Enercon v Enercon (Part I-Facts and Litigation History)

Enercon (India) Ltd. V. Enercon GmbH (Civil Appeal No. 2086/2014 arising out of SLP No. 10924/2013) and Civil Appeal No. 2087/ 204 arising out of SLP 10906/2013 dt. 14.02.2014) (pdf)

Enercon v Enercon is an example of the complexity of disputes arising out of joint venture arrangements. The proceedings culminating in the decision of the Supreme Court read like a screen play of a “mega-serial” (a hilarious explanatory definition of the term can be found here). This series of posts discusses the judgement.

Facts:

Two individuals of a business family (Appellants Nos. 2 & 3) entered into a joint venture arrangement with Enercon GmbH (hereafter “Enercon”) and set up Enercon (India) Ltd. (hereafter “Enercon India”) in 1994. The purpose of the company was to manufacture and sell wind turbine generators (hereafter “WTG”). Respondent 2 held the patent rights pertaining to the WTG technology. As a part of the said joint venture arrangement, several transactions were entered into:

Date	Agreement	Parties
12.01.94	Share Holding Agreement	Appellants 2 & 3, Enercon
12.01.94	Technical Know-How Agreement	Enercon India & Enercon
19.05.98 19.05.00	Supplementary Shareholding Agreements	Appellants 2 & 3, Enercon
19.05.00	Supplementary Technical Know-How Agreement	Enercon India & Enercon
23.05.06	Heads of Agreement (on a future agreement covering future technologies developed by Enercon & Respondent 2	Enercon India & Enercon
29.09.06	Agreed Principles (providing the basis for the final agreements to be executed.	Enercon India, Appellants 2 & 3 & Enercon
29.09.06	Intellectual Property Licence Agreement (IPLA)	Appellants 2 & 3, Enercon

Disputes arose between the parties as to whether the IPLA was in consonance with the Agreed Principles which led to unilateral suspension of supplies by Enercon to pressurize Appellants 2 & 3 to sell their shareholding in Enercon India to Enercon.

Legal Proceedings Post- Dispute:

Appellants 2 & 3 filed a derivative suit in September 2008 in the Bombay High Court seeking an order to resume supplies by Enercon. In response, Enercon filed an application under Section 45 of the Arbitration and Conciliation Act, 1996 (hereafter “1996”) seeking reference of the suit to arbitration in London in view of the arbitration clause. As on the date of the judgement, the suit was still pending. An interim order was passed in the suit seeking resumption of supplies. After complying with the interim order for some time, Enercon allegedly stopped complying with the same, against which Appellants 2 & 3 filed a contempt petition.

In March 2008, Enercon invoked arbitration contained in Clause 18.1 of the IPLA and nominated Mr. VV Veeder QC as its arbitrator. Enercon invited Appellants 2 and 3 to nominate an arbitrator on behalf of Enercon India. Appellants 2 & 3 contested the notice stating that the IPLA was not a concluded contract.

A fortnight later, Enercon filed an application in the English Commercial Court for constitution of the tribunal.

Enercon India and Appellants 2 & 3 filed a suit in the Daman civil court for declaration that the IPLA was not a concluded contract and that there was no arbitration agreement between the parties. In the said suit, the Respondents were ordered to maintain status quo as regards the English proceedings.

Enercon India nominated, without prejudice, a former judge of the Supreme Court as arbitrator in April 2008. In the same month, Enercon India’s nominee arbitrator Mr. Justice BP Jeevan Reddy wrote a letter stating that the arbitration clause was unworkable and that both the arbitrators were unable to appoint the third arbitrators. In August 2008, both arbitrators issued a joint statement reiterating the contents of Mr. Justice BP Jeevan Reddy’s letter.

Enercon then filed an application under Section 45 of the 1996 Act for referring the subject matter of the suit to arbitration which was dismissed. Subsequently, an application for injunction was filed by the Appellants restraining the Respondents from proceeding with the proceedings in the English Commercial Court and the same was allowed. Both the orders were appealed against. The Daman Appellate Court allowed the appeals. Writ Petitions were filed against these orders in the Bombay High Court. The High Court granted interim stay of the pursuit of the English proceedings.

Despite the same, the Respondents proceeded with the English proceedings where an interim anti-suit injunction was granted against the appellants from prosecuting the writ petitions before the Bombay High Court. An ex parte interim injunction was given by the same court restraining Enercon India from disposing of its assets. The English court decided the matter finally in March 2012 wherein it was held that the anti-suit of the Bombay High Court was in force. In addition, the anti-suit injunction against pursuit of proceedings in the Bombay High Court were discharged subject to the undertaking given by the appellants that the proceedings before the High Court would be expedited and concluded as early as possible and that the appellants would not seek further directions for interim relief from the Bombay High Court.

The Appellants filed an application before the High Court for expeditious listing and hearing of the writ petitions. Despite the same, the Respondents filed an application in the English Court for the appointment of the third arbitrator in June 2012. Since no action was taken on the application for expeditious hearing, the Appellants filed a special leave petition to the Supreme Court which requested(?) the High Court to take up the writ petitions. Subsequently, the Writ Petitions were dismissed on 5 October 2012. On the same date, the Respondents’ counsel issued a letter to the Appellants’ counsel for relisting of the application before the English Court for appointment of the third arbitrator. The Respondents also applied for antisuit injunction against filing of any  Special Leave Petition by the Appellants in the Supreme Court against dismissal of the Writ Petitions. The English court decided in November 2012 on the application. Following is a summary of the decision:

1) The Bombay High Court was concerned with the questions as to whether there was a binding arbitration agreement, whether the seat of the alleged arbitration agreement was London, and whether English Courts could exercise supervisory jurisdiction when the seat was not in England.

2) It would be confusing if the Supreme Court of India decided differently from what the English Court decides as regards these questions.

3) Consequently, the  decision of the Supreme Court should be awaited despite delays and difficulties involved.

Also, the Appellants filed an undertaking before the English Court that it would not seek injunction from the Indian courts unless it was determined that the seat was in India and that it would not seek injunction restraining the Respondents from pursuing proceedings instituted in the English High Court on grounds mentioned therein. An order was passed by the English courts in February 2013 on the basis of the undertaking.

In the same month, Special Leave Petitions were filed challenging the orders of the Bombay High court in the Writ Petitions.

We will discuss the judgement of the Supreme Court in the next post. Two inferences can be drawn from the above discussion: One, both parties would have spent several crores of rupees to pursue litigation in multiple fora in more than one country; two, it is apparent that the arbitrators (who are eminent jurists), the Indian and the English courts could not clearly state whether the seat of the arbitration as per the arbitration clause was London or was in India. What was the problem with the arbitration clause? What was the decision of the Supreme Court? These are aspects that would be discussed in the future posts on this topic. 

Voltas v. Rolta India: A Comment

The Supreme Court has been very busy this year in the arbitration front. An example of this is the decision of the court in Voltas Ltd. v. Rolta India Ltd. (Civil Appeal No. 2073/2014 arising out of SLP (Civil) no. 30015/2013 dt. 14.02.2014).

Facts:

Voltas Ltd. ("Voltas") and Rolta India Ltd. ("Rolta") entered into a construction contract for the construction of two buildings and modification of an existing building. Disputes arose between the parties and Rolta terminated the contract in December 2004.

In March 2005, Rolta communicated to Voltas that it is yet to compute the losses, damages, etc., after the building work is over and that it would claim the same from Voltas. Voltas replied in April 2005 that it was not liable for damages. In the same month, Rolta wrote to Voltas stating that it was not liable to pay any compensation and that it had suffered huge losses and damages and incurred heavy costs for which Voltas was responsible. Rolta also stated that it had the right to take approprirate steps as per agreement. Voltas invoked arbitration in March 2006 for the adjudicaiton of the dispute. Several correspondences between the parties ensued and ultimately Rolta raised claims under several heads vide its letter in April 2006. Against the said letter, Voltas denied liability in May 2006. Since an arbitrator was not appointed by Rolta, Voltas approached the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996 (Act) and the Bombay High Court ordered appointment of an arbitrator in November 2010.

The arbitrator entered reference and Voltas filed its Statement of Claim claiming about 23.31 crores plus interest. Rolta filed a counter claim for Rs. 333 crores with interest. In the counter-claim, Rolta stated that it had sent a demand letter in April 2006 claiming several amounts which were subsequently raised in its counter-claims.

Against the counter-claims, Voltas objected stating that the counter claims were not maintainable and was barred by limitation. The arbitrator had to decided (1) whether the counter claim or a part thereof was barred by limitation, and (2) whether the counter claim was not maintainable and beyond the scope of reference. The arbitrator overruled the objections regarding maintainability of counter claims but held that the counter-claims were barred by time in the Interim Award.

Against the said Award, Rolta filed an application under Section 34 of the 1996 Act. The Single Judge upheld the Interim Award. On appeal, the Division Bench reversed the decision of the Single Judge and held that the counter-claim was filed within limitation. The Division Bench held that since a demand was made by Rolta in April 2006 for Rs. 68.63 crores, the period from May 2006 till 2010 during which the Section 11 proceedings were pending had to be excluded. Voltas appealed to the Supreme Court.

Decision:

After hearing the contentions of the parties, the Supreme Court held that the correspondences between the parties after termination in December 2004 had an implication on the ultimate decision. Pursuant to the termination letter, Voltas replied requesting payment for its final bill. The court held that Rolta had already crystallised its claims against Voltas in March 2005 where in claimed Rs. 68.63 crores and threatented to invoke arbitration if Voltas did not pay the said amount within seven days. Further in reply to Rolta's April 2006 letter, Voltas' counsel had replied in April 2006 that since their client had gone abroad, an arbitrator would be appointed within thirty days from their client's return. The Supreme Court considered these communications to indicate that Rolta had crystallised its claims by then. Further, Rolta's letter in April 2006 containing the claims in detail clearly indicated the amounts allegedly due from Voltas. According to the Supreme Court, these communications had indicated that Rolta "had particularised or specified its claims and sought arbitration for the same."

On State of Goa v. Praveen Enterprises (blog post on the decision can be accessed from here), the Court held that the court carved out an exception to the normal rule that in case of counter-claims, the date of filing counter-claims in the arbitration would be the date of its institution. According to the Court, the exception was that in case the respondent against whom arbitration was invoked had also made a claim against the claimant and sought arbitration by serving a notice to the claimant but subsequently raises that claim made previously as a counter claim, the date of institution of such counter-claim would be the date of service of notice of such claim and not the date of filing of the counter claim. Since the counter-claim was made in April 2006 itself, the same was within limitation.

Against the contention that the counter-claim of Rolta had to be restricted to 68.63 crores against the counter-claim of Rs. 333 crores filed by Rolta, the court accepted the submission and held that the exception contemplated in Praveen Enterprises saved only those counter claims which were claimed previously through the notice and not those in addition to such claims. The court also held that a time barred claim cannot be asserted after the prescribed period of limitation.

Consequently, the court modified the decision of the Division Bench and allowed counter-claims to be made in respect of Rs. 68.63 crores. 

WSG (Mauritius) v MSM Satellite: A Descriptive Comment

Recently, a two judge Bench of the Supreme Court of India had the occasion in WSG (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd (pdf) (24.01.2014) to deal with the issue as to whether an Indian court has the power to restrain foreign arbitral proceedings.

Brief Facts:

Appellant WSG (Mauritius) Ltd., or (WSG) and the Respondent MSM Satellite (Singapore) Pte. Ltd or (MSM) entered into a Deed for Provision of Facilitation Services (Facilitation Deed or Deed). The Deed provided for arbitration under ICC Rules in Singapore. Under the Deed, MSM made payment to the tune of Rs. 125 crores to WSG and was allegedly obligated to pay a total of Rs. 425 crores. On 25 June 2010, MSM rescinded the Deed for the reason that the Deed was voidable on grounds of misrepresentation and fraud.

MSM also filed a suit on the same date in the Bombay High Court for declaration that the Deed was void and for recovery of Rs. 125 crores already paid to WSG. After three days, MSM sent a request for arbitration to ICC. On 30 June 2010, MSM filed another suit for declaration that since the Deed was rescinded, WSG was not entitled to invoke arbitration under the arbitration clause in the Deed. In the said suit, an application for temporary injunction restraining WSG from continuing with the arbitral proceedings was filed.

On 9 August 2010, the Single Judge dismissed the application for temporary injunction on the ground that it was for the arbitrator to consider whether the Facilitation Deed was void and the court could not intervene in matters governed by the arbitration clause. MSM challenged the said order before the Division Bench of the Bombay High Court. The Division Bench set aside the order of the Single Judge and passed an order of temporary injunction restraining WSG from continuing the arbitral proceedings.

[Note that Para 7 of the SC decision states that the order was passed “restraining the arbitration by ICC”. This is erroneous. The order was passed not against ICC but against WSG from continuing the ICC arbitration.] WSG appealed to the Supreme Court.

Contentions:

On Behalf of WSG:

1) Bombay High Court has no jurisdiction to order temporary injunction restraining foreign seated arbitration between Non-Indian residents.

2) Clause 9 of the Deed provided that any party may seek equitable relief in a Singaporean court or any other court having jurisdiction. On the basis of principle of comity of courts, the Bombay High Court should have refused to interfere with the matter and should have allowed the parties to resolve the dispute through ICC arbitration.

3) Unless the court finds that the arbitration agreement, which is the agreement specified under Section 45 is null and void Under Section 45 of the Arbitration and Conciliation Act, 1996 (Act or 1996 Act), the court is obligated to refer a dispute arising out of an agreement specified in Section 44 of the Act to arbitration, unless the court finds that the agreement is null and void, inoperative or incapable of being performed., the court cannot entertain a dispute covered by the arbitration agreement and refer the parties to arbitration.

4) The court should not examine whether the entire Deed was void but only whether the Arbitration Agreement was vitiated by fraud/ misrepresentation.

5) Since WSG is the party against which fraud/ misrepresentation was alleged, as per Abdul Kadir’s case which was relied on in Maestro Engineers case, the party against which fraud was alleged could ask the court to go into the issue to resolve it. In this case, it is for WSG to request the court to deal with the dispute and not MSM.

6) Further, Maestro Engineers was rendered in the context of domestic arbitration and not foreign arbitration. The language of Section 45 differed radically from Section 8, under which Maestro Engineers was decided. Under Section 45, MSM had not made out that the arbitration agreement was null and void Under Section 45 of the Arbitration and Conciliation Act, 1996 (Act or 1996 Act), the court is obligated to refer a dispute arising out of an agreement specified in Section 44 of the Act to arbitration, unless the court finds that the agreement is null and void, inoperative or incapable of being performed.

7) Clause 9 of the Deed is not opposed to public policy under the Indian Contract Act, 1872. The Bombay High Court had wrongly held that Clause 9 foreclosed open trial as Exception 1 to Section 28 clearly exempts arbitration agreements. There was no fraud or misrepresentation by WSG before the Deed was signed.

8) An agreement which is voidable is not the same as an agreement which is void. Hence, the Division Bench should have referred the parties to arbitration.

On Behalf of MSM:

1) The Facilitation Deed which also contains the arbitration clause, is void for fraud and misrepresentation.

2) Section 45 prohibits reference of a Deed that is null and void on account of fraud and misrepresentation. In view of the same, the court will have to decide whether the Deed was null and void.

3) As per Section 9, Code of Civil Procedure, the Bombay High Court had the jurisdiction to try the suit .

4) There is no bar in Section 45 restraining the High Court from trying the said suit.

5) Indian and English Law empowered the court to restrain parties from proceedings with the parties. Some relevant decisions are VO Tractoroexport v. Tarapore & Co. [(1969) 3 SCC 562)], ONGC v. Western Co. of North America [(1987) 1 SCC 496], Claxton Engg v. Txam Olajaes Gaz Kutai Ktf [2011] EWHC 345 (Comm.).

6) As held in Chloro Controls v. Severn Trent Water Purification, Section 45 mandates the court to determine the validity of the agreement at the threshold itself and a decision on the issue will be a futile exercise before the arbitrator. Section 45 requires the court to not only consider the a challenge to the arbitration agreement but also a challenge to the substantive contract [SMS Tea Estates v. Chandmari Tea Co. (2011) 14 SCC 66].

7) Where allegations of fraud are made out prima facie, the judicial trend is to have the same adjudicated in court (Abdul Kadir’s case, Maestro Engineers case). In fact, the Madras High Court held in HG Oomor Sait v. O Aslam Sait (2001) 3 CTC 269 (Mad) (referred to in Maestro Engineers case) even if the party against whom allegations of fraud are made requires reference to arbitration, the matter is to be adjudicated by the court.

8) The case establishes prima facie that fraud has been committed not only on MSM but also on BCCI which is a public body (Zee Telefilms v. Union of India AIR 2005 SC 2677). If the arbitration is allowed to go on, interests of BCCI will also be affected. Further, having regard to the magnitude of fraud, such allegations can only by inquired by the court and not the arbitrator.

Decision of the Court:

The question before the Supreme Court was whether the Division Bench of the Bombay High Court was correct in passing the injunction restraining the Singaporean arbitration. The decision is summarized below:

1) It is not correct to contend that the Bombay High Court would not have the jurisdiction to restrain arbitral proceedings in Singapore merely due to the principle of comity.

2) The principle of comity merely provides that courts of one state or jurisdiction will give effect to the laws and judicial decisions of another state or jurisdiction not as a matter of obligation but out of mutual respect. It does not mean that India should not assume jurisdiction of foreign arbitral proceedings out of mutual respect or deference to foreign courts.

3) Therefore, an appropriate civil court in India as provided in Section 9, CPC would have the jurisdiction to entertain the suit and pass orders as per Section 9 and also Clause 9 of the Deed.

4) The Deed, including the arbitration clause, was executed by WSG in Mumbai, the alleged fraudulent inducement of MSM to enter into the Deed occurred in Mumbai, the rescission of the Deed was also issued from Mumbai. Hence, the cause of action for the purpose of Section 20 of the CPC arose within the jurisdiction of the courts at Mumbai.

5) A civil court which entertains a suit has to follow the mandate of Section 45, Chapter I Part II of the 1996 Act. S. 45 makes it clear that notwithstanding anything stated in Part I of the Act or the CPC, when a civil court is seized of a matter in respect of which parties have entered into an agreement specified in S. 44 of the 1996 Act, such court shall refer the parties to arbitration. This provision is applicable even when no application is made by a party to refer the matter to arbitration. In the present case even though no application has been filed by WSG to refer parties to arbitration, it has stated in its affidavit that the Singapore arbitration has already been invoked.

6) The exception to the above rule is that when the agreement is null and void, inoperative or incapable of being performed. For instance, if an agreement containing an arbitration clause is unstamped, the court cannot refer the matter to arbitration but if such agreement is unregistered, the court can do so since the arbitration agreement is a collateral term of the main contract (SMS Tea Estates case).

7) Thus, the court will have to examine in each case if the arbitration agreement is void, unenforceable or inoperative along with the main agreement or whether the arbitration agreement stands apart from the main agreement and is not null and void (Premium Nafta Products v. Fili Shipping Co., UK House of Lords).

8) In the facts, MSM stated that the Deed was voidable at its option for false representation and fraud. This does not in any way affect the arbitration agreement contained in the Deed, which is independent and separate. Hence, the Division Bench was wrong in refusing to refer the parties to arbitration.

9) Arbitration agreement does not become inoperative or incapable of being performed where allegations of fraud have been made. Maestro Engineers and Abdul Kadir’s case were decisions rendered in the context of domestic arbitration and not arbitrations under Chapter I of Part II. In the latter cases, the court can refuse to refer the matter to arbitration only if the arbitration agreement is null and void, inoperative or incapable of being fraud, and not on the ground that allegations of fraud or misrepresentation have to be gone into.

10) Exception 1 to S. 28 Indian Contract Act clearly saves Clause 9 of the Deed. Further, right to jury is not available under Indian laws and therefore, Clause 9 is in hit by Ss 23 and 28 of the Indian Contract Act.

11) Section 45 does not empower a court to decline reference to arbitration on the ground that another suit on the same issue is pending before an Indian Court.

12) Since Clause 9 of the Deed is wide enough to cover the dispute between the parties, the order of the Single Judge referring the parties to ICC Arbitration is restored.

A critique of the decision shall be the subject of a future post. In the meanwhile, readers may read the following comments on the case:

Herbert Smith Freehills LLP, Bombay High Court grants injunction against arbitration proceedings in Singapore

Nishith Desai & Associates, Allegations Of Fraud Not A Bar To Foreign Seated Arbitration

Three Lessons on Humility

As a legal practitioner, we come across presiding officers with various capabilities, expertise in varying degrees on various but not all laws. Often we as legal practitioners come across presiding officers who may not be experts in the subject matter which he has to decide on. In such circumstances, the way in which the legal practitioner appeals to the common sense of the judge becomes extremely important. This post deals with three  incidents which this blawgger came across.

Story 1:  One of the most sought after senior advocate in Mumbai calls a law firm. The receiptionist of the firm picks up the phone. The senior advocate introduces himself: "I am ***** *******, advocate of the Bombay High Court. I would like to speak to **********. Is he available?" 

For those who did not get the point, see that he did not use the term "senior"in the short conversation!

Story 2: In an arbitration proceeding, the arbitrator is not a legally trained person but an official with three decades worth experience in commercial contracts. The advocate (who is from Bangalore) is to argue in support of a petition for summoning an official of the other side. The advocate structures his arguments in the following manner:

(1) The advocate first sums up the structure of his argument

(2) He then states in layman's terms the purport and the purpose of the application.

(3) He states in clear layman's terms the law. While doing so, he cites the submission of the other side in terms of the law.

(4) Lastly he submits the practical difficulty his side would face if the application is not allowed. 

Story 3: In a domestic arbitration proceeding before a non-lawyer arbitrator, the advocate of one side while putting forth his arguments starts off with legal terms and arbitration jargon such as pre-arbitral procedure, arbitrability, etc which the arbitrator had no clue about! God only knows the fate of his application.

The lesson from Story 2 and 3 is that one should realise that throwing attitude about how much one knows may not serve the purpose. A legal practitioner's duty is to support the case of his client, not to show the presiding officer how cool he is! If we forget this, we may not be in a position to support the case of our client, for reasons that may not even be remotely connected to the merits of the case.