell outside the scope of the arbitration agreement. The Court also noted that the matter involved subsequent purchasers of the property, who were not party to the original arbitration agreement.

The Supreme Court held that the amended Section 8 of the Arbitration and Conciliation Act, 1996, does not mandate referral to arbitration when there is a prima facie finding that no valid arbitration agreement exists in relation to the dispute in question. The Court emphasized that the principle of “when in doubt, do refer” does not apply when there is a clear absence of an arbitration agreement in relation to the entire subject matter of the suit.

Flowchart of the Case

Key Takeaways

The Supreme Court’s judgment in Gujarat Composite Ltd. vs. A Infrastructure Ltd. reinforces the principle that an arbitration clause in one agreement cannot be extended to other agreements that do not contain such a clause, especially when multiple parties and causes of action are involved. The judgment clarifies that while the 2015 amendment to Section 8 of the Arbitration and Conciliation Act, 1996, promotes arbitration, it does not mandate referral to arbitration when there is a prima facie finding that no valid arbitration agreement exists in relation to the dispute in question. The Court emphasized that the principle of “when in doubt, do refer” does not apply when there is a clear absence of an arbitration agreement in relation to the entire subject matter of the suit.

This judgment serves as a reminder that arbitration agreements must be clearly defined and cannot be implied or extended to other agreements or parties. It also highlights the importance of carefully drafting arbitration clauses to ensure that they cover all potential disputes that may arise between the parties. The judgment underscores the need for a clear and unambiguous arbitration agreement to ensure that disputes are resolved through arbitration. The decision reinforces the principle of party autonomy in arbitration, that parties should be bound only by the agreements that they have entered into, and not by agreements that they have not signed or agreed to.

Potential Questions

Several questions arise from this judgment that could be explored further:

• How can parties ensure that all related agreements are covered by an arbitration clause?
• What are the best practices for drafting arbitration clauses to prevent disputes over arbitrability?
• Under what circumstances can the “group of companies” doctrine be applied to extend an arbitration agreement to non-signatory parties?
• How can parties avoid the bifurcation of disputes when multiple agreements are involved?
• What are the implications of this judgment for the enforceability of arbitration agreements in complex commercial transactions?
• How does this judgment impact the interpretation of Section 8 of the Arbitration and Conciliation Act, 1996, in future cases?
• What are the implications of this judgment on the principle of party autonomy in arbitration?
• How can parties ensure that they do not inadvertently waive their right to arbitrate a dispute?