"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.

Monday, March 24, 2014

Enercon v. Enercon GmbH- Part II (Decision)

In the previous post, we had detailed the facts in the Enercon v. Enercon GmbH. In this post, we provide a descriptive comment of the decision of the Supreme Court. 

The Supreme Court dealt with seven aspects while deciding the case:
  • Validity of the IPLA (Intellectual Property Licensing Agreement)
  • Competence of the court to decide the validity of the IPLA
  • Refusal to join the arbitral proceedings for the reason that the IPLA is invalid
  • Vagueness and unworkability of the arbitration clause in the IPLA.
  • The seat of arbitration- London or India?
  • If the seat is India, the power of English court to exercise concurrent jurisdiction in ordering measures in support of the arbitration.
  • Power of Indian courts to issue anti-suit injunctions
The court's decision on each of the above aspects is summarised below:

Relevance of the Question of Validity of the IPLA in Section 45 Proceedings: The court held that for a where an application under Section 45 of the Arbitration and Conciliation Act, 1996 (Act or 1996 Act), the court has to decide whether the arbitration agreement, not the agreement containing the arbitration agreement, was null and void or inoperative or incapable of being performed. 

Competence of the Court to Decide the Validity of the IPLA
The question as to whether the IPLA was valid or not is not relevant for the adjudication under Section 45 of the 1996 Act. These are questions which the arbitral tribunal is competent to decide. The party seeking continuance of suit has to establish that the arbitration agreement, and not the underlying contract, was null and void or inoperative or incapable of being performed. Further, the question as to whether there was a valid contract or not is answered by the Heads of Agreement pursuant to which the IPLA was negotiated. Clause 3 of the Heads of Agreement, which was agreed to be legally binding, provided that the Agreement and all negotiations and contracts prepared in connection with the IPLA would be governed by German laws. It further provided that Clause 18 of the Draft IPLA. In view of these clauses, it is clear that the parties agreed to be bound by the dispute resolution clause in the Draft IPLA. In fact, the SHA and the TKHA even contained an identical arbitration clause. There has been no waiver of arbitration. In view of the above, the question as to whether there was a concluded contract or not is not relevant for the question as to whether the matter has to be referred to arbitration. Consequently, Enercon India cannot refuse to participate in the arbitral proceedings on this ground.
Validity of the Arbitration Agreement in the IPLA:
There are no contentions in the pleadings to the effect that the arbitration agreement is null and void, inoperative and incapable of being performed as it violates any of the provisions under Sections 14, 15, 16, 17, 18, 19, 19A and 20 of the Indian Contract Act, 1872. In order to avoid arbitration, a party has to satisfy the court that "it would be just and in the interests of the parties not to proceed with arbitration". Courts are supposed to act in aid and support of arbitration and any interference in the same will amount to "playing havoc with the progress of arbitration".
The arbitration clause is widely worded and encompasses the present disputes. When a court is interpreting the arbitration clause, it "must be conscious of the overarching policy of least intervention by courts or judicial authorities in matters covered by the Indian Arbitration Act, 1996." It may also be noted that the doctrine of separability as enshrined in S. 16 of the 1996 Act is "a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract."
Vagueness and unworkability of the arbitration clause in the IPLA:
While interpreting an arbitration clause, the courts have to adopt a pragmatic approach and when faced with a seemingly unworkable arbitration clause, the courts have to make such clauses workable within the permissible limits of law. In doing so, the courts must see it "from the attitude of reasonable business person, having business common sense as well as being equipped with the knowledge that may be peculiar to the business venture". Since India's law follows the UNCITRAL Model Law, Courts play a supporting role to arbitration. Further, the principle of minimum judicial intervention as recognised in Section 5 of the 1996 Act dictates that the arbitration clause cannot be frustrated for the reason that it is unworkable. The unworkability pertains only to the machinery of arbitration and not the intent to refer disputes to arbitration. Two arbitrators have been appointed by each party. It is obvious that the two arbitrators so appointed have to select a third arbitrators. This can be read into the arbitration clause. While construing the arbitration clause, the court "would be well within its rights to set right an obvious omission without necessarily leaving itself open to the criticism of having reconstructed the clause." The only restriction is that the court while doing so cannot re-write the contract. Another reason is that Ss 10 and 11 have been enacted with the intent to prevent failure of the arbitration clause.
The seat of arbitration- London or India?
London is only a venue chosen for convenience and is not the seat of arbitration. India is the seat of arbitration considering that it has the closest and intimate connection to the arbitration as the parties agreed that the 1996 Act applied to the arbitration proceedings. By choosing the 1996 Act, the parties have made Chapters III-VI of the Act applicable to the arbitration proceedings. Section 2 of the Act provides that Part I of the Act shall be apply where the place of arbitration is India. In the present case, therefore, the parties chose London as a convenient venue for arbitration. In fact, it was considered in Sulamerica CIA Nacional De Seguros SA v. Enesa Engenharia SA that an agreement to arbitrate will normally have a closer and more real connection with the place where the parties have chosen to arbitrate, than with the place of the law of the underlying contract, in cases where the parties have deliberately chosen to arbitrate, in one place, disputes which have arisen under a contract governed by the law of another place. In the present case, all the chosen laws are of India, therefore, it cannot be said the laws of England would have any application. The law governing the contract, the law of arbitration agreement and the law of arbitration are all Indian laws. The case is almost identical to the one decided in Naviera Amazonica Peruana S.A. Vs. Compania Internacional De Seguros Del Peru  1988 (1) Lloyd's Rep 116 (CA).  The the close and the most intimate connection test is applicable to this case although  the parties have specified all the three laws. The relevance is because the court is required to determine the seat of the arbitration.
If the seat is India, the power of English court to exercise concurrent jurisdiction in ordering measures in support of the arbitration:
Holding that two fora would have concurrent supervisory jurisdiction would lead to unnecessary complications and uncertainties. The choice of supervisory court is in the nature of an exclusive jurisdiction clause and excludes other jurisdictions. This was even recognised by Cooke J. in the application by Enercon GmbH against Enercon (2012) EWHC 3711(Comm). The usage of the term "venue" as opposed to seat by the parties supports this conclusion. Hence, the lower court's view that English courts had concurrent jurisdiction is erroneous.
Power of Indian courts to issue anti-suit injunctions:
Indian courts are empowered to issue anti-suit injunctions. Enercon GmbH was carrying on business through its agent Enercon India. Further, the IPLA is governed by Indian laws. Neither party is English. Enercon GmbH is German. Hence, continuance of parallel proceedings by Enercon GmbH is not correct. Merely because the convenient venue of arbitration was London would not confer the English courts supervisory jurisdiction over the arbitration.
Consequently, the order of the High Court referring the parties to arbitration is, to that extent correct. All disputes between the parties, whether under the SHA, TKHA, SSHA, STKHA, Agreed Principles and the IPLA are referred to arbitration. Ordinarily, the parties would have been ordered to approach the arbitrators appointed by each party for the appointment of the third arbitrator. However, considering the peculiar facts and inordinate delay, Lord Hoffmann is appointed as the third arbitrator. Lord Hoffmann's name was one of those three mentioned in Eder J's judgement (March 2012). Enercon GmbH & other Respondents are restrained from approaching English courts that may have the effect of delaying or affecting the constitution of the arbitral tribunal.
More on the judgement in another post.