Arbitration Clause Enforced: Supreme Court Resolves Shareholder Dispute in VGP Marine Kingdom Case (2022)

Date of the Judgment: November 04, 2022

Citation: (2022) INSC 1314

Judges: M.R. Shah, J., Krishna Murari, J.

Can a court deny arbitration if related disputes are already being addressed in other forums? The Supreme Court of India recently tackled this question, focusing on whether a pending case before the National Company Law Tribunal (NCLT) or prior arbitration proceedings should prevent the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996. The court clarified that an arbitration clause in a contract must be honored, even if other related legal battles are ongoing. This judgment, delivered by a two-judge bench comprising Justices M.R. Shah and Krishna Murari, emphasizes the importance of respecting arbitration agreements.

Case Background

This case involves a dispute between VGP Marine Kingdom Pvt Ltd (the appellants) and Kay Ellen Arnold (the respondent) concerning a Share Subscription and Shareholders Agreement dated April 27, 2016. The appellants sought to initiate arbitration proceedings as per the agreement’s dispute resolution clause. However, the respondent had already initiated proceedings before the NCLT, alleging oppression and mismanagement as a minority shareholder. Additionally, previous arbitration proceedings related to other agreements between the parties were also underway. The High Court of Judicature at Madras dismissed the appellant’s application to appoint an arbitrator, leading to this appeal before the Supreme Court.

Timeline:

Course of Proceedings

The appellants initially approached the High Court of Judicature at Madras under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator. The High Court dismissed this application, citing the existence of prior arbitration proceedings related to other agreements between the parties, as well as the pendency of proceedings before the NCLT initiated by the respondent. The High Court reasoned that these ongoing proceedings made the appointment of a new arbitrator unnecessary and potentially conflicting. The appellants then appealed to the Supreme Court, challenging the High Court’s decision.

Legal Framework

The core legal provision at the heart of this case is Section 11(6) of the Arbitration and Conciliation Act, 1996, which deals with the appointment of arbitrators. According to Section 11(6) of the Arbitration and Conciliation Act, 1996, if the parties fail to appoint an arbitrator as per their agreement, the court can step in to appoint one. The relevant clause in the Share Subscription and Shareholders Agreement, Clause 17, outlines the dispute resolution process, including arbitration. Clause 17.1.2 states that if management representatives fail to resolve a dispute within 30 business days, either party may initiate arbitration. Clause 17.1.3 provides for a three-member arbitral board, with each party appointing one arbitrator, and the two appointed arbitrators choosing the third. Clause 17.1.5 specifies that the arbitration shall be governed by the Arbitration and Conciliation Act, 1996.

Specifically, Clause 17 of the agreement states:

“17. DISPUTE RESOLUTION
17.1. Dispute Resolution, Jurisdiction and Governing Law
17.1.1 The Parties agree that this Agreement shall be governed by and construed in accordance with the laws of India. If any question, dispute, controversy or claim shall at any time arise between the Parties inter se or between a Party(ies) and the Company, with respect to the validity, interpretation, implementation or alleged material breach of any provision of this Agreement or the rights or obligations of the Parties and the Company hereunder, or regarding any question including the question as to whether the termination of this Agreement by either Party has been legitimate, (collectively, “Dispute”) then the Parties shall attempt to settle . such Dispute amicably between them by reference to the management of the Parties. In case of KEA, such management shall be represented by a Director, and in case of VGP, such management shall be represented by a Director.
17.l.2 In the event that such management representatives have not agreed upon a decision within thirty (30) Business Days after reference of the matter to them, then either Party may within thirty (30) Business Days after the first thirty (30) Business Days referenced above, give to the other Party, a notice of intention to submit the Dispute to arbitration under this Clause 17.
17.1.3 Upon issuance of such notice, the Dispute shall be referred to a board of three (3) arbitrators. Each Party shall be entitled to appoint one (1) arbitrator and the two (2) arbitrators so appointed by the Parties shall appoint the third arbitrator. The award of the arbitrators shall be final and binding on the Parties and the Company.
17.1.4 The seat of arbitration shall be Chennai and the language to be used in the arbitral proceedings in all instances shall be English.
17.I.5 The arbitration shall be governed by the provisions of the Indian Arbitration and Conciliation Act, 1996 (as amended from time to time and any statutory re­ enactment governing arbitrations).
17.I.6 The fees of the arbitrators shall be borne equally by the Parties. All other costs and expenses of the arbitration shall be borne by the Parties as the arbitrator may award.
17.l.7 Subject to Clauses 17.1.1 to 17.1.6, each Party submits to the exclusive jurisdiction of the courts of Chennai. Provided that, the Parties agree to submit to the exclusive jurisdiction of the competent courts as may be necessary for the enforcement of an arbitral award obtained in accordance with this Clause 17.
17.1.8 Notwithstanding any other provision of this Agreement, the rights and obligations of the Parties under this Clause shall survive termination of this Agreement.”

Arguments

Appellants’ Arguments:

• The appellants argued that the dispute arose from a distinct Share Subscription and Shareholders Agreement dated April 27, 2016, which contains its own arbitration clause (clause 17.1.2).
• They contended that they had issued a notice of termination of the Second Shareholders Agreement and subsequently invoked the arbitration clause due to a failure by the respondent to nominate an arbitrator.
• The appellants emphasized that the dispute was separate from the subject matter of earlier arbitral proceedings and that they were not even a party to those earlier proceedings.
• They argued that the ongoing proceedings before the NCLT, initiated by the respondent for oppression and mismanagement as a minority shareholder, should not prevent the appointment of an arbitrator.
• The appellants relied on the Supreme Court’s decision in Vidya Drolia and Ors. Vs. Durga Trading Corporation; (2021) 2 SCC 1, particularly paragraphs 147.9, 147.11, and 225, to support their position that the court should refer the dispute to arbitration unless it is manifestly non-arbitrable.

Respondent’s Arguments:

• The respondent argued that all three agreements (including the one dated April 27, 2016) were interconnected.
• They contended that the earlier award related to the other two agreements should render the current dispute non-maintainable.
• The respondent relied on the Supreme Court’s decisions in Booz Allen & Hamilton Inc. Vs. SBI Home Finance Ltd., (2011) 5 SCC 532, Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641, and Vidya Drolia (supra) to support their claim that the dispute was not arbitrable.
• They argued that the High Court’s decision to dismiss the application was correct, citing observations from the Vidya Drolia case.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the primary issue before the court was:

1. Whether the High Court was justified in dismissing the application under Section 11(6) of the Arbitration and Conciliation Act, 1996, and refusing to appoint an arbitrator due to the pendency of prior arbitration proceedings and proceedings before the NCLT.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The Supreme Court considered the following authorities:

Cases:

• Vidya Drolia and Ors. Vs. Durga Trading Corporation; (2021) 2 SCC 1: The Supreme Court referred to this three-judge bench decision, which clarified the scope of the court’s power under Section 11(6) of the Arbitration and Conciliation Act, 1996. The court emphasized that unless a dispute is manifestly non-arbitrable, the issue of arbitrability should be left to the arbitrator.
• Booz Allen & Hamilton Inc. Vs. SBI Home Finance Ltd., (2011) 5 SCC 532: This case was cited by the respondent to argue that the dispute was not arbitrable, but the Supreme Court distinguished it, emphasizing that the issue of arbitrability should be left to the arbitrator.
• Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641: This case was also cited by the respondent to argue that the dispute was not arbitrable, but the Supreme Court distinguished it, emphasizing that the issue of arbitrability should be left to the arbitrator.

Legal Provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section empowers the court to appoint an arbitrator if the parties fail to do so as per their agreement.
• Clause 17 of the Share Subscription and Shareholders Agreement: This clause outlines the dispute resolution process, including arbitration.

Authority Table

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed the principles laid down in Vidya Drolia and Ors. Vs. Durga Trading Corporation; (2021) 2 SCC 1*, emphasizing that the issue of arbitrability should be left to the arbitrator unless it is manifestly non-arbitrable.
• The Supreme Court distinguished the cases of Booz Allen & Hamilton Inc. Vs. SBI Home Finance Ltd., (2011) 5 SCC 532* and Chloro Controls India Private Limited Vs. Severn Trent Water Purification Inc. and Ors., (2013) 1 SCC 641*, stating that these cases did not apply to the present situation, where the issue of arbitrability was not manifestly clear.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle that arbitration agreements should be respected and enforced. The Court emphasized that the issue of arbitrability should be decided by the arbitrator, not the court, unless the dispute is manifestly non-arbitrable. The court also noted that the dispute arose from a specific Share Subscription and Shareholders Agreement with its own arbitration clause, separate from the issues raised in the NCLT proceedings. The Court also observed that the appellants were not a party to the earlier arbitration proceedings.

Fact:Law Ratio

The Supreme Court’s reasoning was primarily based on legal principles and the interpretation of the arbitration agreement, with a lesser emphasis on the factual aspects of the case.

Logical Reasoning

The Supreme Court’s decision was based on the following key points:

• The High Court should not have dismissed the application under Section 11(6) of the Arbitration and Conciliation Act, 1996, solely because of prior arbitration proceedings or pending NCLT proceedings.
• The dispute arose from a specific Share Subscription and Shareholders Agreement dated April 27, 2016, which contained an arbitration clause.
• The issue of whether the dispute is arbitrable should be decided by the arbitrator, unless it is manifestly non-arbitrable.

The Supreme Court quoted the following from the judgment:

“…we are of the opinion that the High Court ought to have allowed the application under Section 11(6) of the Act, 1996 and ought to have left the issue on arbitrability of dispute between the parties to the arbitrator.”

“…unless on the facet it is found that the dispute is not arbitrable and if it requires further/deeper consideration, the dispute with respect to the arbitrability should be left to the arbitrator.”

“…on the pendency of such proceedings the application under Section 11(6) of the Act, 1996 cannot be dismissed. It should be left to the arbitrator to consider the entire aspect.”

Key Takeaways

• Courts should generally respect and enforce arbitration agreements.
• The issue of arbitrability should be decided by the arbitrator unless it is manifestly non-arbitrable.
• Pending proceedings before the NCLT or prior arbitration proceedings should not automatically prevent the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996.
• This decision reinforces the principle of minimal judicial intervention in arbitration matters.

Directions

The Supreme Court set aside the High Court’s judgment and order, allowed the application under Section 11(6) of the Arbitration and Conciliation Act, 1996, and appointed Shri Justice K. Ravichandrabaabu, Former Judge, Madras High Court, as the arbitrator. The court also directed that the issue of arbitrability of the dispute should be decided by the appointed arbitrator. The fees of the arbitrator shall be decided by the learned Arbitrator with the consent of the respective parties as per the Schedule to the Act, 1996 as amended from time to time.

Development of Law

The ratio decidendi of this case is that the court should not refuse to appoint an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, merely because of the pendency of prior arbitration proceedings or proceedings before the NCLT. The issue of arbitrability should be left to the arbitrator to decide, unless it is manifestly non-arbitrable. This decision reinforces the principle of minimal judicial intervention in arbitration matters and upholds the sanctity of arbitration agreements. This judgment does not change the previous position of law but reinforces the existing position of law as was held in Vidya Drolia and Ors. Vs. Durga Trading Corporation; (2021) 2 SCC 1.

Conclusion

The Supreme Court’s judgment in VGP Marine Kingdom Pvt Ltd vs. Kay Ellen Arnold clarifies that the existence of prior arbitration proceedings or pending NCLT cases does not automatically preclude the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996. The Court emphasized that the issue of arbitrability should be decided by the arbitrator, reinforcing the principle of minimal judicial intervention in arbitration matters. This decision ensures that parties are held to their arbitration agreements and that disputes are resolved through the agreed-upon process.