Court U/S 45 Of Arbitration Act Must Refer Parties To Arbitration Unless Agreement Is Void Or Inoperative: Delhi High Court

Brief Facts

By way of the present application filed under Section 45 of the Arbitration and Conciliation Act, 1996 (hereinafter, „the Act‟), Defendant no. 1 seeks dismissal of the instant suit along with reference of disputes to arbitration seated in Benin in light of the arbitration agreement contained in Article 11 of the Buyer Seller Agreement (hereinafter, „BSA‟) dated 06.06.2019 and Article 5 of Addendum dated 09.01.2021.

Clause 20 of the Collaboration Agreement provided the dispute resolution mechanism i.e., disputes would be resolved through arbitration and the arbitration will take place in Benin and shall be administered by the Center of Arbitration, Mediation and Conciliation, Benin.

Pursuant to the Collaboration Agreement, at the request of Defendant No.1, Plaintiff executed a Buyer-Seller Agreement dated 06.06.2019 (“BSA”) for a period of the next 5 years, which is stated to have superseded the collaboration agreement.

After executing the BSA, Defendant No. 1 assigned its obligations to Defendants No. 2 & 3. Subsequently, most transactions were made through Defendants No. 2 & 3. Defendants No. 2 and 3 entered into High Sea Sale Agreements (HSSAs) with plaintiff, all including arbitration clauses under the Indian Arbitration Act, with New Delhi as the arbitration location.

Thereafter, the plaintiff issued a notice dated 13.07.2023 under Section 21 of the A&C Act, 1996, for referring the disputes between the parties to arbitration because, as per the plaintiff‟s understanding, the conspectus of all the agreements executed between the parties suggests that seat of arbitration was India. It was also submitted that the said notice was addressed to defendants nos. 1 to 3 because they always represented themselves to be alter egos of each other.

The plaintiff apprehended precipitative actions by the defendants. Therefore, the plaintiff approached this Court seeking a permanent injunction against defendant No. 1 from proceeding and continuing with the Benin Arbitration.

While the matter rested thus, the application bearing I.A. No. 16015/2023 was filed by defendant No. 1 under section 45 of the A&C Act on 16.08.2023, seeking rejection and dismissal of the present Suit filed by plaintiff, and also seeking reference of the plaintiff and defendant No. 1 to the pending arbitration proceedings in the Republic of Benin.

Contentions

The Defendant No. 1 submitted that Section 45 of the A&C Act provides that a judicial authority, when seized of an action in a matter wherein the parties have made an agreement referred to in Section 44, shall at the request of one of the parties refer the parties to arbitration unless it prima facie finds that the said agreement is null and void, inoperative or incapable of being performed.

That Section 45, which is contained in Part II of the A&C Act, casts a statutory mandate on courts to refer parties to arbitration agreements to arbitration.

That defendant no.1, in terms of the arbitration agreement contained in Article 11 of the BSA, initiated Benin Arbitration proceedings on 31.05.2023 by issuing the Fludor NOA. The plaintiff and the applicant are both parties to the Benin Arbitration proceedings.

Defendants No. 2 and 3 submitted that defendant No. 2 is neither a party to the Fludor-Balaji Contracts nor any other agreement to which the plaintiff and defendant No. 1 are parties and that defendants No. 2 & 3 do not have any role to play in the dispute between the plaintiff and Defendant No. 1. Therefore, the plaintiff has no cause of action against the defendant No. 2, and it ought to be removed as a party to the present suit.

Per contra, the plaintiff submitted that defendant No. 1 has wrongly conferred the seat of arbitration to be Benin, as the BSA does not find mention of the seat of arbitration but only states that the arbitration “will take place in Benin”.

That considering the settled position, Benin cannot be considered a seat of arbitration, as it is just a venue/place for conducting the arbitral proceedings and that the intention of the parties as to the seat of arbitration should be determined from other clauses in the agreement and the conduct of the parties.

That defendant No. 1 had conferred the seat of arbitration to a wrong jurisdiction by completely disregarding subsequent arbitration agreements contained in the Sales Contracts and HSSAs executed by and between the plaintiff and defendant No. 2 and 3, which contain arbitration clauses with the seat of arbitration to be in India.

Court's Analysis

The court, at the outset, referred to section 45 of the Arbitration Act which provides that the Court has no discretion other than sending the parties to arbitration once it is found that the agreement in question is a legal and valid agreement that is capable of being performed by the parties to the Suit.

In Superon Schweisstechnik India Ltd v. Europaische Holding Intercito & Ors., 2022, the Delhi High Court has held that although the Court will examine as to whether the Agreement sought to be enforced by way of the instant suit is null and void, inoperative or incapable of being performed, yet the test that would be applied would be of a prima facie basis. This means that the Court is not to conduct any detailed enquiry or minute trial at this stage, in order to discern if such is the case, the court noted.

The court further noted that after pursuing the arbitration clauses of BSA and Addendum, it is clear that the plaintiff and defendant no. 1 had, out of their own will, choose the preferred place of arbitration to be in Benin. Therefore, Arbitration would be the method of resolving any disagreement that might emerge between the parties to the BSA and addendum. Therefore, it is clear that the agreements entered into between defendants no 2 & 3 and the plaintiff are separate from the BSA and addendum.

The court further noted that neither is there a mention of any article/clause that states that the sales contracts and HSSAs are just an addition to the BSA, nor any clause that states that addendum and parties to BSA and addendum would be governed by the clauses of sales contracts and HSSAs. Defendants No. 2 & 3 are individual companies. Therefore, the contracts or agreements entered into between Defendants no 2 & 3 and the plaintiff containing an arbitration clause with the place of arbitration in India will be enforceable separately.

Based on the above, the court came to the conclusion that all ingredients of Section 45 are satisfied. The Plaintiff in the plaint has neither pleaded that this agreement is null and void, inoperative or incapable of being performed nor sought any declaratory reliefs in this regard.

The court further noted that instead, the Plaintiff has admitted that it had executed the BSA and the Addendum and is thus bound by the arbitration clause in the BSA. The Plaintiff‟s only allegation in the Suit is that the said proceedings would be vexatious, inconvenient, unconscionable, oppressive, initiated by fraud and/or would cause demonstrable injustice to Plaintiff. None of these grounds are relevant under Section 45.

The apex court in Balasore Alloys Limited v. Medima LLC, 2020 has held that while dealing with a similar case inter-alia, held that when admittedly the parties had entered into the agreement, and there was consensus ad-idem to the terms and conditions contained therein which is comprehensive and encompassing all terms of the transaction and such agreement also contains an arbitration clause which is different from the arbitration clause provided in the purchase order which is for the limited purpose of supply of the produce; the arbitration clause contained in the main agreement would govern the parties, the court noted.

While applying the above ratio to the facts of the present case, the court observed that in that view, it would not be appropriate for the applicant to invoke the Clause of the purchase orders, more particularly when the arbitration clause contained in the main agreement has been invoked and Arbitral Tribunal has already been constituted.

Accordingly, the present application was allowed and suit of the plaintiff was dismissed.

Case Title: BALAJI STEEL TRADE versus FLUDOR BENIN S.A. AND ORS

Case Reference: CS(COMM) 544/2023, I.A. No. 16015/2023

Judgment Date: 08/11/2024