"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Monday, November 5, 2012

Composite Transactions and the Applicability of Arbitration Agreement to Non-Signatories: Chloro Controls: Part II

Composite Transactions and the Applicability of Arbitration Agreement to Non-Signatories: Chloro Controls: Part II

By Badrinath Srinivasan & Roshni Rajiv

In the previous post, we had dealt with a portion of the decision in Chloro Controls (I) Pvt. Ltd. v. Severn Trent Water Purification Inc. & Others. In this post, we complete the descriptive comment on the decision.

  • In Sumitomo Corporation v. CDS Financial Services , the Supreme Court held that the parties in the judicial proceedings who are to be referred to arbitration in the disputes should be parties to the arbitration agreement as per Section 2(1)(h) of the 1996 Act ("party" means a party to an arbitration agreement.). However, the said decision is not altogether correct as regards Section 45 as the context in which the said provision is used demands the inclusion of a person claiming under such party as well. In fact, Section 2(1)(h) begins with the expression “unless the context otherwise requires”. Also, Sumitomo Corporation is not a binding precedent as this question never arose directly for consideration there.  
  • A seven Bench of the Supreme Court in SBP & Co. v. Patel Engineering has settled the legal position that the nature of enquiry under Section 45 is identical to that of Section 11(6) of the 1996 Act. Patel Engineering has been explained and the kind of questions to be decided under Section 11(6) has been comprehensively dealt with in National Insurance Co. v. Boghara Polyfab. However, the case of Shree Ram Mills v Utility Premises seem to be at “some variance” with the above cases as in Shree Ram, the court was of the view that prima facie satisfaction of existence of live disputes is sufficient. The observations in Shree Ram are obiter and not binding, considering that a larger bench seems to have contradicted with Shree Ram. Thus, under Section 45, the determination by the court of questions that are decided there ( in line with Patel Engineering and Boghara Polyfab) are final and binding and not prima facie. 
  • However, the question as to whether the determinations by the court can be reexamined by the tribunal or by the enforcement court under Section 48 does not directly arise in the case and is left open. However, as regards Section 11, Patel Engineering is clear in making the determination final. The advantage of such finality is that it would save considerable costs and money for the parties. 
  • The correctness of Sukanya Holdings was questioned before the court. It is not necessary to decide the correctness of Sukanya Holdings as it arose under Section 8 which is not the case here. Further, there was no composite transaction involved in Sukanya Holdings, which is the case here. Sukanya Holdings is also distinguishable on facts. 
  • Section 9 of CPC is not an absolute right. It contains certain inbuilt restrictions. Therefore, Section 45 of 1996 Act can prevail over provisions of CPC when Court is satisfied that an agreement is enforceable and operative and the Court is obliged to refer it to arbitration.
  • On facts, the intra-legal relationship between the parties is directed towards one particular object - successful implementation of joint venture. The joint venture is not dependent on one single agreement but several agreements which is “one single chain consisting of different components”. 
  • All the five agreements signed by the parties were primarily to fulfill their obligations and ensure performance of the Principal Agreement. (Para 138,139). Further, all the agreements were executed simultaneously on the same date which implies that parties intended to have all these agreements as a composite transaction.(para 147) . It being a composite transaction gives the parties the right to opt for any remedy from all the remedies provided under the agreements.(para 151,154)
  • The arbitration clause in the Principal agreement is comprehensive enough to include the disputes arising ‘under and in connection with’ the agreement. The word ‘connection’ has been added by the parties to expand the scope of the disputes under the agreements.(para 144). The other agreements originate from the Principal Agreement and are covered under the arbitration clause contained in the Mother/ Shareholders agreement.(para 146) 
  • As per the “Group of Companies Doctrine”, a party being non-signatory to one or other agreement may not be of much significance as performance of one may be quite different with the performance and fulfillment of the Principal/mother agreement(para 150).
  • In certain agreements, there are arbitration & jurisdiction clauses. These clauses are restricted to disputes arising under those agreements. The real intention of the parties was to refer to arbitration disputes not only arising under those agreements in which the arbitration clauses were agreed to but even disputes which arose under the mother agreement. (152-154)
Thus, the court held that in case of composite transactions involving on 'mother' agreement followed by a series of other agreements, a party claiming under the party to the arbitration agreement has the right to apply to the court to get the matter referred to arbitration even if such party is not a party to some of the several agreements in the composite transaction, in which case the arbitration clause in the mother agreement will prevail.

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