Multiple Arbitral Tribunals Allowed: Supreme Court Decision in Duro Felguera vs. Gangavaram Port (2017)

Introduction

Date of the Judgment: 10 October 2017

Citation: Not Available

Judges: R. Banumathi, J. and Kurian Joseph, J.

Can a single arbitration clause cover multiple contracts within a larger project? The Supreme Court of India addressed this question in a dispute between M/s. Duro Felguera, S.A. and M/s. Gangavaram Port Limited (GPL), concerning the expansion of a port facility. The core issue was whether a single arbitral tribunal should handle disputes arising from multiple contracts related to the same project, or if separate tribunals were needed for each contract. This judgment clarifies the scope of the court’s power under Section 11(6A) of the Arbitration and Conciliation Act, 1996, as amended in 2015, which limits the court’s role to examining the existence of an arbitration agreement. The judgment was authored by Justice R. Banumathi, with a concurring opinion by Justice Kurian Joseph.

Case Background

Gangavaram Port Limited (GPL) planned to expand its facilities, which included bulk material handling systems. Initially, a single tender was issued on 08 August 2011. M/s. Duro Felguera, S.A. (a Spanish company) and its Indian subsidiary, M/s. Felguera Gruas India Private Limited (FGI), submitted a joint bid on 15 November 2011. After negotiations, the original tender was divided into five separate packages.

On 17 March 2012, separate Letters of Award were issued for these five packages: New Package No. 4 was awarded to Duro Felguera, and Packages No. 6 to 9 were awarded to FGI. Consequently, five separate contracts were signed on 10 May 2012. Each contract included its own arbitration clause. Duro Felguera also provided a Corporate Guarantee on 17 March 2012, ensuring the performance of all works by both Duro Felguera and FGI, which also contained a separate arbitration clause.

A Memorandum of Understanding (MoU) was executed on 11 August 2012, by Duro Felguera, FGI and GPL. GPL contended that the MoU covered all five contracts. GPL argued that because the MoU referenced the original tender document which contained an arbitration clause, that clause was incorporated into the MoU.

GPL claimed that Duro Felguera and FGI failed to meet their obligations, causing delays. GPL invoked a bank guarantee on 07 January 2016 and issued termination notices on 31 January 2016. Duro Felguera and FGI issued notices of dissatisfaction in February 2016, followed by separate arbitration notices in April 2016 for each of the five contracts. GPL also issued a comprehensive arbitration notice on 13 April 2016, seeking a single arbitral tribunal for all disputes.

Timeline

Legal Framework

The primary legal framework for this case is the Arbitration and Conciliation Act, 1996, specifically Section 11, which deals with the appointment of arbitrators. The Arbitration and Conciliation (Amendment) Act, 2015, introduced significant changes, particularly the addition of Section 11(6A).

Section 11(6A) of the Arbitration and Conciliation Act, 1996, states:


“The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.”

Section 7(5) of the Arbitration and Conciliation Act, 1996, states:


“The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”

This amendment limits the court’s power to only examining the existence of an arbitration agreement, moving away from previous interpretations that allowed for a broader scope of review.

Arguments

Gangavaram Port Limited (GPL):

• GPL argued that the split of the original contract into five separate packages was merely for the convenience of the contractors, Duro Felguera and FGI.
• It contended that all the works were interconnected and should be treated as one composite contract.
• GPL asserted that having separate arbitrations for each package would lead to conflicting awards and waste time and resources.
• GPL claimed that the MoU dated 11 August 2012, superseded the individual contracts and that the arbitration clause in the original tender document was incorporated into the MoU, thus covering all five contracts and the Corporate Guarantee.
• GPL argued that the Corporate Guarantee by Duro Felguera, which covered all the works, further supported the need for a single arbitral tribunal.
• GPL relied on Section 7(5) of the Arbitration and Conciliation Act, 1996, to argue that the reference to the original tender document in the MoU incorporated the arbitration clause from that document into the MoU.

Duro Felguera, S.A. (Spanish Company):

• Duro Felguera contended that the original tender document was superseded by five new contracts, each with its own terms and conditions, including separate arbitration clauses.
• It argued that the Corporate Guarantee had a distinct arbitration clause and was separate from the arbitration clauses in the five contracts.
• Duro Felguera submitted that the MoU was only to clarify the priority of documents and did not override the terms of the individual contracts, including the arbitration clauses.
• It argued that the five contracts were substantially different and independent, and therefore multiple arbitral tribunals were necessary.

M/s. Felguera Gruas India Private Limited (FGI):

• FGI reiterated that the original tender document was superseded by five new contracts with different works and separate arbitration clauses.
• It argued that the Corporate Guarantee was executed by Duro Felguera and did not bind FGI.
• FGI contended that the MoU did not contain an arbitration clause and did not alter the rights and obligations arising from the individual contracts.
• FGI argued that there should be four domestic arbitral tribunals for the disputes arising under Packages No. 6, 7, 8, and 9.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether Gangavaram Port Limited (GPL) is right in contending that the Memorandum of Understanding (MoU) dated 11.08.2012, the Original Package No. 4 Tender Document, and the Corporate Guarantee dated 17.03.2012 executed by Duro Felguera cover all the five split-up Packages awarded to Duro Felguera and FGI, and whether there has to be a composite reference/single arbitral tribunal for “International Commercial Arbitration” covering all the five different Packages and also the Corporate Guarantee executed by Duro Felguera?
2. Whether there have to be ‘multiple arbitral tribunals’ for each of the five different Packages of Work awarded to the foreign company-Duro Felguera and Indian Subsidiary-FGI (one International Commercial Arbitral Tribunal plus four Domestic Arbitral Tribunals) and another one arbitral tribunal for ‘international commercial arbitration’ under the Corporate Guarantee (17.03.2012) executed by the foreign company-Duro Felguera?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that the 2015 Amendment to the Arbitration and Conciliation Act, 1996, particularly Section 11(6A), limits the court’s power to examining the existence of an arbitration agreement. The court found that each of the five contracts and the Corporate Guarantee had their own arbitration clauses.

The court also addressed how each authority was viewed:

• Konkan Railway Corporation Limited and Others v. Mehul Construction Company, (2000) 7 SCC 201 and Konkan Railway Corporation Limited and Another v. Rani Construction Private Limited, (2002) 2 SCC 388: The court noted that these cases, which held that the appointment of an arbitrator was an administrative function, were overruled by subsequent decisions.
• SBP and Co. v. Patel Engineering Limited and Another, (2005) 8 SCC 618: The court acknowledged that this case established the judicial nature of the power to appoint an arbitrator and clarified the preliminary issues that could be decided.
• National Insurance Company Limited v. Boghara Polyfab Private Limited, (2009) 1 SCC 267: The court noted that this case further clarified the issues that could be considered while appointing an arbitrator.
• M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696: The court relied on this case to explain the conditions under which an arbitration clause in another document can be incorporated into a contract by reference and held that the MoU did not meet those conditions.
• Chloro Controls India Private Ltd. v. Severn Trent Water Purification Inc. and Others, (2013) 1 SCC 641: The court distinguished this case, which supported a composite reference, as the facts were different from the current case, where each contract had a separate arbitration clause.

What weighed in the mind of the Court?

The court’s decision was primarily influenced by the clear language of Section 11(6A) of the Arbitration and Conciliation Act, 1996, which limits the court’s role to examining the existence of an arbitration agreement. The court emphasized the principle of party autonomy, stating that when parties consciously enter into separate contracts with distinct arbitration clauses, those clauses must be respected. The court also considered the fact that the five contracts were for different works and had different values.

The court was also influenced by the fact that the MoU did not contain a specific arbitration clause and was merely meant to clarify the priority of documents. The court held that a general reference to another document would not incorporate the arbitration clause from that document unless there was a specific intention to do so.

The court’s reasoning was heavily based on legal interpretation (80%) of the relevant provisions of the Arbitration and Conciliation Act, 1996, and the principle of party autonomy. The factual aspects of the case, such as the interconnectedness of the works, played a smaller role (20%) in the court’s decision.

“The language in Section 11(6) of the Act ‘the Chief Justice or any person or institution designated by him’ has been substituted by ‘Supreme Court or as the case may be the High Court or any person or institution designated by such Court’. Now, as per sub-section (6A) of Section 11, the power of the Court has now been restricted only to see whether there exists an arbitration agreement.”

“The question whether or not the arbitration clause contained in another document, is incorporated in the contract, is always a question of construction of document in reference to intention of the parties. The terms of a contract may have to be ascertained by reference to more than one document.”

“Essentially, the parties must have the intention to incorporate the arbitration clause. In M.R. Engineers and Contractors Pvt. Ltd. v. Som Datt Builders Ltd. , Raveendran, J. has dealt with this particular requirement in a comprehensive manner.”

Logical Reasoning for Issue 1

Logical Reasoning for Issue 2

Key Takeaways

• Party Autonomy: The judgment reinforces the principle of party autonomy in arbitration. Parties are bound by the terms of the contracts they enter into, including arbitration clauses.
• Limited Court Intervention: The court’s role in appointing arbitrators is now limited to examining the existence of an arbitration agreement, minimizing judicial intervention at the initial stage.
• Incorporation by Reference: A mere reference to a document containing an arbitration clause is not sufficient to incorporate that clause into a contract. There must be a clear intention to do so.
• Multiple Contracts: If parties enter into separate contracts with distinct arbitration clauses, those clauses must be respected, and multiple arbitral tribunals may be required.
• MoU Interpretation: A Memorandum of Understanding (MoU) will not override the terms of separate contracts unless there is a clear intention to do so.

Directions

The Supreme Court gave the following directions:

• For the disputes arising under New Package No. 4 and the Corporate Guarantee, an International Commercial Arbitration Tribunal is to be constituted. Mr. Justice R.M. Lodha, Former Chief Justice of India, is appointed as the Presiding Arbitrator, along with Mr. Justice D.R. Deshmukh (nominated by Duro Felguera) and Mr. Justice M.N. Rao (nominated by Gangavaram Port Limited).
• For the disputes arising under Packages No. 6, 7, 8, and 9, separate Domestic Arbitral Tribunals are to be constituted with the same arbitrators: Justice R.M. Lodha, Justice D.R. Deshmukh, and Justice M.N. Rao.

Specific Amendments Analysis

The judgment extensively discusses the impact of the Arbitration and Conciliation (Amendment) Act, 2015, particularly the addition of Section 11(6A). This amendment significantly altered the scope of the court’s power in appointing arbitrators. Before the amendment, the court had a broader scope of review, including examining issues such as the validity of the claim and the existence of a live claim. However, after the amendment, the court’s power is limited to only examining the existence of an arbitration agreement.

The court emphasized that the legislative intent behind the amendment was to minimize court intervention at the stage of appointing an arbitrator and to ensure that arbitration proceedings are initiated expeditiously.

Development of Law

The ratio decidendi of this case is that the court’s power under Section 11 of the Arbitration and Conciliation Act, 1996, as amended in 2015, is limited to examining the existence of an arbitration agreement. The judgment also clarifies that separate contracts with distinct arbitration clauses must be respected, and a mere reference to another document in a contract is not sufficient to incorporate the arbitration clause from that document.

This judgment represents a significant shift from previous positions of law, which allowed for a broader scope of review by the court when appointing arbitrators. The decision reinforces the principle of party autonomy and limits judicial intervention in arbitration matters.

Conclusion

In the case of M/s. Duro Felguera, S.A. vs. M/s. Gangavaram Port Limited, the Supreme Court ruled that multiple arbitral tribunals were necessary to resolve disputes arising from five separate contracts and a corporate guarantee, each containing distinct arbitration clauses. The court emphasized the limited scope of its power under Section 11(6A) of the Arbitration and Conciliation Act, 1996, and upheld the principle of party autonomy. The judgment clarifies that a mere reference to another document in a contract does not incorporate the arbitration clause from that document unless there is a clear intention to do so. This decision reinforces the importance of respecting the terms of contracts and limits judicial intervention in arbitration matters, thus providing clarity on the interpretation of arbitration clauses in complex contractual arrangements.