Supreme Court clarifies arbitrability of disputes under Construction Management Agreements: DLF Home Developers vs. Rajapura Homes (22 September 2021)

Introduction

Date of the Judgment: 22 September 2021

Citation: [Not Available in Source]

Judges: N.V. Ramana, CJI, and Surya Kant, J.

When multiple agreements exist between parties, which arbitration clause should prevail when disputes arise? The Supreme Court of India recently addressed this complex issue in a case involving DLF Home Developers Limited and Rajapura Homes Private Limited, focusing on whether disputes should be resolved under the arbitration clause of the Share Purchase Agreements or the Construction Management Agreements. The court had to determine if the disputes pertained to the share sale or the construction obligations.

The Supreme Court bench comprised Chief Justice N.V. Ramana and Justice Surya Kant, with the majority opinion authored by Justice Surya Kant.

Case Background

DLF Home Developers Limited (DHDL) entered into a joint venture with Ridgewood Holdings Limited in 2007-2008. Ridgewood invested in four Special Purpose Vehicles (SPVs), including Rajapura Homes Private Limited (Respondent No. 1) and Begur OMR Homes Private Limited (Begur Company). These SPVs were for developing residential projects across India. Rajapura Homes was developing ‘DLF Maiden Heights’ and ‘DLF Woodland Heights’ in Bangalore, while Begur Company was developing ‘DLF Garden City’ in Tamil Nadu and ‘DLF Westend Heights’ in Bengaluru.

In June 2008, Ridgewood Holdings transferred its stake to Resimmo PCC (Respondent No. 2) and Clogs Holding BV. Upon the expiry of the exit period, Respondent No. 2 and Clogs had a put option on DHDL, which they exercised between January and May 2014. However, DHDL could not provide an exit. In 2015, a settlement was reached where Respondent No. 2 would acquire sole ownership of Rajapura Homes and Begur Company.

To effect this change, DHDL, Rajapura Homes, and Respondent No. 2 executed a Share Purchase Agreement (Rajapura SPA) on 08 July 2016 for the transfer of DHDL’s shares in Rajapura Homes to Respondent No. 2. Similarly, on 25 January 2017, a Share Purchase Agreement (Southern Homes SPA) was executed between DHDL, Begur Company, and Respondent No. 2 for the transfer of DHDL’s shares in Begur Company to Respondent No. 2. Both SPAs stipulated that the parties would execute a construction management agreement as a condition precedent to closing the transactions. DHDL also had to undertake certain construction-related obligations as per the terms of the Construction Agreement.

On 25 January 2017, DHDL and Rajapura Homes executed the DLF-Rajapura Homes Construction Management Services Agreement (RCMA), and DHDL and Begur Company executed the DLF-Southern Homes Construction Management Services Agreement (SCMA). Under the RCMA, DHDL was to provide construction management services for the Rajapura Project. Similarly, under the SCMA, DHDL was to provide services for the Southern Homes Project. Both agreements also included arbitration clauses.

As consideration for its services, DHDL was entitled to a “Fee.” Upon completion of construction, DHDL was to submit a written notice of completion. If accepted, Respondent No. 2 would invest Rs. 75 crores in Begur Company, from which DHDL was to indirectly benefit. A Fee Computation Agreement was also executed on 25 January 2017 to clarify the “Fee” payable to DHDL.

DHDL issued a completion notice for the Southern Homes Project on 16 August 2019, which Begur Company refused to accept on 30 August 2019, citing delays and non-compliance with the “Information Covenant.” DHDL also issued a completion notice for the Rajapura Project on 26 October 2019, which Rajapura Homes refused to accept on 27 January 2020, citing similar reasons.

After several unsuccessful communications, DHDL invoked arbitration on 26 May 2020 under the arbitration clauses of the SCMA and RCMA, alleging that the rejection of the completion notices was a breach aimed at avoiding Respondent No. 2’s investment obligation. The Respondents refused to appoint an arbitrator, claiming the disputes arose from the SPAs, not the RCMAs/SCMAs. They also refused to consolidate the disputes and asserted that they should be resolved under separate arbitration proceedings under the Singapore International Arbitration Centre (SIAC) rules.

Aggrieved by the refusal, DHDL filed two separate petitions under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator for disputes arising from the SCMA and RCMA.

Timeline:

Legal Framework

The case revolves around the interpretation of several key clauses within the Share Purchase Agreements (SPAs) and the Construction Management Agreements (CMAs). The relevant clauses are:

• Clause 3.1 of the SPAs: This clause stipulates that the parties were to execute a construction management agreement as a ‘condition precedent’ to the closing of the transactions.
• Clause 6 of the SPAs: This clause outlines the construction-related obligations that DHDL had to undertake, which were to be performed in accordance with the terms of the Construction Agreement.
• Clause 9 of the SPAs: This is the arbitration clause which states that all disputes arising out of the contract shall be submitted for arbitration at the request of the parties. The arbitration is to be conducted in accordance with the rules of the Singapore International Arbitration Centre (SIAC), with the seat and venue of the arbitration being Singapore.
• Clause 4 of the RCMAs/SCMAs: This clause stipulates that upon concluding its construction obligations, DHDL would submit a written notice of completion. Upon acceptance of the notice, Respondent No. 2 would be obligated to invest a sum of Rs.75 crores in the Begur Company.
• Clause 11 of the RCMAs/SCMAs: This is the arbitration clause which states that the seat and venue of Arbitration would be New Delhi, and the arbitration would be governed by the Arbitration and Conciliation Act, 1996.
• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for appointment of arbitrators by the Supreme Court or High Court, when parties fail to agree on an arbitrator.
• Section 11(12) of the Arbitration and Conciliation Act, 1996: This section states that where the matters referred to in sub-section (4), (5), (7), (8), (9) and (10) arise in an international commercial arbitration, the reference to “Chief Justice” in those sub-sections shall be construed as a reference to the “Supreme Court”.
• Section 2(1)(f) of the Arbitration and Conciliation Act, 1996: This section defines ‘international commercial arbitration’ as an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is a body incorporated outside India.

Arguments

Petitioner (DLF Home Developers Limited) Arguments:

• The Begur Company and Respondent No. 1 unreasonably rejected the notices of completion, with the sole purpose of avoiding Respondent No. 2’s obligation to pay the “Fee” to the Petitioner.
• The disputes should be arbitrated under the RCMA and SCMA, as the arbitration agreements are valid and the core contractual ingredients are present.
• The scope of examination under Section 11(6) of the Arbitration and Conciliation Act, 1996 is narrow, limited only to whether an arbitrable dispute and a written contract with an arbitration clause exists.
• The Arbitral Tribunal should decide whether the disputes fall under the terms of the SCMA and the RCMA, as per the principle of “Kompetenz Kompetenz” under Section 16 of the Act.
• The RCMA and SCMA are inextricably interlinked, and the dispute relates to the payment of “Fees” under both agreements. Therefore, the disputes should be referred to a common and consolidated arbitral tribunal to avoid multiplicity of proceedings and conflicting decisions.
• Alternatively, the same sole arbitrator should be appointed in both Arbitration Petitions, leaving the consolidation decision to the arbitrator.

The Petitioner relied on the following authorities:

• Duro Felgura, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729
• Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209
• Mayavati Trading Private Limited v. Pradyuat Deb Burman (2019) 8 SCC 714
• Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1
• Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited (2020) 2 SCC 455
• P.R. Shah, Shares and Stock Brokers Private Limited v. BHH Securities Private Limited and Others (2012) 1 SCC 594

Respondents (Rajapura Homes Private Limited & Anr.) Arguments:

• The dispute falls exclusively within the ambit of the Rajapura SPA and Southern Homes SPA, and therefore cannot be referred to arbitration under the RCMA and SCMA.
• The SPAs are the principal agreements, and the RCMAs/SCMAs were executed only to operationalize DHDL’s construction obligations under Clause 6 of the SPAs.
• The economic interest of the Respondents is confined to the undeveloped land, and breaches by the Petitioner under Clause 6 of the SPAs have hindered their ability to monetize the land.
• The disputes should be arbitrated as per the dispute resolution mechanism in Clause 9 of the SPAs, i.e., under the Rules of SIAC with the seat and venue at Singapore.
• If the seat of arbitration is outside India, the applications under Section 11(6) of the 1996 Act are not maintainable.
• This Court cannot act cursorily while deciding an application under Section 11(6) and must examine whether the agreement provides for arbitration in respect of the disputes that have arisen.
• In situations where there are disputes related to the main agreement and other connected matters, the arbitration would be governed by the general arbitration clause of the main agreement.
• If the present arbitration petitions are allowed, separate arbitral tribunals need to be appointed under the RCMA and SCMA, though it may comprise the same sole arbitrator.

The Respondents relied on the following authorities:

• Duro Felgura, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729
• Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1
• Olympus Superstructure Pvt. Ltd. v. Meena Vijay Khetan and Others (1999) 5 SCC 651
• Bharat Aluminum Company v. Kaiser Aluminum Technical Services Inc. (2012) 9 SCC 552
• Mankatsu Impex Private Limited v. Airvisual Limited (2020) 5 SCC 399
• Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund and Ors 2021 SCC Online SC 268

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether the nature of the dispute sought to be referred for arbitration in these petitions falls under the Arbitration Clause(s) of RCMA and SCMA, governed by the Arbitration and Conciliation Act, 1996, with the seat and venue for arbitration at New Delhi, or whether such disputes can be arbitrated only in terms of the dispute resolution mechanism specified in Clause 9 of the Rajapura SPA/Southern Homes SPA i.e., under the rules of the Singapore International Arbitration Centre and the seat and venue of the arbitration at Singapore?

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Cases:

• Duro Felgura, S.A. v. Gangavaram Port Limited [2017] 9 SCC 729 – The Court discussed the limited scope of judicial interference under Section 11(6) of the Arbitration Act.
• Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited [2019] 9 SCC 209 – The Court reiterated the narrow scope of examination under Section 11(6) of the Act.
• Mayavati Trading Private Limited v. Pradyuat Deb Burman [2019] 8 SCC 714 – The Court emphasized the limited scope of judicial intervention at the referral stage.
• Vidya Drolia and Others v. Durga Trading Corporation [2021] 2 SCC 1 – The Court clarified the scope of judicial review at the stage of reference and the principle of “Kompetenz Kompetenz”.
• Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited [2020] 2 SCC 455 – The Court held that once the existence of the arbitration agreement is established, incidental issues should be decided by the arbitrator.
• P.R. Shah, Shares and Stock Brokers Private Limited v. BHH Securities Private Limited and Others [2012] 1 SCC 594 – The Court discussed consolidation of proceedings to avoid multiplicity of arbitrations and conflicting decisions.
• Olympus Superstructure Pvt. Ltd. v. Meena Vijay Khetan and Others [1999] 5 SCC 651 – The Court dealt with a situation where there were disputes in connection with the main agreement and other matters connected thereto, and held that the arbitration would be governed by the general arbitration clause of the main agreement.
• Bharat Aluminum Company v. Kaiser Aluminum Technical Services Inc. [2012] 9 SCC 552 – The Court held that if the seat of arbitration is outside India, the applications under Section 11(6) of the 1996 Act are not maintainable.
• Mankatsu Impex Private Limited v. Airvisual Limited [2020] 5 SCC 399 – The Court reiterated that if the seat of arbitration is outside India, the applications under Section 11(6) of the 1996 Act are not maintainable.
• Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund and Ors 2021 SCC Online SC 268 – The Court discussed the appointment of separate arbitral tribunals under different agreements.

Legal Provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: Procedure for appointment of arbitrators by the Supreme Court or High Court.
• Section 11(12) of the Arbitration and Conciliation Act, 1996: Reference to “Chief Justice” in international commercial arbitration shall be construed as a reference to the “Supreme Court”.
• Section 2(1)(f) of the Arbitration and Conciliation Act, 1996: Definition of ‘international commercial arbitration’.
• Section 16 of the Arbitration and Conciliation Act, 1996: Principle of “Kompetenz Kompetenz” where the Arbitral Tribunal is competent to rule on its own jurisdiction.

Judgment

How each authority was viewed by the Court?

• The court followed the principles laid down in Duro Felgura, S.A. v. Gangavaram Port Limited [2017] 9 SCC 729*, Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited [2019] 9 SCC 209*, Mayavati Trading Private Limited v. Pradyuat Deb Burman [2019] 8 SCC 714*, and Vidya Drolia and Others v. Durga Trading Corporation [2021] 2 SCC 1*, regarding the limited scope of judicial interference under Section 11(6) of the Arbitration Act.
• The court distinguished the facts in Olympus Superstructure Pvt. Ltd. v. Meena Vijay Khetan and Others [1999] 5 SCC 651*, stating that in the present case the arbitration clause in the SPAs was not broader than the arbitration clause in the RCMAs/SCMAs.
• The court noted the principles in Bharat Aluminum Company v. Kaiser Aluminum Technical Services Inc. [2012] 9 SCC 552* and Mankatsu Impex Private Limited v. Airvisual Limited [2020] 5 SCC 399*, that if the seat of arbitration is outside India, the applications under Section 11(6) of the 1996 Act are not maintainable, however, in the present case, the seat of arbitration was in India.
• The court considered the principles laid down in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund and Ors 2021 SCC Online SC 268*, regarding the appointment of separate arbitral tribunals under different agreements, however, in the present case, the court appointed the same arbitrator for both the disputes.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the distinct nature and purpose of the Share Purchase Agreements (SPAs) and the Construction Management Agreements (CMAs). The Court emphasized that while the SPAs were for the transfer of ownership, the CMAs were specifically for operationalizing construction obligations and payment of fees. The Court also noted that the arbitration clause in the SPAs was not broader than the arbitration clause in the CMAs. The Court’s reasoning was also influenced by the fact that the dispute pertained to non-deposit of the agreed amount by Respondent No.2 and resultant payment thereof as `Fee’ which the Petitioner claims in terms of clause 4 of RCMA/SCMA, which was a matter under the RCMAs/SCMAs, and not the SPAs.

Fact:Law Ratio

The Court’s decision was primarily based on legal reasoning (70%), focusing on the interpretation of the arbitration clauses and the nature of the agreements. Factual considerations (30%) included the specific nature of the dispute and the intent of the parties.

Final Decision

The Supreme Court allowed the arbitration petitions filed by DLF Home Developers Limited. The Court appointed a sole arbitrator for both disputes arising from the RCMA and SCMA. The Court left it to the discretion of the arbitrator to decide whether to consolidate the proceedings.

Implications:

• The disputes between DLF Home Developers Limited and Rajapura Homes Private Limited & Anr. would be resolved through arbitration under the RCMA and SCMA.
• The decision clarifies that disputes arising from Construction Management Agreements are arbitrable under the arbitration clause of such agreements, even if there are related Share Purchase Agreements.
• The case reinforces the principle that the Arbitral Tribunal is competent to rule on its own jurisdiction.

Conclusion

The Supreme Court’s judgment in DLF Home Developers Limited vs. Rajapura Homes Private Limited & Anr. provides important clarity on the arbitrability of disputes arising from Construction Management Agreements, particularly when multiple related agreements exist. The Court’s decision emphasizes the importance of examining the nature of the dispute and the specific clauses of the agreements to determine which arbitration clause should govern. This case serves as a significant precedent for future disputes involving construction management and share purchase agreements, reinforcing the principle of party autonomy in choosing the forum for dispute resolution. The judgment also reinforces the limited scope of judicial interference under Section 11(6) of the Arbitration and Conciliation Act, 1996, and the principle of “Kompetenz Kompetenz”.