India: SC: Scope Of Interference Of Courts While Appointing Arbitrators Limited To Determining Existence Of Arbitration Agreement

Last Updated: 16 November 2017
Article by Ajay Bhargava, Jeevan Ballav Panda and Shalini Sati Prasad

Most Read Contributor in India, December 2017

On 10 October 2017, the Supreme Court of India in the matter of Duro Felguera, S.A. v. Gangavaram Port Limited has upheld the legislative policy and purpose to minimize the Court's intervention at the stage of appointing an arbitrator, on an application initiated post 2015 amendment to the Arbitration and Conciliation Act 1996 (1996 Act) in terms of Section 11 (6A) of the 1996 Act. In supersession of the legal position prevalent prior to the 2015 Amendment, the only issue that the Courts exercising powers while appointing arbitrators need to assess is whether an arbitration agreement exists – 'nothing more, nothing less'.

Background

In this matter, Gangavaram Port Limited (GPL) had awarded tender work for Bulk Material Handling Systems of its sea port to Duro Felguera, S.A. (Duro) and its subsidiary Felguera Gruas India Private Limited (FGL). The original contract was divided into five different packages/contracts bearing different works. Out of the five contracts, one was entered with Duro and the rest of the four were entered with FGL, all dated 10 May 2012. Each contract had its own arbitration clause. Duro had issued a corporate guarantee dated 17 March 2012 to GPL guaranteeing due performance of all the works awarded to Duro and FGL. The corporate guarantee had an independent arbitration clause. Subsequently, a tripartite MoU was entered on 11 August 2012 between the parties to carry on works under five contracts as per the priority of documents listed therein to give clarity in carrying out the works.

Disputes arose between the parties and arbitration clause was subsequently invoked by the parties. Duro issued an arbitration notice under its separate contract with GPL. FGL issued four separate arbitration notices under the four contracts entered between FGL and GPL, both nominating the common nominee arbitrator for each of their contracts. GPL issued a comprehensive arbitration notice under the MoU dated 11 August 2012 for resolving the disputes through 'International Commercial Arbitration' and nominated its arbitrator for a composite reference.

Consequently, Duro filed an application under Section 11(6)(a) read with Section 11(12)(a) of the 1996 Act to appoint the nominee arbitrator on behalf of GPL with respect to its contract with GPL. FGL also filed four separate proceedings for appointment of domestic arbitral tribunals for resolving the dispute pertaining to the four contracts awarded to it by GPL. GPL had filed a separate application to appoint a single arbitral tribunal under the MoU dated 11 August 2012 for a composite reference for adjudication of all the disputes between the parties.

The Supreme Court was posed with two main issues for determination, being:

  1. Whether a 'Composite Reference' be made under MoU dated 11 August 2012, as contended by GPL? and
  2. Whether there is a need to constitute 'multiple arbitral tribunals' for each of the five different contracts and a separate 'international commercial arbitration' arbitral tribunal for corporate guarantee given by Duro?

The following contentions were raised by Duro and FGL:

  1. By conscious agreement of the parties, the original tender was superseded by five new and separate contracts prescribing different works, each of which have separate special conditions as well as general conditions of contract;
  2. The corporate guarantee executed by Duro guaranteeing due performance of the works awarded to Duro and FGL has its own separate and distinct arbitration clause and the same has no connection with the arbitration clauses contained in the five separate contracts;
  3. MoU dated 11 August 2012 which enlists priority of the documents is only to have clarity in carrying out the works and the MoU cannot override the terms of the five separate contracts;
  4. There cannot be a composite reference as the five separate contracts were independent and separate in their content and subject matter involved;
  5. The corporate guarantee executed by Duro prescribed for international commercial arbitration, which should be adhered to;
  6. FGL was not a party to the corporate guarantee executed by Duro;
  7. MoU dated 11 August 2012 did not contain any arbitration clause and was executed after the execution of the other contracts. The MoU did not intend to alter the nature of the rights, responsibilities and obligations of the parties arising from the separate contracts; and
  8. For settling the disputes arising under the separate contracts awarded to FGL, there should be four domestic arbitral tribunals and not a 'composite reference' by invoking MoU.

The contentions raised by GPL were:

  1. The split up of the "Works" into five separate contracts was done only on the basis of the requests made by the Duro for convenience of the contractors;
  2. The Works under separate contracts were inter- connected and inter-linked;
  3. The appointment of a single arbitral tribunal will avoid conflicting awards between the parties, wastage of time, resources and expenses and would be consistent with law and public policy;
  4. The arbitration clause under the conditions of contract, which forms part of the tender document (also incorporated by reference in the MoU) shall prevail over the arbitration clause under five separate contracts;
  5. It would be just and proper for a composite reference to be made to a single arbitral tribunal of international commercial arbitration as the same would be consistent with intention of parties and public policy; and
  6. 'Works' has always been envisaged as one composite contract by the parties though the contracts were split into packages.

Judgment

Justice R. Banumathi delivered the detailed judgment and a separate concurring judgment was passed by Justice Kurian Joseph. The petitions filed by Duro and FGL were allowed and the petition filed by GPL stood disposed of. It was held that, post amendment, the courts have been left with the limited scope to decide whether there exists a valid arbitration agreement between the parties.

In the circumstances of the present case, the Supreme Court held that the five contracts as well as the corporate guarantee given by Duro and FGL separately with GPL had separate arbitration agreements and they do not depend on the terms and conditions of the original package and are independent of the MoU dated 11 August 2012. The Supreme Court relying upon the judgment in the case of M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd.1 held that for incorporation by reference for the purpose of Section 7(5) of the 1996 Act, the parties must have the intention to incorporate the arbitration clause by special reference so as to make it applicable. A general reference to another contract will not be sufficient to incorporate the arbitration clause from the referred contract into the contract under consideration. The MoU dated 11 August 2012 did not have an arbitration agreement of its own and there was no incorporation of the arbitration clause from the other contracts by reference.

It was held that since Duro is a foreign company, for its one separate package/ contract and corporate guarantee with GPL, international commercial arbitral tribunals were to be constituted. With respect to the four separate agreements between FGL and GPL, separate domestic arbitral tribunals were to be constituted albeit comprising of the same members as part of such arbitral tribunals.

The Supreme Court opined that the legislative intent is to essentially minimise the Court's intervention at the stage of appointing the arbitrator. The Court further held that while the arbitrators can be the same, there has to be different tribunals constituted to respect the mandate of Section 11(6A) of the 1996 Act.

Comments

This judgment of the Supreme Court upholds the legislative policy and purpose, which is essentially to minimize the Court's intervention in arbitration proceedings. This intention has been incorporated in Section 11(6A) of the 2015 Amendment which has further reduced Court's intervention in exercise of its powers at the stage of appointing the arbitrator(s) to the extent of determining the existence of an arbitration agreement. There has been a significant transition in the position of law as laid down by the Supreme Court in Konkan Railway Corporation Limited & Ors. v. Mehul Construction Company2 and Konkan Railway Corporation Limited & Anr. v. Rani Construction Private Limited3 that exercise of powers of the Court was mere administrative function to the overruling of the said judgments in SBP & Co. v. Patel Engineering Limited & Anr4 to hold that it is a judicial power and not merely an administrative power. Subsequently, the judgment of National Insurance Company Limited v. Boghara Polyfab Private Limited5 further clarified the position as upheld in S.B.P. Case by identifying the specific categories of issues which were within the domain and jurisdiction of the Court while exercising such powers under Section 11 of the 1996 Act. This position has now been completely narrowed down under the 2015 Amendment with the insertion of Section 11(6A).

The power of the Court is now only limited to the issue of determination of existence of arbitration agreement, thereby implying that all other issues (whether preliminary or otherwise) have been left exclusively for adjudication by the arbitral tribunal. In other words, the Court while hearing an application under Section 11 of the 1996 Act is required to only consider whether there exists a valid arbitration agreement between the parties in dispute. The provisions of the 2015 Amendment would be applicable to proceedings which have commenced on or after 23 October 2015 (date on which the Arbitration and Conciliation Ordinance, 2015 was promulgated and from which date subsequently the 2015 Amendment was given retrospective effect).

Therefore, proceedings which have commenced prior to 23 October 2015 would continue to be governed by the legal position as it existed prior to the 2015 Amendment. Therefore, for such proceedings which commenced prior to 23 October 2015, culminating into application under Section 11 of the 1996 Act, the law as laid down by the Supreme Court in the S.B.P. Case and clarified in National Insurance Case would continue to hold good and the present judgment may not be applicable. The recent trend of the Supreme Court taking a pro-active approach in interpreting the provisions of the much deliberated 2015 Amendment and settling the legal position, is definitely a positive step to emphasise Judiciary's support towards the legislative policy of minimal Court's interference in arbitration proceedings and promote it as a preferred mode of dispute resolution.

Footnotes

[1](2009) 7 SCC 696

[2](2000) 7 SCC 201

[3](2002) 2 SCC 388

[4](2005) 8 SCC 618

[5](2009) 1 SCC 267

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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