Supreme Court on arbitration agreements and third parties

A post earlier this year discussed the decision of the Supreme Court in Deutsche Post Bank Home Finance Ltd v Taduri Sridhar, where Raveendran J took a strictly contractual view of arbitration agreements, and held that only parties to an agreement could be made party to arbitral proceedings under it. As a result, in an arbitration between the prospective purchaser of property and the developer, the bank providing a loan for the purchase (with whom the purchaser had an independent arbitration agreement) was not impleaded. However, in a recent decision, Raveendran J appears to have taken a more permissive view.

P.R. Shah Shares & Stock Brokers v BHH Securities involved the Rules, Bye-laws and Regulations of the Mumbai Stock Exchange, which though not made under a statutory provision have a “statutory flavor”. Bye-laws 248 to 281D provide for and govern the arbitration between members and non-members and Bye-laws 282 to 315L provide for and govern the arbitration between members of the Exchange. The arbitration petition was brought by the first respondent (who was a member of the Stock Exchange) against the appellant (who was also a member) and the second respondent (who was not). The issue before the Court was whether these disputes could be heard in a single set of proceedings, or required different proceedings.

The appellant and the second respondent were sister concerns, with a common director who had approached the first respondent for a ‘sauda’ on the Stock Exchange. The first respondent procured the ‘sauda’ and delivered the bill and contract to the second respondent, whose name was on the contract under which this transaction was carried out. In spite of several demands, full payment was not made by the appellant or the second respondent, leading to the arbitral proceedings by the first respondent against both. In its defence, the appellant denied the existence of an arbitration agreement with the first respondent, and also denied that the appellant’s director had procured the contract between the first and the second respondent. It was also contended that since the sets of Bye-laws dealing with arbitrations between members, and between a member and a non-member, were different, there had been a misjoinder of parties. The tribunal, by a majority, held for the first respondent. The Bombay High Court rejected the section 34 application filed by the appellant (the second respondent did not appeal or pay the amount due). An appeal against this decision was rejected by the Division Bench of the High Court, against which the appellant appealed by special leave to the Supreme Court.

Raveendran J begins by pointing out that the arbitral proceedings here were based not on a contractual agreement, but the Bye-laws of the Stock Exchange, by which the members were bound on becoming members. He distinguished Sukunya Holdings on grounds that there was an arbitration agreement between the first respondent and the appellant. In his view, the Court in Sukanya Holdings held that:

where a suit is commenced in respect of a matter which falls partly within the arbitration agreement and partly outside and which involves the parties, some of whom are parties to the agreement while some are not, Section 8 of the Act was not attracted and the subject- matter of the suit could not be referred to arbitration, either wholly or by splitting up the causes of action and the parties. The decision in Sukanya Holdings will not apply as we are not concerned with a suit or a situation where there is no provision for arbitration in regard to some of the parties. (emphasis supplied)

On this basis, he holds that a common set of proceedings between the parties was permissible on the facts here. The rationale of his decision is best summarized in ¶ 14, where he observes:

If A had a claim against B and C, and there was an arbitration agreement between A and B but there was no arbitration agreement between A and C, it might not be possible to have a joint arbitration against B and C. A cannot make a claim against C in an arbitration against B, on the ground that the claim was being made jointly against B and C, as C was not a party to the arbitration agreement. But if A had a claim against B and C and if A had an arbitration agreement with B and A also had a separate arbitration agreement with C, there is no reason why A cannot have a joint arbitration against B and C. Obviously, having an arbitration between A and B and another arbitration between A and C in regard to the same claim would lead to conflicting decisions. In such a case, to deny the benefit of a single arbitration against B and C on the ground that the arbitration agreements against B and C are different, would lead to multiplicity of proceedings, conflicting decisions and cause injustice. It would be proper and just to say that when A has a claim jointly against B and C, and when there are provisions for arbitration in respect of both B and C, there can be a single arbitration. In this case though the arbitration in respect of a non-member is under Bye-law 248 and arbitration in respect of the member is under Bye Law 282, as the Exchange has permitted a single arbitration against both, there could be no impediment for a single arbitration. It is this principle that has been applied by the learned Single Judge, and affirmed by the division bench. As first respondent had a single claim against second respondent and appellant and as there was provision for arbitration in regard to both of them, and as the Exchange had permitted a common arbitration, it is not possible to accept the contention of the appellant that there could not be a common arbitration against appellant and second respondent.

The relationship of this decision with both Sukanya Holdings and Taduri Sridhar merits attention. As to Sukanya Holdings, I would respectfully differ with Raveendran J. in observing that the absence of an independent arbitration agreement between the third party and the petitioner was the crucial issue in that case. The crux of the decision instead was that the action before the court did not concern ‘a matter which was the subject matter of an arbitration agreement’. Even the fact that the third parties were not parties to the agreement under which the proceedings were commenced appears to have been merely an additional factor which the Court considered, and as argued here, is not a line of inquiry expressly mandated by section 8. In the words of the Court in Sukanya Holdings,

Where, however, a suit is commenced – “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words ‘a matter’ indicates entire subject matter of the suit should be subject to arbitration agreement. (emphasis supplied)

Thus, with due respect, the grounds on which Sukanya Holdings was distinguished seem incorrect, a better basis being either that the ‘matter’ was the same on facts here, or even that the decision in Sukanya Holdings was inapplicable to proceedings which were not under section 8.

Coming next to Taduri Sridhar, notwithstanding my faint surprise at the decision not being referred to by the Court, I would argue that the two decisions are reconcilable on one of two bases.

First, on facts, the third party in Taduri Sridhar (the bank) had no connection with the main respondent (the developer), whereas on facts here, the second respondent and the appellant were sister entities, and the transaction involved both of them in equal measure (the tribunal had made a finding of fact accepting the first respondent’s account of the transaction). The problem with this reconciliation is the generality of the observations in ¶14 reproduced above, which suggest that the Court was not deciding the case on this narrow ground alone.

Secondly, and more importantly, the nature of the proceedings before the Court were significantly different. In Taduri Sridhar, the Court was seised of a section 11 application, and held that the third party could not be impleaded unless it was party to the arbitration agreement. The Court here was dealing with a section 34 application, which had been considered twice already by different benches of the Bombay High Court. This deference to the unanimity of the decisions of the lower courts is also reflected towards the end of the passage reproduced above. Thus, although Raveendran J appears to have taken a less contractual view of arbitration agreements than he had in Taduri Sridhar, this need not necessarily be a change in heart, but more the result of the specific facts here and the stage at which the Supreme Court became seised of the matter.

In conclusion, PR Shah is an interesting addition to the Indian arbitration jurisprudence, and with Sukanya Holdings and Taduri Sridhar, forms a troika of decisions dealing with the treatment of third parties in proceedings under section 8, section 11 and section 34. What could also be interesting is if the Court’s interpretation of Sukanya Holdings (as turning on the identity of the parties) could influence the interpretation of ‘matter which is the subject of an arbitration agreement’.