Telangana High Court Rules Arbitration Clause Applies Only To Interconnected Agreements in a Single Commercial Transaction

Telangana High Court Rules Arbitration Clause Applies Only to Interconnected Agreements in a Single Commercial Transaction

The Telangana High Court bench led by Chief Justice Alok Aradhe and Justice Sreenivas Rao has recently upheld the decision of the Commercial Court in a dispute involving multiple agreements. The court affirmed that when several agreements are interconnected as part of a single commercial transaction, the existence of an arbitration clause in one or more agreements can justify referring all disputes related to these agreements to arbitration.

However, this principle is only applicable if the agreements are truly interconnected. In this case, the court ruled that the agreements in question were not connected, and thus, arbitration could not be invoked.

The appeal, filed under Section 13 of the Commercial Courts Act, 2015, and Section 37 of the Arbitration and Conciliation Act, 1996, was against an order dated June 10, 2024, passed by the Commercial Court. The court had dismissed an application from Defendant No.1 (appellant) seeking the rejection of the plaint under Section 8 of the Arbitration and Conciliation Act, 1996, and Order VII Rule 11 of the Code of Civil Procedure, 1908 (C.P.C.).

The plaintiff had entered into an operational lease agreement with Defendant No.1 on October 16, 2019, concerning the lease of 30 Volvo tippers. Defendant No.1 failed to pay the agreed lease rent from November 2019 to August 2020. Subsequently, the parties entered into a Memorandum of Understanding (MOU) on January 5, 2020, modifying the lease agreement. However, the default in payment continued.

In February 2020, Defendant Nos. 1 to 3 proposed a joint venture to the plaintiff, offering to share profits and refund certain expenses. The parties executed a joint venture agreement on February 21, 2020, but the agreement was not acted upon.

The plaintiff filed a suit (C.O.S.No.31 of 2021) seeking Rs. 10.93 crores in respect of the operational lease agreement and Rs. 33.41 lakhs under the joint venture agreement. In response, Defendant No.1 filed an application under Section 8 of the Arbitration and Conciliation Act, arguing that the joint venture agreement contained an arbitration clause and thus the dispute should be referred to arbitration.

Defendant No.1 argued that the joint venture agreement included a specific arbitration clause, and since the plaintiff had not invoked arbitration but instead filed a suit, the Commercial Court lacked jurisdiction to hear the case. Furthermore, Defendant No.1 contended that there was no cause of action for the suit.

On the other hand, the plaintiff maintained that the operational lease agreement and the joint venture agreement were distinct and not interconnected. The lease agreement, executed on October 16, 2019, did not contain an arbitration clause, while the joint venture agreement, which was executed later, included such a clause. The plaintiff also noted that they had already filed an arbitration petition in the Delhi High Court under the joint venture agreement, which was allowed. The court reviewed the facts and noted that the defendant had invoked the arbitration clause of the joint venture agreement by filing an arbitration application before the Delhi High Court, which was subsequently allowed. The Delhi High Court had also ruled that there was no connection between the subject matter of the operational lease agreement and the joint venture agreement.

The court referred to the Supreme Court's decision in Ameet Lalchand Shah v. Rishabh Enterprises (2018), which held that where multiple agreements are interconnected and form part of a single commercial transaction, the presence of an arbitration clause in any one agreement could justify referring all disputes to arbitration. However, this was only applicable if the agreements were substantially interconnected, which was not the case here.

The court concluded that the operational lease agreement and the joint venture agreement were distinct and unconnected. The operational lease agreement related to the leasing of vehicles, while the joint venture agreement concerned a separate business venture in Odisha. As such, the court ruled that the arbitration clause in the joint venture agreement did not apply to the disputes arising from the operational lease agreement and MOU.

Additionally, the court found that Clause 25 of the operational lease agreement designated Hyderabad as the jurisdiction for legal disputes, which justified the Commercial Court's authority to hear the matter. The court also referred to the Raptakos Brett & Co. Ltd. v. Ganesh Property (1998) case, where it was established that, in a plea under Order VII Rule 11 of C.P.C., the court must only consider the plaint and accompanying documents and cannot look into the written statement or documents submitted later.

The Telangana High Court dismissed the appeal, affirming that the Commercial Court’s order to dismiss Defendant No.1's application to reject the plaint was correct. The court found no legal or jurisdictional error in the Commercial Court’s decision, thereby allowing the plaintiff’s suit to proceed.