DLF Home Developers v. Rajapura Homes: A Critical Analysis

[Anushka Juneja is a 2nd year B.A., LL.B. (hons.) student at Gujarat National Law University]

Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) empowers the courts to appoint an arbitrator in case any dispute arises between the parties. For the purpose of the aforementioned section, the power is confined to the examination of the existence of an arbitration agreement as has been provided under section 11(6A). The scope of judicial scrutiny under section 11 of the Arbitration Act is one of the most debated issues in the Indian arbitration regime. The Supreme Court recently in DLF Home Developers Limited v. Rajapura Homes Private Limited and DLF Home Developers Limited v. Begur OMR Homes Private Limited, while determining the extent of judicial inquiry under section 11 has held that the courts are not expected to act mechanically and are required to apply their minds to the core preliminary issues.

Factual Background

DLF Home Developers Limited (“DHDL”) and Ridgewood Holdings Limited (“Ridgewood”) entered into a joint venture. Ridgewood invested in four special vehicles including Rajapura Homes Private Limited (“Rajapura”) and Begur OMR Homes Private Limited (“Begur”). Later, Ridgewood transferred its stake to its affiliate Resimmo PCC (“Resimmo”). Pursuant to an agreement, Resimmo was to acquire sole ownership of Rajapura and Begur from DHDL. Accordingly, two share purchase agreements (“SPAs”) were signed for the transfer of shares of Rajapura and Begur. In both the SPAs, similar arbitration clauses providing for arbitration seated in Singapore in accordance with Singapore International Arbitration Centre (“SIAC”) Rules were present.

The SPAs envisaged execution of Construction Management Agreements (“CMAs”) by the parties as a condition precedent for closure of transactions. Accordingly, the parties signed the DLF-Rajapura Homes Construction Management Services Agreement (“RCMA”) and the DLF-Southern Homes Construction Management Services Agreement (“SCMA”). In both the CMAs, identical arbitration clauses providing for arbitration seated in Delhi in accordance with the Arbitration Act were present. Under the CMAs, DHDL was to provide services for the completion of Rajapura and Begur projects. As provided, DHDL completed the projects and sent the notice of completion. Both Rajapura and Begur, however, denied accepting the notices. The acceptance was a pre-requisite for entitlement to a “fee” (consideration) payable by Resimmo to DHDL. Thus, disputes arose in respect of certifying the completion of the projects and payment of fees under the SCMA and RCMA. DHDL invoked the arbitration under SCMA and RCMA. Rajapura, Begur and Resimmo, however, refused to appoint a sole arbitrator alleging that the dispute was covered under the SPAs and not the CMAs. Aggrieved by the denial, two separate petitions were filed under section 11(6) read with section 11(12) of the Arbitration Act. 

Parties’ Submissions

DHFL contended that the scope of judicial scrutiny under section 11(6) is limited. It is confined only to the examination of an arbitrable dispute and arbitration agreement. They canvassed that since the parties have not disputed the presence of the arbitration agreement, the matter should be referred for arbitration under SCMA and RCMA. They relied upon Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited to assert that once the existence of an arbitration agreement has been established, other incidental issues should be left to be decided by the arbitrator under section 16 of the Arbitration Act which allows an arbitral tribunal to rule upon its own jurisdiction. In contrast, Rajapura and Begur relied upon Duro Felgura, S.A v. Gangavaram Port Limited (“Duro Felgura”) and Vidya Drolia v. Durga Trading Corporation (“Vidya Drolia”) to contend that under section 11(6), the court has the power to examine whether the agreements in question contain an arbitration clause in respect of the disputes that have actually arisen between the parties.  

Another contention put forward by DHFL was that RCMA and SCMA are inextricably interlinked and hence, proceedings under both the agreements should be consolidated and a sole arbitral tribunal should be appointed.

The Decision of the Court

The court first observed that the Arbitration and Conciliation (Amendment) Act, 2015 which introduced section 11(6A) has substantially restricted the scope of judicial interference at the referral stage. It further explained that despite the omission of section 11(6A) by the Arbitration and Conciliation (Amendment) Act, 2019, the legislative intent behind the provision continues to be the guiding force for the courts while examining an application under section 11 of the Arbitration Act. Therefore, under section 11, the court’s jurisdiction is confined to just identifying the existence of the arbitration agreement and an arbitral dispute.

However, it added, that the limited jurisdiction does not denude the court of its judicial function to look beyond the bare existence of an arbitration clause to cut the deadwood. Relying on the Vidya Drolia judgment, it ruled that the courts are not to act mechanically and are obliged to apply their mind “to the core preliminary issues, albeit, within the framework of Section 11(6A) of the Act”. Such a review would help streamline the process of arbitration rather than usurping the jurisdiction of the Arbitral Tribunal. Therefore, if the impugned dispute is not related to the said agreement, the court can decline a party’s prayer for reference. And the existence of an arbitration agreement would not prevent the court from doing so.

Based on the above reasoning, the apex court turned to the facts of the case. Upon examination of SPAs and CMAs, the court found that the impugned dispute of non-payment of “fee” was covered squarely under clauses of RCMA and SCMA. The court, therefore, held that the arbitration clause mentioned in CMAs would apply and the arbitration proceedings would take place accordingly. Regarding the issue of consolidation of proceedings, the court appointed a sole arbitrator and the matter of consolidation has been left to the wisdom of the arbitrator.

Analysis

By holding that a court is required to apply its mind while deciding on an application under section 11, court in DLF has unequivocally expanded the scope of judicial intervention.This approach stands in derogation to the minimal judicial interference principle mentioned under section 5 of the Arbitration Act which is in line with article 5 of the UNCITRAL Model Law. Moreover, the stance is not in consonance to the competence-competence principle prescribed under section 16(1) of the Arbitration Act which empowers the arbitral tribunal to rule on its “own” jurisdiction.

The court in the instant case principally relied on Vidya Drolia while giving out the judgment. However, notably, the Supreme Court in N.N. Global Merchantile Pvt. Ltd. v. Indo Unique Flame Ltd cast doubt on Vidya Drolia and the case has been referred to a larger bench to resolve the cleavage in judicial opinion. Hence, the court’s reliance on Vidya Drolia seems to be misplaced.

Further, the Court did not take into account Mayavati Trading Pvt. Ltd v. Pradyuat Deb Burman, where a 3-judge Supreme Court bench most recently reiterated that the court’s power in an application under section 11 is restricted only to the examination of the presence of an arbitration agreement. The court affirmed the narrow construction of section 11(6A) as was adopted by the Supreme Court in Duro Felguera.

Anushka Juneja

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