Supreme Court on Sukanya Holdings and section 45

It
is well-known that the Supreme Court in Sukanya
Holdings
held that a cause of action cannot be “bifurcated”. Applying this
rule, the courts held in several cases that a dispute involving several parties,
some of whom are not parties to the agreement containing the arbitration
clause, is not arbitrable. Although attempts were made to limit Sukanya, there was considerable doubt as
to its scope, particularly in foreign arbitrations in which an attempt is made
by a party to invoke the jurisdiction of the Indian court. In Chloro Controls v Severn Trent,
a three-judge Bench of the Supreme Court was invited to overrule Sukanya. Although it declined to decide
this issue, it made several important observations about its applicability to
foreign arbitrations.

Chloro Controls was
a dispute between an Indian company and an American joint venture partner. The
facts are of some importance. Chloro Controls, a company run by the “Kocha
Group”, was engaged in the business of manufacturing and selling gas and
electrical chlorination equipment. Severn Trent agreed to appoint Chloro
Controls as its exclusive distributor in India and a joint venture company [“the JVC”] was incorporated in India
for this purpose. As is not uncommon in such transactions, there was a network
of several interlinked agreements, each dealing with a different aspect of the
commercial relationship between the parties. In all, there were seven
agreements, of which the Shareholders Agreement was the principal agreement, to
which Mr Kocha, Severn Trent and Chloro Controls were parties. Clause 4 of the
SHA provided that Chloro Controls could not, during the subsistence of the
agreement, deal with similar products manufactured by any other entity. Clause
30 provided that disputes would be resolved by English law arbitration in
London. The SHA made reference to the other agreements to be executed between
these and other parties. The difficulty arose because not all parties had
signed all the ancillary agreements, and some of the ancillary agreements did
not contain an identical dispute resolution clause. For example, the
International Distributor Agreement, by which the JVC was appointed as the
exclusive distributor, was signed by Severn Trent and the JVC: neither Mr Kocha
nor Chloro Controls was party, and it contained a dispute resolution clause in
favour of the courts of Pennsylvania, USA. Similarly, Chloro was not a party to
the Export Sales Agreement, which contained an arbitration clause, but seated
in the USA, not London.

Eventually,
a dispute arose as to whether the JVA covered electrical chlorination equipments
as well, and Severn purported to terminate it. Chloro instituted a derivative
suit in the Bombay High Court impleading inter
alia
Severn, the JVC, the Kocha group and the directors of the JVC as
parties. It also impleaded two respondents who were not parties to any of the
agreements. Severn sought a reference under section 45 of the Arbitration Act to
arbitration, pleading that the dispute was essentially about the scope of the
JVC and the validity of its termination, matters eminently within the
arbitration clause. A Division Bench of the Bombay High Court agreed.

In
the Supreme Court, Chloro’s case was that a litigant has a right to approach
the civil courts, displaced only by express or clear language; that Sukanya was correctly decided, and that
it is impermissible to refer these multi-party disputes to arbitration when
some agreements contain no arbitration clause or an arbitration clause on
materially different terms. Severn’s case was that Sukanya has become a charter for the disgruntled litigant to avoid
the arbitration clause and subject the other party to lengthy proceedings in
the Indian courts, notwithstanding the express selection of arbitration as the
preferred means of dispute resolution; and that Sukanya was wrongly decided and in any event a complete irrelevance
to section 45.

The
Supreme Court held that section 45 leaves no room for discretion: if the conditions
in sections 44 and 45 are satisfied, the civil court is required to refer the parties to arbitration. With respect to
whether it is appropriate to do so in multi-party arbitrations, the Court examined
many theories on the basis of which such references have been made: group
companies, claiming “through or under” a party to the arbitration clause etc. It
accepted that a reference is permissible if the agreements are “intrinsically interlinked” and the
ancillary agreements serve no purpose except in connection with the principal
agreement which contains the arbitration clause. In other words, a composite
transaction can be referred to arbitration even if some of the parties named as
respondents are not parties to the arbitration clause. It also observed that Sukanya Holdings is of no relevance to
an application made under section 45 for a reference to arbitration because that
case was decided under section 8. The following observations of the Court
illustrate the point:

In a case like the present one,
where origin and end of all is with the Mother or the Principal Agreement, the
fact that a party was non-signatory to one or other agreement may not be of
much significance…
In cases
involving execution of such multiple agreements, two essential features exist;
firstly, all ancillary agreements are relatable to the mother agreement and
secondly, performance of one is so intrinsically inter-linked with the other
agreements that they are incapable of being beneficially performed without
performance of the others or severed from the rest. The intention of the
parties to refer all the disputes between all the parties to the arbitral
tribunal is one of the determinative factor.
Although
the Court has stopped short of overruling Sukanya
Holdings
, its judgment enhances the prospect of resolving multi-party
disputes through arbitration and ensuring that the jurisdiction of the civil
courts remains excluded.

About the author

V. Niranjan

2 comments

  • “……..incapable of being beneficially performed”

    The seemingly never-ending chain of case law calls for a grave misgiving. That is, the use of any such ab-extra term or expression by the judiciary, unwittingly or otherwise, in adjudicating on a given dispute, without clearly indicating or elaborating the significance or meaning thereof,granting there is any, which leaves wide open prospects for further procrastination of disputes.
    Inviting to share individuals' own views!

  • Judgment in Chloro Controls (Section 45 case) has been followed by the Delhi High Court in a case HLS Asis Ltd. v. Geopetrol International Inc., OMP No. 801/2012. The latter case was an appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (domestic arbitration).

    Clearly the Delhi High Court had failed to take into account the difference between Sukanya applicable to domestic arbitration and Chloro Controls applicable to an international arbitration.

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