The immortality of the arbitration clause

BY SAMALI BITALA

Supreme court of India in Ashapura Mine-Chem Ltd vs Gujarat Mineral Development AIR 2015 SC(SUPP)1153

In a judgment made by the supreme court of India on the 16th of April 2015, it was held that the arbitration clause in a contract is a separate agreement within the contract; that even if the entire contract was null, void and therefore unenforceable, the arbitration clause would be enforceable.

Below is a review of the case:

Facts

The appeal was directed against the judgment of the High Court of Judicature of Gujarat at Ahmedabad in Arbitration Petition No. 9/2013 dated 27.9.13/04.10.2013. By the impugned judgment, the learned Single Judge of the High Court dismissed the appellant’s application filed under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to “Act”).

Short facts which should be noted are that the appellant and the respondent entered into a Memorandum of Understanding (MoU) on 17.08.2007. Under the said MoU, the appellant proposed to constitute a joint venture along with Chinese Company, namely, “M/s Qing TongXia Aluminium Group Co. Ltd. Ningxia of China (hereinafter referred to as “QTX”) as well as the respondent for setting up an alumina plant of appropriate capacity in the Kutch District of Gujarat. The MoU also records that the Government of Gujarat agreed to encourage and support the proposed joint venture for setting up of the alumina plant. The respondent agreed to supply on priority basis, medium grade Bauxite to the proposed plant from its 10 existing and 18 expected Bauxite mining leases in the Kutch District.

The other relevant terms were that the appellant should arrange for the equity participation of the QTX in the proposed joint venture; that the respondent should invest in the equity of the joint venture to the extent determined by the Government of Gujarat but not exceeding 26% while the appellant and the QTX should hold 74% of the equity. The capacity of the proposed plant would be 1.00 million tonnes per annum which may be enhanced subsequently. On the part of the respondent, it was to assist the joint venture in obtaining the required land for locating the project. Under Clauses 5, 6, 8, 10 and 11, the quantity of the medium grade Bauxite to be supplied by the respondent, the grade of the Bauxite, the specifications, the rate at which it was to be supplied, the time within which such supply should be effected were all set out which also included a long term agreement for the supply to be entered into.

MoU also stipulated certain other conditions by which the appellant was obligated upon to reimburse to the respondent, within 60 days of the signing of the MoU, an amount of Rs.3.94 crores being the direct expenses incurred by the respondent on its Alumina Project and related matter. It was not in dispute that within the stipulated time limit the appellant gave its cheque for the said sum but the respondent did not cash the same. It also provided for the appellant to pay the respondent a further sum of Rs.6.25 crores within 60 days of the execution of the MoU by way of signature bonus apart from providing a bank guarantee to the value of Rs.10 crores for the due observance for the joint venture by the appellant under the various terms and conditions of the MoU within 30 days of the signing of the MoU.

Clause 12 of the MoU specifically provided that the rights and privileges were not transferable for a period of five years and the appellant would not exit the project/joint venture for a period of five years after the commencement of commercial production.

Under Clause 19, it was stipulated that the MoU was subject to approval of the Board of Directors of the appellant as well as the respondent; that the equity investment and decisions of the respondent should be subject to the concurrence of the Government of Gujarat, while the investment of the appellant should be subject to approval of its shareholders.

It was specifically mentioned that both the appellant and the respondent should endeavour to obtain necessary approval within three months from the date of execution of the MoU. It was further specifically mentioned that on getting necessary approval by both sides, the MoU would be converted into an agreement between the appellant and the respondent. Clause 21 contained relevant stipulation to the effect that in case the concurrence of the Government of Gujarat was not forthcoming for equity participation in the project within six months of the signing of the MoU, the MoU would be construed as one relating to long term supply of medium grade Bauxite to the joint venture by the respondent from its Kutch mines.

The more important Clauses contained in MoU pertaining to arbitration are found in Clauses 26 and 27 which read as under:
“26. In the event of difference disputes arising between the parties in respect of any matter arising out of and relating to this MoU, such dispute/difference shall, in the first instance, be resolved amicably by mutual consultation within 45 days of the reference of disputes by either party.
27. If amicable settlement is not reached between the parties then such unresolved dispute or difference of opinion concerning or arising from the MoU and its implementation, breach or termination whatsoever, including any difference or dispute as to the interpretation of any of the terms of the MoU, shall be referred to the arbitration or a sole arbitrator appointed to GMDC and AML. The Arbitrator shall give a reasoned award. The Arbitration shall be governed by Arbitration and Conciliation Act, 1996 (India) and conducted in the city of Ahmedabad. The language of Arbitration shall be English. The parties shall share the cost of Arbitration equally”

Subsequent to the signing of the above MoU, there was a Board Resolution of respondent dated 29.10.2007. The said Resolution stated that the Board resolved to accord its approval to the MoU executed on 17.08.2007 between the appellant and the respondent subject to the modifications noted in the said resolution. Subsequent to the said resolution which was communicated to the appellant, correspondence was exchanged between the appellant and the respondent and on some occasions with the Principal Secretary of the State of Gujarat between 17.12.2007 and 10.03.2010.

There was a Board Resolution of the respondent dated 18.03.2010 which disclose that the Board decided to the effect that in the light of the new mineral policy announced by the State Government in November, 2009, major changes were made in respect of Bauxite also and, therefore, it was not inclined to extend the validity of the proposed MoU and also decided to invite fresh EOI in Bauxite for higher value addition in alumina. However, in a subsequent communication dated 26.07.2010, the respondent informed the appellant that to maintain parity necessary modification in the terms and conditions of the MoU dated 17.8.2007 as approved by the Board of the respondent were communicated to the State Government for approval which was awaited and that on receipt of such approval, a fresh MoU may have to be executed.

But subsequently, by communication dated 25.04.2011, the respondent tacitly informed the appellant that it decided to forthwith cancel the MoU dated 17.08.2007 in view of failure on the part of the appellant in complying with various terms and conditions of the MoU. The respondent, thus, threw the blame on the appellant for the proposed project not being able to be finalized.

In response to the said letter dated 25.04.2011, the appellant wrote a detailed reply on 11.07.2011 wherein the appellant expressed its desire to amicably resolve the dispute and requested the respondent to make an attempt for an amicable settlement as regards the issues and alleged breaches mentioned in the respondent’s letter dated 25.04.2011. Subsequently, the appellant made a legal notice dated 07.12.2012 to the respondent, wherein it was claimed that its attempt to amicably resolve the dispute as provided under Clause 26 of the MoU failed and, therefore, it decided to invoke Clause 27 of the MoU to appoint an Arbitrator and suggested the name of a retired High Court Judge for appointment with the concurrence of the respondent or else the appellant’s decision to invoke Section 11 of the Act.

On behalf of the respondent, a reply was addressed to the appellant on 04.01.2013 stating that there was no fault whatsoever on its side and, therefore, there was no question of any obligation to be fulfilled on its side and it also expressed its decision not to concur for the appointment of the Arbitrator.

It was in the above stated sequence of events i.e. from the date of MoU to the date of filing of the application, the appellant approached the High Court by filing an application under Section 11 of the Act and sought for appointment of an Arbitrator. By the impugned order, the High Court having rejected the appellant’s application, the appellant sought the opinion of the Supreme Court.

Issue:

Whether the arbitration clause survived the perished contract between the parties

Court ruling and reasoning:

According to Clause 27, the Court found that in the event of failure of an amicable settlement at the bilateral level relating to a dispute or difference arising between the appellant and the respondent to be reached as contained in Clause 26 of the MoU, then such unresolved dispute or difference concerning or arising from the MoU, its implementation breach or termination whatsoever including any difference or dispute as to the interpretation of any of the terms of the MoU is referable to the sole Arbitrator appointed by the appellant and the respondent.

Therefore, irrespective of the question or as to the fact whether the MoU fructified into a full-fledged agreement, having regard to the non-fulfilment of any of the conditions or failure of compliance of any requirement by either of the parties stipulated in the other Clauses of MoU, specific agreement was entered into by the appellant and the respondent under Clause 27 to refer such controversies as between the parties to the sole arbitrator by consensus.

Therefore, when consensus was not reached as between the parties for making the reference, eventually it was open for either of the parties to invoke Section 11 of the Act and seek for reference of the dispute for arbitration.

In the case at hand, after the signing of the MoU on 17.8.2007, the Board of Directors of the Respondent passed a Resolution on 29.10.2007 which expressed its approval to the MoU, subject, however, to modification of the conditions. Thereafter, correspondence exchanged between the parties from 17.12.2007 to 10.03.2010. There was a subsequent Board Resolution of the respondent on 18.03.2010 which stated that the Board took a decision that it was not inclined to extend the validity of proposed MoU due to change in the mineral policy of the State Government.

However, on 26.07.2010, the respondent informed the appellant that to maintain parity, necessary modification in the terms and conditions of the MoU dated 17.8.2007 was communicated to the State Government for approval which was awaited and that on receipt of such approval, a fresh MoU can be executed.

Thereafter, by communication dated 25.4.2011, the respondent categorically informed the appellant that it decided to forthwith cancel the MoU dated 17.8.2007 alleging fault on the side of the appellant with regard to failure to comply with the various terms and conditions of the MoU.

Thus, from the above referred to sequence of events which occurred between 17.8.2007 and 25.4.2011, it is crystal clear that both parties were at variance with reference to the various terms and conditions contained in the MoU and consequently there was every right in either of the parties to seek for an amicable settlement in the first instance as specified in Clause 26 of the MoU.

The Court found that from the materials on record, the appellant in its letter dated 11.07.2011 addressed to respondent expressed its desire to amicably resolve the dispute at the bilateral level. Since there was no response from the respondent, the appellant caused a legal notice on 07.12.2012 by invoking Clause 27 of the MoU for appointment of an Arbitrator and also suggested the name of a retired High Court Judge and sought for the concurrence of the respondent.

In the legal notice, the appellant specifically intimated that in the event of the respondent failing to express its concurrence for the appointment of the named Arbitrator, it will have no other option but to move the High Court under Section 11 of the Act. The respondent having made it clear in its reply dated 04.01.2013 to the lawyer’s notice stating that it was not inclined to agree for a reference, the appellant had no other option except to move the High Court by filing an application under Section 11 of the Act.

Having noted the above factors and inasmuch as the Court was convinced that Clause 27 is a valid arbitration agreement contained in the MoU dated 17.8.2007, the Court noted that the appellant was fully entitled to invoke the said agreement and seek for a reference to the Arbitrator.

In the above, the Court held that the learned Judge having failed to appreciate the legal position as regards the existence of an arbitration agreement in the MoU irrespective of the failure of the parties to reach a full-fledged agreement with respect to the various terms and conditions contained in the MoU for a joint venture, the said conclusion and judgment of the learned Judge was liable to be set aside and was accordingly set aside.

Analysis and conclusion

The concept of separability of the arbitration clause/agreement from the underlying contract is a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract.

The Indian Arbitration Act, 1996, as noticed above, under Section 16 accepts the concept that the main contract and the arbitration agreement form two independent contracts. Commercial rights and obligations are contained in the underlying, substantive, or the main contract. It is followed by a second contract, which expresses the agreement and the intention of the parties to resolve the disputes relating to the underlying contract through arbitration. A remedy is elected by parties outside the normal civil court remedy.

Whereas it is true that support of the judiciary would be required to ensure the success of arbitration, this would not diminish the legitimacy or independence of the collateral arbitration agreement, even if it is contained in a contract, which is claimed to be void or voidable or unconcluded by one or both of the parties.

Under Section 16(1), the Indian legislature makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, the arbitration clause which formed part of the contract, has to be treated as an agreement independent of the other terms of the contract.

To ensure that there is no misunderstanding; Section 16(1) (b) further provides that even if the Arbitral Tribunal concludes that the contract is null and void, it should not result, as a matter of law, in an automatic invalidation of the arbitration clause. Section 16(1)(a) presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. By virtue of Section 16(1)(b), it continues to be enforceable notwithstanding a declaration of the contract being null and void.

The judiciary in East Africa should also strictly enforce arbitration clauses. It will help to clear the backlog of cases and ensure the development of our jurisprudence of alternative dispute resolution methods.

This review and article was originally made and written for our newsletter, The Deuteronomy, as a feature for our student mentorship program

The law permits sharing.
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  

Leave a Reply

Your email address will not be published. Required fields are marked *