In March 2008, Saurashtra Fuels (the plaintiff) contracted with Mechel Trading Ltd (Mechel) to purchase coal to be delivered to Mundra Port, Gujarat, India, by a vessel to be chartered by Mechel. In May 2008, Mechel shipped coal on the Vinalines Fortuna ex Vinalines Saigon (the first defendant vessel) at Posyet, Russia. Five clean on-board bills of lading were issued by the vessel and its owner (the second defendant). The bills were stated 'to be used with charter-parties' but did not identify the vessel or charterparty either by name or date. The plaintiff made payment and became holders of the bills. The first condition of carriage stated that 'all terms and conditions, liberties and exceptions of the charter party as stated overleaf including law of Arbitration clause, are herewith incorporated'. Meanwhile, Mechel and the defendants had entered into a voyage charterparty dated 9 May containing a London arbitration clause.

Subsequently, the second defendant informed the plaintiff of water ingress in the vessel's cargo holds. Cargo in the first hold had liquified, while cargo in the fourth hold was wetted. The vessel's master therefore decided to deviate and arrived at Vung Tau, Vietnam, where the second defendant's surveyors took samples in June. However, the second defendant stated that the condition of the cargo remained unknown.

The vessel arrived at the discharge port in July, where the plaintiff's surveyors and the port authorities observed foreign matter such as iron rods and plastic when cargo was discharged from the first and fourth holds.

In July 2009, the plaintiff commenced proceedings for its cargo claim, arguing that the entire cargo became damaged and unusable due to the misconduct and/or want of skill of the crew. Citing the 'Arrest Convention' and other maritime legislation, the plaintiff applied for the arrest of the vessel and other relief under the Court's admiralty jurisdiction. This included a request for a decree against the defendants for INR 154,378,835 and for the vessel to be sold with the sale proceeds to be applied for the satisfaction of the plaintiff's claim in the suit. The Court issued a direction for the arrest of the vessel. The Court subsequently ordered the vessel to be released because the defendants had furnished security.

The defendants applied for the proceedings to be stayed for arbitration under the Indian Arbitration and Conciliation Act 1996 and for the security to be returned to the defendants duly discharged. They argued that the five bills incorporated the charterparty dated 9 May and its London arbitration clause: The SLS Everest [1981] 2 Lloyd's Rep 389 (CA). The plaintiff was thereby bound to arbitrate despite being a non-signatory: Chloro Controls India Pvt Ltd v Severn Trent Water Purification Inc 2013 (1) SCC 641 (Chloro Controls), citing Owners & Parties Interested in the Vessel MV Baltic Confidence v State Trading Corp of India Ltd 2001 (7) SCC 473. Furthermore, the second defendant had in 2011 commenced arbitration proceedings against the plaintiff for general average contributions.

The plaintiff, however, asserted that it was not party to any arbitration agreement with the defendants, claiming that the bills did not refer to the 9 May charterparty. Even if the parties had an arbitration agreement, the plaintiff can still arrest a vessel to obtain security: JS Ocean Liner LLC v MV Golden Progress MANU/MH/0026/2007 (The Golden Progress) (CMI2803); Gupta Global Exim Pvt Ltd v MV Asean Express (Judgment dated 26 August 2004 in Admiralty Suit No 23 of 2001). The arbitration proceedings for general average are distinct from the plaintiff's claim in the action.

Held: Proceedings stayed. Security retained.

The Court found that the bills incorporated by reference the charterparty dated 9 May and its arbitration clause. The plaintiff did not suggest any other charterparty.

The intention of the parties is a very significant feature. Depending on, and subject to, the clear intention of parties, in exceptional cases a non-signatory third party can also be subjected to arbitration without prior consent: Chloro Controls. The bills show that parties clearly intended to arbitrate their disputes.

The Court did not grant the defendants' application for the return of security but clarified that this matter would be subject to the orders that may be passed by an arbitral tribunal in ongoing or future arbitration proceedings. Until then the security shall be retained and shall be kept alive by the defendants. In arriving at its decision, the Court referred to, among other things, The Golden Progress [77]-[78]:

[A]bsent explicit legislation providing that action in rem may be used to obtain and retain security even though the merits of the dispute are to be determined in the arbitration proceedings and that subject matter of the dispute falls with admiralty jurisdiction, some procedure which is not prohibited and that is also not inconsistent with the law be devised which helps in advancing the cause of justice in accord with Article VII of Arrest Convention, 1999. ...

(i) An application under Section 9 of the Arbitration and Conciliation Act, 1996 is not maintainable for the arrest of the vessel for obtaining security of an Award that may be made in arbitration proceedings. […]

(ii) An action in rem (in admiralty jurisdiction) for recovery of the claim and arrest of the vessel where the parties have agreed to submit the dispute to arbitration can be maintained and in such case if by way of an interim measure, the vessel is arrested or the security provided to obtain the release of the vessel, matter shall proceed in accord with Article VII of the International Convention on Arrest of Ships, 1999.

(iii) If the proceedings are brought within the time so ordered by the Court before the arbitral tribunal, any final decision resulting therefrom shall be recognised and given effect with respect to the arrested ship or to the security provided in order to obtain its release provided that the defendant has been given reasonable notice of such proceedings and a reasonable opportunity to present the case for defence and in accord with the provisions contained in Arbitration and Conciliation Act, 1996.

(iv) With regard to clauses (ii) and (iii), it is, however, clarified that retention of security shall remain a matter of discretion and it shall be for the court to pass appropriate order in that regard after taking into consideration all relevant circumstances.

The Golden Progress indicates 'that in admiralty jurisdiction an action in rem for recovery of the claim and for arrest of vessel can be maintained in those cases where the parties have agreed to submit the dispute to arbitration'. The Court in The Golden Progress had 'observed that in such cases if by way of interim measure the vessel is arrested then the matter shall proceed in accordance with international convention on arrest of ships and so far as the retention of security is concerned the said aspect shall remain a matter of discretion and it would be for the Court to pass appropriate order'.

The Court also referred to Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc 2012 (9) SCC 552 (BALCO). BALCO observed that an inter-parte suit simply for interim relief pending arbitrations, even if it is taken out and for the purpose of arresting loss or for arresting dissolution of asset would not be maintainable. BALCO held that pending of arbitration proceedings outside India would not provide cause of action for a suit where the main prayer is for injunction and that it is not open to the parties to arbitration agreement/proceedings to file a suit touching merits of arbitration. However, BALCO was distinguishable because: (1) no party had issued a notice of arbitration; (2) arbitration was not pending; (3) the relief prayed for the suit was for a money decree; and (4) admiralty jurisdiction was invoked on the premise that there was no arbitration agreement for the maritime claim.