Conclusions of the Five Judge Bench in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd.

 Finally, the decision of the Five Judge Bench in NN Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (25.04.2023: SCI) is out and can be accessed from here. This post provides a quick read of the summary of the decision as encapsulated in the conclusion of Justice KM Joseph's judgment (p. 1 to 140 of the pdf), quoted below. Justice KM Joseph on his behalf and on behalf of Justice Aniruddha Bose, penned the majority opinion. The dissenting views were expressed by Ajay Rastogi, J. (p. 141- 201 of the pdf file) and Hrishikesh Roy, J. (p. 202-279 of the pdf file). Justice CT Ravikumar gave an opinion concurring with Justice KM Joseph (p. 280- 298 of the pdf file). 

Justice Joseph's conclusions are reproduced below:

"109. The view taken in SMS Tea Estates (supra) as followed in Garware (supra) and by the Bench in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram and other Charities v. Bhaskar Raju and Brothers and others36 as to the effect of an unstamped contract containing an Arbitration Agreement and the steps to be taken by the Court, represent the correct position in law as explained by us hereinbefore. N.N. Global (supra) was wrongly decided, when it held to the contrary and overruled SMS Tea Estates (supra) and Garware (supra). 

110. An instrument, which is exigible to stamp duty, may contain an Arbitration Clause and which is not stamped, cannot be said to be a contract, which is enforceable in law within the meaning of Section 2(h) of the Contract Act and is not enforceable under Section 2(g) of the Contract Act. An unstamped instrument, when it is required to be stamped, being not a contract and not enforceable in law, cannot, therefore, exist in law. Therefore, we approve of paragraphs-22 and 29 of Garware (supra). To this extent, we also approve of Vidya Drolia (supra), insofar as the reasoning in paragraphs-22 and 29 of Garware (supra) is approved. 

111. The true intention behind the insertion of Section 11(6A) in the Act was to confine the Court, acting under Section 11, to examine and ascertain about the existence of an Arbitration Agreement. 

112. The Scheme permits the Court, under Section 11 of the Act, acting on the basis of the original agreement or on a certified copy. The certified copy must, however, clearly indicate the stamp duty paid as held in SMS Tea Estates (supra). If it does not do so, the Court should not act on such a certified copy. 

113. If the original of the instrument is produced and it is unstamped, the Court, acting under Section 11, is duty-bound to act under Section 33 of the Stamp Act as explained hereinbefore. When it does so, needless to say, the other provisions, which, in the case of the payment of the duty and penalty would culminate in the certificate under Section 42(2) of the Stamp Act, would also apply. When such a stage arises, the Court will be free to process the Application as per law. 

114. An Arbitration Agreement, within the meaning of Section 7 of the Act, which attracts stamp duty and which is not stamped or insufficiently stamped, cannot be acted upon, in view of Section 35 of the Stamp Act, unless following impounding and payment of the requisite duty, necessary certificate is provided under Section 42 of the Stamp Act. 

115. We further hold that the provisions of Sections 33 and the bar under Section 35 of the Stamp Act, applicable to instruments chargeable to stamp duty under Section 3 read with the Schedule to the Stamp Act, would render the Arbitration Agreement contained in such instrument as being non-existent in law unless the instrument is validated under the Stamp Act.

116. In a given case, the Court has power under paragraph-5 of the Scheme, to seek information from a party, even in regard to stamp duty. 117. We make it clear that we have not pronounced on the matter with reference to Section 9 of the Act. The reference to the Constitution Bench shall stand answered accordingly..."

Happy reading!

International Arbitration Practice: Mistakes to Avoid While Drafting Arbitration Agreements/ Pathological Arbitration Clauses (Lecture 2)

 This is the edited script of Lecture 2 of the Lecture Series on International Arbitration Practice. The lecture series can be accessed from here: 

This 2^nd lecture of the lecture series on Introduction to International Arbitration Practice is titled Mistakes to Avoid While Drafting Arbitration Agreements a.k.a. Pathological Arbitration Clauses”. Pardon the lengthy title. Those who watched the first lecture might be wondering where “arbitration practice” was in it. Let me assure you: this course would not teach arbitration theory. But some theoretical discussion explaining key concepts and doctrines act as a springboard to understand practical aspects. For example, we discussed in the first lecture about the ingredients of an arbitration agreement as per the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the Arbitration and Conciliation Act, 1996. One of the ingredients was that there should be a reference to arbitration. In other words, an agreement to constitute an arbitration agreement should provide that disputes that may arise would be referred to arbitration. In other words, the agreement should provide for reference of disputes to arbitration in order to call it an arbitration agreement.

In this lecture, we will see that if an agreement provides arbitration as an option for both parties to agree to refer disputes, such an agreement is not an arbitration agreement although parties might have, at the time of entering into the agreement, had that in their minds. Such clauses which although purport to be arbitration clauses have some defects that are grounds for not calling them as arbitration clauses are known in arbitration parlance as “pathological” arbitration clauses.  In other words, a pathological arbitration clause is a Defective or badly drafted arbitration clause. So, in order to discuss the common mistakes while drafting arbitration agreements, that is, pathological arbitration clauses, the theoretical prelude was necessary.

In this lecture and the next few, we will discuss some common mistakes parties make while drafting arbitration clauses. Arbitration practice is not only about representing parties in arbitrations but also about advising parties to draft proper arbitration agreements. In India, like in many other countries, this aspect of law practice is largely ignored. Through this lecture, we bring to the attention of lawyers about the importance of drafting good arbitration clauses. Before embarking on the exercise as to how to draft arbitration clauses, it would be better to understand how not to draft arbitration clauses, now that we are well-aware of what is meant by arbitration agreements from the first lecture in the lecture series. For your convenience, we have provided the link to the first lecture in the description to this video.

Coming back to the topic of pathological arbitration clauses, the term “pathological” was used in this context by Frederic Eisemann in 1974 and thereafter, the phrase has become quite popular in international arbitration parlance.

Courts have addressed pathological arbitration clauses with a set of tools, mainly with the intent of enforcing arbitration clauses, known popularly in arbitration parlance as pro-arbitration approach. Courts have generally been liberal in addressing such clauses, that is, resolving it in favour of referring them to arbitration, rather than rejecting reference, unless the clause in question cannot satisfy the ingredients of what constitutes an arbitration agreement.  

Now, you might wonder, why should I know about this topic? Why can’t this guy straightaway talk about invoking arbitration, pleadings, evidence, etc.? Well, a pathological arbitration clause may have huge consequences on enforceability of arbitral awards, and may entail substantial costs and efforts to be expended by your client. A badly drafted arbitration clause may ruin your reputation as a lawyer.

So, be very very careful- drafting arbitration clauses might sound simple but when you see the pathological arbitration clauses, you might wonder: how did this happen?! Without spending much time “about” pathological clauses, we will straightaway deal “with” such clauses.

Let us consider the below clause.

“30.2 In case of such failure, the dispute shall be referred to sole arbitrator to be mutually agreed upon by the Parties. In case the Parties are not able to arrive at such an arbitrator, the arbitrator appointed shall be appointed in accordance with the rules of arbitration of the Singapore Chamber of Commerce.”

Please pause the video and find out what’s wrong with this clause. On the first reading, you will ask: what is wrong with this clause? The clause seems to be fine. But on a closer reading and with a search engine, you will notice that there is no such institution called Singapore Chamber of Commerce. The parties here possibly got confused between the International Chamber of Commerce and the Singapore International Arbitration Centre.

So, this is a type of defect where parties agree to refer the dispute to a non-existent arbitral institution. If there is no such institution, how can the arbitration be conducted as per the rules of the non-existent institution? I will underline the defective portion for your convenience.  

“30.2 In case of such failure, the dispute shall be referred to sole arbitrator to be mutually agreed upon by the Parties. In case the Parties are not able to arrive at such an arbitrator, the arbitrator appointed shall be appointed in accordance with the rules of arbitration of the Singapore Chamber of Commerce.”

You might be wondering if this fact situation we discussed was real. This arose in the case of Pricol Ltd. v. Johnson Controls Enterprises Ltd., a decision of the Supreme Court of India in 2014, which arose out of a joint venture agreement between the said parties. We have provided the link to this decision in the lecture’s description. So the lesson that we learn is if you are opting for institutional arbitration, make sure that you refer to the institution’s name correctly.

This defect typically takes place when non-lawyers negotiate the arbitration clause. Nevertheless, such defects are common. For those supremely confident lawyers, let me tell you about this transaction, from a Press Release dated about ten years ago, that is, 27 March 2012.

“Johnson Controls, a global leader in automotive seating, overhead systems, door and instrument panels, and interior electronics, has formed a joint venture with Pricol Limited, a leading supplier of automotive instrument clusters in India…

About Johnson Controls:

Johnson Controls is a global diversified technology and industrial leader serving customers in more than 150 countries. Our 162,000 employees create quality products, services and solutions to optimize energy and operational efficiencies of buildings; lead-acid automotive batteries and advanced batteries for hybrid and electric vehicles; and interior systems for automobiles. Our commitment to sustainability dates back to our roots in 1885, with the invention of the first electric room thermostat…

…

About Pricol:

Pricol, which started its operations 35 years ago, is a well-known name in the Indian automotive component sector. Over the last 25 years, Pricol has been a leading supplier of automotive instrument clusters for two wheelers, cars, trucks and tractors in India. The company supports automakers and after-market customers across Europe, America, Middle East and Australasia and supplies instruments and other products including sensors, oil pumps, chain tensioners, fleet management solution products…”

Apologies for the lengthy quote. I am not trying to consume your time with an unnecessary quote but to drive home the point that such drafting defects take place even when global and well-experienced companies or sophisticated parties are involved in a transaction, which was probably drafted with legal advice. Link to the complete press release is provided in the link to the description below.

More on pathological arbitration clauses in the next lecture. Till then, adios y hasta luego.

References:

Lecture 1: Introduction to Arbitration Agreements, https://youtu.be/Q4MXe7Z__d4

Pricol Limited v. Johnson Controls Enterprise Ltd (SCI: 2014), https://indiankanoon.org/doc/168474344/ 

Press Release, Johnson Controls and Pricol Establish Joint Venture for Indian Automotive Market (27 March 2012), https://investors.johnsoncontrols.com/news-and-events/press-releases/johnson-controls-inc/2012/27-03-2012

International Arbitration Practice: Introduction to Arbitration Agreements (Lecture 1)

We have been doing video lectures on international arbitration practice, which can be accessed from here. Thirty one lectures have been uploaded so far covering various aspects including drafting arbitration agreements in commercial arbitrations, invoking arbitration in commercial and investment treaty arbitrations. In this post and the next few in this series, we provide the script of these lectures, starting from lecture 1.

 

Welcome to the 1^st lecture in this lecture series titled “Introduction to International Arbitration Practice”. This lecture series will focus on the practical elements of international commercial and investment treaty arbitration. The first lecture in this lecture series will deal with Arbitration Agreements. The focus will be on commercial arbitration agreements.

Most of us are familiar with arbitration agreements. They are, in simple, agreement to refer disputes to arbitration, rather than resolving disputes through other forums.

Such agreements could be entered into for disputes that may arise in future or once a dispute has arisen. Article 7(1) of the UNCITRAL Model Law on International Commercial Arbitration, 1985 states in this regard: “An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.” An identical provision is also contain in Section 7(2) of India’s Arbitration and Conciliation Act, 1996.

Arbitration agreements can be either in the form of arbitration clauses forming a part of an agreement (also called “arbitration clause”) or in the form of separate arbitration agreements (called in arbitration parlance as “submission agreements”). Arbitration clauses are usually part of an agreement. Here the agreement precedes the dispute.

Submission agreements are agreements for reference of disputes to arbitration. Usually, submission agreements are entered into after disputes arises and arbitration clauses refer future disputes to arbitration. It is possible that submission agreements could replace prior arbitration agreements as well.

Now, which one is better? Arbitration clause or submission agreement, you may ask. The answer is: it depends. But there are two factors you should consider: One, it is very difficult for parties to reach a submission agreement after a dispute has arisen. Two, the time between entering into an arbitration agreement in the main agreement and when dispute arises might be long; and by the time dispute has arisen, the arbitration agreement may not be suitable  for resolving that dispute.

Parties therefore opt for the lesser evil and take the risk of providing for resolution of future disputes through the arbitration clause. This is because if no arbitration is agreed upon, parties may have to choose to litigate in the local courts which may not be desirable for various reasons, including non-flexible procedures, formalities, lengthy proceedings, etc.

Whatever may be the case, an arbitration agreement has to satisfy the formal criterial laid down in the relevant law. We will now discuss what the Indian law on this is.

Arbitration & Conciliation Act, 1996 (“1996 Act”)- contains different treatment for different types of arbitration agreements. Part I and Part II of the 1996 Act contain two different types of definition.

Part I of the Act is applicable where the place of arbitration is India. S. 2(1)(b) states: “(b) “arbitration agreement” means an agreement referred to in section 7;”

S. 7(1) states: “In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”

Thus, three main ingredients are to be satisfied:

• There should be an “agreement by the parties”: Parties is defined in S. 2(1)(h): “(h) “party” means a party to an arbitration agreement.”
• The agreement should be “to submit to arbitration”; and
• The submission for arbitration should be for disputes in respect of defined legal relationship.

The expression defined legal relationship has been explained in the case of Vidya Drolia v. Durga TradingCorpn., (2021) 2 SCC 1, where the Supreme Court held in Para 24: “24. … The expression “legal relationship”, again not defined in the Arbitration Act, means a relationship which gives rise to legal obligations and duties and, therefore, confers a right.”

Section 7(3) states that arbitration agreement shall be in writing. So does Article 7(2) of the Model Law.

Now, we make a brief detour on the separability doctrine, to the extent useful from a practical perspective. In simple, separability doctrine enables the arbitration clause to be treated separately from the main agreement, although it forms a part of the said main agreement.

The concept of separability provides doctrinal justification to afford jurisdiction to the arbitral tribunal to decide even on questions relating to the validity of the arbitration clause, rather than going to court for decision on such questions. Article 16(1) of the Model Law recognises this and reads:

 “(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration  agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

This has been incorporated in the 1996 Act in Section 16(1), which reads:

“(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,—

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

The separability doctrine also operates in submission agreements but differently. This has been discussed in the US Supreme Court decision of Rent-A-Center, W., Inc. v. Jackson, 561 US63 (2010) where it was held:

• Application of separability doctrine does not depend on the nature of the remaining portion of the agreement
• Therefore, it applies even to submission agreements
• “delegation” provision contained within an arbitration agreement, providing for resolution of any disputes about the validity or scope of the arbitration agreement by the arbitral tribunal, was itself separable from the more general arbitration agreement

It was therefore held by the US Supreme Court: “In this case, the underlying contract is itself an arbitration agreement. But that makes no difference. Application of the severability rule does not depend on the substance of the remainder of the contract.”

That’s all in this lecture. In the next lecture we will deal with an interesting topic, which has immense practical significance for drafting arbitration agreements.

Hope you enjoyed this first lecture of the lecture series. Do write to lawbadri@gmail.com for feedback and comments. Bye bye and stay safe.