Supreme Court Upholds Rejection of Arbitration in Complex Multi-Party Dispute: Gujarat Composite Ltd. vs. A Infrastructure Ltd. (2023)

Introduction

Date of the Judgment: 01 May 2023

Citation: 2023 INSC 417

Judges: Dinesh Maheshwari, J. and Sudhanshu Dhulia, J.

Can a dispute involving multiple parties and agreements be resolved through arbitration when only one agreement contains an arbitration clause? The Supreme Court of India recently addressed this complex issue in a case between Gujarat Composite Limited and A Infrastructure Limited. The core issue was whether the court should compel arbitration when the dispute arises from a web of interconnected agreements, some of which do not have arbitration clauses and involve parties who are not signatories to the original agreement with the arbitration clause. The judgment was delivered by a two-judge bench consisting of Justice Dinesh Maheshwari and Justice Sudhanshu Dhulia.

Case Background

The dispute arose from a series of agreements between Gujarat Composite Limited (the appellant) and A Infrastructure Limited (respondent No. 1). On April 7, 2005, the appellant entered into two license agreements with respondent No. 1 and its sister concern. The first agreement was for licensing the operation of two manufacturing units (A.C. Sheet and Cement Grinding) for a quarterly fee of Rs. 5,00,000. The second agreement was for licensing another unit (A.C. Pressure Pipe) with a quarterly fee of Rs. 2,00,000. Both agreements were for 7 years, with a potential 7-year extension upon mutual consent.

A supplementary agreement was also executed on the same day, where respondent No. 1 agreed to advance Rs. 5,30,00,000 to the appellant with 10% interest, secured by a mortgage on the licensed units. This advance was to be recovered in ten quarterly installments.

On June 25, 2005, an amendment agreement modified clauses related to asset repurchase and bonus entitlement. A tripartite agreement was executed on July 6, 2006, with Bank of Baroda, where the appellant created a first charge on fixed assets for a loan to respondent No. 1. This agreement was amended on January 23, 2008, restricting the transfer of land title deeds during the license agreement period.

The dispute began on February 22, 2012, when respondent No. 1 sought an extension of the license agreement, which the appellant denied on February 29, 2012. On April 6, 2012, respondent No. 1 refused to hand over possession. The appellant issued a notice on April 7, 2015, demanding possession and dues, which respondent No. 1 disputed. After failed attempts to resolve the dispute, the appellant invoked arbitration on February 28, 2017. Respondent No. 1 contested arbitrability, citing interconnected transactions and unresolved issues.

Subsequently, the appellant filed an arbitration petition before the Gujarat High Court on April 26, 2017, while respondent No. 1 filed a commercial civil suit on April 27, 2017, seeking multiple reliefs, including recovery of dues, declaration of conveyance deeds as void, and injunctions against disturbing possession.

Timeline:

Course of Proceedings

The Commercial Court at Ahmedabad rejected the appellant’s application under Section 8 of the Arbitration and Conciliation Act, 1996, on December 13, 2017. The court held that the arbitration clause in the original license agreement could not be extended to subsequent transactions and agreements with different parties. The court also noted that the tripartite agreement did not have an arbitration clause and that the reliefs sought by the plaintiff involved multiple transactions and parties beyond the scope of the original license agreement.

The High Court of Gujarat upheld the Commercial Court’s decision on April 23, 2018, dismissing the appellant’s appeals. The High Court agreed that the dispute involved multiple causes of action and parties, making it impossible to bifurcate the dispute into arbitrable and non-arbitrable parts. The court emphasized that the tripartite agreement was independent and lacked an arbitration clause, and that the reliefs sought against the bank and subsequent purchasers were not arbitrable.

Legal Framework

The case primarily revolves around Section 8 of the Arbitration and Conciliation Act, 1996, which deals with the power of a judicial authority to refer parties to arbitration when there is an arbitration agreement.

Prior to the 2015 amendment, Section 8 stated:

“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 so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. (2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof: (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”

The 2015 amendment to Section 8 introduced a crucial change:

“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 the date of 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. (2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof: Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court. (3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”

The amendment mandates that a court refer parties to arbitration unless it finds that no valid arbitration agreement exists prima facie. This change aimed to reduce judicial intervention at the referral stage and promote arbitration as a preferred dispute resolution mechanism.

Arguments

Appellant’s Arguments:

• The appellant argued that the Commercial Court and the High Court erred in rejecting their application under Section 8 of the Arbitration and Conciliation Act, 1996, particularly given the 2015 amendment. They contended that the amended Section 8 mandates referral to arbitration unless there is no prima facie valid arbitration agreement.
• 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, particularly by the 3-Judge Bench in Vidya Drolia and Ors. v. Durga Trading Corporation : (2021) 2 SCC 1.
• The appellant asserted that the law now requires that only cases that are “deadwood” should not be referred to arbitration, and that whenever there is doubt, the correct course is to refer to arbitration. They relied on ONGC Ltd. v. Discovery Enterprises: (2022) 8 SCC 42 and Intercontinental Hotels v. Waterline Hotels: (2022) 7 SCC 662 to argue that courts should ensure arbitration unless the issue patently indicates deadwood.
• The appellant argued that the respondent No. 1 has not denied the existence of a dispute but merely argues that the disputes cannot be resolved through arbitration due to the involvement of the bank, an argument that cannot withstand legal scrutiny.
• The appellant highlighted that the mandate of the Arbitration Act would have ensured the completion of proceedings within a year, with a reduced scope of interference in the possible Section 34 proceedings, but the matter has remained pending with only framing of issues. The appellant also stated that the licensees are squatting over the property without performing any work.

Respondent’s Arguments:

• The respondent argued that the underlying civil suits are spread over various agreements and involve multiple parties, where except the appellant, none of the other defendants are parties to the arbitration agreement, which is contained only in the main license agreement dated April 7, 2005.
• The respondent submitted that the cause of action of the suits goes beyond the transaction containing the arbitration agreement, with allegations of serious fraud against the appellant, and that the dispute also pertains to a 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 for a matter to be referred to arbitration, the entire subject matter should be subject to arbitration and relied on Sukanya Holdings (supra), stating that the suit cannot be bifurcated partially to refer a part of the suit to arbitration and to allow the rest of it to continue.
• The respondent also contended that the reliefs claimed in the suits fall outside the license agreement, and the disputes pertaining to different agreements and causes of action go beyond the arbitration agreement.
• The respondent highlighted the 2015 amendment to Section 8, which 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. However, if the judicial authority concludes that the agreement does not exist, then the conclusion will be final and not prima facie.
• The respondent relied 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, where guarantors were not held to be bound by arbitration agreements as they were not party to tripartite agreements having arbitration clauses.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame specific issues in a dedicated section. However, the core issue that the court addressed was:

✓ 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, given the multiple transactions and parties involved.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Considered by the Court:

• Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr. : (2003) 5 SCC 531 – This case was initially relied upon by the lower courts to reject the arbitration application. The Supreme Court discussed this case in light of subsequent amendments and decisions.
• Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. : (2018) 15 SCC 678 – The Supreme Court referred to this case to highlight the amendments to Section 8 of the Arbitration Act.
• Vidya Drolia and Ors. v. Durga Trading Corporation : (2021) 2 SCC 1 – This 3-judge bench decision was discussed extensively by the Supreme Court to determine the scope of judicial intervention at the referral stage and the meaning of non-arbitrability.
• ONGC Ltd. v. Discovery Enterprises: (2022) 8 SCC 42 – The Supreme Court referred to this case to emphasize that courts should ensure arbitration unless the issue patently indicates deadwood.
• Intercontinental Hotels v. Waterline Hotels: (2022) 7 SCC 662 – The Supreme Court referred to this case to reiterate the principle that arbitration should be preferred unless there is a clear case of non-arbitrability.
• Himangi Enterprises v. Kamaljeet Singh Ahluwalia : (2017) 10 SCC 706 – This case was overruled by Vidya Drolia (supra).
• SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618 – This case was referred to in Vidya Drolia (supra) to state that the scope and ambit of court’s jurisdiction under Section 8 or 11 of the Arbitration Act is similar.
• Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc.(2013) 1 SCC 641 – This case was referred to in Vidya Drolia (supra) to state that the decision in Sukanya Holdings (P) Ltd. has to be read along with subsequent judgment of this Court in Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc.
• S.N. Prasad v. Monnet Finance Ltd. and Ors. : (2011) 1 SCC 320 – This case was relied upon by the respondent to argue that guarantors were not bound by arbitration agreement as they were not party to tripartite agreements having arbitration clause.
• Deutsche Bank Home Finance Ltd. v. Taduri Sridhar and Anr. : (2011) 11 SCC 375 – This case was relied upon by the respondent to argue that guarantors were not bound by arbitration agreement as they were not party to tripartite agreements having arbitration clause.

Legal Provisions Considered by the Court:

• Section 8 of the Arbitration and Conciliation Act, 1996 – The core provision under consideration, which deals with the power to refer parties to arbitration. The Court analyzed both the pre-amendment and post-amendment versions of this section.

Judgment

How each authority was viewed by the Court?

• Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr. : (2003) 5 SCC 531: The Court acknowledged this decision’s principle that a suit cannot be bifurcated for partial arbitration. While recognizing that subsequent judgments have clarified the scope of judicial intervention, the Court found the core principle of non-bifurcation relevant to the present case.
• Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr. : (2018) 15 SCC 678: This case was used to highlight the amendments to Section 8, which aimed to reduce judicial interference at the referral stage.
• Vidya Drolia and Ors. v. Durga Trading Corporation : (2021) 2 SCC 1: The Court extensively discussed this case to clarify the scope of judicial intervention at the referral stage. The Court reiterated that only cases of “deadwood” should not be referred to arbitration and that in cases of doubt, referral should be made. However, the Court also noted that the present case was not one of doubt.
• ONGC Ltd. v. Discovery Enterprises: (2022) 8 SCC 42 and Intercontinental Hotels v. Waterline Hotels: (2022) 7 SCC 662: These cases were referred to by the appellant to argue that courts should ensure arbitration unless the issue patently indicates deadwood. The Court distinguished these cases, stating that the present case clearly lacked a valid arbitration agreement for the entire dispute.
• 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: These cases were relied upon by the respondent to argue that guarantors were not bound by arbitration agreement as they were not party to tripartite agreements having arbitration clause. The Court accepted this argument.

The Court concluded that the dispute was not arbitrable because it involved multiple agreements, parties, and causes of action, not all of which were covered by the arbitration clause in the original license agreement. The tripartite agreement, central to the dispute, lacked an arbitration clause. The Court emphasized that the dispute could not be bifurcated and that the entire subject matter must be arbitrable for a reference under Section 8.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarilybased on the following key considerations:

• Non-Bifurcation of Disputes: The Court emphasized that a dispute could not be split into arbitrable and non-arbitrable parts. The entire subject matter of the dispute needed to be subject to an arbitration agreement for a referral to be made under Section 8 of the Arbitration Act. This principle, derived from Sukanya Holdings, remained relevant despite subsequent clarifications on the scope of judicial intervention.
• Multiple Parties and Agreements: The Court noted that the dispute involved multiple parties and agreements, including the tripartite agreement with Bank of Baroda, which did not contain an arbitration clause. The Court was not inclined to extend the arbitration clause of the original license agreement to these other parties and agreements.
• Absence of Arbitration Agreement for Entire Subject Matter: The Court found that there was no valid arbitration agreement covering the entire scope of the dispute. The core issue revolved around the tripartite agreement and the claims arising from it, which were not covered by the arbitration clause in the original license agreement.
• Interconnected Transactions: The Court acknowledged that the various agreements were interconnected but highlighted that this interconnection did not automatically extend the arbitration clause to all transactions. The Court distinguished between interconnectedness and the existence of a valid arbitration agreement for all aspects of the dispute.
• Limitations of Section 8: The Court interpreted Section 8 as requiring a clear and valid arbitration agreement for the entire dispute before a referral could be made. The Court found that the 2015 amendment to Section 8, which aimed to reduce judicial interference, did not change the fundamental requirement of a valid arbitration agreement for the entire subject matter.
• Non-Signatories to Arbitration Agreement: The Court also took into consideration that several parties involved in the dispute were not signatories to the original license agreement containing the arbitration clause. The Court relied on prior rulings to reiterate that non-signatories cannot be compelled to arbitrate.

Conclusion

The Supreme Court’s judgment in Gujarat Composite Limited vs. A Infrastructure Limited reinforces the principle that arbitration agreements must be clear and comprehensive, covering all parties and issues in a dispute. The Court declined to refer the matter to arbitration, primarily because the dispute involved multiple parties and agreements, not all of which were covered by the arbitration clause in the original license agreement. The Court emphasized that a dispute cannot be bifurcated and that the entire subject matter must be arbitrable for a reference under Section 8 of the Arbitration and Conciliation Act, 1996.

Key Takeaways:

• Clarity in Arbitration Agreements: Parties must ensure that arbitration agreements are clear and cover all potential disputes and parties involved. Ambiguous or limited arbitration clauses can lead to litigation and delays in dispute resolution.
• Non-Bifurcation Principle: Courts will not bifurcate disputes for partial arbitration. If a dispute involves both arbitrable and non-arbitrable elements, the entire dispute may not be referred to arbitration.
• Importance of Tripartite Agreements: When multiple parties are involved in a transaction, it is crucial to ensure that all agreements, including tripartite agreements, explicitly include arbitration clauses if arbitration is the preferred mode of dispute resolution.
• Judicial Restraint: While the 2015 amendment to Section 8 aimed to reduce judicial interference, the courts will still scrutinize the existence of a valid arbitration agreement for the entire subject matter of the dispute.
• Non-Signatories: Non-signatories to an arbitration agreement cannot be compelled to arbitrate, even if they are involved in interconnected transactions.

This judgment serves as a critical reminder of the need for meticulous drafting of arbitration agreements and the importance of ensuring that all relevant parties and issues are covered to avoid protracted litigation. It also underscores the limits of judicial intervention at the referral stage, even after the 2015 amendment to Section 8 of the Arbitration Act.