TOPIC: Case Analysis of Chloro Controls P. Ltd. v.

Severn Trent Water

A PROJECT REPORT

Submitted by

PAYAL RAJPUT

(BAL/065/18)

Of

BA.LL.B (Hons.)

DHARMASHASTRA NATIONAL LAW UNIVERSITY,

JABALPUR

Under the guidance of

Prof. (Dr.) V. Nagaraj

(Vice Chancellor)

Mrs. Shruti Nandwana

(Asst. Professor of Law)

ACKNOWLEDGEMENT

I would like to extend my gratitude to the Honorable Vice Chancellor Professor Dr. V Nagaraj
for providing us with such interesting projects to widen our horizons of learning. I also express
my sincere gratitude to our Registrar Mr. Kapil Mehta for helping me in completing this project I
convey my heartfelt thanks to him. I am highly indebted to Mrs. Shruti Nandwana (Asst. Prof. of
Law) for her enviable encouragement, untiring efforts, for the guidance during the course of
execution of the project, without ma’am , it would not be possible to bring it to the stage of
successful conclusion. I also express my special thanks to all those who helped me throughout
this project, without which it was not possible to accomplish it.

-Payal Rajput

TABLE OF CONTENT
S.No. Contents Page No.

1 Introduction 4

2 Fact of the Case 5

3 Allegations 5

4 Contention by Appellant 6

5 Contention by Respondent 7

6 Decision and Judgment 8

7 Analysis 9

8 Conclusion 10
INTRODUCTION

In India the background of the Arbitration law is completely changed after the Judgment of
Balco v. Kaiser[1], On the date of 28th September 2012 the hon’ble SC has gave another
landmark which completely renew the concept and function of international commercial
arbitrations. In the matter of Chloro Control v. Severn Trent Water Purification Inc. & ors[2],
where chloro cholrols as Appellant and the severn trent water purification inc & ors was
respondent, briefly in this case, there was a dispute between Indian and foreign company.

There was a network of interconnected agreements, each of them dealing with a distinct facet of
the parties' commercial relationship. The principal as the parent agreement was the Shareholders
Agreement. The Shareholders Agreement built-in an arbitration clause that stipulated that the
arbitration would take place in London and that English law would apply. An International
Distributor Agreement, a Managing Director's Agreement, a Financial and Technical Know-How
License, an Export Sales Agreement, and a Trademark Registered User License Agreement were
among the other agreements. These agreements did not all involve the same parties, but they
were all part of a larger transaction that stemmed from the Shareholders Agreement or the
mother agreement.

The court held that The phrase "person claiming through or under" as defined in section 45 of the
Arbitration and Conciliation Act, 1996, encompasses several and multi-party agreements,
allowing even non-signatory parties to some of the agreements to petition for arbitration.[3]

After this decision, it has extensive implication of foreign investors and in parties are now in
exceptional cases which includes composite transaction and the interlinked agreement, even
those non parties like parent company, the subsidiary or group companies, they all can be parties
in the international Commercial arbitration. Therefore this paper thoroughly discuss about the
Chloro Control v. Severn Trent Water Purification Inc. & Ors case by discussing its facts,
Allegations, Contention by Appellant and Respondent, Judgment given by hon’ble SC and lastly
analyze it by concluding.

CHLORO CONTROL V. SEVERN TRENT WATER PURIFICATION INC.

In the matter of Chloro Control v. Severn Trent Water Purification Inc. & ors, this case has very
complicated set of facts where the Indian promoters and the foreign partners has entered into
several agreements and the dispute has arisen between them in the relation to joint venture which
was taken by Indian and foreign collaborators.

Facts-

There was a dispute between Indian and foreign company. There was a network of
interconnected agreements, each of them dealing with a distinct facet of the parties' commercial
relationship. The principal as the parent agreement was the Shareholders Agreement. The
Shareholders Agreement built-in an arbitration clause that stipulated that the arbitration would
take place in London and that English law would apply. Other agreements included an
International Distributor Agreement, which is subject to Pennsylvanian court jurisdiction, a
Managing Director's Agreement, which has no arbitration clause, a Financial and Technical
Know-how License, which is subject to ICC arbitration in London, an Export Sales Agreement,
which is subject to AAA arbitration in Pennsylvania, and a Trademark Registered User License
Agreement with no arbitration clause. These agreements did not all involve the same parties, but
they were all part of a larger transaction that stemmed from the Shareholders Agreement or the
mother agreement.[5]

Allegations-

The allegation in this case was that the Resp.[6] no 1 & 2 has to carry out some distribution
activity in India with Resp. no 5. The entity was founded as a result of the Appellant's joint
venture with Respondents No. 1 and 2, rather than through any of their group entities. On the
other hand, Respondent No. 4, which was said to be the group corporation of Resp. no. 1 & 2,
was the distributing the products to India through which Severn Trent (Delaware) Inc., which is
the ultimate parent company of Resp. no. 1 & 2.

Hence the Appellant filed a suit in the hon’ble Bombay High Court, for seeking a declaration
that the Transaction Documents entered into are valid, current, and binding, as well as an
injunction prohibiting the Respondents from breaching the contract by dealing with anyone other
than Resp. no. 5 in relation to the products directly or indirectly. Some respondent has requested
that the matter be submitted to the arbitration under the section 45 of the Act[7], while citing the
SHA's arbitration clause. The application was initially denied by the Single Judge bench, but on
appeal, the application i.e. the impugned order was granted by the Division Bench of the Hon’ble
High Court. As a result, the Appellant filed an appeal against the contested order.[8]

Contentions by Appellant-

· The Appellant in the matter argued, among other things, that Resp. no. 3 & 4 were the
necessary and proper parties because of substantive remedy which had been sought against them,
and that the dispute was not covered by the arbitration clause because they were not parties to
any of the agreements.

· It was further noted that the term "party" as used under Section 45[9] of the Act refers to all
parties to the agreement, not just some or all of them.

· It was also argued that under the Act, it was not conceivable to refer certain parties/or some
the issues to arbitration while allowing the balance to be adjudicated by another forum, and thus
cause of action bifurcation was not permitted.

· At last, it was argued that the IDA, MDA, TMA, and Collaboration Agreement didn’t
include the arbitration clause, and that the IDA gave Pennsylvania courts exclusive jurisdiction,
which making the arbitration clause unenforceable due to its ambiguity and indefiniteness.[10]

Contention by Respondents-

· The Respondents in the matter argued that the entire dispute revolves around the SHA, and
that Resp. Nos. 3 & 4 was added solely to circumvent the arbitration clause. The Transaction
Documents were executed in the support of the SHA[11] and it collectively formed a composite
transaction, and their success was contingent on the SHA's success.

· Furthermore, it was contended that the Act did not impose any restrictions on referral to
arbitration, and that the hon’ble court, in light of the facts of the case, had the ability to send
parties to arbitration using the court's inherent powers as established in Section 151 of the Code
of Civil Procedure, 1908.

· Finally, it was argued in the matter that, under section 45 of the Act, the applicant requesting
reference can be either a party to the arbitration agreement or a person claiming through or under
such party.[12]

Court Held and Reasoning given by Hon’ble Court

The court demonstrated that there were two separate schools of thought by relying heavily on
internationally available jurisprudence. One takes a pro-arbitration stance, allowing
non-signatories to be referred to arbitration if the facts of the case warranted it, while the other
takes a stricter stance, requiring that a matter be referred to arbitration only if the subject matter
of the dispute is covered by the arbitration clause and the parties to the dispute are parties to the
arbitration agreement. The court pointed out that section 45[13] is written in such a way that it
encourages the court to refer to arbitration if it is satisfied that a legal, enforceable, and operative
arbitration agreement exists. It was decided that the phrase "person claiming through or under" in
Section 45 of the Act indicates that the section does not refer to parties to the agreement but to
people in general, and that the matter could be referred to the arbitration if it is established that a
person is claiming through or under the signatory to the arbitration agreement. However, the
court cautioned that such a reference might be made only in extraordinary circumstances where
the facts overwhelmingly justified it.[14]

The following are some essential criteria that the court stated should be addressed while dealing
with such a situation:

· The direct relationship to the party signatory, to the arbitration agreement;

· The direct commonality of the subject matter

· The transaction should be of a composite type, in which the major agreement's performance
may not be possible without the aid, execution, and performance of supplementary or ancillary
agreements, all of which contribute to the shared goal and have an influence on the dispute.

· Whether the objectives of justice would be served by a composite reference of such parties.

The court next considered the different agreements entered into by the parties, noting that they
were all part of a composite transaction in which the SHA[15] acted as a mother agreement and
the other agreements were ancillary to the SHA's proper implementation. Even though some
parties were not signatories to the SHA, the court ruled in favors of referring the case to
arbitration.

ANALYSIS
This Chloro Control v. Severn Trent Water Purification Inc. & ors[16] decision has demonstrates
the powerful pro-arbitration jurisprudence that has emerged in India. This decision illustrates the
judiciary's shift in intent and thinking toward a more pro-arbitration posture. One of the key
concerns of international investors was the burdensome, expensive, and time-consuming dispute
settlement method, hence arbitration was chosen as a solution. Arbitration terms in the principal
agreements would be enforced in an international commercial arbitration in instances involving
composite transactions, such as transactions involving group companies, according to the ruling.

Beforehand, the law stated in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya[17]
that a dispute could not be referred to arbitration if there were non-signatories or subject matter
that was not strictly within the arbitration agreement. The current judgement, on the other hand,
has created a clear distinction between the Sukanya case, which now only applies to domestic
arbitrations, and where an application under, Section 8 of the Act is filed. Parties claiming
through or under a signatory to an arbitration agreement can be referred or request for the matter
to be referred to arbitration in international commercial arbitrations, but this may not be the case
in purely domestic arbitrations.

Furthermore, in the case of composite transactions, the dispute resolution clauses would need to
be examined more comprehensively. Particular attention should be given when including dispute
resolution terms in a variety of transactions, such as joint ventures, lending agreements requiring
security formation, and acquisitions consisting of a number of agreements. In an attempt to
broaden the scope of the dispute resolution clause by using terms like "disputes arising out of or
in connection with," care must be taken to ensure that disputes that do not solely relate to the said
agreement are not covered, potentially exposing non-parties to arbitration, such as group entities
and directors.

CONCLUSION
The Court considered the meaning of section 45 of Part II of the Arbitration & Conciliation Act,
which gives the judicial authority the ability to refer the parties to arbitration, in Chloro Controls
India Pvt. Ltd. vs. Severn Trent Water Purification Inc. & Ors. At the request of either party or
any person claiming through or under them, the court may refer the parties to arbitration,
according to the clause. [18]

The Court concluded in Chloro Controls that the words "any person claiming through or under
him" must be interpreted to encompass non-signatory third parties. "The transaction should be of
a composite nature, where performance of the mother agreement may not be possible without the
aid, execution, and performance of the supplementary or ancillary agreements, for the purpose of
achieving the common object and collectively having bearing on the dispute,"[19] it says.

[1] Bharat Aluminium v. Kaiser Technical Services, Civ App 3678 (2007)

[2] Chloro Control v. Severn Trent Water Purification Inc. & ors,1 SCC 641(2013)

[3] id

[4] Id at 2

[5] Kumar, Manasi,‘The ‘Composite Transaction’ and Extension of Arbitration Agreements in India’.
Journal of International Arbitration, 37, no. 3 (2020)

[6] “Respondent”= “resp.”

[7] The Arbitration And Conciliation Act, Section 45, 1996

[8] id

[9] Supra 7

[10] Chloro Control v. Severn Trent Water Purification Inc. & ors,1 SCC 641(2013)

[11] “Share Holder Agreement”= “SHA”

[12] Chloro Control v. Severn Trent Water Purification Inc. & ors,1 SCC 641(2013)
[13] Supra 7

[14] Kumar, Manasi,‘The ‘Composite Transaction’ and Extension of Arbitration Agreements in India’.
Journal of International Arbitration, 37, no. 3 (2020)

[15] Supra 11

[16] Supra 2

[17] Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya, 5 SCC 531 (2003)

[18] Supra 2

[19] Chloro Control v. Severn Trent Water Purification Inc. & ors,1 SCC 641(2013)