Supreme Court clarifies arbitration clause applicability in Balasore Alloys vs. Medima LLC (16 September 2020)

Date of the Judgment: 16 September 2020

Citation: Not Available

Judges: S. A. Bobde, CJI, A. S. Bopanna, J., V. Ramasubramanian, J.

When a business deal involves multiple agreements with differing arbitration clauses, which clause should prevail? The Supreme Court of India addressed this question in a dispute between Balasore Alloys Limited and Medima LLC. The core issue was whether the arbitration should be governed by the clause in the purchase orders or by the clause in a subsequent “Umbrella Agreement.” The Supreme Court bench, consisting of Chief Justice S. A. Bobde and Justices A. S. Bopanna and V. Ramasubramanian, delivered a unanimous judgment.

Case Background

Balasore Alloys Limited (the applicant) and Medima LLC (the respondent) entered into a business relationship where Balasore would supply High Carbon Ferro Chrome to Medima for sale in the USA and Canada. Initially, an agreement on 19 June 2017, was made for the sale of 2000 MT of the product. Following this, 37 purchase orders were placed by Medima with Balasore. Subsequently, on 31 March 2018, the parties entered into another agreement which the respondent referred to as an “Umbrella Agreement” and the applicant referred to as a “Pricing Agreement.” Disputes arose between the parties concerning these transactions, leading to the present legal proceedings.

Timeline

Course of Proceedings

The applicant, Balasore Alloys Limited, filed an application under Section 11(6) and 11(12)(a) of the Arbitration and Conciliation Act, 1996, seeking the appointment of a sole arbitrator to resolve the disputes arising from 37 purchase orders. Alternatively, they requested the appointment of a second arbitrator due to the respondent’s failure to nominate one. The respondent, Medima LLC, argued that the disputes should be resolved under the “Umbrella Agreement” dated 31 March 2018, which contains its own arbitration clause. Medima had already initiated arbitration under this agreement with the International Chamber of Commerce (ICC), and an Arbitral Tribunal had been constituted. The High Court of Calcutta rejected Balasore’s plea for an interim injunction against the ICC tribunal. Balasore then appealed to a Division Bench, which also declined to grant an interim order.

Legal Framework

The case revolves around Section 11 of the Arbitration and Conciliation Act, 1996, which deals with the appointment of arbitrators. The core issue is the interpretation and application of arbitration clauses in two different agreements related to the same transaction. The Supreme Court had to determine which of these clauses should govern the dispute resolution process. The relevant clauses are:

• Clause 7 of the purchase orders:

  “Disputes and differences arising out of or in connection with or relating to the interpretation or implementation of this contract/order shall be referred to the Arbitral Tribunal consisting of 3 Arbitrators of which each party shall appoint one Arbitrator, and the two appointed Arbitrators shall appoint the third Arbitrator who shall act as the Presiding Arbitrator as per the provisions of the Arbitration and Conciliation Act, 1996 and any modification or re-enactment thereto. The venue of the arbitration proceedings shall be at Kolkata and language of the arbitration shall be English. The arbitration award shall be final and binding upon the parties and the parties agree to be bound thereby and to act accordingly. When any dispute has been referred to arbitration, except for the matters in dispute, the parties shall continue to exercise their remaining respective rights and fulfil their remaining respective obligations.”

• Clause 23 of the Agreement dated 31 March 2018:

  “This Agreement shall be governed by and construed in accordance with the laws of the United Kingdom. Any claim, controversy or dispute arising out of or in connection with this Agreement or the performance hereof, after a thirty calendar day period to enable the parties to resolve such dispute in good faith, shall be submitted to arbitration conducted in the English language in the United Kingdom in accordance with the Rules of Arbitration of the International Chamber of Commerce by 3 (Three) arbitrators appointed in accordance with the said Rules, to be conducted in the English language in London in accordance with British Law. Judgment on the award may be entered and enforced in any court having jurisdiction over the party against whom enforcement is sought.”

Arguments

Applicant (Balasore Alloys Limited) Arguments:

• The applicant contended that the disputes should be resolved through arbitration as per Clause 7 of the 37 purchase orders. They argued that each purchase order constituted a separate contract with its own arbitration clause.
• The applicant submitted that the respondent failed to appoint their arbitrator despite the applicant nominating Mr. Justice Amitava Lala, a retired High Court Judge.
• The applicant argued that the Agreement dated 31 March 2018, referred to as the “Pricing Agreement” by them, only governed the price and payment terms of individual contracts, and not the arbitration process.
• The applicant contended that the transaction had commenced as far back as 08 August 2017 and 21 purchase orders were placed up to 30 March 2018, prior to the execution of the Pricing Agreement on 31 March 2018. Therefore, the Pricing Agreement should not apply to earlier purchase orders.

Respondent (Medima LLC) Arguments:

• The respondent argued that the entire transaction was governed by the Agreement dated 31 March 2018, which they referred to as the “Umbrella Agreement”.
• The respondent submitted that Clause 23 of the “Umbrella Agreement” provides for resolution of disputes through arbitration in the manner indicated therein. They had already invoked this clause by issuing a notice.
• The respondent contended that they had filed a petition before the International Chamber of Commerce (ICC) as per Clause 23, and an Arbitral Tribunal had been duly constituted.
• The respondent argued that the applicant’s application seeking appointment of an Arbitral Tribunal based on Clause 7 of the purchase orders was not bonafide and should be dismissed.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

• Which arbitration clause should govern the resolution of disputes between the parties: Clause 7 of the purchase orders or Clause 23 of the Agreement dated 31 March 2018?

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

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 principle laid down in Olympus Superstructures Pvt. Ltd. vs. Meena Vijay Khetan & Ors. (1999) 5 SCC 651, holding that when there are two arbitration clauses in related agreements, the disputes should be resolved under the main agreement. The Court harmonized the two arbitration clauses, noting that the Agreement dated 31 March 2018 was more comprehensive and intended to govern the entire transaction.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to harmonize the two arbitration clauses and the comprehensive nature of the Agreement dated 31 March 2018. The Court emphasized that the disputes raised by the applicant related to pricing and payment terms, which were specifically addressed in the Agreement dated 31 March 2018. The fact that the respondent had initiated arbitration under this agreement and an Arbitral Tribunal had already been constituted also weighed heavily in the Court’s decision.

Fact:Law Ratio

The Court’s reasoning was a mix of factual analysis (the nature of the disputes and the sequence of events) and legal principles (harmonizing conflicting clauses). The legal considerations slightly outweighed the factual aspects, indicating a focus on the interpretation of the agreements and the application of arbitration law.

Logical Reasoning

Key Takeaways

• When multiple agreements exist between parties, the arbitration clause in the main or comprehensive agreement will generally govern the dispute resolution process.
• The court will harmonize conflicting arbitration clauses to avoid conflicting awards and ensure efficient dispute resolution.
• The sequence of invocation of the arbitration clause can be a crucial factor in determining which clause applies.
• The nature of the dispute and the scope of each agreement are critical in determining which arbitration clause should be applied.

Directions

The Supreme Court dismissed the Arbitration Application No. 15/2020 and SLP No. 10264/2020, with no order as to costs.

Development of Law

The ratio decidendi of this case is that when multiple agreements with different arbitration clauses exist between the same parties for the same transaction, the arbitration clause in the main or comprehensive agreement will govern the dispute resolution process. This case reinforces the principle of harmonizing conflicting arbitration clauses to ensure efficient and consistent dispute resolution. There is no change in the previous position of law, but this case clarifies the application of the principle of harmonisation.

Conclusion

In the case of Balasore Alloys Limited vs. Medima LLC, the Supreme Court clarified that when multiple agreements with different arbitration clauses exist for the same transaction, the arbitration clause in the main or comprehensive agreement will govern. The Court dismissed Balasore’s application seeking arbitration under the purchase orders, holding that the disputes were to be resolved under the “Umbrella Agreement” dated 31 March 2018. This decision emphasizes the importance of harmonizing conflicting arbitration clauses and ensuring that the dispute resolution process aligns with the overall intent of the parties.