[This article has been authored by Tarasha Gupta, an Editor at Mapping ADR.]
Keywords: Section 8 and Section 11 of the Arbitration and Conciliation Act 1996 (“the A&C Act”), Multi-Contract, Multi-Party Disputes, Non-Signatories
Introduction
A composite reference of disputes in arbitration is a single reference of multiple disputes arising from different agreements contracted in the execution of a common project or object. Such situations arise when multiple agreements are contracted either between the same parties or with different parties. These relationships may be “horizontal”, whereby two parties enter successive agreements or “vertical”, wherein parties to an agreement entered into further agreements with different parties for work related to the initial agreement, or “consortium” relationships, wherein a number of different parties enter into different agreements related to a common subject matter.
Generally, an extension of an arbitration agreement to non-signatories has also been justified under Section 8 of the A&C Act, which was amended in 2015 to provide that a party to the arbitration agreement “or any person claiming through or under him” may make an Application for a dispute to be referred to arbitration. Section 45 of the A&C Act further allows reference to arbitration where one of the parties to an arbitration agreement “or any person claiming through or under him” makes such a request, in cases where the place of arbitration is a foreign country.
In the landmark case of Chloro Controls v. Severn Trent Water Purification (“Chloro Controls”), the Supreme Court of India laid down a test to judge whether a contract can be extended to non-signatories. This article is concerned with the second prong, i.e., where various agreements constitute a “composite transaction” where there is a mother agreement with ancillary agreements for its effective implementation. The first part of the article will discuss the Court’s decision in Chloro Controls and the decisions that follow. The second part will analyse arguments for and against the recognition of composite references in Arbitration where the author draws upon the situations in which such references of disputes are permissible under Indian law.
The Chloro Controls Test
The case of Chloro Controls involved a Joint Venture (“JV”) between Chloro Controls Pvt. Ltd., its owner (Madhusudan Kocha) and Capital Controls (Delaware) Co. Inc. (a subsidiary of Severn Trent Services (Delaware), Inc.). . The JV was to work with Capital Controls (Colmar) Co. Inc., a sister company of Capital Controls (Delaware) that was also a subsidiary of Severn Trent. The parties entered into multiple agreements thereafter. A Shareholders’ Agreement (i.e., the Principal Agreement) was entered into by Chloro Controls, Mr. Kocha, and Capital Controls (Delaware). According to the dispute resolution clause herein, disputes would be arbitrated according to English law and following the Rules of the International Chamber of Commerce (“ICC”). All other agreements were entered into by the JV and Capital Controls (Colmar) and contained dispute resolution clauses different from that in the Shareholders’ Agreement.
When disputes arose among the parties, Chloro Controls initiated litigation, and Capital Controls (Colmar) and Severn Trent objected to it, pointing to the dispute resolution clause in the Shareholders’ Agreement. Therefore, the issue was whether a reference to disputes as a whole could be made to the Arbitral Tribunal where multiple agreements are signed between different parties and some agreements contain arbitration clauses whereas some do not. The Court held that multiple and multi-party agreements, in exceptional cases, come within the ambit of “person claiming through or under” in Section 45 of the A&C Act. Arbitration can be extended to non-signatories when there is (a) a direct relationship to a signatory to the arbitration agreement, (b) the disputes have a direct commonality of subject matter, or (c) the agreement between the parties form a “composite transaction” (i.e., the three-part Chloro Controls test), as defined earlier.
With respect to the facts of the case, the Court observed that the agreements subsequent to the Shareholders’ Agreement were entered into by parties to ensure its performance and fulfil their obligations. Thus, they were ancillary and incidental to and would be ineffective without the Shareholders’ Agreement. It was therefore one composite transaction, and the disputes referred to and arising from the multi-party agreements in the present case could be referred to the Arbitral Tribunal.
Subsequent Supreme Court Decisions
The Supreme Court subsequently delivered two notable judgments relying upon Chloro Controls.
Firstly, in M/S Duro Felguera S.A. v. M/S Gangavaram Port Ltd. (“Duro Felguera”), the parties originally entered into one contract for the execution of a project, but then decided to split it into five contracts, one of which was entered into by Duro Felguera, and the others by its Indian subsidiary. The contracts had the same arbitration clause, and the parties also entered a Memorandum of Understanding (“MoU”) explaining the order of execution of each of the contracts. When disputes arose between the parties, Duro Felguera and its Indian subsidiary filed a Petition for the appointment of Arbitrators to hear the dispute arising out of each contract separately. However, Gangavaram Port Ltd. filed a Petition to appoint a single Arbitral Tribunal by a composite reference.
The two-judge bench refused to allow composite reference of the disputes to arbitration. Justice Bhanumati’s judgment distinguished the present case from Chloro Controls on the ground that the arbitration clause in the principal agreement in the latter case (providing arbitration for disputes arising “under or in connection with” the principal agreement) was broader. Justice Kurian Joseph’s concurring judgment added that the MoU did not merge all five agreements into one, and did not incorporate an arbitration clause, emphasizing the importance of parties’ intention for incorporation by reference under Section 7(5) of the A&C Act.
The second case is Ameet Lalchand Shah v. Rishabh Enterprises (“Ameet Lalchand”), in which the Supreme Court held that the case was a “composite transaction” which involved four agreements. The first two were between Rishabh Enterprises and Juwi India Renewable Energies: an equipment and material supply contract, and an engineering, installation, and commissioning contract for a solar plant. Both agreements contained an arbitration clause. The third agreement was between Rishabh Enterprises and Astonfield Renewables, for purchasing certain products to be leased to Dante Energy. This agreement did not contain an arbitration clause. The fourth agreement was between Rishabh Enterprises and Dante Energy, for leasing the equipment (which was to be installed at the solar plant). It contained an arbitration clause.
Disputes arose between Rishabh Enterprises on the one hand, and Astonfield Renewables and Dante Energy (Ameet Lalchand Shah being their common promotor and controlling man) on the other. Consequently, the Appellants (Mr. Shah, Astonfield, and Dante) sought reference to arbitration for all four agreements. Allowing the appeal and dismissing the judgment of the Delhi High Court, the Supreme Court held that the main agreement was the fourth agreement, and the first, second, and third agreements were ancillary. The Court cited Chloro Controls and observed that even though the parties to each contract were different, all agreements involved a single project. Heavy reliance was placed on the specific clauses of the agreements and the intent of the parties to come to this decision.
Consolidated Reference of Disputes: Debates & Concerns
At a time when projects and transactions are becoming increasingly complex and interdependent, the case in favour of recognizing composite references of disputes in arbitration is apparent. It not only saves the time of the parties involved but also the justice system. It can help reduce delays in a process which was supposed to be a better alternative to litigation.
It may also reduce confusion in cases where the award for a dispute under one contract is dependent on a decision with regard to a dispute under another contract. In other jurisdictions, courts have recognized the principle of consolidation of arbitral proceedings to avoid multiplicity of proceedings and conflicting decisions. In India, the Delhi High Court in Gammon India Ltd. v. National Highways Authority of India emphasized that the principle of res judicata and the principles enshrined in Rule 2 of Order 2 and Sections 10 and 11 of the Civil Procedure Code, 1908 are applicable to arbitral proceedings, which currently suffer from multiplicity and require streamlining. The Court also held that authorities ought to avoid constituting separate arbitral tribunals for disputes arising from the same contract or a series of contracts.
However, at the same time, parties who are not privy to all contracts should not be roped into proceedings they were not involved in, or that, at the time of entering into the contract or otherwise, they did not agree or intend to be a part of. Arbitration, after all, is the creation of a contract and is therefore rooted in the idea of consent. This concern, however, may be mitigated by the allowance of composite reference of disputes in cases where all parties agree to consolidation on the date fixed for the Terms of Reference, as is permitted by Rule 6 of the Delhi International Arbitration Centre (DIAC) Rules, 2016.
The Current Position of Indian Law on Composite Reference
Even though the composite references of disputes in arbitration is not explicitly recognized by a statute in India, the cases discussed in this article show that the principle has been recognized by precedent. In addition to the Chloro Controls test, the Supreme Court’s judgments in Duro Felguera and Ameet Lalchand show that Indian law allows composite reference of disputes to arbitration when the agreements are interconnected in a “composite transaction”, such that they are executed for the same purpose or project and have the same scope of work. However, it has been noted that through this approach, the Court has focused on the commonality of the end goal of the contracts in question, rather than their separation into different agreements on a strict interpretation. This may not necessarily be disadvantageous since it may be antithetical to adjudicate disputes together if they are not related in some material manner which can most easily be gauged by its end goal. It would waste not only the Tribunal's time but also prolong the adjudication process. However, drawing from the idea that arbitration arises from parties’ consent if the language of the agreement clearly specifies the parties would prefer composite reference to arbitration, that must be taken into consideration. Therefore, it is necessary for parties’ intent to be given primacy; whether the Court focuses on the commonality of the contracts’ end goal or their separation into different agreements should vary on a case-by-case basis. The foundation for this is already present in current jurisprudence on this subject; in the aforementioned cases, the Supreme Court has placed heavy emphasis on the parties’ intent in arriving at its decision.
Conclusion
This article firstly outlined the landmark Chloro Controls judgment passed by the Supreme Court and subsequent decisions made relying on it, concluding that Indian law allows composite reference of disputes to arbitration when the agreements are interconnected in a “composite transaction”, such that they are executed for the same purpose or project and have the same scope of work. Second, the article analysed the arguments for and against its recognition in Indian law, emphasizing that the Court’s focus must shift depending on the parties’ intent.
Ultimately, a decision with respect to the composite reference of disputes will depend on the construction of the agreements in question and the parties’ ostensible intentions regarding the role of the agreements. Thus, these arbitration clauses must be drafted accordingly. However, there is a need for more legislative clarity (possibly through an amendment or addition to the A&C Act), especially with respect to the scope of Section 11.