The Hon’ble Supreme Court (“SC”) has in its judgment dated September 22, 2021 in the matter of DLF Home Developers Limited v. Rajapura Homes Private Limited & Another [Arbitration Petition No. 17 of 2020] and DLF Home Developers Limited v. Begur OMR Homes Private Limited & Another [Arbitration Petition No. 16 of 2020] (“Judgement”), held that the prayer for reference to arbitration can be declined if the dispute does not correlate to the existing arbitration agreement under the Arbitration and Conciliation Act, 1996 (“Act”).

Facts

DLF Home Developers Limited (“Petitioner”) is a limited liability company involved in the business of providing development, management, and investment services concerning real estate projects. The Petitioner and Ridgewood Holdings Limited (“Ridgewood”) entered into a joint venture, in the year 2007-2008, wherein Ridgewood invested in four special purpose vehicles, including Rajapura Homes Private Limited (“Respondent No. 1”) and Begur OMR Homes Private Limited (“Begur Company”), for developing residential projects in various cities across India. Respondent No. 1 is a company engaged in the construction, development, operations, and maintenance of residential projects in Karnataka (“Rajapura Project”). Similarly, the Begur Company is engaged in the business of construction, development, operations, and maintenance of residential projects, in Tamil Nadu and Karnataka (“Southern Homes Project”).

In June 2008, Ridgewood transferred its stake in the joint venture to its affiliates, Resimmo PCC (“Respondent No. 2”), a company incorporated under the laws of Mauritius and engaged in the business of providing investment management services. Respondent No. 1, Respondent No. 2 and Begur Company are collectively referred to as “Respondents”. In 2015, the parties agreed to a negotiated settlement, in terms of which, Respondent No. 2 was to acquire sole ownership and control of Respondent No. 1 and the Begur Company. To effect the change in ownership, a share purchase agreement was also executed between the Petitioner, Respondent No. 1 and Respondent No. 2 on July 8, 2016 (“Rajapura SPA”). Likewise, a share purchase agreement dated January 25, 2017 was also executed between the Petitioner, the Begur Company and Respondent No. 2. Both the share purchase agreements are collectively referred to as “Share Purchase Agreements”. The Share Purchase Agreements consisted of an identical arbitration clause which laid down that arbitration was to be conducted in accordance with the rules of the Singapore International Arbitration Centre (“SIAC Rules”), with the seat and venue of the arbitration being Singapore.

In pursuance to the conditions of the Share Purchase Agreements, on January 25, 2017, the DLF-Rajapura Homes Construction Management Services Agreement and the DLF-Southern Homes Construction Management Services Agreement, collectively referred to as “Construction Management Agreements”, were executed. To further clarify the modalities of the fee payable to the Petitioner under the Construction Management Agreements, a Fee Computation Agreement dated January 25, 2017 was also executed between Respondent No. 1, the Begur Company and Respondent No. 2 ( “Fee Agreement”). The Petitioner issued a written notice dated August 16, 2019 certifying the completion of the Southern Homes Project, which Begur Company refused to accept as a valid notice of completion and cited reasons of delay and non-completion of the Southern Homes Project, incomplete notice, amongst others. The Petitioner also issued written notice dated October 25, 2019, certifying the completion of the Rajapura Project, which Respondent No. 1 by its reply dated January 27, 2020 again refused to accept as a valid notice of completion and cited reasons of delay and non-completion of the Rajapura Project, incomplete notice, amongst others.

Due to non-resolution of the differences, the Petitioner invoked the arbitration clause under Construction Management Agreements, which contemplated the seat and venue of arbitration to be New Delhi. The Petitioner further referred all disputes arising out of the Construction Management Agreements to a common and composite arbitral tribunal comprising a sole arbitrator (“Arbitral Tribunal”), and proposed two names, for one of them to be appointed as the sole arbitrator. The Respondents claimed that the differences between the parties have arisen under the Share Purchase Agreements and not under the Construction Management Agreements. The Respondents further refused to have the disputes consolidated into a common and composite tribunal and instead asserted that the same would have to be resolved under separate arbitration proceedings. Aggrieved by the refusal of the Respondents to appoint an arbitrator under the Construction Management Agreements, the Petitioner preferred two separate petitions under Section 11(6) of the Act read with Section 11(12) of the Act, to the SC, praying for appointment of a sole arbitrator for resolution of all disputes arising from the Construction Management Agreements.

Issue

• Whether the nature of dispute sought to be referred for arbitration fall under the arbitration clauses of Construction Management Agreements, governed by the Act, 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 the Share Purchase Agreements, that is, under the SIAC Rules, with the seat and venue of the arbitration at Singapore.
• Whether the disputes should be referred to a consolidated and composite tribunal or should there be two different arbitral tribunals to resolve the same.

Arguments

Contentions raised by the Petitioner:

The Petitioner contended that Begur Company and Respondent No. 1 had acted unreasonably in not accepting the notice of completion. It was alleged that the rejection of the notice certifying the completion of Rajapura Project and Southern Homes Project was done to avoid Respondent No. 2’s obligation to pay fees to the Petitioner. It was argued that the contention of the Respondents that the disputes in question cannot be arbitrated under the Construction Management Agreements was legally and factually misconceived. The Petitioner argued that courts while dealing with an application under Section 11(6) of the Act have a narrow scope of examination, confined only to trace out whether there exists an ‘arbitrable dispute’ and a ‘written contract’ providing arbitration as the dispute resolution mechanism.

It was submitted that since the parties had not disputed the existence of arbitration agreement or its core contractual ingredients contained in Construction Management Agreements, the present dispute, in terms of the settled law, should be referred to arbitration. Once the existence of the arbitration agreement was established, all other incidental issues should be left to be decided by the arbitrator as prescribed under Section 16 (Competence of arbitral tribunal to rule on its jurisdiction) of the Act, which enshrines the principle of “kompetenz-kompetenz”. The doctrine of kompetenz-kompetenz indicates that an arbitral tribunal has the competence to rule on its own jurisdiction, including determining all jurisdictional issues, and the existence or validity of an arbitration agreement.

It was further argued that the Arbitral Tribunal would eventually rule whether or not the disputes between the parties fell under the terms of the Construction Management Agreements. Although the Construction Management Agreements were two separate agreements, they were inextricably interlinked, and since the dispute in question related to payment of fees to the Petitioner for its services under both the Construction Management Agreements, the disputes should be referred to a common and consolidated arbitral tribunal, and the proceedings ought to be consolidated to avoid multiplicity of arbitrations and conflicting decisions, which would potentially cause injustice.

Contentions raised by the Respondent:

The Respondents vehemently controverted the case of the Petitioner and reiterated that the dispute sought to be raised in the present arbitration petitions exclusively fell within the ambit of Share Purchase Agreements, and, therefore, the differences between the parties could not be referred to arbitration under the Construction Management Agreements. It was argued that the Share Purchase Agreements were the principal agreements governing the transaction between the parties, and the Construction Management Agreements were subsequently executed only to operationalize the manner in which the Petitioner would fulfill its construction obligation as per the Share Purchase Agreements.

It was contended that the instant disputes could only be arbitrated as per the dispute resolution mechanism specified in the Share Purchase Agreements, namely, by the SIAC Rules, with seat and venue of arbitration at Singapore. It was urged that if the seat of arbitration were to be found outside India, that is, Singapore, the instant applications under Section 11(6) of Act were not maintainable. Citing the decisions of the SC in Duro Felgura, S.A. v. Gangavaram Port Limited [(2017) 9 SCC 729] and Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1] (“Vidya Drolia”), the Respondents contended that while deciding an application under Section 11(6) of the Act, the SC could not act cursorily, and an absolute ‘hands off’ approach would be counterproductive. The Respondents relied on to the judgement in Olympus Superstructure Private Limited v. Meena Vijay Khetan and Others [(1999) 5 SCC 651] (“Olympus Judgement”), wherein, SC had held that in a situation where there were disputes and differences in connection with the main agreement and also disputes regarding other matters connected thereto, the arbitration would be governed by the general arbitration clause of the main agreement.

Lastly, it was submitted that in the event the instant arbitration petitions were allowed, the SC should appoint separate arbitral tribunals under the Construction Management Agreements, though it may comprise of the same sole arbitrator.

Observations of the Supreme Court

The SC observed that the jurisdiction of the SC under Section 11 (Appointment of arbitrators) of the Act is primarily to find out whether there existed a written agreement between the parties for resolution of disputes through arbitration and whether the aggrieved party had made out a prima facie arbitrable case. The SC emphasized that the limited jurisdiction, however, did not denude the SC of its judicial function to look beyond the bare existence of an arbitration clause to cut the deadwood. The SC considered the decision of the three-judge bench in Vidya Drolia, which had eloquently clarified that the SC, with a view to prevent wastage of public and private resources, may conduct ‘prima facie review’ at the stage of reference to weed out any frivolous or vexatious claims. The SC opined that courts are not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen arbitrator. Contrarily, the courts are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6A) of the Act. Such a review is not intended to usurp the jurisdiction of the Arbitral Tribunal but is aimed at streamlining the process of arbitration. The SC thus clarified that even when an arbitration agreement exists, it would not prevent the court to decline a prayer for reference if the dispute in question does not correlate to the said agreement.

The SC observed that the Share Purchase Agreements and the Construction Management Agreements, had distinct and different objects and fields of operation. The SC found it difficult to accept that the respective Share Purchase Agreements were the ‘principal agreements governing the transaction’ between the parties or that the present disputes could be resolved solely under the arbitration clause contained therein. The dispute sought to be referred to arbitration by the Petitioner pertained to non-deposit of agreed amount by Respondent No. 2 and the resultant payment thereof as fees which the Petitioner claimed in terms of the Construction Management Agreements. The SC determined that whether or not the Petitioner had complied with the condition precedent under the Rajapura SPA, thereby becoming entitled to the fees, was a question of fact to be determined by the Arbitral Tribunal.

The SC referred to the Olympus Judgement, where it was held that in a situation where there were disputes and differences in connection with the main agreement and also disputes regarding other matters connected thereto, the arbitration would be governed by the general arbitration clause of the main agreement. Noting that the nature of the arbitration clauses in the instant case were substantially different when compared with the dispute resolution clause of the main agreement in Olympus Judgement, the SC observed that the arbitration clause of the Share Purchase Agreements did not have any overriding effect and was not broader or wider when compared to the Construction Management Agreements. The SC found it difficult to construe that arbitration clause of the Share Purchase Agreements contemplated adjudication of the issues that were “connected with” or were “in relation” to the subject matter of the Share Purchase Agreements.

Thus, the SC noted that the scope of the arbitration clause in Share Purchase Agreements was limited to issues relating to the agreement’s primary subject matter, that is, any dispute arising out of the transaction of sale and purchase of shares. The provisions of the Construction Management Agreements, and the arbitration clause therein, would be applicable to any dispute or difference concerning the performance of the construction related obligations and deposit of agreed amount by Respondent No. 2 or payment thereof to the Petitioner. Since the Respondent No. 2 was not aggrieved by non-compliance, deviation or breach of promise to sell its shares by the Petitioner, the SC took the view that, when neither party pleaded the infringement of the core provisions of the Share Purchase Agreements, it could not be said that the controversy fell within the ambit of the arbitration clause of the Share Purchase Agreements and could be adjudicated only under the SIAC Rules, with seat and venue at Singapore.

Considering that the primary twin-test envisioned under Section 11(6) of the Act had been satisfied by the Petitioner, the SC noted that the instant applications were maintainable. The SC observed that the Construction Management Agreements, though interlinked and connected, are two separate agreements. The SC considered the contention of the Respondents that the Petitioner had committed breaches under both Construction Management Agreements, and that the genesis of the disputes lay in separate and distinct facts. The SC observed that save where the parties have resolved to the contrary, it would be inappropriate to consolidate the proceedings originating out of two separate agreements. However, the SC believed that since the Fee Agreement provided that the fee can only be calculated after taking into consideration various financial components of both the Rajapura Homes Projects and the Southern Homes Project, it would be necessary for the sake of avoiding wastage of time and resources, and to avoid any conflicting awards, that the disputes under petitions be referred to a sole arbitrator.

Decision of the Supreme Court

The SC ruled that the disputes between the parties could be adjudicated in the arbitral proceedings under the Construction Management Agreements, and if on appreciation of the facts and law, the arbitrator discovered that the ‘real dispute’ between the parties arose from the Share Purchase Agreements, the arbitrator would be free to wind up the proceedings with liberty to the parties to seek redressal under the SIAC Rules.

The SC referred the disputes under the arbitration petitions to a sole arbitrator and left it to the wisdom of the sole arbitrator to decide whether the disputes should be consolidated and adjudicated under one composite award or otherwise. The SC allowed both the instant arbitration petitions and appointed Mr. Justice (Retd.) R.V. Raveendran, former judge, Supreme Court of India as the sole arbitrator to resolve all disputes and differences between the parties.

VA View:

The SC by this landmark Judgement has elucidated the importance of synchronizing conflicting arbitration clauses in different agreements entered into between the parties. The SC has unequivocally clarified that the courts cannot act in a mechanical fashion, by merely referring the dispute raised to arbitration, basis the arbitration agreement produced before it. The SC has expanded the scope of judicial inquiry under Section 11 of the Act, and has explained that the exercise of a limited prima facie review does not intend to usurp the jurisdiction of the arbitral tribunal, or negate the doctrine of kompetenz-kompetenz, but rather, is aimed at streamlining the process of arbitration and with a view to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.

The SC has clarified that courts are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6A) of the Act. The SC has expressly laid down that despite the existence of an arbitration agreement, the courts are empowered to decline a prayer for reference to arbitration, if the dispute in question fails to correlate to such arbitration agreement.

For more information please write to Mr. Bomi Daruwala at [email protected]

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