In what
can termed as an important development in Arbitration Law, the Supreme Court of
India (“Supreme Court”) has delivered a 129-page judgment wherein issues such
as ‘factors determining seat of
arbitration’, ‘concurrent jurisdiction of foreign court’ etc. have been
discussed. In Enercon (India) Ltd. & Ors v. Enercon GMBH & Anr. ,
the Supreme Court had to decide appeal(s) against two judgments of Bombay High
Court – one judgment which allowed the application of the respondent under
section 45 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”)
and other judgment vacating the anti-suit injunction issued against the
respondent.
Before
going to and discussing underlying issues, it would first be important to
understand the factual background.
Factual
Background: In
1994, Appellants no. 2 and 3 (“Members of Mehra Family”) entered into a Joint
Venture Agreement (“JVA”) with Respondent no. 1 (“Enercon GMBH”) to incorporate
Appellant no.1 [“Enercon (India) Ltd.”]. The objective behind incorporating Appellant
no.1 was to manufacture and sell Wind Turbine Generators (“WTG”). In
furtherance of JVA, both the parties executed certain agreements which included
Share Holding Agreement and Technical Know How Agreement (“TKHA”) (these agreements were later amended).
After
the expiry of TKHA, there were further negotiations between the parties. These
negotiations, which were recorded in a document titled ‘Heads of Agreement’, sought to explore the possibility of
agreement to transfer future technology developed by the Respondents. Following
these negotiations, parties entered into ‘Agreed Principles’, which were meant to be the basis of all the
final agreements. On the same day when ‘Agreed
Principles’ were executed, parties also executed and signed Intellectual Property License Agreement (“IPLA”). IPLA contained
an arbitration clause (Clause 18) which can be read as follows:
17
GOVERNING LAW
17.1 This
Agreement and any
dispute of claims arising out of or in connection with
its subject matter are governed by
and construed in
accordance with the Law of India.
18.
DISPUTES AND ARBITRATION
18.1 All
disputes.....................any
Party may refer dispute(s), controversy(ies) or difference(s)
for resolution to an
arbitral tribunal to consist of
three (3) arbitrators, of who one will be appointed by each of the
Licensor and the
Licensee and the arbitrator appointed by Licensor shall also
act as the presiding arbitrator.
18.2
....................
18.3 A
proceedings in such
arbitration shall be conducted
in English. The
venue of the arbitration proceedings shall be in London. The arbitrators
may (but shall not
be obliged to)
award costs and reasonable expenses
(including reasonable-fees of counsel)
to the Party
(ies) that substantially
prevail on merit. The
provisions of Indian Arbitration and Conciliation Act, 1996 shall
apply........”
As
disputes arose between the parties, Respondent(s) sought to initiate
arbitration proceedings thereby nominating an arbitrator. Respondents further
sought to file an ‘Arbitration Claim Form’ before the English High Court. This initiation
of arbitration was resisted by the Appellants on the ground that there was no ‘concluded contract (IPLA)’
and hence there was no question of
arbitration. While Appellants claimed that IPLA was not a concluded contract because of its
non-conformity with ‘Agreed Principles’,
Respondents claimed it to be a binding contract.
In
furtherance of resisting arbitration, Appellants filed a Regular Suit (“Daman
Suit”) before Daman Trail Court (“Trial Court”) for a declaration that there
subsists no concluded contract and
hence no question of arbitration. On this issue, Trail Court decreed in
Appellant’s favour thereby ordering Respondents to maintain status quo. In the meantime, Appellants, without prejudice, nominated Justice B.P. Jeevan Reddy as their
nominated arbitrator. However, Justice Reddy, along with the Respondents’
nominated arbitrator, was of the opinion that arbitration agreement is not workable. That is, expressed their inability to appoint a third arbitrator. (Read
the above arbitration clause, wherein it first provided for THREE arbitrators
and thereafter provided that arbitrator appointed by the Licensor would also be presiding arbitrator).
Following
this development, two more applications were filed in the Daman Suit – one by
the Respondents (under Section 45,
Arbitration Act) and other by the Appellants (seeking anti-arbitration injunction for restraining Respondents to
proceed before English High Court). The Trail Court allowed both the
applications of the Appellants and rejected section 45 application of the
Respondents.
Against
the orders of the Trial Court in Daman Suit, Respondent filed appeals before the
Daman Appellate Court (“Appellate Court”). The Appellate Court set aside the
orders of the Trail Court. Against these orders of the Appellate Court, Appellants
filed two writ petitions before the Bombay High Court. Initially, Bombay High Court restored Trial Court’s order in
Daman Suit but later, while finally
disposing off the petitions, it dismissed the writ petitions filed by the Appellants. High Court further held that London is not the seat of arbitration but
English courts will have concurrent jurisdiction.
Initially
when Bombay High Court had restored Trail’s Court order in Daman Suit,
Respondents had filed arbitration application (for constituting arbitral
tribunal) before English High Court. Consequent to this, English High Court
ordered the Appellant to expedite proceedings before the Bombay High Court.
When Bombay High Court finally
disposed off the petitions,
Respondents again approached English High Court for constituting arbitration
tribunal and further asking anti-suit
injunction against the Appellants (to
restrain them from filing of Special Leave Petitions against the orders of
Bombay High Court). The English High Court was, however, of the opinion
that matter should first be considered by the (Indian) Supreme Court; otherwise,
there may be a possibility of conflicting decisions. This is how the present
matter reached the Supreme Court.
Issues:
Following
can be considered as the major issues framed by the Supreme Court (¶ 69):
(i)
Concluded
Contract: Whether IPLA, which was allegedly executed and signed
by the parties, is a concluded contract? Whether this issue should be
decided by the court or arbitral tribunal?
(ii)
Arbitration
Agreement: Whether there exists a valid Arbitration
Agreement? Whether it is unworkable?
(iii)
Seat
of Arbitration: What is the seat of arbitration? This issue is important since courts of
arbitration seat exercises supervisory
jurisdiction over arbitration proceedings. (Clause 18.3 of
Arbitration clause (see above) which referred London as the venue arbitration).
(iv)
Concurrent
Jurisdiction: Whether courts in India and England have
concurrent jurisdiction? Linked to this, whether, Appellants would be entitled
for anti-suit injunction against the
Respondents?
Validity
of Arbitration Agreement Independent of the Underlying Contract
On
the question whether there was a concluded contract, the Supreme Court was of
the opinion that even if the existence of main contract is under dispute, it
may not affect the validity of arbitration clause. Opining that there were no
factors which indicated arbitration agreement to be null or void, the Court
held that parties have irrevocably agreed
that clause 18 of
the proposed IPLA
shall apply to
settle any dispute or claim.
Since
it was the intention of the parties to arbitrate, the question of concluded contract becomes irrelevant.
That is, disputed as regards concluded
contract will have no effect on the existence of arbitration agreement. In
reaching this conclusion, concept of severability
of arbitration agreement was also emphasised. The opinion of the Court also
reflected a pro-arbitration approach:
“.......Whilst
interpreting the arbitration agreement and/or the arbitration clause, the court
must be conscious of the overarching policy of least intervention by courts
or judicial authorities in
matters covered by
the Indian Arbitration Act,
1996.......”
Regarding
the question as to which forum should decide the existence of concluded contract, it was held that that the same can be decided by the arbitral tribunal. This is because
the arbitration clause was widely worded and
would include such disputes.
Interpretation
and Workability of Arbitration Clause and ‘Bystander Principle’
To
address this point, the Supreme Court again adopted a pro-arbitration approach. It was of the opinion that, unlike
statutory provisions, an arbitration clause cannot be construed with the
application of strict rules of
interpretation. And, it would be the obligation of the court to make arbitration clause workable with
the permissible limits of law:
“......following the UNCITRAL
Model Law, that
the Courts play a
supportive role in
encouraging the arbitration to
proceed rather than letting it come to a grinding halt.” (¶ 84)
Opining
that un-workability of arbitration clause is attributed only to the machinery provision, the missing line (“the
two Arbitrators appointed
by the parties
shall appoint the third
Arbitrator”) can be read into the arbitration clause. In doing
so, the court applied ‘bystander
principle’ which, according to Lord Justice MacKinnonn, can be described in
the following terms:
“prima facie that
which in any contract is left to be
implied and need
not be expressed
is something so obvious
that it goes
without saying; so that, if, while the parties were making their bargain,
an officious bystander
were to suggest some
express provision for it in
their agreement, they would testily suppress him with a common 'Oh, of
course!” Shirlaw
v. Southern Foundries,
[1937 S. 1835]
Having
concluded that there exist a manifest intention of the parties to arbitrate,
the crucial line which seems to be an omission or an error can be inserted by the
Court. Reliance was placed on Shin Satellite Public Co. Ltd. Vs. Jain
Studio Ltd, (2006) 2 SCC 628.
‘Seat
of Arbitration’: India or London? What are the Factors which Court considered?
Having
come to the conclusion that there exists a valid arbitration agreement which is
workable, the Court dealt with the critical issue of arbitration ‘seat’. The court rejected the
contention of the Respondent that the usage of term ‘venue’ would indicate that London is the seat of arbitration.
Rather, it was held by the court that London only be treated as a geographical location for arbitration
hearings and proceedings:
“.....where in
substance the parties
agreed that the laws of one country will govern and control a given
arbitration, the place where the arbitration is to be heard will not dictate
what the governing law will be.”(¶ 108; Case referred: Braes of Doune Wind Farm (Scotland) Limited
Vs. Alfred McAlpine Business Services
Limited, [2008]EWHC 426 (TCC)]
According
to the Court, the fact that all three laws, i.e., law governing the Contract, the law governing the arbitration agreement
and law governing arbitration proceedings (curial law), were Indian is a
strong indicator that seat of arbitration is India. Having chosen
these three laws, the parties, in the opinion of the court, could not have
intended to create a difficult situation by choosing London as the seat of
arbitration. It is more so when parties have not chosen a supranational body of rules but Indian Arbitration Act for
arbitration.
There
was another important point. Seat of arbitration also carries with it the
jurisdiction of challenge an arbitral
award. If London is considered to be seat of arbitration, it would mean
that challenge to award would also be
in London or English Courts. But in the present case, parties had chosen
Arbitration Act for arbitration, Part I
of which will also be applicable. Hence, holding London as the seat of arbitration would lead to undesirable results (e..g., challenging award at both the places). (Court opined that in the present case, Bhatia judgment
and not BALCO judgment will be applicable.)
In
concluding that India is the seat of
arbitration, Supreme Court also considered the closest connection test. According to this, the law with which the
agreement to arbitrate has its closest and most real connection is the law of
the seat of arbitration. In the present case, apart from the three laws for the purpose of
arbitration, performance of agreement was also meant in India. (Referred case: SulameRica Sulamerica
CIA Nacional de Seguros SA and others v Enesa Engenharia SA & Ors, [2012]
EWCA Civ 638
The Court
also rejected the application of case relied by the Respondents on the ground
that they relate to phrases such as ‘arbitration
in London’. This, in the opinion of the court, cannot be equated with the
phrase ‘venue of arbitration proceedings
shall be in London’. In
conclusion, it was held by the court that merely because arbitration can be
conducted in a venue (London) would
not mean that seat of arbitration has
also been changed. Such venue can be chosen for the purpose of convenience.
“.....the
placement of the words
that "the Indian
Arbitration and Conciliation Act shall apply" in the
last clause 18.3 indicates the specific intention of the parties to the application
of the Indian Arbitration Act, not only to the Arbitration Agreement but
also that the
curial law or
the Lex Arbitri would
be the Indian
Arbitration Act.....”
Can
Courts of Both the Countries (India and England) have Concurrent Jurisdiction?
Having
come to the conclusion that India is the seat of arbitration, it was not
difficult for the court to hold that only Indian courts would have supervisory jurisdiction over
arbitration proceedings. Holding otherwise, in the opinion of the court, would
create unnecessary inconvenience and problems.
As
per the Court, an agreement providing seat
of arbitration is analogous to exclusive
jurisdiction clause. In the present case, though there was no specific mention of India as the seat of
arbitration, it was nonetheless concluded that India is the arbitration seat. Hence, the conclusion to hold
India as seat of arbitration would
confer exclusive jurisdiction over
Indian courts.
Consequently,
the court held that English Courts
would not have concurrent jurisdictions over the arbitration proceedings. The
Respondent no.1 had chosen Indian Law for contract and has further participated
in litigation before Indian Courts. Hence, in the opinion of the court, these
factors indicate that Respondent no. 1 does not consider India to be forum-non-conveniens. On the basis of
this, the court restored the anti-suit
injunction (Daman Trail Court, see ‘Factual
Background) issued against the Respondents.
(Note: Reference to ‘Bhatia Judgment’ in
this post should understood as the decision of the Supreme Court in Bhatia International v. Bulk Trading S.A.
(2002) 4 SCC 105 . And, reference to ‘BALCO Judgment’ should be understood as
the decision of the same court in “Bharat
Aluminium Company Vs. Kaiser Aluminium, (2012)
9 SCC 552)
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