Guest Post: Mid-Year Arbitration Review- Part IV by Juhi Gupta

(Continuing with her mid-year arbitration review (see previous posts here, here & here), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the fourth and last part of the series of posts on the topic. Happy reading!) 

Fundamental policy of Indian law is violated if core issues for grant of relief are not examined

National Highways Authority of India v Gwalior Jhansi Expressway Limited (Supreme Court, 13 July 2018)

The Supreme Court recently decided a very interesting case about the mandatory participation in a tender process to exercise the right of first refusal. A core issue was whether or not the impugned orders contravened the fundamental policy of Indian law. The case provides a useful illustrative example of the facts and circumstances that would lend to a finding that the fundamental policy has been violated.

Brief facts: A dispute arose between the appellant and respondent under a concession agreement regarding completion of contractual works. Arbitration was invoked and subsequently, the appellant filed an application under section 17 of the Arbitration Act before the tribunal seeking permission to complete the remaining works by going through the tender process again. The respondent moved a section 17 application asking NHAI to either infuse Rs. 400 crores to finish the project or to issue a fresh tender, subject to the respondent being granted the right of first refusal (hereinafter “ROFR”) to match the lowest bid and in the event it did, the right to complete the works subject to any conditions in the tender.

The tribunal passed an order to this effect, following which the appellant issued a fresh public tender for the balance works that was brought to the tribunal’s notice. An important stipulation that repeated in several provisions of the tender document was that if the respondent was also a responsive bidder, then the respondent shall have the option of matching the lowest bid in terms of the selection criteria. Several months later, the respondent filed an application under section 17 before the tribunal seeking permission to complete the works, claiming it was surprised by the appellant’s fresh tender of which it had only received notice on the previous day. The appellant objected saying that the respondent could have only invoked the ROFR if it had participated in the bidding process. The tribunal ruled in favour of the respondent, which was upheld by the Delhi High Court.

Issue: Whether the tribunal’s orders and the Delhi High Court order violated fundamental policy of Indian law?

Arguments: The appellant argued that (i) the respondent could not exercise the ROFR without participating in the bidding process and in violation of the tender conditions; (ii) there was nothing in the tribunal’s first order exempting the respondent from participating in the tender process or prohibiting the appellant from incorporating a condition to this effect in the tender document; (iii) the process of evaluation of tender and awarding of contract are commercial functions that are outside the purview of judicial review, especially when the decision of the statutory body (in this case the appellant) was bona fide and in public interest; and (iv) the tribunal exceeded its jurisdiction under section 17 in both orders because it could not pass an interim order concerning a separate contract (i.e. the fresh tender).

The respondent argued that (i) both the tribunal and High Court were of the view that it was not necessary for the respondent to participate in the fresh tender process to exercise the ROFR; (ii) the tribunal’s first order attained finality since the appellant did not challenge it; (iii) the respondent’s capability to complete the work was undisputed and therefore, there was no logic or rationale to require the respondent to participate in the bidding process; (iv) clause 3.2(f) of the tender document was a deeming provision that essentially declared the respondent as eligible and qualified; and (v) the respondent was not aware of the provisions of the fresh tender document as the tender was neither provided to the respondent nor placed before the tribunal.

Decision: The Supreme Court decided in favour of the appellant and set aside the tribunal’s second order and the High Court’s order, and dismissed the respondent’s section 17 application. The Court noted that the validity of the tender document was not challenged and its provisions made it clear that the respondent was required to participate in the tender process by submitting its sealed bid. The deeming clause in the document did not exempt the respondent from such participation (“…[the respondent], if it has participated in the bidding process, it shall be deemed to fulfil all the requirements of Clauses 3 to 6 of the RFP…”).

As regards the tribunal’s first order, the Court noted that there was nothing in the respondent’s application under section 17 to even remotely suggest that it should be exempted from participating in the fresh tender process. Any such exemption had to be expressly sought and granted, and disclosed in the tender documents. The Court agreed with the respondent that the tribunal’s first order was silent on requiring the respondent to participate in the bidding process as a condition precedent to exercise the ROFR; however, the respondent could not benefit from this as any exemption sought had to be expressly granted by the court. While the Court said it was “debatable” whether an arbitral tribunal could even issue an order like its first order under section 17, it did not enter into a discussion about this as that order was not challenged.

Further, the Court found fault with the tribunal’s undue appreciation of the fact that the respondent had completed a substantial portion of the contractual works and that it would be just and proper to allow it to complete the balance in spite of the respondent’s failure to take notice of the tender document that was duly released in public and disclosed to the tribunal. In addition, the respondent waited for very long to challenge the tender and even then did not file a rejoinder to challenge the appellant’s claim in its reply affidavit that the respondent was fully aware of the terms and conditions of the tender.

“The Arbitral Tribunal made no effort to ascertain as to whether the order dated 23^rd July 2016 was a blanket and unconditional order entitling the respondent to straightaway exercise ROFR without participating in the bidding process. The Arbitral Tribunal merely adverted to the objection of the appellant and rejected the same on the finding that involvement of a third party in the Project would create serious problems. It took the view that giving option to the respondent to match the lowest bid and to complete the balance work, with a condition to periodically submit the progress report to the Arbitral Tribunal for monitoring whether the balance work was successfully completed to the satisfaction of the NHAI, would be a proper and equitable arrangement. This approach is not in conformity with the fundamental policy of Indian law” (paragraph 20) [emphasis supplied].

Similarly, the Court observed that the High Court violated the fundamental policy of Indian law as it did not examine the core issues for grant or non-grant of relief to the respondent:

“The High Court did not find any error, much less manifest error, in the view taken by the Arbitral Tribunal. Further, it can be gleaned…that the High Court was more eager to know as to what prejudice would be caused to the appellant if the respondent had not participated in the bidding process. This query of the High Court is begging the question. For, that cannot be the primary basis to answer the relief claimed by the respondent in the application under Section 17 of the Act…The High Court has overlooked the fact that the appellant is a body corporate under the 1988 Act. It has to act in a just and fair manner in the matter of allocation of contract albeit the balance and unfinished work of the Project…The respondent had the option to participate in the bidding process which was not availed for reasons best known to the respondent. The High Court also overlooked the fact that the tender process was not an empty formality and with the initiation of the same, third parties, who participated in the bidding process, were likely to be prejudiced by allowing the respondent to match the lowest bid or exercise ROFR, without participating in the bidding process despite the express stipulation in that behalf in the tender documents” (paragraph 21) [emphasis supplied].

  

Non-signatories to arbitration agreement can be referred to domestic arbitration based on group of companies doctrine

Cheran Properties Limited v Kasturi and Sons Limited and Ors (Supreme Court, 24 April 2018)

Brief facts: An arbitral tribunal passed the final award in an arbitration between Kasturi and Sons Limited (hereinafter “KSL”) and Hindcorp Resorts Private Limited (HRPL) as the claimants, and Sporting Pastime India Limited (SPIL) and KC Palanisamy (KCP) as the respondents, under a shareholders agreement. The award contained a direction to SPIL and KCP to return to the claimants the documents of title and share certificates relating to 2,43,00,000 shares of SPIL. KCP’s challenge against the award under section 34 of the Arbitration Act was dismissed by the Madras High Court and subsequently the Supreme Court, thereby lending finality to the award.

Following the award, KSL filed an application before the National Companies Law Tribunal (NCLT) seeking rectification of SPIL’s register under section 111 of the Companies Act, 1956. The application was preferred against Cheran Properties Limited (hereinafter “Cheran Properties”), which had purchased SPIL’s shares as KCP’s nominee. NCLT allowed the application, which was further upheld by the appellate tribunal (NCLAT).

What is important to note is that prior to the dispute arising, KCP sent a letter to KSL as the authorised signatory of Cheran Properties (hereinafter “appellant’s letter”), requesting KSL to execute share transfer deeds for registering the transfer of shares “in the following names…[including Cheran Properties]”.

Issues: (1) were the non-signatories to the arbitration agreement bound by the agreement; and (2) did the NCLT have jurisdiction to enforce the arbitral award?

Arguments: The appellant argued that (1) it was not a party to the arbitration agreement that was entered into between KCP, KSL, SPIL and HRPL. Therefore, it was not bound by the arbitral award; (2) an arbitral award has to be enforced as a decree of a civil court and therefore, the award could not have been enforced by the NCLT; and (3) the principles of Chloro Controls are inapplicable as that case was decided in the context of an international arbitration under section 45. The provisions of section 45 of the Arbitration Act must be distinguished from the unamended section 8.

The respondents argued that (1) the shareholders agreement specifically provided that KCP’s nominees would be bound by the agreement, which would include the provision containing the arbitration agreement; (2) the appellant acted as KCP’s nominee at all material times and the appellant’s letter establishes beyond doubt that the appellant assumed all obligations under the shareholders agreement, including the remedy of arbitration; (3) an arbitral award can bind a group company, which is an affiliate of a signatory to the arbitration agreement, as decided in Chloro Controls; (4) section 35 of the Arbitration Act expressly states that an arbitral award binds parties to an arbitration and persons claiming under them; and (5) since the consequence of the arbitral award was to transfer shares to KSL, the NCLT had jurisdiction to order the formal rectification of SPIL’s register, which was the only way to effect the transfer of shares to KSL.

Decision: The Supreme Court decided the first issue in favour of the respondents. The Court relied on Chloro Controls, wherein the “group of companies” doctrine evolved under English law had been relied upon to recognise that non-signatory affiliates can be bound by an arbitration agreement in certain circumstances. Accordingly, in the present case, the Court noted:

“In holding a non-signatory bound by an arbitration agreement, the Court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance. The group of companies doctrine is essentially intended to facilitate the fulfillment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory” (paragraph 17) [emphasis supplied].

The Court emphasised that the present case related to a post-award situation and therefore, the material provision was section 35, and not sections 8 and 45 as contended by the appellant. Section 35 clearly stipulates that an arbitral award shall be final and binding on the parties and persons claiming under them. The expression “persons claiming under them” widens the net of those who are bound by an arbitral award – it is a “legislative recognition [that] an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings” (paragraph 20).

The Court observed that the appellant, in purchasing the shares, was conscious of and accepted the terms of the shareholders agreement. The appellant’s letter unequivocally confirmed the acceptance of this position. The facts and circumstances demonstrate the mutual intention of the parties to bind both signatories and non-signatories to the parent agreement and consequently, the arbitration agreement contained therein. KCP was entitled to transfer his shareholding and in the appellant’s letter, KCP indicated, as authorised signatory of the appellant, that his group of companies agreed to purchase the shares.

The Supreme Court also decided the second issue in favour of the respondents. The arbitral award had attained finality and the only remedy to fully enforce the award was to seek rectification of the register under section 111 of the Companies Act.

Mere claim alleging duress and coercion without proof does not lead to arbitrable dispute

M/s ONGC Mangalore Petrochemicals Ltd. v M/s ANS Constructions Ltd. and Anr. (Supreme Court, 7 February 2018)

Brief facts: The respondent was awarded a contract by the appellant. The respondent issued a no dues/claim certificate on accepting full and final payment after execution of the work. However, subsequently, the respondent withdrew the certificate stating that it was only issued under the appellant’s duress and coercion in order to receive payment. The respondent contended that several of its running account bills remained uncleared and it had to incur other additional expenses on account of causes attributable to the appellant. The appellant meanwhile issued a completion certificate. The respondent initiated arbitration proceedings. The appellant refused to accede to the arbitration request on account of non-arbitrability of the dispute. The respondent approached the Karnataka High Court under section 11 of the Arbitration Act to appoint an arbitrator on behalf of the appellant. The High Court allowed the petition against which the appellant filed a special leave petition to the Supreme Court.

Issue: Did a dispute exist for reference to arbitration under section 11?

Arguments: The appellant argued that (i) there was no genuine and serious dispute; (ii) there was no duress or coercion; (iii) the alleged claim for losses incurred during execution of the contract could not be raised at a belated stage; and (iv) there was complete accord and satisfaction of the contract as the parties had confirmed in writing that the contract was fully and finally discharged by performance of all obligations. As such, there was no outstanding claim or dispute to be arbitrated.

The respondent argued that (i) there was a genuine and serious dispute as it had incurred losses while executing the contract that remained unpaid and even the final payment was made after delay; (ii) the no dues certificate was void as it was issued under duress and therefore had no meaning in the eyes of law; and (iii) it had the right to invoke the arbitration clause in the contract.

Decision: The Supreme Court held that there was no genuine and serious dispute for arbitration. Deciding the accord and satisfaction issue in favour of the appellant, the Court relied on a prior decision to explain the thought process behind determining a reference to arbitration under section 11 as follows:

“The Chief Justice/his designate exercising jurisdiction under Section 11 of the Act will consider whether there was really accord and satisfaction or discharge of contract by performance. If the answer is in the affirmative, he will refuse to refer the dispute to arbitration. On the other hand, if [he] comes to the conclusion that the full and final settlement receipt or discharge voucher was the result of any fraud/coercion/undue influence, he will have to hold that there was no discharge of the contract and consequently, refer the dispute to arbitration” (paragraph 20) [emphasis supplied].

Applying the law to the instant facts and circumstances, the Court concluded that there was full and final settlement of the claim and there was accord and satisfaction. The appellant was discharged of all liabilities pursuant to issuing the completion certificate. Therefore, no arbitrable dispute existed so as to warrant exercise of power under section 11. The respondent made mere bald assertions bereft of any details or particulars, which could not lead to an arbitrable dispute.

Call for Papers: Indian Journal of International Economic Law

(Kindly see the call for papers from the Indian Journal of International Economic Law)

The Board of Editors of the Indian Journal of International Economic Law (IJIEL) is pleased to invite original and unpublished manuscripts for publication in Volume 11. 

About the Journal

The IJIEL is a student-edited and peer-reviewed law journal published annually by National Law School of India University, Bangalore (NLSIU). The previous volume of the journal featured contributions by Prof. Raj Bhala (Rice Distinguished Professor, Associate Dean for International and Comparative Law, Kansas School of Law) and Rodrigo Polanco (Researcher, Lecturer and SNIS/SECO Project Coordinator at World Trade Institute) among several others. We have also published articles by luminaries in the field such as Faizel Ismail, Enrico Baffi, LottaViikari, Rafiqul Islam, G.R. Bhatia, Michelle Sanson, Jason R. Bonin Dr. Rafael Arcas& Colin Picker; and forewords by Prof. JagdishBhagwati and Prof. Stephen Hobe in the past.

Mandate

The Journal is an endeavour to encourage scholarship in the field of international economic law. This includes (but is not necessarily limited to) research concerning the WTO, financial institutions, regulatory subjects such as taxation and competition policy, services sectors such as banking and brokerage and international investment arbitration. Further, the Journal is oriented towards publishing academic work that considers the aforementioned issues from a comparative perspective and/or the perspective of the developing world and Global South nations.

The purpose of IJIEL is to promote academia in the niche area of international economic law and allow scholars and researchers to engage with the myraid facets of this field. The eleventh volume will be a general issue with a mandate that includes (but is not necessarily limited to research concerning the WTO, financial institutions, regulatory subjects such as taxation and competition policy, services sectors such as banking and brokerage and international investment arbitration. Our mandate also includes an emphasis on law and development within the Global South nations.  

Submission Categories

1.      Articles (5000 to 10000 words, exclusive of footnotes) - Papers that comprehensively analyse a theme and engage with all the existing literature on it. 

2.      Essays (3000 to 5000 words, exclusive of footnotes) - Papers that concisely analyse specific contemporary issues in international economic law.

3.      Case notes and/or Legislative Commentaries (2000 to 7000 words, exclusive of footnotes).

Guidelines for Submissions

1.      The Journal reviews submissions on a rolling basis. The deadline for sending submissions for the forthcoming volume is March 31, 2019.

2.      Submissions must be made in electronic form to ijiel@nls.ac.in under the subject heading ‘IJIEL Vol. 11 Submission: <submission Category>.

3.      All submissions must be in MS Word format (.doc) or (.docx), with Times New Roman font (Main text: size 12 and double spaced, footnotes: size 10 and single-spaced).

4.      All manuscripts must be accompanied by a covering letter with the name(s) of the author(s), institution/affiliation, the title of the manuscript and contact information.

5.      An abstract of not more than 200 words shall be provided.

6.      Co - authorship (upto 3 authors) is permitted.

7.      No biographical information or references, including the name(s) of the author(s), affiliation(s) and acknowledgements should be included in the text of the manuscript, file name or document properties. All such information may be incorporated in the covering letter accompanying the manuscripts.

8.      The IJIEL uses only footnotes (and not endnotes) as a method of citation. Submissions must conform to the Bluebook.

For any clarifications, please contact us at ijiel@nls.ac.in.

Tanvee Kanaujia                                                                                     Sushmita Som

(Chief Editor)                                                                                     (Deputy Chief Editor)

                                                                       

Call for Submissions: Trade, Law & Development: Issue 10.2 | Winter ’18

(The Call for submissions for Trade, Law & Development is below)

The Board of Editorsof Trade, Law and Development is pleased to invite original, unpublished manuscripts for publication in the Winter ’18 Issue of the Journal (Vol. 10, No. 2) in the form of Articles, Notes, Comments and Book Reviews.

Manuscripts received by October 15, 2018 pertaining to any area within the purview of international economic law will be received for publication in the Winter ’18 issue.

Founded in 2009, the philosophy of TL&D has been to generate and sustain a constructive and democratic debate on emergent issues in international economic law and to serve as a forum for the discussion and distribution of ideas.Towards these ends, we havepublished works by noted scholars such as Prof. PetrosMavroidis, Prof. MitsuoMatsuhita, Prof.Raj Bhala, Prof. Joel Trachtman, Gabrielle Marceau, Simon Lester, Prof. Bryan Mercurio, Prof.E.U. Petersmann andProf. M. Sornarajah among others. TL&D also has the distinction of being ranked the bestjournal in India across all fields of law for seven consecutive years by Washington and Lee University, School of Law [The Washington & Lee Rankings are considered to be the most comprehensive in this regard].

Manuscripts may be submitted via e-mail or ExpressO. For furtherinformation about the journal please click here.For submission guidelines, please click here.

In case of any queries, please feel free to contact us at: editors[at]tradelawdevelopment[dot]com.

LAST DATE FOR SUBMISSIONS: 15^thOctober, 2018

Guest Post: Mid-Year Arbitration Review- Part III by Juhi Gupta

(Continuing with her mid-year arbitration review (see previous posts here and here), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the third part of the series of posts on the topic. Do check out the awesome, crisp and to-the-point descriptive comment on prominent arbitration related cases decided in India in the first half of 2018. Happy reading!)

In the third of a series of posts, I review two significant Supreme Court decisions on the issue of binding non-signatories to an arbitration agreement. I have discussed the cases in slight detail as they involve different facts and circumstances that demonstrate different aspects of the issue.

Non-signatories to arbitration agreement can be referred to domestic arbitration under section 8 based on facts and circumstances; mere allegations of fraud cannot disable arbitration

Ameet Lalchand Shah and Others v Rishabh Enterprises and Another (Supreme Court, 3 May 2018)

Brief facts: The respondent (Rishabh Enterprises) entered into four agreements: two agreements with Juwi India that contained arbitration clauses, a sale and purchase agreement with Astonfield Renewables (hereinafter “Astonfield Agreement”) that did not contain an arbitration clause, and an equipment lease agreement with Dante Energy that contained an arbitration clause. The agreements related to the commissioning of a solar power plant in Uttar Pradesh, India.

A dispute arose between the parties wherein the respondents alleged that Dante Energy defaulted in payment of rent and that Astonfield Renewables committed fraud by inducing Rishabh Enterprises to purchase certain products under the Astonfield Agreement. Dante Energy invoked the arbitration clause in response to which the respondents filed a civil suit for fraud and misrepresentation. In response to the civil suit, the appellants filed an application under section 8 of the Arbitration Act (hereinafter “the Act”) seeking reference of the dispute to arbitration on the ground that all four agreements were inter-connected as they were executed between the same parties and pertained to the same purpose. The respondents opposed the application, contending that the matter could not be referred to arbitration while the suit for declaration that the agreements were vitiated due to fraud and misrepresentation was pending. Further, the suit only concerned fraud committed by Astonfield Renewables and Dante Energy for which a criminal case had been registered and hence, the dispute could not be referred to arbitration.

The single judge and subsequently Division Bench dismissed the section 8 application by relying on Sukanya Holdings - the Astonfield Agreement, which was the principal agreement according to them, did not contain an arbitration clause and the agreement was not inter-connected with the other agreements. Further, given serious allegations of fraud were involved, the dispute was not arbitrable. The respondents appealed against the Division Bench judgment to the Supreme Court.

Issues: (1) Were all four agreements inter-connected such that the parties could be referred to arbitration even though there was no arbitration clause in the Astonfield Agreement?; and (2) was the dispute non-arbitrable on account of the allegations of fraud or was the dispute arbitrable by taking the agreements as a commercial undertaking of the parties with a sense of business efficacy as held in Ayyasamy?

Arguments: On the first issue: the respondents argued that the Astonfield Agreement was the main agreement and the High Court’s reliance on Sukanya Holdings was correct since under Part I of the Act, parties who were not signatories to the arbitration agreement (in this case Astonfield) cannot be referred to arbitration. The appellants’ reliance on Chloro Controls was misplaced as that case was decided under Part II of the Act and did not overrule Sukanya Holdings (note: Chloro Controls held that non-signatories could be referred to a foreign-seated arbitration under section 45 of the Act in certain circumstances).

On the second issue: the appellants argued that were no serious allegations of fraud to decline a reference to arbitration. Based on Ayyasamy, they submitted that mere allegations of fraud were not sufficient to detract from the referring the matter to arbitration as per the agreement. The respondents argued that the allegations were very serious and not merely to disable the arbitration, and that the appellants were guilty of cheating the respondents from the very beginning.

Decision: The Supreme Court decided both issues in favour of the appellants and referred the parties to arbitration.

On the first issue, the Court, albeit not expressly, applied the principles laid down in Chloro Controls, such as “direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction” (paragraph 20; paragraph 73 of Chloro Controls). The Court concluded that the four agreements were for the single purpose to commission the solar power plant. The Court characterised the equipment lease agreement with Dante Energy as the principal agreement and after undertaking an analysis of the relevant clauses, the Court concluded that the other three agreements were ancillary agreements, which led to the main purpose of commissioning the power plant:

“Even though, the Sale and Purchase Agreement (05.03.2012) between Rishabh and Astonfield does not contain arbitration clause, it is integrally connected with the commissioning of the Solar Plant…and even though, Astonfield and appellant No.1 Ameet Lalchand Shah are not signatories to the main agreement viz. Equipment Lease Agreement (14.03.2012), it is a commercial transaction integrally connected with commissioning of [the power plant]…what is evident from the facts and intention of the parties is to facilitate procurement of equipments, sale and purchase of equipments, installation and leasing out the equipments to Dante Energy. The dispute between the parties to various agreements could be resolved only by referring all the four agreements and the parties thereon to arbitration” (paragraph 21) [emphasis supplied].

Therefore, the Court essentially concluded that since all parties were involved in a single commercial project that was executed through several agreements, they were all covered by the arbitration clause in the equipment lease agreement that was the main agreement. The Court pointed out that the Delhi High Court erred in characterising the Astonfield Agreement as the main agreement.

In this context, the Court also referred to the 2015 amendment of section 8 which amplified the relevant “party” that is entitled to seek a reference to arbitration to include all persons claiming “through or under” a party to the arbitration agreement. Further, as per the recommendations of the 246^th Law Commission Report, a prima facie existence of an arbitration agreement was sufficient to refer parties to arbitration under section 8.

On the second issue, the Court concurred with the appellants’ reliance on Ayyasamy. In that case it was held that when a party wants to wriggle out of an arbitration agreement on the basis of alleged fraud, then a strict and meticulous inquiry is needed to determine whether the allegations are of a serious and complicated nature that should be addressed by the court. Further, it was pointed out that mere allegations of fraud could not preclude arbitration and it was the duty of the court to impart business efficacy to commercial transactions.

Applying Ayyasamy, the Court held that the allegations of fraud were not serious and in any event, could very well be examined by the arbitral tribunal. Even though Juwi India and Astonfield were not parties to the lease agreement, all the agreements contained clauses referring to the lease agreement and it was the duty of the Court to not merely go by the averments made in the submissions but to also adopt a commercial understanding and impart business efficacy.

Comment: The Supreme Court appears to have limited the application of Sukanya Holdings under section 8. While discussing the 2015 amendments to this provision, the Court pointed out the introduction of the section 45 language (“through or under”) and that the amendments apply notwithstanding any judicial precedent, which would arguably include Sukanya Holdings. Therefore, this judicial decision assumes immense significance because it demonstrates the application of Chloro Controls to domestic arbitrations and expands the traditional conception of “parties” to an arbitration agreement to include non-signatories based on the facts and circumstances. Based on this decision, it would probably be prudent for parties in a composite transaction involving multiple agreements with arbitration clauses to expressly exclude arbitration in any agreement should that be the intention.

Although Ayyasamy has been subjected to considerable criticism, this decision is important because it clearly reiterates that mere allegations of fraud cannot be used to disable or obstruct a domestic arbitration.

Mere reference in an agreement to another document containing an arbitration clause is insufficient to incorporate the clause

M/S. Elite Engineering and Construction v M/S. Techtrans Construction India Private Limited (Supreme Court, 23 February 2018)

Brief facts: The respondent (Techtrans) was party to a construction agreement that contained an arbitration clause (“any dispute...between the parties…shall be finally settled by binding arbitration”). Under this agreement, the respondent entered into a sub-contract with the appellant (Elite Engineering) that did not contain an arbitration clause. When disputes arose between the appellant and respondent, the appellant filed a petition under section 9 of the Act. This petition was subsequently allowed but the judge left open the issue of existence of an arbitration agreement. Meanwhile, the appellant’s petition under section 11 of the Act to appoint an arbitrator was dismissed by the High Court on the respondent’s contention that there was no arbitration agreement.

Issue: Was the arbitration clause in the construction agreement incorporated into the sub-contract?

Arguments: The appellant argued that (i) the sub-contract incorporates the arbitration agreement in the construction agreement by implication by virtue of the following clauses: clause 2 that provides that “all the conditions and special conditions of contract, specifications (general and additional clauses relating to the works and quality specified in the [construction agreement] are binding on the Subcontractor” [emphasis supplied]; and clause 9.10 of the Annexure that provides that “for items which are not mentioned in this Agreement Clauses, terms and conditions of [the construction agreement] will be applicable” [emphasis supplied].

The result of reading both clauses together was that the arbitration clause in the construction agreement became applicable to the sub-contract by incorporation; (ii) when the appellant was required to execute the work on the terms and conditions contained in the principal agreement (i.e. the construction agreement), the parties clearly intended to incorporate all terms including the arbitration clause; (iii) clause 8.7 of the sub-contract provides that other terms related to termination of work will be same as the agreement between the EPC, Concessionaire and respondent, which would include settlement of disputes on termination through arbitration as provided in the sub-contract; and (iv) the appellant’s statement in its section 9 petition that it would be constrained to file a suit against the respondent was on account of mistaken understanding of law and cannot be held against it.

The respondent argued that clause 2 of the sub-contract clearly demonstrated that there was only a qualified incorporation of the terms and conditions of the construction agreement, namely only those relating to the works and quality. There was no conscious acceptance of the arbitration clause by the parties, which was reflected in the fact that the appellant did not even refer to it in its section 9 petition.

Decision: The Supreme Court agreed with the respondent’s contentions and held that there was no arbitration agreement between the parties. Relying on its verdict in M.R. Engineers and Contractors Private Limited, the Court held that as per section 7(5) of the Act, an arbitration clause in an independent document can be imported into an agreement between parties by reference to such independent document in the agreement, even if there is no specific provision for arbitration. However, what is key is that the reference must be such so as to make the arbitration clause in such independent document a part of the agreement. Therefore there is a difference between mere reference and incorporation, which is made clear by the language of section 7(5):

“Therefore when there is a reference to a document in a contract, the court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract” (paragraph 16; paragraph 16 of M.R. Engineers) [emphasis supplied].

The Court referred to the conditions laid out in M.R. Engineers that need to be fulfilled for a valid incorporation of an arbitration clause and accordingly agreed with the High Court’s conclusion that there was no conscious acceptance of the arbitration clause in the construction agreement by the appellant and respondent. The Court agreed with the respondent that clause 2 had limited coverage, and noted that clause 9.10 only referred to “items” which had to be taken from the principal contracts. Further, the Court rejected the appellant’s termination of work argument, holding that the procedure relating to termination is completely separate and different from resolution of disputes.

Comment: This case is yet another illustration of the requirement to be express and specific in providing for arbitration in an agreement. Parties’ intention to consent to arbitration has to manifest clearly as opposed to appearing as an after thought. As regards the inclusion of arbitration by incorporation, this decision emphasises that the agreement should contain a clear reference to the document/s containing the arbitration clause and the intention to either incorporate the document/s in their entirety or at least the arbitration clause, unlike a reference to mere technical provisions that is likely to prove insufficient.