Arbitration: Supreme Court Upholds Rejection Of S. 8 Application Since Cause Of Action Went Beyond Transaction Containing Arbitration Agreement

The Supreme Court has upheld the decision of the Gujarat High Court where it had upheld the rejection of an application filed under Section 8 of the Arbitration and Conciliation Act, 1996 (A&C Act) in a commercial civil suit, noting that the cause of action of the suit went beyond the transaction containing the arbitration agreement.

The bench of Justices Dinesh Maheshwari and Sudhanshu Dhulia observed that the reliefs claimed in the said suit fell outside the arbitration clause contained in the agreement executed between the parties. The court reckoned that the issue raised in the civil suit involved multiple transactions, involving different contracting parties and agreements, all of which, except for one, did not contain an arbitration clause.

While noting that the reliefs claimed in the suit involved subsequent purchasers of the suit property, which were not signatories to the arbitration agreement, the court held that the case did not involve any “doubt” about the non-existence of arbitration agreement in relation to the dispute in question.

The appellant, Gujarat Composite Ltd, entered into a licence agreement with the respondent No. 1, A Infrastructure Ltd, for licensing the operation of the manufacturing units of the appellant. The 1^st respondent also advanced a sum to the appellant, as financial assistance as per the terms of the license agreement.

Thereafter, certain disputes arose between the parties after A Infrastructure called upon Gujarat Composite to extend the term of the licence agreement for a further period as the latter was unable to pay certain dues owed to the former. The said proposal was rejected by the Gujarat Composite who issued a notice to A Infrastructure claiming recovery of possession of the manufacturing units, stating that the licence had expired by efflux of time without any extension.

The appellant, Gujarat Composite, thereafter, invoked the arbitration clause contained in the license agreement.

The respondent, A Infrastructure, on the other hand, filed a commercial civil suit before the Commercial Court at Ahmedabad, seeking recovery of it dues from Gujarat Composite.

It was also the case of the respondent that certain parcels of land were transferred by Gujarat Composite to respondent No. 3 to 5. A Infrastructure thus sought a declaration that the Deeds of Conveyance executed by Gujarat Composite in favour of respondent No.3-5, was null and void. It further sought to restraint the parties from disturbing or obstructing the respondent’s occupation/ possession of the suit property.

A Infrastructure also sought a direction to the Bank of Baroda, arrayed as a defendant in the suit, to not release the original title deeds of the land belonging to the appellant, Gujarat Composite, and other relevant documents in favour of the parties. The said title deeds were handed over to the bank in pursuance of a tripartite agreement executed between Gujarat Composite, A Infrastructure and Bank of Baroda (respondent No. 2), after a loan was sanctioned by the bank to A Infrastructure.

Gujarat Composite filed an application under Section 8 of the A&C Act in the suit, seeking reference of the dispute to arbitration.

Thereafter, respondent No. 3 to 5- the subsequent purchasers of the subject property- filed a memo (pursis) before the Commercial Court, stating that they had no objection if the dispute concerning them was resolved by arbitration.

The Commercial Court, however, dismissed the Section 8 application, holding that a partial reference to arbitration was not possible because the cause of action could not be split into separate parts. Noting that there was no arbitration clause in the tripartite agreement, the court held that the arbitration clause contained in the licence agreement could not be extended to apply to the subsequent transactions and agreements with different parties, including the tripartite agreement.

The Commercial Court also took note that certain issues raised in the suit were not connected with the licence agreement. The court reckoned that the reliefs sought by A Infrastructure involved a challenge to the Conveyance Deeds executed by Gujarat Composite in favour of Respondents 3-5, on the ground that the same was violative of the undertaking submitted before the Industrial Tribunal. Further, it was also the respondent’s case that the said transaction was entered into during the operation of a stay granted by the High Court.

The Commercial Court further held that the issue of mortgage was not arbitrable, and that the challenge to the Conveyance Deed and also the relief sought against the bank to not release documents in favour of Gujarat Composite, was only capable of adjudication by the Courts and could not be resolved by arbitrator.

In an appeal, the High Court upheld the decision of the Commercial Court.

In the appeal filed before the Supreme Court, the top court observed that in Sukanya Holdings Pvt Ltd. vs Jayesh H. Pandya & Anr. (2003) 5 SCC 531, the Apex Court underscored the requirement of correlation of the subject-matter of the suit and the subject-matter of the arbitration agreement.

Referring to the facts of the case, the court observed that the matter involved multiple transactions, involving different contracting parties and agreements, all of which did not contain an arbitration clause, except for the license agreement between the 1^st respondent, A Infrastructure, and the appellant, Gujarat Composite.

“Thus, except the principal agreement dated 07.04.2005, none of the other agreements contained any arbitration clause, even if they related to the same property and also involved the appellant and the respondent No. 1,” said the court.

Noting that the tripartite agreement did not contain an arbitration clause, the bench concluded that no dispute resolution process, including arbitration, could be undertaken in relation to the subject-matter of the suit without reference to the terms of tripartite agreement and without involving the Bank of Baroda (respondent No. 2).

While holding that the arbitration clause contained in the license agreement could not be held applicable to the tripartite agreement too, the court added: “This is apart from the fact that in the frame of the suit and various other reliefs claimed, involving subsequent purchasers too and the allegations of fraud, the dispute cannot be said to be arbitrable at all. The present one cannot be said to be a case involving any “doubt” about non-existence of arbitration agreement in relation to the dispute in question.”

The court further said: “There being no doubt about non-existence of arbitration agreement in relation to the entire subject-matter of the suit, and when the substantive reliefs claimed in the suits fall outside the arbitration clause in the original licence agreement, the view taken by the High Court does not appear to be suffering from any infirmity or against any principle laid down by this Court.”

While considering the memo filed by respondents 3-5 before the Commercial Court, the court held that the consent of the said respondents for reference to arbitration could not have infused an arbitration clause in the tripartite agreement.

“The other memo by respondent Nos. 3 to 5 had been of no effect whatsoever. Consent of the said respondents, the subsequent purchasers, for reference to arbitration could not have infused an arbitration clause in the tripartite agreement and their memo could not have propelled the matter to arbitration, particularly looking to the core of the dispute and its obvious non-arbitrability for the reason that it related to the tripartite agreement,” the court held.

The court thus dismissed the appeal.

Case Title: Gujarat Composite Limited vs. A Infrastructure Limited & Ors.

Citation : 2023 LiveLaw (SC) 384

Counsel for the Appellant: Mr. Nikhil Goel, AOR Ms. Naveen Goel, Adv. Mr. Adhitya Koshy Roy, Adv.

Counsel for the Respondents: Mr. Baiju Mattam, Adv. Mr. Prakash Kumar, Adv. Mr. S S Bandyopadhyay, Adv. Mr. Satish Kumar, AOR Mr. Rohan Sharma, Adv. Mr. Pradhuman Gohil, Adv. Mrs. Taruna Singh Gohil, AOR Ms. Ranu Purohit, Adv. Mr. Alapati Sahithya Krishna, Adv. Ms. Nidhi Mittal, Adv. Mr. Dushyant Parashar, AOR Mr. Bhaskar Sharma, Adv. Mr. Dinesh Pandey, Adv. Mr. Manu Parashar, Adv.

Arbitration and Conciliation Act, 1996: Section 8- The Supreme Court has upheld the decision of the Gujarat High Court where it had upheld the rejection of an application filed under Section 8 of the Act in a commercial civil suit, noting that the cause of action of the suit went beyond the transaction containing the arbitration agreement.

The bench observed that the reliefs claimed in the suit fell outside the arbitration clause contained in the agreement executed between the parties. The court reckoned that the issue raised in the civil suit involved multiple transactions, involving different contracting parties and different agreements, all of which, except for one, did not contain an arbitration clause.

While noting that the reliefs claimed in the suit involved subsequent purchasers of the suit property, which were not signatories to the arbitration agreement, the court held that the case did not involve any “doubt” about the non-existence of arbitration agreement in relation to the dispute in question.

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