India: Supreme Court Rules On The Issue Of Composite Reference To Arbitration Under Multiple Agreements

Last Updated: 31 October 2017
Article by Rajat Jariwal, Sahil Narang and Aakash Bajaj

Most Read Contributor in India, August 2018

On 10 October 2017, the Hon'ble Supreme Court (Supreme Court / Court) pronounced a judgment in the case of M/s Duro Felgueria SA v M/s Gangavaram Port Limited1 wherein the issue of composite reference to arbitration under multiple agreements between three parties was decided.

Factual background

This case involved three parties, namely: (1) Gangavaram Port Limited (GPL), an Indian company; (2) Duro Felguera Plantas Industrials SA (DFPI), a Spanish company; and (3) Felguera Gruas India Private Limited (FGI), an Indian company.

GPL had developed a greenfield, ultra-modern, all-weather sea-port and intended to expand its facilities in the port with respect to bulk materials handling system. For this purpose, GPL invited a tender and in response to the said tender, DFPI along with FGI submitted a Single Bid/ Tender - Original Package No 4 dated 15 November 2011.

DFPI and FGI were selected as the contractors for the works and after discussion between the parties, the Original Package No 4 was divided into five different and separate packages, namely (i) New Package No 4, (ii) Package No 6, (iii) Package No 7, (iv) Package No 8 and (v) Package No 9. New Package No 4 was awarded to DFPI whereas Package Nos 6 to 9 were awarded to FGI. Separate letters of award were issued for the five different Packages.

Five different contracts were entered into on 10 May 2012 for the five separate Packages with different parties. The contract with reference to New Package No 4 was entered into with DFPI and the contracts in relation to Package Nos 6, 7, 8, 9 and 10 were entered into with FGI. Each one of the contract/agreement for work under the split up Packages contained an arbitration clause namely, sub-clause 20.6 and the proceedings were governed by the Arbitration and Conciliation Act, 1996 (Act). DFPI also executed a corporate guarantee dated 17 March 2012 (Guarantee) in favor of GPL guaranteeing due performance of all the works awarded to DFPI and FGI. The Guarantee had its own separate arbitration clause (Clause 8).

On 11 August 2012, DFPI and FGI executed a Tripartite Memorandum of Understanding (MOU) with GPL to carry out the works as per the priority of the documents listed therein. The MOU did not contain any specific arbitration clause.

Disputes arose between the parties and DFPI issued a notice invoking arbitration on 5 April 2016 for the New Package No 4 contract. FGI also issued four arbitration notices dated 7 April 2016 for Package Nos 6 to 9 contracts. Both DFPI and FGI nominated Justice D R Deshmukh as their nominee arbitrator in each of the respective five contracts.

GPL issued a comprehensive arbitration notice on 13 April 2016 under sub-section 20.6 of the Original Package No 4 – Tender Document which, as per GPL, was incorporated in the MOU by reference and all the other five contracts namely Package No 4, Package Nos 6 to 9 and the Guarantee.

Main contentions of GPL

  1. The MOU referred to all the agreements and it had subsumed all the separate agreements and therefore there could only be one agreement in relation to which one particular arbitral tribunal should be appointed to resolve the disputes of international commercial arbitration.
  2. The MOU makes a reference to the Original Package No 4 – Tender Document which contains an arbitration clause and hence the arbitration clause is incorporated into the MOU by reference.
  3. The Original Package No 4 – Tender Document was split up into five separate contracts only based on a request made by DFPI for the convenience of the contractors and all the works are interconnected and interlinked.
  4. The appointment of a single arbitral tribunal, under the MOU, would avoid conflicting awards between the parties, huge wastage of time, resources and expenses and would be consistent with law and public policy.

Main contentions of DFPI and FGI

  1. The parties by a conscious decision and agreement superseded the Original Package No 4 – Tender Document and five new package contracts with different works were entered and executed.
  2. The MOU came into existence long after the contracts and it does not contain any arbitration clause. The MOU only enlists the priority of the documents to be considered for carrying out the works and cannot override the terms of the separate contracts.
  3. The Guarantee has its own separate and distinct arbitration clause and the same has no connection with the arbitration clauses of the five different contracts.
  4. There cannot be a composite reference for five different contracts which are separate in their contents and the subject matter. Therefore, there has to be multiple arbitral tribunals for different contracts, however, the composition of these tribunals can be the same.

Decision of the Court

Powers of the Court under Section 11(6A) of the Act

The Court noticed that this was one of the first cases before it on the issue of interpretation of Section 11(6A) of the Act after the amendments to the Act in 2015. Therefore, the Court deemed it appropriate to outline the scope and extent of power of the High Court and the Supreme Court under Sections 11(6) and 11(6A) of the Act.

The Court while considering the pre-amendment judgments2  held that even though the scope and power of the High Court and Supreme Court under Section 11(6) of the Act was considerably wide but after the amendment all that the Court needs to see is whether the arbitration agreement exists and nothing more and nothing less. The Court also held that the amended provisions of Section 11(7) of the Act provides that the order passed under Section 11(6) shall not be appealable and thus finality is attached to the order passed under this Section.

Composite reference of multiple agreements

The Court held that in this case there are six arbitral agreements i.e. five package contracts for works and one under the Guarantee. The Court also held that from the records all that had to be seen was that there were separate letters of award, separate contracts, separate subject matters and separate and distinct works. The Court held that considering these circumstances and the restrictive scope of interference under Section 11 of the Act, there had to be separate arbitral tribunals for the disputes pertaining to each agreement, for the following reasons:

  1. After the Original Package No. 4 was split up into five separate agreements, the parties could not revert to the terms of the Original Package No. 4 nor could they merge into one.
  2. Mere reference of the Original Package No. 4 – Tender Document in the MOU could not lead to an inference of an arbitration clause being incorporated in it. The MOU, in this case, was meant to lay down the priority of documents only to clarify the priority in execution of the work.
  3. Merely because DFPI gave a corporate guarantee undertaking to compensate GPL for both DFPI and FGI, the same cannot supersede the five split up contracts.
  4. The Court while distinguishing the judgment of the Supreme Court in Chloro Controls India Private Limited v Severn Trent Water Purification Inc & Ors (Chloro Controls case)3 held that the said judgment and the ratio regarding the doctrine of 'composite reference' was not applicable to the instant case. The Court considered that the arbitration clause in the Chloro Controls case included the wordings "under and in connection with" in the principal agreement, which was very wide. However, in this case all the contracts had separate arbitration clauses and they did not depend upon the terms and conditions of the parent agreement (i.e. the MOU).
  5. The Court also considered that if the request of GPL for having a composite international commercial arbitration is accepted, then FGI (the Indian party) may lose the opportunity of challenging the award under Section 34(2A) of the Act.

However, since the issues arising between the parties were interrelated, the Court appointed the same arbitral tribunal for resolving each of the disputes under two international commercial arbitrations involving DFPI and four domestic arbitrations involving FGI.

Comment

The decision assumes relevance as the Court has propounded its views on the (i) scope of examination by the relevant court under Section 11 of the Act for appointment of an arbitrator; (ii) the law relating to incorporation of an arbitration clause in a document by reference; and (iii) a composite reference under multiple agreements. The Supreme Court has narrowed the scope of its power in relation to the appointment of an arbitrator. The decision of the Supreme Court may be argued by some to be a hyper-technical view which may defeat other analogous purposes of arbitration i.e. increasing efficacy, efficiency and avoiding wastage of time, resource and money.

Footnotes

[1] Arbitration Petition No 30 of 2016 with Arbitration Petition No 31 of 2016 & TC (C)Nos 25/2017, 26/2017 and 28/2017

[2] Konkan Railway Corporation Limited and Ors. v Mehul Construction Company [(2000) 7 SCC 201]

   Konkan Railway Corporation Limited and Anr v Rani Construction Private Limited [(2002) 2 SCC 388]

   SBP and Co v Patel Engineering Limited and Anr, [(2005) 8 SCC 618]

   National Insurance Company Limited v Boghara Polyfab Private Limited [(2009) 1 SCC 267]

[3] 2013(1) SCC 641

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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