In an application under Section 9 of the Arbitration Act seeking to restrain breach of a Joint Venture Agreement, the court held that non-signatories cannot be subjected to interim relief as they are not parties to the arbitration agreement.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
ARBITRATION PETITON NO. 66 OF 2014
Rakesh S. Kathotia & Anr. …Petitioners vs. Milton Global Ltd. & Ors. ...Respondents
Mr.Vikram Nankani, Mr.Naresh Thacker, Mr.Vipin Jain, Mr.Amit Vyas, Ms.Neeti Sachdeva, Ms.Aanchal Waswani i/b. M/s.Economic Law Practice for Petitioners.
Mr.Diniyar Madon i/b. M/s.Law Charter for Respondent Nos.2, 10 to 15.
Mr.Nitin Thakkar i/b. Mr.Hiren Mehta with Ms.Ritu Pathak for Respondent Nos.1, 3, 4, 5, 8 and 9.
CORAM : S.C. GUPTE, J.
RESERVED ON: 07 APRIL 2014
PRONOUNCED ON: 02 JULY 2014
JUDGMENT :
This Arbitration Petition, filed under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”), seeks to restrain the Respondents from committing breach of a Joint Venture Agreement (“JVA”) between the Petitioners and the Respondents.
Respondent No.1 is a Joint Venture Company, formed by the Petitioners, representing the 'Subhkam Group' and Respondent Nos.2 to 15 representing the 'Vaghani Group'. Respondent Nos.5 to 9, who are claimed to be relations of the Respondents representing the Vaghani Group, are signatories to the JVA. The Vaghani Group owned the company – Respondent No.4, which manufactured and marketed consumer durables and kitchen appliances under the brand name 'Milton'. The JVA was entered into by the parties to carry on this manufacturing and marketing business under the brand name of 'Milton'. According to the Petitioners, they entered into the JVA under the bona fide belief
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that the entire distribution and marketing network of Respondent No.4 would be transferred to Respondent No.1. Under the JVA, the management of Respondent No.1 was to be overseen by a Board of Directors to be appointed by the Subhkam Group and the Vaghani Group in terms of the relevant clauses of the JVA. Subhkam Group held 49.99% of the total issued and paid up capital of Respondent No.1, whilst Vaghani Group held the balance 50.01%. It is the case of the Petitioners that the Vaghani Group, in breach of the JVA, developed a competitive business through Respondent No.2 and have transferred the business of Respondent No.1 to Respondent No.2. The Petitioners seek to enforce the arbitration agreement under the JVA and in the meantime, restrain Respondent No.2 from manufacturing and marketing consumer durables, kitchen appliances and other goods and products falling under the definition of “Goods” in the JVA.
3 The main defence of the Respondents is that there is no identity of the parties to the arbitration agreement contained in the JVA and the parties hereto against whom relief is sought in the petition. If the parties against whom relief is sought in the petition are not parties to the arbitration agreement, then under the principle of the Supreme court ruling in the case of Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya1 the subject matter of the Petition is not covered by the arbitration agreement. It would then be impermissible to grant relief to the Petitioners in a petition under Section 9 of the Act.
4 The parties to the JVA are (i) Petitioner No.1, (ii) Respondent No.4, (iii) Respondent Nos.5 to 9 (described as “the Vaghani Group”), (iv) Respondent No.1 (referred to as “the JVC” or “the Company”). Petitioner No.2, Respondent Nos.2 and 3 and Respondent Nos.10 to 15 are not parties to the JVA. The main allegations in the petition are against Respondent No.3 and the main relief is sought against Respondent No.2. Prima facie, therefore, as the apparent state of affairs indicates, the parties against whom reliefs are sought in the petition, are not parties to the JVA and consequently to the arbitration agreement contained therein.
1 (2003) 5 SCC 531
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5 Mr.Nankani, the learned Senior Counsel appearing for the Petitioners, however, submits that the capacity of the signatories to the JVA, namely, Respondent Nos.5 to 9, was as representatives of the Vaghani Group and the entire Vaghani Group is bound by the JVA and the stipulations therein, including the arbitration agreement contained therein. It is submitted that the other Respondents (Respondent Nos.2, 3 and 10 to 15) are part of the Vaghani Group. Mr.Nankani submits that Respondent No.3 was the Chairman (and earlier Managing Director) of Respondent No.1 and named in the JVA as 'Vaghani Representative' and signed the JVA in his capacity as the authorised signatory of Respondent No.1. Mr.Nankani relies on the judgments in the cases of Smita Conductors Ltd. vs. Euro Alloys Ltd.2 , Tata Industries Ltd. vs. Grasim Industries Ltd.3 , Girish Mulchand Mehta vs. Mahesh S. Mehta4 , Housing Development and Infrastructure Ltd. vs. Mumbai International Airport Pvt. Ltd.5 , Bharat Starch Industries Ltd. vs. Prudent International Shipping and Trading Co.Ltd.6 and HIs Asia Ltd. vs. Geopetrol International Inc.7 , in support.
6 Mr.Thakkar and Mr.Madon, learned Senior Counsel appearing for Respondent Nos.1,3,4,5,8 and 9 and Respondent Nos.2 and 10 to 15, respectively, oppose the petition, submitting that 'Vaghani Group' referred to in the JVA meant a different set of individuals and not 'Vaghani Group' as alleged in the petition; that Respondent No.2 was not covered within 'Vaghani Group' as defined in the JVA; and that no relief can be granted against Respondent Nos.2 and 10 to 15. The learned Counsel rely upon the judgments in the cases of Sukanya Holdings (supra), Indowind Energy Ltd. vs. Wescare (I) Ltd.8 , Manish Estates Pvt.Ltd. vs. Official Assignee9 , and Hemant D. Shah vs.
2 (2001) 7 SCC 728
3 MANU/SC/2869/2008
4 MANU/MH/1458/2009
5 2013 Indlaw MUM 1102
6 1995 (34) DRJ 72
7 2012 Indlaw DEL 3000
8 AIR 2010 SC 1793
9 Arbitration Petition No.18/2006 decided on 14.7.2006
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Chittaranjan D. Shah10 .
7 Respondent Nos.5 to 9, who have executed the JVA, are referred to therein as “the Vaghani Group”. These Respondents are named as Promoters of Respondent No.4. Each of Respondent No.4, its promoters (Respondent Nos.5 to 9) referred to as the Vaghani Group and Petitioner No.1 (referred to as the Subhkam Group) are individually parties to the JVA with their own individual obligations. The individuals, who are parties to the JVA, have no doubt undertaken certain obligations on behalf of the others who are not parties to the JVA. For instance, the obligations of Vaghani Group are undertaken on behalf of Milton Plastic Limited (Respondent No.4), Respondent Nos.5 to 9 and “ their immediate relatives taken together and such other entities controlled by them or their immediate relatives directly or indirectly ”, whereas the Subhkam Group under the JVA meant Petitioner No.1 and “ such other entities controlled by him or his immediate relatives or his group companies directly or indirectly ”. The signatories to the JVA may undertake obligations on behalf of other individuals or entities who may be said to belong to a certain group – in our case, the respective Vaghani and Subhkam Groups – and in an appropriate case, such other individuals or entities may even be bound by these obligations. For instance, in a case where the other individuals or entities represented to the applicant that they would be bound by the agreement and relying on such representation, the applicant entered into the agreement with the signatories, the other individuals or entities may not be allowed to plead to the contrary and be held bound by the agreement. But that still does not imply that these other individuals or entities are themselves party to the JVA or the arbitration agreement contained therein. These other individuals and entities will be party to the JVA, and consequently, the arbitration agreement contained therein, only if the signatories are proved to have executed the JVA as representatives of, or on behalf of, these individuals and entities. For acting as representatives of, or on behalf of, others, the others must be shown to have authorised the signatories to enter into the JVA. There is nothing on record to show that. Respondent No.3 is said to be the Managing Director of Respondent No.2. Respondent No.3 is said
10 Appeal No.658/2006 in Arbitration Petition No.295/2006 decided on 5.9.2006
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to be “fully aware of and in the know of all the transactions, things, matters, understanding and occurrences that have given rise to the present dispute”. Respondent Nos.3,4,10, 11 and 12 are said to have entered into a Memorandum of Understanding and Agreement for transfer of Business carried on in partnership by them in the name of “Milton Exports” to the JV Company – Respondent No.1. This is all that is averred in the petition against Respondent Nos.2, 3 and 10 to 15. The authority of Respondent Nos.2, 3 and 10 to 15 to represent them to Respondent Nos.5 to 9 cannot be spelt out from these averments.
8 The gravamen of the charge in this petition is, Respondent Nos.3 to 15 carrying on business in the name of Respondent No.2, in contravention of the terms of the JVA, and colluding with each other to do so. This may give rise to a cause of action to the Petitioners who are party to the JVA, but this cause of action cannot be agitated before an arbitral forum. None of Respondent Nos.2, 3 and 10 to 14 have consented to this arbitral forum and it cannot be thrust upon them.
9 On the principle of law enunciated by the Supreme Court in Sukanya Holdings (supra) , the subject matter of the present petition is not covered by the arbitration agreement and it is not permissible to grant any interim relief under Section 9 of the Act.
10 Respondent Nos.2 and 4 are separate entities and the mere fact that they have common directors will not make the two companies a single entity or lead to an inference that one company will be bound by the acts of the other. Even if it is assumed for the sake of argument that Respondent No.2 is promoted by Respondent No.4 or its promoters, that will not make Respondent No.2 a party to the JVA or the arbitration agreement contained within it. There is no case of any ratification, approval, adoption or confirmation of the JVA by Respondent No.2. Since we are dealing here with an arbitration agreement, such acts as would spell out a contract ought to be in writing. The judgment of the Supreme Court in Indowind Energy Ltd. (surpa) bears out these prepositions.
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11 There is no question of lifting of corporate veil in this case. Neither is any such case made out nor is any such case permissible in a proceeding under Section 9. What we have to examine here is whether Respondent No.2, which is a separate legal entity, is a “party” to the arbitration agreement. Our Court in Manish Estates Pvt.Ltd. (supra) held as follows :
“ The term ’party’ as defined by section 2(h) to mean "a party to arbitration agreement". Thus, the entity which is party to the arbitration agreement can make an application for interim measure under section 17 and the Arbitrator can make an order under that provision only against an entity which is a party to the arbitration agreement. What is required is that the entity should be actually a party to the arbitration proceedings. The Arbitration and Conciliation Act does not recognise the concept of somebody being deemed to be a party to the arbitration agreement. Therefore, in my opinion, the learned Arbitrator cannot be justified in embarking on the enquiry as to whether the Company can be deemed to be a party to the arbitration agreement.”
The observations quoted above also equally apply to an application under Section 9 of the Act.
12 None of the judgments cited by the learned Counsel for the Petitioners helps him get over this difficulty. In Smita Conductors (supra), the Supreme Court found the contract to be affirmed by reason of the conduct of the parties as indicated in the letters exchanged and held that there was an agreement in writing to refer the disputes to arbitration. In Tata Industries' case (supra), the Supreme Court found that the party raising a challenge on the ground of the applicant not being a party to the arbitration agreement had earlier proceeded before the High Court on the footing that it was a party and did not allow the objector to go back on that. In Girish Mulchand Mehta (supra), our Court held that in an arbitration petition under Section 9 of the Act, the jurisdiction of the court is not limited to passing orders only against parties to an arbitration agreement. The Court affirmed the principle that Section 9 can be invoked even against a third party, if he were to be a person claiming under a party to the
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arbitration agreement and likely to be affected by the interim measures. There is no question in our case of Respondent No.2 claiming under any of the parties to the arbitration agreement. In Housing Development and Infrastructure Ltd. (supra), there was an umbrella agreement and other separate agreements thereunder, performance of each depending on the performance of the other or others. In such a case, the fact that a party was not a signatory to one or the other of the agreements was held to be not of significance and the existence of an arbitration agreement between the parties was affirmed. The facts and the ratio of that judgment have nothing to do with the facts of our case. Even in the Delhi case of Bharat Starch Industries (supra), though the MOU in that case was not signed by a party, the subsequent correspondence showed that it had accepted the MOU. These facts are clearly distinguishable. Even in the other case of HIs Asia Ltd. (supra), the Delhi High Court affirmed the proposition that when a third party, i.e. non-signatory party, is claiming or sued as being directly affected through a party to the arbitration agreement and there are principal and subsidiary agreements, and such third party is signatory to a subsidiary agreement, but not to the principal agreement containing the arbitration clause, then depending on the facts of a given case, it may be possible to hold that even such party can be referred to arbitration. This proposition has no relevance to the facts of our case.
13 For all these reasons, the reliefs claimed cannot be granted. The petition is, accordingly, dismissed. There shall be no order as to costs.
2 issues framed by the court
Whether non-signatory parties (Respondents 2, 3, 10-15) who are alleged breachers of a Joint Venture Agreement are parties to the arbitration agreement within it.
Whether interim relief under Section 9 of the Arbitration and Conciliation Act can be granted against a party not bound by the arbitration agreement.
1 provisions across 1 enactments
Rakesh S. Kathotia
Milton Global Ltd.
S.C. Gupte
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
