Supreme Court clarifies “International Commercial Arbitration” in Consortium Agreements: Larsen and Toubro vs. MMRDA (2018)

Introduction

Date of the Judgment: 3 October 2018

Citation: (2018) INSC 871

Judges: R.F. Nariman, J. and Navin Sinha, J.

Can a consortium of an Indian and a Malaysian company be considered an “international commercial arbitration” under Indian law? The Supreme Court of India addressed this question in a recent case involving a dispute over a monorail project in Mumbai. The core issue revolved around whether the arbitration agreement between the parties qualified as an international commercial arbitration, which would allow the Supreme Court to appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996. The Supreme Court, in this case, held that the consortium did not qualify as an “international commercial arbitration” as defined under the Act.

Case Background

The case originates from a contract dated 09 January 2009 between the Mumbai Metropolitan Region Development Authority (MMRDA) and a consortium consisting of Larsen and Toubro Limited (L&T), an Indian company, and Scomi Engineering Bhd, a Malaysian company. The contract was for the planning, design, development, construction, manufacture, supply, testing, and commissioning of a monorail system in Mumbai. The agreement also included the operation and maintenance of the monorail for three years from the start of commercial operations.

Disputes arose between the parties, and the consortium made several interim claims, which were rejected by MMRDA. The consortium then filed a petition under Section 11 of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator. The consortium argued that since one of its members was a company incorporated outside India, the arbitration should be considered an “international commercial arbitration” under Section 2(1)(f)(ii) of the Act.

The MMRDA contended that the consortium was an unincorporated association and should be considered under Section 2(1)(f)(iii) of the Act. They argued that since the central management and control of the consortium was in India, it could not be considered an international commercial arbitration.

Timeline:

Course of Proceedings

The High Court of Bombay had previously addressed a related matter between the same parties, concerning an interim award arising from the same contract. The High Court upheld the interim award, stating that claims could only be filed in the name of the consortium and not by the individual entities separately. This order was not challenged and became final. The Supreme Court noted that the High Court’s decision was binding on the parties.

Legal Framework

The core legal issue revolves around the interpretation of Section 2(1)(f) of the Arbitration and Conciliation Act, 1996, which defines “international commercial arbitration”. The relevant parts of the section are:

“Section 2(1)(f)“international commercial arbitration” means 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—
(i) an individual who is a national of, or habitually resident in, any country other than India; or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) the Government of a foreign country;”

The petitioner argued that the case fell under Section 2(1)(f)(ii) as one of the parties to the consortium was a body corporate incorporated in Malaysia. The respondent argued that the case fell under Section 2(1)(f)(iii) as the consortium was an association whose central management and control was exercised in India.

Arguments

Petitioner’s Arguments (Larsen and Toubro Limited & Scomi Engineering Bhd):

• The consortium is jointly and severally liable to the employer.
• Separate claims were made by the Indian and Malaysian companies and rejected by MMRDA.
• Clause 20.4 of the General Conditions of Contract (GCC) could be invoked as the procedure outlined in Clauses 20.1 to 20.3 had been exhausted.
• Since one of the parties to the arbitration agreement is a body corporate incorporated in Malaysia, the arbitration qualifies as an “international commercial arbitration” under Section 2(1)(f)(ii) of the Arbitration and Conciliation Act, 1996.

Respondent’s Arguments (Mumbai Metropolitan Region Development Authority):

• The consortium is an unincorporated association and falls under Section 2(1)(f)(iii) of the Act.
• The central management and control of the consortium is exercised in India, not in a foreign country, as the lead partner is the Indian company, and the consortium’s office is in Mumbai.
• The procedure under Clauses 20.1 to 20.3 of the GCC had not been exhausted as the respondent had requested further information, which was not provided before invoking arbitration.
• The High Court of Bombay had already ruled that claims could only be filed in the name of the consortium and not by the individual entities separately.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section but the main issue that the court dealt with was:

1. Whether the arbitration agreement between the consortium and MMRDA constitutes an “international commercial arbitration” under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996.

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 in TDM Infrastructure Private Ltd. v. UE Development India Private Ltd., (2008) 14 SCC 271* was cited to emphasize that Section 2(1)(f)(iii) does not apply to companies registered in India, even if they are controlled by persons outside India. The court used this case to support the deletion of the phrase “a company or” from Section 2(1)(f)(iii).
• The Law Commission Report No. 246 of August 2014* was used to justify the deletion of the expression “a company or” from Section 2(1)(f)(iii), reinforcing the principle that the place of incorporation determines a company’s residence.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The binding nature of the Bombay High Court’s order, which stated that the consortium was a single entity for the purposes of the contract.
• The fact that the consortium agreement identified the Indian company as the lead partner, which implied that the central management and control was in India.
• The location of the consortium’s office in Mumbai, which further supported the conclusion that the central management and control was in India.
• The interpretation of Section 2(1)(f)(iii) of the Arbitration and Conciliation Act, 1996, which was clarified by the deletion of the phrase “a company or” and the reasoning provided by the Law Commission.

Sentiment Analysis of Reasons:

Fact:Law Ratio:

Logical Reasoning:

The Court reasoned that the consortium was an “association” as defined in Section 2(1)(f)(iii) of the Act. It also noted the binding nature of the High Court of Bombay’s order, which stated that the consortium was a single entity for the purposes of the contract. The Court emphasized that the lead partner was the Indian company, and the consortium’s office was in Mumbai, indicating that the central management and control was exercised in India. The court also relied on the Law Commission Report to explain the deletion of “a company or” from the provision. The court concluded that the consortium did not qualify as an “international commercial arbitration” because its central management and control were not exercised in a country other than India.

The court considered the argument that the Malaysian company was a separate entity, but rejected it based on the High Court’s ruling and the terms of the consortium agreement. The court also did not find it necessary to address the argument that the procedure under Clauses 20.1 to 20.3 had been exhausted.

The Court quoted from the judgment:

“It is clear, as has been held by the judgment of the High Court of Bombay, and which is binding inter-parties, that it is not open for the petitioner to rely upon their status as independent entities while dealing with the respondent and they will have to deal with the respondent as a Consortium only.”

“This being the case, coupled with the fact, as correctly argued by Shri Diwan, that the Indian company is the lead partner, and that the Supervisory Board constituted under the Consortium Agreement makes it clear that the lead partner really has the determining voice in that it appoints the Chairman of the said Board (undoubtedly, with the consent of other members); and the fact that the Consortium’s office is in Wadala, Mumbai as also that the lead member shall lead the arbitration proceedings, would all point to the fact that the central management and control of this Consortium appears to be exercised in India and not in any foreign nation.”

“This being the case, we dismiss the petition filed under Section 11 of the Act, as there is no “international commercial arbitration” as defined under Section 2(1)(f) of the Act for the petitioner to come to this Court.”

The bench consisted of two judges, and there was no dissenting opinion.

Key Takeaways

• Consortium agreements between Indian and foreign companies may not automatically qualify as “international commercial arbitration” if the central management and control of the consortium is in India.
• The place of incorporation of a company is a key factor in determining whether it is a foreign entity for the purposes of “international commercial arbitration.”
• The lead partner and the location of the consortium’s office are important factors in determining where the central management and control is exercised.
• Decisions of the High Court on related matters are binding on the parties in subsequent proceedings.
• Parties must follow the procedure outlined in the contract before invoking arbitration.

Directions

The Supreme Court stated that it would be open for the petitioner to approach the relevant court on the footing that this is not a case of an international commercial arbitration.

Specific Amendments Analysis

The judgment discusses the amendment to Section 2(1)(f)(iii) of the Arbitration and Conciliation Act, 1996, where the words “a company or” were deleted. This amendment was based on the Law Commission Report No. 246 of August 2014, which aimed to reinforce the principle that the place of incorporation determines a company’s residence. The court explained that this change clarified that the provision does not apply to companies registered in India, even if controlled by persons outside India.

Development of Law

The ratio decidendi of this case is that a consortium agreement between an Indian company and a foreign company does not automatically qualify as an “international commercial arbitration” under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996, if the central management and control of the consortium is exercised in India. This judgment clarifies the interpretation of Section 2(1)(f)(iii) and reinforces the principle that the place of incorporation is a key factor in determining a company’s residence for the purposes of “international commercial arbitration.” There is no change in the previous position of law, but rather a clarification and application of existing principles to a specific factual scenario.

Conclusion

The Supreme Court dismissed the petition filed by the consortium of Larsen and Toubro Limited and Scomi Engineering Bhd, holding that the arbitration agreement did not qualify as an “international commercial arbitration” under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996. The Court found that the consortium was an unincorporated association whose central management and control was exercised in India. The judgment clarifies the interpretation of “international commercial arbitration” in the context of consortium agreements and emphasizes the importance of the place of incorporation and central management and control in determining the nature of arbitration agreements.