The Hon’ble Supreme Court in a recent judgment has clarified the position with respect to interference by the Courts in Section 11 Petition under Arbitration and Conciliation Act, 1996 (“Act”). The Hon’ble Supreme Court in the matter of DLF Home Developers Ltd.vs Begur OMR Homes Pvt. Ltd & Anr. (Arbitration Petition (Civil) No. 16/2020 and 17/2020) held that the Court(s) are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11 of the Act.
DLF Home Developers Limited and one Ridgewood Holdings Limited entered into a joint venture, in the year 2007-2008, wherein Ridgewood Holdings Limited invested in four Special Purpose Vehicles, including Rajapura Homes Private Limited (“Rajapura Homes”) and Begur OMR Homes Private Limited (“Begur OMR”). Rajapura Homes was developing residential projects, namely, ‘DLF Maiden Heights’ and ‘DLF Woodland Heights’ in Bangalore, Karnataka (Collectively referred to as “Rajapura Homes Project”). Begur OMR was developing residential projects, namely, ‘DLF Garden City’ situated at Kanchipuram District, Tamil Nadu, and ‘DLF Westend Heights’ situated in Bengaluru, Karnataka (Collectively referred to as “Southern Homes Project”).
In June 2008, Ridgewood Holdings Limited transferred its stake in the joint venture to its affiliates, Resimmo PCC (“Resimmo”) and Clogs Holding BV (“Clogs”). Dispute with respect to put option arose between the parties and in 2015, the parties agreed to a negotiated settlement, in terms of which, Resimmo was to acquire sole ownership and control of two Special Purpose Vehicles, namely, Rajapura Homes and the Begur OMR.
To effect the change of ownership of Rajapura Homes, the Petitioner, Rajapura Homes, and Resimmo executed a Share Purchase Agreement dated 08.07.2016 (“Rajapura SPA”) for the transfer of Petitioner’s entire shareholding in Rajapura Homes to Resimmo. Likewise, a Share Purchase Agreement dated 25.01.2017 was also executed between the Petitioner, the Begur OMR, and Resimmo to transfer the Petitioner’s entire holding in the Begur OMR to Resimmo (“Southern Homes SPA”).
The SPA Agreements contemplated a condition precedent under Clause 3.1 read with Schedule II of the SPA’s which required the parties to execute a construction management agreement prior to the closing of the transactions. Further, in terms of Clause 6 of the SPA’s, the Petitioner had to undertake certain construction related obligations, which were to be performed “in accordance with the terms of the Construction Agreement”. The SPA’s prescribed that the disputes shall be resolved by arbitration which is to be conducted in accordance with the rules of the Singapore International Arbitration Centre ( “SIAC”), with the seat and venue of the arbitration being Singapore.
Thereafter, the Parties on 25.01.2017 executed the DLF-Rajapura Homes Construction Management Services Agreement (hereinafter, “RCMA”) and the DLF-Southern Homes Construction Management Services Agreement (hereinafter, “SCMA”). Clause 11 of the Agreements contemplated that the seat and venue of Arbitration would be New Delhi, and the arbitration would be governed by the Act.
As consideration for the construction management services to be provided under the SCMA and the RCMA, the Petitioner was entitled to a “Fee”. Further, upon concluding the construction obligations, Petitioner was required to submit a written notice of completion to Rajapura Homes and the Begur OMR. Consequently, Rajapura Homes and Begur OMR had a right to reject or confirm the completion of the Rajapura Homes Project and the Southern Homes Project as submitted by the Petitioner. Upon confirmation of notice of completion, Resimmo was obligated to invest a sum of Rs.75 crores in Begur OMR.
In compliance with the SCMA and RCMA, the Petitioner issued notice for completion to Rajapura Homes and Begur OMR in August, 2019 and October, 2019 and called upon them to fulfill their obligations under the SCMA and RCMA. However, both the companies refused to accept the notice as a valid notice and cited various grounds for refusal of the same. The disputes were raised between the parties with respect to the said completion notices.
The Petitioner subsequently vide letter dated 26.05.2020 issued a notice invoking arbitration under Clause 11 of the SCMA and RCMA. The Petitioner further referred all disputes arising out of the RCMA and SCMA to a common and composite Arbitral Tribunal comprising a sole arbitrator. The Respondents vide two separate emails refused to appoint a sole arbitrator. It was thus claimed that the differences between the parties have arisen under the Rajapura SPA and Southern Homes SPA and not under the RCMA/SCMA.
Aggrieved by the refusal of the Respondent(s) to appoint an Arbitrator under the RCMA and SCMA, the Petitioner approached Hon’ble Supreme Court under Section 11(6) read with Section 11(12) of the Act, praying for appointment of a sole arbitrator for resolution of all disputes arising from the SCMA and RCMA.
- Whether the Court has the power to look into core preliminary issues raised before referring the parties to the Arbitral Tribunal under Section 11 of the Act?
- Whether the disputes raised by the Petitioner are arbitrable under SCMA and RCMA?
Contentions by the Parties
- The Court while dealing with an application under Section 11(6) of the Act has 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.
- 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 of the Act, which enshrines the principle of “Kompetenz Kompetenz”.
- The proceedings ought to be consolidated to avoid multiplicity of arbitrations and conflicting decisions, which would have the potential to cause injustice.
- While deciding an application under Section 11(6), the Court cannot act cursorily and an absolute ‘hands off’ approach would be counterproductive. The Court is required to examine whether the agreement(s) in question contain a clause that provides for arbitration in respect of the disputes which have actually arisen between the parties.
- Where there are 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.
- The Courts are not expected to act mechanically merely to deliver a purported dispute raised by an applicant at the doors of the chosen Arbitrator. On the contrary, the Court(s) are obliged to apply their mind to the core preliminary issues, albeit, within the framework of Section 11(6-A) 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. Therefore, 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 scope of the arbitration clause in Rajapura SPA/Southern Homes SPA is limited to issues relating to the agreement’s primary subject matter, i.e., any dispute arising out of the transaction of sale and purchase of shares. The provisions of the RCMA/SCMA, and the arbitration clause therein, would as a logical corollary then be applicable to any dispute/difference concerning the performance of the construction related obligations and deposit of agreed amount by Resimmo or payment thereof to the Petitioner.
- Where the parties have resolved to the contrary, it would be inappropriate to consolidate the proceedings originating out of two separate agreements. However, since the Fee Agreement provides 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 Arbitration Petition No.17 and Arbitration Petition No.16 are referred to a sole Arbitrator.
The Hon’ble Supreme Court has reaffirmed the reasoning in the matter of Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1 to hold that the Court may conduct ‘prima facie review’ at the stage of reference to weed out any frivolous claims. It is absolutely necessary for the Court to exercise discretion while deciding the Section 11 petition as to whether the matter is clear case deadwood. Further, the Court cannot be restricted to mechanically refer the parties to the arbitral tribunal only on reference under Section 8 or 11. Furthermore, the Court in the instant matter has departed from the principle laid down in Olympus Superstructure Pvt. Ltd. v. Meena Vijay Khetan and Others that in a situation where there are 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. The Court restricted itself to the specific facts of the instant matter where the scope of the arbitration clause of the main agreement (SPA’s) is limited to issues relating to the agreement’s primary subject matter, i.e., any dispute arising out of the transaction of sale and purchase of shares. Hence the reliance on the arbitration clause of RCMA and SCMA regarding dispute/difference concerning the performance of the construction related obligations and deposit of agreed amount by Resimmo or payment thereof to the Petitioner would be appropriate.
 Duro Felgura, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729, ¶ 48 & 59 , Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (2019) 9 SCC 209, ¶14 , Mayavati Trading Private Limited v. Pradyuat Deb Burman (2019) 8 SCC 714, ¶10 , and Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1, ¶236, 237, 244.3, 244.4, 244.5, 244.5.1–244.5.3
 Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Limited (2020) 2 SCC 455, ¶7.10, 7.11
 P.R. Shah, Shares and Stock Brokers Private Limited v. BHH Securities Private Limited and Others (2012) 1 SCC 594, ¶ 19
 Duro Felgura, S.A. v. Gangavaram Port Limited (2017) 9 SCC 729, ¶ 48 and Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1, ¶132, 134, 139, 147.2, 147.6, 147.7 & 147.10
 Vidya Drolia and Others v. Durga Trading Corporation (2021) 2 SCC 1
 (1999) 5 SCC 651, ¶ 27, 28 & 30