INDOWIND ENERGY LTD.versusWESCARE (I) LTD. AND ANR.

                        [2010] 5 S.C.R. 284


A                    INDOWIND ENERGY LTD.
                                  v.
                   WESCARE (I) LTD. AND ANR.
                  (Civil Appeal No. 3874 of 2010)
                          APRIL 27, 2010
B
    [R.V. RAVEENDRAN AND K.S. RADHAKRISHNAN, JJ.)

         Arbitration and Conciliation Act, 1996 - ss. 7 and 11 -
    Agreement of sale between respondent nos. 1 and 2
C   described respondent no. 1 as the seller, and respondent no. 2
    as the buyer and the promoters of appellant - Agreement
    contained an arbitration clause - Disputes between
    respondent no. 1 on one hand and respondent no. 2 and
    appellant on the other, in respect of th.e said agreement -
D   Respondent no. 1 filed petition u/s. 11 (6) against respondent
    no. 2 and appellanf for appointment of sole arbitrator to·
    arbitrate upon disputes between them in respect of the said
    agreement - Dispute as to whether appellant was prima facie
    a party to the arbitration agreement contained in the
E   agreement of sale and was bound by it, even though it was
    not a signatory to the agreement of sale - Held: Merely
    because respondent no. 2 described appellant as its nominee
    or as a company promoted by it or that the agreement was
    purportedly entered by respondent no.2 on behalf of appellant,
F   did not make appellant a party to the agreement in the
    absence of a ratification, approval, adoption or confirmation
    of the same by appellant - Consequently, appellant cannot
    be deemed to be a party to the arbitration agreement
    contained in the said agreement - In absence of arbitration
G   agreement between respondent no. 1 and appellant, no claim
    against appellant or no dispute with appellant could be
    subject-matter of reference to an arbitrator - Order of High
    Court appointing arbitrator in regard to claims of respondent
    no. 1 against appellant accordingly set aside.
H                               284
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 285
                  ANR.

    Arbitration and Conciliation Act, 1996 - ss.2(1){bj and 7 A
- Arbitration agreement - Held: A provision for arbitration to
constitute an arbitration agreement for the purpose of s. 7
should satisfy two conditions : (i) it should be between the
parties to the dispute; and (ii) it should relate to or be
applicable to the dispute.                                     B

    The appellant and respondent nos.1 and 2 are
companies incorporated under the Companies Act, 1956.
Respondent no.1 is in the business of setting up and
operating/managing wind farms and generation of power C
from Wind Electric Generators (WEGs). Respondent no.2
is a promoter of appellant.
     On 24.2.2006 an agreement of sale was entered into
 between respondent nos.1 and 2. The agreement
 described respondent no.1 as the seller, and respondent D
 no.2 as the buyet and the promoters of appellant. The
 said agreement contained an arbitration clause. The
 Board of Directors of respondent no._1 at its meeting
 accorded approval to the agreement dated 24.2.2006. The
 Board of Directors of respondent no.2 also approved the E
 said agreement. There was however no such approval by
 the Board of Directors of the appellant.
       Certain disputes allegedly arose between
:. respondent no.1 on the one· hand and respondent no.2 F
   and appellant on the other, in respect of the ,said
   agreement dated 24.2.2006. Respondent no.1 filed three
   petitions under section 9 of the Arbitration and
   Conciliation Act, 1996 against respondent no.2 and
   appellant seeking various interim measures. The petitions G
   were dismissed by the High Court.
     Thereafter, respon~ent no.1 filed a petition under            •
 section 11 (6) of the Act against respondent no.2 and
 appellant for appointment of a sole arbitrator to arbitrate
 upon the disputes between them in respect of agreement H
    286      SUPREME COURT REPORTS             [2010] 5 S.C.R.


A dated 24.2.2006. Respondent no.2 resisted the said
  petition alleging that there was no cause of action nor
  any arbitrable dispute between them. Appellant on the
  other hand resisted the petition inter alia on grounds that
  it was not a party to the agreement dated 24.2.2006
B entered into between respondent nos. 1 and 2; that it had
  not ratified the agreement dated 24.2.2006 or acted upon
  it and that there was no arbitration agreement between
  respondent no.1 and appellant.
       The Chief Justice of the High Court allowed the said
C application under section 11 and appointed a sole
  arbitrator holding that appellant was prima facie a party
  to the arbitration agreement and was bound by it, even
  though it was not a signatory to the agreement dated
  24.2.2006.
D
      In appeal to this Court, the following two questions
  arose for consideration: 1) whether appellant-cqmpany
  could be said to be a party to the agreement dated 24-2-
  2006, even though it did not sign the agreement, and 2)
E whether the arbitration clause found in the agreement
  dated 24-2-2006 between respondent nos. 1 and 2, could
  be considered as a binding arbitration agreement on the
  appellant.
          Allowing the appeal, the Court
F
       HELD: 1. The order of the High Court appointing an
  Arbitrator in regard to the claims of respondent no.1
  against the appellant is set aside and the application
  under section 11 (6) of the Arbitration and Conciliation Act,
G 1996 filed by respondent no.1 insofar as appellant is
  concerned is dismissed. The appointment of Arbitrator
  insofar as respondent no.2 is concerned, is not
  disturbed. [Para 25] [308-C-D]
      2. The term arbitration agreement is defined under
H section 2(1)(b) of the Arbitration and Conciliation Act,
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 287
                  ANR.
1996 as an agreement referred to in section 7. An analysis       A
of sub-sections (2), (3) and (4) of section 7 shows that an
arbitration agreement will be considered to be in writing
if it is contained in: (a) a document signed by the parties;
or (b) an exchange of letters, telex, telegrams or other
means of telecommunication which provide a record of             B
the agreement; or (c) an exchange of statements of claim
and defence in which the existence of the agreement is
alleged by one party and not denied by the other, or (d)
a contract between the parties making a reference to
another document containing an arbitration clause                c
indicating a mutual intention to incorporate the arbitration
clause from such other document into the contract. It is
fundamental that a provision for arbitration to constitute
an arbitration agreement for the purpose of section 7
should satisfy two conditions : (i) it should be between         D
the parties to the dispute; and (ii) it should relate to or be
applicable to the dispute. [Paras 10, 11) [299-D-H; 300-A]
   'Yogi Agrawal v. Inspiration Clothes & U & Ors. 2009 (1)
sec 372, relied on.                                 -"-'- -·
                                                                 E
     3.1. In the present case, respondent no.1 has not
entered into any agreement with appellant, referring to
the agreement dated 24.2.2006 containing the arbitratiQn
agreement, with the intention of making such arbitration
                                            1



agreement, a part of their agreement. Nor is it the case         F
of respondent no.1 that there has been any exchange of
statements of claim and defence in which it had alleged
the existence of an arbitration agreement and the same
had been accepted and not denied by appellant in the
defence statement. It is also not the case of respondent         G
no.1 that any exchange of letters, telex, telegrams or other
means of telecommunication referred to and provided a
record of any arbitration agreement between the parties.
It therefore follows that neither sub-section (5) nor
                                                                 H
    288    SUPREME COURT REPORTS               [2010] 5 S.C.R.


A clauses (b) and (c) of sub-section (4) of section 7 applies.
  [Para 12] [300-B-D]
        3.2. There can be appointment of an arbitrator if there
   was any dispute between respondent nos. 1 and 2.
   However, in the absence of any document signed by the
8
   parties as contemplated under clause (a) of sub-section
   (4) of section 7, and in the absence of existence of an
   arbitration agreement as contemplated in clauses (b) or
   (c) of sub-section (4) of section 7 and in the absence of
   a contract which incorporates the arbitration agreement
C by reference as contemplated under sub-section (5) of
   section 7, the inescapable conclusion is that appellant is
   not a party to the arbitration agreement. In the absence
   of an arbitration agreement between respondent no.1
   and appellant, no claim against appellant or no dispute
D with appellant can be the subject-matter of reference to
  ,an arbitrator. This is evident from a plain, simple and
   normal reading of section 7 of the Act. [Para 13] [300-E-
   H; 301-A-B]
E      4. Respondent no.2 and appellant are two
  independent companies incorporated under the
  Companies Act, 1956. Each company is a separate and
  distinct legal entity and the mere fact that two companies
  have common shareholders . or common Board of .
F Directors, will not make the two companies a single
  entity. Nor will existence of common shareholders or
  Directors lead to an inference that one company will be
  bound by the acts of the other. If the Director who signed
  on behalf of respondent no.2 was also a Director of
G appellant and if the intention of the parties was that
  appellant should be bound by the agreement, nothing
  prevented respondent no.1 insisting that appellant
  should be made a party to the agreement and requesting
  the Director who signed for respondent no.2 also to sign
H on behalf of appellant. The very fact that parties carefully
  INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 289
                    ANR.
   avoided making appellant a party and the fact that the         A
:::=c:-Oirector of respondent no.2 though a Director of
- appellant, was careful not to sign the agreement as on
- behalf of appellant, shows that the parties did not intend
   that appellant should be a party to the agreement.
 -Therefore the mere fact that respondent no.2 described          B
   appellant as its nominee or as a company promoted by
   it or that the agreement was purportedly entered by
  ·respondent no.2 on behalf of appellant, will not make
   appellant a party in the absence of a ratification,
   approval, adoption or confirmation of the agreement            C
   dated 24.2.2006 by appellant. [Para 15) [301-F-H; 302-A-
 C]
      5. Also, a specific clause of the agreement dated
 24.2.2006 categorically states that the agreement shall be       D
 null and void and of no effect whatsoever unless it is
 expressly approved by the respective Board of Directors/
 shareholders of respondent no.1, respondent no.2 and
 appellant. In the present case, the Board of Directors of
 respondent no.1 and respondent no.2 approved the
 agreement. But the Board of Directors or the                     E
 shareholders of appellant did not approve the agreement.
 In the absence of such approval by appellant, and in the
 absence of appellant being a party or signatory to the
 agreement dated 24.2.2006, it is not understandable as to
 how appellant can be deemed to be a party to the                 F
 agreement dated 24.2.2006 and consequently a party to
 the arbitration agreement contained therein. [Para 16]
 [302-D-E]
      6. An arbitration agreement is different from a             G
 contract. An arbitration agreement can come into
 existence only in the manner contemplated under section
 7. If section 7 says that an arbitration agreement should
 be in writing, it will not be sufficient for the petitioner in
 an application under section 11 to show that there               H
    290     SUPREME COURT REPORTS              (2010] 5 S.C.R.


A   existed an oral contract between the parties, or that
    appellant had transacted with respondent no.1, or
    respondent no.1 had performed certain acts with
    reference to Appellant, as proof of arbitration agreement.
    [Para 17] (303-B-C]
B
       7.1. The scope of examination of the agreement
  dated 24.2.2006, by the Chief Justice or his Designate
  under section 11 (6) is necessarily to be restricted to the
  question whether there is an arbitration agreement
C between the parties. The examination cannot extend to
  examining the agreement to ascertain the rights and
  obligations regarding performance of such contract
  between the parties. The Chief Justice exercising
  jurisdiction under section 11 of the Act has to only
  consider whether there is an arbitration agreement
D between the petitioner and the respondent/s in the
  application under section 11 of the Act. Any wider
  examination in such a summary proceeding will not be
  warrante~. [Para 19] [304-C-F]

E       7.2. Insofar as the issue of existence of arbitration
  agreement between the parties, the Chief Justice or his
  Designate is required to decide the issue finally and it is
  not permissible in a proceeding under section 11 to
  merely hold that a party is prima facie a party to the
F arbitration agreement and that a party is prima facie
  bound by it. It is not as if the Chief Justice or his
  Designate will subsequently be passing any other final
  decision as to who are the parties to the arbitration
  agreement. Once a decision is rendered by the Chief
G Justice or his Designate under section 11 of the Act,
  holding that there is an arbitration agreement between
  the parties, it will not be permissible for the arbitrator to
  consider or examine the same issue and record a finding
  contrary to the finding recorded by the court. Therefore
H ffie prima facie finding by the Chief Justice that appellant
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 291
  .               ANR.

is a party to .the arbitration agreement is not what is        A
         "
contemplated   by the Act. [Para 20) [304-F-H; 305-A-C]
    Economic Transport Organisation v. Mis. Charan
Spinning Mills (P) Ltd. 2010 (2) SCALE 427 and SBP & Co.
v. Patel Engineering Limited 2005 (8) SCC 618, followed.
                                                               B
    National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd.
2009 (1) sec 267, relied on.
      8. No doubt if appellant had acknowledged or
 confirmed in any correspondence or other agreement or
 document, that it is a party to the arbitration agreement C
 dated 24.2.2006 or that it is bound by the arbitration
 agreement contained therein, it could have been possible
•to say that appellant is a party to the arbitration
 agreement. But that would not be under section 7(4)(a)
 but under section 7(4)(b) or section 7(5). Be that as it may. D
 That is not the case of respondent no.1. In fact, the
 delivery notes/invoices issued by respondent no.1 do not ·
 refer to the agreement dated 24.2.2006. Nor does any
 letter or correspondence sent by appellant refers to the
 agreement dated 24.2.2006, either as an agreement E
 executed by it or as an agreement binding on it. [Para 21]
 [305-C-E]
     9.1. The letter dated 15.3.2006 enclosing the invoice,
the delivery notes dated 15.3.2006 given by respondent         F
no.1 to appellant, the confirmation dated 15.3.2006 by
respondent no.1 to appellant relating to the sale of WEGs,
relied on by respondent no.1, very significantly do not
refer to the agreement dated 24.2.2006. They are straight
and simple delivery notes and an invoice in regard to the      G
sale of goods. They can be independent transactions
which do not depend on or relate to the agreement dated
24.2.2006. If they were with reference to the agreement
dated 24.2.2006, it is strange that respondent no.1 did not
choose to refer to the said agreement in any of these          H
    292     SUPREME COURT REPORTS             (2010] 5 S.C.R.


A   documents. [Para 22] (305-F-H;, 306-A]
       9.2. The Red Herring Prospectus issued by the
  appellant in connection with the public issue of its shares
  merely refers to appellant agreeing to take over the wind
  mills along with land, infrastructure and spares from
8
  respondent no.1. It does not refer to the agreement dated
  24.2.2006 nor does it state that the takeover of the wind
  mills etc., was in pursuance of the agreement dated
  24.2.2006. The Prospectus specifically states that
  respondent no.2 had entered into an agreement dated
C 24.2.2006 with respondent no.1 to acquire WEGs and
  other assets in the name of its nominee Appellant. This
  has never been disputed by anyone. But what is
  significant is that there is nq acknowledgement or
  statement that the said agreement was authorized to be
D entered on its behalf by appellant or appellant had ratified
  or approved the said agreement. The prospectus also
  refers to the applications under section 9 filed by
  respondent no.1 and the interlocutory applications filed
  in such applications. But then that also does not help as
E in fact in the said application under section 9 the High
  Court had held that appellant is not a party to the
  agreement dated 24.2.2006 and therefore not a party to
  an arbitration agreement. (Pafa 23] [306-B-D; 307-F-G]
F       FISSER v. International Bank 282 F.2d 231 (1960); JJ
    Ryan & Sons, Inc. v. Rhone Paulene Textile S.A. 863 F.2d
    315, referred to.
                        Case Law Reference:
          2009 (1) sec 312      relied on           Para 11
G
          2010 (2) SCALE 427    followed            Para 18
          2005 (8) sec 618      followed            Para 19

          2009 (1) sec 267      relied on           Para 19
H
 INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 293
                   ANR.
      282 F.2d 231 (1960        referred to           Para 24      A
      863 F.2d 315              referred to           Para 24
     CIVIL APPELLATE JURISDICTION              Civil Appeal No.
 3874 of 2010.
                                                                   B
     From the Judgment & Order dated 1.8.2008 of the High
 Court of Madras in O.P. No. 748 of 2007.
      K.V. Vishwanathan, T.R.B. Sivakumar and K.V.
 Vijayakumar for the Appellant.

      C.A. Sundaram, P.C. Sen, Rohini Musa, A.J. Jawad, S.K.
                                                                   c
 Srinivasan, Zafar lnayat, Abhishek Guptas, Aanchal Yadav,
 Anadh Kannan, Binu Tamta, Satish C.S.K., Garvesh Kabra,
 Haripriya and Pooja Kabra for the Respondents.
      The Judgment of the Court was delivered by                   D

      RV. RAVEENDRAN, J. 1. Leave granted.
         2. The appellant and respondents 1 and 2 are companies
    incorporated under the Companies Act, 1956. Wescare Care
    (I) Ltd., the first respondent (for ~hort 'Wescare'), is in the E
 c,business of setting up and operating/managing windfarms and
  -:cgeneration of power from Wind Electric Generators. Subuthi
·· Finance Ltd - second respondent ('Subuthi' for short) is a
    promoter of the appellant company - lndowind Energy Ltd.,
    (referred to as 'lndowind'). On 24.2.2006 an agreement of sale F
    was entered into between Wescare and Subuthi. The
    agreement described "Wescare (India) Ltd. including its
    subsidiary RCI Power Ltd" as the "seller/Wescare". It described
    Subuthi Finance Ltd. and its nominee as "buyer" and as the
    "promoters of lndowind Energy Ltd." Under the said agreement, G
   the seller agreed to transfer to the buyer certain business
    assets of the seller for a consideration of Rs.98.19 crores, of
    which Rs.24.19 crores was payable in cash and Rs.74 crores
    by issue of 74 lakhs shares (of the face value of Rs.10/- at a
    premium of Rs.90/- per share). Clause 10 of the agreement H
    294       SUPREME COURT REPORTS                 [2010] 5 S.C.R.


A   relates to arbitration. Clause 11 of the agreement relates to
    approval. The said clauses are extracted below :
          "10. Governing Law and Jurisdiction.

          This AGREEMENT shall be governed by and interpreted
B         in accordance with the Jaws of India. The Parties submit
          to the exclusive jurisdiction of the court in the city of
          Chennai, Tamil Nadu. Any dispute, difference, claims or
          questions arising under this agreement or concerning any
          matter covered by this Agreement or touching upon this
c         Agreement, the same shall be referred to arbitration before
          a sole arbitrator to be appointed by consent of Seller,
          Buyer/IW. The decision/award of the Sole Arbitrator shall
          be final and binding on all parties. The provisions of the
          Arbitration and Conciliation Act, 1996, with such
D         amendments thereto as may be applicable, shall apply to
          the proceedings. The venue of the arbitration shall be
          Chennai and the language of the Arbitration shall be
          English."
          "11. Approval.
E
          Notwithstanding anything to the contrary herein contained
          in this AGREEMENT this agreement is expressly subject
          to the approval of the respective Boards of Directors/
          Shareholders by the Seller, the Buyer and lndowind
F         Energy Limited and if such approval is not obtained either
          by the Seller, the Buyer or IW on or before 30th June 2006
          this AGREEMENT shall be null and void and of no effect
          whatsoever and all transactions dc:me under the agreement
          shall be reversed with all the costs and damages to the
G         defaulting party."
         3. The Board of Directors of Wescare at its meeting held       1



    on 28.2.2006 accorded approval to the agreement dated
    24.2.2006. The Board of Directors of Subuthi at its meeting held
    on 1.3.2006 approved the said agreement. There was however
H
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 295
         ANR. [R.V. RAVEENDRAN, J.]

no such approval by the Board of Directors of lndowind.              A

    4. According to lndowind, Wescare sold 31 Wind Electric
Generators (WEGs) to lndowind on 15.3.2006 for a
consideration of Rs.13,48,00, 700/-, out of which Rs.4.5 crores
was paid in cash and Rs.8.84 crores by allotment of 884,000          B
shares of lndowind to Wescare. Further, towards the purchase
of another 8 WEGs from Wescare, lndowind allotted 58,000
shares.

      5. According to Wescare, certain disputes arose between
Wescare on the one hand and Subuthi and lndowind on the              C
other, in respect of the said agreement. Wescare filed three
petitions under section 9 of the Arbitration and Conciliation Act,
1996 ('the Act', for short) against Subuthi and lndowind seeking
the following interim measures :
                                                                     D
     (i) OA No.64112007 to restrain Subuthi and lndowind from
     alienating, encumbering or otherwise disposing of the 31
     WEGs and the land appurtenant thereto.

    (ii) OA N0.642/2007 to restrain Subuthi and lndowind from        E
    operating or running the WEGs pending completion of
    arbitration proceedings.

    (iii) OA No. 975/2007 to restrain lndowind from proceeding
    with the issue of initial public offer, proposed under the Red
    Herring Prospectus issued by it, pending final disposal of       F
    the arbitration proceedings.

     6. The said applications were dismissed by a learned
Single Judge of the Madras High Curt on 21.8.2007, holding
as follows :                                                         G

    (a) As lndowind has not signed nor ratified the agreement
    dated 24.2.2006, the maintainability of the applications ·
    under section 9 of the Act was doubtful.
                                                                     H
     296      SUPREME COURT REPORTS                 (2010] 5 S.C.R:


A          (b) As the WEGs were purchased by lndowind after paying
           the entire sale consideration, Wescare was not entitled to
           an injunction restraining lndowind from alienating the
           WE Gs.

8    The order however clarified that whatever had been stated
     therein was in the context of disposal of the applications
     seeking· interim measures under section 9 of the Act and
     nothing contained therein should be construed as findings on
     merits and the Arbitrator should determine the issues raised
C    before him uninfluenced by the observations made in the said
     order.

       7. Wescare filed a petition under section 11 (6) of the Act
  against Subuthi and lndowind for appointment of a sole
  arbitrator to arbitrate upon the disputes between them in
D respect of agreement dated 24.2.2006. Subuthi resisted the
  said petition alleging that as the agreement dated 24.2.2006
  did not contemplate any transaction between Wescare and itself
  (Subuthi) and as no transaction took place between Wescare
  and Subuthi under the agreement dated 24.2.2006, there was
E no cause of action nor any arbitrable dispute between them.
  lndowind resisted the petition on the ground that it was not a
  party to the agreement dated 24.2.2006 entered into between
  Wescare and Subuthi; that it had not ratified the agreement
  dated 24.2.2006 or acted upon it; that there was no arbitration
F agreement between Wescare and lndowind; that the
  transactions of purchase of 31 WE Gs were neither covered by
  nor in pursuance of the agreement dated 24.2.2006 and
  therefore the petition was liable to be dismissed.

G       8. The learned Chief Justice of the Madras High Court
   allowed the said application under section 11 of the Act, by the
   impugned order dated 1.8.2008 and appointed a sole arbitrator.
   The learned Chief Justice held that lndowind was prima facie
   a party to the arbitration agreement and was bound by it, even
HJ tApugh it was not a signatory to the agreement dated
';
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 297
         ANR. [R.V. RAVEEND~AN, J.]

24.2.2006. His conclusion was based on the following findings:   A

     (a)    Execution of the agreement dated 24.2.2006
            between Wescare and Subuthi containing the
            arbitration agreement, was not in dispute.
                                                                 B
      (b)   Subuthi is one of the promoters of lndowind. Both
            of them had a common registered office and
            common Directors. The correspondence
            emanating from lndowind was signed by Raja
            Sukumar who was the signatory on behalf of
            Subuthi in the agreement dated 24.2.2006. By         C
            lifting the corporate veil, it could be seen that
            Subuthi and lndowind was one and the same party.

      (c)   The agreement dated 24.2.2006 described Subuthi
            as the promoter of lndowind and also described       D
            lndowind as the nominee of Subuthi. Subuthi had
            entered into an agreement for purchase of the
            business assets of Wescare for its nominee
            lndowind. The signatory to the agreement on behalf
            of Subuthi was also a Director of lndowind.          E

      (d)   The agreement dated 24.2.2006 contemplated
            lndowind purchasing the assets of Wescare
            inch •rJing the WE Gs. and making payment therefor,
            both 1n cash and by allotment of shares. lndowind
                                                                F
            had in fact purchased from Wescare 39 WEGs. in
            March, 2006, the consideration for which was paid.
            partly in cast)_,and partly by allotment of shares,
            thereby indicating that lndowind acted in terms of
            the agreement dated 24.2.2006.
                                                                G
      (e)   The Red Hemng Prospectus issued by lndowind in
            connection with the public issue of equity shares
            gives a clear iJJdication that it is pound by the
            agreement dated 24.2.2006 between Wescare and
                                                                H
    298           SUPREME COURT REPORTS                [2010] 5 S.C.R.


A                   Subuthi (vide Risk Factor Nos.30 and 31 ).

           (f)      Signature of a party is not a formal requirement of
                    an arbitration agreement either under sub-section
                    (4)(b) and (c) or under sub-section (5) of section 7
s                   of the Act. Therefore, lndowind could be held to be
                    a party to the agreement dated 24.2.2006, even if
                    it had not executed the said agreement.

       9 The said judgment is challenged in this appeal by special
C leave. On the contentions urged the following two questions
  arise for consideration:

           (i)      Whether an arbitration clause found in a document
                    (agreement) between two parties, could be
                    considered as a binding arbitration agreement on
D                   a person who is not a signatory to the agreement?

           (ii)     Whether a company could be said to be a party to
                    a contract containing an arbitration agreement,
                    even though it did not sign the agreement
E                   containing an arbitration clause, with reference to
                    its subsequent conduct?

         10. Section 7 defines an arbitration agreement and it is
    extracted below :

F         "7. Arbitration agreement.-(1) In this Part, "arbitration
          agreement" means an agreement by the parties to submit
          to arbitration all or certain disputes which have arisen or
          which may arise between them in respect of a defined
          legal relationship, whether contractual or not.
G
          (2) An arbitration agreement may be in the form of an
          arbitration clause in a contract or in the form of a separate
          agreement.

          (3) An arbitration agreement shall be in writing.
H
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 299
         ANR. [R.V. RAVEENDRAN, J.]
    (4) An arbitration agreement is in writing if it is contained     A
    in-

            (a) a document signed by the parties'

            (b) an exchange of letters, telex, telegrams or other
            means of telecommunication which provide a                8
            record of the agreement; or

            (c) an exchange of state1J1ents of claim and defence
            in which the existence of the agreement is alleged
            by one party and not denied by the other,                 c
     (5) The reference in a contract to a document containing
     an arbitration clause constitutes an arbitration agreement
     if the contract is in writing and the reference is such as to
     make that arbitration clause part of the contract."              D
The term 'party' is defined in section 2(1 )(h) as referring to a
party to an arbitration agreement. The term arbitration
agreement is defined under section 2(1)(b) as an agreement
referred to in section 7. An analysis of sub-sectionS> (2), (3) and
(4) of section 7 shows that an arbitration agreement will be          E
considered to be in writing if it is contained in : (a) a document
signed by the parties; or (b) an exchange of letters, telex,
telegrams or other means of telecommunication which provide
a record of the agreement; or (c) an exchange of statements
of claim and defence in which the existence of the agreement          F
is alleged by one party and not denied by the other, or (d) a
contract between the parties making a reference to another
document containing an arbitration clause indicating a mutual
intention to incorporate the arbitration clause from such other
document into the contract.                                           G

    11. It is fundamental that a provision for arbitration to
constitute an arbitration agreement for the purpose of section
7 should satisfy two conditions : (i) it should be between the
                                                                      H
    300     SUPREME COURT REPORTS                    [2010] 5 S.C.R.


A   parties to the dispute; and (ii) it should relate to or be
    applicable to the dispute. [See: Yogi Agrawal v. Inspiration
    Clothes & U & Ors. - 2009 (1) SCC 372].

          12. Wescare has not entered into any agreement with
8   lndowind, referring to the agreement dated 24.2.2006
    containing the arbitration agreement, with the intention of
    making such arbitration agreement, a part of the their
    agreement. Nor is it the case of Wescare that there has been
    any exchange of statements of claim and defence in which it
C   had alleged the existence of an arbitration agreement and the
    same had been accepted and not denied by lndowind in the
    defence statement. It is also not the case of Wescare that any
    exchange of letters, telex, telegrams or other means of
    telecommunication referred to and provided a record of any
    arbitration agreement between the parties. It therefore follows
0
    that neither sub-secti9n (5) nor clauses (b) and (c) of sub-
    section (4) of section 7 applies. Therefore, what remains to be
    seen is whether there is any 'document signed by parties', as
    provided in clause (a) of sub-section (4) of section 7.

E         13. Wescare puts forth· the agreement dated 24.2.2006 as
    an agreement signed by the parties containing an arbitration
    agreement but the said agreement is signed by Wescare and
    Subuthi and not by lndowind. It is not in dispute that there can
    be appointment of an arbitrator if there was any dispute
                                                                          /.
F   between Wescare and Subuthi. The question is when lndo~ind            ··.
                                                                                /
    is not a signatory to the agreement date_d 24.2.2006, whether
    it can be considered to be a 'party' to the. arbitration agreement.
    In the absence of any document signed by the parties as
    contemplated under clause (a) of sub-section (4) of section 7,
G   and in the absence of existence of an arbitration agreement
    as contemplated in clauses (b) or (c) of sub-section (4) of
    section 7 and in the absence of a contract which incorporates
    the arbitration agreement by reference as contemplated under
    sub-section (5) of section 7, the inescapable conclusion is that
H
                                              •
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 301
         ANR. [R.V. RAVEENDRAN, J.]
lndowind is not a party to the arbitration agreement. In the       A
absence of an arbitration agreement between Wescare and
lndowind, no claim against lndowind or no dispute with lndowind
can be the subject-matter of reference to an arbitrator. This is
evident from a plain, simple and normal reading of section 7
of the Act.                                                        B

     14. Learned counsel for Wescare referred to various
clauses in the agreement dated 24.2.2006 to contend that it
should be deemed to be an agreement executed/signed by
lndowind. Firstly it was submitted that the agreement was C
entered into by Subuthi as promoter of lndowind and also
described lndowind as its nominee and the agreement was
signed on behalf of Subuthi by a person who was also a
Director of lndowind. It is submitted that the agreement also
specifically stated that Subuthi was desirous of purchasing D
certain assets of Wescare for its nominee lndowind, and in fact,
lndowind purchased the said assets of Wescare. This·
according to the learned counsel for Wescare, led to an
irresistible conclusion that lndowind was acting in terms of the
agreement dated 24.2.2006 and therefore, it would be bound
by the arbitration clause therein.                               E

     15. It is not in dispute that Subuthi and lndowind are two
independent companies incorporated under the Companies
Act, 1956. Each company is a separate and distinct legal entity
and the mere fact that two companies have common                   F
shareholders or common Board of Directors, will not make the
two companies a single entity. Nor will existence of common
shareholders or Directors lead to an inference that one
company will be bound by the acts of the other. If the Director
who signed on behalf of Subuthi was also a Director of lndowind    G
and if the intention of the parties was that lndowind should be
bound by the agreement, nothing prevented Wescare insisting
that lndowind should be made a party to the agreement and
requesting the Director who signed for Subuthi also to sign on
                                                                   H
    302     SUPREME COURT REPORTS                  [2010] 5 S.C.R.


A behalf of lndowind. The very fact that parties carefullyavoided
  making lndowind a party and the fact that the Director of
  Subuthi though a Director of lndowind, was careful not to sign
  the agreement as on behalf of lndowind, shows that the parties
  did not intend that lndowind should be a party to the agreement.
B Therefore the mere fact that Subuthi described lndowind as its
  nominee or as a company promoted by it or that the agreement
  was purportedly entered by Subuthi on behalf of lndowind, will
  not make lndowind a party in the absence of a ratification,
  approval, adoption or confirmation of the agreement dated
C 24.2.2006 by lndowind.

       16. Clause 11 of the agreement dated 24.2.2006
  categorically states that the agreement shall be null and void
  and of no effect whatsoever unless it is expressly approved by
D the respective Board of Directors/shareholders of Wescare,
  Subuthi and lndowind. It is admitted that the Board of Directors
  of Wescare and Subuthi approved the agreement. But the
  Board of Directors or the shareholders of lndowind did not
  approve the agreement. In the absence of such approval by
E lndowind, and in the absence of lndowind being a party or
  signatory to the agreement dated 24.2.2006, it is
  ununderstandable as to how lndowind can bE!'deemed to be a
  party to the agreement dated 24.2.2006 and consequently a
  party to the arbitration agreement contained therein.

F      17. Wescare referred to several acts and transactions as
  also the conduct of lndowind to contend that an inference should
  be drawn that lndowind was a party to the agreement or that it
  had affirmed and approved the agreement or acted in terms
  of the agreement. An examination of the transactions between
G the parties to decide whether there is a valid contract or whether
  a particular party owed any obligation towards another party or
  whether any person had committed a breach of contract, will
  be possible in a suit or arbitration proceeding claiming
  damages or performance. But the issue in a proc.eeding under
H
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 303
         ANR. [R.V. RAVEENDRAN, J.]
section 11 is not whether there was any contract between the A
parties or any breach thereof. A contract can be entered into
even orally. A contract can be spelt out from correspondence
or conduct. But an arbitration agreement is different from a
contract. An arbitration agreement can come into existence only
in the manner contemplated under section 7. If section 7 says B
that an arbitration agreement should be in writing, it will not be
sufficient for the petitioner in an application under section 11
to show that there existed an oral contract between the parties,
or that lndowind had transacted with Wescare, or Wescare had
performed certain acts with reference to lndowind, as proof of C
arbitration agreement.

     18. A Constitution Bench of this Court in Economic
Transport Organisation v. Mis. Charan Spinning Mills (P) Ltd.
- 2010 (2) SCALE 427 pointed out that court examines a               D
document from different perspectives in different types of cases.
This Court observed:

    "20. In this context, it is necessary to remember that the
    nature of examination of a document may differ with
    reference to the context in which it is examined. If a           E
    document is examined to find out whether adequate stamp
    duty has been paid under the Stamp Act, it will not be
    necessary to examine whether it is validly executed or
    whether it is fraudulent or forged. On the other hand, if a
    document is being examined in a criminal case in the             F
    context of whether an offence of forgery has been
    committed, the question for examination will be whether it
    is forged or fraudulent, and the issue of stamp duty or
    registration will be irrelevant. But if the document is sought
    to be produced and relied upon in a civil suit, in addition      G
    to the question whether it is genuine, or forged, the question
    whether it is compulsorily registrable or not, and the
    question whether it bears the proper stamp duty, will
    become relevant. If the document is examined in the
                                                                     H
    304     SUPREME COURT REPORTS                    [2010) 5 S.C.R.


A        context of a dispute between the parties to the document,
         the nature .of examination will be to find out that rights and
         obligation ·of one party vis-a-vis the other party. If in a
         summary proceedings by a consumer against a service
         provider, the insurer is added as a Cb-complainant or if the
B      . insurer represents the consumer as a power of attorney,
         there is no need to examine the nature of rights inter-se
         between the consumer and his insurer."

        19. The scope of examination of the agreement dated
c 24.2.2006, by the learned Chief Justice or his Designate under
  section 11 (6) is necessarily to be restricted to the question
  whether there is an arbitration agreement between the parties.
  The examination cannot extend to examining the agreement to
  ascertain the rights and obligations regarding performance of
D such contract between the parties. This Court in SBP & Co. v.
  Patel Engineering Limited [2005 (8) SCC 618) and in National
  Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. [2009 (1) SCC
  267] has held that when an application is filed under section
  11, the Chief Justice or his Designate is required to decide only
E two issues, that is whether the party making the application has
  approached the appropriate court and whether there is an
  arbitration agreement and whether the party who has applied
  under section 11 of the Act, is a party to such agreement.
  Therefore, the Chief Justice exercising jurisdiction under section ·
F 11 of the Act has to only consider whether there is an arbitration
  agreement between the petitioner and the respondent/s in the
  application under section 11 of the Act. Any wider examination
  in such a summary proceeding will no.t be warranted.

       20. In so far as the issue of existence of arbitration
G agreement between the parties, the learned Chief ·Justice. or
  his Designa~e is required to decide the issue finally .and it is
  not permissible in a proceeding under section 11 to merely hold
  that a party is prima facie a party to the arbitration agreement
  and that a party is prima facie bound by it. It is not as lf the
H
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 305
         ANR. [R.V. RAVEENDRAN, J.]

Chief Justice or his Designate will subsequently be passing any      A
other final decision as to who are the parties to the arbitration
agreement. Once a decision is rendered by the Chief Justice
or his Designate under section 11 of the Act, holding that there
is an arbitration agreement between the parties, it will not be
permissible for the arbitrator to consider or examine the same       B
issue and record a finding contrary to the finding recorded by
the court. This is categorically laid down by the Constitution
Bench in SBP. Therefore the prima facie finding by the learned
Chief Justice that lndowind is a party to the arbitration
agreement is not what is contemplated by the Act.                    C

     21. It is no doubt true that if lndowind had acknowledged
or confirmed in any correspondence or other agreement or
document, that it is a party to the arbitration agreement dated
24.2.2006 or that it is bound by the arbitration agreement           0
contained therein, it could have been possible: to say that
lndowind is a party to the arbitration agreement. But that would
not be under section 7(4)(a) but under section 7(4)(b) or section
7(5). Be that as it may. That is not the case of Wescare. In fact,
the delivery notes/invoices issued by Wescare do not refer to        E
the agreement dated 24.2.2006. Nor does any letter or
correspondence sent by lndowind refers to the agreement
dated 24.2.2006, either as an agreement executed by it or as
an agreement binding on it. We may now refer to the several
documents referred to and relied on by Wescare.
                                                                     F
     22. The first is in regard to the sale of WEGs by Wescare
to lndowind. The letter dated 15.3.2006 enclosing the invoice,
the delivery notes dated 15.3.2006 given by Wescare to
lndowind, the confirmation dated 15.3.2006 by Wescare to
lndowind relating to the sale of WEGs, relied on by Wescare,         G
very significantly do not refer to the agreement dated 24.2.2006.
They are straight and simple delivery notes and an invoice in
regard to the sale of goods. They can be independent
transactions which do not depend on or relate to the agreement
dated 24.2.2006. If they were with reference to the agreement        H
        306       SUPREME COURT REPORTS                  [2010] 5 S.C.R.


    A   dated 24.2.2006, it is strange that Wescare did not choose to
        refer to the said agreement in any of these documents. .

             23. Strong reliance is placed on the Red Herring
        Prospectus issued by the lndowind in connection with the public
    8   issue of its shares. We extract below the relied upon portions
        of the prospectus :

              "30. We have agreed to takeover the assets of Wescare
              (India) Limited, subject to approval of owners of assets
              and statutory formalities, but only a portion of acquisition
    c         has been completed.

/            Our Company agreed to takeover wind mills along with
             land, infrastructure and spares from Wescare India
             Limited. But due to non receipt of approvals from the
    o        lenders/lessors, only a part of the total being 6.49 MW has
             been acquired by us. The Company is not certain of
           ' completing the remaining acquisition. We had paid the
             total amount for 39 windmills, however only 28 windmills
             were delivered to us representing nearly 72% of the total
    E        money paid by us.

              31. One of our Promoters, Subuthi Finance Limited, has
              entered into an agreement dated February 24, 2006 with
              Wescare (India) Limited for the acquiring wind mills and
              other assets in the name of its nominee viz. lndowind
    F         Energy Limited for a consideration aggregating
              approximately Rs.9819 lacs.

              The consideration for the above was to be partly settled
              in partly in cash (Rs.2419 lacs) and partly by way of shares
    G         (74 lacs) of lndowind Energy Limited.

              Wescare (India) Limited has filed the following
              applications before the Hon'ble High Court of Madras
              under Section 9 of the Arbitration and Conciliation Act,
    H         1996:
INDOWIND ENERGY LTD. v. WESCARE (I) LTD. AND 307
         ANR. [R.V. RAVEENDRAN, J.]

3.No. Application No.       Applicant         Respondents        A

1     O.A.No.641of2007      Wescare India     (i) Subuthi
                            Limited           Finance Limited
                                              (ii) lndowind
                                              Energy Limited     B
2     O.A.No.642 of 2007    -same as above- -same as above
3     Appl. No.3808 of 2007 -same as above- -same as above
4     Appl. No.3808 of 2007 -same as above- -same as above-

    All above applications are pending before the Hon'ble High
                                                                 c
    Court of Madras. For further details of the same, please
    refer section titled "Outstanding Litigations and Material
    Developments" on page 190 of this Red Herring
    Prospectus."
                                                                 D
Para 30 of the Prospectus merely refers to lndowind agreeing
to take over the wind mills along with land, infrastructure and
spares from Wescare. It does not refer to the agreement dated
24.2.2006 nor does it state that the takeover of the wind mills
etc., was in pursuance of the agreement dated 24.2.2006. Para E
31 of the Prospectus .specifically states that Subuthi had
entered into an agreement dated 24.2.2006 with Wescare to
acquire WEGs and other assets in the name of its nominee
lndowind. This has never been disputed by anyone. But what
is significant is that there is no acknowledgement or statement F
that the said agreement was authorized to be entered on its
behalf by lndowind or lndowind had ratified or approved the said
agreement. Para 31 also refers to the applications under
section 9 fiied by Wescare and the interlocutory applications
filed in such applications. But then that also does not help as G
in fact in the said application under section 9 the High Court
has held that lndowind is not a party to the agreement dated
24.2.2006 and therefore not a party to an arbitration agreement.

    24. Wescare relied upon two decisions of the US Court        H
    308      SUPREME COURT REPORTS                   (2010] 5 S.C.R.


A   of Appeals to contend that a person to be bound by an
    arbitration agreement need not personally sign the written
    arbitration agreement. [FISSER v. International Bank - 282
  . F.2d 231 (1960) and J.J.Ryan & Sons, Inc. v. Rhone Poulene
    Textile, S.A. - 863 F.2d 315]. These decisions are of no
B assistance as they do not relate to_a provision similar to section
    7 of the Indian Act.

          25. In view of the above, we allow this appeal, set aside
    the order of the High Court appointing an Arbitrator in regard
    to the claims of Wescare against lndowind and dismiss the
C   application under section 11 (6) of the Act filed by Wescare in
    so far as lndowind is concerned. The appointment of Arbitrator
    in _so far as Subuthi is concerned, is not disturbed. It is however
    open to Subuthi to raise all contentions including the contention
    relating to absence of arbitral dispute, before the Arbitrator.
D
    B.B.B.                                          Appeal allowed.




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