DLF Power Ltd V.

Mangalore Refinery & Petrochemicals Limited

Arb. Petition No. 509 of 2011

Decided: 20 July 2016

Bombay High Court

By, THE HONOURABLE MR. JUSTICE R.D. DHANUKA

For the Petitioner: Zal Andhyarujina, Harsh Meghani, Samshed Garud, Vishwabhushan Kamble
i/b Jaykar & Partners, Advocates.

For the Respondent: Kevic Setalvad, Senior Counsel with Rashna Khan, Pooja Garg, Parikshit
B. i/b Mulla & Mulla & C. B. & C., Advocates.

FACTS

1. DLF Industries Ltd (DIL) signed two contracts on 16 th April, 1997 and 30th April, 1997
with the respondents i.e, contract No. E-10010 for engineering and supply of equipment’s
for 3x 26.5 MW power project and contract No.E-11011 for civil works for carrying out
erection of power plant respectively. DLF undertook the performance of contracts in right
earnest.
2. However, DLF could not do the commission in the contractual time giving various
reasons not attributable to the said company but to the defaults of the respondents in
meeting its reciprocal obligations under the contract. DLF then commissioned 4 units of
Co-generation power Plant on 30th May 1999, 23rd July 1999, 7th August 1999 and 18th
April 2000.
3. That on the High Court of Delhi and Punjab & Haryana High Court on 19th October,
1999, approved a scheme of merger by which the Energy System Business of DIL
merged with DLF Universal Limited (DUL) as its energy system arbp509-11 division, to

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 which the Registrar of Companies, NCT, Delhi and Haryana granted certificates of
registration.
4. The petitioner contends that pursuant to the said scheme sanctioned by the Delhi High
Court and Punjab & Haryana High Court, the rights and liabilities of DLF in the said
contracts stood transferred to DUL and was discharged by DUL.
5. The petitioner contends that the respondent accepted and acknowledged the said DUL as
a party to the contract and performance in its entirety including the arbitration agreement
contained therein. Also contended that the said DUL had succeeded to the said two
contracts executed between DIL and the respondent executed them in the capacity of a
party to these two contracts.
6. That around 14th December 2000, DUL in its capacity as the contractor under the two
contracts requested the respondent to release the pending payment and to execute the
bank guarantee. On 3rd January 2001, DUL furnished a bank guarantee being BG
No.43/2 for a sum of Rs.4,66,58,621/- representing 2.5% of the basic purchase price of
the two contracts.
7. That on 28th June 2001, the energy system division of the said arbp509-11 DUL was
purchased through a memorandum of sale by the petitioner i.e. DLF Power Limited, now
known as Eastern India Power tech Limited with effect from 31st March, 2001. It is the
case of the petitioner that the petitioner is absolute successor in interest of the DIL and
DUL of the said two contracts which were initially entered into between the DIL and the
respondent.
8. That on 2nd August 2001, the petitioner requested the respondent for release of the
balance payment, release of bank guarantee, return of excess material, extension of
contractual completion period, payment of additional expenses incurred by it due to non-
release of payment by the respondent within 20 days as provided under the contracts, etc.
9. That the respondent admitted on 24th September 2001, that a sum of Rs.523.84 lacs
consisting of Rs.362.11 lacs (payable against the original contract price) and Rs.161.73
lacs (against extra work was due) payable by the respondent to the petitioner but failed
and neglected to pay the said sum alleged to have been admitted by them.

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 10. That on 24th September, 2001 and 1st October, 2001, the petitioner requested the
respondent to release its bank guarantee alleging that the respondent was continuously
delaying the performance guarantee tests.
11. That on 2nd December 2003, 29th November 2004 and 25th November 2005, the
petitioner informed the respondent that its bankers had issued amendment extending the
validity and claim period of the bank guarantee.
12. That on 28th December 2002, 17th November, 2003, 25th November, 2004, 29th
September, 2005, 24th July, 2006 and 8th March, 2007, the respondent addressed letters
to the bankers of the petitioner i.e. Central Bank of India directing them to extend the
validity of the bank guarantee for further periods ranging from three to six months. The
petitioner states that the respondent sought 45 extensions by writing letters to the bankers
of the petitioner, which was issued.
13. That on 25th September 2004, the respondent informed the petitioner that they were
reviewing at their end various issues relating to the contracts and shall be forwarding
their comments to their new management for their consideration. The respondent also
requested the petitioner to keep the bank guarantee for liquidated damages duly extended
and valid.
14. That on 20th April 2007, the petitioner received a letter from the respondent in which the
respondent informed the petitioner that it had recovered an amount of Rs.443.20 lacs
towards liquidated damages and after adjusting sums of Rs.3,72,92,861/- which
according to the respondent was due to the petitioner, sum of Rs.70.28 lacs was claimed
as payable by the petitioner to the respondent.
15. By the said letter, the respondent called upon the petitioner to send the demand draft of
Rs.70.28 lacs as full and final payment and agreed to return the bank guarantee No.43/2
of Rs.4,68,58,621/- in return of the said demand draft of Rs.70.28 lacs.
16. The respondent threatened the petitioner that it would encash the bank guarantee against
the liquidated damages in the event of failure of the petitioner to pay a sum of Rs.70.28
lacs. The petitioner filed a petition under section 9 of the Arbitration Act in the month of
May, 2007 inter-alia praying for interim measures of protection against the respondent
from encashing the bank guarantee No.43/2 dated 3rd January, 2001 or receiving any
moneys thereunder.

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 Procedural History

17. That in the month of June 2007, the petitioner invoked arbitration clause and appointed
its arbitrator, to which respondent also appointed its arbitrator. The two arbitrators agreed
and nominated the presiding arbitrator.
18. That on 27th July, 2001, this Court disposed of the said arbitration petition filed by the
petitioner with a direction that upon the petitioner depositing a sum of Rs.70.28 lacs in
this Court within a period of six weeks, the respondent shall not eacash the bank
guarantee and it would stand released and discharged.
19. That on 20th June, 2008, during the pendency of the arbitral proceedings, the petitioner
changed its name to Eastern India Powertech Limited. The Deputy Registrar of
Companies, Delhi and Haryana issued a fresh certificate of incorporation for the same.
That the respondent filed an application under section 16 of the Arbitration Act before the
arbitral tribunal raising the plea of jurisdiction of the arbitral tribunal to entertain, try and
dispose of the claim filed by the petitioner.
20. The said application was resisted by the petitioner on various grounds. The arbitral
tribunal framed the issues including preliminary issue "whether the claimant proves that
it has locus to initiate, sustain and pursue the present proceedings". After recording of
evidence, the arbitral tribunal heard the arguments on the said preliminary issue.
21. By an order dated 2nd February, 2011, the arbitral tribunal dismissed the arbitral
proceedings on the ground that it had no jurisdiction to entertain the said proceedings.
This order of the arbitral tribunal is impugned by the petitioner in the present petition
filed under section 37 of the Arbitration Act on various grounds.

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 LEGAL ISSUES INVOLVED IN THE CASE

The main issues which the High Court dealt was;

A. Whether or not the order passed by the arbitral tribunal dismissing arbitration
proceedings on the ground of jurisdiction is valid or not?

B. Whether a separate Arbitration Agreement was required to be entered between the

petitioner and the respondent for adjudication of the disputes arising between the parties
having arisen under the original contracts dated 16th April, 1997 between respondent and
DIL ?

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 ANALYSIS

Hon’ble High Court judge in the judgment made several points after hearing contentions of both
the senior councils.

A. “REASONING OF THE COURT FOR DERIVING ON CERTAIN CONCLUSION

AND ANALYSIS OF THE COURT ON THE LEGAL ISSUES- The question that had
arisen for consideration of the Hon’ble High Court is “whether an arbitration agreement
can be assigned”. The judge said that the scrutiny of the correspondence was exchanged
between parties and the execution of bank guarantee by the petitioner in favour of the
respondent and the respondent addressing various letters to the bankers of petitioner to
extend the time period of the bank guarantee & the point that remaining obligation of DIL
and thereafter DUL were complied with the petitioner and also accepted by the respondent
would clearly indicate the intention of the parties in implementation of the rights,
obligations, duties, obligations, and benefits of the said contract (dated 16th April, 1997).
In the view of the judge, respondent cannot be allowed to say that all other rights &
obligations and benefits under the said contract could be accepted by the respondent from
the petitioner as successor of DIL and DUL, however, the benefit of arbitration agreement
could not be claimed by petitioner.”

“The judge also stated that a perusal of the impugned order passed by the arbitral tribunal
clearly indicates that even the respondent herein had accepted the assignment and rights and
liabilities flowing out of the said two contracts.

Hon’ble judge of High Court listed down some points held by the arbitral tribunal;

a) that the said meeting of mind or agreement is essential as will be seen from the language
of section 7 of the Arbitration & Conciliation Act, 1996. It is also stated by the arbitral

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 tribunal that none of the successors of DLF Industries Limited were parties to the
arbitration agreement.

b) stated that there is neither any agreement in writing, nor any record of arbitration
agreement by means of any correspondence between petitioner and respondent. The
arbitral tribunal has held that the provisions of sections 7(3) and 7(4) are not satisfied and
thus there is no arbitration agreement between the petitioner and the respondent and it
would not be possible in law to treat the petitioner herein a party to the arbitration
agreement because it is the assignee of the main commercial contract.

c) finally it is held by the arbitral tribunal that the petitioner had no locus to initiate, sustain
and pursue the present proceedings because there was no arbitration agreement as
contemplated by virtue of section 7 of the Act in existence and thus the proceedings are
liable to be dropped for total lack of jurisdiction of the arbitral tribunal for want of
arbitration agreement.

d) tribunal distinguished the landmark judgments of the SC in the following cases :-

 M/s.Shakti Bhog Foods Limited vs. Kola Shipping Limited 1,

 Unissi (India) Pvt. Limited vs. Post Graduate Institute of Medical Education And
Research2,
 Smita Conductors Limited vs. Euro Alloys Limited3, and
 Trimex International FZE Limited vs. Vedanta Aluminium Limited 4,

That none of the aforesaid judgments of the Supreme Court speaks conduct of the parties
but has held that the meeting of minds to arbitrate on a dispute arising out of a contract
can be inferred or evidenced through correspondence between those parties. It does not
refer to the conduct of any party.

1
reported in AIR 2009 SC 12,
2
reported in (2009) 1 SCC 107
3
reported in AIR 2001 SC 3730
4
reported in MANU/SC/0057/2010

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 e) the tribunal has further noted that in this case the respondent had refused to go to
arbitration for any dispute arising out of a contract with the successors of the DIL
because they never agreed to arbitrate with any of the successors of DIL. It is not in
dispute that various findings recorded by the arbitral tribunal to the effect that there was
no dispute that the respondent had accepted the assignment and rights and liabilities
flowing out of that contract, are not challenged by the respondent herein.

B. DECISION OF THE COURT- It is held that the contention of the respondent however,
was that they could not be compelled to go to arbitration as there was no meeting of minds
on that point between any of the successors of DIL and the respondent. The arbitral
tribunal held that there was no dispute that DUL had sold its power transmission business
to the petitioner and by the said merger and sale, both the contracts were taken over by
petitioner. It is also held that it has become legal successor of DIL (the initial contracting
party). It is held that there was no dispute that under both the contracts, rights of the parties
were assignable but same must be with the consent of other side. It is also held that “the
stipulation in the contracts that the assignment should have approval of the respondent
obviously cannot render an assignment void for want of consent, however the question
would remain whether after such assignment could it be said that there was meeting of
mind or agreement between the assignees of DIL and the respondent regarding reference to
arbitration in the event of dispute.”

C. “ANALYSIS OF THE DECISION- The question that arises before this Court is whether
a separate arbitration agreement was required to be entered between the petitioner and the
respondent for adjudication of the disputes arising between the parties having arisen under
the original contracts dated 16th April, 1997 between respondent and DIL would include
the assignment of arbitration agreement also recorded in the said contracts by conduct or
otherwise. It is stated by the judge of hon’ble High Court that the respondent did not
dispute before this Court that all the rights and obligations under the said contracts which

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 were to be performed by DIL were performed by the petitioner and that the respondent had
called upon the petitioner to comply with such obligations.”

“Supreme Court in case of Enercon (India) Limited & Ors.5 has considered section 16 of the
Arbitration &  Conciliation Act, 1996 and in that context has held that under the said
provision, the concept that the main contract and the arbitration agreement formed two
independent contracts. Commercial rights and obligations are contained in the underlying,
substantive, or the main contract. It is followed by a second contract, which expresses the
agreement and the intention of the parties to resolve the disputes relating to the underlying
contract through arbitration. A remedy is elected by parties outside the normal Civil Court
remedy. It is also stated that under section 7(2) of the Arbitration & Conciliation Act, it is
provided that the arbitration agreement could be in the form of arbitration clause in a
contract or in the form of a separate agreement. It is thus clear that the arbitration agreement
can also be part of the main contract.”

“A review of contracts (dated 16th April, 1997) clearly indicates that there is no provision in
the said contracts that even if the said contracts were assigned in favour of a third party by
any of the party to the said contracts, the same could be of the entire contract however,
excluding the arbitration agreement. No separate writing is contemplated under the said two
contracts for execution of a fresh arbitration agreement.”

“SC in case of M.R. Engineers & Contractors Pvt. Limited 6 has held that an arbitration
clause though an integral part of the contract, is an agreement within an agreement. It is a
collateral term of a contract, independent of and distinct from its substantive terms. The
Supreme Court in the said judgment was considering the case of doctrine of incorporation
under section 7(5) of the Arbitration & Conciliation Act, 1996. It is held that there is a
difference between the reference to another document in a contract and incorporation of
another document in a contract by reference. In the first case, the parties intended to adopt
only specific portions and part of referred document for the purpose of contract. In the
second case, the parties intend to incorporate referred document in entirely into the
contract.”
5
(2014) 5 SCC 1
6
(2009) 7 SCC 696

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 “The facts of this case are totally different, the judgment of the Supreme Court in case of
M.R. Engineers & Contractors (P) Limited is clearly distinguishable in the facts and
circumstances of this case and would not assist the case of the respondent.”

“Insofar as the judgment of the Supreme Court in case of Indowind Energy Limited7 relied
upon by the learned senior counsel for the respondent is concerned, the issue before the
Supreme Court in the said judgment was whether the arbitration clause found in the
document (agreement) between the two parties, could be considered as a binding arbitration
agreement on a person who was not a signatory to the said agreement. Another issue for
consideration before the Supreme Court in the said judgment was whether a company could
be said to be a party to the said contract containing an arbitration agreement, even though it
did not sign the agreement containing an arbitration clause, with reference to its subsequent
conduct.”

“The said judgment of the Supreme Court in case of Smita Conductors Limited was
specifically approved by the Supreme Court in its judgment in case of Trimex
International FZE Limited vs. Vedanta Aluminium Limited 8, and in case of Unissi
(India) Pvt. Limited vs. Post Graduate Institute of Medical Education And Research 9,.
These judgments were cited by the petitioner before the arbitral tribunal, clearly considering
the conduct of the parties while determining the issue whether their existed arbitration
agreement or not. The arbitral tribunal however, in paragraph 26 of the impugned award
though referred to these judgments, has taken an erroneous view that none of those
judgments of the Supreme Court spoke about the conduct of the parties. In my view, the
impugned order shows patent illegality on the face of award.”

““An inspection of the record indicates that the arbitral tribunal has not accepted the case of
the respondent that in view of clause 6 of the Memorandum of Sale entered into between
the petitioner and DLF Universal Limited, the petitioner could act only as a constituted
authority on behalf of the said assignors in case of any dispute between the petitioner and

7
(2010) 5 SCC 306
8
(2010) 3 SCC 1
9
(2009) 1 SCC 107

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 the respondent. It is not in dispute that the said assignors did not file any separate
proceedings against the respondent nor the respondent filed any separate proceedings
against the said assignors in respect of the dispute arising under the said two contracts dated
16th April, 1997.”

“In the judge’s view, no separate execution of the arbitration agreement was required to be
executed between the petitioner and the respondent, in view of the fact that the said two
contracts containing arbitration agreement was already assigned in favour of the petitioner
and the entire contracts were acted upon by both the parties herein. In view of the
assignment of the said two contracts in favour of the petitioner, the arbitration agreement
contained therein also stood assigned in favour of the petitioner. The petitioner had thus
locus standi and had rightly invoked the said arbitration agreement. The impugned order
holding that arbitration agreement was not assigned in favor of the petitioner shows patent
illegality.”

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 CONCLUSION

The case after the proceedings and the contentions of both the learned councils for the parties
came to an end and the Hon’ble judge after hearing both the parties came to an conclusion that
the petition No. 509 of 2011 is allowed in terms of prayer clause by quashing the order passed by
the arbitral tribunal that;

 the impugned order dated 2nd February, 2011 passed by the arbitral tribunal is set aside.
There exists an arbitration agreement between the petitioner and the respondent in view of
the contracts dated 16th April, 1997 having been assigned in favour of the petitioner,
including the arbitration agreement, and
 the parties are directed to proceed with the arbitral proceedings expeditiously and there is no
order passed as to costs.

“Also the learned counsel appearing for the respondent gave an application for stay of the
operation of this order, which was fervently opposed by the learned counsel for the petitioner. He
submited that for a period of four weeks, his client will not apply for execution of this order by
addressing any letter to the arbitral tribunal which was accepted by the court.

“In my view, the judgment it is very clear that no separate execution of the arbitration agreement
was required to be executed between the petitioner and the respondent, in view of the fact that
the said two contracts containing arbitration agreement was already assigned in favour of the
petitioner and the entire contracts were acted upon by both the parties herein. Also as the
judgment states “ In view of the assignment of the said two contracts in favour of the petitioner,
the arbitration agreement contained therein also stood assigned in favour of the petitioner. The
petitioner had thus locus standi and had rightly invoked the said arbitration agreement. The
impugned order holding that arbitration agreement was not assigned in favour of the petitioner
shows patent illegality.” It is very clear that the petitioner had the locus standi and the arbitral
tribunal passed an impugned order which is now quashed.

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“After two years of the order passed by the Hon’ble Bombay High Court, there was an Special
Leave Petition filed by respondents in the Supreme Court, on 28th January 2018 the court passed
an order directing the DLF Power Ltd to file the counter affidavit in four weeks from the order
date. The Supreme Court has now passed an order on 19 th March 2018 that; “Sole respondent
has filed counter affidavit. Service and pleadings are complete.”

Before this judgment came into picture there were many cases wherein it was said that the
arbitration agreement has to be separate, like in the case of Baytur S.A. vs. Finagro Holding
S.A10. which is relied upon by the petitioner has been followed and accepted by various Courts in
India, that; ‘the arbitration agreement is not obligation but is a benefit under the contract which
can be assigned’. Reliance is also placed on the order of Supreme Court in the case of Eneron
(India) Limited & Ors. Vs. Enercon GMBH & Anr. 11, in particular para no. 83 which states that
“the arbitration agreement is separate and independent agreement”.

This case changed and paved a way for the arbitration contracts in India. Further this case has
been precedent for many cases wherein the court has relied on this judgment and stated that an
assignment of contract will be followed by an arbitration clause. The judgments like Kotak
Mahindra Bank vs Mr.S.Nagabhushan & Ors 12. Which was decided on 24 January, 2018 and
Gulshan Kumar Grover vs Shriram Transport Finance 13 which was decided on 3 October,
2018 read that;

“The extant law is that if a contract is assignable, the arbitration clause will follow the
assignment of the contract.”

Thus it is clear that an arbitration agreement need not be separately made if there is any contract
which is assignable. In future there were many judgments which came up with the ratio that an
arbitration agreement without being a separate one will not valid unless the contract involves a
clause and the parties can refer to arbitration.

10
(1992) (Court of Appeal) 610 (QB)
11
(2014) 5 SCC 1
12
OMP (COMM) 341/2017
13
New Arbt. No. 585305/16

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