Case Note & Summary
The case pertained to a Notice of Motion under Section 45 of the Arbitration and Conciliation Act, 1996 filed by Defendant Nos. 1 and 2 in a suit brought by the plaintiffs, who were shareholders of Defendant No. 3 company. The plaintiffs had filed a derivative action and personal claims alleging misrepresentation and fraud by the defendants in connection with shareholding reductions and capacity expansion, leading to loss of control over Defendant No. 3. The defendants sought to refer the disputes to arbitration relying on arbitration clauses in three agreements: an Agreement to Invest dated 16.12.1994, a Shareholder's Agreement dated 16.12.1994, and a Foreign Collaboration Agreement dated 4.4.1995. The buyback agreement dated 1.6.1996, as amended on 6.12.2000, which was also in dispute, did not contain an arbitration clause. The plaintiffs opposed the motion on two grounds: first, that Section 45 was inapplicable because Defendant No. 1 was incorporated in Denmark and Defendant No. 2 in the British Virgin Islands, which are not notified reciprocating territories under Section 44(b) of the Act; second, that there was no arbitration agreement covering the disputes raised in the plaint, especially the derivative action and the buyback agreement. The court rejected both grounds. On the first ground, the court held that Section 45 does not incorporate the condition in Section 44(b) that the foreign award be made in a notified territory; it only requires that the parties have made an agreement referred to in Section 44, i.e., an agreement to which the New York Convention applies. Therefore, even if the defendants were from non-notified territories, the reference could be made. On the second ground, the court held that a derivative action can be referred to arbitration. It further held that the arbitration clauses in the three agreements covered the disputes under the buyback agreement as they formed part of a single composite transaction. The court accordingly allowed the Notice of Motion and referred the parties to arbitration.
Headnote
A) Arbitration – Section 45, Arbitration and Conciliation Act, 1996 – Requirement of Reciprocity – Section 45 does not require the award to be made in a territory notified under Section 44(b); the judicial authority need only find that the parties made an agreement referred to in Section 44, i.e., an agreement to which the New York Convention applies. Defendants from non-notified territories can still seek reference if the arbitration agreement falls within the Convention. (Paras 8-11) B) Arbitration – Derivative Action – Arbitrability – A derivative action brought by shareholders on behalf of a company can be referred to arbitration under a valid arbitration agreement. (Para 3) C) Arbitration – Scope of Arbitration Clause – Buyback Agreement Without Clause – Where multiple agreements form a single composite transaction, an arbitration clause in one agreement may extend to disputes under another agreement that lacks its own arbitration clause. The court allowed the reference, rejecting the contention that no arbitration agreement existed in respect of the buyback agreement disputes. (Paras 2, 3)
Issue of Consideration
Whether Section 45 of the Arbitration and Conciliation Act, 1996 applies when defendant companies are incorporated in non-notified reciprocating territories; whether a derivative action can be referred to arbitration; and whether arbitration clauses in certain agreements extend to disputes under a buyback agreement that has no arbitration clause.
Final Decision
Notice of Motion allowed; the disputes are referred to arbitration. The court rejected both grounds of challenge raised by the plaintiffs.
Law Points
- Section 45 of Arbitration and Conciliation Act
- 1996 does not require the award to be made in a notified reciprocating territory for reference
- only that the agreement is one to which the New York Convention applies
- derivative action can be referred to arbitration
- arbitration clauses in connected agreements can cover disputes under a buyback agreement lacking its own clause if they form part of the same transaction
