Supreme Court clarifies the effect of Amendment of Agreement on Arbitration Clause in construction contracts: WAPCOS Ltd. vs. Salma Dam Joint Venture (2019)

Date of the Judgment: 14 November 2019
Citation: (2019) INSC 1124
Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J.

Can a subsequent agreement between parties nullify an existing arbitration clause in a contract? The Supreme Court of India recently addressed this crucial question in a case involving a dispute over a construction project in Afghanistan. This judgment clarifies the circumstances under which an arbitration clause can be deemed non-existent due to a later agreement.
The core issue was whether an Amendment of Agreement (AoA), which revised the original contract’s terms and included a clause stating “no arbitration,” effectively superseded the original contract’s arbitration clause. The Court examined the intent of the parties and the implications of the AoA on the dispute resolution mechanism.
The judgment was delivered by a two-judge bench comprising Justice A.M. Khanwilkar and Justice Dinesh Maheshwari, with the majority opinion authored by Justice A.M. Khanwilkar.

Case Background

The Ministry of External Affairs (MEA) and Water and Power Consultancy Services (India) Limited (WAPCOSL) entered into an agreement on 29 November 2004 for the reconstruction of the Salma Dam Project in Afghanistan. WAPCOSL was responsible for managing the project’s finances and contracts, with funds provided by the MEA. Salma Dam Joint Venture (SDJV), a joint venture between M/s SSJV Projects Private Limited (SSPPL) and M/s Angelique International Ltd. (AIL), was awarded the tender on 17 January 2006. A contract agreement was signed between WAPCOSL and SDJV on 9 March 2006. The original contract was for Rs. 253.84 Crores, which was later revised to Rs. 470.40 Crores, and subsequently to Rs. 872.67 Crores. A revised agreement, the Amendment of Agreement (AoA), was signed on 9 June 2015.

Disputes arose after the signing of the AoA. SDJV raised claims which were rejected by WAPCOSL’s Engineer. SDJV then filed six appeals to the Technical Committee, five of which were rejected on 28 October 2016. Meanwhile, AIL revoked the Power of Attorney (PoA) given to SSPPL and informed WAPCOSL that only communications signed by both AIL and SSPPL would be valid. Despite this, SSPPL unilaterally invoked arbitration on 12 November 2016 on behalf of SDJV. WAPCOSL rejected this, stating that SSPPL’s authority had been revoked.

SSPPL then filed a petition on behalf of SDJV under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court of Delhi, asserting that the PoA given by AIL was still in force. The High Court allowed the petition and appointed an arbitrator. WAPCOSL appealed to the Supreme Court, which directed that AIL be made a party and stayed the arbitration proceedings. The Supreme Court then remanded the matter back to the High Court for reconsideration. The High Court again allowed the arbitration petition, leading to the present appeals before the Supreme Court.

Timeline

Course of Proceedings

Initially, SSPPL, on behalf of SDJV, filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 before the High Court of Delhi, seeking the appointment of an arbitrator. The High Court allowed the petition and appointed an arbitrator. WAPCOSL then appealed to the Supreme Court. The Supreme Court directed AIL to be impleaded as a party and stayed the arbitral proceedings. AIL asserted that it had not consented to SSPPL’s actions. The Supreme Court set aside the High Court’s order and remanded the matter for reconsideration. On reconsideration, the High Court again allowed the arbitration petition, leading to the final appeal before the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of the arbitration clause in the original Contract Agreement and the subsequent Amendment of Agreement (AoA). The relevant legal provisions include:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for appointing arbitrators when parties fail to agree on an appointment process.
• Clause 4 of the Contract Agreement: This clause specifies that disputes arising out of the agreement shall be resolved through settlement and arbitration as per Clause 20 of the Conditions of the Contract. It also states that the Salma Dam Joint Venture agreement dated 9 September 2005 shall be treated as part of this agreement, and both parties to the joint venture shall be jointly and severally liable in the process of settlement of disputes in arbitration between WAPCOS and Salma Dam Joint Venture.
• Clause 20 of the Conditions of Particular Applications (CoPA): This clause deals with the contractor’s claims and arbitration. Clause 20.6 specifically deals with arbitration.
• Clauses 1.2 and 1.3 of Section-01 of the Amendment of Agreement (AoA):
  • 1.2 The balance pending claims of Contractor stands buried and it was agreed by the Contractor that, no claims will be raised by Contractor on any of the pending/settled claims/other claims resulting out of the correspondences made so far and there will be no arbitration for the settlement of claims. It is agreed that the Contractor shall not be paid any further amount on claim/additional rate for new item of work settled or pending over and above the payments already released to the contractor.
  • 1.3 In future, no claim of Contractor on any account shall be entertained. However any claim arising out of force majeure shall be examined.
• Clause 1.4 of the AoA: Any Clauses/items other than the Amendment of Agreement will be governed by Original Agreement and in case of any dispute the decision of CMD, WAPCOS will be final and binding to the Contractor.
• Clause 1.5 of the AoA: In case of any inconsistency between Original Agreement and Amendment of Agreement, the content of Amendment of Agreement will succeed.
• Clause 1.6 of the AoA: In case of any dispute on Technical Specification and interpretation of any contract clauses the decision of CMD, WAPCOS will be final and binding to the Contractor.

The legal framework also considers the principle of “accord and satisfaction,” where a new agreement settles all prior claims, thereby discharging the original contract.

Arguments

Arguments by WAPCOSL (Appellant):

• The Amendment of Agreement (AoA) dated 09.06.2015, specifically clauses 1.2 and 1.3 of Section-01, clearly states that all pending claims are buried, and there will be no arbitration for settlement of claims.
• The AoA was executed after substantial completion of the project, and it was a conscious decision by SDJV to accept the revised rates and forego any further claims.
• The Technical Committee was constituted under the AoA, not the original contract, and its consideration of appeals does not imply a waiver of the AoA’s terms.
• The arbitration clause in the original contract was superseded by the AoA and, therefore, there was no valid arbitration agreement when the petition was filed.

Arguments by AIL (Appellant):

• AIL supported WAPCOSL’s arguments and asserted that SSPPL had no authority to represent SDJV or initiate arbitration proceedings after the revocation of the Power of Attorney (PoA).
• The arbitration petition was not validly presented as SSPPL lacked the authority to act on behalf of SDJV.

Arguments by SDJV (Respondent):

• The arbitration clause in the original contract remains valid and enforceable.
• The AoA did not explicitly modify Clause 20 of CoPA, which contains the arbitration agreement.
• The claims raised by SDJV pertained to a period post the execution of the AoA and were not covered by the waiver clause in the AoA.
• The Technical Committee’s consideration of SDJV’s appeals indicated that the AoA was not a full and final settlement of all claims.
• The High Court correctly held that the question of whether SDJV’s claims were valid should be decided by an Arbitral Tribunal.

Innovativeness of the argument: WAPCOSL’s argument that the AoA superseded the arbitration clause was innovative because it emphasized the specific “no arbitration” clause in the AoA, which was a clear departure from the original contract. SDJV’s argument that the AoA did not explicitly modify Clause 20 of CoPA was also innovative as it relied on a technicality to try and keep the arbitration clause alive.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether on the date of presentation of the Arbitration Petition, purportedly by SDJV through SSPPL on 15.12.2016, the arbitration agreement posited in Contract Agreement dated 09.03.2006 was in existence or subsisting and in force?
2. Whether the Arbitration Petition filed in the name of SDJV through SSPPL, in law can be considered as having been properly and validly presented despite the express revocation of authority of SSPPL vide resolution passed by the Board of Directors of AIL on 21.09.2016 and duly communicated to SSPPL as well as WAPCOSL before 15.12.2016, as was granted to SSPPL in terms of JVA read with PoA including the Contract Agreement?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

How each authority was viewed by the Court?

• The Supreme Court followed the principles laid down in Damodar Valley Corporation vs. K. K. Kar [1974] 2 SCR 240*, emphasizing that parties can agree to terminate or alter a contract, including the arbitration clause.
• The Supreme Court applied the principles from National Insurance Company Limited vs. Boghara Polyfab Private Limited (2009) 1 SCC 267* to determine that the execution of the AoA amounted to an accord and satisfaction, thereby precluding arbitration.
• The Supreme Court relied on Nathani Steels Ltd. v. Associated Constructions 1995 Supp (3) SCC 324* to reinforce that once a settlement is reached, it is not open to one party to spurn it and invoke the arbitration clause.
• The Court considered Section 11(6) of the Arbitration and Conciliation Act, 1996* to highlight the procedure for appointing arbitrators, but ultimately found it inapplicable due to the absence of a valid arbitration agreement.
• The Court analyzed Clause 4 of the Contract Agreement*, Clause 20 of the Conditions of Particular Applications (CoPA)*, and Clauses 1.2 and 1.3 of Section-01 of the Amendment of Agreement (AoA)* to interpret the contractual provisions and determine the effect of the AoA on the arbitration clause.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear and unambiguous language of the Amendment of Agreement (AoA), particularly clauses 1.2 and 1.3 of Section-01, which explicitly stated that all pending claims were “buried,” and there would be “no arbitration” for the settlement of claims. The Court emphasized that the AoA was a conscious decision by the parties to settle all existing and future claims (except those arising from force majeure) in exchange for revised rates. The court also noted that the AoA was executed after 97% of the project was completed. The court also considered that the Technical Committee was constituted under the AoA and not the original contract.

The Court’s reasoning was heavily based on the legal principle of “accord and satisfaction,” where a new agreement settles all prior claims, thereby discharging the original contract. The court found that the AoA was a clear example of such an accord, and therefore, the arbitration clause in the original contract was no longer valid. The Court also emphasized the importance of upholding the sanctity of contracts and settlements.

The Court considered and rejected the argument that the Technical Committee’s consideration of appeals meant the AoA was not a final settlement, noting that the Technical Committee was constituted under the AoA and not the original contract. The Court also rejected the argument that the AoA did not explicitly modify Clause 20 of CoPA, stating that the substantive provision for arbitration had been done away with.

The majority opinion was delivered by Justice A.M. Khanwilkar, with Justice Dinesh Maheshwari concurring. There was no dissenting opinion.

The Court quoted the following from the judgment:

• “In our opinion, the terms and conditions specified in AoA leave no manner of doubt that the arbitration agreement has been done away with – as is manifest from the unambiguous declaration that balance pending claims of Contractor stand buried and that there will be no arbitration for the settlement of claims.”
• “The terms agreed upon between the parties and as recorded in AoA dated 09.06.2015 was the outcome of steep revision of rates. These circumstances are germane whilst answering the question under consideration.”
• “Having chosen to adopt that path, it is not open to the contractor to now take recourse to arbitration process or to resurrect the claim which has been resolved in terms of the amended agreement, after availing of steep revision of rates being condition precedent.”

Key Takeaways

• An Amendment of Agreement (AoA) can supersede the original contract’s arbitration clause if it contains explicit terms indicating the parties’ intention to do so.
• A clause stating “no arbitration” in a subsequent agreement can effectively nullify an existing arbitration clause.
• Parties are bound by the terms of a settlement agreement, and it is not open to them to unilaterally reject the settlement and invoke the arbitration clause.
• The principle of “accord and satisfaction” can discharge the original contract, including the arbitration clause.
• Technicalities will not be upheld where the intent of the parties is clear from the terms of the contract or settlement agreement.

Directions

The Supreme Court did not give any specific directions, but it clarified that the parties are free to pursue other remedies available to them under the law, and the rejection of the arbitration petition will not be an impediment to those remedies.

Development of Law

The ratio decidendi of this case is that a subsequent agreement, specifically an Amendment of Agreement (AoA), can supersede the original arbitration clause if it contains explicit terms indicating the parties’ intention to do so, such as a “no arbitration” clause. This judgment reinforces the principle that parties are bound by the terms of a settlement agreement and cannot unilaterally reject it to invoke arbitration. It emphasizes the sanctity of contracts and settlements and clarifies the circumstances under which an arbitration clause can be deemed non-existent due to a later agreement. This case clarifies that parties cannot take recourse to arbitration if they have waived their right to do so by way of a subsequent agreement.

Conclusion

The Supreme Court set aside the High Court’s judgment, holding that the Amendment of Agreement (AoA) superseded the original arbitration clause. The Court emphasized the importance of upholding the explicit terms of the AoA, which clearly stated that all pending claims were buried and there would be no arbitration. This judgment clarifies that a subsequent agreement can nullify an arbitration clause if the intent of the parties is clear, reinforcing the principles of accord and satisfaction and the sanctity of contracts. The Supreme Court dismissed the arbitration petition filed by SDJV.