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Arbitration involving consortium of an Indian and foreign entity

Arbitration involving consortium of an Indian and foreign entity: Treatment under the Arbitration and Conciliation Background of the Case

The Supreme Court of India in a recent judgment passed in Larsen and Toubro Limited Scomi Engineering BHD Vs Mumbai Metropolitan Region Development Authority[1], analysed the following issues relating to ‘international commercial arbitration’ (ICA) as contemplated under section 2(i) (f) of the Arbitration and Conciliation Act, 1996 (ACA):

(i) Whether a consortium formed by a company incorporated in India and a company incorporated outside India will be considered to be a ‘body corporate’ as stipulated under section 2(1)(f)(ii) of the ACA or an ‘association’ as stipulated under section 2(1)(f)(iii) of the ACA?

(ii) Whether an arbitration proceeding in which such consortium is a party, would be considered to be an ICA?

This note discusses the analysis and the ratio held by the Supreme Court in relation to the above issues.

(i) Treatment of the Consortium

In the instance case the consortium was formed by M/s Larsen and Toubro, an Indian Company (L&T) with Scomi Engineering Bhd, a Malaysian Company (Scomi). The consortium of L&T and Scomi (Consortium) was governed by terms and conditions of a consortium agreement dated 09.01.2009 (Consortium Agreement).

Whilst analysing whether the Consortium will be a body corporate or an association under section 2(1)(f) of the ACA, the Supreme Court relied upon a previous judgment of Bombay High Court inter se between the parties which prohibited L&T and Scomi to rely upon their status as independent entities under the Consortium. Therefore, the Consortium was not considered to be a body corporate for the purpose of section 2(1)(f)(ii) of the ICA.

Further, the apex Court relied upon the definition of ‘person’ as provided under the Income Tax Act, 1961 and observed that under Section 2(31) of the Income Tax Act, 1961, “person” is defined as including, under subclause (v), an association of persons, or body of individuals, whether incorporated or not.

It was therefore laid down that an association is referred to in Section 2(1)(f)(iii) of the ACA in the similar sense as established under the Income Tax Act, 1961 which would therefore include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country other than India.

(ii) Applicability of ICA
The apex court further analysing the said Consortium Agreement, observed the following:
(a) L&T was the lead partner of the Consortium;
(b) the supervisory board constituted under the Consortium Agreement makes it clear that the lead partner, i.e., L&T has the power to appoint the Chairman of the said Board;
(c) the fact that the Consortium’s office is in Wadala, Mumbai; and
(d) L&T shall lead the arbitration proceedings.

From the aforesaid provisions of the Consortium Agreement, the Supreme Court concluded that central management and control of the Consortium in the present case appears to be exercised in India and not in any foreign nation as the central management and control rests with the lead partner of the Consortium, i.e., L&T which is a company incorporated in India. Accordingly, the arbitration proceedings in which the Consortium is a party and the other party in MMRDA, shall not be considered to be an ICA.

The above judgment of the Supreme Court appears to provide the following conclusion:
(i) A consortium formed by an Indian entity and an entity incorporated outside India will be considered to be an association if parties have agreed not to rely upon their status as independent entities under their consortium agreement. In such cases, the consortium is considered to be an unincorporated body of associations.
(ii) Further, in order to determine the applicability of Section 2(i)(f) of the ACA, the status and origin of incorporation of the lead member of such consortium having the central management and control over supervisory board shall be considered. In the event such lead member is an Indian entity, the Section 2(i)(f) of the ACA shall not be applicable and any arbitration proceeding involving such consortium and any other Indian entity shall not be held to be an ICA.

This judgment is a welcome analysis by the Apex court which provides certainty on the treatment of consortium involving Indian and foreign company for the purposes of the ACA.

[1] Arbitration Petition (C) No. 28 of 2017, decided on 03.10.2018, (2018 SCC OnLine SC 1910)

* By- Amiy Kumar, Associate,
King Stubb & Kaisva, Advocates & Attorneys, Mumbai.

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