Twilight Properties v. Romola Bhattacharjee: Bifurcating Cause of Action



Judgement Name: Twilight Properties v. Romola Bhattacharjee

Citation: C.A. 879/2017

Court: Supreme Court of India

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

Date: 23rd January 2017

Keywords: Misrepresentation, Fraud, Bifurcation of Cause of Action.


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 of the agreement. However, the trial court refused to refer the same to arbitration on the following grounds:


1. That fraud and misrepresentation are not arbitrable disputes,

2. 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 bench of the High Court did not dwell on the issues of misrepresentation & fraud but rather came to a conclusion on the drafting of the 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, 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 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 case, we must distinguish between reference to arbitration under Section 8 and Section 45. The language of Section 45 stipulates the enlargement 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 enlarged to include non-signatories. However, in light of the recent judgment of the Supreme Court in Ameet Lalchand, 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, which had held that serious allegations of fraud and malpractices could not be arbitrated upon. Also mentioned was Booz Allen which held that fraud is a matter which cannot be adjudicated by an arbitrator. While these judgments are, in their own light, valid, there has been no mention of the A. Ayyasamy 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 the 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 arbitrability 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 establish that a case for a serious allegation of fraud has been 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, these five theories were illustrated in Thomson-csf, S.a. v. American Arbitration Association, 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 that it is 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 the 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 a 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 interfere unless the arbitration agreement is prima facie vitiated. 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, held that an arbitration clause is severable from the remainder 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 reduce their interference significantly.


Conclusion:

The present order overlooks not only precedence but the overall recent development in the 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.

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