The Bombay High Court has declared that under Section 8 of the Arbitration and Conciliation Act, 1996, the matter cannot be automatically sent to arbitration if the plaintiff seeks relief in a lawsuit against parties, some of whom are not signatories to the arbitration agreement (A&C Act).
The court's decision in Vidya Drolia & Ors. v. Durga Trading Corporation (2020) and the amendment to Section 8 made by the 2015 Amendment Act, the bench of Justice Manish Pitale noted, do not mandate that all parties be compelled to participate in arbitration proceedings if there is an existing arbitration agreement between some of the parties to the suit.
Facts
Super Cassettes Industries Pvt Ltd and Hungama Digital Media Entertainment Pvt Ltd filed a lawsuit with the Bombay High Court seeking a permanent injunction against the defendants, including RBEP Entertainment Private Limited (defendant no. 1). The plaintiffs sought a court order preventing the defendants from making use of the copyrights that RBEP had granted to them via a "Long Form Agreement" and other assignment deeds. The defendant, RBEP, canceled the Long Form Agreement, which led to the conflict between the parties.
The defendant, RBEP, applied Section 8 of the A&C Act in arguing that the parties should be referred to arbitration in light of the Arbitration Clause found in the "Long Form Agreement."
Arguments of the parties
Super Cassettes and Hungama, the plaintiffs, argued before the High Court that the disagreement between the parties went beyond the Long Form Agreement. It further stated that defendants 4, 5, and 6 were not signatories to the Long Form Agreement and that they were basing their claims of copyright assignment on other business deals they had made with RBEP. The plaintiff argued that sending only some of the parties to the lawsuit to arbitration would split the claim and lead to parallel processes, which would be against public policy.
The Long Form Agreement, which contained the arbitration clause, was only signed by the two plaintiffs and the first defendant, RBEP, as noted by the court.
The Court noted that the Apex Court had determined that arbitration is inappropriate when it has an erga omnes effect, or when it affects the rights and obligations of people who are not parties to the arbitration agreement, in Vidya Drolia & Ors. v. Durga Trading Corporation (2020).
In Vidya Drolia (2020), the High Court cited the supplemental judgment in which it concluded that, in light of Section 8's amendment by the Amendment Act of 2015, the Court should refer the dispute to arbitration following Section 8 unless it is determined that, on the surface, no valid arbitration agreement exists. The dispute cannot be automatically referred to arbitration, the High Court held, if the plaintiff seeks redress in the lawsuit against parties, some of whom are not signatories to the arbitration agreement.
"On a prima facie basis, the issue of whether an arbitration agreement exists with such non-signatory parties would remain open if it were determined that such non-signatory parties cannot even be deemed to be asserting claims through and under the signatories to the arbitration agreement. It cannot be argued that the law established by the Supreme Court in decisions rendered after Section 8 of the aforementioned Act was amended—including the ruling in Vidya Drolia and others Vs. Durga Trading Corporation (supra)—indicates that all parties to a lawsuit would have to be compelled to take part in arbitration proceedings upon the Court's referral once it is determined that an arbitration agreement exists between some of the parties to the suit.
The bench ruled that the dispute can only be submitted to arbitration if defendant number one, RBEP Entertainment, can demonstrate, through a prima facie examination, that the defendants in the current suit, who are not signatories to the Long Form Agreement, are asserting claims through and under RBEP, or that the agreements that RBEP has signed in the non-signatories favour are connected to the Long Form Agreement. The bench also stated that RBEP had not demonstrated the same.
The defendants Madman Film Ventures Private Limited and Zee Entertainment Enterprises Limited are asserting rights in the in question works based on separate commercial contracts signed with defendant No. 1 - RBEP, according to the plaintiff's arguments, the court found.
The court continued, "On even a prima facie examination of the matter, these agreements/contracts are purely independent and commercial transactions between defendant Nos. 1, 5, and 6, with no reference to the Long Form Agreement, to which only the plaintiffs in the suits and defendant No. 1 - RBEP are parties. The rights asserted by the defendant's Madman Film Ventures Private Limited and Zee Entertainment Enterprises Limited cannot be regarded to constitute underlying contracts or agreements to the Long Form Agreement because the arbitration clause is contained in this Long Form Agreement.
Super Cassettes, the plaintiff, also argued in front of the High Court that some copyrights had been assigned in its favour by RBEP via assignment deeds and that any legal issues relating to such copyrights had no bearing on the Long Form Agreement.
Court observation
The bench agreed with Super Cassettes' arguments and stated, "Plaintiff Super Cassettes is seeking specific relief in respect of the two lots of 6 films and 3 films, which have no connection to the Long Form Agreement, and the disputes about such works/films cannot be said to be the subject matter of the arbitration agreement, even on a prima facie basis. In other words, according to the modified Section 8 of the aforementioned Act, this Court's prima facie examination reveals that there is no arbitration agreement about the aforementioned two lots of labour.
The Court held that it would be against public policy and contrary to the goal of expeditious case resolution to refer only the signatories to the Long Form Agreement to arbitration because if the contentions raised on behalf of the defendants who are not signatories to the "Long Form Agreement" and who are claiming rights independent of the Long Form Agreement are true, then the plaintiffs and defendants 5 and 6 would be ineligible for arbitration.
The bench stated that the "nature of the issues and the complexity of the case requires centralized resolution of disputes before this Court and subsequent continuation of the actions for resolution of the disputes to parties, to pronounce upon their rights and obligations."
Therefore, the application was denied by the court.
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