Supreme Court Declines to Make Composite Reference to Arbitration from Interrelated Multiple Agreements

[Ritvik M. Kulkarni is an associate with Wadia Ghandy & Co., Mumbai. Views are strictly personal]

In its order last month in Duro Fulgeura v. Gangavaram Port Ltd., the Supreme Court of India refused to make a composite reference and to appoint a single arbitral tribunal for disputes arising out of multiple agreements between the same parties (the “Order”).

Factual Background

A tender was invited by Gangavaram Port Ltd. (“GPL”) for the development of the eponymous port located in Andhra Pradesh, India. In 2011, Duro Fulguera S.A. (“DFSA”) and its Indian subsidiary Fulgueras Gruas India Pvt. Ltd. (“FGI”) successfully submitted a single bid tender – ”Original Package No. 4”– for the expansion of the Port’s Bulk Material Handling Systems.

The Original Package was subsequently split into five separate agreements for the parties’ convenience: whereby “New Package No. 4” was executed between DFSA and GPL and “New Package Nos. 6 to 9” were executed between FGI and GPL. Additionally, DFSA executed a bank guarantee in favor of GPL to secure DFSA and FGI’s performance obligations to GPL (“the Agreements”). Lastly, a tripartite MoU was executed by DFSA, FGI and GPL, among other things, listing the priority of documents and to have more clarity on the technical and execution related matters of the works.

After disputes arose between the parties, DFSA issued an arbitration notice for international arbitration and FGI issued four separate notices of arbitration for domestic arbitration under their respective agreements with GPL. Concurrently, GPL also issued an arbitration notice under the Original Package and sought to make a composite reference of all the disputes.

The Ratio

The Court observed that the section 11(6A) of the amended Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) strictly curtails its scope of intervention to determine only the existence of an arbitration agreement between the parties. While the MoU did not contain an arbitration clause, GPL contended that its invocation is valid since the MoU refers to the Original Package and therefore incorporates the arbitration clause therein.

Relying on its previous judgment in MR Engineers v. Som Datt Builders [(2009) 7 SCC 696], the Apex Court observed that a mere general reference to the Original Package in the MoU was not enough to incorporate the arbitration clause in the Original Package. Concurrently, the Court distinguished its previous judgment in Chloro Controls v. Severn Trent [(2013) 1 SCC 641] from the present dispute since the arbitration agreement in Chloro Controls specifically provided that any dispute under and in connection with the principal/mother agreement must be referred to arbitration. The Court remarked that the words “under and in connection with” “were very wide to make it more comprehensive”. Since such expansive terms were missing from the Agreements, the Court refused to import the principle of a “composite reference” in the present case.

The Court therefore refused GPL’s request to make a composite reference of the dispute to arbitration, primarily since the MoU neither superseded the Agreements nor incorporated the arbitration clause in the Original Package within the meaning of section 7(5) of the Arbitration Act.

The Court then appointed an international arbitral tribunal each for disputes arising under New Package 4 & the Bank Guarantee, and a domestic arbitral tribunal each for those arising under New Package Nos. 6 to 9. Lastly, the Supreme Court observed that “while the arbitrators can be the same, there has [sic] to be six Tribunals – two for international commercial arbitration and involving the Spanish Company… and four for the domestic”.  ***

Comment

It is quite evident that the Original Package was split into several successive contracts only for the parties’ operational convenience; their rights and obligations remained unaltered. In fact, the Court has categorically observed that “it is clear that there is no novation by substitution of all the five agreements nor is there a merger of all into one”. In the circumstances, all disputes between the parties should have been referred to a one arbitral tribunal under the arbitration clause in the Original Package, which admittedly covers all works and all parties to the dispute.

Deconstructing the Arbitration Clause[1]

In Fiona Trusts v. Primalov  [2007] UKHL 40, the House of Lords observed that, unless the context requires otherwise, the construction of the arbitration clause should start from the assumption that parties are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The “one-stop presumption” developed in Fiona has also been referred to by the Indian Supreme Court in A. Ayyasamy v A. Paramasivam & Ors (2016).

On the other hand, the UK Court of Appeals in Trust Risk Group v. AmTrust Europe Ltd  [2015] EWCA Civ 437 refused to import the Fiona presumption when the parties had opted to execute different agreements, having different jurisdictional/dispute resolution clauses, albeit in a related transaction. Therefore, to the extent that the agreements in question have discernably different jurisdiction clauses, the underlying parties should be referred to different proceedings under each such agreement. However, in Duro Fulgeura, the arbitration clauses are completely similar, and the Agreements have not undergone any supersession or novation. In such circumstances, the Court ought to have considered the Fiona presumption and avoided a strict interpretation of Chloro Controls to make a composite arbitral reference of the dispute.

The Section 34 Conundrum

DFSA posited that a composite reference to international arbitration will deprive FGI of its opportunity take benefit of section 34(2A) of the Arbitration Act, whereby an award can be challenged when marred by a “patent illegality appearing on the face of the record”. Interestingly, GPL offered to concede this point and submitted that FGI may nevertheless be permitted to invoke Section 34(2A) of the Act. The Court, however, rightly refused GPL’s attempted concession.

The arbitration clause in the Original Package, which was reproduced in each of the new packages, reads as follows:

Sub-Clause 20.6 – Arbitration

Any dispute … settled by Arbitration under the Arbitration and Conciliation Act, 1996 by appointing two arbitrators one by each party and a presiding arbitrator to be appointed by the said arbitrators. Any such arbitration proceeding shall be within the exclusive jurisdiction of court of law at Hyderabad, India. The place of Arbitration shall be Hyderabad and the Language of Arbitration shall be English. […]” (emphasis supplied).

The arbitration clause in the Agreements, including the two concluded with DFSA, evidently defer to the Arbitration Act and to Hyderabad as the place of arbitration. It can be safely inferred that the parties intended to choose India as the seat of arbitration as well. Pursuant to section 2(2) of the Arbitration Act, an arbitration arising out of any of the Agreements must be governed by Part I of the Arbitration Act. 

Section 34 of the Arbitration Act, except for section 34(2A), will therefore apply to such arbitral proceedings notwithstanding the fact that two of them are international commercial arbitrations.  It is true that an international arbitration will not attract the provisions of section 34(2A). It can be argued, however, that FGI should not be entitled to rely on the aforesaid provision since a reference under the Original Package will indubitably lead to an international arbitration between all three parties; which would rule out the applicability of section 34(2A).  

Defragmentation of Disputes

The Supreme Court was previously faced with the issue of making a composite arbitral reference in P. R. Shah v. B. H. H. Securities (2011) in an application under section 34. The Supreme Court summed up its analysis as follows:

[…] if A had a claim against B and C and if A had an arbitration agreement with B and A also had a separate arbitration agreement with C, there is no reason why A cannot have a joint arbitration against B & C. Obviously, having an arbitration between A and B and another arbitration between A and C in regard to the same claim would lead to conflicting decisions. In such a case, to deny the benefit of a single arbitration against B and C on the ground that the arbitration agreements against B and C are different, would lead to multiplicity of proceedings, conflicting decisions and cause injustice. It would be proper and just to say that when A has a claim jointly against B and C, and when there are provisions for arbitration in respect of both B and C, there can be a single arbitration […]

In Filmwaves Combine Pvt. Ltd. v. Kochi Cricket Private Limited & Ors., [Arbitration Application 352 of 2012], the Bombay High Court applied the principles in P. R. Shah to an application for appointment of an arbitrator under section 11 of the Arbitration Act. In fact, the Court categorically rejected the contention that the judgment in P. R. Shah must be confined to the context of an institutional arbitration governed by the bylaws of the stock exchange and not to an arbitration governed by a commercial agreement. Lastly, the Court emphasized that there is no reason or justification why the same principle which is intended to facilitate efficacy of arbitration as a form of alternate dispute resolution should not be given effect to in the latter case.

Concluding Remarks

In the present dispute, the Supreme Court heavily relied on the amended section 11(6A) of the Arbitration Act to restrict its examination to the existence of an arbitration agreement in the MoU, and eventually answered in the negative.

It is indeed commendable that the Court has encouraged minimal­ intervention in arbitration proceedings. However, the Indian legislature could not have intended, in amending section 11, to curtail the judiciary’s power to make a composite reference in the interest of parties’ convenience, avoidance of multiple proceedings, and in that of curbing the possibility of conflicting awards.  It is also submitted that the manner of reference, whether composite or otherwise, should not be categorized as an intervention within the meaning of section 11(6A) of the Arbitration Act.

Interestingly, the Civil Procedure Code, 1908 expressly contemplates joinder of parties and causes of action in certain disputes. Perhaps Duro Fulguera may serve as the necessary catalyst for the introduction of specific provisions in the Arbitration Act for consolidation of arbitral proceedings and joinder of parties.

– Ritvik M. Kulkarni

[1] During the editorial process for this post, Mr. V. Niranjan pointed me to two very interesting judgments pertaining to the matter in hand.

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