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Gujarat Composite Limited v. A Infrastructure Limited & Ors.

Gujarat Composite Limited v. A Infrastructure Limited & Ors. Case Analysis 

Facts of the case

Gujarat Composite Ltd (Appellant) licensed the operation of its manufacturing plants through two license agreements it signed with A Infrastructure Ltd (Respondent No. 1) and its sister firm. Subsequently, a supplemental agreement was signed by the Appellant and Respondent No. 1 outlining the advancement of a certain amount to the Appellant. It was also agreed that Respondent No. 1 would be allowed to mortgage the licensed production units to finance the ad hoc advance. Later, the Appellant, Respondent No. 1, and Bank of Baroda (Respondent No. 2) signed a tripartite arrangement whereby Respondent No. 2 approved a loan of INR 500 lakh to Respondent No. 1. In addition, a restriction on the transfer of the Appellant's land's title documents throughout the license agreement's duration was included to the tripartite agreement. When Respondent No. 1 asked the Appellant to extend the license agreement's duration, a disagreement emerged between the parties. However, the appellant rejected this suggestion. The reason for requesting the extension was the appellant's inability to pay Respondent No. 1's dues. When the first license agreement's term ended, Respondent No. 1 refused to give up possession and instead said it intended to keep it. Then, using the principal defence that the license had expired owing to the passage of time and that such possession was unlawful, the appellant sent a notice to Respondent No. 1 demanding recovery of custody of the manufacturing units and payment of certain outstanding debts.
After many attempts to resolve the issue peacefully, the Appellant sent Respondent No. 1 a notice requesting arbitration by the license agreement. Respondent No. 1 responded by contesting the dispute's arbitrability because it was inextricably linked to other related transactions and the arbitrator's jurisdiction was derived from the agreement, meaning that resolving the dispute would go beyond the terms of the agreement. A composite arbitration petition was submitted by the appellant against Respondent No. 1 before the Gujarat High Court (HC) against the previously indicated background of events. Conversely, Respondent No. 1 brought a commercial civil complaint before the Ahmedabad Commercial Court (Commercial Court). The Commercial Court denied the appellant's application under Section 8 of the Arbitration & Conciliation Act, 1996 (Arbitration Act) on December 13, 2017, issuing an order that stated that the tripartite agreement did not contain an arbitration clause and that no reference to the original or supplemental contract was made to consider the arbitration clause as an integral part of the tripartite agreement. Following that, the appellant filed an appeal, which was also denied by the HC because Section 8 of the Arbitration Act would not apply because the suit's subject matter involves non-parties and falls somewhat inside and outside of the arbitration agreement.
Angry by the rulings made by the High Court and the Commercial Court, the appellant filed an appeal with the Supreme Court (SC).

Issues Dealt 

Whether, for an application under Section 8 of the Arbitration & Conciliation Act, the questions presented in the complaint extended beyond the license agreement.


Arguments Presented 

A. Original Defendant No. 1's Arguments
The first defendant contends that the arbitration provision contained in the license agreement applies to the remedy requested in the plaint. They argue that the arbitration agreement should apply to the whole subject matter of the lawsuit. Additionally, they contend that the suit's denial of the application under section 8 of the Arbitration Act of 1996 is not justified by the defendants' joining of defendants Nos. 2 through 5. To bolster their claims, they refer to rulings from the Delhi High Court and the Bombay High Court.

B. The Original Plaintiff's Arguments
The initial plaintiff contends that since the arbitration agreement does not completely cover the subject matter of the claim, the litigation need not be sent to arbitration. They contend that arbitration does not apply to the tripartite agreement. Additionally, they contend that arbitration cannot be used to resolve the relief requested against the original defendant No. 2, who is not a party to the arbitration agreement.

Judgment of the Court 

Following the rulings of the HC and the civil court, the SC dismissed the appeal and stated that it was very evident that the dispute's subject matter should be amenable to an arbitration agreement because Section 8 of the Act uses the phrase "in a matter which is the subject of an arbitration agreement." In its ruling, the Supreme Court made it clear that when a suit is filed and the relief sought by one of the parties is not covered by the arbitration agreement, the court is not permitted to refer the parties under Section 8 of the Act. Section 8 of the Arbitration Act, which deals with the Court referring the parties to arbitration, was first reviewed by the SC, which emphasized that the suit should be over a topic that the parties have consented to refer to r and that falls inside the purview of the arbitration agreement. Based on its ruling in Ameet Lalchand Shah v. Rishabh Enterprises & Anr1, the Supreme Court noted that the recommendations of the 246th Law Commission Report, which was released following the Sukanya Holdings Pvt Ltd v. Jayesh H Pandya & Ors2 decision, could be seen as the context for the proposed amendment to Section 8 of the Arbitration Act. Among other things, the report noted that under the proposed amendment, the court would not refer the parties to arbitration solely if it determines that there is no arbitration agreement or that it is void.
The SC cited the following considerations for applying the group of businesses doctrine, drawing on its ruling in Oil and Natural Gas Corporation v. Discovery Enterprises, the link between a party that is not a signatory to the agreement and the parties' mutual intent. The topic matter's shared characteristics, the transaction's complex nature. A corporation that is not a signatory to an arbitration agreement within a group of companies may nonetheless be bound by it based on how the contract is performed. The Supreme Court remarked that there had been several transactions in this case and that aside from the first license agreement, none of the other agreements—even those involving Respondent No. 1 and the Appellant—included an arbitration clause, even though they all had to do with the same property. Additionally, the SC pointed out that the original license agreement is the source of the contractual relationship between Appellant and Respondent No.1, and it does not automatically result in the availability of the arbitration agreement about the dispute in question, which arises from the tripartite agreement and cannot be resolved without consulting the aforementioned agreement and involving all parties. The SC went on to note that there is no question about the absence of an arbitration agreement about the entirety of the suit's subject matter, and the HC's view does not seem to be flawed or to go against any precedent established by this Court when the substantive reliefs sought in the suit are not covered by the arbitration clause in the original license agreement. With the aforementioned in mind, the SC rejected the appeal, ruling that it was impossible to condemn the Commercial Court and the HC for turning down the appellant's request for a referral to arbitration under Section 8 of the Arbitration Act.

  • The Supreme Court clarified that arbitration can only be mandated under Section 8 of the Arbitration Act if the dispute falls within the scope of the arbitration agreement.
  • It highlighted that the absence of an arbitration clause in agreements related to the dispute, except the original license agreement, doesn't automatically extend arbitration to the subject matter.
  • The Commercial Court denied the appellant's application under Section 8 of the Arbitration & Conciliation Act, 1996 (Arbitration Act).

BY : Vaishnavi Rastogi

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