Supreme Court of India: Whether Arbitration Between an Indian Entity And A Consortium of Indian And Foreign Entities Would Be An “International Commercial Arbitration” Under The Indian Arbitration Act

Supreme-Court-of-India-1_85138_730x419

In the case of M/S Larsen and Toubro Limited Scomi Engineering Bhd v. Mumbai Metropolitan Region Development Authority Arb. Petition (C) no. 28 of 2017 decided on 3 October 2018, the Supreme Court of India (“Court”) dealt with the issue of whether a consortium of an Indian company and a Malaysian company is a “body corporate which is incorporated in any country other than India” or it is an “association or a body of individuals whose central management and control is exercised in any country other than India” for the purposes of the expression “international commercial arbitration” defined under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (“Act”). Detailed case analysis given below:

Factual Matrix

A Consortium (“Consortium”) comprising of an Indian company and a Malaysian company entered into a Construction Contract (“Construction Contract”) with Mumbai Metropolitan Region Development Authority (“MMRDA”) for commissioning of a Monorail system in Mumbai, India, including operation and maintenance for a period of three years from the date of start of commercial operations. Disputes arouse between the parties and the Consortium filed a petition under Section 11 of the Act before the Court for the appointment of an arbitrator.

Arbitration Clause

Claims, Disputes and Arbitration

20.2 Dispute to be referred to and settled by Employer’s Representative at Site

Should any dispute or difference of any kind whatsoever arise between the Employer and the Contractor, in connection with, or arising out of the Contract, or subject matter thereof, or the execution of Works/commissioning of the System/Operation & Maintenance of the System, whether, during the progress of Works/during Operation and Maintenance of the System or after their completion and whether before or after termination, abandonment or breach of Contract, it should, in the first place, subject to the provision under Sub-clause 14.4 above, be referred to and settled by the Employer’s Representative at Site, who shall, within a period of 60 days after being requested in writing by either party to do so, give written notice of his decision to the Employer and the Contractor. The Employer’s Representative at Site while considering the matters of dispute referred to him, shall be competent to call for any records, vouchers, information and enforce the attendance of the parties either in person or through authorised representatives, to sort out or clarify any issue, resolve the differences and to assist him to decide the matters referred to him. Subject to arbitration, as hereinafter provided, such decision in respect of every matter so referred shall be final and binding upon the Employer and the Contractor, who shall proceed with the execution of Works/ commissioning of the System/Operation & Maintenance of the System (as the case may be) with all due diligence irrespective of whether any of the parties goes in or desires to go in for arbitration. If the Employer’s Representative at Site has given written notice of his decision to the Employer and the Contractor and no intimation of reference of any claim to arbitration has been sent to him by either the Employer or the Contractor within a period of 60 days from receipt of such notice, the said decision of the Employer’s Representative shall remain final and binding upon the Employer and the Contractor and the same shall be deemed to have been accepted by them. The Employer or the Contractor shall not seek any arbitration thereafter.

20.3 Referring of Disputes for Arbitration

If the Employer’s Representative at Site fails to give notice of his decision, as aforesaid, within a period of 60 days after being requested as aforesaid or if either the Employer or the Contractor be dissatisfied with any such decision of the Employer’s Representative at Site, only then shall the matter in dispute be referred to arbitration as herein provided

20.4 Disputes Due for Arbitration and Settlement of Disputes

Disputes or differences shall be due for arbitration only if the conditions in Sub-Clause 20.2 and 20.3 above fulfilled. Except where otherwise provided in the Contract, all disputes or differences, whatsoever arising between the parties, arising out of or relating to construction, measuring operation or effect of the Contract or the breach thereof, shall be settled by arbitration as detailed in Sub Clause 20.5.

20.5 Nomination of

Arbitrators/Sole Arbitrator

Matters to be arbitrated upon shall be referred to a Sole Arbitrator where the individual claim does not exceed Rs. 5 million or the total value of claims does not exceed Rs. 15 millions. Beyond the above limit(s), there shall be three arbitrators. For this purpose the employer will make out a panel of Arbitrators with the requisite qualifications and professional experience relevant to the field to which the Contract relates and will be residents of India only. In case of a single arbitrator, the Panel will be of three Arbitrators, out of which the Contractor will choose one. In case three arbitrators are to be appointed, the Employer will make out a panel of five. The Contractor and the Employer will choose one arbitrator each from the above and the two so chosen will choose the third arbitrator from the above panel only who will act as the “Presiding Arbitration” of the arbitration panel.

If in a dispute, the contractor fails to choose the Arbitrator within thirty (30) days after the Employer has nominated the Panel, the Employer may nominate an Arbitrator from the same panel of Arbitrators given by the Employer for the matter in dispute.

If, in a dispute, the two chosen Arbitrators fail to appoint third Arbitrator- Presiding Arbitrator (Arbitration Panel’s case) within thirty (30) days after they have been appointed, the Employer may apply to the Indian Council of Arbitration, New Delhi, to nominate the third Arbitrator from the same panel of Arbitrators given by the Employer for the matter in dispute.

Neither party shall be limited in the proceedings before such arbitrator/s to the evidence or arguments put before the Employer’s Representative at Site for the purpose of obtaining his decision. No decision given by the Employer’s

Representative in accordance with the foregoing provisions shall disqualify him from being called as a witness and giving evidence before the arbitrator/s on any matter, whatsoever, relevant to dispute or difference referred to arbitrator/s.

Substitute Arbitrators- If for any reason on arbitrator is unable to perform his function, a substitute shall be appointed in the same manner as the original arbitrator.

20.6 Arbitration Venue, Language and Award

In any Arbitration proceedings hereunder:

(a) Proceedings shall be held in Mumbai, India only.

(b) English language shall be the official language for all purposes. (Note: English language may be changed to any other language, with the agreement of both the parties)

(c) The Arbitration Award shall be final and binding on all parties and shall be enforceable in any Court of competent jurisdiction, and the parties hereby waive any objection to or claims of immunity in respect of such enforcements.

(d) In Arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal shall be made by a majority of all its members.

(e) The Arbitrator(s) shall always give item-wise and reasoned awards irrespective of the value of claim(s) in the dispute in all cases.

(f) Where the arbitral award is for payment of money, no interest shall be payable on the whole or any part of the money for any period till the date on which the award is made.

(g) The cost of arbitration shall be borne by the respective parties. The cost inter-alia includes the fees of the Arbitrator(s) as per the rate fixed by the Employer from time to time.

20.7 Rules Governing the Arbitration Proceedings

The arbitration proceedings shall be governed by India Arbitration and Conciliation Act, 1996, as amended, from time to time including provisions in force at the time the reference is made.

Parties Contentions

The Consortium contended that since one of the parties to the Arbitration agreement, being a body corporate, incorporated in Malaysia, would be a body corporate, which is incorporated in a country other than India, which would attract Section 2(1)(f)(ii) of the Act. It was further contended that the two entities, that is, the Indian company and the Malaysian company, though stated to be a Consortium, are jointly and severally liable, to the employer. Further, throughout the working of the contract, separate claims have been made, which have been rejected by MMRDA.

MMRDA relied both on the Construction Contract and the Consortium Agreement between the Indian company and the Malaysian company, which, when read together, shows that they are really an un-incorporated association and would, therefore, fall within Section 2(1)(f)(iii) as being an association or a body of individuals, provided the central management and control is exercised in any country other than India. It was further contended that since the lead partner is the Indian company, and the Consortium’s office in Mumbai making it clear, therefore, that sub-Clause (iii) of Section 2(1)(f) of the Act would not apply as it is clear that the central management and control, that is envisaged by the said sub-Clause, would not be exercised in a country outside India but in India itself.

MMRDA relied upon an order passed by the High Court of Bombay between the same parties, in which an interim Award was challenged, which was between the same parties arising out of the self-same agreement. This Order upheld the interim Award of the Learned Arbitrators in stating that the particular claim that was made in that case could be made only as a Consortium and not as two entities separately. MMRDA has also pointed out that this Order has become final as it has not been challenged by the petitioner before this Court.

Applicable Legal Principle

Definition of “international commercial arbitration” under Section 2(1)(f) of the Act

“(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

(iv) the Government of a foreign country;”

Judgement

The Court held as under:

  • That the Indian Company and the Malaysian Company is jointly and severally responsible to the employer, being collectively referred to as the “contractor” in the contract between MMRDA and the Consortium;
  • That the High Court of Bombay as well as the Arbitrators were right in holding that it is not open for the Consortium to rely upon their independent identities while dealing with the MMRDA and that they will have to deal with the MMRDA as a Consortium only.
  • That Section 2(1)(f)(iii) of the Act refers to two different sets of persons: an “association” as distinct and separate from a “body of individuals”.
  • That an association is referred to in Section 2(1)(f)(iii) which would include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country other than India.
  • That “an association” cannot be read with “body of individuals” which follows it but is a separate and distinct category by itself.
  • 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;
  • That the Consortium’s office is in Mumbai as also that the lead member shall lead the arbitration proceedings

In the light of above, the Court concluded that all these points to the fact that the central management and control of this Consortium appears to be exercised in India and not in any foreign nation. Therefore, there is no “international commercial arbitration” as defined under Section 2(1)(f) of the Act for the Consortium to come to the Supreme Court.

My Comment

This case makes it clear that in case a corporation has dual nationality, one based on foreign control and other based on registration in India, for the purpose of the Act, such corporation would not be regarded as a foreign corporation and therefore, it would be outside the purview of the expression “international commercial arbitration” under Section 2(1)(f).

This reasoning first originated in TDM Infrastructure Pvt. Ltd. v. UE Development India Private Ltd, (2008) 14 SCC 271 wherein the Supreme Court has held that the when both the parties to the arbitration agreement are registered as companies in India, it is a case of domestic arbitration and the provisions of section 2 (1) (f) of the Act cannot be invoked in such a case. This judgment was relied upon in order to support the plea that two Indian parties cannot fall within the ambit of the international commercial arbitration and thus cannot exclude the applicability of the part I of the Act.

Later the Law Commission Report No. 246 of August 2014, made several amendments to the Act and deleted the words “a company or” from Section 2(1)(f)(iii) of the Act stating that “the reference to “a company” in sub-section (iii) has been removed since the same is already covered under sub-section (ii). The intention is to determine the residence of a company based on its place of incorporation and not the place of central management/control.”

Finally in the Arbitration and Conciliation Act, (Amendment) Act, 2015 the words ‘a company’ was deleted from the definition of “International Commercial Arbitration” thereby restricting the definition only to the body of individuals or association. Therefore, by inference, it has been made clear that if a company has its place of incorporation as India then central management and control would be irrelevant as far as its determination of being an “international commercial arbitration” is concerned.

Comparison with the International Arbitration Act of Singapore

It is pertinent to note that the International Arbitration Act Ch 143A (“IAA”) of Singapore does not decide the residence of a company by its place of central management/control. Under Section 5 of IAA, an arbitration is international if —

(a) at the time of the conclusion of the arbitration agreement at least one of the parties, has its place of business in any State other than Singapore; or

(b) one of the following places is situated outside the State in which the parties have their places of business:

(i) the place of arbitration if determined in, or pursuant to, the arbitration agreement;

(ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or

(c) the parties have expressly agreed that the subject-matter of the arbitration agreement relates to more than one country.

As it is clear from Section 5(a), the IAA does not use the word “incorporated” therefore, the ambit is wider than the expression “international commercial arbitration” under the Act. Since under IAA even if a company is not incorporated in a foreign state but has its presence in that state in form of a place of business, then arbitration commenced by such company can be invoked under IAA. This is not the same with the term “body corporate which is incorporated in any country other than India” appearing in Section 2(1)(f) of the Act.

Further, under sub-clause 5(b), the IAA provides two situations when arbitrations can be termed as international – (i) when the seat of arbitration is situated outside the State in which the parties have their places of business or (ii) when the place of substantial performance of contract or the place having most close and real connection with the dispute is situated outside the State in which the parties have their places of business.

The Indian Act does not consider an arbitration to be international commercial arbitration if a place where substantial part of the obligations of the commercial relationship is to be performed is situated outside India or the place with which the subject-matter of the dispute is most closely connected is outside India. One possible reason behind this could be that it might make an arbitration between two Indian entities to be subsumed under the expression “international commercial arbitration” thereby making part II applicable on them. To explain this in a better way, suppose party A and party B, both being Indian incorporated body corporates enters into a contract for exploration of oil from an oil well in Iraq. Then under current Indian Act, this dispute would not be covered under “international commercial arbitration” whereas under the same scenario the parties can validly invoked IAA subject to their other necessary agreements in this regard.

Under third limb of Section 5 of IAA, an arbitration can be termed as “international” if the parties have expressly agreed that the subject-matter of the arbitration agreement relates to more than one country. Again, the determination of domestic or international nature of arbitration based on the “subject-matter” of the arbitration agreement is absent in the Indian Act.

Possible Issue

The distinction of domestic and international arbitration might create problem in light of the New York Convention which seeks to provide common legislative standards for the recognition of arbitration agreements and court recognition and enforcement of foreign and “non-domestic arbitral awards”. The term “non-domestic” appears to embrace awards which, although made in the state of enforcement, are treated as “foreign” under its law because of some foreign element in the proceedings, e.g. another State’s procedural laws are applied. Meaning thereby the convention is applicable for the recognition and enforcement of foreign or international awards and not domestic awards. A question which I ask to myself is does this means that if there is an award that the relevant law considers to be domestic (suppose an award passed under Part I of the Indian Act i.e. a domestic award under Indian Act), would be difficult to enforce in any country other than the domestic tribunals under the New York Convention?

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