Kobelco Construction Equipment ... vs Lara Mining & Anr
2023 Latest Caselaw 2000 Cal/2

                     IN THE HIGH COURT AT CALCUTTA
                     Ordinary Original Civil Jurisdiction
                               Original Side
                           (Commercial Division)


Present :-
The Hon'ble Justice Moushumi Bhattacharya


                            AP 181 of 2023
                                   with

                            AP 182 of 2023

       Kobelco Construction Equipment India Private Limited

                                   vs.

                           Lara Mining & Anr.


For the Petitioner                 :           Mr. Swatatrup Banerjee, Adv.

                                               Mr. Sariful Haque, Adv.

                                               Mr. Hareram Singh, Adv.

                                               Ms. Shilpa Das, Adv.



For the Respondents                :           Mr. Anirban Ray, Adv.

                                               Mr. Varun Kothari, Adv.

                                               Ms. Anshumala Bansal, Adv.


Last Heard on                      :           07.08.2023


Delivered on                       :           11.08.2023
                                       2


Moushumi Bhattacharya, J.

1. The Arbitration Petitions have been filed under section 9 of The

Arbitration and Conciliation Act, 1996 for interim measures of protection.

The facts are identical in both the matters and learned counsel appearing

for the parties have relied on the same propositions of law. Hence both the

Arbitration Petitions are being disposed of by this judgment.

2. The petitioner seeks an injunction on the respondent no 1 from

dealing with or disposing of the assets under a Master Facility Agreement

dated 19th January, 2020 and a Settlement Agreement dated 17th July,

2021. Prayer (i) of the application does not give the date of the Master

Facility Agreement.

3. Learned counsel appearing for the petitioner submits that the

respondent no. 1 is bound by the Master Facility Agreement dated 19th

January, 2020 executed between SREI Equipment Finance Limited and the

respondent no. 1 with regard to the financial assistance given by SREI to the

respondent no. 1 of Rs. 6,72,60,000/-. Counsel submits that the respondent

no. 1 paid 14 instalments out of 34 instalments under the agreement and

hypothecated assets for the loan. The Master Facility Agreement was

thereafter assigned by SREI to the petitioner in satisfaction of SREI's dues of

Rs. 70,97,70,999/- to the petitioner. The assignment was made in the form

of a "Settlement Agreement" executed between SREI and the petitioner on

17th July, 2021.

4. Learned counsel appearing for the respondent takes a point of

maintainability of the application on the ground that the respondent no. 1 is

not a party to the Settlement Agreement between the petitioner and SREI

and that the petitioner cannot hence seek to invoke both the arbitration

clauses contained in the Master Facility Agreement and the Settlement

Agreement. Counsel submits that there is no privity of contract between the

petitioner and the respondent no. 1 and thus there cannot be a composite

reference. Counsel further submits that the petitioner has only been given

the collection rights in respect of the receivables and disputes that the

Master Facility Agreement had not been assigned in favour of the petitioner.

It is further argued that the arbitration clause has to be specifically

incorporated which has not been done in the present case. Counsel submits

that a general reference to the Master Facility Agreement is not sufficient to

incorporate the arbitration clause under section 7(5) of the 1996 Act.

5. Learned counsel for the petitioner relies on the definitions of

"receivable", "security", "security documents" and "underlying agreement" of

the Settlement Agreement to urge that the assignment was done under

clause 9.7 of the Master Facility Agreement whereby SREI had the right at

its discretion to transfer its rights, benefits and obligations under the

Agreement to any person without notice to the borrower (the respondent no.

1) and that SREI had in any event sent an intimation to the respondent no.

1 about the assignment by a letter dated 17th July, 2021. Counsel submits

that as signatory to the Master Facility Agreement, the respondent no. 1 had

agreed to the assignment and further that the respondent no. 1 had paid 3

installments to the petitioner after execution of the Settlement Agreement.

Counsel relies on these payments as implied consent on the part of the

respondent no. 1 to the assignment of the agreement.

6. Before the Court proceeds to decide on the issue of maintainability,

the following facts appear to be undisputed. The respondent no. 1 had

availed of a loan from SREI Equipment Financial Limited for purchase of

certain equipment by way of a Master Facility Agreement dated 19th

January, 2020. Thereafter, the petitioner executed a Settlement Agreement

with SREI on 17th July, 2021. The respondent no. 1 is not a party to the

Settlement Agreement. The petitioner and SREI entered into the Settlement

Agreement for the purpose of assignment of dues of SREI to the petitioner.

7. Clause 9.11 of the Master Facility Agreement contains a dispute

resolution clause which is to be settled by arbitration. Clause 5 of the

Settlement Agreement provides for arbitration of disputes and differences

arising out of that Agreement. The petitioner has sought to make a

composite reference of the arbitration clauses in both the agreements and

an injunction on the respondents on the basis of the arbitration agreement.

8. The issue which is required to be decided is whether there is any

arbitration agreement between the petitioner and the respondent no. 1 on

the basis of which the petitioner can claim interim relief against the

respondents. If not, the second issue would be whether a composite

reference can be made for two separate arbitration agreements.

There is admittedly not 1, but 2 arbitration agreements

9. The factual conspectus before the Court involves two agreements. The

first is the Master Facility Agreement of 19th January, 2020 between SREI

and the respondent no. 1 and the second is a Settlement Agreement between

SREI and the petitioner dated 17th July, 2021. The common entity between

these two agreements is SREI who is not a party to the present application.

Both agreements have independent arbitration clauses. To put the

arguments in perspective, the petitioner says that the two agreements are

interlinked since the rights of SREI as the lender has flowed to the petitioner

from the first to the second agreement. The petitioner in essence seeks to

make out a case that SREI has assigned all rights to the petitioner from the

first agreement where the petitioner is not a party and that the respondent

no. 1 is bound by the second agreement where the respondent no. 1 is not a

party.

10. Admittedly, the bridge between these two island-agreements is SREI

who is "missing in action" in the present application.

11. Hence, there is no arbitration agreement between the petitioner and

the respondent no. 1 which can form the basis of a section 9 application.

Can the petitioner make a composite reference?

12. The petitioner therefore seeks to make out a case for a composite

reference on the strength of the two agreements being interlinked by reason

of the petitioner stepping into the shoes of SREI in terms of the security and

receivables forming the substance of the Master Facility Agreement executed

between SREI and the respondent no. 1.

13. The fact of each of the parties before the Court being present in one of

the two agreements (and absent from the other) makes it evident that there

is no privity of contract between the petitioner and the respondent no. 1.

14. The statutory position under The Arbitration and Conciliation Act,

1996 does not support a fact-scenario as the present one where the

petitioner seeks to make a reference in terms of an arbitration agreement

where the entity intended to be bound by the reference is not a party to the

arbitration agreement. This position was considered by the Supreme Court

in Duro Felguera, S.A. vs. Gangavaram Port Limited; (2017) 9 SCC 729 where

it was held that there must be a specific incorporation of the arbitration

clauses into the contract in a case involving several agreements between the

parties. Inox Wind Limited vs. Thermocables Limited; (2018) 2 SCC 519

referred to a decision of the High Court of Justice, Queen's Bench Division,

Commercial Court in Sea Trade Maritime Corpn. V. Hellenic Mutual War

Risks Assn. (Bermuda) Ltd. No. 2 (The Athena); 2006 EWHC 2530 (Comm)

which recognised the difference between the incorporation of an arbitration

clause in a single contract case and a two-contract case. The Court

explained that if the secondary document is between other parties or if only

one of the parties to the contract in dispute is a party to an earlier contract

to which a reference is made, then it would be a two-contract case. In such

a case, a general reference to the earlier contract would not be sufficient to

incorporate the arbitration clause.

The law with regard to incorporation of an arbitration clause by reference

15. Section 7(1) of the 1996 Act defines an "arbitration agreement" to

mean an agreement by the parties to submit to arbitration all or certain

disputes which have arisen or which may arise between them in respect of a

defined legal relationship which may or may not be contractual in nature.

Section 7(2) clarifies that an arbitration agreement may be in the form of an

arbitration clause in a contract or in the form of a separate agreement.

Section 7(3) requires an arbitration agreement to be in writing while section

7(4) provides for the three circumstances where the requirement of section

7(3) would be satisfied, namely, that the arbitration agreement would be

accepted as a written document.

Section 7(5), which is relevant for the present matter, lays down the

statutory position with regard to incorporation of an arbitration clause by

reference. Section 7(5) is set out below.

"Section 7(5). - The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract."

16. The legislative intent behind section 7(5) is aimed at ease of the

arbitration process between parties who seek to be bound by an arbitration

clause in another agreement but must act in terms of a later agreement

which does not contain the arbitration clause. The 1996 Act recognises the

problem and facilitates the transition. The arbitration clause is hence absent

from the "contract" referred to in section 7(5) while the "document" in

section 7(5) contains the arbitration clause constituting the arbitration

agreement between the parties. Section 7(5) intends to link the contract

without the arbitration clause to the document containing the arbitration

clause subject to the contract being in writing and the reference in the

contract to the arbitration clause in the document makes the arbitration

clause a part of the contract.

17. In other words, section 7(5) deals with a contract without an

arbitration clause and the "document" with an arbitration clause. The idea

is to incorporate the arbitration clause in the "document" to the "contract"

by reference so that the arbitration clause is incorporated in the contract

and becomes part thereof.

18. The above presumes that the reference to the contract is clear and

reflects the intention of the parties to be bound by the arbitration clause

which is to be incorporated into the contract. The incorporation of the

arbitration clause into the contract (which does not contain the arbitration

clause) would also have to be appropriate to the disputes under the contract

to which the arbitration clause is incorporated and not result in repugnancy

to the terms of the contract. Simply put, the incorporation must be

harmonious and not lead to a conflict between the two agreements.

19. The consensus in the case-law on incorporation by reference is also

that the incorporation must not be in general or vague terms; M.R.

Engineers and Contractors Private Limited vs. Som Datt Builders Limited;

(2009) 7 SCC 696.

20. Russell on Arbitration (23rd Edn.) explains section 6(2) of the (English)

Arbitration Act, 1996 which corresponds to section 7(5) as essentially

ascertaining the terms of a contract by reference to more than one

document. The issue is of applying the usual numbers of construction in

order to infer the intention of the parties. A dispute may arise where the

principal document refers to standard form containing an arbitration

agreement which may not be appropriate for the contract in which the party

seeks to incorporate the arbitration clause. Russell concludes that if the

arbitration agreement is incorporated from a standard form contract, a

general reference to those forms is sufficient whereas in the case of a non-

standard form contract, a specific reference to the arbitration agreement is

necessary; Sea Trade Maritime Corpn. v. Hellenic Mutual War Risks Assn.

(Bermuda) Ltd. No. 2; 2006 EWHC 2530.

21. Since the present application has been made by the petitioner for

interim relief, section 9(1) of the 1996 Act becomes relevant to complete the

enquiry into the statutory position.

What does section 9(1) of the Act say?

22. Section 9(1) which confers the power to grant interim measures on a

Court on an appropriate application, is available only to a "party". The

section permits only a party to apply to a Court for a wide spectrum of

interim measures primarily to preserve the subject-matter of the arbitration

agreement before the award is enforced under section 36 of the Act.

23. On a meaningful reading of sections 7(5), 2(1)(h) and 9(1) of the Act,

only a party to the arbitration agreement, which clause was originally

contained in the arbitration agreement or incorporated into a second

document, can exercise the right to interim measures. This is in view of the

fact that section 9 pre-supposes an underlying arbitration agreement and a

party to that "arbitration agreement" applying to the Court for interim

reliefs.

24. It is also relevant that an application under section 9 which involves a

party to an arbitration agreement is different from an application under

section 11 of the 1996 Act. Section 11, particularly sub-sections (5) and (6)

thereunder also envisages a party giving the right to the Supreme Court or

High Court to appoint an Arbitrator/s on its behalf. However, the dispute as

to which arbitration agreement would form the subject matter of the claim /

counter-claim in the arbitration can also be adjudicated by the arbitral

tribunal in that case. A section 9 Court, on the other hand, presumes that

there is an underlying arbitration agreement between the party who

approaches the Court for interim relief and the party against whom the

interim relief is sought. Unlike a Court in a section 11 application, it would

rarely be a business of a section 9 Court to go about ascertaining which

arbitration agreement will have precedence over the other for the Court to

grant interim measures of protection.

25. Therefore, the entire issue of incorporation of the arbitration clause

from the Settlement Agreement dated 17th July, 2021 to the

agreement/Master Facility Agreement of 19th January, 2020 (or vice versa)

assumes relevance since SREI which is the only common "party" to both the

agreements is not before the Court for seeking any relief under the two

agreements or otherwise.

26. In the present case, the presumptive link between the petitioner, the

respondent no. 1 and the Arbitration Agreement between them has snapped

by the mix-up of parties.

The facts of the case - is there an incorporation of the arbitration clause by

reference?

27. Clause 9.7 of the Master facility Agreement dated 19th January, 2020

authorises the company (SREI) to transfer all or any of its rights, benefits or

obligations under this Agreement to any person without notice or permission

from the Borrower. The "Borrower" in the Agreement is the respondent no.

1. The petitioner relies on Clause 9.3 (The Assignment Clause) to urge that

Clause 9.3 was sufficient notice to the respondent no. 1 that SREI would

assign its rights in favour of the petitioner with regard to the SREI's rights in

the Master Facility Agreement. The petitioner's entire case is based on the

assignment and consequently the respondent no. 1 being bound by the

assignment of SREI's rights in favour of the petitioner which would also

include the arbitration clause.

28. The difficulty in that logic is that this is not a case of the arbitration

clause being present in one of the Agreements and absent in the other. Each

of the Agreements has its own arbitration clause with an express intention

to restrict the arbitration clause only to that Agreement. For instance,

clause 9.11 of the first Master Facility Agreement makes it clear that the

disputes and differences between the parties to disagreements and

interpretation of "the Agreement" shall be settled by arbitration. Similarly,

the arbitration clause in the second / Settlement Agreement states that

disputes, differences, construction, duties or liabilities of the parties arising

out of or consequent to or in connection with "this agreement" shall be

resolved by mutual discussions and thereafter arbitration.

29. Therefore, unlike most of the decisions cited where one or the other of

the agreements did not contain the arbitration clause, the present case

involves two arbitration clauses and the Court is being asked to hold that

the arbitration clause of the first Agreement should be treated as being

incorporated into the second Agreement by reference. The only guiding

factor in a situation such as this is where the parties have clearly evinced

their intention in the agreements to say that the second Agreement should

incorporate the arbitration clause of the first Agreement with the petitioner

and the respondent no. 1 being on the same page on this point.

30. This would clearly be a matter of a harmonious construction of the

two documents. The only indication that the respondent no. 1 was intended

to be brought within the purview of the first / Master Facility Agreement is

Schedule I to the Settlement Agreement (between the petitioner and SREI)

which contains the name of the respondent no. 1 in the list of debtors. The

other places clause 2 of the Settlement Agreement which provides for notice

for payment on the debtors and giving the petitioner the right to the

Receivables and payments from debtors. The petitioner has also been given

the collection rights for all future Receivables from the debtors. As stated

above, the respondent no. 1 features in the list of debtors in the Schedule I

to the Settlement Agreement.

31. The other significant facts which is relevant to the construction of the

documents is a notice given by SREI to the respondent no. 1 on 17.7.2021

putting the latter on notice that the petitioner would now have the right to

the Receivables which was part of the Master Facility Agreement. The

respondent no. 1 acted in terms of this letter and paid three installments to

the petitioner. Although, the petitioner heavily relies on these payments,

clause 2 of the Settlement Agreement indicates that these payments were

made by the respondent no. 1 on a "notice for payments" with regard to the

future receivables which were assigned by SREI to Kobelco. The form with

regard to the "notice for payments" matches word-for-word with the Notice

issued by SREI to the respondent no. 1 on 17th July, 2021. Clause 2.2 of the

Settlement Agreement clearly mentions that the petitioner / Kobelco shall be

entitled to receive the receivables from the debtors of SREI on and from the

date of service of the notice of payments. The definition of "notice for

payments" in clause 1.1 of the Settlement Agreement also makes it clear

that the Notice would be issued by SREI to the debtors from time to time in

accordance with the Settlement Agreement specifying details of the

Receivables payable by the debtors.

32. Hence, a careful reading of the Settlement Agreement executed

between the petitioner and SREI on 17th July, 2021 makes it clear that SREI

gave the petitioner only the collection rights with respect to the receivables.

The Settlement Agreement does not provide for assignment of the Master

Facility Agreement of 19th January, 2020 or incorporation of the arbitration

clause in the Master Facility Agreement to the Settlement Agreement by

reference or otherwise or at all. To repeat, there is no special reference

indicating a mutual intention on the part of the petitioner, SREI and the

respondent no. 1 to incorporate the arbitration clause from the Master

Facility Agreement to the Settlement Agreement. A general reference to the

Master Facility Agreement is not sufficient to incorporate the arbitration

clause.

33. To make matters worse or rather more complicated, the petitioner has

sought for an injunction on the respondents under both the Master Facility

Agreement as well as the Settlement Agreement. There is no clear indication

in the pleadings or in the submissions made as to which direction the

incorporation by reference will travel, i.e., whether from the Master Facility

Agreement → Settlement Agreement or the other way around. The non-

commonality of parties makes such a composite reference impossible in the

eye of law.

34. The petitioner's case for interim relief must therefore fail in the

absence of a definitive contractual relationship between the petitioner and

the respondent no. 1 containing an arbitration clause and further the

absence of an unambiguous intention expressed by the petitioner and the

respondent no. 1 to incorporate the arbitration clause from one of the

agreements to the other. In the absence of either of the aforesaid, this Court

is unable to find a basis for grant of interim relief.

35. The case law on the subject of incorporation by reference is a matter

which is entirely fact - based as also the construction of the Agreements to

assess the intention of the parties. In Chloro Controls India Private Limited v

Severn Trent Water Purification Inc. ; (2013) 1 SCC 641, the Supreme Court

came to a finding that the transaction was a composite transaction between

the parties where even a non-signatory could be subjected to arbitration but

in exceptional cases and exceptional cases would be where the performance

of the mother agreement may not be feasible without the performance of the

supplementary and ancillary agreements for achieving a common object.

Similarly, in Ameet Lalchand Shah vs Rishabh Enterprises; (2018) 15 SCC

678, the Supreme Court found that although there were several agreements

involving different parties, all the agreements related to a single commercial

project. The decision of the Co-ordinate Bench in Tantia Constructions

Limited vs. Mather and Platt Pumps Limited in AP No. 72 of 2023, the Court

found that the agreements in question and the components of the dispute

were intrinsically linked with one another. Thus, whether the rights of the

parties would flow from one agreement to the other and the arbitration

clause would likewise be incorporated from one to the other agreement is

entirely a matter of construction of what the parties intended as expressed

in the agreements in question.

36. The reasons stated in the above discussion persuades this Court to

reject the prayer for interim relief. AP 181 of 2023 and AP 182 of 2023 are

accordingly dismissed without any order as to costs.

Urgent photostat certified copies of this judgment if applied for, be

supplied to the parties upon fulfillment of requisite formalities.

(Moushumi Bhattacharya, J.)