Arbitration Requires Dispute Arising From Agreement, Unrelated Disputes Ineligible for Arbitration: Rajasthan High Court

Brief Facts:

M/s Blue City Indane (“Applicant”) was awarded the distributorship of LPG by Indian Oil Corporation (“Respondent”) for Jodhpur, as per an agreement. Despite efforts, the firm could only distribute 1500-2000 cylinders on average, whereas neighbouring gas agencies managed 25,000-30,000 connections which led to substantial losses to the Applicant. The Applicant made several requests to the Respondent to increase connections or transfer them from other agencies but they went unanswered.

As the agreement included an arbitration clause, the Applicant served a notice under Clause 36(a) on the Respondent which also remained unanswered. Feeling aggrieved, the Applicant approached the Rajasthan High Court (“High Court”) and filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) for the appointment of the arbitrator.

The Applicant contended that there were disputes which existed between the parties and should be referred to arbitration as per the agreement's clause. It argued that the arbitrability of the disputes should be decided by the arbitrator, not by the High Court.

In response, the Respondent denied receiving the notice. It argued that the agreement did not specify the allotment or transfer of a certain number of connections to a distributor which relieved it of any contractual obligation to transfer connections from other distributors. It argued that although attempts were made to transfer connections to the firm upon request, legal challenges from other distributors resulted in interim orders favouring them. It argued that this prevented the transfer of additional connections to the Applicant.

Arbitration Clause read as follows:

“36(a) All questions, disputes and differences arising under or in relation to this Agreement shall be referred to the sole arbitration of an officer to be nominated by the Director (Marketing) of the Corporation The arbitrator to whom the matter is originally referred by the Director (Marketing), on his being transferred or vacating his office or being unable to act, for any reason, the Director (Marketing) may designate any other officer to act as arbitrator. It is also the express term of this Agreement that no person other than the officer designated by the Director (Marketing) as aforesaid shall act as arbitrator. The award of the Arbitrator so appointed shall be final, conclusive and binding on all Arbitration & of the parties to the Agreement and provisions Act, 1996 or any statutory modification or re-enactment Conciliation thereof and the Rules made thereunder and for the time being in force shall apply to the arbitration proceedings under this clause.”

Observations by the High Court:

The High Court noted that the dispute raised in the application by the Applicant did not fall within the purview of the agreement's terms and conditions. Nowhere in the agreement was it specified that a distributor must be granted a certain number of connections, nor did it obligate the Respondent to transfer or allot a specific number of connections to any particular distributor. The High Court held that the application failed to specify any term of the agreement that wasn't complied with or breached by the Respondent.

The High Court held that only "arbitrable disputes" can be referred to arbitration. It referred to the decision of the Delhi High Court in BCC-Monalisa (JV) vs. Container Corporation of India Limited, where it was held that the court should conduct an inquiry to determine if the claims are prima facie arbitrable. It held that the court cannot simply defer all jurisdictional issues to the arbitrator; rather, the Applicant must meet a minimum threshold before the court can act on the request.

The High Court held that the dispute raised by the Applicant did not relate to any condition of the agreement between the parties. Without any averments of breach, non-compliance, or non-adherence to the agreement's conditions, it held that it can't be said that a dispute or difference arose from the agreement. Consequently, it held that there was no dispute that could be referred to arbitration under Clause 36(a) of the agreement.

The High Court observed that:

“arbitration presupposes a 'dispute' and the dispute ought to have arisen out of the agreement governing the parties. A dispute, foreign to the agreement as entered into between the parties, cannot be governed by the Arbitration clause and cannot be referred to arbitration in terms of the said clause.”

Therefore, the application was dismissed.

Case Title: M/s Blue City Indane vs Indian Oil Corporation Ltd

Citation: 2024 LiveLaw (Raj) 115

Case Number: S.B. Arbitration Application No. 18/2020

Advocate for the Applicant: Shreshtha Mathur

Advocate for the Respondent: Akshiti Singhvi

Date of Judgment: 07/05/2024

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