Decision marks another step widening the arbitration net

By Karthik Somasundram and Shreya Gupta, Bharucha & Partners

In Ameet Lalchand Shah & Ors v Rishabh Enterprises & Anr, the Supreme Court has taken one more step to widen the net of arbitration and avoid litigation.

Karthik SomasundramPartnerBharucha & Partners
Karthik Somasundram
Bharucha & Partners

The transaction in dispute involved a solar power plant to be set up in Uttar Pradesh. Respondent No.1 (Rishabh), under two agreements, both dated 1 February 2012, agreed to purchase power generating equipment from Juwi India Renewable Energies, and Juwi agreed to provide installation and commissioning for the power plant. Rishabh also purchased photovoltaic equipment for use in the project from appellant No. 2 (Aston) under an agreement dated 5 March 2012. Rishabh leased the photovoltaic equipment to Dante under an agreement dated 14 March 2012.

The two agreements between Rishabh and Juwi and the lease agreement between Rishabh and Dante provided for arbitration with the seat at Mumbai. The agreement with Aston did not contain an arbitration stipulation. Appellant No.1 (Shah) was the promoter of Aston and Dante. Aston received ₹214 million (US$3.1 million) from Rishabh towards the price of ₹251.6 million. Aston also paid ₹100 million in cash to the sons of Rishabh’s sole proprietor. The solar plant was commissioned in March 2012 but Dante failed to pay lease rental to Rishabh from March 2012.

Rishabh, alleging fraud, misrepresentation and criminal breach of trust, filed a complaint with the Economic Offences Wing of Delhi Police against all the appellants and a first information report was registered in 2015. The appellants moved Delhi High Court to quash the criminal proceedings. Income tax authorities also started an enquiry into the payments made to the sons of Rishabh’s sole proprietor.

While these proceedings were pending, Rishabh sued the appellants in Delhi High Court, seeking a declaration that all the four agreements were vitiated by fraud; recovery of monies paid to the appellants along with interest; and arrears of lease rentals. The appellants filed an application under section 8 of the Arbitration and Conciliation Act, 1996, for reference to arbitration of Rishabh’s claims in the suit.

Shreya GuptaAssociateBharucha & Partners
Shreya Gupta
Senior associate
Bharucha & Partners

A single judge and then a division bench, in an appeal, refused the appellants’ application to refer the disputes to arbitration. The division bench rejected the appeal mainly on two grounds: (1) the agreement with Aston was the primary agreement between the parties and it did not contain an arbitration clause; (2) the serious allegations of fraud rendered the dispute non-arbitrable in light of the Supreme Court’s judgment in A Ayyasamy v A Paramasivam & Ors (2016).

On appeal, the Supreme Court had to consider: (i) whether the four agreements were interconnected so as to refer all the parties to arbitration despite the absence of an arbitration stipulation in the agreement with Aston; and (ii) whether reference to arbitration should be refused on account of the allegations of fraud or whether the four agreements should be construed as having been undertaken by the parties for reasons of “business efficacy” and the reference to arbitration granted.

The Supreme Court concluded that all four agreements were interrelated. The underlying commercial arrangement was for Rishabh to procure and commission the power plant and lease it to Dante. The claims in Rishabh’s suit in Delhi High Court supported this conclusion.

The Supreme Court also concluded that the primary agreement between the parties was not the agreement with Aston. Since the underlying objective was to commission the power plant, the agreement with Dante was the primary agreement and, crucially, this agreement contained an arbitration clause.

The court also examined the amendments made to section 8 of the 1996 act in 2015 and noted that the recommendation in the 246th Law Commission Report, based on the Supreme Court’s judgment in Sukanya Holdings Pvt Ltd v Jayesh H Pandya & AnrI (2003) had not been incorporated. The amendments had, however, allowed “persons claiming through or under” parties to an arbitration agreement to seek reference of disputes to arbitration. Therefore non-signatories or those who were not directly parties to an arbitration agreement could require disputes to be arbitrated, if all disputes related to the same transaction and were covered by an arbitration agreement.

As regards fraud precluding arbitration, the Supreme Court followed its earlier ruling in Ayyasamy. Allegations of fraud were insufficient to oust the jurisdiction of an arbitral tribunal. Moreover, it was the court’s duty to impart a “sense of business efficacy” to commercial transactions or understandings.

In sync with the ethos of global commerce, business efficacy can best be imparted by driving disputing parties to arbitration.

Karthik Somasundram is a partner and Shreya Gupta is a senior associate at Bharucha & Partners.

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