(Continuing with her mid-year arbitration review (see previous posts here and here), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the third part of the series of posts on the topic. Do check out the awesome, crisp and to-the-point descriptive comment on prominent arbitration related cases decided in India in the first half of 2018. Happy reading!)
In
the third of a series of posts, I review two significant Supreme Court
decisions on the issue of binding non-signatories to an arbitration agreement.
I have discussed the cases in slight detail as they involve different facts and
circumstances that demonstrate different aspects of the issue.
Non-signatories to arbitration agreement
can be referred to domestic arbitration under section 8 based on facts and
circumstances; mere allegations of fraud cannot disable arbitration
Ameet Lalchand Shah and Others v Rishabh Enterprises
and Another (Supreme Court, 3 May 2018)
Brief facts: The respondent
(Rishabh Enterprises) entered into four agreements: two agreements with Juwi
India that contained arbitration clauses, a sale and purchase agreement with
Astonfield Renewables (hereinafter “Astonfield Agreement”) that did not
contain an arbitration clause, and an equipment lease agreement with Dante
Energy that contained an arbitration clause. The agreements related to the
commissioning of a solar power plant in Uttar Pradesh, India.
A
dispute arose between the parties wherein the respondents alleged that Dante
Energy defaulted in payment of rent and that Astonfield Renewables committed
fraud by inducing Rishabh Enterprises to purchase certain products under the
Astonfield Agreement. Dante Energy invoked the arbitration clause in response
to which the respondents filed a civil suit for fraud and misrepresentation. In
response to the civil suit, the appellants filed an application under section 8
of the Arbitration Act (hereinafter “the Act”) seeking reference of the dispute
to arbitration on the ground that all four agreements were inter-connected as
they were executed between the same parties and pertained to the same purpose.
The respondents opposed the application, contending that the matter could not
be referred to arbitration while the suit for declaration that the agreements
were vitiated due to fraud and misrepresentation was pending. Further, the suit
only concerned fraud committed by Astonfield Renewables and Dante Energy for
which a criminal case had been registered and hence, the dispute could not be
referred to arbitration.
The
single judge and subsequently Division Bench dismissed the section 8
application by relying on Sukanya
Holdings - the Astonfield Agreement, which was the principal agreement
according to them, did not contain an arbitration clause and the agreement was
not inter-connected with the other agreements. Further, given serious
allegations of fraud were involved, the dispute was not arbitrable. The
respondents appealed against the Division Bench judgment to the Supreme Court.
Issues: (1) Were all
four agreements inter-connected such that the parties could be referred to
arbitration even though there was no arbitration clause in the Astonfield
Agreement?; and (2) was the dispute non-arbitrable on account of the
allegations of fraud or was the dispute arbitrable by taking the agreements as
a commercial undertaking of the parties with a sense of business efficacy as
held in Ayyasamy?
Arguments: On the first
issue: the respondents argued that the Astonfield Agreement was the main
agreement and the High Court’s reliance on Sukanya
Holdings was correct since under Part I of the Act, parties who were not
signatories to the arbitration agreement (in this case Astonfield) cannot be
referred to arbitration. The appellants’ reliance on Chloro Controls was misplaced as that case was decided under Part
II of the Act and did not overrule Sukanya
Holdings (note: Chloro Controls
held that non-signatories could be referred to a foreign-seated arbitration
under section 45 of the Act in certain circumstances).
On the
second issue: the appellants argued that were no serious allegations of fraud
to decline a reference to arbitration. Based on Ayyasamy, they submitted that mere allegations of fraud were not
sufficient to detract from the referring the matter to arbitration as per the
agreement. The respondents argued that the allegations were very serious and
not merely to disable the arbitration, and that the appellants were guilty of
cheating the respondents from the very beginning.
Decision: The Supreme
Court decided both issues in favour of the appellants and referred the parties
to arbitration.
On
the first issue, the Court, albeit not expressly, applied the principles laid
down in Chloro Controls, such as “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” (paragraph 20;
paragraph 73 of Chloro Controls). The
Court concluded that the four agreements were for the single purpose to commission
the solar power plant. The Court characterised the equipment lease agreement
with Dante Energy as the principal agreement and after undertaking an analysis
of the relevant clauses, the Court concluded that the other three agreements
were ancillary agreements, which led to the main purpose of commissioning the
power plant:
“Even
though, the Sale and Purchase Agreement (05.03.2012) between Rishabh and
Astonfield does not contain arbitration clause, it is integrally connected with
the commissioning of the Solar Plant…and even though, Astonfield and appellant
No.1 Ameet Lalchand Shah are not signatories to the main agreement viz.
Equipment Lease Agreement (14.03.2012), it is a commercial transaction
integrally connected with commissioning of [the power plant]…what is
evident from the facts and intention of the parties is to facilitate
procurement of equipments, sale and purchase of equipments, installation and
leasing out the equipments to Dante Energy. The dispute between the parties
to various agreements could be resolved only by referring all the four
agreements and the parties thereon to arbitration” (paragraph 21) [emphasis
supplied].
Therefore,
the Court essentially concluded that since all parties were involved in a single
commercial project that was executed through several agreements, they were
all covered by the arbitration clause in the equipment lease agreement that was
the main agreement. The Court pointed out that the Delhi High Court erred in
characterising the Astonfield Agreement as the main agreement.
In
this context, the Court also referred to the 2015 amendment of section 8 which
amplified the relevant “party” that is entitled to seek a reference to
arbitration to include all persons claiming “through or under” a party to the
arbitration agreement. Further, as per the recommendations of the 246th
Law Commission Report, a prima facie existence of an arbitration agreement was
sufficient to refer parties to arbitration under section 8.
On
the second issue, the Court concurred with the appellants’ reliance on Ayyasamy. In that case it was held that
when a party wants to wriggle out of an arbitration agreement on the basis of
alleged fraud, then a strict and meticulous inquiry is needed to determine
whether the allegations are of a serious and complicated nature that should be
addressed by the court. Further, it was pointed out that mere allegations of
fraud could not preclude arbitration and it was the duty of the court to impart
business efficacy to commercial transactions.
Applying
Ayyasamy, the Court held that the
allegations of fraud were not serious and in any event, could very well be
examined by the arbitral tribunal. Even though Juwi India and Astonfield were
not parties to the lease agreement, all the agreements contained clauses referring
to the lease agreement and it was the duty of the Court to not merely go by the
averments made in the submissions but to also adopt a commercial
understanding and impart business efficacy.
Comment: The Supreme
Court appears to have limited the application of Sukanya Holdings under section 8. While discussing the 2015
amendments to this provision, the Court pointed out the introduction of the
section 45 language (“through or under”)
and that the amendments apply notwithstanding any judicial precedent, which
would arguably include Sukanya Holdings.
Therefore, this judicial decision assumes immense significance because it
demonstrates the application of Chloro
Controls to domestic arbitrations and expands the traditional conception of
“parties” to an arbitration agreement to include non-signatories based on the
facts and circumstances. Based on this decision, it would probably be prudent
for parties in a composite transaction involving multiple agreements with
arbitration clauses to expressly exclude arbitration in any agreement should
that be the intention.
Although
Ayyasamy has been subjected to
considerable criticism, this decision is important because it clearly reiterates
that mere allegations of fraud cannot be used to disable or obstruct a domestic
arbitration.
Mere reference in an agreement to
another document containing an arbitration clause is insufficient to
incorporate the clause
M/S. Elite Engineering and Construction v M/S.
Techtrans Construction India Private Limited (Supreme Court, 23
February 2018)
Brief facts: The respondent
(Techtrans) was party to a construction agreement that contained an arbitration
clause (“any dispute...between the
parties…shall be finally settled by binding arbitration”). Under this
agreement, the respondent entered into a sub-contract with the appellant (Elite
Engineering) that did not contain an arbitration clause. When disputes arose
between the appellant and respondent, the appellant filed a petition under
section 9 of the Act. This petition was subsequently allowed but the judge left
open the issue of existence of an arbitration agreement. Meanwhile, the
appellant’s petition under section 11 of the Act to appoint an arbitrator was
dismissed by the High Court on the respondent’s contention that there was no
arbitration agreement.
Issue: Was the
arbitration clause in the construction agreement incorporated into the
sub-contract?
Arguments: The appellant
argued that (i) the sub-contract incorporates the arbitration agreement in the
construction agreement by implication by virtue of the following clauses:
clause 2 that provides that “all the
conditions and special conditions of contract, specifications (general and
additional clauses relating to the works and quality specified in the [construction
agreement] are binding on the
Subcontractor” [emphasis supplied]; and clause 9.10 of the Annexure that
provides that “for items which are
not mentioned in this Agreement Clauses, terms and conditions of [the
construction agreement] will be
applicable” [emphasis supplied].
The
result of reading both clauses together was that the arbitration clause in the
construction agreement became applicable to the sub-contract by incorporation;
(ii) when the appellant was required to execute the work on the terms and
conditions contained in the principal agreement (i.e. the construction
agreement), the parties clearly intended to incorporate all terms including the
arbitration clause; (iii) clause 8.7 of the sub-contract provides that other
terms related to termination of work will be same as the agreement between the
EPC, Concessionaire and respondent, which would include settlement of disputes
on termination through arbitration as provided in the sub-contract; and (iv)
the appellant’s statement in its section 9 petition that it would be
constrained to file a suit against the respondent was on account of mistaken
understanding of law and cannot be held against it.
The
respondent argued that clause 2 of the sub-contract clearly demonstrated that
there was only a qualified incorporation of the terms and conditions of the
construction agreement, namely only those relating to the works and quality.
There was no conscious acceptance of the arbitration clause by the parties,
which was reflected in the fact that the appellant did not even refer to it in
its section 9 petition.
Decision: The Supreme
Court agreed with the respondent’s contentions and held that there was no arbitration
agreement between the parties. Relying on its verdict in M.R. Engineers and Contractors Private Limited, the Court held that
as per section 7(5) of the Act, an arbitration clause in an independent
document can be imported into an agreement between parties by reference to such
independent document in the agreement, even if there is no specific provision
for arbitration. However, what is key is that the reference must be such so as
to make the arbitration clause in such independent document a part of the
agreement. Therefore there is a difference between mere reference and
incorporation, which is made clear by the language of section 7(5):
“Therefore
when there is a reference to a document in a contract, the court has to
consider whether the reference to the document is with the intention of
incorporating the contents of that document in entirety into the contract,
or with the intention of adopting or borrowing specific portions of the said
document for application to the contract” (paragraph 16; paragraph 16 of M.R. Engineers) [emphasis supplied].
The
Court referred to the conditions laid out in M.R. Engineers that need to be fulfilled for a valid incorporation
of an arbitration clause and accordingly agreed with the High Court’s
conclusion that there was no conscious acceptance of the arbitration
clause in the construction agreement by the appellant and respondent. The Court
agreed with the respondent that clause 2 had limited coverage, and noted that
clause 9.10 only referred to “items” which had to be taken from the principal
contracts. Further, the Court rejected the appellant’s termination of work
argument, holding that the procedure relating to termination is completely
separate and different from resolution of disputes.
Comment: This case is yet another illustration of the
requirement to be express and specific in providing for arbitration in an
agreement. Parties’ intention to consent to arbitration has to manifest clearly
as opposed to appearing as an after thought. As regards the inclusion of
arbitration by incorporation, this decision emphasises that the agreement
should contain a clear reference to the document/s containing the arbitration
clause and the intention to either incorporate the document/s in their entirety
or at least the arbitration clause, unlike a reference to mere technical
provisions that is likely to prove insufficient.
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