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

The Bombay High Court has ruled that mere reference to an Agreement containing an arbitration clause, in a subsequent Agreement, will not bring about a consequence envisaged under Section 7(5) of the Arbitration & Conciliation Act, 1996 (A&C Act), to the effect that the arbitration agreement would be incorporated into the subsequent Agreement. 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 1st 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 1st respondent had failed to fulfil...

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

Parina Katyal

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