Holding

An arbitration clause cannot be invoked against defendants who are not parties to the arbitration agreement, and once the plaint is amended to delete such parties, the clause is inapplicable under Section 34 of the 1940 Act or Section 8 of the 1996 Act.

Summary

The appellants, shareholders of Dev Papers Ltd., filed a suit against several defendants. An arbitration agreement existed between the appellants and some, but not all, of the defendants. The appellants amended the plaint to delete the names of those defendants who were parties to the arbitration agreement and proceeded only against the remaining defendants. The trial court and the High Court stayed the suit, invoking the arbitration clause under Section 34 of the Arbitration Act, 1940 and Section 8 of the Arbitration and Conciliation Act, 1996. The Supreme Court held that the arbitration clause cannot be invoked against defendants who are not parties to the arbitration agreement, especially after the amendment deleting the parties to the agreement. Consequently, the lower courts' judgment was set aside and the appeal was allowed.

Issues considered

Whether an arbitration clause can be invoked against a defendant who is not a party to the arbitration agreement.
Whether the amendment of the plaint deleting parties to the arbitration agreement defeats the operation of Section 34 of the Arbitration Act, 1940 and Section 8 of the Arbitration and Conciliation Act, 1996.
Whether the jurisdiction of the arbitral tribunal can be challenged under Section 16 of the 1996 Act in such circumstances.

Legislation cited

Arbitration and Conciliation Act, 1996s. 16, s. 8
Companies Act, 1956

Subjects

arbitrationarbitration agreementsection 34section 8amendment of plaintjurisdictionshareholders disputestay of suit

Judgment

SANDEEP KUMAR AND ORS. A
v.
MASTER RITESH AND ORS.

OCTOBER 31, 2006

[S.B. SINHA AND DAL VEER BHANDARI, JJ.] B

Arbitration Act, 1940; Section 34/Arbitration and Conciliation Act,
1996; Section 8:

Shareholders-Disputes-Filing of suit-Arbitration agreement- C
Invoking of against. some of the defendants who were not parties to the
Arbitration Agreement-Held: In terms of Section 34 of 1940 Act or Section
8 of 1996 Act, the Arbitration Clause could not be invoked as against the
defendants who were not parties to the Arbitration agreement.

Appellants as also Respondent Nos.2 to 7 were shareholders in a
D
Company. Disputes having arisen between the parties, a suit came to be filed
by the appellants. In the meantime, an arbitration agreement had been entered
, I,,. into by and between plaintiffs-appellants and some of the defendants. In view
~f the existence of the said arbitration agreement, an order was passed by the
trial Court in terms of the Arbitration Act 1940 and the matter came up to E
this Court when plaintiffs-appellants made a representation before this Court
that they would amend the plaint by deleting the names of respondents who
were parties to the arbitration agreement and continue with the suit as against
those who were not parties thereto. Their statements were recorded in the
order of thi~ Court and the special leave petition was disposed of. The suit F
came up for hearing when it was directed to be stayed by the trial Court. The
appeals preferred thereagainst by Appellants were also dismissed. High Court
upheld the findings of the trial Court. Hence the present appeal.

Appellants contended that the Courts below committed a serious error
in passing the impugned judgment insofar as it failed to take into G
consideration the effect of deleting the names of some of the defendants by
amending the plaint; and that although there might exist an arbitration
agreement between Appellants and some of the Defendants, but in view of the
fact that the amendments had been carried out in the plaint the arbitration
agreement could not have been enforced as against Respondents who were
57 H
58 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R. ~- \ .
A not parties thereto.
Respondents submitted that the matter being governed by the provisions
of Section 8 of the Arbitration and Conciliation Act, 1996, the parties could
raise the question of jurisdiction of the arbitral tribunal in terms of section
16 thereof.
B
Allowing the appeal, the Court

HELD: 1.1. It may be true that Plaintiffs-Appellants had been (" j

representing a group, but admittedly all the parties to the suit were not parties
to the arbitration agreement. If some of the Defendants were not parties to
c the arbitration agreement, the question of invoking the arbitration clause as
against those Defendants would not arise. [60-H; 61-A)

1.2. There were three parties to the said arbitration agreement. If the
names of those who were Party No. 1 and Party No.2 in the said agreement
had been deleted from the array of Defendants-Appellants and the claims
D against them have been given up, then there is no reason as to how the
arbitration agreement can still be invoked against them under Section 34 of
the Arbitration Act, 1940 or Section 8 of the Arbitration and Conciliation
Act, 1996. Hence, the impugned judgment cannot be sustained. [61-B-~-D)
""1
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4610 of2006.
E
From the Judgment and Order dated 24.10.2002 of the High Court of
Punjab and Haryana at Chandigarh in C.R. Nos. 3045-3053/2000.

K.N. Balgopal, P. Somasundram and Devendra Singh for the Appellants.
F Balbir Singh Gupta for the Respondent.

The Judgment of the Court was delivered by

S.B. SINHA, J: Leave granted.

G Dev Papers (P) Ltd., Meham, is a company incorporated under the
Companies Act, 1956. Appellants herein as also Respondent Nos.2 to 7 were
its shareholders. One R.P. Gupta was representing the appellants whereas .
Satyadev Gupta was representing the defendants-respondents in the Board
.
of Directors. Disputes and differences having arisen between the parties, a
H suit came to be filed by Appellants. Admittedly, an arbitration agreement had

"-
..
SANDEEP KUMAR v. MASTER RITESH [S.B. SINHA, J.] 59
been entered into by and between Plaintiffs-Appellants and some of the A
Defendants. However, some of the Defendants were not parties to the said
agreement. In view of the existence of the said arbitration agreement, an order
was passed by the learned trial Judge in terms of the Arbitration Act 1940.
The matter came up to this Court on an earlier occasion. Plaintiffs-Appellants
herein made a representation before this Court that they wouid amend the
plaint by deleting the names of Respondents who were parties to the arbitration B
agreement and continue with the suit as against those who were not parties
I .., thereto. The said statements were recorded in the order of this Court in the
following terms :

"Mr. K.N. Balgopal, learned counsel representing the respondents in C
these 9 SLPs, states that the plaintiff(s) in each of the 9 suits which
have been ordered, shall confine his/their suit against the principal
debtor in each case and shall drop him from the array of defendants
all such defendants other than principal defendant. Prima facie, on
such stance being adopted by the petitioners' learned counsel, the
grievance of the special leave petitioners, apparently, vanishes. Learned D
counsel for the parties need and are granted time to check up on this
aspect of the matter."

~,... By an order dated 04.04.1997, the said special leave petition was disposed
of. The matter in regard to the stay of the suit thereafter again came up for
ht:aring. By reason of a judgment and order dated 13.08.1999, it was, inter E
a/ia, held :

" ... The legal proceedings in this case have been started after the
agreement by persons claiming under parties to the agreements. The
plaintiffs in all the nine cases are claiming under Rajender Parshad
Gupta and the defendant is claiming through Satyadev Gupta, both of F
whom are signatories/executants of the arbitration agreement. Moreover,
the plaintiffs in their plaints have admitted that they were bound by
the agreement dated 6.8.88, so that they cannot now contend that
they were not signatories of the agreement. The third contention is
that the proceeding must be with respect of the matter agreed to be G
referred to arbitration. This condition has already been dealt within
the preceding paragraphs and need not be reproduced. Further, the
application for stay has been made by the defendant, who is party to
the legal proceeding and was filed before filing the written statement
or taking any step in the proceedings. I have already held that the
applicant is ready and willing to do all things necessary for the proper H
( (
_;
60 SUPREME COURT REPORTS [2006] SUPP. 8 S.C.R. __
.,... ),,

~
A conduct of arbitration. The conditions set out in the authorities cited
above, have been fulfilled and the suits are liable to be stayed."

In terms of the said findings the suit was again directed to be stayed.
The appeals preferred thereagainst by Appellants herein were also dismissed.
The High Court by reason of its impugned judgment passed in C.R. No. 3045
B of 2000 upheld the said findings.

Mr. K.N. Balgopal, the learned counsel appearing on behalf of Appellants,
would submit that the courts below committed a serious error in passing the "j
impugned judgment insofar as it failed to take into consideration the effect
of deleting the names of those defendants by amending the plaint. According
c to the learned counsel although there might exist an arbitration agreement
between Appellants and some of the Defendants, but in view .of the fact that
the amendments had been carried out in the plaint the arbitration agreement
could not have been enforced as against Respondents who were not parties
thereto.
D
Mr. Balbir Singh, the learned counsel appearing on behalf of Respondents,
on the other hand, would submit that the matter being govf!med by the
provisions of Section 8 of the Arbitration and Conciliation Act, 1996, the
parties could raise the question of jurisdiction of the arbitral tribunal in terms
·~
of section 16 thereof.
E
It appears that the counter affidavit has been filed by one Shri Ramesh
Kumar Gupta. He had been representing a group in the suit. His name had
been deleted from the array of the parties by amending the plaint. In his
counter affidavit he does not state that he has any authority to represent
other Respondents or any authority to file a counter affidavit on their behalf.
F Paragraph 7 of the plaint whereupon reliance has been placed reads as under:-

"7. That the plaintiff as well as defendants No. 2 to 7 including
defendant No. 5 are bound by the agreement dated 6.8.88 and
that defendants No. 2 to 4 have repayed Rs.26,51,000/- and have
to repay Rs. 2.95 lakh including amount of the plaintiff for which
G the plaintiff is filing the suit against defendant No. 5 as well as
defendant No. 2 to 4. Defendant No. I and defendants No. 6 to
7 have been joined as proforma defendants."

It may be true that Plaintiffs-Appellants had been representing a group,
but admittedly all the parties to the suit were not patties to the arbitration
H
')
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SANDEEP KUMAR v. MASTER RITESH [S.B. SINHA, J.] 61
agreement. If some of the Defendants were not parties to the arbitration A
agreement, the question of invoking the arbitration clause as against those
Defendants would not arise. As noticed hereinbefore, in the earlier round of
litigation, Appellants categorically stated that the suit would be confined only
as against those who were not parties to the arbitration agreement.

There were three parties to the said arbitration agreement. Party No. 1 B
was represented by (1) Satya Dev Gupta; (2) Ramesh Kumar Gupta; and (3)
Jai Dev Gupta. Party No.2 was represented by (1) Rajender Parshad Gupta;
(2) Sham Lal Gupta; and (3) Sushi! Gupta. The third party to the said agreement
was the company itself. If the names of those who were in the Party No. I
and Party No.2 in the said agreement had been deleted from the array of C
Defendants-Appellants and the claims against them have been given up, we
fail to see as to how the arbitration agreement can still be invoked under
Section 34 of the Arbitration Act, 1940 or Section 8 of the Arbitration and
Conciliation Act, 1996.

For the reasons aforementioned, the impugned judgment cannot be D ·,·
sustained which is set aside accordingly. The Appeal is allowed. No costs.

S.K.S. Appeal allowed.