Abstract
The present paper delves into an often-discussed question, whether oppression and mismanagement disputes are arbitrable. Public policy concerns are cited as the primary reason for justifying the non-arbitrability of oppression and mismanagement disputes. However, while offering such an argument, what needs to be considered is whether an allegation of oppression and mismanagement in itself amounts to oppression and mismanagement and thereby pushing the tribunal to give up its jurisdiction (which is perverse and completely against the principles of competence–competence). In this paper, a thorough analysis of the concept of arbitrability has been undertaken where arguments beyond the notion of arbitrability being limited to public policy considerations have been explored. The research specifically focuses upon how arbitrability grew in terms of a tribunal’s power vis-a-vis à statutory remedy (courts), by looking at the growth of antitrust and securities transaction disputes in the United States of America.
Introduction
Arbitration, as a dispute resolution method, has seen enormous growth in India over recent years. It has gone beyond the traditional realm of commercial and construction disputes (Law Commission of India, 2014). It is knocking at the gates of subjects/areas governed by specific statutes. Lately, arbitration has found relevance in corporate disputes which were exclusively decided by formal courts, until expressly referred to arbitration. The increasing use of arbitration attracts its own set of issues – the foremost being arbitrability of disputes already covered by statutory remedies. The primary concern of this paper is to address the traditional notion of subject matter arbitrability of disputes vis-à-vis the jurisdiction conferred upon the courts by the relevant enabling statute.
The most prominent debate is of arbitrability of disputes alleging oppression and mismanagement (O&M) under the Companies Act 2013 and Jaysimha and Tigadi (2018: 11). The law has elaborate provisions for the protection of the interest of shareholders (specifically of minority shareholders) in a company. The provisions arm the section of shareholders aggrieved by an unfair corporate management decision of the company. It provides for a petition for O&M under Sections 241 and 242 of the Companies Act. Due to the growing shareholder activism in India and the increasing use of arbitration, the Indian courts have repeatedly faced the question of arbitrability of disputes involving grievances of shareholders (Kumar, 2015: 202–208). Particularly, in the last 5 years, several conflicting judgments have been delivered on this issue alone. On the one hand, some judgments have given weightage to the arbitration clause and accordingly referred to the matter for arbitration. In contrast, few judgments have declared disputes involving O&M to be per se non-arbitrable. The incoherence in the jurisprudence on this issue has complicated the arbitration law regime in India.
The present paper delves into an often-discussed question, whether O&M disputes are arbitrable. Public policy concerns are cited as a primary reason for justifying the non-arbitrability of O&M disputes. However, while offering such an argument, what needs to be considered is whether an allegation of O&M in itself amounts to O&M and thereby pushing the tribunal to give up its jurisdiction (which is perverse and completely against the principles of competence–competence). This issue is further compounded by the fact that municipal courts and tribunals are also empowered under respective legislations to address intracompany disputes. This paper provides an academic framework to determine the appropriate forum for deciding intracompany disputes given the presence of conflicting laws. Essentially, this paper looks at pre-award arbitrability of O&M allegations and what is the interface of arbitration tribunals with courts in a dispute where there exists a statutory remedy as well.
The National Company Law Tribunal (NCLT) has been given wide powers for adjudicating allegations (The authors are of the opinion that the courts just ascertain whether an allegation constitutes O&M or not. Branding the allegation itself O&M is an incorrect approach adopted by various jurisdictions) of O&M under Sections 241 and 242 of the Companies Act (2013). NCLT is a quasi-judicial statutory body that has been established by the Companies Act (2013) itself. However, for a simple allegation to culminate into a conclusive determination of O&M, the fundamentals of O&M need to be mapped in the factual situation during the adjudication, irrespective of the forum. It is to be noted that the main adjudication by the NCLT is whether an act alleged is oppressive in nature. Reliefs against a dismissal have been prescribed within the Companies Act 2013.
In this paper, the subject of O&M has been approached primarily from a contract law perspective. The paper argues that wider reliefs in terms of compensation are available to the aggrieved claimant when the allegations are examined from the lens of contract law. It is trite law that the nature of the relationship between the company and a shareholder is contractual in nature and in almost all cases the shareholding agreement contains an arbitration clause.
In this paper, a thorough analysis of the concept of arbitrability has been undertaken where arguments beyond the notion of arbitrability being limited to public policy considerations have been explored. The research specifically focuses upon how arbitrability grew in terms of a tribunal's power vis-à-vis a statutory remedy (courts), by looking at the growth of antitrust and securities transaction disputes in the United States of America (USA).
The roadmap of discussion in the paper is as follows. The first part provides a primer on the contractual nature of the disputes pertaining to shareholder agreements and the opinions of various courts that have opined on this subject. The second part essentially looks at the concept of arbitrability as opposed to the notion of arbitrability (detached from public policy). The US perspective and the Indian perspectives on subject matter arbitrability have been assessed. The third part is dedicated to identifying what is O&M and the powers of the NCLT in terms of granting a relief have been discussed. The fourth part discusses the intersection of arbitration and O&M. The powers of the courts to refer parties to arbitration have been looked at on the basis of core and non-core issues in the Indian context.
Part I
Locating the contractual importance of shareholders agreement
It is a truism to note that claims of O&M emanate from the shareholders agreement (SHA). Therefore, any discussion on O&M must explore the nature of SHA as a document. In essence, the SHA is a contract executed between the shareholders of a company individually or as a group (Duffy, 2008). Typically, the SHA aims to impose obligations and confer rights on subjects that are ordinarily not covered by the company law.
With respect to the nature of the document itself, it is pertinent to mention that SHA is a private contract unlike the Articles of Association (AoA) which is a public document. As a consequence of being a private document, the applicability of the terms of the SHA is limited to only those who are parties to the contract. Radhakrishnan J. in Vodafone International Holdings B.V. v. Union of India [(2012) 341 ITR 1 (SC)] opines that:
… SHA is a private contract between the shareholders compared to Articles of Association of the Company, which is a public document. Being a private document, it binds parties thereof and not the other remaining (shareholders). Advantage of SHA is that it gives greater flexibility, unlike Articles of Association. It also makes provisions for resolution of any dispute between the shareholders and also how the future capital contributions have to be made.
As SHA is aimed at providing the effective mechanism for the internal management of the company, it is but natural that it assumes central importance whenever there is any allegation of O&M. However, given the wider ambit of the SHA is to complement the necessary protections given in the company law, the contractual nature of the SHA is not given due consideration [Mafatlal Industries Ltd v. Gujarat Gas (1999) 97 Comp Cas 301 (Guj. HC)].
In Scally v. Southern Health ([1992] 1 AC 294), Lord Bridge held that the SHA is a ‘definable category of contractual relationship’. Unfortunately, this particular characteristic of SHA of being a contract does not find much merit in judicial decisions, most pertinently after the Supreme Court's decision in V.B. Rangaraj v. V.B. Gopalakrishnan (AIR [1992] SC 453), which has looked at the SHA from a company law perspective. In the aforementioned case and decisions after Rangaraj [Madhusudan v. Kerala Kaumudi (2004) 9 SCC 204; Pushpa Katoch v. Manu Maharani (2006) 131 Comp Cas 42 (Delhi HC)], the courts have held that an SHA that puts a fetter on the management of the affairs of the company is not considered binding on the company, unless the provisions of the SHA are not incorporated into the AoA [IL and FS Trust Company Ltd v. Birla Perucchini Ltd, [2004] 121 Comp Cas 335 (Bom)]. This interpretation, although affirmed by Supreme Court and various High Courts, has been heavily criticised (Singh, 2009).
The reason why it is important to relook at the jurisprudence post-Rangaraj is that companies usually consist of or involve a multitude of parties, such as shareholders, management, the company as a legal entity, creditors and employees. This means that the various subject matters may be contested among shareholders, between shareholders and the company, or the company and its management. By contrast, the classic form of commercial arbitration often is conducted between two parties to a particular contract. Thus, where arbitration involves a multitude of parties and the decision of the tribunal affects other than the disputing parties (in rem or inter omnes effect), the question arises how the sometimes-rigid principles of corporate law can be reconciled with the concepts and confines of arbitration.
A common strand of argument that attacks the in personam nature of the Shareholder Agreement is that statutory law such as Securities and Exchange Board of India regulations, Companies Act 2013 and other public law provisions are invariably attracted. However, various judgments from different jurisdictions [Woolcock v. Bushert (2004) 246 D.L.R. (4th) 139] have noted that the applicability of public law provisions in itself does not take away from the contractual nature of SHA that could be resolved among parties. As a matter of public policy, the legislative branch can regulate the adjudication of a certain class of cases (Manzoni, 1985: 454). Consequently, disputes which involve rights in rem cannot be referred for arbitration [Booz Allen & Hamilton Inc v SBI Home Finance and Ors (2012) 173 CompCas 184 (SC); Horton, 1977: 76] because such disputes can affect third party rights [Chiranjilala Shrilal Goenka v Jasjit Singh & Ors 1993 SCC (2) 507]. Those disputes involving rights in personam can be referred to arbitration because they only impact the rights of the parties which are part of the agreement [HDFC Bank Ltd v Satpal Singh Bakshi 193 (2012) DLT 203]. In the case of Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd [(1996) 39 NSWLR 160], Justice Austin observes that:
I would not regard these public policy considerations as preventing parties to a dispute from referring questions to arbitration merely because those questions arise under the Corporations Act. I see nothing special about the Corporations Act that would distinguish it, as a whole, from other legislation such as the Trade Practices Act. [emphasis added]
The nature of the SHA is such that only contractual remedies can be granted. Therefore, for an arbitration tribunal, there would always be cases where certain remedies are beyond the scope of its jurisdiction. However, does it take away the contractual aspect of the Shareholder Agreement to the extent that it relegates into a statutory contract empowering the judicial tribunal to exercise jurisdiction?
The Singaporean Court in the decision of Fulham Football Club (1987) Ltd ([2011] EWCA Civ 855) citing the Canadian Court decision (Singh, 2009) provides a quote to appreciate the present discussion. The Fulham court opined that ‘the fact that part of the dispute among the parties involves oppressive conduct does not preclude resort to arbitration where the dispute is captured by an arbitration agreement made by the parties’.
Specifically, on the aspect of O&M, a wide array of cases could potentially constitute O&M, such as (a) excluding the director of a family company from being involved in management decision [Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688], (b) directors issuing shares to themselves in contradiction to the SHA to outvote shareholders [Hannes v MJH Pty Ltd (1992) 7 ACSR 8] or (c) major shareholders diverting business opportunities to themselves [Scottish Co-operative Wholesale Society Ltd v Meyer (1959) AC 324]. A decision by the High Court of Australia [Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359], provides a useful example in looking at the claims of ‘oppression’ through the lens of a contractual dispute and thereby, awarding a contractual remedy of damages. While the fact situation is elaborate in detail, in sum it is important to note that the applicants had alleged ‘oppression’ through misleading or deceptive conduct claims in contravention to the ‘share sale agreement’ entered into between three companies. The misleading or deceptive conduct was carried out that excluded the participation of a company despite the shareholder agreement to the contrary. The court proceeded to pay contractual damages to the applicant, keeping in mind the contractual nature of the shareholder agreement. Through an extensive analysis of industry practice [Elson, 1967: 449], it has been argued that shareholders’ agreement rather than perpetuating the notion of ‘tyranny of the majority’ could to the contrary, ensure that the minority interests of the company can be safeguarded.
The legislative scheme in the Indian context is quite clear. Section 244(1) of the Indian Companies Act, 1956, specifically requires a waiver to be granted by the Court upon which the judicial tribunal may decide upon the case. Therefore, a careful judicial adjudication in every case needs to be undertaken to decide whether a statutory tribunal's intervention is necessary. It is only in extraordinary cases that the Court is clothed with the judicial power to adjudicate. This statutory arrangement buttresses the argument that in cases where the dispute is merely contractual in nature such as the removal of a director, the contract that is SHA must be given due preference and importance. Vodafone International Holdings B.V. v. Union of India.
The authors do not embark on the argument that the arbitral nature of the dispute per se does not warrant any judicial intervention. On the contrary, there are sufficient available avenues through and post the arbitral proceedings wherein judicial doors can be knocked through different provisions of the Arbitration Act, 1996.
Arbitrability – the concept
Arbitrability is the capability of a dispute to be resolved via arbitration (Gailard and Savage, 1999: 311). It is of two types: objective and subjective. The former bars the adjudication of certain subject matters via arbitration (arbitrability rationae materiae), the latter envisages the authority of the State to disallow state entities into arbitration agreements or may require an authorisation to do so (arbitrability rationae personae) [Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688: 312, 313]. Fouchard Gaillard Goldman very succinctly put the difference as ‘… first that the agreement must relate to the subject matter which is capable of being resolved by arbitration and, second, that the agreement must have been entered into by parties entitled to submit their disputes to arbitration.’ Objective arbitrability can be considered as the conflict between the will of the parties expressed in an agreement to arbitrate, with the laws governing the subject matter viz. jurisdiction of the domestic courts to decide an issue arising out of that contract (Mistelis, 2009).
Municipal laws impose certain restrictions on party autonomy regarding the reference of a particular dispute to arbitration [For instance, all disputes pertaining to an economic interest are arbitrable in Germany (which includes insolvency), which is not arbitrable in India]. The private nature of arbitration may have certain public policy repercussions, especially at the time of enforcement of awards (Redfern et al., 2015). It is characteristic of domestic laws to confer exclusive jurisdiction to courts to decide on such issues, for instance, criminal laws (Lew et al., 2003). An award adjudicating such disputes is not recognised in that jurisdiction hence cannot be enforced, hence considered non-arbitrable (Lew et al., 2003). For instance, disputes pertaining to insolvency, intellectual property, securities transactions, tax, etc. may be arbitrated upon in certain jurisdictions where the domestic laws permit. Since the parties have chosen a seat of arbitration, it may well be so that the public policy of one country is being decided in a third country. However, ‘the scope of objective non-arbitrability largely depends upon on the confidence placed in arbitration as a dispute resolution mechanism’ [Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688]. For instance, in Reliance Industries Ltd [Civil Appeal No. 5675 of 2014], the Supreme Court of India decided the correctness of the decision of the Delhi High Court setting aside a partial award passed by a three-member tribunal seated in London. The tribunal while deciding its jurisdiction had held that issues pertaining to royalties, cess, service tax and comptroller and auditor general audit were arbitrable in London as opposed to the respondent's claim that tax as a subject matter was not arbitrable in India and the law governing the arbitration agreement and the law governing the contract was subject to the laws of India. The Supreme Court while setting aside the Delhi High Court Judgement sided with the partial award, stating that the parties had chosen the seat to be London.
The aspect which should be noticed is whether the arbitrators are obliged to consider the grounds which constitute public policy of a different country. This issue needs to be considered because the parties have expressly chosen a distinct law and forum to govern their disputes and are now subject to the choices made. Does the choice then cast an obligation upon the tribunal to render an award considering the public policy of a third country? The answer could be found out only at the stage of enforcement at the place whose public policy was sought to be adjudicated before the tribunal seated elsewhere. However, tribunals ought to take into consideration all the relevant facts while adjudicating a claim, which has often led to a debate on the arbitrator's responsibility to render an enforceable award (Brekoulakis, 2009; Boog and Moss, 2013: 647–658).
The notion of objective arbitrability has been generally aligned with public policy considerations which are to be construed very narrowly [Associate Builders v. DDA (2015) 3 SCC 49] because a broad interpretation of public policy will adversely affect the enforcement of foreign awards. Therefore, it should be restricted to situations where ‘the enforcement would violate the forum state's most basic notions of morality and justice’ [Campbell v Backoffice Investments Pty Ltd (2008) 66 ACSR 359]. Given that, public policy has to be construed narrowly, the arbitrability of a specific dispute should not be tested solely on its basis. This discussion is relevant not only for the purposes of the present paper but also for exploring another facet of arbitrability, which is the interface between the courts and a tribunal.
In international arbitration, objective arbitrability can be bifurcated into pre- and post-award. Pre-award arbitrability pertains to the restrictions imposed by the laws of the seat on subject matter arbitrability (objective arbitrability). For instance, disputes pertaining to antitrust issues are arbitrable in the USA but not in India. Hence, an award rendered in arbitration proceedings conducted in the USA will be recognised and enforceable at the seat. However, it cannot be enforced in India owing to public policy considerations, as enshrined in Article V(2)(b) of the New York Convention. Post-award arbitrability is the review of the award by the municipal courts of the jurisdiction where the award is sought to be enforced. To understand pre-award arbitrability, emphasis must be laid on the fact that states may reserve certain areas for the courts to adjudicate, however, given the presence of an arbitration agreement, the arbitral tribunal (hereinafter referred to as tribunal) should be permitted to hear the disputes involving a question of violation of public policy. The state courts always retain the right to set it aside in case a challenge is brought. Pre-award arbitrability essentially rebuts the presumption that arbitrators are ill-suited to ‘uphold the requirements of international public policy’ [Hannes v MJH Pty Ltd (1992) 7 ACSR 8]. This implies that tribunals while dealing with cases where a certain subject matter has been reserved by the municipal legislation to be adjudicated by the courts, owing to their competence to rule on their own jurisdiction, should initially determine the merits of the dispute and the validity of the arbitration agreement.
A classic example of pre-award arbitrability and competence–competence is Judge Lagergren's opinion in ICC case No. 1110 (Argentine Engineer v. British Company ICC case No. 1110) where non-arbitrability of bribery was in question. He held that neither the French law as the law of the seat nor Argentine law as the law governing the contract would allow the disputes to be arbitrated (Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [(1998) 28 ACSR 688: 213]. He held:
Judge Lagergren's finding is not only relevant from the perspective of the non-arbitrable nature of a bribery allegation (weighed and considered properly) but also relevant from the power of the tribunal to decide its own jurisdiction having assessed the allegations levelled. At the cost of repetition, it is opined that while before a tribunal a dispute involving allegations of fraud, corruption, court provided remedy, etc. does not automatically become non-arbitrable, the intent of the parties enshrined in the arbitration agreement should be respected (Model Law Article 16 enshrines Competence–Competence with Separability, also see Section 16, Arbitration & Conciliation Act, 2015). Absent this power, a recalcitrant party may easily frustrate the arbitral adjudication by raising jurisdictional issues as dilatory tactics. It is not possible to reject a claim on the basis of merely an allegation without verifying the antecedents of the objections.
The above discussions ensue that arbitrability encompasses the capacity of a tribunal to render a valid and enforceable award thereby adequately remedying the grievances of the parties (Redfern et al., 2015). This becomes important in situations (contractual/commercial nature of a transaction) where a contract espouses an arbitration clause yet there exists a remedy before the courts. The party which has already entered into an arbitration agreement may seek remedies beyond the powers of the arbitration tribunal (Redfern et al., 2015). For instance (for the purposes of the present paper one may consider), a Share Purchase Agreement may contain an arbitration clause that is valid and workable. However, at the stage of invoking the clause, it is realised that the company has committed certain other breaches and insolvency proceedings have been initiated. Alternatively, a dispute arising out of the same Share Purchase Agreement may give rise to allegations of O&M. In such situations, although the arbitration agreement would be valid and workable, the relief sought cannot be given by the tribunal owing to the contractual nature of the arbitration.
The issue of whether the dispute is capable of being resolved by arbitration falls within the sole jurisdiction of the tribunal and no other adjudicatory body until the arbitration agreement is illegal or incapable of being performed can look into the underlying dispute, the principle of competence–competence finds its applicability in this context. The jurisdiction of an arbitrator can be established only by a valid agreement of the parties, whereas jurisdiction of the courts in insolvency or a motion alleging oppression and mismanagement is determined by legislation (Liebscher, 2009: 165). The competence of the tribunal to adjudicate the dispute depends upon whether the dispute is arbitrable or not. What needs to be noted here is the concept of pre- and post-award arbitrability which is where the above stratification becomes important. Arbitration as a process or as a dispute resolution mechanism is not flawed or inappropriate, it is because of the inherent structural (privity of contract) shortcoming that insolvency disputes are considered inarbitrable [Argentine Engineer v. British Company ICC case No. 1110]. Since arbitration proceedings can take place only between the parties to the arbitration agreement, disputes such as insolvency which involve third party rights cannot be appropriately adjudicated and reliefs cannot be granted to all aggrieved. Professor Brekoulakis suggests
The negative repercussions of non-collective proceedings in this case would extend way further than in the case of other types of multiparty disputes, such as construction or maritime disputes. The mandatory centralisation of insolvency disputes seems more reasonable. This does not mean that ‘public policy’ considerations would enter again ‘through the back door’. The primary reason for inarbitrability remains the fact that arbitration has inherent difficulties to reach out beyond its contractual boundaries. As is accepted, if all the relevant parties agreed to submit to arbitration, insolvency or intra company disputes would be perfectly arbitrable (Redfern et al., 2015).
Gailard and Savage (1999: 569) have argued that while adjudicating upon a question of whether antitrust or securities law are arbitrable, the question of the invalidity of the arbitration agreement should be decided by the arbitrators first and should not be considered non-arbitrable as a matter of principle.
The arbitrators can rule on the merits of the dispute and if need be declared a contract contravening the requirements of public policy to be void, without holding the arbitration agreement which is autonomous to be invalid (Gailard and Savage, 1999: 311).
In cases of a challenge to the arbitrability of a dispute, the tribunal should have the first word on its jurisdiction. If a court provided remedy exists, the arbitration agreement is not automatically invalidated.
Part II
The US Perspective
A mere claim that an issue is inarbitrable will not bar the tribunal from looking into the substance of the allegations. The present portion discusses in greater detail how the wider import of arbitrability in the USA has created landmark jurisprudence and has paved the way for certain issues inarbitrable to be arbitrable. The graduation of disputes pertaining to securities and antitrust has been discussed in detail to examine how the US courts have evolved. This comparative discussion is essential from the Indian perspective, as India strives to be acknowledged as a pro-arbitration jurisdiction (Debroy and Jain, 2015).
To understand the US perspective, no discussion would ever be complete without referring to the landmark First Options case. In First Options Chicago vs. Kaplan [514 U.S. 938 (1995)], a dispute emanated from a ‘workout agreement’ comprised four documents governing the working out of debts to First Options that the respondents incurred as a result of a stock market crash in 1987. In 1989, after entering into the agreement, the Respondent lost an additional $1.5m. First Options then took control of liquidated certain assets held by the Respondents and demanded the payment of the entire debt. When the demands were not satisfied, First Options sought arbitration by a panel of the Philadelphia Stock Exchange. The respondent had signed only that document (out of four) which contained the arbitration clause. Written objections on the grounds of arbitrability were filed before the tribunal by the Respondents. The arbitrators decided that they had the power to rule on the merits of the disputes, thereby rejecting the objections.
The Respondents subsequently approached the Federal District Court which confirmed the award. The Court of Appeals held that the dispute was not arbitrable. The Supreme Court while assessing the Court of Appeals’ order framed two questions: First, whether the parties have referred the question of arbitrability to be decided by the arbitrators. Second, who primarily should decide arbitrability. It was held ‘courts should not assume that the parties agreed to arbitrate arbitrability unless there is clear and unmistakable evidence that they did so.’ [First Options Chicago vs. Kaplan [514 U.S. 938 (1995): 944] The court held: ‘… who (primarily) should decide arbitrability’ question is rather arcane. A party might not focus upon that question or upon significance of having arbitrators decide the scope of their own powers.” This was in contrast (Shore, 2009) to the presumption in favour of arbitration where there is ambiguity in the scope of a valid arbitration agreement.
First Options puts forward the broad view adopted by courts in the United States (US) on questions of arbitrability. A discussion on arbitrability of antitrust issues especially in light of Mitsubishi v. Soler [473 US 614 (1985)] and the graduation of non-arbitrability of securities transactions from Wilko v. Swan to Rodriquez de Quijas and Shearson/American Express Inc. v. McMahon will explain how objective arbitrability has evolved in the US.
The decision in Soler shows that the courts (post-award stage) are ready and willing to uphold and confirm arbitration awards on issues pertaining to economic policy, which are considered to fall within the sole jurisdiction of national courts. In Soler, the US Supreme Court held that in contracts affecting international business, the tribunal could determine antitrust issues and rejected arguments that antitrust disputes cannot be resolved via arbitration as they require a sophisticated legal and economic analysis and are too important to be determined by arbitrators (Lew, 2009). The dispute arose out of a distributorship agreement between Chrysler International and Soler, wherein Soler was to sell automobiles manufactured by Mitsubishi Motors (a Joint Venture between Chrysler International and Mitsubishi Heavy Industries) within a designated area. On the same date, the parties entered into a Sales Procedure Agreement (SPA) which, referring to the Distributorship Agreement provided for direct sale of Mitsubishi products to Soler and governed the terms and conditions of such sale, importantly the SPA included an arbitration clause, which read as –
All disputes controversies or differences which may arise between Mitsubishi and Soler out of or in relation to Articles I-B through V of this Agreement or for the breach thereof, shall be finally settled by arbitration in Japan in accordance with the rules and regulations of the Japan Commercial Arbitration Association.
After successfully selling cars, Soler could not maintain the desired sale expectations. It sought to extend the sale from the designated area but was refused. Aggrieved by this, Soler brought court proceedings against Chrysler in Puerto Rico for a breach of the Sherman Act and Chrysler sought a stay of the court proceedings in favour of arbitration in Japan. The US Supreme Court held:
There is no reason to assume at the outset of the dispute that international arbitration will not provide an adequate mechanism. To be sure, the international tribunal owes no prior allegiance to the legal norms of particular states; hence it has no direct obligation to vindicate their statutory dictates. The tribunal, however, is bound to effectuate the intentions of the parties. Where parties have agreed that the arbitral body is to decide a defined set of claims which includes as in these cases, those arising from the application of American Antitrust law, the tribunal therefore should be bound to decide that dispute in accordance with the national law giving rise to the claim.
However, although the argument is convincing and upholds the intent of the parties to arbitrate, it presumes that the enforcement shall take place in the US, because the losing party may have assets located in other countries [Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (1998) 28 ACSR 688: 203].
Similarly, on issues pertaining to securities transactions, there is an intersection of national laws regulating the market and providing certain remedies against breaches on the one hand and independent agreements containing arbitration clauses on the other. In Wilko v. Swan [36 US 427 (1953)], the US Supreme Court held that claims under the Securities Act 1933 were not capable of being resolved by arbitration and had to be referred to the courts, as arbitration offered the parties ‘less protection of their statutory rights than the courts’ (emphasis applied). The court essentially focused on the ‘inadequacy of arbitration when compared with statutory remedies’ (emphasis applied). However, in Scherk v. Alberto-Culver Co [417 US 506 (1974)], the dispute arose out of a cross-border transaction between a German citizen and a US Company. Highlighting the international nature of the transaction, the US Supreme Court held that while purely domestic claims cannot be arbitrated, international claims can be. Justice Stewart, delivering the opinion of the Court held:
A parochial refusal by the courts of one country to enforce an international arbitration agreement would not only frustrate these purposes but would invite unseemly and mutually destructive jockeying by the parties to secure tactical litigation advantages. In the present case, for example, it is not inconceivable that if Scherk had anticipated that Alberto-Culver would be able in this country to enjoin resort to arbitration he might have sought an order in France or some other country enjoining Alberto-Culver from proceeding with its litigation in the U.S.A.
Later in Shearson/American Express Inc. [482 US 220 (1987)], all federal securities disputes were declared arbitrable. What needs to be noticed again is the fact that in Scherk, the US Court presumed the enforcement proceedings to take place in their jurisdiction solely based on the reason that one of the parties Alberto-Culver was an American company. US Courts despite the inherent limitation of arbitration as a dispute resolution mechanism in Antitrust and Securities disputes have recognised the tribunal's power to adjudicate. The recognition as observed in Soler respects the intention of the parties to refer the dispute to arbitration and have restrained from interrupting the tribunal's power to assess pre-award arbitrability.
Arbitrability in India
The wider ambit of arbitrability in the US as seen above and the development of jurisprudence recognising the authority of the arbitrators (although post-award) categorically shows that courts have harmonised the issues of objective arbitrability in domestic and international arbitrations. A caveat indeed exists with respect to the presumption of enforcement [Scherk v. Alberto-Culver Co. 417 US 506 (1974)], which finds similarity in the pre-Balco [Bharat Aluminium v. Kaiser Technical Services, Civil Appeal No. 3678 of 2007] judgements rendered in India. Reference being had to the arguments made by the Union of India in the Reliance (Civil Appeal No. 5675 of 2014) matter, wherein issues of royalty, cess and service tax were subject to arbitration and a plea with respect to non-enforceability was taken before the Supreme Court. The discussion in the present portion pertains to the decisions rendered by the Supreme Court of India on objective arbitrability of certain types of disputes.
The Booz Allen judgement is a benchmark while assessing questions of arbitrability. It categorises arbitrability on the basis of rights in rem and rights in personam. In Booz Allen, the scope of Section 8 of the Arbitration and Conciliation Act (Section 8, Arbitration and Conciliation Act 2015) was in question where disputes pertaining to the mortgage of a property were in question. Two properties were mortgaged with the Respondent, and the Respondent had filed a suit before the Bombay High Court for the realisation of certain debts against the defendants before the High Court and the Appellant's possession of the property in question. Booz Allen contended that the parties be referred to arbitration because the deposit agreement consisted of an arbitration clause; however, this request was rejected by the Bombay High Court. The High Court was of the opinion that the arbitration clause did not cover the dispute and it was not under the purview of the Appellant to refer the case for arbitration since he had already submitted to the jurisdiction of the High Court when he had filed a detailed reply to the notice by State Bank of India (SBI).
The Supreme Court while deciding whether the matter as contended was arbitrable and, whether the tribunal would have the competence to decide the dispute, held, that the parties to the suit were parties to the main agreement, which contains the clause of the settlement of disputes by way of arbitration. The clause provided for arbitration of disputes relating to the creation of charge over flats and shares and their enforcement. Therefore, SBI required a vacancy for the said flat. Hence, all the contested claims fall within the ambit of the arbitration clause of the tripartite deposit agreement.
While adjudicating on the question of arbitrability, the court held that in cases where an application under Section 8 has been filed in a pending suit, questions of arbitrability are to be decided by the court before which the suit is pending, if the subject matter is capable of being resolved only by a public forum and the relief claimed can be granted by a special court or a tribunal, irrespective of the existence of a valid arbitration clause. The court while explaining the concept of arbitrability, held that it has three facets, viz.
Whether the disputes are capable of settlement by arbitration? Whether the disputes are covered by the arbitration agreement? Whether the parties have referred the dispute to arbitration?
The court held that the legislature reserves a certain category of disputes to be adjudicated by the courts as a matter of public policy. The court provided a list of non-arbitrable matters, such as Criminal Offences, Matrimonial Disputes, Guardianship matters, Insolvency and Winding-up matters, testamentary and eviction or tenancy-related matters. The reasoning adopted by the court was that these cases related to actions in rem and the remedies available were exercisable against the world at large. However, actions in personam could be adjudicated in private for such an arbitration. The court, however, distinguished the present dispute with an action for winding up of to be referred to an arbitrator. It referred to Haryana Telecom Ltd v Sterlite Industries India Ltd [(1999) 5 SCC 688] wherein an application under Section 8 was filed before the High Court, for referring a winding-up matter to arbitration, it was held that a winding-up matter is not for money and the subordinate court had rightfully rejected the application.
The test of right in rem and right in personam for deciding arbitrability, as laid down by the Supreme Court in Booz Allen, once compared with the US approach seems to be narrower while granting powers to the arbitrators to decide on their own jurisdiction. A discussion on the arbitrability of fraud, Intellectual Property and Consumer Disputes shall establish the Indian approach towards arbitrability.
In Swiss Timing [(2014) 6 SCC 677], the Supreme Court while deciding issues pertaining to reference to arbitration and appointment of an arbitrator where simultaneous criminal proceedings were pending, held that registering a criminal case, on the grounds of fraud, collusion, corruption is not an absolute bar to refer disputes to arbitration. The court held [Swiss Timing Limited v. Commonwealth Games Organising Committee 2020 (2014) 6 SCC 677: 28] that shutting arbitration at the initial stages would frustrate the reason for which the parties had entered into an agreement to arbitrate. The court considered the possibility of the accused being acquitted at the end of the criminal proceedings, which will render no challenge open on the grounds of the agreement being void. However, in Aiyyasamy [(2016) 10 SCC 386] a two-judge bench of the Supreme Court categorised fraud in two ways – ‘simple allegations of fraud’ and ‘serious frauds’. ‘Simple allegations of fraud’ were held to be those which only relate to internal affairs of the parties inter se without any implication in the public domain. In such cases, the arbitration clause need not be avoided and therefore, arbitration could be resorted to. However, the Court specifically held that cases of serious fraud, for instance, those which make out a criminal case, are inarbitrable in domestic arbitrations. It is argued that this stand of the Indian Supreme Court is anomalous because in World Sport Group Limited v MSM Satellite [(2014) 11 SCC 639] it was held that disputes involving fraud in foreign seated arbitrations are arbitrable. This distinction on the grounds of the seat is unjustified as the competence of the tribunal to enquire into the existence question of fraud is inherent.
In December 2020, the Supreme Court of India revisited the stand taken in Ayyasamy in the case of Vidya Drolia v. Durga Trading Corporation (2020 SCC OnLine SC 1018). In this case, the Supreme Court responded to the two major justifications which are forwarded in support of non-arbitrability of fraud. This judgement is significant as it has sought to address a long-standing debate around the arbitrability of disputes relating to fraud. The Court has affirmed the presumption in favour of arbitrability in cases involving fraud.
For consumer disputes, the Supreme Court in Aftab Singh [(2019) 12 SCC 751] held that where a consumer complaint has been filed, the parties shall not be referred to arbitration despite the existence of an arbitration agreement. The court was of the opinion ‘In the event a person entitled to seek an additional remedy provided in a statute does not opt for the additional/special remedy and he is a party to an arbitration agreement there is no inhibition in disputes being proceeded in arbitration. It is only the case where specific/special remedies are provided for and which are opted by an aggrieved person that judicial authority can refuse to relegate the parties to the arbitration’ [Emaar MGF Land Ltd v Aftab Singh (2019) 12 SCC 751: 28]. This approach of the court focuses on special legislations and the remedies provided therein and most importantly the appropriateness of the forum, without delving into the question of the capacity of the dispute to be decided by arbitration (objective arbitrability).
The Bombay High Court in Eros International Media [(2016) 6 Bom CR 321] was deciding a matter where a suit was filed as a copyright action. An application was filed for referring all the disputes arising out of a term sheet to arbitration. The court while referring all the disputes to arbitration held that it would be an incorrect approach to see ‘intellectual property’ statutes distinct from the ‘general body of law’. The judge recognised that such rights are special in nature, however, ‘they are a species of property and share much with their more tangible cousins to whom acts such as the Sale of Goods or the Transfer of Property Act apply’. On the nature of provisions that specify a particular hierarchy of courts to decide such cases, it was held such provisions do not confer any exclusivity on a forum and it would be incorrect to infer that such provisions can oust the application of a complete statute. It was held that such provisions do not comment on the arbitrability of a dispute, for arbitrability to be decided, the nature of the claim must be looked at [Eros International Media [(2016) 6 Bom CR 321: 16].
The Indian take on objective arbitrability seems to be more in the form of Section 8 applications, where the courts have relied upon the effect of the action (in rem or personam). It was in Reliance judgement that an award on the grounds of inarbitrability of tax disputes was sought to be set aside and the tribunal's competence to rule on its own jurisdiction was recognised. The authors opine that ‘competence–competence’ and objective arbitrability are not dependent on court recognition, they exist independently of the courts and are inherent to the arbitration, limits can be imposed only on the subject matter and not the concepts per se. Approaches such as the one in Eros as mentioned above should be promoted where the mere existence of a legislative provision should not be the criterion for deciding arbitrability rather the nature of the claim. This approach in Eros garners support from Swiss Timings [Swiss Timing Limited v. Commonwealth Games Organising Committee 2020 (2014) 6 SCC 677: 78], where the court assesses the nature of the claims and distinguishes the two proceedings. Importantly, it recognises that declaring the claim as inarbitrable and referring the matter to a criminal court would be incorrect as the Criminal court may find the accused not guilty.
Part III
Claims of O&M
Oppression generally takes place where a minority shareholder is subjected to unfairness or prejudice by a majority shareholder as a result of the abuse of majority power or control over the company. Typically, cases of oppression involve one shareholder arm twisting the other, either in relation to running the operations of the company or taking (or refraining from taking) actions that result in causing prejudice or other harm to the interests of the minority, resulting in a deadlock or a breakdown in the relationship between the shareholders. Any act of oppression is contextual and relative to the facts and circumstances of each case. What may constitute as oppression in one case may not amount to oppression in other cases. Accordingly, depending on the facts and circumstances of a particular case, there can even be an oppression of the majority by the minority.
The ‘Majority Rule’ as laid down in Foss v Harbottle [(1843) 67 ER 189], the proposition is to the effect that decisions and choices of the majority will always prevail over that of the minorities. The Court itself acknowledges this saying:
The corporation, in a sense, is undoubtedly the cestui que trust; but the majority of the proprietors at a special general meeting assembled, independently of any general rules of law upon the subject, by the very terms of the incorporation in the present case, has power to bind the whole body, and every individual corporator must be taken to have come into the corporation upon the terms of being liable to be so bound.
However, there are certain exceptions to the rule in Foss v. Harbottle, where litigation will be allowed. These are:
Ultra vires and illegality [Smith v Croft (No 2) and Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR 237, 252-59 (per O’Brien LC and Holmes LJ]. Actions requiring a special majority (Edwards v Halliwell [1950] 2 All ER 1064). Invasion of individual rights [Pender v Lushington (1877) 6 Ch D 70, per Jessel MR]. Frauds on the minority [Atwool v Merryweather (1867) LR 5 EQ 464n, per Page Wood VC; Gambotto v WCP Limited (1995) 182 CLR 432 (Aus) Daniels v Daniels (1978)].
Foss v Harbottle leaves the minority in an unprotected position. Law has compensated by providing statutory exceptions providing some protection for the minority. By far and away the most important protection is the unfair prejudice action in Sections 994–996 of the UK Companies Act 2006 (2006 Act) and Section 232 of the Australian Corporations Act 2001. The New Companies Act, 2013 (2013 Act) appears to use the same provision.
In the Indian context, the 2013 legislation under Section 241 deals with both O&M and is in fact, a combination of Sections 397, 398 and 401 of the Companies Act, 1956. Section 241(1)(a) of the 2013 Act addresses complaints on the conduct on the company's affairs, which are ‘prejudicial’ to the public interest or the company or prejudicial and oppressive to the members. Section 241(1)(b) of the 2013 Act addresses complaints arising out of a change in management or control in the company, which is likely to be prejudicial to the members or the company. Section 242 of the 2013 Act sets out the power of the Tribunal when hearing a petition under Section 241 of the Act, and combines the provision of Sections 397(2), 398(2), 402 and 403 of the 1956 Act. Section 242(1) of the 2013 Act gives the Tribunal a wide array of powers to decide on such disputes.
Ingredients of oppression and mismanagement
Both the Companies Act, 1956 and 2013 do not define ‘oppression’, however, provisions for statutory protection were made against the same, Section 397 of the 1956 Act and Section 241 of the 2013 Act. The lack of a definition allows the court to decide on the existence of oppression on the basis of the facts of each case while complying with the relevant provisions. In Shanti Prasad (AIR 1965 SC 1535: 14 & 17), reference was made to Harmer's case [(1958) 3 All ER 689], in which they held that ‘the word “oppressive” meant burdensome, harsh and wrongful’. The courts in Shanti Prasad laid down that for a petition under Section 397, the existence of just and equitable cause for winding up the company is compulsory but not enough. The petitioner(s) must show that the conduct of the majority shareholders was oppressive towards the minority members. This creates a requirement for the events to be considered in continuity as part of a consecutive story and not in isolation. Therefore, alleged acts of oppression must be continuous till the date of the petition. It should substantiate that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless lack of confidence arises from the oppression of the minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing with a member in the matter of his proprietary rights as a shareholder.
Likewise, ‘Mismanagement’ is also undefined in both Acts. Some instances of mismanagement are the absence of basic records; failure to hold a general meeting for the purposes of adoption of accounts; failure to get their accounts audited; and failure to file required documents with the Registrar of Companies (Dugar, 2010: 6).
In Needle Industries [(1981) 3 SCC 333], the courts held that the person complaining of oppression must show that they have been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. Additionally, the SC held that even if the company petition were to fail to succeed in making a case of oppression, the court could still proceed to act to bring justice between the parties and that the act of oppression should be continuous and continue till the date of filing of the petition.
Additionally, recent judgements may be considered which clarify the said issue. Deepak Shriram v. General Sales Ltd [(2002) 109 Comp Cas 732 (CLB): 43] laid down an exception to the requirement of continuity, wherein a single and isolated act could amount to oppression provided the nature of its effect is permanently and continuously harsh or oppressive towards any member.
Part IV
The intersection of arbitration with oppression and management
Before adverting to precedents on the intersection of O&M with Arbitration, the authors wish to reiterate the stand taken in the Eros judgement. The authors argue that an arbitration tribunal is not devoid of jurisdiction merely because of the claim to be of a particular nature. The facts and claims need to be assessed individually by the arbitrators first. As observed in the ‘Arbitrability in India’ section, the judgements have focused on the power of the courts to refer parties to arbitration, instead of a debate on the power of the arbitrator to rule on his jurisdiction. In a number of cases, it has been decided that reference to arbitration can be done while dealing with a case under O&M provisions of the Companies Act, 2013 (CLB v Saz C/SCA/2179/2014 [hereinafter ‘Saz Case’]; Escorts Finance v G.R. Solvents 1999 96 CompCas 323 CLB [hereinafter ‘Escorts Case’]; 20th Century Corp v RFB latex Ltd 1999 97 Comp Cas 636). Only if it was found that the origin of the dispute lies in the agreement which contained an arbitration clause, the courts have referred the matter for arbitration [Saz Case; Escorts Case; Bhadresh Kantilal Shah v Magotteaux International and Ors (2000) 36 CLA 76].
In Haryana Telecom Ltd [(1999) 5 SCC 688] the Supreme Court was called upon to decide whether a Winding-up matter can be referred to arbitration. The court interestingly in the context of Section 8 held that ‘this, however, postulates in our opinion, that what can be referred to the arbitrator is only that the dispute or matter which the arbitrator is competent to decide.’ (Haryana Telecom Ltd [(1999) 5 SCC 688: 4] It was held that the arbitrator was not competent to decide the winding up of a company as it was a power contained in the Companies Act, 2013.
In a case where an allegation of improper valuation of shares when the shareholding of a company was increased inter alia were prejudicial to the rights of the minority shareholder (Petitioner) were made [Siddharth Gupta and Ors. v. Getit Infoservices Private Ltd and Ors. (2016) SCC online Company Law Board (CLB) 26]. It was argued that issues pertaining to allotment of shares, the appointment of directors, regulation of the affairs of the company, etc. cannot be referred to arbitration. Another interesting argument that was made was with respect to the absence of the arbitration clause being contained in the Shareholding agreement and not in the AoA, resulting in non-reference of disputes arising out of the breach of the AoA. It was argued that the Shareholding Agreement was between the investor and the promoter but not with the company, hence disputes inter se the company and others would not be capable of settlement by arbitration. The CLB held that merely dressing up a claim as oppressive would not amount to oppression. It was held that the allegations levelled were in the nature of a contractual dispute, and no serious cases of O&M and the parties were referred to arbitration.
Dressing up of claims and arbitrability of claims pertaining to O&M were taken up by the Bombay High Court in Rakesh Malhotra [(2014) SCC Online Bom 1146] The case emanates from a very complex factual matrix which is not relevant to be reproduced here. The Appellant had filed an application under Section 45 of the Arbitration and Conciliation Act before the CLB to refer the disputes between the parties to be resolved by arbitration under the London Court of International Arbitration Rules in Geneva. The major grounds inter alia for opposing the application were that certain companies held by the Respondent (five Transauto Companies) (Rakesh Malhotra: 14) and its directors were not a party to the agreement containing the arbitration clause; disputes pertaining to O&M are not arbitrable. The CLB dismissed the application under Section 45, which was challenged before the High Court.
The High Court, after detailing the arguments made by the parties, held that a matter which is sought to be referred to arbitration should relate to the dispute which is covered by the arbitration agreement. The nature of Sections 8 and 45 of the Arbitration Act was referred to stating that the courts should mandatorily refer the parties to arbitration (Rakesh Malhotra: 76). The court held that it is difficult for the arbitration agreement to envisage all disputes which arise between the parties. Certain non-contractual matters may result in O&M (Rakesh Malhotra: 81), the court recognised the rights of the CLB to verify the claims of O&M before referring the disputes to arbitration, to avoid vexatious litigation. The court held in the facts of the present case that the matters should not be referred to arbitration as dressing up of a claim vexes the lis. As per the law of interpretation, the word ‘matter’ as referred to in Rakesh Malhotra would be understood as the subject matter of the dispute (Rakesh Malhotra: 81). Even, contextual interpretation can be employed to understand the meaning of the terms used in the statute (RIL v State of Maharashtra AIR 2006 Bom 213). As highlighted earlier, Section 45 only deals with the power of judicial authority to intervene in the matter (Arbitration and Conciliation Act, 2015, Section 45). Therefore, it is quite clear that the term ‘matter’ as used in the statute can only be construed to mean the subject matter of the dispute [Sukanya Holdings v Jayesh H. Pandya (2003) 5 SCC 531]. While interpreting the powers of the court under this provision, the court should take into consideration the subject matter of the dispute and not the powers of the tribunal which are being invoked by the suit [Arbitration and Conciliation Act, 2015, Section 45].
Very recently in Dhananjay Mishra [Company Appeal (AT) No. 389 of 2018], the National Company Law Appellate Tribunal was faced with an impugned order where an application under Section 8 was dismissed in dispute which involved claims of O&M, presented in a company petition. An interesting fact which arose in this judgement was that parties had mutually agreed to appoint a sole arbitrator and the Respondent had filed an application under Section 17 (Power of the Tribunal to grant interim measures) of the Arbitration Act to direct the Appellant to appoint two nominee directors. The Appellant, however, filed a Section 8 application in the company petition, before the NCLT to refer the disputes arising out of two Memorandum of Understanding's to arbitration. The sole arbitrator found that the issues in the application under Section 17 and the company petition are different. The sole arbitrator held ‘the powers available to National Company Law Tribunal to adjudicate upon issues of O&M, financial irregularities, appointment of Directors etc. could not be exercised by the sole arbitrator’. Consequently, the Appellate Tribunal relying on the ratio of actions in rem and in personam as per Booz Allen dismissed the appeal.
Perspectives
Conclusively, arbitration can be initiated while dealing with a case under O&M provisions of the Companies Act, 2013 (Saz Case; Escorts Case; Century Case). In such cases, the courts have preferred to adopt a fact-based approach (Fulham Football Club v Richards, 2011 EWCA Civ 855). If it was found that the origin of the dispute lies in the agreement which contained an arbitration clause, the courts have referred the matter for arbitration [Saz Case; Escorts Case; Bhadresh Kantilal Shah v Magotteaux International and Ors (2000) 36 CLA 76 (CLB)]. The courts have ruled that reference to arbitration becomes mandatory in situations where the agreement provided for the relief being sought [E Logistics v Financial Technologies 2007 139 CompCas 311 CLB [hereinafter ‘Logistics Case’]; Spray Engg v Shree Saibaba Sugars Ltd 2008 145 CompCas 166 CLB]. When it comes to civil proceedings which do involve questions related to public rights, the tribunal does have the power to adjudge (Saz Case). Therefore, it is clear that the factual context of the claim related to O&M should be given utmost consideration when it comes to deciding the question of reference to arbitration [Tapan Kumar Paul vs. Krishna Kanta Paul and Ors AIR 1980 Cal 28]. A conjoint reading of Sections 8 and 45 provides that judicial authority must refer the parties to arbitration in cases where the relationship is governed by way of an agreement containing an arbitration clause. However, these provisions are subject to the limitation imposed by Section 2(3) of the Arbitration Act which speaks about the situation where specific statutory authority is given the jurisdiction over the disputes. In this regard, it has been held that the bar over the judicial authority is not absolute in nature and only confined to the extent as defined by Section 2(3) [Chloro Controls Pvt Ltd v Severn Trent Water Purification (2013) 1 SCC].
The judgements discussed in the Indian context, have the following things in common:
all cases arose only out of Section 8 or Section 45 applications, all cases involved two sets of reliefs (i) which could be granted only by the specialised tribunal; (ii) some reliefs which could be granted by the arbitrators, involvement of multiple parties in a company dispute, raising issues of non-signatories, there is literally no or less discussion on objective and pre-award arbitrability, the concerns with respect to dressed up claims.
The common questions as identified call for detailed research in themselves, however, the authors opine that it is essential to bifurcate core and non-core issues in cases alleging O&M. For instance, in cases where arbitration and insolvency proceedings have been initiated, arising from the same cause of action. A bifurcation of core and non-core issues is important, as the arbitrator cannot appoint the resolution professional, cover aspects of appointment of insolvency administrators, the constitution of a committee of creditors, hierarchy of claims and quantum of disbursement to be made to each creditor. Courts seem to be nearly unanimous that there is no discretion to deny arbitration of non-core claims if a valid arbitration clause applies. That does not mean, however, that courts necessarily have the discretion to refuse to enforce valid arbitration clauses in core proceedings. A number of different tests have emerged as to when a court may refuse to enforce an arbitration agreement in a core proceeding (Kirgis, 2009: 503). Likewise, claims of O&M, the appointment of directors, deciding issues of financial irregularities, winding up, etc. can be categorised as core issues and hence cannot be adjudicated by arbitration. The authors agree with the stand of the sole arbitrator in Dhananjay Mishra's case, wherein he exercised his jurisdiction under Section 17 and bifurcated the claims.
The stand of the Indian courts is in stark contrast with the US take on arbitrability. The graduation as seen with respect to arbitrability is not seen in intracompany disputes, instances of the tribunal exercising jurisdiction as seen in Dhananjay Mishra’s case are rare. It was observed that the nature of disputes right from Wilko, to Mcmahon, to Soler involved issues where an alternative statutory remedy was available. However, the scope of the arbitration agreement was in question. The reason why the US perspective to a certain extent has taken centre stage in a majority of the discussion undertaken in this research is because of the wider interpretation of arbitrability. The contributions made in terms of arbitrability of antitrust or securities transactions may be limited only to the US and have not been considered arbitrable elsewhere, however, the perspective which the judgements have provided in terms of interpretation is noteworthy. Notably, recent judgments coming from the Indian Supreme Court such as Vidya Drolia are also taking an approach similar to US courts. It can be inferred that American jurisprudence on this subject is being viewed as a better template for addressing issues around arbitrability. Arbitrability of issues relating to anti-trust and securities have been a major focus of this paper. The reason for the same is that such issues are usually considered to be in the sovereign domain and not an intracompany dispute. Yet, US courts have favoured arbitration as a method of dispute resolution. It follows from this position of US courts that O&M disputes, which are essentially intracountry disputes, are regarded as arbitrable.
In the opinion of the authors, the disputes involving claims of O&M to begin as a breach of contractual duty between the company and the shareholder, the impact of which affects the shareholders at large, which may or may not entail core issues.
The allegation of O&M illustrates the interface of the power of the courts and the jurisdiction of the arbitration tribunal. As stated above, arbitrability is not limited to ascertaining whether a dispute is capable of being resolved via arbitration or an award being opposed to public policy as the subject matter fell within the exclusive jurisdiction of the courts etc. Because, even before a statement on the objective arbitrability, the issue of the validity of an arbitration agreement is generally taken up. The party opposing the jurisdiction of the tribunal may (deliberately) argue the invalidity of the arbitration agreement itself owing to the nature of allegations sought to be arbitrated. The scope of the jurisdiction of the courts at that stage cannot be extended to examining the validity of the arbitration agreement vis-à-vis the subject matter, rather, it shall be limited to whether the arbitration agreement is null and void, inoperative and incapable of being performed [Article II (3) New York Convention].
A shareholding agreement contains an arbitration clause, for an efficacious resolution of disputes inter se the parties, however, the relevant company legislation provides ways and means of addressing the grievances of a shareholder or a group of shareholders (also by way of a class action). What needs to be looked at is whether the arbitration agreement is effective enough to provide a suitable remedy to all the shareholders; whether the courts are competent to declare that the arbitration agreement is incapable of being performed (validity); whether class arbitration is a possibility in shareholder disputes, whether a waiver of remedies in favour of arbitration is a question on arbitrability.
Additionally, the extent of involvement of third parties (in cases of O&M) is a question that is yet to be resolved and not only depends on the facts and circumstances of each case but the extent of interest the third party has in the outcome of the dispute. As the shareholders who are not bound by an arbitration agreement will be left unaffected by the award, hence, the dispute remains partially resolved [Booz Allen Case; Chiranjilala Shrilal Goenka v Jasjit Singh and Ors 1993 SCC (2) 507].
In the present situation, arraigning aggrieved shareholders to the arbitration proceedings will not only be impractical but also be time-consuming as opposed to the pristine idea of arbitration as an efficient mode of dispute resolution [National Thermal Power Corporation v Singer Co and Ors. (1992) 3 SCC 551]. What needs to be taken into account is whether honouring the arbitration agreement of all the shareholders is permissible and not against the intent of the company. It has been suggested [National Thermal Power Corporation v Singer Co & Ors. (1992) 3 SCC 551] that intracompany disputes and insolvency disputes are generally considered non-arbitrable owing to non-effective dispute resolution for a specific dispute. The inherent shortcoming of arbitration to reach beyond contractual boundaries makes these specific disputes non-arbitrable, however, there is nothing to suggest that a tribunal would not be able to hear and determine collective insolvency or intracompany dispute [National Thermal Power Corporation v Singer Co & Ors. (1992) 3 SCC 551]. Jurisdictions such as Singapore (Silica Investors Ltd v Tomolugen Holdings Ltd [2014] SGHC 101), UK (Fulham Case), Canada [Acier Leroux v Trembley 2004 CanLII 28564 (QC CA)], and Hong Kong (Quicksilver Greater China Ltd v Quicksilver Glorious Sun JV Ltd HCCW 364/2013) have adopted a similar looking at the nature of the dispute as well. In particular, the House of Lords has stressed adopting a fact-based dispute while determining the subject of a reference to arbitration (Heyman v Darwins Ltd 1942 AC 356). In effect, the courts have held that insufficient powers of the tribunal cannot be considered as a ground (Silica Case) to disallow reference to arbitration in cases involving a claim of O&M (Fulham case). If the relief sought in the claim arises out of the agreement, reference to arbitration has been held to be valid (Fulham case).
Fallouts of avoiding consideration of the nature of the dispute
It has been held that the courts are required to take into consideration the real substance of the suit rather than what is presented by way of clever drafting in the petition [ITC Ltd v Debt Recovery Appellate Tribunal (1998) 2 SCC 17]. Courts should examine the legal ingenuity and the real issue in the suit. In cases, where the court decides to approach the question of arbitrability by examining the source of the power of the tribunal, the parties would find it easier to misuse the procedure by avoiding the reference to arbitration through clever drafting [Nagin Mansukhlal Dagli v Haribhai Manibhai Patel AIR 1980 Bom 123]. In contrast, if the court chooses to focus on the nature of the dispute and get into the substance of the suit, the chances of misusing this provision get diminished [Nagin Mansukhlal Dagli v Haribhai Manibhai Patel AIR 1980 Bom 123]. Therefore, it is argued that the adoption of a test that focuses on the nature of dispute should be preferred over the test which solely focuses on the power of the tribunal [Nagin Mansukhlal Dagli v Haribhai Manibhai Patel AIR 1980 Bom 123].
The reliefs that are usually sought by aggrieved shareholders in a petition filed under Sections 241 and 242, are located in the agreement concluded between the parties. Clearly, such claims are contractual in origin rather being statutory in nature as conceived in the Companies Act, 2013. Therefore, it is not important for the court to look at the powers of NCLT (Companies Act 2013, Section 242) in cases where the primary aim of the petition is to seek enforcement of the contractual obligations.
It needs to be acknowledged that the NCLT does have wide powers to deal with claims of O&M (Companies Act 2013, Section 242). This view has been affirmed by the decision of the Supreme Court in the case of CDS Financial Services (Mauritius) Ltd (2004 56 SCL 665 Bom). In another judgment, the Supreme Court has clarified that while the NCLT has exclusive powers to provide reliefs as specified under the Companies Act [S.P. Jain v UOI (1973) 75 Bom LR 778 (Bom)], this provision cannot be construed to mean an express bar on the reference to arbitration [Gurnir Singh v Saz Int 1988 (15) DRJ 358].
The tribunal has the authority to rule over its own jurisdiction as per the mandate of Section 16 which recognises the power of a tribunal (Arbitration & Conciliation Act, 1996, Section 16). In this regard, it has been ruled that the jurisdiction of the tribunal is not confined only to the width of jurisdiction but also extends to the origin of the same [Pender v Lushington (1877) 6 Ch D 70, per Jessel MR]. To enable the tribunal to exercise its jurisdiction, reference to arbitration is necessary. As per Section 16, the principle of Kompetenz–Kompetenz is followed pervasively under the Arbitration Law (Gaillard and Savage, 1999: 382). This principle provides that the tribunal shall have the authority to determine its jurisdiction (Gaillard and Savage, 1999: 382). It says that the tribunal should be the first forum for consideration of this principle (Gaillard and Savage, 1999: 382). In numerous cases, the courts have held that the arbitral process has the necessary expertise,both procedural and substantive (Saz case), so as to decide cases. An interesting point has been made which recognises the power of a tribunal as a separate legal order operating side by side with the municipal courts and not merely relegated to a contractual forum (Marchisio, 2014: 455–474).
A careful reading of the approach adopted by Indian courts indicates that examination of the source of the dispute is critical while determining the question of arbitrability. However, this is precisely the point with which the courts have not attempted to engage with. A mere allegation of O&M has been construed to exclusively fall within the jurisdiction of the NCLT.
Conclusion
Arbitrability as seen in the above discussions in the Indian context has been controlled by courts, rightly so, but the cost has been borne by arbitration tribunals. Tribunals could have been constituted to assess their jurisdiction. It is not denied that matters pertaining to O&M have never been referred to arbitration, but an underpinning is that courts do not rely upon arbitrators to decide on matters which fall within their domain by virtue of Sections 241 and 242 of the Companies Act 2013. This approach largely culminates into a court versus tribunal situation. The larger question of objective arbitrability or arbitrability rationae materiae of O&M gets diluted and so does the concept of competence–competence. The discussions in the judgements have always been backed by the courts’ power to refer the dispute to arbitration, however, the tribunal's power to exercise or give up jurisdiction has not been looked at. Instances have been mentioned (although rare) where the tribunals have been given up jurisdiction on the basis of core and non-core issues. The assessment of arbitrability of O&M allegations is essentially an exercise to look beyond the notion of public policy constraints. The suitability and ability of arbitration for resolving disputes are what should arbitrability be seen as, albeit there are certain inherent structural shortcomings that render arbitration falling short when compared with courts, however, given the parties’ consent that to becomes redundant. The onus is on the courts to not interfere with pre-award arbitrability, and let the parties have what they originally agreed.
However, courts in the USA have enabled the tribunals to adjudicate, arbitrability of antitrust and securities disputes. It is a broad and expansive notion of arbitrability which sets the US practice distinct. Arbitrability was not only confined to the subject matter but also to the forum which gets to decide upon the matter first and whether a valid arbitration agreement exists or not. It may be safely said that arbitrability in the US is not only limited to the subject matter but encompasses competence–competence, which in the opinion of the authors is a correct approach. Absent the competence to refuse exercising jurisdiction, a tribunal would always be bound by the black letter of municipal laws, which is an incorrect perception especially for jurisdictions such as India and conflicting judgements will be the order of the day.
Footnotes
Declaration of conflicting interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.
