1 pdp IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORIDINARY ORIGINAL CIVIL JURISDICTION APPEAL NO. 372 OF 2004 IN NOTICE OF MOTION NO. 778 OF 2004 IN SUIT NO. 233 OF 2004 Severn Trent Water Purification, Inc. a Corporation organized and existing under the laws of the State of Pennsylvania, United States of America, having its principal office at 3000 Advance Lane, Colmar, Pennsylvania 18915, U.S.A. ..Appellant (Org.Deft.No.1) Vs. 1. Chloro Controls India Private Ltd., 15-AJ, Laxmi Industrial Estate, Linke Road, Andheri (W), Mumbai – 400 053. 2. Captial Controls (Delaware) Company Inc., a Corporation organized and existing under the laws of the State of Delaware, having its office and place of business at 300 Delaware Avenue Suite 1704, Wilmington, Delaware 19801-1612 USA. 3. Titanor Components Ltd. Plot No.184, 185 and 189 Kundaim Industrial Estate, Kundaim 403 115, Goa, India. 4. Hi Point Services Pvt. Ltd. 2 310 Gokul Arcade, CTS No. 173-A, Swami Nitayanand Road, Vile Parle (East), Mumbai 400 057. 5. Capital Controls India Pvt. Ltd. 15/AJ Laxmi Industrial Estate, Link Road, Andheri (W), Mumbai 400 053. 6. W.A. Stimeling 10A, Jalan SS 20/58, Damansara, Utama, 47400, Petaling, Jaya Selangor, Malaysia. 7. Marwan Nesicolasi, 2660 Columbia Street, Torrance CA 90503, U.S.A. 8. R. Fernandez, 1110 Industrial Boulevard, Sugarland, Texas 77478, USA. 9. Madhusudan B. Kocha, 15/AJ, Laxmi Industrial Estate, Link Road, Andheri (W), Mumbai 400 053. 10. Milin M. Kocha, 15/AJ, Laxmi Industrial Estate, Link Road, Andheri (W), Mumbai 400 053. 11. Nilesh M. Kocha 15/AJ, Laxmi Industrial Estate, Link Road, Andheri (W), Mumbai 400 053. ..Respondents (No.1 – Org. Plff. & Nos.2 to 11 – Org. Deft. Nos.2 to 11) Mr. J.P. Sen a/w Jyothi Saigal and Shrawan Shah for appellant. Mr. Saleh Doctor, Senior Advocate a/w Naval Agarwal i/by B. Munim and Co. for respondent no.1. Mr. Jaideep Raut i/by Cr.By. & Co. for respondent no.3. Mr. Clive D’Souza i/by Legal Associate for respondent no.4. 3 CORAM: B. H. MARLAPALLE & SMT. V.K. TAHILRAMANI, JJ. Reserved on : January 28, 2010. Pronounced on : March 04, 2010 JUDGMENT (PER B.H.MARLAPALLE, J.) 1. This appeal filed, by the original defendant no.1, arises from the order dated 8th April, 2004 passed by the learned trial Judge, dismissing Notice of Motion No. 778 of 2004 which was an application under Section 8 of the Arbitration and Conciliation Act, 1996 (the Act for short) and the said Motion was taken out by defendant no.1. The appeal was dismissed as per the order dated 11th February, 2009 and the said order came to be challenged in Civil Appeal No. 6302 of 2009. The Supreme Court was pleased to allow the appeal by setting aside the order dated 11th February, 2009 and the appeal came to be remitted to this court for a fresh decision in accordance with law, with a further request to pass a speaking and reasoned order within three months. It is under these circumstances that the appeal is heard afresh. 2. The present respondent no.1 filed Suit No. 233 of 2004 for a 4 declaration that the joint venture agreements and supplementary collaboration agreement are valid, subsisting, binding and that the scope of business of defendant no.5 – Company includes the manufacture, sale distribution and service of the entire range of chlorination equipments, including electro chlorination equipment, of the defendant nos.1 and 2, their parents, associates and affiliated companies, as well as of the Kocha family/Chloro Controls Equipment Company and some other reliefs by way of restraining orders against defendant nos.1 to 4. 3. The plaintiff is a Private Limited Company and its shares are entirely held by defendant nos. 9 to 11 (Kocha/Chloro Control Group). Defendant No. 1 – Company was earlier known as “Capital Controls Company Inc.” and in or about the year 1990 the Capital Controls Group came to be acquired by Severn Trent Services PLC (UK), originally a state- owned water authority and following privatization from the UK Government in 1989, it proceeded to build a product and services business from the US beginning with the acquisition of the Capital Controls Group. The name of the first defendant was changed to Severn Trent Water Purification Inc with effect from 1/4/2002. Thus defendant nos.1 and 2 became the group companies and were earlier part of “ the Capital Controls 5 Group” (hereinafter referred to as the Capital Controls/Severn Trent group). Till January, 1999 the defendant nos. 1 and 2 developed and sold electro chlorination equipment under the brand name “Hypogen” and from January, 1999 onwards the said brand was replaced by the brands “Sanilec” and “Omnipure”. Defendant Nos.1 and 2 carry on the business of manufacture, supply, sale and distribution of chlorination equipments, including gas and electro chlorination equipments. Defendant No.3 is a company incorporated under the Companies Act, 1956 and engaged in the business of manufacture and marketing of electro chlorination equipment. In or about the year 1989-90, the said defendant no.3 was floated as a joint venture in technical and financial collaboration with the De Nora group of Italy who held 51% of the equity share capital of the said defendant. Defendant No. 4 is a Private Limited Company incorporated under the Companies Act, 1956 and carries on business in electro chlorination equipments. It had a tie up with an American Company called “Exceltec Inc.” which was engaged in the business of electrolytic disinfection equipment. Defendant No.5 i.e. Capital Controls India Private Ltd. is a Company incorporated under the Companies Act, 1956 pursuant to the 6 joint venture agreements dated 16/11/1995 executed between the plaintiff and defendant no.9 on the one hand and the defendant nos.1 and 2 on the other. 50% of the share capital of defendant no.5 is held by the plaintiff and balance of 50% is held by defendant no.2. Thus, the plaintiff and defendant no.2 are the joint venture partners which have incorporated the defendant no.5 – company. Defendant Nos. 6 to 8 are the Directors of the defendant no.5 – company appointed by the Capital Controls Group with defendant no.7 as the Chairman but with no casting vote. Defendant Nos. 9 to 11 are the Directors of the fifth defendant – company nominated by the Kocha Group/Chloro Control Group and defendant no.9 is the Managing Director of the said joint venture. 4. Prior to the formation of the joint venture company, the Chloro Control Group carried on the business of manufacture and sale of gas chlorination equipments and from 1980 onwards it developed and commenced the manufacturing of electro chlorination equipment and the business was done in the name of “Chloro Controls Equipments Company”, a sole proprietary concern of defendant no.9 and it was the 7 distributor in India for the products of Capital Controls for more than a decade prior to the formation of the joint venture. It appears that the joint venture was incorporated on 14/11/1995. The joint venture agreements between the 1st/2nd defendants and the plaintiff/defendant no.9 executed on 16/11/1995 are as under:- Sr.No. Name of Agreement Parties Relevant Clause of Arbitration. 1. Shareholders Agreement Plff., D-2 & D-9 Clause 30 (Plaint Pg. 31) – ICC Arbitration at London 2. International Distributor D-1 and D-5 (No Arbitration Agreement Clause) Clause 21 (pg 44) - Subject to jurisdiction of any Federal Court located in Eastern District of the Commonwealth of Pennsylvania. 3. Managing Director’s D-5 and D-9 (No Arbitration Agreement Clause) 4. Financial and Technical D-1 and D-5 Clause 26 (pg.78) Know-how License - ICC Arbitration Agreement at London 5. Export Sales Agreement D-1 and D05 Clause 18 (pg 91) 8 Arbitration in accordance with the Rules of American Arbitration Asso- -ciation to be held at Pennsylvania, USA. 6. Trademark Registered D-1 and D-5 (No Arbitration User License Agreement clause) 5. As per the plaintiff, the main object of the joint venture and as mentioned in its Memorandum of Association is as follows:- “to design, manufacture, import, export, act as agent, deal in assembling, testing, erecting, servicing and marketing of gas and electro chlorination equipments.” The Shareholders Agreement is between the defendant no.2 on one hand and the plaintiff, represented through defendant no.9, on the other. The International Distributor Agreement is between defendant no.1 and defendant no.5. As per the said agreement, Capital Controls agreed to appoint the joint venture as a distributor in India of the products 9 manufactured by Capital Controls subject to the terms and conditions of the said agreement and it would normally be renewed as long as Capital Controls holds at least 26% of the shares in the joint venture. Whereas between defendant no.1 and defendant no.5 there are three more agreements i.e., (1) Financial and Technical Know-how License Agreement, (2) Export Sales Agreement and (3) Trademark Registered User License Agreement. Clause 14 of the Shareholders Agreement reads as under;- “14. Financial and Technical Know-how Licence Agreement Chloro Controls and Capital Controls shall together cause the Company to enter into the financial Technical Know- How License Agreement with Capital Controls attached hereto (hereinafter referred to as the License Agreement). Under the said License Agreement and subject to the terms and conditions specified therein, Capital Controls agrees to grant the Company the right and license to manufacture the Products in India in accordance with the Technical Know-How and other technical information possessed by Capital Controls. (the company means the 10 joint venture – defendant no.5)” It is the contention of the plaintiff that the Capital Controls granted an exclusive license to the joint venture to manufacture all its products in India and to sell them in India, Afghanistan, Nepal and Bhutan and the agreement was to remain in force for 10 years from the date it was filed with the Reserve Bank of India. Clause 2.4 and 2.5 of the Financial and Technical Know-how License Agreement read as under:- “2.4 Licensee agrees that it shall not during the terms of this Agreement manufacture or have manufactured for its, sell or offer for sale or be financially interested in any other venture for the manufacture and sale of any goods similar to the Products, without the prior written permission of Capital Controls. 2.5 During the term of this Agreement, Capital Controls and its affiliated companies shall sell the Products in India only through the Licensee.” 11 It is further contended by the plaintiff that between the products listed in the Financial and Technical Know-how License Agreement as well as the International Distributors Agreement, the complete range of the then existing chlorination equipments, including gas and electro chlorination equipments of Capital Controls was covered within the scope of the joint venture agreements and at the time of the execution of the joint venture agreements, the entire chlorination equipment business of Severn Trent was conducted through defendant nos.1 and 2 and Severn Trent had no existing or other business in chlorination equipments. In addition, it is also contended that at the relevant time Severn Trent conducted business in electro chlorination equipment of only one brand i.e. Hypogen, which was covered under the above International Distributors Agreement. As per the plaintiff it was also the intention of the parties that the business of the joint venture would include the entire range of chlorination business of Chloro Controls Equipment Company, including its range of electro chlorination equipments and similarly the entire range of chlorination equipments of Severn Trent was ultimately to be manufactured by the joint venture. In short, it is the claim of the plaintiff that the purpose of formation of the joint venture was to fuse and pool together the resources, technology and business in the entire 12 range of chlorination equipments, including electro chlorination equipments of Severn Trent (Capital Controls) with that of Kocha family/Chloro Controls Equipment Company. 6. On 26/2/1996 the joint venture company made an application to the Secretariat for Industrial Approval (SIA), Department of Industrial Development, Ministry of Industries for approval for the setting up of the joint venture company. The SIA granted its approval to the said proposal by letter dated 11/10/1996 and certain amendments were also approved by a further letter dated 21/4/1997. Consequent to this approval by the Government of India, a 7th Agreement called as “Supplementary Collaboration Agreement” (Exh. M) came to be signed between the parties. Based on the said agreement it is contended by the plaintiff that the joint venture agreements covered and were always intended to cover the manufacture and supply of electro chlorination equipments within the scope of business of the joint venture and it denies the contentions of the Capital Controls that the scope of the joint venture did not include dealing with the electro chlorination equipments. 7. The plaintiff alleges that a circular was issued by the first 13 defendant which was received by the joint venture on 1/2/1999 stating that Capital Control’s “Hypogen” brand of electro chlorination equipment was to be completely replaced by Exceltec’s “Omnipure” and “Sanilec” and upon such replacement, the joint venture was exclusively entitled to conduct the business in the said brands of “Omnipure” and “Sanilec” in India as well. The dispute between the parties thus centered around the range of products to be manufactured and marketed by the joint venture and the dispute is purely between the Chloro Controls/Kocha Group on one hand and the Capital Controls on the other hand. 8. The suit is filed by the plaintiff as a derivative action by a 50% shareholder of the joint venture company to correct and remedy the illegality /wrongs done to the joint venture by the Capital Controls/Severn Trent group. The crux of the suit, even as per the plaintiff, centers around the following main questions: (a) the scope of business of the joint venture company was restricted to gas chlorination equipment with the exception of one brand and electro chlorination equipment, viz. “Hypogen”, as alleged by the Severn Trent Group 14 Or Whether (b) the scope of business of the joint venture company covered gas chlorination equipment as well as the entire range of electro chlorination equipment of the Severn Trent group and the Kocha family, as contended by the Kocha Group. While the suit was pending, the Capital Control/Severn Trent Group issued the letter dated 21/7/2004 purported to terminate the joint venture agreements. It is the claim of the plaintiff that under Clause 21.2 of the Shareholders Agreement, the joint venture agreements are not terminable, save and except by the party not in default or breach of the terms of joint venture agreements fulfilling certain precise conditions set out in the said clause. He said termination has also been challenged in the suit. 9. In the said suit, Notice of Motion No. 778 of 2004 was taken out by the defendant no.1 under Section 8 of the Act. It is fairly conceded that the said Motion was required to be treated as the one under Section 45 of the Act. The Motion was opposed by the plaintiff and the learned Single Judge, by relying 15 upon the law laid down by the Supreme Court in the case of Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya and anr. [(2003) 5 SCC 531] held that different parties are signatories to different agreements and several parties to the suit are not parties to the agreements. Defendant Nos.3 and 4 are not parties to any of the joint venture agreements. The suit was filed by the plaintiff in their capacity as shareholders of defendant no.5 and not for themselves as parties to the joint venture agreements and it was filed for the benefit of defendant no.5 which is not party to the shareholders agreement and not party to the proposed arbitral proceedings. Though law laid down in the case of Sukanya is not distinguishable and squarely applies to the case, the entire subject matter of the suit is required to be the subject matter of the arbitration agreements and bifurcation of the subject matter of the suit is not contemplated while entertaining an application either under Section 8 or Section 45 of the Act. There is no provision for splitting the cause of action and referring the subject matter of the suit for arbitration. In short, the bifurcation of parties as well as bifurcation of the cause of action in the suit cannot be allowed. The learned Single Judge, therefore, held that there was no fit case to exercise jurisdiction either under Section 8 or Section 45 of the Act to refer the disputes in the suit for arbitration. 10. We are, therefore, required to consider whether the law laid down by 16 the Supreme Court in Sukanya’s case is applicable in the instant case and the view taken by the learned Single Judge in dismissing the Notice of Motion is sustainable. 11. It would be advantageous to reproduce the observations made by the Supreme Court in Sukanya’s case in para 12 to 17 as under:- “12. For interpretation of Section 8, Section 5 would have no bearing because it only contemplates that in the matters governed by Part I of the Act, the judicial authority shall not intervene except where so provided in the Act. Except Section 8, there is no other provision in the Act that in a pending suit, the dispute is required to be referred to the arbitrator. Further, the matter is not required to be referred to the Arbitral Tribunal, if (1) the parties to the arbitration agreement have not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. 17 This would, therefore, mean that the Arbitration Act does not oust the jurisdiction of the civil court to decide the dispute in a case where parties to the arbitration agreement do not take appropriate steps as contemplated under sub-sections (1) and (2) of Section 8 of the Act. 13. Secondly, there is no provision in the Act that when the subject matter of the suit includes subject matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators. 14. Thirdly, there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the court may refer the same to arbitration provided that the same can be separated from the rest of the 18 subject matter of the suit. The section also provided that the suit would continue so far as it related to parties who have not joined in such application. 15. The relevant language used in section 8 is, “in a matter which is the subject of an arbitration agreement”. The court is required to refer the parties to arbitration. Therefore, the suit should be in respect of “a matter” which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced - “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of section 8. The words “a matter” indicate that the entire subject matter of the suit should be subject to arbitration agreement. 16. The next question which requires consideration is --- even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under section 8 of the Act. In our view, it would be difficult to give an 19 interpretation to section 8 under which bifurcation of the cause of action, that is to say, the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language, it follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed. 17. Secondly, such bifurcation of suit in two parts, one to be decided by the Arbitral Tribunal and the other to be decided by the Civil Court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums.” 12. The Supreme Court held that there is no provision in the Act when 20 the subject matter of the suit includes subject matter of the arbitration agreement as well as other disputes, the matter is required to refer to arbitration and further there is no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrator. There is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. The provisions akin to Section 24 of the Arbitration Act, 1940 are not available in the Act. It would be difficult to give an interpretation to section 8 of the Act under which bifurcation of the cause of action, that is to say, the subject matter of the suit or in some cases bifurcation of the suit between the parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. It, therefore, follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed. Similarly, bifurcation of the suit in two parts i.e. one to be decided by the Arbitral Tribunal and the other to be decided by the Civil Court would inevitably delay the proceedings and thus the whole purpose of speedy disposal of disputes and decreasing the cost of litigation would be frustrated by such procedure. In addition, on occasions, there is a possibility of conflicting judgments and orders by two different courts. 13. As is clear from the above chart, the following three agreements 21 provide for a clause of arbitration: (a) Shareholders Agreement – signed between Defendant No.2 and the plaintiff, through Defendant No. 9. Clause 30 of the said agreement provides for ICC Arbitration at London. (b) Financial and Technical Know-how License Agreement – signed between Defendant No.1 and Defendant No.5. Clause 26 of the said agreement provides for ICC Arbitration at London. (c) Export Sales Agreement – signed between Defendant No.5 and Defendant No.1. Clause 18 of the said agreement provides for arbitration under the Rules of American Arbitration Association to be held at Pennsylvania, USA. The Supplementary Collaboration Agreement singed between Defendant No.2 and Defendant No.5 does not provide for an arbitration clause. Clause 30 of the Shareholders Agreement (between Defendant No.2 and plaintiff) is in paramateria with clause 26 of the Financial and Technical Know-how License Agreement (between Defendant No.1 and Defendant No.5). Clause 30 of 22 the Shareholders Agreement reads as under:- “Any dispute or difference arising under or in connection with this Agreement, or any breach thereof, which cannot be settled by friendly negotiation and agreement between the parties, shall be finally settled by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators designated in conformity with those Rules. The arbitration proceedings shall be held in London, England and shall be governed