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!

Vidya Drolia v DTC: Part I: Interesting Aspects- Arbitration Law as a Special Contract Law

 Vidya Drolia v Durga Trading Corporation is an interesting and important decision of a three judge Bench of the Supreme Court of India on arbitrability in Indian arbitration and the allocation of powers between the court and the arbitral tribunal to decide questions relating to arbitrability, especially in the context of Section 8 (where the court refers a dispute covered by an arbitration agreement to arbitration) and Section 11 (power of the supervisory court to arbitrators).

This post and the posts following this one are not run-of-the-mill case comments. Rather, the objective here is to discuss certain interesting points about this 242 page decision. 

The first interesting aspect covered in the judgement is the relationship between general contract law (covered in Sections 1-75 of the Indian Contract Act, 1872) and arbitration law, which deals with a type of special contract, that is, arbitration agreement. Paras  11 to 15 of the decision (p. 12-17) deal with this issue. 

According to the Court, the meaning of "agreement" is derived from Section 10 of the Indian Contract Act, 1872 ("Contract Act") and therefore, "an arbitration agreement should satisfy the mandate of Section 10 of the Contract Act..." (Para 11). Thus, the arbitration agreement should satisfy the general contract law requirements of free consent and other such requirements. A contract is an agreement enforceable by law. An arbitration agreement not enforceable by law is void and is not legally valid (Para 11). 

Thus, arbitration is "a matter of contract". The immediate implication of this is that "the parties are entitled to fix boundaries as to confer and limit the jurisdiction and legal authority of the arbitrator." (Para 15).

If an arbitration agreement is a contract, taking this proposition to its logical end, an arbitration agreement can be specifically enforced. The mechanism of specific enforcement is provided in Section 8 of the Arbitration and Conciliation Act, 1996. The question further arises, whether specific performance is the only remedy for breach of an arbitration agreement. 

Many jurisdictions and commentaries have explored the question of whether damages would lie where a party breaches an arbitration agreement. A popular commentary on the subject argues on the breach of an arbitration agreement: "If it is broken, an award of damages is unlikely to be a practical remedy, given the difficulty of quantifying the loss sustained." (Para 1.55, Redfern, Hunter et al, Redfern & Hunter on International Arbitration, 2015). See also, Julio César Betancourt, Damages for breach of an international arbitration agreement under English arbitration law, Arbitration International, Volume 34, Issue 4, December 2018, Pages 511–532, https://doi.org/10.1093/arbint/aiy030. Born argues:

"Nevertheless, while inadequate when considered alone, damages for breach of an arbitration agreement can be an appropriate supplementary means of enforcing arbitration agreements, by increasing the disincentives for such conduct. A few contemporary judicial decisions in the United States, England and Switzerland have either awarded damages for the breach of an arbitration agreement or indicated that the possibility for doing so existed. Nonetheless, some contemporary judicial decisions deny the existence of a right to damages for breaches of arbitration agreements (ironically, effectively resurrecting the historic hostility to arbitration agreements, but in reverse form)." (Gary B Born, International Commercial Arbitration 1305-1306 (2014).

An aspect to be considered is: whether the provision relating to costs as contained in Section 31A could be considered as damages for breach of an arbitration agreement? See, "Costs Allocation Under the Amended Indian Arbitration Law: A Critique" which criticizes the practice of Indian courts in not adhering to the spirit behind the enactment of Section 31A. Before Indian courts delves on these aspects, Indian courts should uniformly allocate costs as per the general rule provided in Section 31A(2)(a) that "unsuccessful party shall be ordered to pay the costs of the successful party". 

If not damages, whether courts could order costs on an indemnity basis for breach of arbitration agreement could be explored. Such a movement would, prima facie, be in the right direction.

More on the decision in another post.

Supreme Court on Arbitrability of Fraud: Rashid Raza (2019)

A three-judge Bench of the Supreme Court in Rashid Raza v Sadaf Akhtar (2019: SC) had the occasion to clarify the law relating to arbitrability of fraud. The Supreme Court also reiterated and re-stated the law in the two-judge Bench decision in Ayyasamy v. Paramasivam, (2016) 10 SCC 386. The re-stated test as per the three-judge Bench is as follows:

"Two working tests laid down in paragraph 25 are: "(1) does this plea [of fraud] permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain."

Note the use of "or" for these two tests, conveying the meaning that one has to establish either of the grounds to enable the court hold the dispute to be non-arbitrable. The focus of the second aspect of the "working tests" suggests that the court has not considered correct the previous position that arbitral tribunals are incapable of handling complicated facts involving collecting evidence. This is a subtle but significant shift in position. Without overruling Ayyasamy insofar the position of law that the "dispute may require voluminous evidence on the part of both the parties to come to a finding which can be only properly undertaken by a civil court of competent jurisdiction”, the court in effect abandoned this position. Now, the two working tests are the only tests for deciding whether a dispute involving allegation of fraud is arbitrable. 

Guest Post: Mid-Year Arbitration Review- Part IV by Juhi Gupta

(Continuing with her mid-year arbitration review (see previous posts here, here & here), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the fourth and last part of the series of posts on the topic. Happy reading!) 

Fundamental policy of Indian law is violated if core issues for grant of relief are not examined

National Highways Authority of India v Gwalior Jhansi Expressway Limited (Supreme Court, 13 July 2018)

The Supreme Court recently decided a very interesting case about the mandatory participation in a tender process to exercise the right of first refusal. A core issue was whether or not the impugned orders contravened the fundamental policy of Indian law. The case provides a useful illustrative example of the facts and circumstances that would lend to a finding that the fundamental policy has been violated.

Brief facts: A dispute arose between the appellant and respondent under a concession agreement regarding completion of contractual works. Arbitration was invoked and subsequently, the appellant filed an application under section 17 of the Arbitration Act before the tribunal seeking permission to complete the remaining works by going through the tender process again. The respondent moved a section 17 application asking NHAI to either infuse Rs. 400 crores to finish the project or to issue a fresh tender, subject to the respondent being granted the right of first refusal (hereinafter “ROFR”) to match the lowest bid and in the event it did, the right to complete the works subject to any conditions in the tender.

The tribunal passed an order to this effect, following which the appellant issued a fresh public tender for the balance works that was brought to the tribunal’s notice. An important stipulation that repeated in several provisions of the tender document was that if the respondent was also a responsive bidder, then the respondent shall have the option of matching the lowest bid in terms of the selection criteria. Several months later, the respondent filed an application under section 17 before the tribunal seeking permission to complete the works, claiming it was surprised by the appellant’s fresh tender of which it had only received notice on the previous day. The appellant objected saying that the respondent could have only invoked the ROFR if it had participated in the bidding process. The tribunal ruled in favour of the respondent, which was upheld by the Delhi High Court.

Issue: Whether the tribunal’s orders and the Delhi High Court order violated fundamental policy of Indian law?

Arguments: The appellant argued that (i) the respondent could not exercise the ROFR without participating in the bidding process and in violation of the tender conditions; (ii) there was nothing in the tribunal’s first order exempting the respondent from participating in the tender process or prohibiting the appellant from incorporating a condition to this effect in the tender document; (iii) the process of evaluation of tender and awarding of contract are commercial functions that are outside the purview of judicial review, especially when the decision of the statutory body (in this case the appellant) was bona fide and in public interest; and (iv) the tribunal exceeded its jurisdiction under section 17 in both orders because it could not pass an interim order concerning a separate contract (i.e. the fresh tender).

The respondent argued that (i) both the tribunal and High Court were of the view that it was not necessary for the respondent to participate in the fresh tender process to exercise the ROFR; (ii) the tribunal’s first order attained finality since the appellant did not challenge it; (iii) the respondent’s capability to complete the work was undisputed and therefore, there was no logic or rationale to require the respondent to participate in the bidding process; (iv) clause 3.2(f) of the tender document was a deeming provision that essentially declared the respondent as eligible and qualified; and (v) the respondent was not aware of the provisions of the fresh tender document as the tender was neither provided to the respondent nor placed before the tribunal.

Decision: The Supreme Court decided in favour of the appellant and set aside the tribunal’s second order and the High Court’s order, and dismissed the respondent’s section 17 application. The Court noted that the validity of the tender document was not challenged and its provisions made it clear that the respondent was required to participate in the tender process by submitting its sealed bid. The deeming clause in the document did not exempt the respondent from such participation (“…[the respondent], if it has participated in the bidding process, it shall be deemed to fulfil all the requirements of Clauses 3 to 6 of the RFP…”).

As regards the tribunal’s first order, the Court noted that there was nothing in the respondent’s application under section 17 to even remotely suggest that it should be exempted from participating in the fresh tender process. Any such exemption had to be expressly sought and granted, and disclosed in the tender documents. The Court agreed with the respondent that the tribunal’s first order was silent on requiring the respondent to participate in the bidding process as a condition precedent to exercise the ROFR; however, the respondent could not benefit from this as any exemption sought had to be expressly granted by the court. While the Court said it was “debatable” whether an arbitral tribunal could even issue an order like its first order under section 17, it did not enter into a discussion about this as that order was not challenged.

Further, the Court found fault with the tribunal’s undue appreciation of the fact that the respondent had completed a substantial portion of the contractual works and that it would be just and proper to allow it to complete the balance in spite of the respondent’s failure to take notice of the tender document that was duly released in public and disclosed to the tribunal. In addition, the respondent waited for very long to challenge the tender and even then did not file a rejoinder to challenge the appellant’s claim in its reply affidavit that the respondent was fully aware of the terms and conditions of the tender.

“The Arbitral Tribunal made no effort to ascertain as to whether the order dated 23^rd July 2016 was a blanket and unconditional order entitling the respondent to straightaway exercise ROFR without participating in the bidding process. The Arbitral Tribunal merely adverted to the objection of the appellant and rejected the same on the finding that involvement of a third party in the Project would create serious problems. It took the view that giving option to the respondent to match the lowest bid and to complete the balance work, with a condition to periodically submit the progress report to the Arbitral Tribunal for monitoring whether the balance work was successfully completed to the satisfaction of the NHAI, would be a proper and equitable arrangement. This approach is not in conformity with the fundamental policy of Indian law” (paragraph 20) [emphasis supplied].

Similarly, the Court observed that the High Court violated the fundamental policy of Indian law as it did not examine the core issues for grant or non-grant of relief to the respondent:

“The High Court did not find any error, much less manifest error, in the view taken by the Arbitral Tribunal. Further, it can be gleaned…that the High Court was more eager to know as to what prejudice would be caused to the appellant if the respondent had not participated in the bidding process. This query of the High Court is begging the question. For, that cannot be the primary basis to answer the relief claimed by the respondent in the application under Section 17 of the Act…The High Court has overlooked the fact that the appellant is a body corporate under the 1988 Act. It has to act in a just and fair manner in the matter of allocation of contract albeit the balance and unfinished work of the Project…The respondent had the option to participate in the bidding process which was not availed for reasons best known to the respondent. The High Court also overlooked the fact that the tender process was not an empty formality and with the initiation of the same, third parties, who participated in the bidding process, were likely to be prejudiced by allowing the respondent to match the lowest bid or exercise ROFR, without participating in the bidding process despite the express stipulation in that behalf in the tender documents” (paragraph 21) [emphasis supplied].

  

Non-signatories to arbitration agreement can be referred to domestic arbitration based on group of companies doctrine

Cheran Properties Limited v Kasturi and Sons Limited and Ors (Supreme Court, 24 April 2018)

Brief facts: An arbitral tribunal passed the final award in an arbitration between Kasturi and Sons Limited (hereinafter “KSL”) and Hindcorp Resorts Private Limited (HRPL) as the claimants, and Sporting Pastime India Limited (SPIL) and KC Palanisamy (KCP) as the respondents, under a shareholders agreement. The award contained a direction to SPIL and KCP to return to the claimants the documents of title and share certificates relating to 2,43,00,000 shares of SPIL. KCP’s challenge against the award under section 34 of the Arbitration Act was dismissed by the Madras High Court and subsequently the Supreme Court, thereby lending finality to the award.

Following the award, KSL filed an application before the National Companies Law Tribunal (NCLT) seeking rectification of SPIL’s register under section 111 of the Companies Act, 1956. The application was preferred against Cheran Properties Limited (hereinafter “Cheran Properties”), which had purchased SPIL’s shares as KCP’s nominee. NCLT allowed the application, which was further upheld by the appellate tribunal (NCLAT).

What is important to note is that prior to the dispute arising, KCP sent a letter to KSL as the authorised signatory of Cheran Properties (hereinafter “appellant’s letter”), requesting KSL to execute share transfer deeds for registering the transfer of shares “in the following names…[including Cheran Properties]”.

Issues: (1) were the non-signatories to the arbitration agreement bound by the agreement; and (2) did the NCLT have jurisdiction to enforce the arbitral award?

Arguments: The appellant argued that (1) it was not a party to the arbitration agreement that was entered into between KCP, KSL, SPIL and HRPL. Therefore, it was not bound by the arbitral award; (2) an arbitral award has to be enforced as a decree of a civil court and therefore, the award could not have been enforced by the NCLT; and (3) the principles of Chloro Controls are inapplicable as that case was decided in the context of an international arbitration under section 45. The provisions of section 45 of the Arbitration Act must be distinguished from the unamended section 8.

The respondents argued that (1) the shareholders agreement specifically provided that KCP’s nominees would be bound by the agreement, which would include the provision containing the arbitration agreement; (2) the appellant acted as KCP’s nominee at all material times and the appellant’s letter establishes beyond doubt that the appellant assumed all obligations under the shareholders agreement, including the remedy of arbitration; (3) an arbitral award can bind a group company, which is an affiliate of a signatory to the arbitration agreement, as decided in Chloro Controls; (4) section 35 of the Arbitration Act expressly states that an arbitral award binds parties to an arbitration and persons claiming under them; and (5) since the consequence of the arbitral award was to transfer shares to KSL, the NCLT had jurisdiction to order the formal rectification of SPIL’s register, which was the only way to effect the transfer of shares to KSL.

Decision: The Supreme Court decided the first issue in favour of the respondents. The Court relied on Chloro Controls, wherein the “group of companies” doctrine evolved under English law had been relied upon to recognise that non-signatory affiliates can be bound by an arbitration agreement in certain circumstances. Accordingly, in the present case, the Court noted:

“In holding a non-signatory bound by an arbitration agreement, the Court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance. The group of companies doctrine is essentially intended to facilitate the fulfillment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory” (paragraph 17) [emphasis supplied].

The Court emphasised that the present case related to a post-award situation and therefore, the material provision was section 35, and not sections 8 and 45 as contended by the appellant. Section 35 clearly stipulates that an arbitral award shall be final and binding on the parties and persons claiming under them. The expression “persons claiming under them” widens the net of those who are bound by an arbitral award – it is a “legislative recognition [that] an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings” (paragraph 20).

The Court observed that the appellant, in purchasing the shares, was conscious of and accepted the terms of the shareholders agreement. The appellant’s letter unequivocally confirmed the acceptance of this position. The facts and circumstances demonstrate the mutual intention of the parties to bind both signatories and non-signatories to the parent agreement and consequently, the arbitration agreement contained therein. KCP was entitled to transfer his shareholding and in the appellant’s letter, KCP indicated, as authorised signatory of the appellant, that his group of companies agreed to purchase the shares.

The Supreme Court also decided the second issue in favour of the respondents. The arbitral award had attained finality and the only remedy to fully enforce the award was to seek rectification of the register under section 111 of the Companies Act.

Mere claim alleging duress and coercion without proof does not lead to arbitrable dispute

M/s ONGC Mangalore Petrochemicals Ltd. v M/s ANS Constructions Ltd. and Anr. (Supreme Court, 7 February 2018)

Brief facts: The respondent was awarded a contract by the appellant. The respondent issued a no dues/claim certificate on accepting full and final payment after execution of the work. However, subsequently, the respondent withdrew the certificate stating that it was only issued under the appellant’s duress and coercion in order to receive payment. The respondent contended that several of its running account bills remained uncleared and it had to incur other additional expenses on account of causes attributable to the appellant. The appellant meanwhile issued a completion certificate. The respondent initiated arbitration proceedings. The appellant refused to accede to the arbitration request on account of non-arbitrability of the dispute. The respondent approached the Karnataka High Court under section 11 of the Arbitration Act to appoint an arbitrator on behalf of the appellant. The High Court allowed the petition against which the appellant filed a special leave petition to the Supreme Court.

Issue: Did a dispute exist for reference to arbitration under section 11?

Arguments: The appellant argued that (i) there was no genuine and serious dispute; (ii) there was no duress or coercion; (iii) the alleged claim for losses incurred during execution of the contract could not be raised at a belated stage; and (iv) there was complete accord and satisfaction of the contract as the parties had confirmed in writing that the contract was fully and finally discharged by performance of all obligations. As such, there was no outstanding claim or dispute to be arbitrated.

The respondent argued that (i) there was a genuine and serious dispute as it had incurred losses while executing the contract that remained unpaid and even the final payment was made after delay; (ii) the no dues certificate was void as it was issued under duress and therefore had no meaning in the eyes of law; and (iii) it had the right to invoke the arbitration clause in the contract.

Decision: The Supreme Court held that there was no genuine and serious dispute for arbitration. Deciding the accord and satisfaction issue in favour of the appellant, the Court relied on a prior decision to explain the thought process behind determining a reference to arbitration under section 11 as follows:

“The Chief Justice/his designate exercising jurisdiction under Section 11 of the Act will consider whether there was really accord and satisfaction or discharge of contract by performance. If the answer is in the affirmative, he will refuse to refer the dispute to arbitration. On the other hand, if [he] comes to the conclusion that the full and final settlement receipt or discharge voucher was the result of any fraud/coercion/undue influence, he will have to hold that there was no discharge of the contract and consequently, refer the dispute to arbitration” (paragraph 20) [emphasis supplied].

Applying the law to the instant facts and circumstances, the Court concluded that there was full and final settlement of the claim and there was accord and satisfaction. The appellant was discharged of all liabilities pursuant to issuing the completion certificate. Therefore, no arbitrable dispute existed so as to warrant exercise of power under section 11. The respondent made mere bald assertions bereft of any details or particulars, which could not lead to an arbitrable dispute.

Guest Post: Mid-Year Arbitration Review- Part III by Juhi Gupta

(Continuing with her mid-year arbitration review (see previous posts here and here), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the third part of the series of posts on the topic. Do check out the awesome, crisp and to-the-point descriptive comment on prominent arbitration related cases decided in India in the first half of 2018. Happy reading!)

In the third of a series of posts, I review two significant Supreme Court decisions on the issue of binding non-signatories to an arbitration agreement. I have discussed the cases in slight detail as they involve different facts and circumstances that demonstrate different aspects of the issue.

Non-signatories to arbitration agreement can be referred to domestic arbitration under section 8 based on facts and circumstances; mere allegations of fraud cannot disable arbitration

Ameet Lalchand Shah and Others v Rishabh Enterprises and Another (Supreme Court, 3 May 2018)

Brief facts: The respondent (Rishabh Enterprises) entered into four agreements: two agreements with Juwi India that contained arbitration clauses, a sale and purchase agreement with Astonfield Renewables (hereinafter “Astonfield Agreement”) that did not contain an arbitration clause, and an equipment lease agreement with Dante Energy that contained an arbitration clause. The agreements related to the commissioning of a solar power plant in Uttar Pradesh, India.

A dispute arose between the parties wherein the respondents alleged that Dante Energy defaulted in payment of rent and that Astonfield Renewables committed fraud by inducing Rishabh Enterprises to purchase certain products under the Astonfield Agreement. Dante Energy invoked the arbitration clause in response to which the respondents filed a civil suit for fraud and misrepresentation. In response to the civil suit, the appellants filed an application under section 8 of the Arbitration Act (hereinafter “the Act”) seeking reference of the dispute to arbitration on the ground that all four agreements were inter-connected as they were executed between the same parties and pertained to the same purpose. The respondents opposed the application, contending that the matter could not be referred to arbitration while the suit for declaration that the agreements were vitiated due to fraud and misrepresentation was pending. Further, the suit only concerned fraud committed by Astonfield Renewables and Dante Energy for which a criminal case had been registered and hence, the dispute could not be referred to arbitration.

The single judge and subsequently Division Bench dismissed the section 8 application by relying on Sukanya Holdings - the Astonfield Agreement, which was the principal agreement according to them, did not contain an arbitration clause and the agreement was not inter-connected with the other agreements. Further, given serious allegations of fraud were involved, the dispute was not arbitrable. The respondents appealed against the Division Bench judgment to the Supreme Court.

Issues: (1) Were all four agreements inter-connected such that the parties could be referred to arbitration even though there was no arbitration clause in the Astonfield Agreement?; and (2) was the dispute non-arbitrable on account of the allegations of fraud or was the dispute arbitrable by taking the agreements as a commercial undertaking of the parties with a sense of business efficacy as held in Ayyasamy?

Arguments: On the first issue: the respondents argued that the Astonfield Agreement was the main agreement and the High Court’s reliance on Sukanya Holdings was correct since under Part I of the Act, parties who were not signatories to the arbitration agreement (in this case Astonfield) cannot be referred to arbitration. The appellants’ reliance on Chloro Controls was misplaced as that case was decided under Part II of the Act and did not overrule Sukanya Holdings (note: Chloro Controls held that non-signatories could be referred to a foreign-seated arbitration under section 45 of the Act in certain circumstances).

On the second issue: the appellants argued that were no serious allegations of fraud to decline a reference to arbitration. Based on Ayyasamy, they submitted that mere allegations of fraud were not sufficient to detract from the referring the matter to arbitration as per the agreement. The respondents argued that the allegations were very serious and not merely to disable the arbitration, and that the appellants were guilty of cheating the respondents from the very beginning.

Decision: The Supreme Court decided both issues in favour of the appellants and referred the parties to arbitration.

On the first issue, the Court, albeit not expressly, applied the principles laid down in Chloro Controls, such as “direct relationship to the party signatory to the arbitration agreement, direct commonality of the subject-matter and the agreement between the parties being a composite transaction” (paragraph 20; paragraph 73 of Chloro Controls). The Court concluded that the four agreements were for the single purpose to commission the solar power plant. The Court characterised the equipment lease agreement with Dante Energy as the principal agreement and after undertaking an analysis of the relevant clauses, the Court concluded that the other three agreements were ancillary agreements, which led to the main purpose of commissioning the power plant:

“Even though, the Sale and Purchase Agreement (05.03.2012) between Rishabh and Astonfield does not contain arbitration clause, it is integrally connected with the commissioning of the Solar Plant…and even though, Astonfield and appellant No.1 Ameet Lalchand Shah are not signatories to the main agreement viz. Equipment Lease Agreement (14.03.2012), it is a commercial transaction integrally connected with commissioning of [the power plant]…what is evident from the facts and intention of the parties is to facilitate procurement of equipments, sale and purchase of equipments, installation and leasing out the equipments to Dante Energy. The dispute between the parties to various agreements could be resolved only by referring all the four agreements and the parties thereon to arbitration” (paragraph 21) [emphasis supplied].

Therefore, the Court essentially concluded that since all parties were involved in a single commercial project that was executed through several agreements, they were all covered by the arbitration clause in the equipment lease agreement that was the main agreement. The Court pointed out that the Delhi High Court erred in characterising the Astonfield Agreement as the main agreement.

In this context, the Court also referred to the 2015 amendment of section 8 which amplified the relevant “party” that is entitled to seek a reference to arbitration to include all persons claiming “through or under” a party to the arbitration agreement. Further, as per the recommendations of the 246^th Law Commission Report, a prima facie existence of an arbitration agreement was sufficient to refer parties to arbitration under section 8.

On the second issue, the Court concurred with the appellants’ reliance on Ayyasamy. In that case it was held that when a party wants to wriggle out of an arbitration agreement on the basis of alleged fraud, then a strict and meticulous inquiry is needed to determine whether the allegations are of a serious and complicated nature that should be addressed by the court. Further, it was pointed out that mere allegations of fraud could not preclude arbitration and it was the duty of the court to impart business efficacy to commercial transactions.

Applying Ayyasamy, the Court held that the allegations of fraud were not serious and in any event, could very well be examined by the arbitral tribunal. Even though Juwi India and Astonfield were not parties to the lease agreement, all the agreements contained clauses referring to the lease agreement and it was the duty of the Court to not merely go by the averments made in the submissions but to also adopt a commercial understanding and impart business efficacy.

Comment: The Supreme Court appears to have limited the application of Sukanya Holdings under section 8. While discussing the 2015 amendments to this provision, the Court pointed out the introduction of the section 45 language (“through or under”) and that the amendments apply notwithstanding any judicial precedent, which would arguably include Sukanya Holdings. Therefore, this judicial decision assumes immense significance because it demonstrates the application of Chloro Controls to domestic arbitrations and expands the traditional conception of “parties” to an arbitration agreement to include non-signatories based on the facts and circumstances. Based on this decision, it would probably be prudent for parties in a composite transaction involving multiple agreements with arbitration clauses to expressly exclude arbitration in any agreement should that be the intention.

Although Ayyasamy has been subjected to considerable criticism, this decision is important because it clearly reiterates that mere allegations of fraud cannot be used to disable or obstruct a domestic arbitration.

Mere reference in an agreement to another document containing an arbitration clause is insufficient to incorporate the clause

M/S. Elite Engineering and Construction v M/S. Techtrans Construction India Private Limited (Supreme Court, 23 February 2018)

Brief facts: The respondent (Techtrans) was party to a construction agreement that contained an arbitration clause (“any dispute...between the parties…shall be finally settled by binding arbitration”). Under this agreement, the respondent entered into a sub-contract with the appellant (Elite Engineering) that did not contain an arbitration clause. When disputes arose between the appellant and respondent, the appellant filed a petition under section 9 of the Act. This petition was subsequently allowed but the judge left open the issue of existence of an arbitration agreement. Meanwhile, the appellant’s petition under section 11 of the Act to appoint an arbitrator was dismissed by the High Court on the respondent’s contention that there was no arbitration agreement.

Issue: Was the arbitration clause in the construction agreement incorporated into the sub-contract?

Arguments: The appellant argued that (i) the sub-contract incorporates the arbitration agreement in the construction agreement by implication by virtue of the following clauses: clause 2 that provides that “all the conditions and special conditions of contract, specifications (general and additional clauses relating to the works and quality specified in the [construction agreement] are binding on the Subcontractor” [emphasis supplied]; and clause 9.10 of the Annexure that provides that “for items which are not mentioned in this Agreement Clauses, terms and conditions of [the construction agreement] will be applicable” [emphasis supplied].

The result of reading both clauses together was that the arbitration clause in the construction agreement became applicable to the sub-contract by incorporation; (ii) when the appellant was required to execute the work on the terms and conditions contained in the principal agreement (i.e. the construction agreement), the parties clearly intended to incorporate all terms including the arbitration clause; (iii) clause 8.7 of the sub-contract provides that other terms related to termination of work will be same as the agreement between the EPC, Concessionaire and respondent, which would include settlement of disputes on termination through arbitration as provided in the sub-contract; and (iv) the appellant’s statement in its section 9 petition that it would be constrained to file a suit against the respondent was on account of mistaken understanding of law and cannot be held against it.

The respondent argued that clause 2 of the sub-contract clearly demonstrated that there was only a qualified incorporation of the terms and conditions of the construction agreement, namely only those relating to the works and quality. There was no conscious acceptance of the arbitration clause by the parties, which was reflected in the fact that the appellant did not even refer to it in its section 9 petition.

Decision: The Supreme Court agreed with the respondent’s contentions and held that there was no arbitration agreement between the parties. Relying on its verdict in M.R. Engineers and Contractors Private Limited, the Court held that as per section 7(5) of the Act, an arbitration clause in an independent document can be imported into an agreement between parties by reference to such independent document in the agreement, even if there is no specific provision for arbitration. However, what is key is that the reference must be such so as to make the arbitration clause in such independent document a part of the agreement. Therefore there is a difference between mere reference and incorporation, which is made clear by the language of section 7(5):

“Therefore when there is a reference to a document in a contract, the court has to consider whether the reference to the document is with the intention of incorporating the contents of that document in entirety into the contract, or with the intention of adopting or borrowing specific portions of the said document for application to the contract” (paragraph 16; paragraph 16 of M.R. Engineers) [emphasis supplied].

The Court referred to the conditions laid out in M.R. Engineers that need to be fulfilled for a valid incorporation of an arbitration clause and accordingly agreed with the High Court’s conclusion that there was no conscious acceptance of the arbitration clause in the construction agreement by the appellant and respondent. The Court agreed with the respondent that clause 2 had limited coverage, and noted that clause 9.10 only referred to “items” which had to be taken from the principal contracts. Further, the Court rejected the appellant’s termination of work argument, holding that the procedure relating to termination is completely separate and different from resolution of disputes.

Comment: This case is yet another illustration of the requirement to be express and specific in providing for arbitration in an agreement. Parties’ intention to consent to arbitration has to manifest clearly as opposed to appearing as an after thought. As regards the inclusion of arbitration by incorporation, this decision emphasises that the agreement should contain a clear reference to the document/s containing the arbitration clause and the intention to either incorporate the document/s in their entirety or at least the arbitration clause, unlike a reference to mere technical provisions that is likely to prove insufficient.

The Arbitrability Paradox: Arbitrability in Eviction/ Tenancy Matters in India

It is well-known that since 2012, the world is seeing India as a pro-arbitration jurisdiction. Courts have been rendering several pro-arbitration decisions since then. Even the legislature has attempted to improve the overall arbitration experience in India by bringing about amendments in 2015. Despite these developments, it is paradoxical that the scope of disputes that are not arbitrable has increased, and that too, not for the right reasons. One such species of disputes is the arbitrability of tenancy matters, as exemplified by a recent judgement of the Supreme Court in Himangni Enterprises v. KS Ahluwalia (SCI. 2017). We had provided a descriptive comment of the judgement in this blog a few days back in the form of a presentation, where we had raised certain issues with the judgement. In this post, we critically evaluate the law on this subject using the points raised in the presentation.

Rent Control Laws in India

A slew of legislation were passed in independent India under the rubric Rent Control Act where the interests of the tenants were sought to be protected. These laws were enacted when there was scarcity of available accommodations [see, Santosh Mehta vs Om Prakash AIR 1980 SC 1664. These laws provided that no court or tribunal could, irrespective of any contract or otherwise, order eviction in a proceeding by a landlord against a tenant, subject to limited exceptions.

These rent control laws conferred exclusive jurisdiction on select courts, such as the Court of Small Causes to deal with eviction matters. Natraj Studios (P) Ltd. v. Navrang Studios, AIR 1981 SC 537 is a typical example. Two commercial entities, studios, fought for possession of two studios. Navrang Studios (Navrang), the owner entered into a leave and licence agreement. The concerned law was the Bombay Rent, Hotel and Lodging House Rates Control Act, 1947. Under the said law, the licensor and the licensee were deemed to be governed under the said law and  the Small Causes court had the exclusive jurisdiction to decide the disputes between the parties. Since the Rent Control law was a social welfare legislation, the court held that only the Small Causes court had the jurisdiction to decide the issues under the said law and that an arbitral tribunal could not. The court observed:

"The Bombay Rent Act is a welfare legislation aimed at the definite social objective of protection of tenants against harassment by landlords in various ways. It is a matter of public policy. The scheme of the Act shows that the conferment of exclusive jurisdiction on certain Courts is pursuant to the social objective at which the legislation aims. Public policy requires that contracts to the contrary which nullify the rights conferred on tenants by the Act cannot be permitted. Therefore, public policy requires that parties cannot also be permitted to contract out of the legislative mandate which requires certain kind of disputes to be settled by special courts constituted by the Act. It follows that arbitration agreements between parties whose rights are regulated by the Bombay Rent Act cannot be recognised by a Court of law."

Curiously both the parties were commercial entities and yet the court chose to view the case as relating to social welfare and public policy.

Critique of the Rent Control Laws

These rent control laws were criticised for being heavily in favour of the tenants even at the cost of landlords. The Supreme Court recognised this in various decisions. In Prabhakaran Nair & Ors. Vs. State of Tamil Nadu & Ors. [(1987) 4 SCC 238, the court held: "Tenants are in all cases not the weaker sections. There are those who are weak both among the landlords as well as the tenants." [Also see, Ganpat Ram v Gayatri Devi AIR 1987 SC 2016].

[For a discussion on the evolution of the the law, see, for instance, Aditya Alok & Pankti Vora, Rent Control in India- Obstacles for Urban Reform, 4 NUJS Law Review 81 (2011)].

The law in many states moved forward in enacting a legislation that balanced the interests of both the landlord and the tenant and repealed the old rent control laws. Karnataka is a typical example. The Karnataka repealed the old rent control law and enacted the Karnataka Rent Act, 1999. The Statement of Objects and Reasons to the Karnataka Rent Bill, (which eventually became Karnataka Rent Act, 1999) stated:

"Economic Administration Reforms Commission and the National Commission on Urbanisation have recommended reform of the Rent Legislation in a way that balances the interests of both landlord and the tenant and also stimulates future construction. The Government of India have formulated a model rent control law and recommended to the State Governments to undertake amendments to existing rent control laws or enact new laws on the basis of the model law. It is considered necessary and expedient to bring about a new legislation to provide for regulation of rent and eviction in the spirit of modern economy in a manner more suited to our State, by adopting some provisions of the model rent control law and some of the existing law of Rent Control in the state."

Why such Disputes should be Non-Arbitrable?

The question is given that the new set of laws are concerned with balancing the interests of the landlords and the tenants. There are two connected issues here: the law and the policy underlying it has considerably changed. Considering this, there seems to be no basis for holding that such disputes are not arbitrable. Secondly, despite the pro-arbitration developments in the past five years in India, there seems to be a deep mistrust in the ability of arbitration to deliver justice. This distrust may be justified in certain cases and this might have led the Supreme Court in Himangni Enterprises to decide in favour of non-arbitrability. Such a conclusion needs re-visiting for the following reasons:

• As has been discussed above, the law has undergone changes owing to the change in economic policies of the country. Given this, is there a need to make such disputes non-arbitrable? Disputes under rent control laws were not arbitrable since the rent control laws were considered social welfare legislations. Given that the rent laws repealing the rent control regime balance the rights of the landlords and the tenants, the reasons for making disputes under such laws do not survive. Therefore, the bar should consequently not lie: cessante ratione legis cessat ipsa lex.
• This is true especially in the context of putting a property to commercial use. When a property is put to commercial use, the parties generally enjoy equal bargaining power. The decision of the Supreme Court in 1981 in Natraj Studios pertained to two commercial entities fighting over possession of two studios. Where is the question of applying the social welfare test in such cases? 
• Although in Booz Allen, tenancy disputes were recognised as well-known non-arbitrable disputes, the test of in rem-in personam distinction to decide arbitrability as laid down in Booz Allen allows arbitrability of tenancy disputes as tenancy creates rights in personam. This is all the more reason why such disputes should be arbitrable.

Does Himangni go Much Further?

When the counsel for the appellant argued that the Delhi Rent Act 1995 [Note: The Supreme Court in Himangni Enterprises wrongly refers to the Delhi Rent Act of 1955; it is 1995 and not 1955.] would not apply to certain premises as listed out in Section 3 thereof, the Supreme Court went much further and held that tenancy disputes under the Transfer of Property Act, 1882 were also not arbitrable:

"26. The Delhi Rent Act, which deals with the cases relating to rent and eviction of the premises, is a special Act. Though it contains a provision (Section 3) by virtue of it, the provisions of the Act do not apply to certain premises but that does not mean that the Arbitration Act, ipso facto, would be applicable to such premises conferring jurisdiction on the arbitrator to decide the eviction/rent disputes. In such a situation, the rights of the parties and the demised premises would be governed by the Transfer of Property Act and the civil suit would be triable by the Civil Court and not by the arbitrator. In other words, though by virtue of Section 3 of the Act, the provisions of the Act are not applicable to certain premises but no sooner the exemption is withdrawn or ceased to have its application to a particular premises, the Act becomes applicable to such premises. In this view of the matter, it cannot be contended that the provisions of the Arbitration Act would, therefore, apply to such premises."

It is submitted that the Supreme Court has got this part of the decision completely wrong and the same deserves reversal or statutory abrogation. This reasoning is even contrary to Booz Allen. Note that Booz Allen talks about "eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes" and does not talk about cases where eviction or tenancy matters are not governed by special statutes. In the instant case, the Supreme Court held that even if the Delhi Rent Act did not apply by virtue of Section 3 thereof and the general law, that is, the Transfer of Property Act, 1882 applied, the dispute under the latter law would remain non-arbitrable. The court supplied a convoluted reasoning that if the exemption is withdrawn or if it ceases to have application to such premises the Act would become applicable. Obviously, if a premises ceases to fall within the exemption in Section 3, the Delhi Rent Act would apply. But so long as it falls within the exemption, the law would not apply. Thus, the Supreme Court's reasoning as regards non-arbitrability of tenancy disputes even under the general law is neither supported by the Supreme Court in Booz Allen nor is it supported by convincing reasoning.

The Way Forward

The way forward is for the Supreme Court to constitute a larger Bench and decide on all the issues that are noted above. At the least, the court has to exempt tenancy under the general law (not governed by special statutes) and commercial leases/ licences from the bar on arbitrability. Letting Himangni Enterprises to hold the field will do immense damage to Indian arbitration, which is otherwise on the right path.

Arbitrability of Tenancy/ Eviction Matters: Recent Developments

This presentation discusses the recent judgement of the Supreme Court in Himangni Enterprises v. KS Ahluwalia (SCI. 2017) where the Supreme Court reiterated the previously held position that tenancy/ eviction matters were not arbitrable. The presentation concludes raising questions as to whether it is sound policy to make such disputes non-arbitrable. If the dispute really is a dispute about rights in personam, should not such disputes be arbitrable? More on the law on this issue in another post. 

The decision of the Supreme Court can be accessed from here. 

Arbitration in India: New Developments

We've not been blogging for some time but the period of lull is over. In this post, we intend to bring to the readers a few developments in Indian arbitration law and provide link comments on those developments.

Raffles Design Intl. India Pvt. Ltd v. Educomp Professional Education (Del HC: Oct. 2016): Non-applicability of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 to arbitration related court proceedings; whether Part I has been excluded?; Non-availability of relief under Section 9 to enforce orders of the arbitral tribunal; power of the court to award interim relief under S. 9 independent of the tribunal's orders; non-availability of relief under S. 27(5) (purportedly contempt) for disobedience of interim relief awarded by a Singapore seated arbitral tribunal.  

Comments: here and here

Ayyasami v. Paramasivam (SC: Oct. 2016): Disputes involving fraud are non-arbitrable; But allegations of such fraud should not only be serious and in normal course constitute a criminal offence but also that they "are also complex in nature and the decision on these issues demand extensive evidence for which civil court should appear to be more appropriate forum than the Arbitral Tribunal." The court later held: "It is only in those cases where the Court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced, the Court can sidetrack the agreement by dismissing application under Section 8 and proceed with the suit on merits."

The blogger still thinks N Radhakrishnan is based on shaky foundations and is liable to be overruled. If at all disputes of the nature mentioned in Ayyasami have to be made non-arbitrable, it could be only for the purposes of bringing such disputes tainted by serious allegations of fraud to the public domain rather than deciding it in arbitration, which is private and confidential. Unfortunately, N. Radhakrishnan and Ayyasami are based on the misconceived basis that "the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, Courts, i.e. public for a, are better suited than a private forum of arbitration." This is totally misconceived considering that English law abandoned the legal position, as has been argued in this paper.

Comments: here and here

[Note: The links are just one of many comments on the topic and there is no particular reason for providing only those links and not others. Readers may please provide links to more comprehensive analyses in the comment section of this blog post.]

Bombay High Court Follows Swiss Timing Instead of Maestro Engineers

We had noted in a previous post (Is this the End of N. Radhakrishnan v. Maestro Engineers? Swiss Timing v Organising Committee) the decision of the Supreme Court in Swiss Timing v Organising Committee, Commonwealth Games (May 2014: SC) where a Single Judge of the Supreme Court refused to follow a decision of a Two Judge Bench of the Supreme Court in N. Radhakrishnan v. Maestro Engineers (2009: SC) on the ground that it was rendered per incuriam. 

Image link

Maestro Engineers was a decision by two judges of the Supreme Court while Swiss Timing was by a Single Judge. Therefore, the issue as to whether a Single Judge could effectively end the reign of a two judge precedent was expected to be canvassed while citing Swiss Timing. In Avitel Post Studioz Ltd v. HSBC PI Holdings (Mauritius) Ltd., a Division Bench of the Bombay High Court had the occasion to consider the binding force of Maestro Engineers. Therefore, the Court followed Swiss Timing and followed the ruling in Swiss Timing that Maestro Engineers was indeed rendered per incuriam despite the fact that one of the contentions was that Maestro Engineers prevailed over Swiss Timing due to the larger bench strength in Mestro Engineers. . 

It may however be noted that a Single Judge of the Calcutta High Court in Guiness Securities Limited vs Geeta Dilip Vyas has taken note of Swiss Timing but has leaned in favour of Maestro Engineers although he has not conclusively ruled on the issue. According to the Judge:

"In the instant case, there is no challenge to the existence of the arbitration agreement, or the agreement containing the arbitration clause. The arbitration is a mode of resolution of a dispute agreed by the parties. If the agreement is vitiated by fraud or by misrepresentation then it goes to the very root of the matter. Arbitration is consensual. A claim founded on the agreement containing an arbitration clause if is a product of fraud, the ratio of India House Hold and N. Radha Krishnan could apply." (emphasis supplied)

It is going to be interesting as to how the courts would deal with Swiss Timing. Going by the Supreme Court's pro-arbitration record in the past since 2012 (BALCO), Swiss Timing would probably be the end of Maestro Engineers. 

Is this the End of N. Radhakrishnan v. Maestro Engineers? Swiss Timing v Organising Committee

Recently, a Single Judge of the Supreme Court of India held in the case of Swiss Timing v. Organising Committee, Commonwealth Games 2010 (28.05.2014) that N. Radhakrishnan v. Maestro Engineers where it was held that where allegations of fraud are involved, such disputes are not arbitrable, was rendered per incuriam. SS Nijjar, rejecting the preliminary objections of the Respondent held that even if criminal cases were pending regarding the alleged corruption, the dispute pertaining to termination of contract and non-payment of dues under the contract was arbitrable.

The Single Judge held that the observations in Maestro Engineers that allegations of fraud and serious malpractices cannot be referred to arbitration but can only be settled in court ran counter to the ratio of HPCL v. Pinkcity Midway Petroleums where it was held that where there was an arbitration clause, the matter is to be referred to arbitration in view of the mandatory language of Section 8. The Single Judge held that although Maestro Engineers made reference to the above judgement but failed to distinguish the said decision from the facts in Maestro Engineers. The court also held that Raju v Raju which held in the same lines as Pinkcity was not even brought to the attention of the court in Maestro Engineers.

The court also held that Maestro Engineers was per incuriam for another reason- it failed to take note of the provisions in Section 16 of the Arbitration and Conciliation Act, 1996 which provided that the arbitral tribunal was competent to rule on its own jurisdiction, including on the question as to the existence or validity of the arbitration agreement.

Two observations on this development: one, recently, the Supreme Court in  WSG (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd effectively held Maestro Engineers inapplicable in foreign arbitrations in the context of Section 45. This decision effectively sounds the death knell on the operability of Maestro Engineers in the domestic context. Two, SS Nijjar, J. held that Maestro Engineers was per incuriam because it failed to take note of Section 16. Wasn't SBP & Co. v. Patel Engineering guilty of the same failure?

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.