Exploring Cox & Kings v SAP: Group of Companies Doctrine

The five judge Bench's decision of the Supreme Court of India in Cox & Kings v. SAP 2023 INSC 1051 on the group of companies doctrine has been in the news since the decision was anncounced on 06.12.2023. Numerous articles/ posts have been written on it and we are not going to add one more to the list of such writings. Those who are yet to read the decision but do not have time can go to the end of this post, which quotes Para 165 of the decision, which summarises it. We highlight certain interesting things about the decision and the doctrine in this post.

Non-Signatory Should Have Intended to be Bound by the Arbitration Agreement

The judgment takes specific note of the French position, as summarised in ICC award in case No. 11405 of 2001 that it it must be shown that not only the party which seeks to make a non-signatory a party to the arbitration (or extend the arbitration agreement to such non-signatory) intended to extend the agreement to non-signatory; the non-signatory (as well as the signatory) intended to be bound by the arbitration clause. The portion of the ICC award which states so has been quoted by the Supreme Court and the quotation is reproduced below:

“[t]here is no general rule, in French international arbitration law, that would provide that non-signatory parties members of a same group of companies would be bound by an arbitration clause, whether always or in determined circumstances. What is relevant is whether all parties intended non-signatory parties to be bound by the arbitration clause. Not only the signatory parties, but also the non signatory parties should have intended (or led the other parties to reasonably believe that they intended) to be bound by the arbitration clause.” (emphasis added)

The Swiss approach, analysed by the Supreme Court, also calls for "valid manifestation of consent of the non-signatory party to the arbitration agreement." (Para 47).

The Court's analysis of the English position is interesting because it appears that English law favours the Chloro Controls' approach of extending the Group of Companies doctrine owing to the definition of "party" which also includes "claiming through or under". This approach has been rejected by the Supreme Court in Cox & Kings. And so this is a clear departure from English law. At the same time, while discussing Dallah Real Estate, the SCI quoted the following phrase of that judgment:  “common intention of the parties means their subjective intention derived from the objective evidence.” How is this approach different from the French and the Swiss approach?  

How to Establish Extension to Non-Signatory?

After discussing the French arbitration jurisprudence on the issue, the Supreme Court summarised the position by stating: "The subjective intention of the parties is to be inferred on the basis of their objective conduct during the negotiation, performance, and termination of the underlying contract containing the arbitration agreement." (Para 45).

The subjective intention is that all parties, including the non-signatory, should have intended or led other parties to believe they intended to be bound by the arbitration agreement. This subjective aspect could be established through objective conduct of the parties during negotiation, performance and termination of the contract containing the arbitration clause. 

The Swiss approach as analysed by the Supreme Court seems somewhat similar: "the subjective element of willingness to be bound by an arbitration agreement ought to be expressed through an objective element in the form of negotiation or performance of the contract."

So, the application for extending the arbitration agreement to non-signatory, in whichever stage of proceedings as may be moved, should specifically deal with these aspects- what was the conduct of the non-signatory during the process of negotiation, performance and termination of the contract?

The Supreme Court ultimately favoured the criteria in the Discovery Enterprises judgment (Para 110), where it was stated:

“40. In deciding whether a company within a group of companies which is not a signatory to arbitration agreement would nonetheless be bound by it, the law considers the following factors:

i) The mutual intent of the parties; 

(ii) The relationship of a non-signatory to a party which is a signatory to the agreement; 

(iii) The commonality of the subject-matter; 

(iv) The composite nature of the transactions; and 

(v) The performance of the contract.”

Young practitioners and law students may note that your application should contain specific averments on each of these aspects. Although this criteria seems general, the Supreme Court gave further clarity: "In other words, the group of companies doctrine is a means to infer the mutual intentions of both the signatory and non-signatory parties to be bound by the arbitration agreement." (Para 111). So, while drafting the application, there must be averments which point out that the mutual intention of the signatory and its non-signatory party was to be bound by the arbitration agreement. This is the baseline and the burden is on the applicant who seeks to make the non-signatory be bound by the arbitration agreement (Para 111).

Note that mere commercial relationship between a party and the non-signatory affiliate that is a part of its group is not sufficient (Para 113). Likewise, liability cannot be imposed on a group company merely because it is a part of the party's group (Para 113), tight or otherwise. 

Implied or tacit consent by the non-signatory group company will alone get the applicant to the finish line (Para 114). The SCI clarified while referring to the Canara Bank decision:

"In Canara Bank (supra), this Court did not apply the group of companies doctrine solely on the basis that the companies belonged to a single economic unit. Rather, it was held that there was an implied or tacit consent by the non-signatory party (CANFINA) to being impleaded in the arbitral proceedings." 

To Whom Should the Application be Made?

Para 165(l) of the judgment notes: "At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement;". This entails that a court hearing an application under Section 11 would, if the question is raised, let the tribunal decide it (provided other conditions for appointing the arbitrator are fulfilled). So, should the plea for including the non-signatory be raised at that time?

On the one hand, it would be a waste to raise it before the court u/s 11 because the court would, in any case, let the tribunal decide. But it is possible that the tribunal could (although it shouldn't) state that it was not raised in Section 11 proceedings and that the appointment was only in respect of the dispute and the parties, as appointed by the Supreme Court. Therefore, it would be a prudent to include the non-signatory and the relevant pleadings on extending the agreement to non-signatory at the Section 11 stage itself and state in the application referring to this judgment that the question should be decided by the arbitrator, if the respondents objected to it.    

Lack of Uniformity on Group of Companies Doctrine

The judgment highlights the difference in approaches in jurisdictions on the applicability of the Group of Companies doctrine. Singapore, it appears, does not recognise this doctrine (para 54). France and Switzerland recognise it through objective tests. English law recognises it because "party" includes those claiming under such party.  US employs non-consensual tests, such as alter ego, piercing the corporate veil, arbitral estoppel, etc. to extend the arbitration agreement to non-signatories. This, then is a ripe area for harmonisation. Shouldn't the UNCITRAL be working on this?   

Summary of the SC Decision in Cox & Kings: Para 165

"165. In view of the discussion above, we arrive at the following conclusions: 

a. The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration Act includes both the signatory as well as non-signatory parties; 

b. Conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement; 

c. The requirement of a written arbitration agreement under Section 7 does not exclude the possibility of binding non-signatory parties; 

d. Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement; 

e. The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non signatory party to the arbitration agreement; 

f. The principle of alter ego or piercing the corporate veil cannot be the basis for the application of the group of companies doctrine; 

g. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the Arbitration Act; 

h. To apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Discovery Enterprises (supra). Resultantly, the principle of single economic unit cannot be the sole basis for invoking the group of companies doctrine; i. The persons “claiming through or under” can only assert a right in a derivative capacity; 

j. The approach of this Court in Chloro Controls (supra) to the extent that it traced the group of companies doctrine to the phrase “claiming through or under” is erroneous and against the well-established principles of contract law and corporate law; 

k. The group of companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements; 

l. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and 

m. In the course of this judgment, any authoritative determination given by this Court pertaining to the group of companies doctrine should not be interpreted to exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement."

Should Nuclear Fusion Reactors be a part of Nuclear Fission Reactor Regulatory Regime?

Nuclear energy generators and suppliers using the plank of climate change to promote nuclear energy as the solution and economies okaying such an approach. It looks like nuclear energy is here to stay and possible contribute significantly to the energy share of many countries. Given this fillip to nuclear energy, there is also bound to be increasing technological solutions in the sector. Two of them are noteworthy: one is the small and modular reactors which allow nuclear energy generation through smaller nuclear plants. Thes operate in a relatively smaller scale than conventional nuclear plants.

The other technological development in nuclear energy sector is fusion reactors. The core idea is that unlike in nuclear fission, where atom is split, in fusion, atoms are fused together. Both these processes release considerable energy. But with fusion, there seems to be a distinct advantage: it does not produce nuclear wastes like fission does. This is extremely important becuase one of the signficant problems with fission reactors is harmful radioactive waste and its disposal. The advantage of fusion reactors vis-a-vis fission and coal energy, as noted by the International Atomic Energy Agency, is stated below: 

"Fusion could generate four times more energy per kilogram of fuel than fission (used in nuclear power plants) and nearly four million times more energy than burning oil or coal."

It appears that in fusion reactors, the chances of major industrial accidents are also minimal, as the IAEA notes. 

Given these considerations several jurisdictions are adopting regulatory measures that are more liberalised as compared to the regulation of fission reactors, as this Financial Times article notes. For instance, in USA, the Nuclear Regulatory Commission opted for a less onerous regime for regulating fusion reactors. Details of key consdierations for NRC to opt for the less burdensome regime can be accessed from here. 

However, it appears that it might take at a decade or two for fusion reactors to be used in an industrial scale like fission reactors.

The FT articles notes that developments in UK on this: it appears that UK might opt for regulation of fusion industry not by the nuclear energy regulator but by the Environment regulator! To provide clarity of the regulatory regime, the (UK) Energy Act, 2023 notes that the the Nuclear Installations Act 1965 would not apply to fusion reactors. Section 156 of the said law covers these aspects.

Earlier, in 2021, the European Union published a study on the regulation of fusion energy, which also proposed a separate regulatory regime for nuclear fusion.

It would be interesting to see how India plans to regulate nuclear fusion.

Commercial Reservation of New York Convention in India & Latest Developments in India's International Investment Treaty Practice

India was one of the founding signatories to the New York Convention, 1958, formally known as the Convention on Recognition & Enforcement of Foreign Arbitral Awards, 1958. The commercial reservation meant that the New York Convention insofar as applicable to India was only in respect of international commercial arbitration and not international investment arbitration.

This position was reiterated in Union of India vs. Vodafone Group Plc United Kingdom and Ors. (07.05.2018 - DELHC) : MANU/DE/1673/2018, where the Delhi High Court held:

"89. Also, though the BIPA constitutes an arbitration agreement between a private investor on the one side and the host State on the other, yet it is neither an International Commercial Arbitration governed by the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "Act, 1996") nor a domestic arbitration.

90. The Act, 1996 including Sections 5 and 45 thereof, do not apply proprio vigore to a BIPA..." 

BIPA referenced here was the UK Bilateral Investment Protection Agreement.

There have been numerous papers, etc. written on the lack of enforcement mechanisms of BIT awards in India. The Model BIT addresses this issue by holding:

"27.5 A claim that is submitted to arbitration under this Article shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention."

This provision has now found its place in various BITs signed since 2015-2016. For instance, the Belarus India BIT, 2018 states:

"27.5 A claim that is submitted to arbitration under this Chapter shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention."

Note that this BIT has been signed and is in force as well.

Similar provision exists in Article 27.5 of the India Kyrgyzstan BIT (2019) too, although it does not find any place in the Brazil India BIT, 2020 most likely because the Brazil India BIT does not provide for Investor-State Disputes. 

Thus, it appears that India has now sought to address the problem of enforceability of the BIT awards through recognition that BITs are "commercial" transactions for the purpose of the New York Convention, thereby retaining the Commercial Reservation but also by providing that BIT awards would be enforceable under Part II of the Arbitration and Conciliation Act, 1996, which deals with enforcement of foreign awards.

Climate Change, the Nuclear Turn & Legal Education in India

 In a surprising development post-Fukushima, the world has shunned its anti-nuclear energy image and has sought to encourage efforts at increase the share of nuclear power, in the background of mounting pressure to acheive Net Zero by 2050.

The COP (the Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) (COP) saw significant calls for substantially increasing nuclear power, especially from nuclear energy generators and the International Atomic Energy Agency, which stated in COP28:

"Studies confirm that the goal of global net zero carbon emissions can only be reached by 2050 with swift, sustained and significant investment in nuclear energy. The International Atomic Energy Agency (IAEA) and the Intergovernmental Panel on Climate Change see nuclear as important part of the solution to climate change and energy insecurity."

While there are several countries such as Germany, Australia, Austria, Denmark, New Zealand, Norway, etc., that are markedly anti-nuclear, many other major countries such as India, China, USA, France, Russia, South Korea, Canada, etc. which produce nuclear power and many of them are establishing new nuclear plants. 

The idea of Small Modular Reactors has also emerged throughout the world. 

Considering these developments, it would be important for Indian legal education to undertake the following:

• Commence legal education in nuclear energy law, both domestic and international;
• Organise awareness programmes, conferences and credit courses on nuclear energy law;
• Devote specific journal issues on nuclear energy law.
• Devote signifcant resources for cutting edge research in nuclear energy law.

There are many areas of law that are required to be explored vis-a-vis nuclear energy. These include climate change law, environmental law, contract law, insurance law, taxation, etc. Law and other Universities need to take up this issue in a major way.

Small Modular Nuclear reactors in India: Liberalisation of Regime & Way Forward

In the recent past, there has been substantial developments in exploring the potential of Small Modular Nuclear reactors (SMR) in India. NITI Aayog came up with a detailed publication in May 2023 about SMRs in India titled "The Role of Small Modular Reactors in the Energy Transition" (download the study from here).

The first and the most important regulatory stumbling block is the Atomic Energy Act, 1962, which prohibits the private sector from commissioning nuclear reactors. Section 14(1) of the 1962 Act states:

“(1) The Central Government may, subject to such rules as may be made in this behalf, by order prohibit except under a licence granted by it—

(i) the working of any mine or minerals specified in the order, being a mine or minerals from which in the opinion of the Central Government any of the prescribed substances can be obtained;

(ii) the acquisition, production, possession, use, disposal, export or import—

(a) of any of the prescribed substances; or

(b) of any minerals or other substances specified in the rules, from which in the opinion of the Central Government any of the prescribed substances can be obtained; or

(c) of any plant designed or adopted or manufactured for the production, development and use of atomic energy or for research into matters connected therewith; or

(d) of any prescribed equipment.”

A perusal of Section 14(1)(ii)(c) seems to suggest that the Central Government could grant licence for the acquisition, production, possession, use, disposal, export or import of any of any plant designed or adopted or manufactured for the production, development and use of atomic energy or for research. But this provision has to be read together with Section 14(1A), which states:

“[(1A) No licence under sub-clause (c) of clause (ii) of sub-section (1) shall be granted to a person other than a Department of the Central Government or any authority or an institution or a corporation established by the Central Government, or a Government company.”

In other words, the Central Government is barred from granting a licence to a person other than a Central Government entity for this purpose.

NITI Aayog has recommended in its Report:

“With the advent of clean energy transition, there has been a great thrust towards adopting cleaner energy options to move towards the net zero emissions scenario by the respective countries. Many nations have already declared their net zero emissions targets. Apart from Renewable Energy (RE), nuclear is also being explored as a clean energy option to help the nations in achieving their decarbonization goals…" (p. 2)

SMR industry needs to find its way through early challenges of technology demonstration, special material availability, special manufacturing techniques, project funding requirements and regulatory harmonization. Given such challenges and the need to grow SMR industry for achieving long-term Net-zero goals, it is essential to establish SMR ecosystem.” (p. 5).

About fifteen years back, there were news reports that India would open up nuclear energy for private participation in producing nuclear power. See, for example, here.  Somehow, that did not happen. See, here.

But for these to happen now as envisaged in the NITI Aayog report, the first step would be to amend these provisions to allow participation of private players in SMRs.

Call for Papers: Trade, Law & Development

 Trade, Law and Development

Call for Submissions

 

General Issue

Issue 15.2| Winter’ 23

 

Founded in 2009, the philosophy of Trade, Law and Development (TL&D) has been to generate and sustain a constructive and democratic debate on emergent issues in international economic law and to serve as a forum for the discussion and distribution of ideas. Towards these ends, the Journal has published works by noted scholars such as the WTO DDG Yonov F. Agah, Dr. (Prof.) Ernst Ulrich Petersmann, Prof. Steve Charnovitz, Prof. Petros Mavroidis, Prof. Mitsuo Matsuhita, Prof. Raj Bhala, Prof. Joel Trachtman, Dr. (Prof.) Gabrielle Marceau, Prof. Simon Lester, Prof. Bryan Mercurio, and Prof. M. Sornarajah among others. TL&D also has the distinction of being ranked the best journal in India across all fields of law for several years by Washington and Lee University, School of Law.

Accordingly, the Board of Editors of TL&D is pleased to invite original, unpublished manuscripts for publication in the Special Issue of the Journal (Vol. XV, No. 2) in the form of ‘Articles’, ‘Notes’, ‘Comments’ and ‘Book Reviews’.

Manuscripts received by August 05, 2023, pertaining to any area within the purview of international economic law will be reviewed for publication in the Winter’22 issue.

Manuscripts may be submitted via e-mail or via the Journal’s website here. For further information about the Journal, please click here. For submission guidelines, please click here. In case of any queries, please feel free to contact us at: editors[at]tradelawdevelopment[dot]com.

 

Last Date for Submissions: August 05, 2023

 

 

PATRON: P.P. Saxena | ADVISORS: Raj Bhala | Jagdish Bhagwati | B.S. Chimni | Glenn Wiser | Daniel B. Magraw, Jr. | Vaughan Lowe | Ricardo Ramirez Hernandez | W. Michael Reisman | M. Sornarajah | FACULTY-IN-CHARGE: Dr. Rosmy Joan | BOARD OF EDITORS: Ananya Awasthi | Ria Chaudhary | Priyanshu Shrivastava| Simran Bherwani| Sunchit Sethi| Shiva Patil| Anoushka| Chathurya Srinivasan| Himanshu Sharma| Nivedita Sharma| Alka Mahapatra | Anandita Srivastava | Ishaan Pant | Krishna Ravishankar | Nalin Agnihotri|Neel Rao | Samiksha Lohia | Shambhavi Uniyal | Sonali P. Raju | Aastha Gupta | Akanksha Samantray | Ansh Sethi | Bianca Bhardwaj | Manvi Goyal | Nandini Tripathi | Thejas Velaga| Y. Leela Krishna Reddy | Yug Gandhi

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.