[The Viewpoint] Arbitration and joint ventures in electricity infrastructure construction contracts

With the rapid electrification of India over the last decade, we have witnessed a sharp surge in contracts for construction and maintenance of infrastructure, dedicated to fulfilling the growing demand of energy access around the country. For a single contractor, constructing electricity infrastructure can be an enormous undertaking.

Therefore, various contractors frequently enter into joint venture agreements with other contractors/parties to undertake the same by making one of the parties of the said joint venture as lead partner, being the single point of contract from the side of the contractor.

A contractor has the opportunity to access specialized knowledge which may be available with other contractors/parties by way of executing a joint venture agreement. Joint ventures also allow contractors to bid on larger construction projects which they would otherwise be unable to do in their personal capacity. Such agreements provide for the rights and liabilities of both the contractors/parties to the construction contract and the employer of such project.

However, taking the joint venture (JV) route can also pose certain challenges, especially when a dispute arises between the JV and the employer. At this juncture, it is relevant to consider the position of each partner to the said JV in accordance with the agreement. It is also crucial to examine the procedure required, as a pre-requisite condition, before initiating dispute resolution provided under the contract either by the JV, its lead partner or as mandated under the terms of the JV agreement. If the lead partner embroiled in a JV dispute invokes the arbitration clause in its individual capacity and without consent from the other member partner, then an interesting point of law arises as to whether the said invocation of arbitration would be effective under the law.

Pertinently, the Bombay High Court, while considering a similar legal matrix in Maharashtra State Electricity Distribution Company Limited (MSEDCL) v. Godrej and Boyce Manufacturing Company (GBMC), settled the question of law by holding that the invocation of an arbitration clause provided under the tender contract by an individual partner to the JV, without taking consent of the JV or other member/s of the JV, would not amount to a proper invocation of the arbitration clause.

In this case, MSEDCL had invited bids for an engineering, procurement, and construction (EPC) contract wherein the JV of GBMC and Electropath Services (joint partner) came out as the successful bidders, and were accordingly awarded with the said contract. Subsequently, a dispute arose between the JV and MSEDCL, after which GBMC (being a lead partner) invoked the arbitration clause available under the said tender contract against MSEDCL.

GBMC consequently approached the Bombay High Court for appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act. Pursuant to the appointment of the arbitral tribunal, MSEDCL raised the preliminary issue of maintainability, more particularly on the ground of privity of contract, before the tribunal. It stated that barring one contract, the other seven contracts have been executed between MSEDCL and the JV collectively, and not with GBMC individually. Therefore, the said disputes under arbitral proceedings could not be proceeded without impleading the joint partner of the JV as a party to the arbitral proceedings.

The tribunal dismissed MSEDCL's application, recording that it possessed requisite jurisdiction to hear and decide the dispute between the parties. Aggrieved by the said order, MSEDCL filed a Section 34 petition before the Bombay High Court.

The High Court, while considering the petition, framed the following issues:

(a) Whether the arbitration agreement was invoked by the Respondent under the provisions of the Agreement entered into between the Petitioner and the JV or was a separate arbitration agreement individually between the Petitioner and the Respondent by virtue of executing the joint memo; and

(b) Whether the Statement of Claim filed by the Respondent in the arbitral proceedings was on behalf of the JV of the Respondent or was made by the Respondent for itself and if it is held that it was made individually and not on behalf of the JV, whether such claim would be maintainable.

After considering the various provisions of law and clauses in the contract, the High Court set aside the tribunal's order, and consequently, the application of MSEDCL under Section 31(6) of the Arbitration Act was allowed.

The Court established that where a contract signed between the JV and the employer defines the JV as a contractor, there could not be any invocation of the arbitration clause by the lead partner of the said JV alone, or even in its individual capacity, without the express consent of the JV or its JV partner.

The judgment cleared the pre-existing general notion that the lead partner of a JV can, in its individual capacity, invoke the arbitration clause against the employer without seeking and obtaining the requisite consent from the JV or the JV partner to initiate such dispute resolution procedure. In fact, as was held by the Court, the JV or its partner are necessary parties to any further proceedings arising out of the invocation of arbitration proceedings and thereafter.

Even as the number of JVs in the electricity and infrastructure construction industry increases, we cannot disregard the dramatically low number of JVs that eventually achieve success in reality. Unfortunately, more often than not, JVs fall prey to a myriad of disputes which ultimately leads to a fatal breakdown in leadership. Therefore, we hope that the above judicial precedent is an important step forward to stimulate conversation about the various steps parties can take to protect themselves contractually and actionably against future disputes that may arise.

In view of the above settled law, it is important for all JV entities to look into their agreements and assess their position and requirement in terms of the law before invoking the arbitration clause of such agreements.

Samir Malik is a Partner, Rahul Sinha is an Associate Partner and Udita Saxena is an Associate at DSK Legal.

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