Sunday, December 30, 2012

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.


vswami said...

“........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!

Renu Gupta said...

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.