SOURCE: SONAL KUMAR SINGH AND RAJAT DASGUPTA, AKS PARTNERS.
A composite reference in arbitration is a single reference of all the disputes arising from multiple agreements carrying independent arbitration clauses with respect to execution of a common project. In such situations, the parties are often faced with a dilemma on whether they may proceed to invoke the arbitration under separate agreements or issue a consolidated arbitration notice to adjudicate the disputes collectively which may have arisen under a particular project.
This generally pertains to contracts, where there are multiple parties and arbitration agreements with an intrinsic scope of work to be performed. It may also arise out of situations where there are various subsidiaries performing ancillary services during the execution of a project. This piece discusses the several case laws with respect to the bar on consolidation of arbitration proceedings and the exemptions wherein a party maybe allowed to refer their disputes in composite transactions.
- DURO FELGUERA, S.Avs GANGAVARAM PORT LIMITED1
The respondent i.e. Gangavaram Port Limited (“GPL“) awarded work based on a tender to a Spanish company Duro Felguera Plant Industrials SA (“DFI“) and its Indian subsidiary M/s Felguera Gruas India (P) Ltd. (“FGI“). After the post-bid negotiations, DFI and FGI were selected as the contractors for the project i.e. original package no. 4. The original package no.4was divided into five packages which were distinct contracts and each of them contained an arbitration clause i.e. Clause 20.6. Subsequently, DFI was awarded the contract pertaining to the supply of bulk material and handling equipment however, on the other hand, the remaining four contracts were awarded to the FGI.
DFI also entered into a corporate guarantee, for due performance of all the works awarded to DFI and FGI, which also had its own separate arbitration clause i.e. Clause 8 of the corporate guarantee. Subsequently, a tripartite Memorandum of Understanding (“MoU“) was also executed among DFI, FGI and GPL which did not contain any arbitration clause. During the course of the work, certain disputes arose between the parties and GPL terminated the contracts and issued a comprehensive arbitration notice under clause 20.6 of the original package no.4. On the contrary, DFI and FGI issued five separate arbitration notices to GPL seeking resolution of disputes under the separate contracts.
GPL contended that all the contracts were interlinked and inter-connected and appointment of a single tribunal would result in avoiding conflicting arbitral awards and prevent loss of time, money and resources. The MoU being the latest document entered into between all the parties would cover all the five contracts. Since the MoU also contained a reference to the original package no.4, the arbitration clause of the original package no.4 i.e. clause 20.6 stood incorporated in the MoU.
This contention was vehemently opposed by DFI on the basis that all the contracts contained separate arbitration clauses and hence, they were all distinct. It was also argued that the MoU could not be invoked as it did not even contain an arbitration clause. In view of the above, composite reference would be invalid. DFI insisted that there must be multiple arbitral tribunals and the disputes invoked by them be adjudicated through an international commercial arbitration.
Decision of the Supreme Court of India (“SCI”)
The SCI took cognizance of Chloro Controls (I) Pvt. Ltd. vs Severn Trent Water Purification Inc. &Ors2.wherein the SCI had held that it has the power to consolidate disputes if all ancillary agreements are related to the principal agreement and performance of one agreement is intrinsically interlinked with other agreementsi.e.by applying the doctrine of group companies. The SCI has clarified that the words “under or in connection with” that were used in the arbitration clause of the principal agreement in Chloro Controls had wider applicability which would allow the parties to proceed for a composite arbitration for disputes arising out of the parent agreement. In the present case, the arbitration clauses did not have such a wide power and all five contracts as well as the corporate guarantee contained separate arbitration clauses.
In response to the contention of GPL that the MoU covers all the five packages and the arbitration clause in the original package no. 4 stood incorporated in view of the reference of the document in the MoU, the SCI while relying on M.R. Engineers & Contractors (P) Ltd. vs Som Datt Builders Ltd3 held that the MoU does not expressly incorporate the intention of parties to refer their disputes before a single arbitral tribunal and the reference was only for the purpose of clarity in execution of work. It was further held that a mere reference would not be sufficient to incorporate the arbitration clause from the referred contract until there is a special reference which would indicate a mutual intention to incorporate the arbitration clause from another contract. Therefore, it cannot be agreed that the arbitration clause from the original package no.4 stood incorporated in the MoU.
Accordingly, the SCI while rejecting the composite reference reasoned that the five different packages (i.e. contracts) and the corporate guarantee had separate arbitration clauses and were not dependent on the original package no.4 or the MoU. The SCI also held that in disputes where the arbitration clause was invoked by DFI, the same would have to be referred to a separate international commercial arbitration whereas the other disputes where the arbitration agreement was invoked by FGI and GPL would have to be referred to separate domestic arbitral tribunals.
- LIBRA AUTOMOTIVES PVT. LTD v. BMW INDIA PVT. LTD AND ANOTHER.4
A petition under Section 11 of the Arbitration and Conciliation Act, 1996 was filed by Libra Automotives (“Libra“) arising out of disputes between the parties wherein multiple and separate agreements were entered into by Libra with BMW India Pvt. Ltd (“R-1”) and BMW India Financial Services (“R-2“). Each of the agreements contained a separate procedure for invocation of arbitration proceedings under different institutions. As certain disputes arose between the parties, Libra invoked the arbitration clause under the agreements and requested the respondents to either agree to appointment of a common arbitrator to decide all the disputes in a tripartite arbitration or to approach the Delhi International Arbitration Centre for appointment of a sole arbitrator.
Decision of the High Court of Delhi (“DHC”)
The element of overlapping disputes between the parties on account of inter-connected agreements, cannot be the sole ground for the court to/ direct parties to go for a composite transaction contrary to the procedure prescribed under the arbitration clauses provided under different agreements. The main agreement i.e., the dealership agreement, provides for an arbitration to be administered by the Singapore International Arbitration Centre. The said dealership agreement was entered into by the Libra and R-1 and did not include R-2.
It was also observed that there was no arbitration agreement under the floor plan financing agreement which was the principal agreement for the financing scheme between Libra and R-2wherein R-1was not a party. The said agreements also contained different clauses for constitution of the arbitral tribunal. Therefore, in view of the above, the DHC rejected the composite reference sought by Libra as it had evidently failed to abide by the procedure stipulated under different agreements which was essential to be followed by parties.
- TAMIL NADU ROAD SECTOR PROJECT II, HIGHWAYS DEPARTMENT REPRESENTED BY PROJECT DIRECTOR v. IRCON INTERNATIONAL LTD. AND SUMBER MITRA JAYA & ANR.5
In the said case, the petitioner i.e. the Tamil Nadu Road Sector Project II, Highways Department had entered into separate agreements with each of the respondents i.e. the contractor and the supervisory consultant, containing distinct arbitration clauses. The petitioner had filed an arbitration petition before the High Court of Judicature at Madras (“MHC“) requesting for a consolidated reference to arbitration even though the petitioner had issued separate notices under the respective arbitration clauses of the agreements to both the parties. In response, the respondents objected to the notice by stating that both the agreements had a separate procedure for appointment of the arbitrators i.e. a sole arbitrator in the first contract and three arbitrators for the latter.
Before the MHC, the petitioner had contended that as the scope of work was intrinsically connected, a composite reference to arbitration was maintainable. The respondents however, countered the said submission by averring that the petition was not maintainable in view of the different procedures contemplated for appointment of the arbitrators in each of the agreements which had not been followed by the petitioner.
Findings and decision of the MHC
The MHC observed that the scope of work of both the respondents was intrinsically intertwined, since the second respondent had to supervise the work of the first respondent. The court also observed that despite the interconnected scope of work of the respondents, the agreement of the petitioner with the first respondent was capable of being performed independent of the agreement entered into with the second respondent. The MHC also took the opportunity to differentiate various judgments passed by the courts in India which had allowed a composite reference based on a common and dependent scope of work and intention of the parties by stating that none of the said decisions contemplated a separate procedure for appointment of the arbitrators.
In the present case, the MHC noted that the procedure for appointment of arbitrators under both the agreements was distinct and the same had not been followed by the petitioner. In view of the above, the MHC held that the single petition seeking appointment of a common arbitral tribunal with respect to the independent agreements was not maintainable and dismissed the petition.
CONCLUSION
The judgments discussed above passed make it evident that composite reference in arbitration proceedings cannot be made on the sole basis of interconnected or intermingled agreements. Analyzing the above decisions rendered by the courts, in order to bind parties who are signatories to different agreements emanating from the same contract to a single arbitration proceeding, it is necessary for the courts to examine whether the scope of work is interconnected. Secondly, the courts while applying the doctrine of composite reference, must be satisfied that the agreements are not capable of being performed independently.
Thirdly, the procedure for appointment of the arbitration in the arbitration agreements of all the parties who are being consolidated to a single arbitration proceeding, must be uniform and similar to each other. In cases where the procedure for appointment of arbitrators under multiple arbitration agreements are distinct, it would be necessary to invoke the arbitration under the separate contracts and the parties are bound by the specific procedure enumerated in the agreements. It also appears that instead of resorting to different procedures for appointment of arbitrators with reference to parties involved in the same project, the parties should be cautious while drafting the arbitration clauses by avoiding the conflicting procedures for appointment of arbitrators, to promote the efficacy of the arbitration process and to avoid a rejection of consolidation of the disputes.
Footnotes
1 (2017) 9 SCC 729
2 (2013) 1 SCC 641
3 (2009) 7 SCC 696
- 2019 (5) Arb LR 465 (Delhi)
5 2021 SCC OnLine Mad 181
