Sec 8 Arbitration Act - Court Can't Adjudicate Bifurcability Of Causes Of Action Or Presence Of Necessary Parties After 2015 Amendment: Calcutta HC

The Calcutta High Court on Friday had the opportunity to expound on the issue as to whether Courts should consider the dictum of the Supreme Court as laid down in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya regarding non-permissibility of bifurcation of subject-matter or causes of action in a suit while adjudicating upon an application filed under section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). 

Section 8 of the Arbitration Act as amended with effect from October 23, 2015, mandates a judicial authority to refer parties to arbitration 'unless it prima facie finds that no valid arbitration agreement exists.

Justice Moushumi Bhattacharya ruled that 'without a doubt' the dictum as laid down in Sukanya Holdings is no longer a relevant factor for the Court to consider at the stage of reference in an application under section 8 of the Arbitration Act.

In the instant case, the applicants IFGL Refractories Limited, had filed two applications for reference of claims, disputes and differences made by the first plaintiff against the applicants to arbitration. The applicants are the defendant nos. 41 and 42 in the suit filed by Lindsay International Private Limited (plaintiff no.1) and its majority shareholders and directors.

Observations

Parties must be referred to arbitration if a valid arbitration agreement exists in suits filed post-2015 amendment 

The Court noted that Section 8(1) of the Arbitration Act mandates a judicial authority before which an action is brought to refer a matter which is the subject matter of an arbitration agreement to arbitration. It was further recorded that such a statutory mandate is subject to the Court ascertaining a) Whether any valid arbitration agreement exists; b) Whether the matter is arbitrable; c) Whether the party, who seeks reference, has applied before submitting its first statement on the subject matter of the dispute.

"If the Court can tick all of the above conditions, the Court must refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists", the Court underscored.

Thus, the Court observed that it is 'crystal clear' that if a valid arbitration agreement exists, parties must be referred to arbitration even if there are judgments, decrees or orders of the Supreme Court or any other court pronounced before 2016.

Furthermore, Justice Bhattacharya noted that the 2015 amendment to Section 8 was recommended by the Law Commission Report No.246 in the wake of the verdict of the Supreme Court in Sukanya Holdings Pvt Ltd (2003) 5 SCC 531 which held that arbitration reference was not maintainable against parties not covered by the arbitration agreement.

The Commission recommended to restrict the rigour of Sukanya Holdings only to 'necessary parties'.

In this regard, the Court clarified, "However, this recommendation did not find place in the final amendment which instead brought '…notwithstanding any judgment, decree or order of the Supreme Court or any Court…' in section 8(1)"

Pursuant to a reference to a host of Supreme Court judgments in this regard, Justice Bhattacharya ruled,

"The only conclusion which emerges from the above interpretations and decisions is this: a Court must keep a hands-off approach – as opposed to a face-off with the arbitration process − and give a decisive push to the arbitral process once the court is satisfied, prima facie, that a valid arbitration agreement exists in a matter which is arbitrable. The Court's enquiry is limited only to this and no more."

The 2020 Supreme Court judgment in Vidya Drolia vs Durga Trading Corporation was also extensively referred to in the judgment.

Application under Section 8 of the Arbitration Act can succeed even if the entire suit is not capable of being referred to arbitration 

The Court placed reliance on the Supreme Court judgment in  N.N. Global Mercantile v. Indo Unique Flame Ltd wherein it was held that all civil and commercial disputes, either contractual or non-contractual, which can be adjudicated by a Civil Court, in principle, can be adjudicated and resolved through arbitration unless it is excluded either expressly, by a statute or by necessary implication. The Apex Court had further held that the Arbitration Act does not exclude any category of disputes as being non-arbitrable.

Reference was also made to the Supreme Court judgment in Booz Allen & Hamilton Inc. vs. SBI Home Finance Ltd wherein it had been held that the civil aspect of fraud can be adjudicated by an arbitral tribunal with the only exception being where the arbitration agreement itself is vitiated by fraud or fraudulent inducement and goes to the validity of the underlying contract and impeaches the arbitration clause itself.

Accordingly, Justice Bhattacharya rejected the contention of the petitioners that the disputes, if referred, would result in the bifurcation of composite causes of action or split-up necessary and proper parties.

"This interpretation is in any event destructive of the legislative intent to promote arbitration as noticed in the earlier part of the judgment. The view of this Court is bolstered by the fact that none of the decisions cited, including Vidya Drolia, have held that an application under section 8 will only succeed if the entire suit is capable of being referred to arbitration", the Court emphasised.

Court not under a mandate to adjudicate on the bifurcability of the causes of action post-2015 amendment 

The Court noted that the 2015 amendment to Section 8 gives an overriding effect over Sukanya Holdings dictum.

"The legislature, in fact, jettisoned the entire portion on "necessary parties" as well as Sukanya Holdings to declare, with unequivocal intent, that a judicial authority shall refer the parties to arbitration "notwithstanding any judgment, decree or order of the Supreme Court or any Court". The amended section 8 hence does not contain any remnant of the recommendation with reference to Sukanya Holdings and has thrown out any impediment in connection with the dictum in Sukanya Holdings, or any other judicial pronouncements before the amendment, in its entirety", the Court clarified.

Thus, the Court ruled that 'without a doubt' the dictum laid down in Sukanya Holdings is no longer a relevant factor for the Court to consider at the stage of reference in an application under section 8 of the Arbitration Act.

"The Court is not even under a mandate, post amendment, to adjudicate on the bifurcability of the causes of action or the presence of parties who are necessary parties to the action but not to the arbitration. The only brake in the momentum of reference is the court finding, prima facie, that no valid arbitration agreement exists", the Court emphasised.

It was further clarified that the law laid down in Sukanya Holdings may continue to hold good for deciding applications under section 8 filed prior to the 2015 amendment however it will not be applicable where the suit or application is filed after October 23, 2015, when the amendment came into force (underlined for emphasis).

Accordingly, the Court held that in the instant case a case has been made out for reference of the disputes to arbitration in terms of the arbitration agreement contained in the Purchase Orders. It was further held that once an application under Section 8 of the Act is allowed, the Civil Court does not retain jurisdiction to entertain the suit as against the defendants who filed the instant application for reference.

Case Title: Lindsay International Private Limited v. Laxmi Niwas Mittal 

Case Citation: 2022 LiveLaw (Cal) 14. 

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