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Arbitration Clause in an Agreement cannot be Invoked for Another Agreement that operates Independently: Bombay High Court

By - King Stubb & Kasiva on December 31, 2022

Section 7(5) of the Arbitration and Conciliation Act[1] provides that a reference in a contract to another contract or document containing an arbitration clause can constitute an arbitration agreement. However, it is only such when the contract is in writing and the reference is such that makes the arbitration clause a part of the contract. The Bombay High Court, in the recent case of JSW Steel Limited v. Bellary Oxygen Company Private Limited &Anr.[2], held that an arbitration clause in an agreement cannot be invoked for another agreement that operates independently.

Analysing the Judgment

In this case, the Applicant, JSW Steel entered into a Gas Supply agreement with the Respondent, Bellary Oxygen Company, along with a Shareholder’s Agreement. In addition, there was also a ‘Second Agreement’ executed, which dealt with the terms and conditions of the allotment of shares. A dispute arose between the parties when the Respondent failed to fulfill its obligations under the Second agreement. Thus, the Applicant invoked the arbitration clause contained in the Shareholder Agreement and referred to in the Second Agreement.

The Respondent contended that the Applicant’s claim only related to the Second Agreement, which is a separate agreement with and different purpose and scope from the Shareholder Agreement. The Applicant, however, contended that both agreements were executed 1 day apart and were intrinsically related to each other because of the single transaction.

The Court held that the Applicant’s claim was primarily concerned only with the Second Agreement. The Court further observed that the arbitration clause in the Shareholder Agreement referred to arbitration to resolve disputes arising in connection with the Shareholder Agreement only. Since the Second Agreement was separate, there was no bearing of the arbitration clause on it. This is also in addition to the fact that the Second Agreement did not have such a strong reference to the arbitration clause, which itself showed that the parties did not intend to refer to arbitration in case of any dispute arising out of any other agreement. Further, there was no conscious intention of the parties to include arbitration in the Second Agreement.

The Court highlighted the real test to determine the integral nature of two Agreements, that is to determine whether either of the Agreements becomes unworkable if the other one is absent. In the Court’s opinion, both Agreements were separate and independent; the Second Agreement does not collapse in the absence of the Shareholder Agreement.

The Court relied on the case of DuroFelguera S.A. v. Gangavaram Port Ltd.[3]and held that mere reference to the arbitration clause in the Second Agreement does not have the consequence of including the arbitration clause. It requires conscious acceptance of such an arbitration clause. Thus, the Court dismissed the Section 11 Application.

[1] Section 7(5), Arbitration and Conciliation Act, 1996.

[2]JSW Steel Limited v. Bellary Oxygen Company Private Limited &Anr., Commercial Arbitration Petition No. 131/2022.

[3]DuroFelguera S.A. v. Gangavaram Port Ltd., Arbitration Petition No. 30/ 2016.

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