Consolidation of arbitration – an Overview

By - Mallika Joshi, Senior Associate, Solomon & Co.

Introduction and meaning :

Consolidation of a reference means joining two or more claims together under one arbitration so that they can be adjudicated together. Typically, a consolidation or a composite reference can be made to save time, money and resources of the arbitral tribunal as well as the parties. It is a procedural means to bring together two or more claims between the same parties arising under one composite transaction which can be instituted in one arbitration.

Most commonly, for contracts of construction/ works, EPC, real estate development, joint ventures, share transfer and purchase, tenders etc., there may be layers of agreements, i.e. one principal agreement along with other connected, ancillary or supplemental agreements on the same subject matter. These contracts may lay down the rights, duties and obligations of the parties and detail the scope of work of the subject matter and form a composite transaction or a single project. Each of these agreements could contain a separate arbitration clause or give reference to the arbitration clause contained in the principal agreement with a binding intention. If disputes arise under one of such agreements, it may likely have an impact on the other agreements giving rise to claims between the parties under the other agreements. In such a situation, parties would have the option to invoke the arbitration clauses under each such agreement where their claims have arisen and seek to initiate arbitration proceedings for each such claim. This would lead to multiplicity of proceedings as well as multiple arbitration awards, that may ultimately lead to a conflict. Thus, consolidation of arbitration proceedings is a requisite in such situations.

While the aforesaid is a simplified explanation of what consolidation entails, often it is a far complex process. In some cases, the ancillary or supplemental agreements may not contain arbitration clauses and only give reference to the principal agreement which could contain an arbitration clause. The Courts then would be required to interpret whether the arbitration clause in the principal agreement can be read into the ancillary agreement and be binding thereon. Further, the ancillary agreements may be with parties that are not parties to the principal agreement, and thus non-signatory to the arbitration agreement. The Courts would also be required to consider whether the claimant can initiate arbitration against a non-signatory.

Under the Arbitration and Conciliation Act, 1996 (“Act”), there is no specific provision of consolidation of a reference, and there is no specific legislature which assists the parties as such. Jurisprudence on consolidation, if not the legislation, has much evolved over the years. While largely the facts of the cases determines whether consolidation can take place, there are a few parameters that are applied by the Courts while determining this issue.

Consolidation of proceedings : when allowed

The Hon’ble Supreme Court, in the case of PR Shah, Shares and Stock Brokers v BHH Securities Pvt Ltd & Ors. [(2012) 1 Supreme Court Cases 594] was considering an appeal under section 34 of the Act against an award passed in an arbitration where claims were arising out of two separate arbitration agreements, which were consolidated and a single award was passed. The Court held that that if A had a claim against B and C, and had separate arbitration agreements with B and C respectively, then there was no reason why A could not have a joint arbitration against B and C. If there were separate arbitrations for a common claim, then a likelihood of having conflicting awards arising out of these two arbitrations leading to multiplicity of decisions. The Court dismissed the appeal while holding that a common arbitration could be led in the given facts.

The Hon’ble Supreme Court in the case of Chloro Controls v Severn Trent Water Purification Inc [(2013) 1 Supreme Court Cases 641] while inter alia considering the larger issue of binding non-signatories to arbitration, examined the issue of what constitutes a composite transaction. The Court observed that the transaction between the parties is of a composite nature where performance of the mother agreement may not be feasible without aid, execution and supplement of the ancillary agreements for achieving the common object and ultimately having a bearing on the dispute. Further, the principle of composite performance would have to be gathered from the co-joint reading of the principle and supplementary agreements on the one hand and on the other hand, the intention of the parties to treat it as such.

The Delhi High Court, in the case of Gammon India Ltd & Anr v National Highways Authority of India [2020 SCC OnLine Del 659], analysed the need for consolidation of arbitration. Multiple arbitrations before different tribunals in respect of the same contract are bound to lead to enormous confusion. The constitution of multiple tribunals for the same contract would set the entire arbitration process at naught as the purpose of arbitration being a speedy dispute resolution mechanism would turn out to be counter-productive. The High Court while dismissing the Petition under section 34 of the Act, issued certain directions to avoid multiplicity of tribunals and inconsistent/ contradictory awards such as to the parties to disclose at the time of Petitions under section 11, whether any claims between the parties arising out of the same set of agreements / contract are already being adjudicated, and for the appointing authorities to avoid appointment of separate tribunals for claims arising out of the same contract or series of contracts.

Hence, the Courts while deciding the consolidation of arbitrations opt to not apply a straitjacket formula and the same is largely depended on the nature of the transaction, whether the agreements are inter-dependent as well as the end result.

Consolidation of proceedings: when not allowed

In the case of M/s Duro Felguera, SA v M/s Gangavaram Port Ltd [(2017) 9 SCC 729], the Apex Court dealt with five connected petitions under section 11 of the Act arising out of five work contracts awarded by the Respondent to the Petitioner. The Petitioner was awarded a tender, which was later split into five different and separate packages containing various scopes for the work to be carried out for the principal tender, for which five different contracts were subsequently executed. A memorandum of understanding was executed along with a corporate guarantee. All the aforementioned documents viz the work contracts, memorandum and corporate guarantee contained individual arbitration clauses. As disputes arose between the parties, Petitioner issued five invocation notices seeking under the aforementioned work contracts. This was opposed to by the Respondent to say that five arbitrations are untenable and likely to lead to conflicting awards. Petitioner relied on the case of Chloro Controls (supra) and contended that all the work contracts constitute a composite transaction, and the court can refer disputes to arbitration if all ancillary agreements are related to principal agreement and performance of one agreement is intrinsically interlinked with the other agreements. The Court distinguished from Chloro Controls (supra) and held that the five work contracts as well as the corporate guarantee all have separate arbitration clauses and do not depend upon the principal work contract nor the memorandum of understanding. The Court rejected the consolidation of the five arbitrations, and while holding that the issues involved are inter-related, appointed the same Tribunal for all the five arbitrations to safeguard the commonality of the issues / claims between the parties and resolve the apprehension of any conflicting awards that may be passed in such connected disputes.

In the case of DLF Home Developers v Rajapura Homes Pvt Ltd [(2021) 16 Supreme Court Cases 743], the Apex Court was considering two Petitions under section 11 of the Act arising out of two separate agreements, praying for the consolidation of both references and the appointment of a sole arbitrator to adjudicate both disputes together. Apex Court noted that the two agreements in dispute though interlinked and connected, were still separate and breaches were alleged to have been committed separately under both agreements. The Court held that it would be inappropriate to consolidate the arbitration and left it to the wisdom of the sole arbitrator to decide whether the disputes should be consolidated and adjudicated under one composite award.

The Bombay High Court in the case of JSW Steel Ltd v Bellary Oxygen Company Pvt Ltd. [2022 SCC OnLine Bom 5166], was considering a Petition under section 11 of the Act which sought reference to arbitration under two connected agreements, however one of the agreements did not have an arbitration clause and dispute was against a non-signatory party under the other agreement. The Court considered two issues, i.e. under which of the two agreements have the disputes arisen and whether there exists an arbitration agreement between the parties qua such disputes, and if there is no arbitration agreement qua such disputes, then whether there is an inextricable connection between the two agreements so that the arbitration agreement under one agreement can be construed to be applicable to the other. The Court held that the real test to determine whether the two agreements are integral to each other, would be to examine whether in the absence of one agreement, would the other become unworkable. Applying this test to the case, the Court held that the agreements in the instant case are not integral to the other and there is no unimpeachable position that one would collapse without the other. The Court rejected the contention that both agreements form a composite transaction or single transaction and thus Petitioners could not take recourse under one agreement.

Similarly, the Calcutta High Court in the case of Ganapati Technology Services Pvt. Ltd. v State Fisheries Development Corporation Ltd [2021 SCC OnLine Cal 4320]. while relying on the Apex Court’s decision in Duro Felguera SA (supra), noted that the two contracts in dispute are separate and the facts did not demonstrate that there is a single commercial project, thereby not leading to a composite arbitration reference. The Court also ruled that a composite reference is permissible under the Act, and in order to make a composite reference, various factors have to amalgamate so as to make such a reference possible. There has to be a mother agreement and ancillary agreements governing the parties. The arbitration clause governing the mother agreement, or the concerned arbitration agreement is wide enough to bring within its fold agreements ancillary to the mother agreement such that the disputes arising out of or in connection to the mother agreement can also be referred to arbitration. Further, while considering the issue of consolidation, the Courts must also come to a finding that a composite reference would serve the ends of justice.

Conclusion :

Thus, while determining the consolidation of arbitration proceedings, the Courts delve into various factual aspects such as the nature of the transaction i.e. whether or not there is a single composite transaction, though formed out of layers of agreements, whether or not these agreements are inter-dependant / integral to the other such that the performance of one is intrinsically linked to the other, whether or not the parties are agreeing for arbitration in each of the layers of the agreements either directly or by explicit reference, whether or not parties are consenting to the consolidation, etc., and the end result i.e. whether or not there will be multiplicity or conflict of awards that may be passed in the separate arbitrations, and whether the ends of justice are met. The parties however, in the absence of legislative intent, can consider adding a clause to consolidate in the agreement itself for the sake of convenience. Parties can also mutually stipulate a clause for the appointment of a particular tribunal for all disputes arising out of their agreements to ensure continuity in adjudication of disputes. While the aforesaid judgments discuss ad-hoc arbitration, several arbitration institutions do contain provisions for consolidation, which may be determined by the arbitral tribunal formed under such institutional rules.

Mallika Joshi, Senior Associate, Solomon & Co.

About Solomon & Co.

Solomon & Co. (Advocates & Solicitors) was founded in 1909 and is amongst India’s oldest law-firms. The Firm is a full-service firm that provides legal service to Indian and international companies and high net-worth individuals on all aspects of Indian law.

“Disclaimer”

The information contained in this article is intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. The application and impact of laws can vary widely based on the specific facts involved. As such, it should not be used as a substitute for consultation with a competent adviser. Before making any decision or taking any action, the reader should always consult a professional adviser relating to the relevant article posting.