Annual Arbitration Review- 2017

Twilight Properties v. Romola Bhattacharjee: Bifurcating Cause of Action

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This case is a part of our Annual Arbitration Review 2017.

Judgement Name: Twilight Properties v. Romola Bhattacharjee

Citation: C.A. 879/2017

Court: Supreme Court of India

Coram: Dipak Misra, CJI & R. Banumathi J.

Date: January 23, 2017 

Overview:

In a petition to refer parties to arbitration under section 8, which was ultimately not permitted, the present order provides insufficient reasons as to why the grounds of, bifurcation of the cause of action and non-arbitrability of fraud, were relied on to oust the jurisdiction of the arbitration agreement.

Issue:

Whether invocation of arbitration under section 8 is valid in a suit for misrepresentation & fraud and further whether bifurcation of the cause of action is viable?

Facts:

Twilight Properties (“Appellant”) and Romola Bhattacharjee (“Respondents”) had executed an Agreement for the development of certain properties. A dispute emerged, and during the trial of the suit before the trial court, section 8 of the Arbitration and Conciliation Act, 1996 (the “A&C Act”) was invoked in accordance with clause 15 in the agreement. However, the trial court refused to refer the same to arbitration on the following grounds:

  • that fraud and misrepresentation are not arbitrable disputes,
  • and there are non-signatories to the Agreement and the cause of action cannot be bifurcated.

The Single Judge of the High Court overturned this decision and allowed the parties to go for arbitration. In the special leave before the Supreme Court, the Division Bench found that where there is an allegation of misrepresentation and fraud as well as non-signatories the suit filed ought to be adjudicated first. The apex court also opined that the single judge of the High Court did not dwell on the issues of misrepresentation & fraud but rather came to the conclusion on the drafting of plaint, which was an incorrect approach according to them.

Analysis:

Looking into the order of the Single Judge, we find that the Trial Judge had rejected the application, relying on the decision of Sukanya Holdings[1], wherein bifurcation of the cause of action cannot be allowed. A perusal of the relief in the present matter, reveals that no relief was sought against the Respondents 3 to 8, but since relief was sought against the Respondent 1, the Respondents 3 to 8  being subsequent transferees were seemingly impleaded thus a case for, non-signatories being impleaded into the arbitration agreement was made. With reference to the Chloro Controls[2] case, we must distinguish between reference to arbitration under section 8 and section 45. The language of section 45 stipulates the enlargening of the scope of the term “parties” to include parties beyond the signatories to the arbitration agreement. However, section 8 in contradistinction to this uses “parties” in its simplicitor and thus cannot be enlargened to include non-signatories. However in light of the recent judgment of the Supreme Court in Ameet Lalchand[3], the apex court took a magnifying glass to the matter and recommended that, in certain transactions it is imperative to look at all the connected agreements be it between the parties to the arbitration agreement or otherwise. Further, in that matter, the Court found that the High Court had erred in not taking all the agreements into consideration, and in light of this where several parties were involved in a single commercial project they can be covered by an arbitration agreement which they are not privy to. While this judgment is subsequent to the present order, it displays a comparatively in-depth and logical analysis as compared to the present matter.

On the matter of arbitrability of fraud before the High Court, reliance was also placed on N. Radhakrishnan[4], which had held that serious allegations of fraud and malpractices cannot be arbitrated upon. Also mentioned, was Booz Allen[5] which held that fraud is a matter which cannot be adjudicated on by an arbitrator. While these judgments are, in their own light, valid, there has been no mention of the A. Ayyasamy[6] case. Ayyasamy specifically addresses what N.Radhakrishnan (supra) did not, i.e. that allegations of fraud at the stage of pleadings, could not be a ground to oust arbitration. Justice D.Y. Chandrachud in his judgment in Ayyasamy, reiterates that the law under section 8, compels the judicial authority to refer matters to arbitration. He even identified the use of N.Radhakrishnan (supra) as a ruse to avoid arbitration. He emphasized that the apex court has not ruled a mere allegation of fraud as amounting to exclusion of arbitrability. Rather the burden lies on the party which avoids compliance, to establish that the dispute is not arbitrable. Based on this reading of arbitrabilty of fraud and the judgment of the Single Judge, there has been a misstep in rendering the present judgment. No sufficient evidence has been put on record to estbalish a case for serious allegation of fraud being made out, nor has a discussion on impleading of non-signatories been raised.

Had the apex court perused the orbiter of Chloro Controls (supra) on “implied consent” and “judicial determinism”, we could have embarked on an interesting dialogue on the impleading of non-signatories. Further pertaining to the matter to reference of non-signatories to arbitration by a judicial determination, the five theories illustrated in Thomson-csf, S.a., v. American Arbitration Association[7] namely:

1) incorporation theory – where a non-signatory may compel arbitration against a party to an arbitration agreement;

2) assumption – a non-signatory party may be bound by an arbitration clause if its subsequent conduct indicates its assuming the obligation to arbitrate;

3) agency – a non-signatory to an arbitration agreement may also be bound by the law of agency, if such agency can be proved contractually and its intention to arbitrate can be ascertained in the absence of a signed agreement;

4) veil-piercing/alter ego; and

5) estoppel – if a party knowingly receives the benefits of a contract, it is estopped from denying it’s obligation to arbitrate; invite a much need discussion on moving towards favouring arbitration over court interference.

The Indian model of arbitration has been lagging behind international standards due to the interference by courts and plethora of contradictory judgements. Generalia Specialibus Non Derogant – if a special law is applicable it should surely gain priority. If a reference to arbitration is made, then it is no place for the Court to interefere unless the arbitration agreement is prima facie vitated. If the court does interfere, it is then duty bound to sift through the materials for the purpose of determining whether the defence is merely a pretext to avoid arbitration. Justice Scalia too in his judgment in Southland Corporation[8], held that an arbitration clause, is severable from the remaineder of the contract and unless there is a challenge to the arbitration clause itself, the contract’s validity remains to be considered by the arbitrator. If India is to give true effect to its arbitration laws, efforts to strengthen institutional arbitration must be made and to do so, the courts, need to significantly reduce their interference.

Conclusion:

The present order overlooks not only precedence but the overall recent development in law. It altogether negatives the arbitration clause without a scholarly analysis. While this case may have missed the mark by a long shot, the Ameet Lalchand (supra) is an enlightening judgment, which makes a positive step towards strengthening institutional arbitration in India.

[1] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531

[2] Chloro Controls (I) P. Ltd.) v. Severn Trent Water Purification Inc., (2013) 1 SCC 641

[3] Ameet Lalchand Shah v. Rishabh Enterprise, 2018 SCC OnLine SC487, SLP(c) 16789/2017

[4] N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72

[5] Booz Allen & Hamilton Inc. v. SBI Home Finance Limited, (2011) 5 SCC 532

[6] A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386

[7] Thomson-csf, S.a., v. American Arbitration Association, [64 F.3d 773 (2d Cir. 1994)]

[8] Southland Corporation v. Keating, 465 U.S. 1 (1984), MANU/USSC/0149/1984

(This case comment was contributed by Parvathi Bakshi, fourth year law student at Jindal Global Law School)

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