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.
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 On 25 June 2010, MSM rescinded the Deed for the reason that the Deed was voidable on grounds of misrepresentation and fraud.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 On 30 June 2010, MSM filed another suit for declaration that since the Deed was rescinded, WSG was not entitled to invoke arbitration under the arbitration clause in the Deed.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.
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  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