Bombay High Court rules on arbitration clause in an agreement

Bombay High Court rules on arbitration clause in an agreement

The bench observed that the two companies had consciously not provided any mediation term in the subsequent arrangement

The Bombay High Court has ruled that mere reference to an agreement containing an arbitration clause, in a subsequent agreement, will not bring a consequence envisaged under the Arbitration & Conciliation (A&C) Act, 1996. It would only make the arbitration clause a part of the contract.

The bench of Justice GS Kulkarni observed that the parties had categorically confined the applicability of the arbitration agreement only to the agreement containing the arbitration clause. They had consciously not provided any arbitration agreement in the subsequent agreement.

The court ruled that when two agreements operated independently, the applicant could not overcome the specific exclusion of an arbitration agreement in the second agreement by invoking the arbitration agreement contained in the first one.

The applicant JSW Steel (formerly known as Jindal Vijayanagar Steel Ltd. (JVSL), entered into a gas supply agreement with BOC India Limited.

A shareholders' agreement was executed between JSW Power and respondent Bellary Oxygen Company Pvt. Ltd. (the successor-in-interest of BOC India).

Under the shareholders' agreement, Bellary agreed to subscribe to certain shares of JSW Power. Later, a second agreement was executed between the parties, setting the terms and conditions on which the shares of JSW Power were allotted to Bellary. The second agreement also provided that Bellary was to be issued shares of JVSL in consideration of JSW Power merging into JVSL.

Subsequent to the merger, Bellary was allotted certain equity shares of JVSL. After that, the gas supply agreement was terminated between JSW Steel and Bellary.

Certain disputes arose between JSW Steel (applicant) and Bellary (respondent) under the second agreement read with the shareholders agreement.

JSW Steel contended that Bellary failed to perform its obligation under the second agreement. Thus, it invoked the arbitration clause contained in the shareholders' agreement and filed an application under A&C Act before the court seeking the appointment of an arbitrator.

Bellary told the court that the claim raised by JSW Steel arose solely under the second agreement, which did not have any arbitration clause. It was an independent agreement, not interlinked with the shareholders' agreement. Therefore, the purpose and scope of the two agreements were totally different.

It further argued that the scope of the shareholders' agreement containing an arbitration clause explained the circumstances in which the respondent could subscribe to and invest in the equity shares of JSW Power. The obligations pertained to matters not regulated or governed by the shareholders' agreement.

Bellary submitted that in the second agreement, there was no clear reference to the arbitration clause as contained in the shareholders' agreement. It contended that the parties never intended to refer the disputes under the second agreement to arbitration.

However, JSW Steel averred that the shareholders' agreement and the second agreement were executed only a day apart. The two were inextricably interlinked and a part of the same transaction.

It contended that the second agreement contained multiple references to the shareholders' agreement. These were composite agreements to be read together. The disputes arising were under the shareholders' agreement, so they should be covered under the arbitration clause in the shareholders' agreement.

The court noted that in the notice invoking arbitration, the applicant had contended that since the gas supply agreement was terminated between the parties, Bellary was no longer being supplied power. Therefore, the conditions enumerated in the second agreement were attracted.

In terms of the relevant clause of the second agreement, Bellary was obligated to sell the shares held by it in JSW Steel to be purchased by the latter's existing shareholders' or any other nominated entity. JSW Steel averred that Bellary had failed to fulfil the obligation under the second agreement.

The bench held that the dispute raised by the applicant in the invocation notice was related to the second agreement.

Thus, the court ruled that the arbitration clause clearly provided that if any dispute arose "in connection with the shareholders agreement", the parties would, failing an amicable settlement, seek adjudication through arbitration.

It stated, "To read into the arbitration agreement, something which would fall outside the shareholders' agreement, is certainly not the intention of the parties. They clearly intended to restrict the operation of the arbitration clause only and only to the shareholders' agreement."

The bench noted that under the second agreement the two entities agreed that the relevant clauses would survive even in the termination of the shareholders' agreement. Thus, even if the shareholders' agreement was extinguished, the second agreement would survive. The agreement between JSW Steel and Bellary was wholly independent, having no bearing or relation to the shareholders' agreement.

The court, therefore, rejected the contention of JSW Steel that there was an inextricable connection between the shareholders agreement and the second agreement. It said the applicant could not overcome the specific exclusion of an arbitration agreement in the second agreement by invoking the arbitration agreement contained in the shareholders agreement.

The bench held that merely because the respondent became a shareholder of the merged entity, JSW Steel, it could not be said there was an inextricable connection between the two agreements.

Noting that the parties had consciously not provided any arbitration agreement in the second agreement, the court held that to lift the arbitration clause under and foist the same on the second agreement would amount to re-writing the second agreement. It amounted to imposing on them something that the parties had not desired.

The court said the real test was to determine whether the two agreements were integral or not and whether either of the agreements became unworkable in the absence of the other.

Thus, Justice Kulkarni ruled, "Applying this test to the present facts and circumstances, it certainly cannot be said that the shareholders' agreement finds for itself such an unimpeachable position in the second agreement that the second agreement would fail/collapse in the absence of the shareholders' agreement."

The bench ruled that the same would run contrary to the requirement of an arbitration agreement, as provided under the A&C Act. The Act provided reference to a document containing an arbitration clause, constituting an arbitration agreement if the contract was in writing and the reference was such that it would make the arbitration clause a part of the contract.

The court referred to the decision of the Supreme Court in the Duro Felguera S.A. vs Gangavaram Port Ltd case, wherein the court had observed that A&C Act required conscious acceptance of the arbitration clause from the other document as a part of the contract before such arbitration clause could be read as a part of the contract between the parties.

The bench noted that the arbitration clause categorically used the words "in connection with this agreement." Thus, the parties had clearly confined the applicability of the arbitration agreement only to the shareholders' agreement.

Thus dismissing the application filed under the A&C Act, Justice Kulkarni held, "It is not possible to come to a conclusion that a composite transaction or single transaction existed between the parties. The shareholders' agreement cannot be called the principal agreement, as both operate independently and cannot be considered and termed to be interconnected."