Bombay High Court Sets Aside Arbitral Award Against MSRDC In Toll Collection Dispute

The Bombay High Court has recently set aside an arbitral award in a dispute between Maharashtra State Road Development Corporation Ltd. (MSRDC) and Jai Laxmi Constructions Engineers and Contractors, holding that no arbitration agreement existed governing disputes under the Toll Collection Agreement and that an arbitration clause contained in a separate lender-related agreement could not be invoked for such disputes.

A bench of Justice Somasekhar Sundaresan observed, “Therefore, the main test of Section 7(1) has not been met by the arbitration clause in the Replacement Agreement when applied to disputes raised entirely under the Toll Collection Agreement. On the disputes under the Toll Collection Agreement, the parties have agreed that Jai Laxmi would have resort to the Principal Civil Court at Mumbai."

The dispute arose from a tender issued by MSRDC on July 9, 2005 for toll collection near Dusarbeed. Jai Laxmi was selected and issued a letter of acceptance on December 30, 2005 for a three-year contract against an upfront payment of Rs 3.60 crore.

This was followed by the execution of a Toll Collection Agreement on January 27, 2006, which did not contain any arbitration clause. Clause 8.2 of the agreement provided that disputes would fall within the exclusive jurisdiction of the Principal Civil Court in Mumbai, while Clause 38 provided for decisions by the Vice Chairman and Managing Director of MSRDC, which the Court held was not an arbitration mechanism.

On the same day, a separate tripartite agreement was executed between MSRDC, Jai Laxmi and State Bank of India (SBI), which had financed the upfront payment.

This agreement, referred to as the Replacement Agreement, did not replace the Toll Collection Agreement but was intended to protect the lender by allowing SBI to nominate a substitute contractor only if the toll contract was terminated.

It contained an arbitration clause that applied only to disputes arising out of or connected with that agreement.

Jai Laxmi invoked arbitration on May 26, 2012, raising claims under the Toll Collection Agreement but relying on the arbitration clause in this lender-related arrangement.

MSRDC pushed back at the outset, questioning the very basis of the proceedings and filing a jurisdictional challenge under Section 16 of the Arbitration and Conciliation Act, arguing that no arbitration agreement covered these disputes.

The arbitral tribunal disagreed and went ahead with the proceedings, eventually passing an award on April 18, 2018 in favour of Jai Laxmi.

MSRDC then moved the court under Section 34, maintaining that the two agreements operated in separate spheres and that any disputes under the Toll Collection Agreement were meant to be decided by civil courts, not through arbitration.

Jai Laxmi took a different view. It argued that the two agreements were part of a single, composite transaction, and that the arbitration clause should extend across both. It also said MSRDC had effectively accepted arbitration by participating in the appointment of the arbitrator and by filing a counterclaim.

Rejecting these submissions, the Court held that although the two agreements were related, they embodied distinct legal relationships, one governing toll collection and the other governing substitution of the contractor.

It noted that the lender-related agreement would come into play only upon termination of the Toll Collection Agreement, and since no such termination occurred, it had “no role to play”.

The court further held that Clause 38 of the Toll Collection Agreement did not constitute an arbitration clause, as it did not provide for adjudication by an independent and impartial forum.

“Although the heading uses the words “Disputes” and “Resolution”, the manner of drafting of the provision does not necessarily lend itself to being an arbitration provision – there is nothing to indicate that the parties would have to abide by whatever the Vice-Chairman and Managing Director of MSRDC would say. This provision also has to be reconciled with Clause 8.2, which would only mean that the parties would attempt to resolve by means of Clause 38, but it is possible that Jai Laxmi would be dissatisfied and would want to litigate. If that occasion were to arise, Clause 8.2 would point to Jai Laxmi having to litigate in the Principal Civil Court in Mumbai – far from resorting to arbitration.”, the court observed.

It also rejected the waiver argument, holding that participation in arbitration proceedings or in the appointment of an arbitrator does not create an arbitration agreement or bar a jurisdictional challenge.

Holding that the arbitral tribunal lacked jurisdiction from the outset, the court set aside the award as a nullity.

For Petitioner (MSRDC): Advocates Dr. Birendra Saraf, Jay Sanklecha, Arun Siwach, Priyanka Mitra, Shanthan Reddy.

For Respondent (Jai Laxmi): Advocates Sachin Punde, Suraj B. Jadhav.