Arbitration and Conciliation Act, 1996 – Section 8 – Reference to arbitration – 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.

[1] Hereinafter also referred to as Act of 1996 or simply the Act.

“3. The duration of the Licence for manufacture will be for a period of 84 months, extendable to a further period of 84 months on mutual consent from the date on which the LICENSEE takes over production and manufacturing facilities after completion of the necessary inspection and the compilation of inventories as stipulated herein. The said takeover would be fully and duly evidenced by acknowledgement of both the parties in writing, and will constitute a pan of this Licence Agreement.

8. LICENSEE shall pay quarterly licence fee of Rs.1,00,000 (Rupees One lakh only) per quarter towards the use of land and building including office building and Rs. 4,00,000 (Rupees Four lakhs only) per quarter towards the use of factory machinery & equipments. The Licence fee shall, be paid within 21 days of end of the quarter.

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12. LICENSEE shall not be entitled to mortgage, assign, licence or sublet the said Unit. However, LICENSEE shall be at liberty to mortgage/ charge, Raw Material stock, Finished Goods book debts and equipment brought in and belonging to LICENSEE under this arrangement which shall be kept separately identified and insured.

15. The LICENSOR will be entitled to a Bonus, in addition to licence fee payable under Clause 8, in consideration of the use of its manufacturing facilities, licence, brand goodwill etc, as worked out below:

i. 14% of the profit earned will be the retained profit in this arrangement and balance 86% shall be distributable as under:

a) The Bonus payable by LICENSEE to LICENSOR under this Clause would be 43% of the divisible profit minus the licence fee payable as per Clause 8 above. In the event the amount of Bonus works out to be negative, then LICENSOR shall be liable to reimburse this amount to LICENSEE on quarter to quarter basis.

b) The retained profit shall always belongs to the LICENSEE during the continuation or upon determination of the licence period.

c) The computation of the Profit & Loss and its distribution shall be done quarterly.

ii. Profit for this purpose means operating profits/losses earned during the quarter, after deducting interest on working capital and depreciation on the assets added by LICENSEE, but before charging the licence fee specified in Clause 8. The operating profit shall be worked out on the basis of Accepted Accounting principles.

17. The LICENSEE at its absolute discretion may advance some amount to the LICENSOR on the terms/conditions/security as may be mutually agreed to facilitate smooth operation of this agreement.

32. Disputes if any, arising out of this Agreement shall be referred to arbitration of a Sole Arbitrator if mutually agreed, failing which Arbitrator will be appointed as per provisions of Arbitration and Conciliation Act, 1996. The venue of Arbitration will be as decided mutually but preferably at Delhi.”

[2] Hereinafter referred to as sister concern.

“NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth herein, and also in the main License Agreement dated 7th April 2005 and for other good and valuable considerations, the parties hereto hereby agrees as follows:

1. The LICENSOR requested the LICENSEE for some financial assistance to arrive at an amicable settlement with the creditors; employees and statutory authorities for discharging of their dues.

2. The LICENSEE, in consideration of facilitating the smooth operation of the main agreement dated 7th April 2005 between LICENSOR and CONFIRMING PARTY and main agreement dated 7th April 2005 between LICENSOR and LICENSEE including smooth operation of A. C. Pipes, A. C. Sheets and Cement Units, have agreed to advance a sum of Rs. 5,30,00,000 (Rupees Five Crores Thirty Lakhs only) to the LICENSOR fetching interest at 10% per annum to be calculated at monthly rests after receipt of the approval of LICENSOR’S secured creditors as per Clause 4 of the main agreement and upon creation of mortgage on A.C. Sheet, A. C. Pipe and Cement manufacturing Unit including building, plant, and machineries in favour of LICENSEE for securing the above adhoc advance. LICENSOR shall use the said (illegible) for entering into a settlement with its secured creditors by making a down payment towards their dues and for payment of balance in an agreed manner and for obtaining their consent to the above agreement and to pay and discharge various other pressing liabilities of LICENSOR including payment of dues of workers, statutory liabilities etc. This advance along with interest thereon shall be recoverable in Ten. (10) quarterly instalments, commencing from the 90th day of the payment of ad-hoc advance amount, out of the licence fee payable as per Clause 8 and Bonus as per Clause 15 of the main Agreement.”

“Clause- 11: LICENSOR will allow LICENSEE to make necessary modification/ addition/ changes in the machinery, building or any other fixed assets for smooth operation of the plant. Minor expenses to the extent of Rs. 25000/- (Rupees Twenty Five Thousand only) may be debited to P&L Account and the expenses in excess of specified amount will be capitalized and may be funded by both the parties in the following ratio.

i) Licensor : 43%

ii) Licensee : 57%

Such expenses to be decided mutually and duly minuted. Depreciation on these additions to the fixed assets shall be calculated at the rates specified in the Companies Act as per Straight Line Method. Upon determination of the license period the LICENSOR would be under obligation to buy these assets at the Written Down Value.

b) Clause No.15 : The LICENSOR will be entitled to a Bonus, in addition to license fee payable under Clause-8, in consideration of the use of its manufacturing facilities, license, brand goodwill etc. as worked out below.

i) The Bonus payable by LICENSEE to LICENSOR under this Clause would be 43% of the profit. The Bonus so payable shall be reduced by the amount of License fee payable as per Clause-8 of the Agreement. However, in the event of loss, the LICENSOR shall be liable to reimburse 43% of the total loss to LICENSEE on a quarter-to-quarter basis.

ii) Computation of the Profit & Loss and its distribution shall be provisionally based on the annual audited accounts.

iii) Profit/Losses for this purpose means profits/losses earned, after deducting interest on working capital and depreciation on the assets added by the LICENSEE but before changing the license fee specified in Clause No. 8. The profit/loss shall be worked out on the basis of accepted accounting principles.”

“WHEREAS Bank of Baroda has sanctioned Corporate loan of Rs. 500 lacs to M/s. A Infrastructure Limited on the terms & conditions stipulated in the sanction letter and to secure this above loan in addition to other conditions and corporate guarantee also provided by M/s. Gujarat Composite Limited.

Further M/s. Gujarat Composite Limited has agreed to create first charge on the fixed assets as stipulated in the sanctioned letter in favour of Bank of Baroda.

Further M/s. Gujarat Composite Limited, has agreed that first charges will be released by Bank of Baroda only with the consent of M/s. A Infrastructure Limited even after repayment of the said loan. Bank of Baroda further agreed to release the first charge only with the consent of M/s. A Infrastructure Limited. However in case M/s. Gujarat Composite Ltd. will make payment of this corporate loan of Rs. 500 lacs directly to Bank of Baroda. Bank of Baroda will release the first charges without the consent of M/ s. A Infrastructure Limited”

[3] Hereinafter also referred to as the bank.

“Further M/ s. Gujarat Composite Limited, has agreed that First Charge will be released by Bank of Baroda only with the consent of M/s. A Infrastructure Limited even after repayment of the said loan. Bank of Baroda further agreed to release the First Charge only with the consent of M/s. A Infrastructure Limited. However, in case M/s. Gujarat Composite Ltd. will make payment of dues against this corporate loan of Rs. 500 lacs directly to Bank of Baroda, Bank of Baroda will release the First Charge without the consent of M/s. A Infrastructure Limited. But M/s Gujarat Composite agrees that the title Deeds of the land will not be transferred to any other party during the currency of Licence Agreements executed between M/s. A Infrastructure Limited and M/ s. Gujarat Composite Ltd. “

1. Gujarat Composite Limited

2. Bank of Baroda

3. Real Home Corporation – a partnership firm

4. M/s. Raj Corporation (Confirming Party) – partnership firm

5. RJD Buildcon Ltd.

“33) The Plaintiff therefore prays that:

(A) This Hon’ble Court may be pleased to direct the defendant No.1 to pay to the Plaintiff herein a sum of Rs. 32,66 crores with interest @ 14% per annum from the date of suit till realization herein under this decree and any further orders to be passed by this Hon’ble Court;

(B) This Hon’ble Court may be pleased to hold and declare that the Deeds of Conveyance dated 23rd January, 2015 registered vide registration no. 742 and 750 executed by defendant No.1 in favour of defendant Nos.3 and 5, as null and void;

(C) This Hon’ble Court may be pleased to permanently restrain the defendant Nos.1, 3, 4 and 5 or their agent, executors, or administrators from disturbing or obstructing the plaintiffs occupation possession of the suit property till the discharged;

(D) This Hon’ble Court may be pleased to direct the defendant No.2 Bank not to release original title papers and other relevant documents in favour of defendant Nos.1, 3 and/or 4;

(E) This Honble Court may be pleased to hold and declare that the Conveyance Deed dated 23rd January, 2015 entered into between the defendant No. 1 and defendant No. 3 to 5 as null and void;

(F) This Honble Court may be pleased to direct the defendant No. 2 to take over all the current assets of the plaintiff pertaining to or in connection with the operation of A.C. Sheet and Cement. Manufacturing unit under license agreement at their book value and make payment to the plaintiff for the current assets available at the time of handing over of the possession, if required.”

“15….As such, no arbitration clause seems to have been inserted nor any reference has been made as to the License Agreement or Supplementary License Agreement executed between the plaintiff and defendant No. 1 so as to give effect and to consider as a part and parcel of the tripartite agreement executed between the plaintiff, defendant No. 1 and defendant No. 2.

16. Even perusing item No. 32 of the Licence Agreement dated 07/04/2005 executed between the plaintiff and defendant No. 1 wherein it has been expressly agreed upon between the parties thereto that dispute, if any, arising out of this Agreement shall be referred to arbitration…Thus, it is explicitly clear that the arbitration clause is binding to the plaintiff and defendant No. 1 only and that too pertaining to the Licence Agreement/Supplementary Licence Agreement and cannot be given effect and extended and made applicable to the subsequent transactions and/or agreements so executed between the plaintiff and defendant No. 1 with the strangers.

ARBITRATION AGREEMENT:

17. Now the question arises is as to what is an “arbitration agreement” and/or “a valid arbitration agreement”? To meet with the aforesaid issue, the provisions of Section 7 of the Arbitration Act requires to have a glance wherein the arbitration agreement means an agreement between the parties to submit to arbitration of or certain disputes which have arisen or which may arise between them in respect of a definite legal relationship, whether contractual or not.

18. It is further provided that the arbitration agreement must be in writing and signed by the parties and also in exchange of statement – defence in which the existence of the agreement is alleged by one party and not denied by the other party.

19. Thus, considering the facts of the case on hand while applying the provisions of Section 7 of the Arbitration Act, the powers of the Court to refer the parties to arbitration are subject to fulfilment of the required conditions i.e. there should be an arbitration agreement and if the Court finds that no valid arbitration agreement exists between the parties, then to invoke the powers under Section 8 and the issue thereof does not arise.

20. Hence, on the aforesaid account and as discussed in the foregoing paragraphs, the clause of arbitration so inserted is between the plaintiff and defendant No.1 as inserted in the Licence Agreement and the same cannot be applied to the subsequent transactions and with the persons who are not the parties to the arbitration agreement who cannot be compelled to or referred to arbitration. Hence, in view of the aforesaid, the arbitration clause, the binding effect applies to the plaintiff and defendant No.1 only and cannot be extended to the rest, admittedly who are not the parties to the arbitration agreement.

21. Thus, the sum and substance of the aforesaid discussion is that the reference to the arbitration is possible only if there is a valid arbitration agreement between the parties, but if the dispute is between the parties to an arbitration with the other parties as also non-parties to the arbitration agreement, a reference to the arbitration or even the appointment of the arbitrator can only be made with respect to only the parties to the arbitration agreement and not the non-parties.”

[4] We have not elaborated on the other litigations wherein the said orders were passed, for being not entirely necessary in relation to the core question involved in the matter.

“[8.5] In the present case as observed herein above there are license agreements containing the arbitration clause, executed between the plaintiff and the original defendant No.1 on one hand. Admittedly, the original defendant Nos.2 to 5 are not party to the arbitration agreement. There is a tripartite agreement between the original plaintiff, original defendant No.1 and the original defendant No.2 (Bank of Baroda) under which the plaintiff and the original defendant No.2 have prayed the reliefs. It is an admitted position that in the tripartite agreement between the original plaintiff, original defendant No.1 and the original defendant No.2 (Bank of Baroda), there does not exist any arbitration agreement. Under the tripartite agreement the original defendant No.1 has placed the title deeds and the said tripartite agreement as such can be said to be an independent agreement and under the said tripartite agreement there is a mortgage by deposit of title deeds in respect of immovables and hypothecation of movables. It appears that the said tripartite agreement was executed while sanctioning a corporate loan of Rs.500 lakh in favour of the original plaintiff and the charge and mortgage has been created in favour of Bank of Baroda – original defendant No.2. It appears that during the pendency and subsistence of the aforesaid mortgage and as alleged by the original plaintiff surreptitiously and in breach of the injunction granted by this Court as well as the undertaking before the Industrial Tribunal, the original defendant No.1 has sold some of the properties (mortgaged properties) in favour of original defendant Nos.3 to 5. In light of the above broad facts and averments in the plaint, pleadings on the cause of action and the reliefs sought are required to be considered.

[8.6] In the plaint in Commercial Civil Suit No.90/2017, the plaintiff has sought the relief against the following defendants:

1. Gujarat Composite Limited

2. Bank of Baroda

3. Real Home Corporation – a partnership firm

4. M/s. Raj Corporation (Confirming Party) – partnership firm

5. RJD Buildcon Ltd.

The suit is filed for recovery of legitimate dues, cancellation of sale deed and for permanent injunction. In the suit the plaintiff has prayed for the following reliefs.

“(A ) This Hon’ble Court may be pleased to direct the defendant No.1 to pay to the Plaintiff herein a sum of Rs.32.66 Crores with interest @ 14% per annum from the date of suit till realization herein under this decree and any further orders to be passed by this Hon’ble Court;

(B) This Hon’ble Court may be pleased to hold and declare that the Deeds of Conveyance dated 23rd January, 2015 registered vide registration no. 742 and 750 executed by defendant No.1 in favour of defendant Nos.3 and 5, as null and void;

(C) This Hon’ble Court may be pleased to permanently restrain the defendant Nos.1, 3, 4 and 5 or their agent, executors, or administrators from disturbing or obstructing the plaintiffs occupation possession of the suit property till the plaintiff claim made in para (a) and (b) above is fully discharged;

(D) This Hon’ble Court may be pleased to direct the defendant No. 2 Bank not to release original title papers and other relevant documents in favour of defendant Nos.1, 3 and/or 4;

(E) This Honble Court may be pleased to hold and declare that the Conveyance Deed dated 23rd January, 2015 entered into between the defendant No. 1 and defendant No. 3 to 5 as null and void;

(F) This Honble Court may be pleased to direct the defendant No. 2 to take over all the current assets of the plaintiff pertaining to or in connection with the operation of A.C. Sheet and Cement Manufacturing unit under license agreement at their book value and make payment to the plaintiff for the current assets available at the time of handing over of the possession, if required.”

[8.7] Necessary pleadings in the plaint with respect to cause of action are as under:

1. The cause of action has arisen when the defendant No. 1, behind the back of the plaintiff, entered into Conveyance Deed with defendant no. 3 and defendant No. 5.

2. Even the original title deeds and other documents partially pertaining to the suit property are in the custody of defendant No. 2 Bank and by suppressing the fact that the plaintiff has absolute right over the suit property qua possession, the defendant No. 1 has entered into Conveyance Deed with defendant No. 3 and defendant No. 5 stating that suit property is free from any encumbrance and/or mortgage.

3. That the cause of action for filing the suit has arisen because the defendant No. 3 and defendant No. 5 made an application to mutate the entry in the revenue record in regard to the Deed of Conveyance. As the plaintiff is legitimately in possession of the suit property by virtue of license agreement, supplementary agreement, tripartite and amended tripartite agreement, it vehemently opposed the said entry and ultimately the authority concerned rejected the application of the defendant No. 3 and defendant No. 5 for mutation of entry in regard to Conveyance Deed. Thus the mutation entry with regard to mortgage of the suit property with defendant No. 2 Bank still exists and the defendant No. 2 Bank has not removed/revoked the said mortgage.

4. That though the plaintiff is in possession of the suit property by virtue of license agreement, supplementary agreement, tripartite agreement and amended tripartite agreement, the defendant No. 1; behind the back of the plaintiff, entered into Conveyance Deed with defendant No. 3 and defendant No. 5.

5. The defendant No. 1 even did not part with the sale consideration with the plaintiff which it has received from defendant No. 3 and defendant No. 5 for conveying the suit property to defendant No. 3 and defendant No. 5.

6. That the cause of action for filing the suit has arisen also as defendant No. 1 had defaulted in repayment to Punjab National Bank and hence was not in a position to get any loan whatsoever in its own capacity from any financial institution, and as it was in need of financial assistance, defendant No. 1 requested the plaintiff for financial help, because of which plaintiff obtained corporate loan of Rs. 05.00 Crores on its name from defendant No. 2 and advanced the same to defendant No. 1. 7. Even during the currency of the license agreement, plaintiff has paid other amounts also for and on behalf of the defendant No. 1 towards wages to the workers, revenue taxes, electricity bills, excise duty, etc. 8. The cause of action has arisen because in lieu of all these financial help from plaintiff, defendant No. 1 entered into tripartite agreement and subsequently amended tripartite agreement with plaintiff and defendant No. 2 Bank, whereby defendant No. 1 mortgaged the suit property with defendant No. 2 Bank and stood as guarantor towards the corporate loan which was obtained by plaintiff in its name to help out the defendant No. 1, wherein it has been specifically agreed by defendant No. 1 that unless all and full legitimate dues of the plaintiff has been paid up, plaintiff shall enjoy the possession of the suit property. 9. That the cause of action for filing of the suit has arisen also because the plaintiff has to recover Rs. 32.66 Crores from the defendant No. 1 towards corporate loan and other amount, which the plaintiff has advanced to the defendant No. 1.”

“[8.8] Considering the above and the reliefs prayed / sought in the suit, it can be said that the prayer in terms of para 33(A) can be said to be against the original defendant No.1 who is a party to the arbitration agreement contained in the license agreement. Prayer in terms of paras 33(B), 33(C) and 33(E) can be said to be against the original defendant No.1 and original defendant Nos.3 to 5. Original defendant Nos.3 to 5 are not party to the arbitration agreement and as such they are third parties who have alleged to have purchased the properties from the original defendant No.1 during the subsistence of the license agreement as well as they have purchased the said property surreptitiously. The prayer in terms of paras 33(D) and 33(F) can be said to be against the original defendant No.2 – Bank of Baroda who admittedly is not a party to the arbitration agreement. All these reliefs are interconnected and the reliefs sought in the plaint are on the basis of multiple cause of actions and multiple reliefs against the defendants and it is not possible to bifurcate the dispute in the suit between the plaintiff and the original defendant No.1 (parties to the arbitration agreement) and the original plaintiff and the original defendant Nos.2 to 5 (nonparties to the arbitration agreement). Therefore, applying the law laid down by the Honble Supreme Court in the case of Sukanya Holdings (P) Ltd. (Supra) and other decisions referred to herein above, it cannot be said that the learned Commercial Court has committed any error in rejecting section 8 application and refusing to refer the matter / dispute in the suit for arbitration.

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[8.13] Considering the facts and circumstances of the case narrated herein above and the law laid down by the Honble Supreme Court in the case of Sukanya Holdings Pvt. Ltd. (Supra) and other decisions referred to herein above, it cannot be said that the learned Commercial Court has committed any error in rejecting the application under Section 8 of the Arbitration Act, 1996 and refusing to refer the dispute / matter for arbitration. On facts it is not proper, advisable and/or possible to bifurcate the disputes viz. arbitrable and nonarbitrable. We are in complete agreement with the view taken by the learned Commercial Court while rejecting the application under Section 8 of the Arbitration Act, 1996.”

“8. Power to refer parties to arbitration where there is an arbitration agreement.- (1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof:

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”

“8. Power to refer parties to arbitration where there is an arbitration agreement.- (1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof:

Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”

“12. For interpretation of Section 8, Section 5 would have no bearing because it only contemplates that in the matters governed by Part I of the Act, the judicial authority shall not intervene except where so provided in the Act. Except Section 8, there is no other provision in the Act that in a pending suit, the dispute is required to be referred to the arbitrator. Further, the matter is not required to be referred to the Arbitral Tribunal, if: (1) the parties to the arbitration agreement have not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. This would, therefore, mean that the Arbitration Act does not oust the jurisdiction of the civil court to decide the dispute in a case where parties to the arbitration agreement do not take appropriate steps as contemplated under sub-sections (1) and (2) of Section 8 of the Act.

13. Secondly, there is no provision in the Act that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitrators.

14. Thirdly, there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the court may refer the same to arbitration provided that the same can be separated from the rest of the subject-matter of the suit. The section also provided that the suit would continue so far as it related to parties who have not joined in such application.

15. The relevant language used in Section 8 is: “in a matter which is the subject of an arbitration agreement”. The court is required to refer the parties to arbitration. Therefore, the suit should be in respect of “a matter” which the parties have agreed to refer and which comes within the ambit of arbitration agreement. 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” indicate that the entire subject-matter of the suit should be subject to arbitration agreement.

16. The next question which requires consideration is – even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act. In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action, that is to say, the subject-matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.

17. Secondly, such bifurcation of suit in two parts, one to be decided by the Arbitral Tribunal and the other to be decided by the civil court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums.”

“28. Another facet, not highlighted earlier, arises from the dictum in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya [(2003) 5 SCC 531], a decision upholding rejection of an application under Section 8, on the ground that there is no provision in the Arbitration Act to bifurcate and divide the causes or parties, that is, the subject-matter of the suit/judicial proceedings, and parties to the arbitration agreement. The suit should be in respect of a “matter” which the parties have agreed to refer and which comes within the ambit of the arbitration agreement. The words “a matter”, it was interpreted, would indicate that the entire subject-matter of the suit should be subject to arbitration agreement. Bifurcation of subject-matter or causes of action in the suit is not permissible and contemplated. Similarly, the parties to the suit should be bound by the arbitration agreement, as there is no provision in the Arbitration Act to compel third persons who have not exercised the option to give up the right to have access to courts and be bound by the arbitration clause. This would violate party autonomy and consensual nature of arbitration. Bifurcation in such cases would result in a suit being divided into two parts, one being decided by the Arbitral Tribunal, and the other by the court or judicial authorities. This would defeat the entire purpose and inevitably delay the proceedings and increase cost of litigation, cause harassment and on occasions give rise to conflicting judgments and orders by two different fora. Cause of action in relation to the subject-matter relates to the scope of the arbitration agreement and whether the dispute can be resolved by arbitration. Second mandate relating to common parties exposits the inherent limitation of the arbitration process which is consensual and mutual, an aspect we would subsequently examine.

31. We are clearly bound by the dictum of the Constitution Bench judgment in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] that the scope and ambit of court’s jurisdiction under Section 8 or 11 of the Arbitration Act is similar. An application under Section 11 of the Arbitration Act need not set out in detail the disputes or the claims and may briefly refer to the subject-matter or broad contours of the dispute. However, where judicial proceedings are initiated and pending, specific details of the claims and disputes are normally pleaded and, therefore, the court or the judicial authority has the advantage of these details. There is a difference between a non-arbitrable claim and non-arbitrable subject-matter. Former may arise on account of scope of the arbitration agreement and also when the claim is not capable of being resolved through arbitration. Generally non-arbitrability of the subject-matter would relate to non-arbitrability in law. Further, the decision in Sukanya Holdings (P) Ltd. [Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531] has to be read along with subsequent judgment of this Court in Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc. (2013) 1 SCC 641.

15 4.3. The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)( a) or sub-clause (i) of Section 34(2)( b) of the Arbitration Act.

15 4.4. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood. The court by default would refer the matter when contentions relating to non-arbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the Arbitral Tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism. *** *** ***

238. At the cost of repetition, we note that Section 8 of the Act mandates that a matter should not (sic) be referred to an arbitration by a court of law unless it finds that prima facie there is no valid arbitration agreement. The negative language used in the section is required to be taken into consideration, while analysing the section. The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above. Therefore, the rule for the court is “when in doubt, do refer”.

239. Moreover, the amendment to Section 8 now rectifies the shortcomings pointed out in Chloro Controls case [Chloro Controls (India) (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641: (2013) 1 SCC (Civ) 689] with respect to domestic arbitration. Jurisdictional issues concerning whether certain parties are bound by a particular arbitration, under group-company doctrine or good faith, etc., in a multi-party arbitration raises complicated factual questions, which are best left for the tribunal to handle. The amendment to Section 8 on this front also indicates the legislative intention to further reduce the judicial interference at the stage of reference.

240. Courts, while analysing a case under Section 8, may choose to identify the issues which require adjudication pertaining to the validity of the arbitration agreement. If the court cannot rule on the invalidity of the arbitration agreement on a prima facie basis, then the court should stop any further analysis and simply refer all the issues to arbitration to be settled.

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244: Before we part the conclusions reached, with respect to Question 1 are:

244.1. Sections 8 and 11 of the Act have the same ambit with respect to judicial interference.

244.2. Usually, subject-matter arbitrability cannot be decided at the stage of Section 8 or 11 of the Act, unless it is a clear case of deadwood.

244.3. The court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of nonexistence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding.

244.4. The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above i.e. “when in doubt, do refer”.

244.5. The scope of the court to examine the prima facie validity of an arbitration agreement includes only:

244.5.1. Whether the arbitration agreement was in writing? or

244.5.2. Whether the arbitration agreement was contained in exchange of letters, telecommunication, etc.?

244.5.3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?

244.5.4. On rare occasions, whether the subject-matter of dispute is arbitrable?”

“3 8. Explaining the application of the alter ego principle in arbitration, Born also notes:

“Authorities from virtually all jurisdictions hold that a party who has not assented to a contract containing an arbitration clause may nonetheless be bound by the clause if that party is an alter ego of an entity that did execute, or was otherwise a party to, the agreement. This is a significant, but exceptional, departure from the fundamental principle … that each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate rights and liabilities.

“the group of companies doctrine is akin to principles of agency or implied consent, whereby the corporate affiliations among distinct legal entities provide the foundation for concluding that they were intended to be parties to an agreement, notwithstanding their formal status as non-signatories.”

39. Recently, John Fellas elaborated on the principle of binding a non-signatory to an arbitration agreement from the lens of the doctrine of estoppel. He situated the rationale behind the application of the principle of direct estoppel against competing considerations of party autonomy and consent in interpreting arbitration agreements. Fellas observed that non-signatory parties can be bound by the principle of direct estoppel to prohibit such a party from deriving the benefits of a contract while disavowing the obligations to arbitrate under the same:

“There are at least two distinct types of estoppel doctrine that apply in the non-signatory context:”the direct benefits” estoppel theory and the “intertwined” estoppel theory. The direct benefits theory bears the hallmark of any estoppel doctrine-prohibiting a party from taking inconsistent positions or seeking to “have it both ways” by “rely[ing] on the contract when it works to its advantage and ignor[ing] it when it works to its disadvantage.” Tepper Realty Co. v. Mosaic Tile Co. [Tepper Realty Co. v. Mosaic Tile Co., 259 F Supp 688 (SDNY 1966)]. The direct benefits doctrine reflects that core principle by preventing a party from claiming rights under a contract but, at the same time, disavowing the obligation to arbitrate in the same contract.

By contrast, the intertwined estoppel theory looks not to whether any benefit was received by the non-signatory, but rather at the nature of the dispute between the signatory and the nonsignatory, and, in particular whether “the issues the non-signatory is seeking to resolve in arbitration are intertwined with the agreement that the estoppel [signatory party] has signed….the intertwined estoppel theory has as its central aim the perseveration of the efficacy of the arbitration process is clear when one looks at the typical fact pattern of an intertwined estoppel case.” [John Fellas, “Compelling Signatories to Arbitrate with Non-Signatories”, New York Law Journal (28-3-2022)] (emphasis supplied)

40. In deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors:

(i) The mutual intent of the parties;

(ii) The relationship of a non-signatory to a party which is a signatory to the agreement;

(iii) The commonality of the subject-matter;

(iv) The composite nature of the transaction; and

(v) The performance of the contract.””