Non-Signatory Defendants Cannot Be Exposed To Arbitration Under Section 8 Of The A&C Act: Karnataka High Court

The Karnataka High Court has held that the non-signatory defendants cannot be exposed to arbitration under Section 8 of the A&C Act by allowing the dispute to be referred to arbitration.The bench of Justice Sreenivas Harish Kumar held that when the cause of action against all the defendants is stated to be the same, it cannot be bifurcated so to allow arbitration proceedings against few of the defendants and continuation of the suit against the others as it would lead to multiplicity of proceedings and delay in adjudication. 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.It held that the Court would not allow an application under Section 8 of the A&C Act on the ground that the plaintiff and one of the defendants has an arbitration agreement when the remaining defendants were not a party to the arbitration agreement and the only feasible option in such a situation would be the continuation of the suit against all the defendants.FactsThe plaintiff and the first defendant entered into a Supplier and Service Provider Agreement dated 29.10.2017. The plaintiff took over the entire bankend operation of the business of the first defendant. The agreement contained an arbitration agreement. Later, the first defendant was acquired by the second respondent, however, this fact was not allegedly disclosed to the plaintiff. Thereafter, the plaintiff started incurring losses in the business on account of alleged siphoning of monies by the defendants and the plaintiff blamed the defendants for inducing breach of the contract. Accordingly, the plaintiff filed a Commercial Suit for relief of permanent injunction against the defendants and a direction to pay a sum of Rs. 36,22,00,000/-. Before the Commercial Court, the first defendant filed an application under Section 8 of the A&C Act seeking the reference of the dispute to arbitration. The Court below allowed the application. Aggrieved by it, the plaintiff challenged the order under Article 227 of the Constitution of India. Grounds of ChallengeThe plaintiff challenged the order on the following grounds:The ld. Commercial Court failed to appreciate that the arbitration clause was only between the plaintiff and the first defendant and the relief in the suit is claimed against several other defendants who are not a party to the arbitration agreement, thus, the dispute could not be referred to arbitration. The ld. Court failed to appreciate that as per Section 7 of the A&C Act only the parties who are signatories to the arbitration clause can be referred to arbitration.The Court also failed to appreciate that Section 8 of the Act does not permit splitting of the cause of action and the when the dispute arise out of a composite cause of action, the it must be decided by a single forum to avoid multiplicity and chances of conflicting findings. Section 8 permits actin by persons who might not be a signatory to arbitration agreement if they are acting under a party to the agreement, however, the defendants in this case are sued in their individual capacity and not owing to their relationship with the first defendant. The respondents objected to the maintainability of the petition on the following grounds:Non-signatories can invoke Section 8 since the dispute between the parties are interlinked in such a way as no adjudication is possible concerning defendants 2 to 7 without reference to the agreement, necessarily the parties must be referred to arbitration. The existence of the arbitration agreement is not disputed and post the 2015 amendment, the Courts have taken a pro-arbitration approach and have allowed the splitting of cause of action as well to give effect to the mandate of the arbitration agreement. Analysis by the CourtThe Court observed that the case has given rise to an anomalous situation wherein not just few of the defendants are not signatory to the arbitration agreement but the relief claimed arises out of a composite cause of action and each of them is sued in their individual capacity.The Court referred to the provisions of Order 1 Rule 3 of CPC to observe that if an act or transaction or series of acts or transactions give rise to reliefs against several persons either jointly or severally or in the alternative, all such persons may be joined as defendants in a suit and another requirement for joining several persons as defendants in a suit is if separate suits are brought against them, a common question of law or fact would arise for adjudication.The Court also observed that there is no provision under the A&C Act to deal with a situation wherein a part of the action is arising out of the arbitration agreement and the remaining independent of it. In short, there is no provision in the Act for splitting the cause of action unlike Section 24 of the 1940 Act which permitted such splitting. The Court observed that Section 8 uses the words “a...

Non-Signatory Defendants Cannot Be Exposed To Arbitration Under Section 8 Of The A&C Act: Karnataka High Court

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