Composite reference to arbitration — A new conundrum

In the recent decision of the Supreme Court (SC) in Duro Felguera, SA v. Gangavaram Port Ltd.[1], while holding that the doctrine of “composite reference”, is not applicable in the present case, the Court clarified as to when a composite reference to arbitration in case of multiple agreements can be made. In fact, the decision is also in line with the objective and intention of the Arbitration and Conciliation (Amendment) Act, 2015 as it affirmed the position pertaining to limited intervention of the Court at the stage of appointment of arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Act) and narrow scope of challenge to an award in international commercial arbitration.

Brief facts

Gangavaram Port Limited (GPL) herein the respondent awarded tender work to a Spanish Company — Duro Felguera Plant as Industrials SA (Duro Felguera) and its Indian subsidiary — M/s Felguera Gruas India (P) Ltd. (FGI). Subsequently this original contract was divided into five distinct contracts with different works description. The contract pertaining to supply of bulk material handling equipment’s was awarded to Duro Felguera. Whereas the other remaining four contracts, were awarded to FGI (i.e. Indian subsidiary). Each of these contracts contained an arbitration clause. Apart from this, Duro Felguera also entered into a corporate guarantee, thereby guaranteeing due performance of all the works awarded to Duro Felguera and FGI, which had its own arbitration clause. Later on, a tripartite Memorandum of Understanding (MoU) was executed between Duro Felguera, FGI and GPL. When dispute arose, the petitioner and its Indian subsidiary issued five separate arbitration notices (i.e. one by petitioner and four by Indian subsidiary). Whereas the respondent issued a comprehensive one arbitration notice.

GPL inter alia contended that the MoU being the latest had subsumed all the separate agreements and therefore there can only be one agreement, hence only one Arbitral Tribunal for all the disputes emanating from the five different agreements and the corporate guarantee was to be constituted. According to GPL, since MoU referred to original contract which contained arbitration clause, the original contract with its arbitration clause shall be deemed to have been incorporated in the MoU. It was further contended that having regard to the nature of works in each contract and in order to avoid conflicting awards, huge wastage of time, resources and expenses it would be just and proper to make a “composite reference” and have a single Arbitral Tribunal of “international commercial arbitration” for settling the dispute arising between the parties as the same would be consistent with the intention of the parties and public policy.

On the other hand, the contention of the Duro Felguera was that all the five contracts were distinct and separate, as regards, their content and subject-matter and hence there cannot be a “composite reference” for efficacious dispute settlement. It was also contended that MoU cannot override the terms of five contracts which includes different arbitration clauses, as the MoU only listed the priority of the documents which was to be considered in order to have clarity in carrying out the works and nothing more.

Decision

The SC held that there cannot be a single arbitration reference for disputes arising out of different agreements, even if they are interlinked to a single transaction. This decision of the SC is in contrast with the ratio laid down in its earlier decision of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc.[2] (Chloro Controls), wherein the doctrine of “composite reference” was recognised.

Scope of S. 7(5) — Mere reference of a document cannot lead to an inference that arbitration clause in the document becomes part of the agreement by such reference

The Court held that for incorporation of an arbitration clause by reference it requires “a conscious acceptance” of the arbitration clause from another document, as a part of the contract, before such arbitration clause could be read as a part of the contract between the parties. The question whether or not the arbitration clause contained in another document, is incorporated in the contract would essentially be a question of intention of the parties to be gathered from the terms of the contract. The SC held that the fact that the MoU makes a reference to the original agreement does not indicate that, by such reference, arbitration clause was intended to be incorporated in the MoU. The reason being that the MoU only make a reference to original agreement in order to have more clarity in execution of the work and such general reference will not be sufficient to hold that the arbitration clause in the original agreement is incorporated in the MoU. Thus the Court laid down the test of general and specific reference of the document for the applicability of incorporation by reference test. This observation of the SC is in line with its dicta laid down in M.R. Engineers & Contractors (P) Ltd. v. Som Datt Builders Ltd.[3] Hence the Court made it clear that inclusion of arbitration agreement by reference would require more than a general reference to another contract.

Composite reference when permissible

GPL placed reliance on Chloro Controls[4] to contend that where various agreements constitute a composite transaction, Court can refer disputes to arbitration if all ancillary agreements are relatable to principal agreement and performance of one agreement is so intrinsically interlinked with other agreements. Though Chloro Controls[5] has considered the doctrine of “composite reference”, the SC in the present case distinguished the same. In Chloro Controls[6] the principal agreement contained an arbitration clause which required that any dispute or difference arising under or in connection with the principal agreement, which could not be settled by friendly negotiation and agreement between the parties, would be finally settled by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The words “under or in connection with” had wider ambit. However, no such clause was present in the case at hand. All five contracts as well as the corporate guarantee have separate arbitration clauses which were neither dependent on the terms and conditions of the original contract nor on the MoU. Therefore no composite reference to arbitration was allowed in the present case. On analysing the reasoning of the Court it can be concluded that the Court has clarified the principle laid down in Chloro Controls[7] as one that limits the reference to composite arbitration in case of intrinsically interlinked agreements by the wording of the arbitration clause of the principal agreement. Therefore the Court interpreted the law laid down in Chloro Controls[8] as one that makes reference to composite arbitration dependent on an interpretation of the arbitration clause in the principal agreement to be wide enough to allow such a reference and not merely when the agreements are intrinsically interlinked.

Scope of enquiry under S. 11(6-A) of the Act

The Supreme Court by its earlier decision in SBP & Co. v. Patel Engg. Ltd.[9], had waived the scope of court’s power under Section 11 of the Act. However, by virtue of 2015 amendment this position has changed and the power of court to appoint an arbitrator under Section 11(6-A) of the Act have been narrowed down with the sole purpose to minimise the Court’s intervention at the stage of appointing the arbitrator. The Delhi High Court in Picasso Digital Media (P) Ltd. v. Pick-A-Cent Consultancy Service (P) Ltd.[10] followed the same line of thoughts wherein it  held that the court, at the stage of appointment of arbitrator, cannot examine whether the respondent has a justified claim of misrepresentation against the petitioner as that would be a question to be examined by the arbitrator in the arbitration proceedings. The SC, in the present case, confirmed this position of law. This is one of the first case of Section 11(6-A) before this Court. The Court in explicit terms clarified its role at the stage of Section 11(6-A) petition to be to prima facie examine the existence of a valid arbitration agreement and not its validity and therefore concluded that: “From the record, all that we could see are five separate letters of award; five separate contracts; separate subject-matters; separate and distinct work; each containing separate arbitration clause.…”

In the present case there were six arbitrable agreements (five agreements for works and one corporate guarantee) and each agreement contains a provision for arbitration. Hence, the Court concluded that 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, SA and four for the domestic.

Conclusion

This case sets a standard regarding drafting of an arbitration clause in multiple agreements so as to bring all those agreements within the purview of Section 7 of the Act. Further, since this is one of the first few cases under Section 11(6-A) it provides us with the scope of the term “existence of an arbitration agreement”. This decision becomes relevant as it would throw a guiding light on what subsumes within an analysis of existence of an arbitration agreement and what is covered under validity of an arbitration agreement. Further, this decision of SC is in line with the legislative intent and promotes pro-arbitration approach by minimising Court’s intervention at the stage of Section 11 of the Act.

 

* Kiran Devrani, Practicing Lawyer, Dispute Resolution; Graduate, Vivekananda Institute of Professional Studies, GGSIPU (Batch of 2015) and Surabhi Lal, Practicing Lawyer, Dispute Resolution; Graduate, National Law University, Delhi (Batch of 2016).

[1]  (2017) 9 SCC 729

[2]  (2013) 1 SCC 641

[3]  (2009) 7 SCC 696

[4]  (2013) 1 SCC 641

[5]  (2013) 1 SCC 641

[6]  (2013) 1 SCC 641

[7]  (2013) 1 SCC 641

[8]  (2013) 1 SCC 641

[9]  (2005) 8 SCC 618

[10] 2016 SCC OnLine Del 5581

Join the discussion

Your email address will not be published. Required fields are marked *