Arbitration Clause Can Be Invoked Against Disputes Under Another Agreement, If Both Agreements Form One Composite Transaction: Karnataka High Court

The Single Bench of Justice Suraj Govindaraj held that where one of the necessary parties was not issued a legal notice, the said legal notice would be defective and not in consonance with Section 21 of the Arbitration and Conciliation Act, 1996. Ruling that such defect would go to the root of the matter, the Court dismissed the petition for referring the parties to arbitration.

The petitioner M/s Bestpay Solutions Private Limited and the respondent M/s Razorpay Software Private Limited entered into a Service Agreement, containing an Arbitration Clause, under which the respondent was required to provide certain gateway services to the petitioner.

The petitioner also entered into another agreement with ICICI Bank, under which the petitioner engaged the services of the respondent as a payment gateway. After certain dues claimed by the respondent under the agreement with the ICICI Bank were not cleared, the respondent setoff certain amount, which was available in the account of the petitioner under the Service Agreement.

The petitioner issued notices to the respondent seeking return and refund of the amount which had been deducted from the account of the petitioner. Thereafter, the petitioner issued a notice to the respondent invoking the Arbitration Clause.

The respondent, in its reply to the legal notice, averred that there was no such amount which was required to be repaid. The respondent contented that the setoff towards unpaid dues was made by the respondent on account of the agreement between the petitioner and the ICICI Bank, and not with respect to the Service Agreement between the respondent and petitioner. Hence, the respondent replied that there was no privity of contract for invoking the Arbitration Clause contained in the Service Agreement.

The petitioner filed a petition before the Karnataka High Court for appointment of a Sole Arbitrator as per the Arbitration Clause contained in the said Service Agreement, and for referring the parties to arbitration.

The petitioner M/s Bestpay Solutions Private Limited submitted before the High Court that the respondent in an illegal manner deducted the amount available in the account of the petitioner under the Service Agreement.

The respondent M/s Razorpay Software Private Limited averred that it had deducted the amount in view of a lien available to it under the agreement between the petitioner and the ICICI Bank, wherein the respondent has been given the right to set off any amounts which were due to it.

Thus, the respondent submitted that the deduction was not made under the Service Agreement, but under the tri-parted agreement with the ICICI Bank. Hence, the respondent contended that arbitration cannot be resorted to with respect to the said dispute under the said tri-parted agreement.

The respondent added that the Arbitration Clause contained in the Service Agreement is restricted to the disputes under the said Service Agreement and it cannot be extended to the agreement with the ICICI Bank.

The respondent argued that it has initiated a commercial suit against the petitioner and the ICICI Bank, which is a composite suit encompassing the entire dispute and thus, the matter should not be referred to arbitration.

The Court observed that the amount set off by the respondent was on account of the unpaid dues of the respondent with respect to the transaction entered into between the petitioner, the respondent and the ICICI Bank.

The Court refuted the contention of the respondent that the Arbitration Clause in the Service Agreement would only apply to the disputes between the petitioner and the respondent arising under the said Service Agreement. The Court ruled that the petitioner can also invoke the Arbitration Clause against ICICI Bank since the Service Agreement between the petitioner and the respondent, and the agreement between the petitioner and the ICICI Bank, refer to each other and form one composite transaction.

Thus, the Court held that since the transaction between the parties is a composite transaction, therefore, the Arbitration Clause contained in the Service Agreement would equally apply to any dispute between the ICICI Bank, the petitioner and the respondent

The Court added that since the relevant transaction was entered into between the petitioner, the respondent and the ICICI Bank, thus the petitioner was also required to issue a notice to the ICICI Bank, since the disputes were between all the three parties.

The Court ruled that since the petitioner only issued a legal notice to the respondent and failed to issue a legal notice to the ICICI Bank, thus, the said legal notice was defective since the ICICI Bank was not made a party to it.

"In the present case one of the necessary parties namely ICICI Bank not having issued a notice and not having made as a party to the petition and, I am of the considered opinion that the present petition cannot be considered by this Court.", the Court said.

The Court added that since the said legal notice was not issued as per Section 21 of the Arbitration and Conciliation Act, 1996, it would go to the root of the matter.

Hence, the Court dismissed the petition.

Case Title: M/S Bestpay Solutions Private Limited versus M/S Razorpay Software Private Limited

Citation : 2022 LiveLaw (Kar) 286

Dated: 06.07.2022 (Karnataka High Court)

Counsel for the Petitioner: Mr. Lalith Besoya, Advocate for Ms. Ekta Pradhan, Advocate and Ms. Mehak Katra, Advocate

Counsel for the Respondent: Mr. Vikas Mahendra, Advocate for Mr. Pradeep Nayak, Advocate, Mr. Vedanth Anand, Advocate

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