India: Risks Of Split Contracts & Arbitration Clause Included By Reference

Executive Summary:

The Supreme Court in  Ms. Duro Felguera, S.A ("Duro") v.  M/s Gangavaram Port Limited ("GPL")  held that there cannot be a "composite reference" to an arbitration of disputes arising out of multiple agreements that replaced a single agreement when a Memorandum of Understanding ("MoU") executed postdating such multiple agreements failed to incorporate arbitration clause from the single agreement.

Project & Agreements:

GPL, a green-field, ultra-modern seaport in the state of Andhra Pradesh started operations in 2009. GPL invited bids to expand its port facilities by a tender. Duro Felguera Plantas Industries S.A ("DF"), a Spanish company, and its Indian subsidiary, M/s. Felguera Graus India Private Limited ("FGI") submitted a single bid for Original Package 4 Tender Document ("Original P4T Document"). GPL awarded the tender to DF and FGI as contractors.

Parties split the Original P4T Document into five separate contracts, each with its own arbitration clause. All five contracts were executed on 10-5-2012, each with a separate work package. Of the five contracts, one was between GPL and DF, while four were between GPL and FGI. On 17-03-2012, DF executed a "Corporate Guarantee", in favour of GPL, with its own arbitration clause. DF, FGI and GPL executed a tripartite MoU, dated 11-08-2012,  that set priority of work execution as per a list of documents and referred to Original P4T Document that included an arbitration clause.

Disputes & Arbitration Notices:

Later, disputes related to delay arose between the parties regarding the works. GPL invoked the bank guarantee. DF issued a notice invoking arbitration under its one contract with GPL. FGI issued four notices under its four contracts with GPL. The GPL issued a comprehensive notice constituting a single arbitral tribunal under the MoU. GPL contended that the Original P4T document, the Corporate Guarantee and the split of Original P4T Document was done only for the convenience of contractors. In contrast, DF and FGI contended that the reference should be made to 'multiple arbitral tribunals' - one International Commercial Arbitral Tribunal (DF-GPL) and four Domestic Arbitral Tribunals (DF-GPL) and to another international arbitral tribunal for Corporate Guarantee (DF-GPL).

Writing the main judgement in the matter, Justice R. Banumathi opined that as per the amended Section 11(6A), of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"), "the power of the court is confined only to examine the existence of the arbitration agreement". Court noted that there are five separate letters of award; and five separate subject matters; and five separate contracts, each containing a separate arbitration clause signed by the respective parties to the contract. Further, once the Original P4T Document had been divided into five different contracts, the parties cannot revert to Original P4T Document, nor can they merge them into one. Since the Corporate Guarantee, though covering all five split contracts, itself has a separate arbitration clause and hence cannot supersede the five split-up contracts.

GPL argued that Chloro Controls India Private Limited v. Severen Trent Water Purification Inc and other, (2013) 1 SCC 641, ratio applies and the tripartite MoU covers all the five packages and shall therefore prevail over the arbitration clauses contained in the five agreements. The court clarified that Chloro Controls ratio is inapplicable, because in Chloro Controls case the arbitration clause in the principal agreement required that any dispute or difference arising under or in connection with the principal (mother) agreement, would be settled by arbitration. The use of words "under or in connection with" in the principal agreement made it more comprehensive, unlike here wherein all the five agreements and the Corporate Guarantee contains separate arbitration clauses and do not depend either on the Original P4T Document or the MoU.

The court added that s.7(5) of the Arbitration Act requires a conscious acceptance of the arbitration clause from another document as a part of their contract, before such arbitration clause could be read as a part of the contract. Incorporation by reference of an arbitration clause is a question of document construction referring to the intention of the parties.

Justice Kurian in  a concurring but separate judgment  relied on the precedent M.R Engineers and Contractors Pvt. Ltd. v. Som Dutt Builder Ltd. (2009) 7 SCC 696, to state that an arbitration clause in another document would get incorporated into a contract by reference if the contract contains a clear reference to the document containing such an arbitration clause is coupled with a clear intention to incorporate the clause and that the arbitration clause is capable of application to the disputes under the contract without being repugnant to any term of the contract.

The court held that in this case there was no novation by substitution of all the five agreements nor there is a merger of all into one. The reference in MoU to the Original P4T Document is only for better clarity on technical and execution related matters. Further, under s.11(6) of the Arbitration Act all that the court needs to see is whether an arbitration agreement exists – "nothing more, nothing less".

Therefore, in the present matter six tribunals had to be formed - two for international commercial arbitration involving Duro & GPL and four domestic tribunals involving FGI & GPL. Hence, in this case a composite reference to an arbitration would be non est in law.

Epilogue:

This case highlights the dangers of arbitration clauses that may not operate as intended when a contract is split into multiple contracts for business or operational convenience. Incorporating an arbitration clause by reference needs careful drafting to obviate such risks.

Ms. Duro Felguera, S.A  v.  M/s Gangavaram Port Limited, 2017 SCC Online SC 1233

Authors: Hasit B. Seth, Partner, and Sakshi Ahuja, Associate, Link Legal India Law Services.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.