"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Thursday, June 17, 2010

Bhushan Steel Ltd. v. Singapore International Arbitration Centre & Anr.

Case No: IA No. 11355/2009 & CS (OS) No. 1392/2009
Court: High Court of Delhi 
Bench: Manmohan Singh, J. 
Date: 4 June 2010

Below is the arbitration clause in the contracts between the Bhushan Steel Ltd, an Indian company and a Danish company.

In the event of any question of dispute arising under the contract, the same shall be referred to the award of arbitrators to be nominated one each by the sellers and buyers within 30 days notice from either side or in the case of arbitrators not agreeing then to the award of an umpire to be appointed by the arbitrators in writing prior to proceeding with the arbitration. The decision of the arbitrators or the umpire as the case may be shall be final and binding on both parties. The arbitration will take place in Singapore as per the international law.”

We'll call the Indian company by the acronym of its name- "BS" and the Danish company as "DC'. The facts leading to this decision are:

2007: Fourteen Sales Contracts were entered into between BS and DC for the sale and purchase of certain goods. The parties were in accord with the quality and quantity of the goods. Curiously, the parties agreed that the specifications of the goods were to be determined at the time of placing of the purchase orders.

July- November 2007: 776 units of the goods under eight contracts were despatched to DC. The said goods were received without objection by DC. Invoices for the said goods were also sent to DC. 

16.01.2008: BS received a letter from DC stating that the goods supplied under the contracts were not in accordance with the specifications of DC. BS sent its surveyor to verify if the goods were not in consonance with the specifications. The surveyor found DC's complaint to be wrong. Also, the surveyor found that only 32 of the 776 units of goods remained in the possession of DC. Yet, DC chose to make advance payment for the goods under the remaining contracts, consequent to which BS started making the goods. Subsequently, however, BS was informed by DC not to dispatch the said goods till further directions from DC. BS has allegedly suffered a loss of USD 777,297.23 as BS could not sell the goods in open market as the goods were tailor-made to DC's specs.

11.06.2008: BS received a notice from DC stating that BS was liable to pay DC Rs. 4,278,689.88 plus interest @12%. Further DC also asked BS to deliver the remaining goods in the contract.

18.06.2008: BS replied that it was DC which had to pay USD 777,297.23to BS. Further BS also contended that arbitration clause was vague, and was therefore, not valid.

05.01.2009: DC initiated winding up proceedings against BS and had asked for payment of money due to it under the said contracts.

DC sent a notice invoking arbitration against BS in respect of the allegedly defective goods supplied under the first eight contracts. Against the said notice, BS filed a suit before the Delhi High Court for:  
  1. declaring the arbitration clause as vague and therefore incapable of being enforced
  2. declaring that Singapore International Arbitration Centre (SIAC) had not jurisdiction in respect of the matter
  3. declaring that the contracts in the transactions were to be interpreted as per the substantive laws of India.
  4. grant permanent injunction against SIAC and DC preventing them from initiating arbitration proceedings
  5. declaring that there were no arbitrable disputes between BS and DC. 
An interlocutory application was filed by DC under Order VII Rule 11(d) of the CPC.  Rule 11(d) reads:

"The plaint shall be rejected in the following cases:
...
(d) where the suit appears from the statement in the plaint to be barred by any law:
"

DC, the second Defendant has sought to argue the following against the plaint:
  • The suit is barred by S 5 of the Arbitration and Conciliation Act, 1996.
  • The suit by BS was a counter to the winding up proceedings initiated by DC against BS and was merely a dilatory tactic adopted by BS to delay the arbitration.
  • The issue regarding the validity of the arbitration clause could be canvassed before the arbitral tribunal and not by a separate suit.
  • BS had acquisced to the arbitration clause and hence the suit is not maintainable by the reasons of waiver, estoppel and acquiscence.
  • The suit is undervalued and is without adequate court fee.
Tha plaintiff, BS, had argued that the bar under S 5 is only as regards matters that cover Part I and not matters under Part II, which are, by their very nature, 'international'. S 5 of the Arbitration and Conciliation Act, 1996 (Act) reads:
"Extent of judicial intervention. -Notwithstanding anything contained in any other law for the time being in force, in matter governed by this Part, no judicial authority shall intervene except where so provided in this Part."

BS argued that the suit filed by it could be barred on satisfaction of the requirements under S 45 of the Act. S 45 reads:

"Power of judicial authority to refer parties to arbitration. -Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908) a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed."

BS further alleged that DC had not deliberately made an application under S 45 because that would mean that the judicial authority referred to thereunder would have to decide on the validity of the arbitration clause, which would be dangerous to DC's case.

BS cited S 9 of the Code of Civil Procedure, 1908 (CPC) and certain decisions underlying it and contended that the bar to sue should be express.

BS also argued that DC had wrongfully brought the suit under Order VII Rule 11 when it should have approached the court under S 45 of the Act. It intent, BS argued, was not to delay the arbitration but to contend that the arbitration clause was vague and unenforceable.

On the contention as to S 5 not applying to arbitrations which are 'international' in character, DC argued that as per Bhatia International Part I would apply to arbitration held even outside India.

Issues:

The court framed two issues:
  1. Whether the suit is barred under Order VII Rule 11(d) of the CPC?
  2. Whether S 5 of the Act bars the jurisdiction of this court to take cognisance of the suit? If this is in the negative, is the present suit barred by any other law for the time being in force as per the said Rule 11(d)?
Decision:

The court held that the contention of BS that the application under Order VII Rule 11(d) is not maintainable does not hold good because an application under the said rule could be filed at any time before the conclusion of the trial. S 5 is very clear. It begins with a non-obstante clause and the judicial authority referred to in S 5 would clearly include even civil courts. The purpose of S 5 was to limit the extent of judicial intervention in arbitration only for necessary purposes. In the exercise of its powere, the courts should not bypass settled law. 

Further, Part I would apply, by virtue of Bhatia International, to even arbitrations that are the subject matter of Part II of the Act, unless they were excluded. In this case, Part I was not excluded. Part I could be excluded by one or all of the following ways:

"(a) There must be no agreement as to the governing law of the contract, governing law being presumed to be the law of arbitration also;
(b) There must be no agreement as to the place of arbitration; and/ or
(c) It must be shown that if no interim action is taken, a party would be remidiless."

Plaintiff's contention to counter the argument of estoppel/ waiver that the arbitration clause had to be treated independently of the main contract did not find favour with the court. The court held that severability of the arbitration clause from the main agreement was only for the purpose of enabling the arbitral tribunal to rule on its own jurisdiction. After having signed and acted upon a contract, a party cannot later rescind the terms of the contract by quoting a statutory provision out of context. Further, the plaintiff had raised invoices by attaching the contracts in their entirety.

Under the Singaporean International Arbitration Act (SIAA), the place of arbitraiton is Singapore. Further, the arbitration is international as BS is situated outside Singapore. Also, as per the SIAA, UNCITRAL Model Law on International Commercial Arbitration (UML) would be applicable in case of international arbitrations.

Also, the words "international law" in the arbitration clause "were intended to mean the [UML]..." The governing law as per the arbitration clause was to be the UML and the venue was Singapore. The court stated:

"43. It is evident from the above that the arbitration clause in the sales contract clearly provides the governing law as well as the place of arbitration in case of disputes between the parties. The 'International Law' which is stated to be applicable to the dispute clearly exlcudes this Court's jurisdiction in the present matter."

The court found that the arbitration clause was valid in view of the fact of reliance of the said clause by the plaintiff.

Comment:

Clarification: In  Para 43 of the the judgement quoted above, the judge referred to governing law being Singaporean law. Note that this is probably not the reference to the governing law of the contract but to the governing law of arbitration. If the governing law of the contract was 'international law', I am not sure if such a choice could be sustained. As Redfern and Hunter say:

"There is no reason in principle why [parties] should not select public international law, or alternatively the general principles of law as the law which is to govern their contractual relationship... [T]he problem of adopting international law [] as the system of law which is to govern a commercial relationship is not a problem of principle, but of practice. International law [is] concerned primarily concerned with the relationship between states, is not particularly well equipped to deal with detailed contractual matters..." (p. 119-121)

Maintainability of the Suit and the Validity of the Arbitration Agreement: If the question before the judge is only regarding maintainability of the suit (or even the validity of the arbitration agreement,) what is the need to take note of detailed facts relating to performance of the contract? Such recording of facts might have serious implications when the arbitral tribunal or the award-reviewing/ enforcing courts deal with the matter. For example, what if the tribunal's finding on a fact is contrary to that of the High Cout judge? In this case, several such facts have been recorded by the Single Judge. For instance, the judge states that the allegedly defective goods were received by DC without any objection. How does this help in the ultimate decision-making on the issues?

Saraf & Jhunjhunuwala, in their book titled 'Law of Arbitration and Conciliation' state:

"Section 5 does not bar filing of a suit in the court in a case where there is an arbitration agreement. Section 8 of the Act deals with that situation. What Section 5 provides is that in the matter governed by the Act, i.e. in arbitral proceedings, no judicial authority shall intervene except as provided in the Act." (p. 120, 5th ed.)

On this point. the learned authors have cited (and so have the counsel for BS) the case of PK Bajaj v. Reminiscent India Television Ltd. 2006(2) Arb. LR 361 (Delhi): MANU/DE/8612/2006 (Bajaj) where a Single Bench of the same High Court has held that "[Section 5] does not say that a suit will not lie in case there is an arbitration agreement in respect of the dispute between the parties. All that it says is that in case there is any matter governed by this part of the Act, the judicial intervention would be only as provided in this Act."

In Bajaj, Reminiscent India Television Ltd., the Defendant (RIT) had entered into an agreement with one Mr. Aman Bajaj. The agreement contained an arbitration clause and also provided that Mumbai courts would have jurisdiction for entertaining matters related to the agreement (Note that such forum selection clauses are regarded as subject to the arbitration clauses). In this case, arbitration was invoked by RIT against PK Bajaj when PK Bajaj was not a party to the agreement. PK Bajaj filed a suit in the Delhi High Court contending that he was not a party to the contract (consequently the arbitration agreement). In the same suit, RIT had filed an interlocutory application, stating that in view of Order VII Rule 11 CPC read with Section 5 of the Act, the suit has to be dismissed. Justice Manju Goel disagreed with RIT, dismissed the IA and also imposed costs amounting to Rs 3000 on RIT.

Bajaj, like, Bhushan Steel, is a decision by a single judge. Bhushan Steel has reached a conclusion that it diametrically opposite to Bajaj. While Bhushan Steel states that a court could dismiss ,by virtue of Order VII Rule 11 CPC read with S 5 of the Act, a suit in respect of a dispute under contract containing arbitration clause, Bajaj states that the appropriate remedy is S 8 of the Act and not Order VII Rule 11 CPC read with S 5 of the Act. I fail to understand why the judge in Bhushan Steel failed to analyse Bajaj and clearly state why he disagreed with Bajaj.

The law as it stands as regards S 8 and S 45 is this: when the court refers a matter to arbitration it has to be satisfied of the existence of the arbitration agreement. S 45 clearly provides that the court cannot refer a matter to arbitration if it "finds that the [arbitration] agreement is null and void, inoperative or incapable of being performed". By invoking Order VII Rule 11(d) CPC, the court has circumvented the statutory requirement of determination of the validity of arbitration clause when such circumvention was not possible under S 45 of the Act. Note that the court actually decided on the validity of the arbitration clause. Should the court have done so? The simple question that the court had to decide was whether the suit was liable to be dismissed under Order VII Rule 11(d) CPC read with S 5 of the Act. Why did the judge decide on the validity of the arbitration clause? If the suit was not maintainable by virtue of the said provisions, shouldn't the judge have simply dismissed the suit without giving any finding on the validity of the arbitration clause?

Drafting of the Arbitration Clause: The arbitration clause quoted above provides for the following:

1. Two arbitrators are to be appointed to resolve the dispute.
2. In case there is no unanimity between the arbitrators on the award, an umpire is to be appointed in writing.
3. Such appointment is to be done even prior to proceeding with arbitration
4. In case there is no unanimity between the arbitrators, the decision of the umpire (and not the majority of arbitrators) would be final and binding on the parties
5. The venue of arbitration would be Singapore
6. The arbitration would be conducted in accordance with 'international law'.

I am surprised at how parties choose such an irregular arbitration clause when there are innumerable model clauses available these days. Despite that, I think the said clause creates an unambiguous intent to arbitrate disputes under the contracts. Even the complicated appointment procedure cannot be held to be unenforceable. The arbitral tribunal, as per the clause, would consist of two arbitrators. If there is no unanmimity in their decision, the matter would have to be referred to an umpire (Curiously, the clause also provides impliedly that even if the umpire comes to a decision that is not in complete agreement with either of the arbitrators, his decision would be final). The clause provides that the arbitration will take place in Singapore. What seems to be ambiguous is the choice of law. The arbitration is supposed to take place as per international law. The Single Judge interpreted the term 'international law' to the UNCITRAL Model Law which is made applicable in Singapore by the SIAA in case of international arbitrations. Lucky for DC- the seat of arbitration was Sinapore and not New York or France or London. If it was France or London or New York how could the court have interpreted 'international law'? Most websites of the International arbitration institutions provide for model arbitral clauses that parties could incorporate in their agreements. 

[Note: On the validity of the arbitartion agreement in this case, the justification that can been made to validate the arbitration clause is the almost universal principle of severability of invalid protions of a contract from the valid portions. Clearly, the choice of international law is vague. Even in the absence of such a choice, the arbitration would, in any case, be conducted in accordance with the UML (SIAA). (Note that this severability is not the same as the severability doctrine which implies that the arbitration clause forming a part of a contract is deemed independent of the contract).] 

2 comments:

Nona said...

Your blog is different from all the blogs that I follow! But, I'm not into your domain. So, can you write it in a simple way so that laymen like me are able to understand this too? Currently, the blog is too technical and is difficult to follow if the reader is not in the same profession!

Badri said...

@ Nona,
thanks for your comments. Primarily, this blog is a law blog (blawg). Once in a while, we do write on non-law issues, but we do it in rare cases. Despite this, we'll see what we can do to cut out the lawyer jargon and make it simple for non-lawyers to understand. Thanks, once again, for your comments.