Arbitration Clause In An Agreement Can't Be Invoked For Another Agreement, Operating Independently: Bombay High Court

The Court added that the reference contemplated under Section 7(5) of the A&C Act, should be such so as to make the arbitration clause part of the contract.

The bench of Justice G.S. Kulkarni observed that the parties had categorically confined the applicability of the arbitration agreement only to the Agreement containing the arbitration clause, and that they had consciously not provided for any arbitration agreement in the subsequent Agreement.

The Court ruled that where the two Agreements operate independently, having no interconnection, the applicant cannot overcome the specific exclusion of an arbitration agreement in the second Agreement, by invoking the arbitration agreement contained in the first Agreement.

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 the respondent no. 1- Bellary Oxygen Company Pvt. Ltd. (the successor-in-interest of BOC India Ltd.). Under the Shareholders Agreement, the respondent no.1- Bellary Oxygen Company, had agreed to subscribe to certain shares of JSW Power Ltd. A 'Second Agreement' was also executed between the parties, setting out the terms and conditions on which the shares of JSW Power were allotted to respondent no.1. The Second Agreement also provided that the respondent no.1 was to be issued shares of JVSL in consideration of JSW Power merging into JVSL.

Subsequently, JSW Power merged into JVSL. Pursuant to such merger, respondent no.1 was allotted certain equity shares of JVSL. Thereafter, the Gas Supply Agreement was terminated between the parties.

Certain disputes arose between the applicant JSW Steel (formerly JVSL) and the respondent- Bellary Oxygen, under the Second Agreement read with the Shareholders Agreement. The applicant contended that the respondent no.1 failed to perform its obligation under the Second Agreement. Accordingly, the applicant invoked the arbitration clause contained in the Shareholders Agreement and filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996 (A&C Act) before the Bombay High Court seeking appointment of an arbitrator.

The respondent no. 1/Bellary Oxygen submitted before the Court that the claim raised by the applicant arose solely under the Second Agreement, which does not have any arbitration clause. It added that the Second Agreement is an independent agreement which is not interlinked or connected with the Shareholders Agreement, and that the purpose and scope of the two Agreements is totally different.

The respondent argued that the scope of the Shareholders Agreement, which contains an arbitration clause, is to explain the circumstances in which respondent no.1 would subscribe to and invest in the equity shares of JSW Power Ltd. It added that the obligations under the Second Agreement pertain to matters not regulated or governed by the Shareholders Agreement.

It submitted that in the Second Agreement, there is no clear reference made to the arbitration clause as contained in the Shareholders Agreement. Thus, the respondent contended that the parties never intended to refer the disputes under the Second Agreement to arbitration.

The applicant JSW Steel averred that the Shareholders Agreement and the Second Agreement were executed one day apart. The applicant added that the said Agreements were inextricably interlinked and a part of the same transaction.

It contended that the Second agreement contained multiple references to the Shareholders Agreement; thus, the Second Agreement and the Shareholders Agreement were composite agreements which must be read together. Therefore, it submitted that the disputes arising under the Second Agreement were disputes under the Shareholders Agreement and thus, they were covered under the arbitration clause contained in the Shareholders Agreement.

The Court noted that in the notice invoking arbitration, the applicant had contended that since the Gas Supply Agreement had terminated between the parties and the respondent no. 1 was no longer being supplied power under the Gas Supply Agreement, the conditions enumerated in the Second Agreement were attracted. Thus, in terms of the relevant clause of the Second Agreement, the 1^st respondent was obligated to sell the shares held by it in JSW Steel/ applicant, to be purchased by the applicant's existing shareholders or any other nominated entity. The applicant had averred that the 1^st respondent had failed to fulfil the said obligation under the Second Agreement.

The bench held that the dispute sought to be raised by the applicant in the invocation notice pertained, primarily, only under the Second Agreement.

Referring to the arbitration clause contained in the Shareholder's Agreement, the Court ruled that the arbitration clause very clearly provided that in the event of any dispute arising "in connection with the Shareholders Agreement", the parties shall, failing an amicable settlement, seek adjudication through arbitration.

"Thus, to read into the arbitration agreement, something which would fall outside the Shareholders' agreement is certainly not the intention of the parties, as the parties have clearly intended to restrict the operation of the arbitration clause only and only to the Shareholders' agreement", the Court said.

The bench noted that the parties under the Second Agreement had agreed that the relevant clauses contained in the Second Agreement shall survive even the termination of the Shareholders' Agreement. Further, as per the Second Agreement, in the event of any conflict between the provisions of the Second Agreement and the Shareholders' Agreement, the Second Agreement shall prevail. Thus, the Court concluded that even if the Shareholders Agreement was extinguished, the Second Agreement would survive.

It added that the arrangement/agreement between the parties, as contained in the relevant clauses of the Second Agreement, was wholly independent, having no bearing or relation to the Shareholders' Agreement.

The Court, therefore, rejected the contention of the applicant that there was an inextricable connection between the Shareholders Agreement and the Second Agreement.

"In my view, respondent No.1 would be correct in its contention that both the agreements stand independent of each other, inasmuch as the consequences as brought about by both these agreements are totally distinct and separate", the Court added.

Thus, the Court ruled that since the Shareholders Agreement had no bearing or relating to what was agreed between the parties under the Second Agreement, the applicant cannot 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 under the Shareholders Agreement the respondent no.1 became a Shareholder of the merged entity, that is JSW Steel, it cannot be said that there was an inextricable connection between both the Agreements.

While noting that the parties had consciously not provided for any arbitration agreement in the Second Agreement, the Court held that to lift the arbitration clause under the Shareholders Agreement and foist the same on the Second Agreement would amount to re-writing of the Second Agreement. It added that the same would amount to imposing on the parties, something which the parties themselves had not desired.

The Court ruled that the real test to determine whether the two Agreements are integral to each other or not, is to determine whether either of the Agreements become unworkable in the absence of the other, or whether both the Agreements are interdependent and thus, unworkable without each other.

"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 Court concluded.

The Court added that there was no conscious intention of the parties to subject the disputes under the Second Agreement to arbitration. It held that the Second Agreement cannot be forcibly stretched as falling under the Shareholders Agreement, only for the purpose of adopting the dispute resolution mechanism provided under the Shareholders Agreement. The bench ruled that the same would run contrary to the requirement of an arbitration agreement, as provided under Section 7 of the A&C Act.

The Court refuted the contention of the applicant that in view of Section 7 (5) of the A&C Act, due to the reference made to the Shareholders Agreement in Second Agreement, the disputes arising under the Second Agreement would fall under the ambit of the Arbitration Clause.

Section 7(5) of the A&C Act provides that reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement, if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

The Court held that mere reference to the Shareholders Agreement in the relevant Clause of the Second Agreement, cannot bring about a consequence that the arbitration agreement in the Shareholders Agreement is incorporated into the Second Agreement. It added that the reference contemplated under Section 7(5) of the A&C Act should be such so as to make the arbitration clause part of the contract.

The Court referred to the decision of the Supreme Court in Duro Felguera S.A. versus Gangavaram Port Ltd. (2017), where the Apex Court had observed that Section 7(5) requires conscious acceptance of the arbitration clause from the other document, as a part of the contract, before such arbitration clause can 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", and thus, the parties had clearly confined the applicability of the arbitration agreement only to the Shareholders' Agreement.

"In any event, as discussed above, on a perusal of both the agreements in question, namely the Shareholders' Agreement and the Second Agreement, it is not possible to come to a conclusion that a composite transaction or single transaction exists between the parties. The Shareholders' Agreement cannot be called as the principal agreement between the parties, as both the agreements operate independently and cannot be considered and termed to be interconnected, so that arbitration of disputes under the Second Agreement could get facilitated by taking recourse to the arbitration clause in the Shareholders' Agreement", the Court ruled.

Therefore, ruling that there was no arbitration agreement between the parties, the Court dismissed the application filed under Section 11 of the A&C Act.

Case Title: JSW Steel Limited versus Bellary Oxygen Company Private Limited & Anr.

Dated: 18.11.2022 (Bombay High Court)

Counsel for the Petitioner: Mr.Janak Dwarkadas, Senior Advocate with Mr.Kunal Dwarkadas with Vineet Unnikrishnan with Samhita Mehra with Ms.Vaidehi Chande i/b. Cyril Amarchand Mangaldas

Counsel for the Respondent: Mr.Sharan Jagtiani, Senior Advocate with Ms. Shradha Achliya, Aditya N.Raut, Nitesh Jain, Atul Jain, Mahi Mehta i/b. Desai Desai Carrimjee and Mulla

Citation: 2022 LiveLaw (Bom) 462  

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