This case comment is a part of our Annual Arbitration Review of the year 2017.
CITATION/ORDER: (2017) 9 SCC 729: AIR 2017 SC 5070
COURT: SUPREME COURT OF INDIA
CORAM: JUSTICE KURIAN JOSEPH and JUSTICE R. BANUMATHI
This landmark case clarifies the position of courts with respect to the appointment of arbitrators in matters related to arbitration in reference documents. Taking a narrow approach, the court interpreted the Section 11(6A) of the Arbitration and Conciliation Act, 1996 (“Act”) to allow courts the power only to see if an arbitration agreement exists in the first place or not, ‘nothing more, nothing less’. This case shows that when a contract is split into multiple agreements for the sake of convenience incorporation of an arbitration clause by reference needs to be drafted cautiously to avoid problems of dispute settlement in case of arbitration.
FACTS: This case is a tripartite arbitral dispute involving two Indian parties, Gangavaram Port Ltd. (GPL) and Felguera Gruas India Pvt. Ltd. (FGI) as well as a Spanish party by the name of Duro Felguera Plantas Industrials SA (DFPI). On August 8, 2011 GPL invited tenders for the purpose of expanding their sea-port facilities to the bulk-handling system after the commencement of the proposed activities in 2009. FGI and DFPI submitted a single tender bid on November 15, 2011- Original Package No. 4. After this tender was accepted, the aforementioned package was sub-divided into separate packages – (i) New Package No 4, (ii) Package No 6, (iii) Package No 7, (iv) Package No 8 and (v) Package No 9. The first one was allotted to DFPI while the rest were allotted to FGI. Each of the packages had a separate contract entered into, with different parties. Each of the contracts contained an arbitration clause which mentioned that disputes would be governed by the Arbitration and Conciliation Act, 1996 (Act). A corporate guarantee dated March 17, 2012 with its own arbitration clause, was issued in favor of GPL. It guaranteed performance of the works given to these two entities. Subsequently, a Memorandum of Understanding (MoU) was executed by the three parties to carry out the works, though with no specific arbitration clause.
Disputes arose between the parties, pursuant to which DFPI issued arbitration proceedings for a nominee arbitrator related to New Package No.4 on April 5, 2016. FGI too initiated a notice for multiple domestic arbitration proceedings pertaining to the Package No. 6-9. On April 13, 2015 GPL filed for arbitration of the Original Package No.4 which was incorporated in the MoU and the corporate guarantee. It requested a single arbitral tribunal to adjudicate all issues related to this commercial dispute. Thus, the dispute was between GPL on one side and DFPI and FGI on the other regarding the relation between the MoU and the five contracts.
- How much can a court of law intervene to interpret Section 11(6) and 11(6A) of the Arbitration and Conciliation Act, 1996 for the appointment of an arbitrator?
- Whether the MoU, Original Package No.4 and the corporate guarantee issued by DFPI and FGI covers all packages awarded to these parties?
- Whether a single or a multiple arbitral tribunal/s are needed to decide these issues of the packages and the corporate guarantee or not?
DECISION AND ANALYSIS:
Issue 1 – This was the first case related to the interpretation of Section 11(6A) of the Act. The court observed that post the 2015 amendments, the court must only look at whether an arbitration agreement does or does not exist, thus displaying an attitude of restrictive interference. Apart from the limited room for interference, it was seen that it was not a judicial order and thus was not subject to appeal. The present case contained a guarantee and five other work contracts, with each containing an arbitral agreement. Deciding issues 2 in the negative but opined that multiple tribunals are needed for the package contracts but another tribunal for the international commercial arbitration. It was seen that the contracts were of different subject-matters and were purely distinct works.
Issue 2 and 3 – The court opined that each agreement needed separate arbitral proceedings. It relied on the judgment of M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd. (2009) 7 SCC 696 in which it was held that a mere reference to an arbitration clause in another contract was not enough to incorporate that into the contract in dispute; and a special and mutual intention to incorporate must be seen in the form of a “conscious acceptance” u/s 7(5) of the Act. Deviating from the judgment in Chloro Contols India Pvt. Ltd. v. Severn Trent Water Purification Inc. (2013) 1 SCC 641 where the court recognized a “composite reference”, the court observed that, “…there are six arbitrable agreements (five agreements for works and one Corporate Guarantee) and each agreement contains a provision for arbitration. Hence, there has to be an Arbitral Tribunal for the disputes pertaining to each agreement. While the arbitrators can be the same, there has to be six Tribunals – two for international commercial arbitration involving the Spanish Company-M/s Duro Felguera, S.A. and four for the domestic.”However, since the case was with respect to the same issues between the parties, the court appointed the same arbitral tribunal to deal with the matters. This was done in the form of two international commercial arbitration in the DFPI matter and two domestic arbitrations for FGI. The apex court has narrowed its room for intervention in matters under this section for the appointment of arbitrators. It can be seen through this case that consolidation is difficult to prove unless the party shows an intention and the agreements flow from an overarching, main agreement. The case was disposed of seeing that though the arbitrators can be the same, there have to be each of the six agreements must be looked at by a separate arbitral tribunal.
CONCLUSION: In the present case, the Supreme Court of India held that in cases where a single agreement was replaced with multiple agreements and the consequent MoU did not contain an arbitration clause, a “composite reference” to arbitration cannot be made in a mix of domestic and international arbitrations as the same would be non est in law.
[This article has been contributed by Dushayant Kishan Kaul, 4th year law student of Jindal Global Law School.]