India: Courts Can Decline Reference Under Section 11 Of Arbitration Act If Disputes Do Not Fall Within The Ambit Of Arbitration Agreement: Supreme Court Of India

The Hon'ble Supreme Court in its recent judgment in DLF Home Developers Ltd. v. Rajapura Homes Pvt. Ltd. & Anr.¹ reiterated that the courts acting under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) are not expected to act mechanically merely to deliver a dispute at the doors of an arbitrator. On the contrary, the courts are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11 of the Arbitration Act. Such a review, is not intended to usurp the jurisdiction of the arbitral tribunal, but is rather aimed at streamlining the process of arbitration. Resultantly, the Hon'ble Supreme Court held that even when an arbitration agreement exists, the courts can decline a prayer for reference under Section 11 if the dispute was not correlated to the arbitration agreement. In this article, we briefly examine the facts and findings in the aforesaid judgment.

Brief facts

The petitioner DLF Home Developers Ltd. (DHDL) filed two arbitration petitions under Section 11(6) of the Arbitration Act for appointment of sole arbitrator to adjudicate differences that had arisen out of two construction management Agreements (Construction Management Agreements).

In 2007-2008, DHDL and Ridgewood Holdings Ltd. (Ridgewood) invested in a joint venture wherein Ridgewood invested in four special purpose vehicles, including Rajapura Homes Pvt. Ltd. (Rajapura) (first respondent in Arbitration Petition No. 17 of 2020) and Begur OMR Homes Pvt. Ltd. (Begur) (first respondent in Arbitration Petition No. 16 of 2020). Rajapura was engaged for construction, operation, and maintenance of certain properties in Bangalore, Karnataka (Rajapura Projects). Similarly, Begur was engaged for certain properties located in Tamil Nadu, and Karnataka (Southern Homes Projects).

In 2008, Ridgewood transferred its stake in joint ventures to its affiliate, Resimmo PCC (Second Respondent) which is a company incorporated in Mauritius. Subsequently, in 2015, it was agreed that the Second Respondent was to acquire sole ownership and control of Rajapura and Begur. Accordingly, to give effect to change in ownership of Rajapura and Begur, DHDL signed two share purchase agreements, one for Rajapura (Rajapura SPA) and one for Begur (Southern Homes SPA) respectively. The primary purpose of the share purchase agreements was to transfer shares from DHDL to Second Respondent. The share purchase agreements contained identical arbitration clauses providing for arbitration seated in Singapore in accordance with Singapore International Arbitration Centre Rules (SIAC Rules).

The share purchase agreements provided that the parties were to execute a construction management agreement as a condition precedent for closing the transactions. Thus, in terms of the enabling provisions contained in the Rajapura SPA and the Southern Homes SPA, the parties signed DLF-Rajapura Homes Construction Management Services Agreement (RCMA), and DLF-Southern Homes Construction Management Services Agreement (SCMA) respectively. Under the RCMA, DHDL was required to provide, inter alia, construction management services to Rajapura for completion of Rajapura Projects. Likewise, under the SCMA, DHDL had to provide similar services to Begur for completion of the Southern Homes Projects. As a consideration for the construction management services provided by DHDL, it was entitled to a fee. For having the fee paid to it, DHDL was required to submit a written notice of completion to Rajapura and Begur. Upon acceptance of the notice of completion by Rajapura and Begur, Second Respondent was obligated to invest a sum of INR 750 million in Begur of which DHDL would be an indirect beneficiary. RCMA and SCMA contained identical arbitration clauses which provided for arbitration seated in New Delhi under the Arbitration Act.

DHDL issued competition notices as envisaged under the RCMA and SCMA to Rajapura and Begur respectively. The competition notices came to be rejected by Rajapura and Begur on account of various reasons such as delay in completion of projects, lack of necessary documents. DHDL invoked arbitration under the RCMA and SCMA and sought appointment of a sole arbitrator to decide disputes arising out of both, RCMA and SCMA. DHDL contended that the rejection of notice of completion issued to Rajapura and Begur was an attempt of avoiding the Second Respondent's obligation to invest INR 750 million in Begur as contemplated by the parties. Rajapura, Begur, and the Second Respondent (together referred to as Respondents) refused to appoint a sole arbitrator. The Respondents argued that the disputes related to construction obligations under the share purchase agreements and not under RCMA or SCMA.

Aggrieved by the refusal of the Respondents to appoint an arbitrator, DHDL preferred two separate petitions under Section 11(6) read with Section 11(12) of the Arbitration Act before the Hon'ble Supreme Court for the appointment of a sole arbitrator.

Contentions of DHDL

DHDL contended that the rejection of notice of completion was allegedly done with the sole motive of avoiding Second Respondents obligation to pay the fee of INR 750 million. DHDL relied upon a catena of decisions² to contend that the court while dealing with an application under Section 11(6) of the Arbitration Act had a narrow scope of examination, confined only to trace out the existence of an arbitrable dispute and a written contract providing for arbitration.

DHDL then referred to the decision in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.³ to contend that once the existence of an arbitration agreement was established, all other incidental issues should be left to be decided by arbitrator as prescribed under Section 16 of the Arbitration Act enshrining the principle of Kompetenz-Kompetenz.

Lastly, DHDL contended that although RCMA and SCMA were two separate agreements, they were inextricably interlinked to the same dispute. Hence, DHDL relied upon the decision in P.R. Shah, Shares and Stock Brokers Pvt. Ltd. v. BHH Securities Pvt. Ltd. and Ors.⁴ and urged the Apex Court to consolidate the proceedings to avoid multiplicity of arbitrations and conflicting decisions.

Contentions of Respondents

The Respondents argued that the instant matter fell exclusively within the ambit of Rajapura SPA and Southern Homes SPA therefore the disputes could not be referred to arbitral tribunal under RCMA and SCMA. The Respondents argued that the Rajapura SPA and the Southern Homes SPA were the principal agreements governing the transaction between the parties, and RCMA or SCMA were subsequently executed only to operationalize the construction obligations set out under the share purchase agreements. Accordingly, Respondents submitted that the instant matter could only be arbitrated as per the dispute resolution mechanism specified under the Rajapura SPA or the Southern Homes SPA. The said share purchase agreements provided for a seat in Singapore. Hence, Respondents submitted that the instant applications under Section 11(6) of the Arbitration Act were not maintainable.

Held

The Hon'ble Supreme Court, at the outset, observed that post the 2015 amendment, the scope of interference of the Apex Court at the stage of referring matters to arbitration was substantially restricted. The jurisdiction of the Hon'ble Supreme Court under Section 11 was primarily to find out whether there exists a written agreement amongst the parties for resolution of the disputes through arbitration and whether the aggrieved party made out a prima facie arbitration case.

However, it was clarified that the limited jurisdiction under Section 11(6), did not denude the Apex Court of its judicial function to look beyond the bare existence of an arbitration clause. The Hon'ble Supreme Court referred to the decision in Vidya Drolia and Others v. Durga Trading Corporation⁵ to state that the Apex Court was empowered to conduct a 'prima facie review' under Section 11(6) to weed out any frivolous or vexatious claims and prevent wastage of public and private resources. To put it differently, it was held that the Hon'ble Supreme Court or a High Court, as the case may be, was not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the arbitrator. Even in existence of an arbitration agreement, the courts would not be prevented from declining a prayer for reference if the dispute in question did not correlate to the arbitration agreement.

Based on the above legal position, the Hon'ble Supreme Court turned to the facts of the case. It was held that the share purchase agreements and the Construction Management Agreements had to be read in harmony and reconciled with each other so as to avoid any head on collision. It was observed that whether or not DHDL had complied with the condition's precedent under the share purchase agreement and became eligible to the contractual fee was purely a question of fact left to be determined by the arbitral tribunal.

The Hon'ble Supreme Court observed that the nature of arbitration clauses contained in the share purchase agreements and the Construction Management Agreements was substantially different with neither overriding the other. The Apex Court then considered the argument of the Respondents that the disputes must be arbitrated under the share purchase agreements. It was held that even if Respondent's argument was accepted at face value, the result would be that any dispute relating to DHDL's construction obligation would be referred to arbitration under the share purchase agreements rendering the dispute resolution clauses under the Construction Management Agreements otiose.

The Apex Court noted that there was nothing on record to suggest that the Respondents were aggrieved by non-compliance, deviation, or breach of promise to sell it shares by DHDL. On the contrary, it was accepted by the parties that the sale of shares stood completed. Thus, when neither party pleaded an infringement of the core provisions of the share purchase agreements, the Apex Court observed that it was difficult to agree that the dispute fell within the ambit of the said agreements.

Thus, the Hon'ble Supreme Court concluded that the dispute could be adjudicated in arbitral proceedings under the RCMA and the SCMA. However, the arbitrator was at liberty to wind up proceedings under the Construction Management Agreements if, on appreciation of facts, it was found that the disputes stemmed from the share purchase agreements.

On whether the arbitral proceedings should be consolidated or not, the Apex Court highlighted the fact that RCMA and SCMA were two distinct agreements. Accordingly, it was held that it would not be appropriate to consolidate the proceedings. The matter of consolidation of proceedings was left to the wisdom of the arbitrator. Accordingly, the arbitration petitions were allowed and a sole arbitrator was appointed.

Comments

The instant matter highlights the importance of examining the interplay, and evaluating the implications of conflicting arbitration clauses when parties enter into multiple agreements. It is important for the parties engaging in multiple transactions to harmonize their dispute resolution or arbitration clauses to set out a linear process of resolving disputes. Such reconciliation of conflicting clauses would enable the parties in preventing protracted litigation that consumes their time and resources.

The present judgment has also strengthened the law on the limited jurisdiction of the courts while referring matters to arbitration under Section 11 of the Arbitration Act. The courts can only conduct a limited review of an application for reference to arbitration within the confines of Section 11 to streamline the arbitral process.

Footnotes

1. DLF Home Developers Ltd. v. Rajapura Homes Pvt. Ltd. & Anr., 2021 SCC OnLine SC 781.

2. Duro Felgura, S.A. v. Gangavaram Port Limited, 2017 9 SCC 729; Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited, 2019 9 SCC 209; Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman, 2019 8 SCC 714; and Vidya Drolia and Others v. Durga Trading Corporation, 2021 2 SCC 1.

3. in Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd., 2020 2 SCC 455.

4. P.R. Shah, Shares and Stock Brokers Pvt. Ltd. v. BHH Securities Pvt. Ltd. and Ors., 2012 1 SCC 594.

5. Vidya Drolia and Others v. Durga Trading Corporation, 2021 2 SCC 1.

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