Risks of Non-Joinder In Joint-Venture Arbitrations

MAHARASHTRA STATE ELECTRICITY DISTRIBUTION COMPANY LIMITED (MSEDCL) V. GODREJ AND BOYCE MANUFACTURING COMPANY 

COMMERCIAL ARBITRATION PETITION (L) NO.238 OF 2019

A single judge bench of the Bombay High Court (Court) set aide a partial arbitration award where the lead member of a Joint-Venture (JV) was allowed to arbitrate without joining as a party the other JV member in the arbitration 

The Contract: 

1. A JV with a "lead partner", i.e., Godrej and Boyce Manufacturing Company Limited (G) and other Electropath Services (India) Private Limited (E) bid for Maharashtra State Electricity Distribution Company Limited (M) contracts (Contract) .
2. M contracted via eight separate Contracts with JV of G & E for various works of M spread over many geographic zones. [Note: Court initially refers to a single Contract but then refers to right such Contracts referred to the arbitration. I follow the same nomenclature to avoid confusion.]
3. The bid that preceded the Contracts allowed a JV partner to be a lead partner if the JV submits a mutually signed power of attorney in favour of the lead partner. 
4. The Contract was entered into by the JV partners. Under the Contract, lead partner of JV was authorised to incur liabilities, receive payments and instructions of behalf of all the JV partners. 
5. JV partners were jointly and severally liable. Further, the consortium could not be altered in any case.
6. Under a Contract’s clause all disputes between “parties” could be referred to an arbitration.
7. For the JV, G and E both had their separate “Memorandum of Understanding” Contract.

Starting Arbitration:

1. G, without joining E, moved court by a S.11(6) application to initiate an arbitration against M. 
2. During the S.11(6) proceeding to appoint an arbitrator through the Court, G & M agreed afresh by a joint memo to arbitrate eight disputes stipulating not to challenge the appointed arbitrator's jurisdiction. The court recorded the joint memo as an arbitration agreement under S.7.

Arbitration:

1. G alone filed a Statement of Claim (SoC) without joining its JV partner E. 
2. M filed its Statement of Defence (SoD). 
3. G amended its SoC. 
4. M filed an additional SoD/Replication and raised the issue that all (except 1) of eight Contracts were given to JV with G as a lead partner and "Letter of award" was also given to the JV and hence the arbitration cannot be initiated by G alone.
5. M filed a S.31(6) Application before the arbitrator. 
6. By an interim award, the arbitrator dismissed the S.31(6) application for an interim award by holding that he had jurisdiction to decide the dispute between the parties. 
7. M withdrew its counter-claim.

The Court's Reasoning: 

1. M challenged the interim award of the arbitrator in the Bombay High Court (referred to as "Court"). 
2. G sent various notices to invoke arbitrations on behalf of the JV. M rejected initiation of the arbitration(s) as G was required to invoke an arbitration within 180 days of making a claim before the Chief Engineer as per the Contract’s arbitration clause. 
3. The Claim (SoC) filed by G does not refer to any power of attorney given by E to represent it in the arbitration against M. 
4. While the G & M’s joint memo to arbitrate eight claims was filed in Court, the notices sent by G to invoke arbitrations were done separately under each Contract.
5. G’s case was not that the joint memo substituted the arbitration agreement in the Contract. [Note: Court is noting that joint memo by M & G alone did not override the arbitration clause in the original Contract where M, G & E all are parties. Very nuanced observation by the court].
6. While M did not raise the objection to G’s claims in its SoD that G made claim for itself and excluded E, M only did that in its reply to the amended claim. 
7. Court noted that inter-se disputes between G & E were pending before the court in a separate suit filed by G in 2013 in the same Court and well before the arbitration was initiated.
8. G did not disclose the suit proceedings against E in its notice invoking arbitration or in its SoC against M in the arbitration. M brought this suit to court’s notice and this excused M from proving in the arbitration if there was indeed any claim of E against M. [Note: This is a rather circuitous argument but is a bit plausible too.]
9. The arbitrator did not deal with most of the submissions of M in its S.31(6) application. The arbitrator referred to the joint-memo of M & G filed in the court as the basis of the arbitration. But it wasn’t G’s case that the joint-memo replaced the original Contract for the purpose of arbitration. Hence, reasons recorded by the arbitrator are contrary to G’s pleadings.
10. Bombay High Court in LARSEN & TOUBRO v. MUMBAI METROPOLITAN, 2016 SCCOnline Bom 13348, had noted that consortium members in that case had filed independent claims before the arbitral tribunal. The contract in that case did not permit any partner of consortium to make individual claims. The Court here note that the arbitrator ignored this binding judgment by distinguishing it on facts. [Note: FYI, I was involved in the arbitration referred in this case at a later stage in EOT & uncovered claim issue.]
11. The Court found that the arbitrator erred in not relying on Delhi High Court judgment in GEO MILLER v. BIHAR URBAN, 2017 (1) ARBLR 245 (Delhi). The arbitrator distinguished this case as being inapplicable on facts. Here, the Delhi Hight Court had held that though the contract in that case stated that the consortium would be represented through its lead member, the parties never intended that one of the parties can separately invoke an arbitration under the contract.
12. Instead, the arbitrator here relied on AUTOMATION TECHNOLOGIES v. UNITECH LTD. & ORS, 2008 SCCOnline 315, and ONGC v. SAW PIPES LTD., (2002) 6 Bom CR 657. But the Court here noted that AUTOMATION TECHNOLOGIES judgment has been rightly distinguished in GEO MILLER by the same high court. The court noted that AUTOMATION TECHNOLOGIES is inapplicable on facts to this case. Further, in the ONGC judgment, the payments were to be separately received by joint venture partners. The claim there was for amount to be exclusively by one JV partner alone. 
13. Here, G had not argued that it was only claiming amounts due to G alone. G’s case was that the entire payment was due to G, and when the amount was received by G then G was to disburse amounts due to E as per terms of MOU between G & E. [Note: A fine difference exists in G claiming what is due to the JV or G claiming whole amount and then being liable to E under its MOU is the fine difference here that the court has expounded.] 
14. The court held that ONGC case is distinguishable otherwise also because it did not consider effect of S.19(2)(a) of the Indian Partnership Act, 1932, where in the absence of any usage or custom, the implied authority of a partner does not empower a partner to submit disputes related to the business of the firm to an arbitration.
15. Further, the Court distinguished the Delhi High Court judgment in POWER GRID CORPROATION OF INDIA LTD v. SIEMENS LTD., 2013 (134) DRJ 606, case where the provision in a contract authorising the lead partner to receive payments and execute a contract were held to include power to bring a legal action on behalf of the JV. The Court here distinguished the POWER GRID judgment on the ground that it had not considered the application of S.19(2)(a) of the 
16. The court rejected G’s argument that it had express authority from E to submit a JV’s dispute to the arbitration. G argued so because under the Contract, G could incur liability and recover dues payable to JV. 
17. The Court rejected G’s stand in its additional affidavit that G had filed the SoC on behalf of the JV. The Court also rejected the statement by its counsel that it can offer an indemnity in favour of M if any claims are made by E against M. The Court here noted that G’s stand in the additional affidavit contradicted its stand in its own SoC in the arbitration. The Court noted that even if such an indemnity is given, M will have to file a suit to recover the same!
18. As for the G's argument that it was only at a much late stage of pleadings that M objected to G's non-joinder of E in the arbitration, the Court noted that the arbitrator’s decision in S.31(6) application is not based on that ground. 
19. The court rejected G’s argument that it had express authority from E to arbitrate the dispute also on behalf of E, because it had authority to recover all payments. Court noted that there cannot be such an express authority when the same parties, E & G are also litigating against each other in parallel to the arbitration. 
20. That G filed a counter-claim does not validate the arbitration initiated by G alone in exclusion to E, because G had by now withdrawn its counter-claim!

Court's Ruling:

1. The Court set aside the interim award and the arbitrator's minutes of the meeting on the date of interim award. M’s application under S.31(6) was allowed without any costs being awarded.