Case: Larsen and Toubro Limited Scomi Engineering BHD Vs. Mumbai Metropolitan Region Development Authority

Rohinton Fali Nariman, J. 1. The present petition, Under Section 11 of the Arbitration & Conciliation Act, 1996, (in short the Act), that has been filed before this Court, arises out of a contract entered into on 09.01.2009 for the work of planning, design, development, construction, manufacture, supply, testing and commissioning of a Monorail system in two particular earmarked Sections in Wadala, Mumbai including operation and maintenance for a period of three years from the date of start of commercial operations. This agreement contains an arbitration clause, which is set out hereunder: Claims, Disputes and Arbitration table Since disputes arose between the parties to the agreement, various interim claims had been made by the Consortium of M/s. Larsen and Toubro, an Indian company, together with Scomi Engineering Bhd, a Company incorporated in Malaysia, for which the Consortium has filed this petition Under Section 11 of the Act to this Court, since according to them, one of the parties to the Arbitration agreement, being a body corporate, incorporated in Malaysia, would be a body corporate, which is incorporated in a country other than India, which would attract Section 2(1)(f)(ii) of the Act. 2. Shri Gopal Jain, learned senior Counsel appearing on behalf of the Consortium, has taken us through the agreement, in which he strongly relies upon the fact that the two entities, that is, the Indian company and the Malaysian company, though stated to be a Consortium, are jointly and severally liable, to the employer. Learned senior Counsel has also relied upon the fact that throughout the working of the contract, separate claims have been made, which have been rejected by the Mumbai Metropolitan Region Development Authority (hereinafter referred to as MMRDA). He has also further relied upon the fact that by at least three letters, during the working of the agreement, the claims have in fact been rejected altogether and that, therefore, there is no impediment in invoking the Arbitration Clause Under Section 20.4 of the General Conditions of Contract (hereinafter referred to as GCC), as the procedure outlined by Clauses 20.1 to 20.03 had already been exhausted. 3. On the other hand, Mr. Shyam Diwan, learned senior Counsel appearing on behalf of MMRDA, the Respondent, has relied upon both the contract dated 09.01.2009 as well as the actual Consortium Agreement dated 04.06.2008 between the Indian company and the Malaysian company, which, when read together, would show that they are really an un-incorporated association and would, therefore, fall within Section 2(1)(f)(iii) as being an association or a body of individuals, provided the central management and control is exercised in any country other than India. He has also gone on to rely heavily upon the fact that in the Consortium, the lead partner is the Indian company, and the Consortiums office is at Wadala in Mumbai making it clear, therefore, that Sub-clause (iii) of Section 2(1)(f) of the Act would not apply as it is clear that the central management and control, that is envisaged by the said sub-Clause, would not be exercised in a country outside India but in India itself. He has also strongly relied upon an order passed by the High Court of Bombay, dated 20.10.2016 between the same parties, in which an interim Award dated 18.08.2016 was challenged, which was between the same parties arising out of the self-same agreement. This Order upheld the interim Award of the learned Arbitrators in stating that the particular claim that was made in that case could be made only as a Consortium and not as two entities separately. He has also pointed out that this Order has become final as it has not been challenged by the Petitioner before this Court. In answering Mr. Gopal Jains submission as to Clause 20.4 of the GCC being invoked after the procedure under Clauses 20.1 to 20.3 has been exhausted, he referred to and relied upon a letter dated 22.04.2016 written by the Respondent in which, after referring to the various refusals, referred to by Mr. Jain, further information and material was requested from Mr. Jains client. Instead of furnishing such material straightaway, a notice invoking Arbitration dated 01.07.2016 was sent by Mr. Jains client. The Respondent, by a reply dated 20.08.2016 reiterated its position that Clauses 20.1 to 20.3 had not yet been exhausted, and therefore, on 08.09.2016, rejected the request for arbitration. 4. The contract dated 09.01.2009 is between (1) MMRDA and (2) a Consortium, comprising, (a) L&T, an Indian Company, and; (b) M/s. Scomi Engineering Bhd, a Malaysian Company. It is true that each of them are jointly and severally responsible to the employer, being collectively referred to as the "contractor." 5. Under the General Conditions of Contract, the "contractor", in Clause 1.1.2.3 is defined as meaning an Individual, Firm, Company, Corporation, Joint Venture or Consortium, whether incorporated or not. "Bidder" is also defined under Clause 1.1.2.10 as meaning an Individual, Firm, Company, Corporation, Joint Venture or Consortium which could submit a bid. What is important to notice is that the contract was signed by the employer, viz., MMRDA and by the contractor under the head Sub-clauses (A) and (B) in which L&T India signed as A and Scomi Engineering Bhd has signed as B. When we come to the consortium agreement that is entered into between the Indian company and the Malaysian company as aforestated, we find in the definition Clause that "Consortium" shall mean L&T and Scomi Engineering Bhd, acting in collaboration, for the purpose of this agreement and shall be called "the L&T-SEB" Consortium "un-incorporated." The contract is defined in sub-Clause 6 as meaning, "the contract to be entered by the Consortium with the employer for the execution of the Project". Under sub-Clause 7, "the lead Member of the Consortium" or "Consortium Leader" shall mean L&T, that is, the Indian Company. Under sub-Clause 8, the "Supervisory Board" (hereinafter referred to as the SB) shall mean a Board constituted under Clause 11 of the GCC. When we come to Clause 11.2, it is clear that the Members of this Supervisory Board will consist of four members, two appointed by each Member. One of the Members nominated by the Consortium Leader and agreed to by all members shall then act as the Chairman of the Supervisory Board, which is, by Clause 11.5, to decide on various matters relating to the execution of the contract. Clause 21.1(g) provides that the Consortium leader shall lead all arbitration proceedings. 6. As correctly pointed out by Shri Jain, separate claims were made by the Indian company and the Malaysian company which were rejected by the Respondent. Nonetheless, by a letter dated 22.04.2016, the Respondent referred to these various rejection letters, and stated that documents in support of the list of "delayed events" had not yet been given, and therefore, necessary information and clarification, in response to certain observations, together with all documents in support of the claim, was requested to be furnished. By a letter dated 01.07.2016, the Consortium, instead of responding to this letter, invoked arbitration, stating that interim claims had already been rejected, and all the necessary information had already been furnished, as a result of which, the stage of Clause 20.4 had arrived. This was replied to by a letter dated 20.08.2016 in which the Respondent reiterated its position that the remedies provided under Clause 20.3 has not yet been exhausted, and that therefore, there is no question of appointing an Arbitrator. On 08.09.2016, the notice invoking arbitration was replied to by the Respondent, rejecting the same. 7. It is important, at this juncture, to refer to an order made by the High Court of Bombay dated 20.10.2016 which, as has been stated earlier, arises between the self-same parties, under the same contract. An interim Award made by the Arbitrators qua different claims arising under the same contract had made it clear that the claim could be filed only in the name of the Consortium and not separately, as was contended by Shri Jains client. The preliminary issue framed on this count was "whether the claimants are entitled to file this claim as Claimant No. 1 and Claimant No. 2 or only as the Consortium of L&T and Scomi Engineering Bhd?" The High Court of Bombay, agreed with the interim Award of the Arbitrators, and held as follows: "8. Considering the terms and conditions of the contract as well as the decision cited by Mr. Ankhad, in my opinion, in the facts and circumstances of the present case, it is not open for the Petitioners to rely upon their independent identities while dealing with the Respondent and that they will have to deal with the Respondent as a Consortium only. Therefore, there is no infirmity in the impugned order. For the same reason, the present petition as filed would also not been maintainable. Hence, the same is dismissed." 8. Shri Gopal Jain did not dispute the fact that this judgment was final inter-parties as no appeal has been preferred. Therefore, to stress the fact that it pertains only to "this claim" and would therefore, not apply to a different set of claims under the arbitration Clause is not an argument that appeals to us. 9. It is clear, as has been held by the judgment of the High Court of Bombay, and which is binding inter-parties, that it is not open for the Petitioner to rely upon their status as independent entities while dealing with the Respondent and they will have to deal with the Respondent as a Consortium only. 10. This being the case, it is clear that the un-incorporated "association" referred to in Section 2(1)(f)(iii) would be attracted on the facts of this case and not Section 2(1)(f)(ii) as the Malaysian body cannot be referred to as an independent entity following the judgment of the High Court of Bombay. 11. Section 2(1)(f)(iii) of the Act refers to two different sets of persons: an "association" as distinct and separate from a "body of individuals". For example, Under Section 2(31) of the Income Tax Act, 1961, "person" is defined as including, Under Sub-clause (v), an association of persons, or body of individuals, whether incorporated or not. It is in this sense, that an association is referred to in Section 2(1)(f)(iii) which would therefore include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country other than India. 12. Further, the expression "a company or" which was originally at the beginning of Section 2(1)(f)(iii) was omitted by Act 3 of 2016. This was for the reason that the judgment of this Court, in TDM Infrastructure Private Ltd. v. UE Development India Private Ltd. (2008) 14 SCC 271 , held that the expression "a company or" in Section 2(1)(f)(iii) of the Act cannot possibly be said to refer to a company registered and incorporated in India which may be controlled by persons in a country outside India. The Court held: "20. The learned Counsel contends that the word "or" being disjunctive, Sub-clause (iii) of Section 2(1)(f) of the 1996 Act shall apply in a case where Sub-clause (ii) shall not apply. We do not agree. The question of taking recourse to Sub-clause (iii) would come into play only in a case where Sub-clause (ii) otherwise does not apply in its entirety and not where by reason of an exclusion clause, consideration for construing an agreement to be an international commercial arbitration agreement goes outside the purview of its definition. Once it is held that both the companies are incorporated in India, and, thus, they have been domiciled in India, the arbitration agreement entered into by and between them would not be an international commercial arbitration agreement and, thus, the question of applicability of Sub-clause (iii) of Section 2(1)(f) would not arise." The Law Commission Report No. 246 of August 2014, which made several amendments to the Arbitration and Conciliation Act, 1996, gave the following reason for deleting the words "a company or": "(iii) In Sub-section (1), Clause (f), Sub-clause (iii), delete the words "a company or" before the words "an association or a body of individuals. [NOTE: The reference to "a company" In Sub-section (iii) has been removed since the same is already covered Under Sub-section (ii). The intention is to determine the residence of a company based on its place of incorporation and not the place of central management/control. This further re-enforces the "place of incorporation" principle laid down by the Supreme Court in TDM Infrastructure Private Limited v. UE Development India Private Limited, (2008) 14 SCC 271 , and adds greater certainty in case of companies having a different place of incorporation and place of exercise of central management and control]" It would become clear that prior to the deletion of the expression "a company or", there were three sets of persons referred to in Section 2(1)(f)(iii) as separate and distinct persons who would fall within the said sub-clause. This does not change due to the deletion of the phrase "a company or" for the reason given by the Law Commission. This is another reason as to why "an association" cannot be read with "body of individuals" which follows it but is a separate and distinct category by itself, as is understood from the definition of "person" as defined in the Income Tax Act referred to above. 13. This being the case, coupled with the fact, as correctly argued by Shri Diwan, that the Indian company is the lead partner, and that the Supervisory Board constituted under the Consortium Agreement makes it clear that the lead partner really has the determining voice in that it appoints the Chairman of the said Board (undoubtedly, with the consent of other members); and the fact that the Consortiums office is in Wadala, Mumbai as also that the lead member shall lead the arbitration proceedings, would all point to the fact that the central management and control of this Consortium appears to be exercised in India and not in any foreign nation.

Decision reasoning: 0[ds]When we come to the consortium agreement that is entered into between the Indian company and the Malaysian company as aforestated, we find in the definition Clause that "Consortium" shall mean L&T and Scomi Engineering Bhd, acting in collaboration, for the purpose of this agreement and shall be called "the L&T-SEB" Consortium "un-incorporated." The contract is defined in sub-Clause 6 as meaning, "the contract to be entered by the Consortium with the employer for the execution of the Project". Under sub-Clause 7, "the lead Member of the Consortium" or "Consortium Leader" shall mean L&T, that is, the Indian Company. Under sub-Clause 8, the "Supervisory Board" (hereinafter referred to as the SB) shall mean a Board constituted under Clause 11 of the GCC. When we come to Clause 11.2, it is clear that the Members of this Supervisory Board will consist of four members, two appointed by each Member. One of the Members nominated by the Consortium Leader and agreed to by all members shall then act as the Chairman of the Supervisory Board, which is, by Clause 11.5, to decide on various matters relating to the execution of the contract. Clause 21.1(g) provides that the Consortium leader shall lead all arbitration proceedings6. As correctly pointed out by Shri Jain, separate claims were made by the Indian company and the Malaysian company which were rejected by the Respondent. Nonetheless, by a letter dated 22.04.2016, the Respondent referred to these various rejection letters, and stated that documents in support of the list of "delayed events" had not yet been given, and therefore, necessary information and clarification, in response to certain observations, together with all documents in support of the claim, was requested to be furnished8. Shri Gopal Jain did not dispute the fact that this judgment was final inter-parties as no appeal has been preferred. Therefore, to stress the fact that it pertains only to "this claim" and would therefore, not apply to a different set of claims under the arbitration Clause is not an argument that appeals to us9. It is clear, as has been held by the judgment of the High Court of Bombay, and which is binding inter-parties, that it is not open for the Petitioner to rely upon their status as independent entities while dealing with the Respondent and they will have to deal with the Respondent as a Consortium only10. This being the case, it is clear that the un-incorporated "association" referred to in Section 2(1)(f)(iii) would be attracted on the facts of this case and not Section 2(1)(f)(ii) as the Malaysian body cannot be referred to as an independent entity following the judgment of the High Court of BombayIt would become clear that prior to the deletion of the expression "a company or", there were three sets of persons referred to in Section 2(1)(f)(iii) as separate and distinct persons who would fall within the said sub-clause. This does not change due to the deletion of the phrase "a company or" for the reason given by the Law Commission. This is another reason as to why "an association" cannot be read with "body of individuals" which follows it but is a separate and distinct category by itself, as is understood from the definition of "person" as defined in the Income Tax Act referred to above13. This being the case, coupled with the fact, as correctly argued by Shri Diwan, that the Indian company is the lead partner, and that the Supervisory Board constituted under the Consortium Agreement makes it clear that the lead partner really has the determining voice in that it appoints the Chairman of the said Board (undoubtedly, with the consent of other members); and the fact that the Consortiums office is in Wadala, Mumbai as also that the lead member shall lead the arbitration proceedings, would all point to the fact that the central management and control of this Consortium appears to be exercised in India and not in any foreign nation.