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 1st 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...

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

Parina Katyal

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