India: "Association" Under Arbitration & Conciliation Act, 1996

Last Updated: 19 October 2018
Article by AMLEGALS  

IN THE SUPREME COURT OF INDIA

M/s Larsen and Toubro Limited Scomi Engineering Bhd v. Mumbai Metropolitan Region Development Authority
Arbitration Petition (C) No. 28 OF 2017
[Judgement on 03.10.2018]

FACTS

The Petitioner is a Consortium of M/s Larsen and Toubro, an Indian company, together with Scomi Engineering Bhd, a Company incorporated in Malaysia, that had entered into an agreement with the Respondent for planning, design, development, construction, manufacture, supply, testing and commissioning of a Monorail system in Wadala, Mumbai including operation and maintenance for a period of three years from the date of start of commercial operations on 09/01/2009.

The agreement contained a detailed clause concerning claims, dispute and arbitration.

After disputes arose between the parties, several interim claims were been made by the Consortium under Section 11 of the Arbitration & Conciliation Act to Supreme Court.

The contention of the Consortium was that since one of the parties to the Arbitration agreement is a body corporate incorporated in Malaysia, a country other than India, then by the virtue of this fact the provisions of Section 2(1)(f)(ii) of the Arbitration & Conciliation Act, 1996 should be applied.

On the other hand, respondents contended that the petitioners are really an un-incorporated association and would, therefore, fall within Section 2(1)(f)(iii) as being an association or a body of individuals.

It was also pleaded that since the Petitioners have their central management and control exercised in India through the Consortium's office in Wadala, Mumbai, therefore sub-Clause (iii) of Section 2(1)(f) of the Act is also exhausted to the petitioner.

An order was also passed by Bombay High Court on 20/10/2016 wherein an interim Award dated 18/08/2016 was challenged, which was between the same parties arising out of the same agreement.

This order had upheld an interim Award of the Arbitrators that had stated that the particular claim, that was made in that case, could be made only as a Consortium and not as two entities separately. However, the petitioner had not challenged this order before the Supreme Court.

Hence, the present petition has been filed under Section 11 of the Arbitration and Conciliation Act, 1996 for appointment of Arbitrator by the Supreme Court.

ISSUES BEFORE SC

Whether the Petitioner would fall under Section 2(1)(f)(ii) or Section 2(1)(f)(iii) of the Arbitration & Conciliation Act, 1996 for them to approach this Court thinking this to be an 'international commercial arbitration' under the Act.

OBSERVATION

Reference had been made by the court to an order made by Bombay High Court dated 20/10/2016 which was passed for the same parties and arising out of same contract where it was held as follows:

"8. Considering the terms and conditions of the contract as well as the decision cited by Mr. Ankhad, in my opinion, in the facts and circumstances of the present case, it is not open for the petitioners to rely upon their independent identities while dealing with the respondent and that they will have to deal with the respondent as a Consortium only. Therefore, there is no infirmity in the impugned order. For the same reason, the present petition as filed would also not been maintainable. Hence, the same is dismissed."

The above order of the Bombay High Court was made when an appeal was preferred by the consortium against an interim Award made by the Arbitrators, qua different claims arising under the same contract, had made it clear that

"the claim could be filed only in the name of the Consortium and not separately".

The Supreme Court also made a reference to TDM Infrastructure Private Ltd. v. UE Development India Private Ltd., wherein it was observed by the court that expression "a company or" in Section 2(1)(f)(iii) of the Act cannot possibly be said to refer to a company registered and incorporated in India which may be controlled by persons in a country outside India"; And, this is the reason behind the omission of the expression "a company or" which was originally at the beginning of Section 2(1)(f)(iii), by Act 3 of 2016.

CONCLUDING VIEW

The court according to the factual position dismissed the Arbitration petition.

The court observed that this was not an "international commercial arbitration" as defined under Section 2(1)(f) of the Act for the petitioner to come to Supreme Court.

However, the court did not find it necessary to adjudicate whether the appropriate stage for invoking Arbitration has been reached or not, and has held that, it would be open for the petitioner to approach the relevant court on the footing that their case is not a case of an international commercial arbitration.

RELIED UPON DECISIONS

The Hon'ble Court put reliance upon the following decisions in forming the view:

  1. Bombay High Court order passed in a matter between M/S Larsen And Toubro Limited Scomi Engineering Bhd & Mumbai Metropolitan Region Development Authority, dated 20/10/2016.
  2. TDM Infrastructure Private Ltd. v. UE Development India Private Ltd. (2008) 14 SCC 271.

REASON OF JURISPRUDENCE

The Court observed that

Firstly, "Section 2(1)(f)(iii) of the Act refers to two different sets of persons: an "association" as distinct and separate from a "body of individuals". For example, under Section 2(31) of the Income Tax Act, 1961, "person" is defined as including, under sub clause (v), an association of persons, or body of individuals, whether incorporated or not. It is in this sense, that an association is referred to in Section 2(1)(f)(iii) which would therefore include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country other than India."

Secondly, the court said: "The Indian company is the lead partner, and that the Supervisory Board constituted under the Consortium Agreement makes it clear that the lead partner, and that the Supervisory Board constituted under the Consortium Agreement makes it clear that the lead partner really has the determining voice in that it appoints the Chairman of the said Board (undoubtedly, with the consent of other members); and the fact that the Consortium's office is in Wadala, Mumbai as also that the lead member shall lead the arbitration proceedings, would all point to the fact that the central management and control of this Consortium appears to be exercised in India and not in any foreign nation."

Thirdly, judgement of the Bombay High Court is binding inter-parties as the petitioner had not preferred an appeal against the said order.

Thus, following the judgment of the High Court of Bombay, it was clear that the un-incorporated "association" referred to in Section 2(1)(f)(iii) would be attracted on the facts of this case and not Section 2(1)(f)(ii) as the Malaysian body cannot be referred to as an independent entity.

AMLEGALS REMARKS

Section 2(1)(f)(iii) has already once been amended after judgement of the Supreme Court. This judgement too will pave way for a clearer picture of interpretation of Arbitration clauses with regards to an International Commercial Arbitration especially when there is a consortium of an Indian and foreign company and there is a debate as to the role and liabilities of the Companies involved.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reade should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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