Mere Existence Of Clause Dealing With Arbitration Does Not Mandate Arbitration Reference: NCLT Bengaluru

The National Company Law Tribunal (NCLT) at Bengaluru has recently held that the mere existence of a clause providing only for the possibility of arbitration does not require disputes to be referred to arbitration.

A coram of Judicial Member Sunil Kumar Aggarwal and Technical Member Radhakrishna Sreepada dismissed an application filed by Vishrutha Dhruva and Amit Kumar Tyagi, who are parties to the Shareholders' Agreement and hold employment with Acumen Technical Advisory Pvt. Ltd. The application sought reference of the dispute to arbitration.

“It is true that the SHA contains a clause dealing with Arbitration. Mere existence of such a clause does not make it Obligatory to make reference to Arbitration,” the tribunal observed.

Air Works UK Engineering Ltd had filed a petition seeking an investigation into the affairs of Acumen Technical Advisory Pvt Ltd. The company alleged fraud, misfeasance, misconduct and financial irregularities in the affairs of the company. Vishrutha Dhruva and Amit Kumar Tyagi were arrayed as respondents in that petition.

During the pendency of the proceedings, the applicants moved the Tribunal seeking reference of the dispute to arbitration. They contended that Air Works had acquired a 50% stake in Acumen Technical pursuant to a Share Purchase Agreement and a Shareholders' Agreement executed in 2015.

According to the applicants, the grievances raised in the main petition arose from alleged violations of rights and obligations under the Shareholders' Agreement. They argued that the relationship between the shareholders was governed by that agreement. They further contended that the allegations in the company petition essentially concerned breaches of the agreement and therefore ought to be decided through arbitration.

Air Works opposed the application. It contended that the petition sought an investigation into the affairs of the company. It argued that the relief sought could be granted only by the Tribunal. The company further contended that the petition concerned allegations of fraud, misfeasance and misconduct in the management of the company.

The Tribunal observed that issues relating to corporate governance are issues in rem. It further observed that relief contemplated under the Companies Act, 2013 could not be provided through an arbitration exercise.

“The Issues relating to Corporate governance are issues in Rem and the relief contemplated under various provisions of the Companies Act, 2013 cannot be hoped to be provided or given under an Arbitration exercise,” the tribunal observed.

The Tribunal relied on the Supreme Court's decision in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. The judgment discusses the distinction between rights in rem and rights in personam. It also discusses the arbitrability of disputes.

The Tribunal then examined Clause 17.8.2 of the Shareholders' Agreement, which was relied upon by the applicants. The clause provided that disputes arising under the agreement shall be resolved by arbitration under the provisions of the London Court of International Arbitration.

Referring to Supreme Court decisions on what constitutes a valid arbitration agreement, the Tribunal observed that an agreement must disclose a determination and obligation to go to arbitration. It observed that an agreement must not merely provide for the possibility of arbitration.

“Clearly this clause does not satisfy the Criteria laid down to be attributes which must be present for an agreement to be considered as an arbitration agreement. Consequently, they cannot be considered to disclose a determination and obligation to go for arbitration and not only provide for the possibility of going to arbitration. When the word provides only a possibility, the same does not constitute a valid arbitration agreement,” the tribunal held.

The tribunal held that Clause 17.8.2 of the Shareholders' Agreement did not satisfy the criteria laid down by the Supreme Court. It therefore could not be interpreted as an agreement to decide disputes through arbitration.

“In view of this We decline to allow this application and reject the Prayer for making a reference of the matter to Arbitration,” the Tribunal ruled.

Accordingly, the Tribunal dismissed the application without costs.

For Applicants: Vegadarshi K

For Respondents: Lisa Mishra