In this article, we analyse the legal possibility of whether the arbitration agreement, which is a part of the original contract, can be abrogated by the parties by way of amending the contract which will perish along with the said contract.
The Supreme Court of India (Supreme Court) in a recent decision in the matter titled as WAPCOS Ltd. v. Salma Dam Joint Venture and Another1 has deliberated whether an arbitration clause can be abrogated by an amendment.
It has been held that when a party, consciously and with full understanding executes an amended agreement, giving up all its claims, including arbitration clause for the settlement of claims in the future, then such a party cannot take recourse to arbitration process or resurrect claims which have been resolved in terms of the amended agreement.
FACTS Water and Power Consultancy Services (India) Limited (WAPCOS), a public sector undertaking, was engaged by the Ministry of External affairs to provide financial, administrative and contractual management services in relation to the reconstruction, rehabilitation and completion of Salma Dam Project, Afghanistan (Project).
Salma Dam Joint Venture (SDJV), was formed by M/s SSJV Projects Private Limited (SSJV) and M/s Angelique International Ltd. (AIL) under a joint venture agreement (JVA) dated 09 September 2005, to submit its bid for the Project. SSJV was nominated as the lead partner of SDJV with ninety-five percent (95%) share as compared to five percent (5%) share of AIL. Thereafter, AIL executed a power of attorney (POA) in favour of SSJV, authorizing it to invoke arbitration as need be, by appointing an arbitrator and filing claims on behalf of AIL.
SDJV being the successful bidder, was awarded tender for the Project, and an agreement to that effect dated 09 March 2006 (Contract Agreement), was executed between WAPCOS and SDJV. It is pertinent to note that along with the Contract Agreement, WAPCOS and SDJV signed certain documents including the conditions of particular applications (COPA), which was to be read with the Contract Agreement and form part and parcel thereof. Thereafter, SDJV and WAPCOS revised the Contract Agreement and signed an amendment of agreement dated 09 June 2015 (AoA), whereby the total consideration of the Contract Agreement was revised to INR 872.67 crores (Rupees eight hundred and seventy-two crores and sixty-seven lakhs).
On 21 September 2016, the board of directors of AIL resolved to revoke the POA executed in favour of SSJV and in furtherance of the same, AIL issued letters to the respective banks and WAPCOS informing them about the revocation of authority conferred upon SSJV. AIL further informed WAPCOS that for future purposes, only those letters or communications which are acknowledged by both AIL and SSJV shall be valid.
In the meanwhile, SDJV raised certain claims before the engineer of WAPCOS. Once the claims raised were rejected, SDJV preferred six (6) appeals before the technical committee constituted in terms of the AoA. Out of the six (6) appeals, five (5) were rejected by the technical committee. Upon rejection of claims by the technical committee, SSJV, proceeded to invoke the arbitration clause, being clause 20.6 of the COPA, and appointed a nominee arbitrator on behalf of SDJV.
WAPCOS responded to the said legal notice, stating that SDJV was a joint venture entity and since the authority given to SSJV to represent AIL had been revoked, the unilateral appointment of arbitrator by SSJV was illegal in terms of Clause 4.2 of the Contract Agreement, as well as Clause 3.2 of the JVA.
Aggrieved by the response of WAPCOS, SSJV filed an arbitration petition2 (Arbitration Petition) against WAPCOS under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court of Delhi (High Court), seeking appointment of an arbitrator on behalf of WAPCOS. The High Court, vide its order dated 15 March 2017 allowed the Arbitration Petition and appointed an arbitrator on behalf of WAPCOS.
WAPCOS preferred a special leave petition 3 before the Supreme Court, impugning the order passed by the High Court on 15 March 2017. The Supreme Court, vide its order dated 11 December 2017, set aside the order passed by the High Court and remanded the matter back to the High Court in view of the fact that AIL was not a party to the proceedings before the High Court and directed the Court to reconsider all the aspects as would be raised by the parties.
The High Court, vide judgment dated 25 January 2019, once again allowed the Arbitration Petition and appointed a sole arbitrator, in place of a panel of three (3) arbitrators envisaged in the COPA. Aggrieved by the High Court's order, two special leave petitions4 were filed by WAPCOS and AIL before the Supreme Court.
FINDINGS OF THE HIGH COURT
The findings of the High Court are summarized hereinbelow:
- The High Court opined that the arbitration agreement between SDJV and WAPCOS was still in force on the date of filing the Arbitration Petition and the same would operate between the parties.
- The High Court further opined that SSJV had authority under the JVA as well as the Contract Agreement to represent SDJV as a leading partner. It was held that SSJV derived authority from clause 20.6 of the COPA read with other enabling terms in the JVA.
- In consideration of the fact that SSJV had ninety-five percent (95%) shareholding in SDJV as against the five percent (5%) shareholding of AIL, the High Court held that AIL could not be permitted to derail the arbitration process commenced for and on behalf of SDJV through SSJV.
- It was observed that despite the execution of the AoA, the technical committee entertained the appeals filed by SDJV in respect of certain items, which goes to show that even the technical committee was of the view that dispensation regarding settlement of further claims of SDJV could be pursued and the arrangement arrived at under the AoA could not have been be treated as full and final settlement. Resultantly, the High Court held that SDJV was well within its rights to take recourse to arbitration for resolution of disputes.
ISSUES
The two principal issues that arose before the Supreme Court were as follows: -
- Whether on the date of presentation of the Arbitration Petition, purportedly by SDJV through SSJV, the arbitration agreement contained in the Contract Agreement, was subsisting and in force?
- Whether the Arbitration Petition filed in the name of SDJV through SSJV, could be considered as having been properly and validly presented in law, despite the express revocation of POA by AIL?
FINDINGS OF THE SUPREME COURT
With regard to the first issue, the Supreme Court observed that the execution of the AoA was not disputed by AIL or SSJV and neither of these entities had challenged the implementation of the AoA. In fact, all the concerned parties had even given effect to the terms set out in the AoA through their conduct of business and the payment against the said revised rates had already been received and availed by the concerned parties, without any demur.
The Supreme Court placed reliance on clause 1.2 of Section-01 of the AoA, wherein it was categorically agreed between SDJV and WAPCOS that the balance pending claims of SDJV stand buried, and that no claims will be raised by SDJV on any of the pending/settled claims/other claims resulting out of the correspondences made up to that point; and that there will be no arbitration for the settlement of such claims. The Supreme Court opined that despite such pre-emptory agreement and declaration between the parties, SDJV had proceeded on an erroneous basis that the arbitration agreement in the Contract Agreement still subsists or that the same can be enforced. It was concluded that the terms and conditions specified in the AoA leave no room for doubt that the arbitration agreement stands overridden, in view of the unambiguous declaration in the AoA that the balance claims of SDJV stand buried and that there will be no arbitration for the settlement of claims.
The Supreme Court further observed that it is not uncommon in the commercial world for parties to amend original contracts and even give up their claims under the subsisting agreement. It was held that the present case was one such case where the parties executed the AoA consciously and with full understanding that SDJV was giving up all its claims and consenting to the new arrangement specified in the AoA, and that there will be no arbitration for the settlement of such claims by SDJV in the future. Having chosen to adopt that path, it is not open to SDJV to now take recourse to the arbitration process or resurrect a claim which has been resolved in terms of the amended agreement, after availing the benefit of a steep revision of rates.
With respect to the findings of the High Court in relation to the technical committee, the Supreme Court took the view that the mere fact that the technical committee processed the appeals instituted by SDJV does not mean that WAPCOS had waived the terms and conditions of the AoA. It was held that entertainment of appeals by the technical committee, cannot, by any stretch of imagination, undo the effect of the express terms and conditions of the AoA, which had annulled the arbitration clause in the Contract Agreement.
The Supreme Court observed that the decision of the High Court was based on the premise that clause 20.6 of the COPA, providing for resolution of disputes by arbitration has not been modified by the AoA. In this regard, it was held that since the substantive provision regarding remedy of arbitration itself had been done away with in terms of clause 1.2 of Section-01 of the AoA, there was no need to modify clause 20 in COPA. It was further held that the remedy of arbitration cannot be resurrected merely because clause 20 of COPA has not been expressly modified in the AoA.
The Supreme Court reiterated its earlier decision in Damodar Valley Corporation v. K.K. Kar5 wherein it was held that where the dispute between the parties is that the contract itself does not subsist either as a result of it being substituted by a new contract, by rescission, or by alteration, such a dispute cannot be referred to arbitration as the arbitration clause itself would perish, if the averment is found to be valid. The Court further held that as the jurisdiction of the arbitrator is dependent upon the existence of the arbitration clause under which he is appointed, the parties have no right to invoke a clause which perishes with the contract.
Reliance was also placed upon the decision in National Insurance Company Limited v. Boghara Polyfab Private Limited6 where the Supreme Court held that once a contract is discharged by way of settlement, neither the contract, nor any dispute arising therefrom survives for consideration. Therefore, such disputes cannot be referred to arbitration. The view taken in the previous decision dealing with this issue, titled as Nathani Steels Ltd. v. Associated Constructions7 was also held to be good in law.
Based on the aforesaid findings, the Supreme Court came to the conclusion that the Arbitration Petition filed for and on behalf of SDJV through SSJV was not maintainable and ought to have been rejected for lack of subsisting or existing arbitration agreement between the parties. In view of the said finding in relation to the first issue, the Supreme Court did not dwell upon the second issue.
COMMENTS
The decision of the Supreme Court upholds the sanctity of a settlement agreement between parties. Once the parties have arrived at a settlement is respect of any dispute or difference arising under a contract and the dispute is amicably settled by way of a final settlement by and between the parties, it is not open to either of the parties to such settlement to turn around and invoke arbitration to revive the settled dispute. If this is permitted, the sanctity of settlement agreement would be completely negated and it may cause a contractual anarchy.
Footnotes
1 2019 SCC OnLine SC 1464, Decided on 14 November 2019.
2 Arb. P. No. 810 of 2016
3 SLP(Civil) No. 26555 of 2017
4 SLP (Civil) No. 7979 of 2019 and Diary No. 6975 of 2019
5 (1974) 2 SCR 240
6 (2009) 1 SCC 267
7 1995 Supp (3) SCC 324
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