Delhi High Court
Dholi Spintex Private Limited vs Louis Dreyfus Company India Pvt. ... on 24 November, 2020
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Reserved on: 24th September, 2020
Decided on: 24th November, 2020
+ CS(COMM) 286/2020
DHOLI SPINTEX PVT. LTD. ..... Plaintiff
Represented by: Mr.Nakul Dewan and Mr.Devang
Nanavati, Sr. Advocates with
Mr.Rishi Agrawala, Mr.Karan Luthra,
Ms.Prachiti Shah, Ms.Aarushi Tiku,
Ms.Anushka Shah, Mr.Sambit Nanda
and Mr.Dev Shah, Advocates.
versus
LOUIS DREYFUS COMPANY INDIA PVT. LTD...... Defendant
Represented by: Mr.Jayant K. Mehta, Mr.Rakesh K.
Ojha, Mr.Sanjeev Sarawast,
Mr.Achintya Dwivedi and Mr.Ankush
Chattopadhyay, Advocates.
CORAM:
HON'BLE MS. JUSTICE MUKTA GUPTA
CS(COMM) 286/2020
I.A. 6298/2020 (under Order XXXIX Rule 1 and 2 CPC)
I.A. 6299/2020 (under Order II Rule 2 CPC)
I.A. 6701/2020 (under Section 45 of the Arbitration and Conciliation
Act-by defendant)
1. The plaintiff-Dholi Spintex Pvt. Ltd. (in short „Dholi Spintex‟) has
instituted the present suit, inter alia, seeking a decree of declaration,
declaring Clause 6 of the contract dated 30th May, 2019 being a sale contract
between the Dholi Spintex and defendant-Louis Dreyfus Company India
Pvt. Ltd. (in short „Louis Dreyfus‟) providing for reference of dispute
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between the parties through arbitration under the rules and arbitration
procedures of International Cotton Association (in short, the „ICA‟) as
invalid, null & void and consequentially, a declaration of the letter dated 29th
April, 2020 issued by the ICA and the reference through arbitration being
ICA Reference LOU005.0004/AO1 2020 24 initiated by the defendant as
null and void besides permanent injunction restraining the defendant from
proceeding/continuing with the arbitration proceedings against the plaintiff.
2. After the summons in the suit and notice in the application were
issued on 30th July, 2020 to the defendant, defendant filed the written
statement as also an application under Section 45 of the Arbitration and
Conciliation Act, 1996 (in short „the Act‟) to which reply has been filed by
the plaintiff and rejoinder thereto by the defendant.
3. Case of the plaintiff-Dholi Spintex is that it entered into a contract
with the defendant-Louis Dreyfus for supply of 600 Metric Tons of
American imported raw Cotton in Bales to Dholi Spintex on 30th May, 2019.
Since the shipment and delivery of the raw Cotton Bales was delayed, Dholi
Spintex refused to take delivery of the goods. Pursuant to the rejection of the
goods by Dholi Spintex in India defendant-Louis Dreyfus initiated
arbitration proceedings against Dholi Spintex before ICA on 29th April, 2020
under Clause-6 of the contract. Dholi Spintex thereafter received a
communication dated 29th April, 2020 from the ICA forwarding the request
for appointment of a Technical Arbitrator made by the defendant-Louis
Dreyfus and calling upon Dholi Spintex to appoint its nominee Arbitrator
within 14 days from the receipt of request of arbitration clearly advising that
the arbitration under ICA Bylaws is conducted under the English Arbitration
Act, 1996. Dholi Spintex was unable to respond to ICA‟s mail dated 29th
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April, 2020 due to nationwide lockdown in India. On 2nd June, 2020, Dholi
Spintex received another letter informing appointment of Mr.David Adcroft
as an Arbitrator on behalf of Dholi Spintex since it failed to do so within the
stipulated time stated by ICA. As per the Dholi Spintex, Mr.David Adcroft
has given a declaration that he had been employed with one of the group
companies of Louis Dreyfus namely LDCS, Switzerland until June, 2015.
On 10th June, 2020 Louis Dreyfus submitted its claim for a sum of
₹2,44,85,796/-. Dholi Spintex wrote an email to ICA seeking extension of
time for taking necessary action on 6th July, 2020 without prejudice to its
contentions and submissions to the arbitration, however, in disregard
thereof, ICA issued an email to the parties dated 9th July, 2020 quoting the
Tribunal‟s communication to the ICA. On 16th July, 2020, Louis Dreyfus
submitted its rejoinder/additional comments as directed by the ICA pursuant
whereto, on 20th July, 2020, the ICA issued an email to Dholi Spintex
directing it to reply to Louis Dreyfus‟s comments within 7 days, resulting in
Dholi Spintex seeking the anti-arbitration injunction in the present suit. In
the response dated 6th July, 2020 Dholi Spintex objected to the arbitration
on the following grounds:
a. The Contract was executed between two Indian
companies in India and was to be performed in India.
Therefore, the proper law/ substantive law governing the
parties‟ obligations under the Contract can only be Indian
law
b. Clauses of 6 and 7 made it clear that by conferring
exclusive jurisdiction upon the courts of New Delhi, the
parties intended for Indian law to govern the arbitration
proceedings
c. Bylaw 200 of the ICA Bylaws is opposed to and directly
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contravenes Indian public policy which envisages that
Indian parties cannot contract out of Indian law.
4. The dispute raised by the plaintiff- Dholi Spintex in the present suit
relates to the interpretation of Clauses 6 and 7 of the contract dated 30th
May, 2019 between the parties which read as under:-
"6. Any dispute arising out of this contract shall be resolved
through arbitration in accordance with ICA (International
Cotton Association) rules & arbitration procedure. Venue of
arbitration shall be London.
7. Only the courts in New Delhi will have jurisdiction."
5. Case of the defendant is that it is, inter alia, engaged in trading of
imported cotton, procures the said cotton from overseas suppliers and sells
the same to buyers in India on „High Sea Sales‟ basis. Thus, the ownership
of the goods is transferred when the items are in transit and not in the
territorial waters of India, therefore, outside the territorial jurisdiction of
India. It is the case of the defendant that it entered into a supply contract
No. SO/IMP/2018-19/157 with the plaintiff to sell the American cotton and
consistent with the practice, the contract was entered into on high sea sales
basis. Plaintiff refused to accept the assignment, breached the contract, and
has filed the present suit to avoid legal consequences and defendant‟s
contractual remedies. The contract between the parties clearly notes that it
is a high seas sale agreement and the invoices would be high seas sale
invoices. Besides clauses 6 and 7 of the contract between the parties as
noted above, it is further provided in the contract that goods being sold on
high seas, the recipient shall make its own arrangements for custom and port
clearance at its own responsibility. Since the plaintiff refused to accept the
goods and sought change in the payment of terms on 10th September, 2019, a
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price revision email was also sent by the defendant. The market price of the
cotton falling by 13%, the plaintiff was liable to pay the said additional
margins as per the contract, industrial practice and law.
6. Despite reminder when the plaintiff did not perform its part of the
contract, a breach note dated 17th January, 2020 was issued followed by a
debit note. However, no payment was received, whereafter on 13th April,
2020, the defendant invoked the technical arbitration before the ICA and
appointed its nominee Arbitrator in terms of the arbitration agreement
between the parties. On 29th April, 2020, ICA wrote to the plaintiff
informing it about request for arbitration and asking plaintiff to nominate its
Arbitrator in 14 days. Since the plaintiff failed to nominate its Arbitrator, on
2nd June, 2020, ICA appointed nominee Arbitrator for the plaintiff being Mr.
David Adcroft. On 11th June, 2020, the defendant filed its claim before the
ICA which was responded by the plaintiff on 6th July, 2020 requesting for 30
days for necessary action citing Covid-19 situation. On 16th July, 2020,
defendant submitted its reply to the plaintiff‟s jurisdictional objections to the
Arbitral Tribunal and on 20th July, 2020, ICA wrote to the plaintiff to reply
to/provide additional comments received from the defendant. Instead of
submitting the reply to the Tribunal, the plaintiff instituted the present suit.
It is the case of the defendant that international trade in American cotton is
generally conducted under the International Cotton Association (ICA) Rules
and Procedures, and thus, in the contract dated 30th May, 2019, it was
agreed that the parties will submit to the arbitration conducted by ICA.
7. According to learned counsel for Dholi Spintex, in view of the
arbitration agreement in the contract dated 30th May, 2019, two issues
required to be determined by this Court are:
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(1) Whether two Indian parties can choose a foreign system
of law as the substantive law of the contract?
(2) Whether the express designation of a court under Clause
7 of the Contract providing for exclusive jurisdiction at
New Delhi is determinative of the Seat of Arbitration?
8. Learned counsel for the Dholi Spintex contends that the impugned
contract has been executed between two Indian parties as the plaintiff
company is incorporated in India under the Companies Act, 1956 with its
registered office at Ahmadabad, Gujarat and the defendant- Louis Dreyfus is
also a company incorporated in India with its registered office in New Delhi.
The impugned contract between the parties dated 30 th May, 2019 was
executed in India with performance in India with Dholi Spintex as the buyer
and Louis Dreyfus as the supplier for sale of 600 MT of American Raw
Cotton. The contract was executed at New Delhi, India. The contract was
also required to be performed in India for the reason the American Raw
Cotton was to be delivered by Louis Dreyfus from Mundra Port, India to
Dholi Spintex in Ahmadabad, the payment was to be made in India, an
advance payment of ₹75 lakhs was made to Louis Dreyfus in terms of the
contract through RTGS from Dholi Spintex‟s bank account to Louis
Dreyfus‟s bank account, both being in India. The delay in delivery of the
goods was in India and the goods were rejected in India due to delay. The
contract applies INCO Term "CIF CY Mundra" choosing Container Yard
(CY) at Mundra, Gujarat, India as the place of origin of goods. Though the
contract mentions sale on High Seas Sales Basis but the contract is not a
High Seas Sale Agreement nor was any High Seas Sale Agreement entered
into between the parties.
9. Learned counsel for the Dholi Spintex further states that by virtue of
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the Bylaws 102, 200 and 300 of the International Cotton Association, the
governing law of the contract is the English law mandatorily, the seat of
arbitration had also to be in England and disputes have to be settled
according to the law of English and Wales irrespective of domicile,
residence or place of business of the parties to the contract.
10. It is contended that two Indian parties cannot contract out of Indian
law as the substantive law of their contract, however, in terms of Clause-6 of
the contract and the Bylaws of ICA, since the English law would govern the
substantive rights and obligations of two Indian parties entering into a
contract which is to be performed in India, the same is clearly impermissible
and against the very fundamentals of nationality and sovereignty. As per
Section 23 of the Contract Act any attempt to exclude the application of
Indian laws is void. When sale and purchase of commodities is made by
two Indian parties within India, the same should be governed by the laws of
India and the parties cannot choose to exit out of the applicability of the
Indian laws.
11. Referring to the decision reported as 2018 SCC OnLine Del 8842
Union of India vs. Vodafone Group PLC, UK, it is contended that the
Supreme Court in the said decision in a converse situation held that since the
two entities entered into an offshore sale and purchase of shares and not the
sale of assets which were within India, Vodafone was not liable to pay
income tax as per Indian Law. Merely because the plaintiff-Dholi Spintex
agrees to purchase American raw cotton from Louis Dreyfus, the contract
between two Indian parties cannot be subjected to foreign law. It is not the
nature of the goods which govern the applicability of the law but the parties
who are entering into the contract, where the contract is entered into and
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where it is required to be performed which govern the applicability of the
law. Relying upon the decision of the Supreme Court reported as 1983 (3)
SCC 61 M.G. Brothers Lorry Services vs. Prasad Textiles it is contended
that a contractual provision which has the effect of defeating the provisions
of law is void under Section 23 of the Contract Act. The decision in
M.G.Brothers (supra) has been followed by this Court in the decision
reported as ILR (2010) 2 Del. 699 Simplex Concrete Piles (India) Ltd. vs.
Union of India wherein it was also held that a contractual provision which
resulted in exclusion of Section 55 and 72 of the Indian Contract Act would
be contrary to the public policy of India.
12. It is contended that where performance of a contract is in India, the
parties to a contract can choose a foreign system of law only in two
conditions, that is, where the conflict of law rules apply which give
precedence to the choice of law made by the parties and/or in case of an
International commercial arbitration seated in India as set out in Section
28(1) (b) of the Act. Merely because the products originated from a country
outside India would not mean that a foreign system of law would apply to
the two parties who are Indians and have agreed to the performance of the
contract in India and the same would be a domestic contract between
domestic parties only. In the present case no conflict of law rules are
applicable and thus no precedence to party autonomy can be given. For a
domestic contract, parties have no option to choose a foreign law as has
been held by Supreme Court in the decision reported as 1992 (3) SCC 551
NTPC vs. Singer Co. and by the Full Bench of Bombay High Court in the
decision reported as 1957 SCC OnLine Bom 87 The State vs. Narayandas
Mangilal Dayame. This principle of law has been further upheld by the
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Supreme Court in 1990 (3) SCC 481 British India Steam Navigation Co.
Ltd. vs. Shanmughavilas Cashew Industries and 2001 (4) SCC 713
Syndicate Bank vs. Prabha D. Naik.
13. Referring to Section 28 of the Act it is contended that provision
makes it clear that only if the nationality of one of the parties is non-Indian
can a choice be made to have a foreign governing law, thus if the nationality
of both the parties is Indian then Indian law would be the substantive law
applicable to the parties. The imperative character of Section 28 of the Act
has been emphasised by the Supreme Court in the decision reported as 2008
(14) SCC 271 TDM Infrastructure (P) Ltd. vs. UE Development India (P)
Ltd. and also by the Constitution Bench in the decision reported as 2012 (9)
SCC 552 Bharat Aluminium Company vs. Kaiser Aluminium Technical
Services Inc. (BALCO). It is contended that the decisions in BALCO (supra)
and in TDM Infrastructure (supra) have laid down the broad policy principle
that the Indian Contract Act applies to Indian parties and the applicability
this law cannot be circumvented by Indian parties by choosing a foreign seat
of arbitration. Learned counsel for Dholi Spintex illustrates by examples of
the mischief that can be committed if two Indian parties are permitted to
choose a foreign governing law. It is stated for instance in the present case
itself if the parties are not governed by the Indian law but by the English
law, the period of limitation for breach of contract would be six years as
opposed to three years which is prescribed under the Indian law.
14. Rebutting the contention of learned counsel for Louis Dreyfus that an
exception has been provided under Section 28 of the Contract Act in respect
of arbitrations, it is contended that the exception to Section 28 of the
Contract Act is not intended to permit Indian parties to circumvent Indian
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laws by resorting to arbitration. The exception to Section 28 of the Contract
Act simply allows the parties to have their disputes resolved by arbitration
instead of litigation. However, the said exception does not imply that the
parties can resort to foreign arbitration to escape from India law. Since the
terms of clause-6 of the contract between Dholi Spintex and Louis Dreyfus
are contrary to the Indian law and the ICA Bylaws 102, 200, 300
mandatorily provide for application of substantive law of contract as English
law, Clasue-6 of the contract is liable to be declared null and void. In the
alternative it is contended that even if this Court holds that Clause-6 cannot
be declared as null and void, illegal portions of Clause-6 of the contract may
be struck down by applying the „Blue Pencil Test‟ laid down by the
Supreme Court in the decision reported as 2006 (2) SCC 628 Shin Satellite
Public Co. Ltd. vs. Jain Studios Ltd. By reading Clauses 6 and 7
harmoniously in terms of the Indian Law it would be aptly clear that the
arbitration would be governed by the Act with its seat in New Delhi and
venue in London.
15. Rebutting the assertion on behalf of Louis Dreyfus that Clause-7 of
the contract has to be read down as the same applies to ancillary issues only,
it is contended that under Indian law conferment of exclusive jurisdiction on
a particular Court has a definite meaning. Relying upon the decision
reported as 2019 (17) SCALE 369: 2019 SCC OnLine SC 1585 BGS SGS
Soma JV vs. NHPC Ltd. it is contended that where parties have selected the
seat of arbitration in their agreement, such selection would then amount to
an exclusive jurisdiction clause and as a corollary the parties‟ intention to
confer exclusive jurisdiction on Courts of New Delhi as per Clause-7
necessarily indicates their intention to select the seat of arbitration as New
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Delhi.
16. Referring to the decision of the Supreme Court reported as 1983 (3)
SCR 662 Dhula Bhai vs. State of Madhya Pradesh it is contended that a suit
filed under Section 9 of CPC is maintainable unless expressly barred. There
being no bar to entertain the present anti arbitration injunction suit, the same
is maintainable. Reliance is further placed on the decision of the Division
Bench of this Court reported as 2016 SCC OnLine Del. 3949 Mcdonald‟s
India Pvt. Limited vs. Vikram Bakshi wherein this Court following the
decision of the Calcutta High Court in Board of Trustees of the Port of
Kolkata vs. Louis Dreyfus Armatures SAS, G.A. 1997/2014, CS
No.220/2014 held that an anti arbitration injunction can be granted (i) if an
issue is raised whether there is any valid arbitration agreement between the
parties and the Court is of the view that no agreement exists between the
parties; (ii) If the arbitration agreement is null and void, inoperative or
incapable of being performed; and (iii) Continuation of foreign arbitration
proceeding might be oppressive or vexatious or unconscionable. It is further
contended that the present Court is the only forum with jurisdiction to
decide the issues set out in the present suit.
17. Reliance is also placed on the decision reported as 2011 SCC OnLine
Del 3050 Devender Kumar Gupta vs. Reaology Corporation to contend that
in an application under Section 45 of the Act, the validity of the arbitration
clause has to be decided by the Court and in case the Court skirts the issue
the same would run counter to the decisions of the Supreme Court in 2012
(5) SCC 214 Kvaerner Cementation India Ltd. vs. Bajranflal Agarwal,
(2005 (8) SCC 618 SBP & Co. vs. Patel Engineering and 2003 (5) SCC 531
Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya. Even in the decision
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reported as 2014 (11) SCC 639 World Sport Group (Mauritius) Ltd. vs.
MSM Satellite (Singapore) PTE Ltd. Supreme Court reiterated that the
principles as laid down in Section 45 of the Act would be applicable to a suit
seeking declaration and injunction.
18. Referring to the English decisions on the issues, that is, 1993 (1) QB
701 Harbour Assurance Co. (UK) Ltd. vs. Kansa General Insurance Co.
Ltd. and 2007 (4) All ER 951 Fiona Trust & Holding Corporation vs.
Privalov wherein it was held that the question of initial illegality is
incapable of being referred to arbitration, it is contended that in terms of
Sections 8 and 45 of the Act, this Court is obligated to refer the parties to
arbitration only if it is prima facie of the view that there exists a valid
arbitration agreement which is capable of being performed. Relying upon
the decision of the English Court of Appeals reported as (2019) EWCA Civ
129 Sabbagh Vs. Khoury & Ors., it is submitted that the present anti-
arbitration suit is maintainable. Reliance is also placed on the decision
reported as 2005 (8) SCC 618 SBP & Co. vs. Patel Engineering.
19. The ICA Arbitral Tribunal is not competent to determine the validity
of Clause -6 under the Indian law for the reason the Tribunal is a creation of
the contract between the parties as also the Arbitral Tribunal appointed by
the ICA cannot apply Indian law, even if Indian law is considered to be
mandatory and non-derogable. Further, though Bylaw 306 provides that the
Tribunal may rule on its own jurisdiction, that is, whether there is a valid
arbitration agreement, whether the Tribunal is properly constituted and what
matters can be submitted to arbitration in accordance with the arbitration
agreement, however, Byelaw 306 is subject to Bylaw 302 which states that
all Bylaws are mandatory and Bylaw 200 and 300 mandate the application
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of English Law as the substantive law. It is contended that not only Dholi
Spintex has prima facie case in its favour and in case the plaintiff is
subjected to arbitration contrary to the law of this country, the plaintiff
would suffer irreparable loss. Balance of convenience also lies in favour of
the plaintiff. Consequently, a decree of declaration and injunction as sought
for be granted.
20. Contention of learned counsel for the defendant is that the present suit
is not maintainable. An anti-arbitration injunction ought not to be granted
against foreign seated arbitration. The parties have agreed that the
arbitration would be conducted under the ICA Arbitration Bylaws and
seated at London. The plaintiff having agreed to these terms cannot now
wriggle out of the same contending that Clause-6 of the Agreement between
the parties is null and void. Relying upon Russell on Arbitration, 24th
Edition, learned counsel for the defendant contends that the discretion to
grant an injunction to restrain an arbitration, should be exercised very
sparingly where the seat of arbitration is in a foreign country. Reliance is
placed on the decision of the Division Bench of this Court reported as 2016
SCC Online Delhi 3949: 232 (2016) DLT394 McDonalds India Pvt. Ltd. vs.
Vikram Bakshi & Ors. wherein the Division Bench cautioned that the trend
is to minimize the interference with the arbitration process as that is the
forum of choice. It was held that while the Courts in India may have the
jurisdiction to injunct arbitration proceedings, the said power is required to
be exercised rarely and only on principles analogous to those found in
Sections 8 and 45 of the Act. This rule of anti-arbitration injunction is
reaffirmed in Chitty on Contracts, Thirty Third Edition, published by Sweet
and Maxwell wherein it is stated that it is the Arbitral Tribunal which
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generally deals with the issue of its jurisdiction. Bylaw-306 of the ICA
Bylaws empowers and obliges the Arbitral Tribunal to decide matters of
jurisdiction and the validity of underlying arbitration agreement. Reliance is
placed on the decision reported as 2019 (11) Scale 440:
MANU/SC/1153/2019 National Aluminium Company Limited vs. Subhash
Infra Engineers Pvt. Ltd. & Anr. wherein the Supreme Court held that any
objection with respect to existence or validity of the arbitration agreement
can be raised only by way of an application under Section 16 of the Act and
the Civil Court cannot have jurisdiction to go into such question. Reliance
is also placed on the decision reported as 2012 (5) SCC 215 Kvaerner
Cementation India Ltd. vs. Bajranglal Agarwal & Anr. Referring to the
decision reported as 2018 SCC OnLine Delhi 8842 Union of India vs.
Vodafone Group LC United Kingdom & Anr. it is contended that the
principle of kompetenz-kompetenz, is recognized in Article-21 of the
UNCITRAL Arbitration Rules, 1976 and thus, the arbitrators have
jurisdiction to consider and decide the existence and extent of their own
jurisdiction. The Competence-Competence principle is almost universally
accepted. Bylaw-306 of the ICA Arbitration Bylaws constitutes a sufficient
and efficacious remedy for deciding the issues raised in the present suit as
regards the validity of Clause-6 of the Act.
21. The present suit is specifically barred under Section 45 of the Act as
the said provision mandates rejection of the suit and referring to arbitration
with no discretion with this Court. Only if the agreement between the
parties is null and void, inoperative or incapable of being performed, this
Court will have jurisdiction to entertain the suit, which on facts of this case
is not made out. The term „null and void‟ permits defences based on
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unconscionability, fraud, mistake, lack of capacity and illegality. The term
„inoperative‟ permits defences based on termination, waiver, changed
circumstances and repudiation and the term „incapable of being performed‟
refers to impossibility and similar defences. Supreme Court in the decision
reported as 2014 (11) SCC 639 World Sport Group (Mauritius) Ltd. vs.
MSM Satellite (Singapore), Pte Limited. explained the meaning of words
„inoperative‟ or „incapable of being performed‟ to mean that where parties,
by way of conduct, impliedly revoke the arbitration agreement and/or would
be a situation where for some reason it is impossible to establish Arbitral
Tribunal. Since in the present case a valid arbitration agreement exists and
the disputes between the parties are within the ambit of arbitration
agreement, any other aspect is irrelevant and alien to Section 45 of the Act,
hence, the suit be dismissed and the application of the defendant be allowed.
22. It is contended that the seat of arbitration being London, English
courts have exclusive jurisdiction in matters concerning arbitration and New
Delhi is not the seat of arbitration. Reliance of learned counsel for the
plaintiff on Clause-7 of the Contract to argue that the seat of arbitration is
New Delhi is erroneous. It is well settled that once the arbitration agreement
determines the seat, the exclusive jurisdiction clause cannot change/override
it. The arbitral seat is a nation where the International Arbitration has its
legal domicile or juridical home. The intricate connection between the seat
of arbitration and the jurisdiction of the Courts attached has been laid down
by the Supreme Court in the decision reported as 2012 (9) SCC 552 Bharat
Aluminium Company vs. Kaiser Aluminium Technical Services Inc. (in
short 'BALCO'). It was held that the arbitral procedure, including the
constitution of Arbitral Tribunal, shall be governed by the Will of the parties
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and by the law of the country in whose territory, the arbitration takes place.
An agreement as to the seat of arbitration is analogous to the exclusive
jurisdiction clause and any claim for a remedy as to the validity of an
existing interim or final award can be made only in the Courts of the place
designated as the seat of arbitration. Reliance is placed on the decisions
reported as (2020) 4 SCC 234: 2019 SCC OnLine SC 1585 BGS SGS Soma
JV vs. NHPC Limited and 2017 (7) SCC 678 Indus Mobile Distribution Pvt.
Ltd. vs. Datawind Innovations Pvt. Ltd. & Ors.
23. As the contract between the plaintiff and defendant related to sale of
imported American cotton and is on "High Seas Sale" basis and the rights,
title and interest of the goods having passed outside the territorial
jurisdiction of India, in such a situation, two Indian parties have agreed to an
International Arbitration. Since at the point of actual sale, as envisioned
under the contract, the goods were located in the international waters, there
existed potential conflict of laws situation and therefore, the parties in their
wisdom and with open eyes decided to obviate by agreeing to resolve all
disputes by way of arbitration under the ICA Bylaws and Rules. Reliance is
placed on the decision reported as 1990 (3) SCC 481 British India Steam
Navigation Company ltd. vs. Shanmughavilas Cashew Industries & Ors.
24. Contention of learned counsel for the plaintiff that no high seas sale
agreement was arrived at between the parties and the contract agreed was
clearly domestic transaction, is untenable as subsequent events concerning
the manner in which there was breach of contract is completely irrelevant to
interpretation of the contract and underlying intention of the parties.
Reliance is placed on the decisions reported as 1961 (1) AC 281 Union
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Insurance Society of Canton Ltd. vs. George Wills & Co. and 1975 (1) SCC
199 Godhra Electricity Co. Ltd. vs. State of Gujarat.
25. Two Indian parties can agree to arbitrate abroad and there is no legal
bar to this extent especially where transactions involved foreign elements.
One of the central objectives of the international arbitration agreements is to
provide neutral forum of dispute resolution. The principle of Party
Autonomy is well recognized by the Supreme Court in the decisions
reported as 1992 (3) SCC 551 National Thermal Power Corporation vs.
Singer Company & Ors. and British India Steam Navigation Company
(supra).
26. The Bombay High Court in the decision reported as 2012 (3) Mh. L.J.
94 Sakuma Exports Ltd. vs. Louis Dreyfus Commodities Suisse SA, held that
the parties can agree and decide to which law would govern the contract in
principal and/or the arbitration proceedings and the parties may decide to
have different laws applicable to the contract and arbitration proceedings.
27. It is contended that Section 28 (1) (a) of the Act does not apply to
foreign seated arbitration and is applicable only to Part-I of the Act.
Applicability of Part-I and Part-II of the Act is not based on the nationality
of the parties but solely on the territoriality as to whether the seat of
arbitration is in India or not. Since as per the agreement between the parties,
seat of arbitration is outside the territorial limits of India, Part-I of the Act
would not be applicable. Contention on behalf of the plaintiff that Indian law
must govern contract between the two Indian parties, irrespective of the seat
of arbitration, would render the opening words of the Section 28 of the Act,
that is, „where the place of arbitration is situate in India‟ as otiose,
redundant and superfluous. This has been clarified in the decision in para-
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118 of BALCO (supra). The two mandatory requirements of Section 28 are
that both the parties should be Indian and the seat of arbitration should be in
India. Even if one condition is not met, parties will not be bound to apply
Indian law as the substantive law. Reliance is placed on the decisions
reported as 1999 (7) SCC 61 Atlas Export Industries vs. Kotak & Company
which was followed by the Madhya Pradesh High Court in the decision
reported as 2015 SCC OnLine MP 7417 Sasan Power Limited vs. North
American Coal Corporation (India) Pvt. Ltd. and of this Court reported as
2017 SCC OnLine Del. 11625: MANU/DE/3689/2017 GMR Energy Ltd. vs.
Doosan Power Systems India Pvt. Ltd. The applicability of the Indian law
cannot be decided merely on the basis of nationality of two contracting
parties and would depend entirely on the contractual transaction which in the
present case is the „high seas sale‟.
28. Under the contract between the parties, the seat of arbitration is not
and cannot be at New Delhi. Clause-6 of the Contract explicitly provides
that the venue of the arbitration would be London and Bylaw 300 (3)
mandates that the seat of the arbitration shall be England and the exclusive
jurisdiction on the arbitral process would vest in the Courts in England.
Any interpretation based on Clause-7 of the agreement between the parties
to contend that seat of arbitration is New Delhi would run counter to Clause-
6 of the contract and would make the same redundant and nugatory and
would be contrary to the clear intention of the parties as regards the seat of
arbitration. Supreme Court in the decision reported as 2020 SCC OnLine
SC 301 Mankatsu Impex Pvt. Ltd. vs. Airvisual Limited dealing with similar
situation held that the words in Clause-17.1 of the contract therein do not
suggest that the seat of arbitration is in New Delhi and that since the
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arbitration was seated at Hong Kong in the said case, the petition filed under
Section 11 (6) of the Act was not maintainable and dismissed. A
harmonious construction of Clauses-6 and 7 of the agreement between the
parties is required to be adopted for a meaningful construction of the two
Clauses and the Clauses are required to be read as a whole and not in parts.
29. Heard learned counsels for the parties. Thus contention of learned
counsel for the plaintiff in nutshell is that on reading clauses 6 and 7 of the
agreement between the parties it is evident that though the venue of
arbitration is in London but the seat of arbitration is India and since the ICA
byelaws provide for the mandatory application of the Law of England
thereby ousting the Indian Law, clause 6 of the agreement be either declared
null and void or read meaningfully by striking the otiose portions of clause 6
by applying the blue pencil test. However, broadly the contention of learned
counsel for the defendant is that there is no ambiguity in clause 6 and 7 of
the agreement between the parties and the present suit is not maintainable
as the determination sought by the plaintiff is not within the scope of
Section 45 of the Act. Therefore, besides the two issues raised by the
plaintiff, one more issue which needs determination on the pleadings and
submissions as also for application under Section 45 of the Act filed by the
defendant, is "Whether the present suit is maintainable or not in terms of
Section 45 of the Arbitration and Conciliation Act, 1996, 1996? ".
30. ICA‟s Rules and Bylaws which are relevant for the decision of the
present suit i.e. Bylaws 200,300 and 306 are as under:
"Bylaw 200
Every contract made under our Bylaws and Rules will be
deemed to be a contract made in England and governed by
English law.
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Bylaw 300
1. We will conduct arbitration in one of two ways:
Quality arbitrations will deal with disputes
arising from the manual examination of the quality of
cotton and/or the quality characteristics which can only
be determined by instrument testing. Bylaws especially
applicable to quality arbitrations and appeals are set
out herein.
• Technical arbitrations will deal with all other
disputes. Bylaws especially applicable to technical
arbitrations are set in.
2. The law of England and Wales and the mandatory
provisions of the Arbitration Act 1996 (Act) shall apply to
every arbitration and/or appeal under these Bylaws. The
non-mandatory provisions of the Act shall apply save
insofar as such provisions are modified by, or are
inconsistent with, these Bylaws.
3. The seat of our arbitrations is in England. No one
can decide or agree otherwise.
4. Disputes shall be settled according to the law of
England and Wales wherever domicile, residence, or
place of business of the parties to the contract may.
5. If parties have agreed to arbitration under our Bylaws,
then subject to paragraph (6) below, they must not use
any court at all unless we have no further power to do
what is required, or the Act allows, in which case they
must apply to the courts in England or Wales.
6. A party can apply to a court anywhere to obtain
security for its claim while arbitration or an appeal is
taking place.
7. If a party is prevented from proceeding with an
arbitration as a result of the application of the provisions
of Bylaw 302 (4) or Bylaw 330 (1), it is free to apply to
any court which is willing to accept jurisdiction.
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8. Any contract in dispute referred to us for arbitration
that has not been, or will not be, performed, will not be
treated as cancelled. It will be closed by being invoiced
back to the seller under our Rules in force at the date of
the contract.
9. After eight weeks has passed from the receipt by the
Tribunal or Technical Appeal Committee of final written
submissions from the parties, the Tribunal or Technical
Appeal Committee will send a message to the parties
providing them with an update on the status of the Award.
Bylaw 306
Without prejudice to the provisions of the Act relating to
jurisdiction, the tribunal may rule on its own jurisdiction,
that is, as to whether there is a valid arbitration agreement,
whether the tribunal is properly constituted and what matters
have been submitted to arbitration in accordance with the
arbitration agreement".
Issue No.1:-
31.1 Learned counsel for the plaintiff has strenuously argued that in terms
of Section 23 of the Indian Contract Act, if the contract is of such a nature
that if permitted, it would defeat the provisions of law or is opposed to
public policy, then, such an agreement is unlawful and void. Case of the
plaintiff is that since the parties are Indian, contract was entered into in India
and the performance was also in India, the two Indian parties could not have
avoided the Indian law by choosing a foreign seat of arbitration and a
specific foreign system of law. Such term in the contract which allows the
two Indians to escape the rigors of Indian law would be directly contrary to
Section 23 of the Indian Contract Act. It is stated that the parties can choose
a foreign system of law to govern their contractual relationship, where
performance of a contract is in India, only in two instances, firstly, cases
where conflict of law rules apply which gives precedence to the choice of
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law made by the parties and/or in case of an International Commercial
Arbitration seated in India as set out in Section 28(1)(b) of the Act. It is
submitted that the parties have the ability to choose a law of contract only
when there are foreign or transnational elements in the transaction, where
several laws could potentially apply to the rights and obligations of the
parties.
31.2 Case of the defendant in this regard is that there is a foreign element
in the contract between the parties as it is a high seas sale agreement and it
was agreed to be performed on high seas, that is, outside the territorial
jurisdiction of India. Therefore, there can be no derogation of the laws of
India. Since at the point of actual sale as envisaged in the contract, the
goods were located in international waters, there existed potential conflict of
laws situation, therefore, the two Indian parties voluntarily chose to resolve
all disputes by having English law as the governing law of arbitration under
the ICA Bylaws and Rules.
31.3 Countering these arguments, learned counsel for the plaintiff has
submitted that the argument of the defendant, thus, accepts the proposition
that two Indian parties cannot agree to application of a foreign system of law
unless the transaction involves a foreign element. To counter the argument
of the defendant that there is a foreign element in the transaction between
the parties as it is a high seas sale agreement and the property in the goods
passed on to the plaintiff in international waters, plaintiff relied upon the
delivery terms mentioned in the contract which states "CIF CY Mundra,
India on High-Seas Sale Basis, final place of delivery ICD Ahmedabad on
cost and risk of Recipient. Risk and title of goods passes from Supplier to
Recipient upon signing of high-seas sales agreement".
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31.4 According to the plaintiff, reference to High Seas sale agreement is
only in the perspective as to the party which would bear the incidence of tax
when the goods are imported and delivered at Mundra, India. Referring to
the decision of the Constitution Bench in (1960) 2 SCR 852 J.V.Gokal Vs.
Assistant Collector of Sales Tax (Inspection) and Others, it is stated that the
import and export of goods can have an international element only when one
of the party is a foreign party.
31.5 The issue raised by learned counsel for the plaintiff that whether two
Indian parties can choose a foreign system of law as the substantive law of
the contract i.e. whether two Indian parties can agree to contract out of
substantive Indian law is no more res-integra having been decided by the
Supreme Court, Madhya Pradesh High Court and this Court as well. In the
decision reported as 1999 (7) SCC 61 Atlas Export Industries vs. Kotak &
Company Supreme Court dealing with this issue, referring to Exception 1 to
Section 28 of the Indian Contract Act held that an agreement to refer the
disputes to arbitration does not imply that there is an exclusion by the
agreement to have recourse to legal proceedings. It was further held that
merely because arbitrators are situated in a foreign country cannot by itself
be enough to nullify the arbitration agreement.
31.6 Following the decision of the Hon'ble Supreme Court in Atlas Export
(supra) the Division Bench of the Madhya Pradesh High Court in the
decision reported as 2015 SCC OnLine MP 7417 Sasan Power Limited vs.
North American Coal Corporation (India) Pvt. Ltd. dealt with the issue
raised in the present suit at length. Noting para-118 of the decision in
BALCO (supra) it was held:
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"46. Finally, in paragraph 118, the crucial part heavily
relied upon by Shri. V.K. Tankha, learned Senior Advocate,
reference is made to section 28, and it is held as under:
„118. It was submitted by the learned counsel for the
appellants that Section 28 is another indication of the intention
of Parliament that Part I of the Arbitration Act, 1996 was not
confined to arbitrations which take place in India. We are
unable to accept the submissions made by the learned counsel
for the parties. As the heading of Section 28 indicates, its only
purpose is to identify the rules that would be applicable to
„substance of dispute‟. In other words, it deals with the
applicable conflict of law rules. This section makes a
distinction between purely domestic arbitrations and
international commercial arbitrations, with a seat in India.
Section 28(1)(a) makes it clear that in an arbitration under
Part I to which section 2(1)(f) does not apply, there is no
choice but for the Tribunal to decide „the dispute‟ by applying
the Indian „substantive law applicable to the contract‟. This is
clearly to ensure that two or more Indian parties do not
circumvent the substantive Indian law, by resorting to
arbitrations. The provision would have an overriding effect
over any other contrary provision in such contract. On the
other hand, where an arbitration under Part I is an
international commercial arbitration within Section 2(1)(f), the
parties would be free to agree to any other „substantive law‟
and if not so agreed, the „substantive law‟ applicable would be
as determined by the Tribunal. The section merely shows that
the legislature has segregated the domestic and international
arbitration. Therefore, to suit India, conflict of law rules have
been suitably modified, where the arbitration is in India. This
will not apply where the seat is outside India. In that event, the
conflict of law rules of the country in which the arbitration
takes place would have to be applied. Therefore, in our
opinion, the emphasis placed on the express „where the place
of arbitration is situated in India‟, by the learned Senior
Counsel for the appellants, is not indicative of the fact that the
intention of Parliament was to give an extra-territorial
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operation to Part I of the Arbitration Act, 1996.‟ (Emphasis
supplied)
47. Hon'ble Supreme Court holds that section 28 makes a
clear distinction between purely domestic arbitration and
international arbitration with a seat in India, and it is indicated
that section 28(1)(a) makes it clear that in an arbitration under
Part I to which section 2(1)(f) does not apply, there is no
choice but for the Tribunal to decide the dispute by applying
the Indian substantive law applicable to the Contract. It is this
part of the judgment which was heavily relied upon by Shri.
V.K. Tankha, learned Senior Advocate further refers to the next
sentence which says that two or more Indian parties cannot
circumvent the substantive Indian Law by resorting to
arbitration. By placing much emphasis on this part, learned
Senior Advocate tried to indicate that the order of the learned
District Judge is unsustainable.
48. However, if we further read the findings recorded by the
Supreme Court in the same paragraph 118, as reproduced
hereinabove, it is held by the Supreme Court that when the seat
is outside India, the conflict of law rule of the country in which
the arbitration takes place would have to be applied, and
thereafter it is held that the expression „whether the place of
arbitration is situated in India‟ does not indicate the intention
of the Parliament to give extra territorial operation to Part I, of
the Arbitration Act of 1996. In paragraph 123 also, the matter
has been considered in the backdrop of the provisions
contemplated under section 28, this also makes us to come to
the inevitable conclusion that the provisions of Part I will not
apply where the seat of arbitration is outside India.
49. On consideration of the law laid down in the case
of TDM Infrastructure (supra), we find, that the proceeding
before the Hon'ble Supreme Court was with regard to
appointing an arbitrator under section 11(6) and after taking
note of the definition of International Commercial Arbitration
as provided in section 2(1)(f), the procedure for appointment of
arbitrator and the provision of section 28, it was held that Part
I of the Act of 1996 deals with domestic arbitration and Part II
deals with „foreign award‟, and by specifically taking note of
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the provisions of section 28, has held that companies
incorporated in India and when both the parties have Indian
nationality, then such arbitration cannot be said to be an
international commercial arbitration. However, after having
said so, in paragraph 23 reference is made to section 28, the
intention of the legislature, to hold that two Indian nationals
should not be permitted to derogate Indian Law.
50. Finally, in para 23 the following observations are made
by the Supreme Court in the aforesaid case:-
„23. Section 28 of the 1996 Act is imperative in
character in view of Section 2(6) thereof, which
excluded the same from those provisions which
parties derogate from (if so provided by the
Act). The intention of the legislature appears to be
clear that Indian nationals should not be permitted
to derogate from Indian Law. This is part of the
public policy of the country.
36. It is, however, made clear that any
findings/observations made hereinbefore were only
for the purpose of determining the jurisdiction of
this Court as envisaged under Section 11 of the
1996 Act and not for any other purpose.‟
(Emphasis Supplied)
51. If we analyse this judgment, we find, that apart from
being one rendered in a proceeding held under section 11(6), is
based on the consideration made with reference to section
28(1), as is evident from paragraph 23 relied upon by Shri.
V.K. Tankha and thereafter in paragraph 36, a caution is
indicated with regard to applicability of this judgment. Whereas
in the case of Atlas Exports (supra), we find that in Atlas
Exports, in paragraphs 10 and 11, the following principles have
been laid down:-
„10. It was however contended by the learned
counsel for the appellant that the award should have
been held to be unenforceable in as much as the
very contract between the parties relating to
arbitration was opposed to public policy under
Section 23 read with Section 28 of the Contract Act.
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It was submitted that Atlas and Kotak, the parties
between whom the dispute arose, are both Indian
parties and the contract which had the effect of
compelling them to resort to arbitration by foreign
arbitrators and thereby impliedly excluding the
remedy available to them under the ordinary law of
India should be held to be opposed to public
policy. Under section 23 of the Indian Contract Act
the consideration or object or an agreement is
unlawful if it is opposed to public policy. Section 28
and Exception 1 to it, (which only is relevant for the
purpose of this case) are extracted and reproduced
hereunder:
„28. Every agreement, by which any party thereto is
restricted absolutely from enforcing his rights under
or in respect of any contract, by the usual legal
proceedings in the ordinary tribunals, or which
limits the time within which he may thus enforce his
rights, is void to that extent.
Exception 1 - This section shall not render illegal a
contract, by which two or more persons agree that
any dispute which may arise between them in
respect of any subject or class of subjects shall be
referred to arbitration, and that only the amount
awarded in such arbitration shall be recoverable in
respect of the dispute so referred.‟
11. The case at hand is clearly covered by Exception 1
to Section 28. Right of the parties to have recourse to legal
action is not excluded by the agreement. The parties are
only required to have their dispute/s adjudicated by having
the same referred to arbitration. Merely because the
arbitrators are situated in a foreign country cannot by
itself be enough to nullify the arbitration agreement when
the parties have with their eyes open willingly entered into
the agreement. Moreover, in the case at hand the parties
have willing initiated the arbitration proceedings on the
disputes having arisen between them. They have appointed
arbitrators, participated in arbitration proceedings and
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suffered an award. The plea raised before us was not
raised either before or during the arbitration proceedings,
nor before the learned Single Judge of the High Court in
the objections filed before him, nor in the letters patent
appeal filed before the Division Bench. Such a plea is not
available to be raised by the appellant Atlas before this
Court for the first time.‟ (Emphasis supplied)
52. In this case i.e. Atlas Exports (supra), Sections 23 and
28 of the Contract Act are considered and it is held that when a
dispute arises where both the parties are Indian, and if the
contract has the effect of compelling them to resort to
arbitration by foreign arbitrators and thereby impliedly
excluding the remedy available to them under the ordinary law
of India, the same is not opposed to public policy. Section 28
exception (1) of the Contract Act is taken note of and it is held
that merely because the arbitrators are situated in a foreign
country that by itself cannot be enough to nullify the arbitration
agreement, when the parties have with their eyes open,
willingly entered into an agreement. If this observation made by
the Supreme Court is taken note of, we find that merely because
two Indian companies have entered into an arbitration
agreement to be held in a foreign country by agreed
arbitrators, that by itself is not enough to nullify the arbitration
agreement.
53. Shri. V.K. Tankha, learned Senior Advocate, tried to
indicate that Atlas Exports (supra) case was rendered in a
proceeding held under the Arbitration Act, 1940 which is
entirely different from the Act of 1996 and, therefore, the said
judgment will not apply in the present case. Instead, the
judgment in the case of TDM Infrastructure (supra) would be
applicable.
54. We cannot accept the aforesaid proposition. Shri.
Anirudh Krishnan, learned counsel, had taken us through the
provisions of both the Act of 1940 and the Act of 1996, and
thereafter he had referred to the judgment of the Supreme
Court in the case of Fuerst Day Lawson Limited (supra), where
after a detailed comparison of various sections of both the Acts,
from paragraphs 65 onwards, Hon'ble Supreme Court
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discussed the provisions of both Acts, and finally has observed
that there is not much of a difference between them. If the
aforesaid judgment in the case of Fuerst Day Lawson
Limited (supra) is considered, the same holds that both, the Act
of 1980 and 1996 are identical and the Hon'ble Court has also
indicated the similarity in both the Acts. That being so, we see
no reason as to why the principle laid down of Atlas
Exports (supra), which is by a Larger Bench i.e.. Division
Bench, should not be applied particularly in the light of the law
of precedent as laid down in the case of A.R. Antulay (supra).
The contention of Shri. V.K. Tankha, learned Senior Advocate,
that the learned District Judge relied upon the judgment in the
case of Atlas Exports (supra) and refused to rely upon the case
of TDM Infrastructure (supra) only because it is by a Single
Bench is not convincing or acceptable, as the Division Bench
Judgment in the case of Atlas Exports (supra) is a binding
precedent and once it is held in the aforesaid case that two
Indian companies can agree to arbitrate in a foreign country
and the same is not hit by public policy, we see no error in the
order passed by the learned District Judge.
55. That apart, we also find that in the case of TDM
Infrastructure (supra), a note of caution is indicated in
paragraph 36, which was added by a corrigendum subsequent
to pronouncement of judgment, this clearly indicates the
principle laid down by the Supreme Court was only for
determining the jurisdiction under section 11 and nothing more.
We need not go into the questions any further now, as we find
that the judgment in the case of Atlas Exports (supra) is a
binding precedent.
56. xxx
57. On going through the scheme of the Arbitration and
Conciliation Act, 1996, we find that based on the seat of
arbitration so also the nationality of parties, an arbitration is
classified to be an „International Arbitration‟, and the
governing law is also determined on the basis of the seat of
arbitration. Therefore, it is clear that based on the seat of
arbitration, the question of permitting two Indian
companies/parties to arbitrate out of India is permissible. In the
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case of Atlas Exports (supra) itself, the principle has been
settled that two Indians can agree to have a seat of arbitration
outside India. Now, if two Indian Companies agree to have
their seat of arbitration in a foreign country, the question would
be as to whether the provisions of Part I or Part II would apply.
Section 44, of the Act of 1996, contemplates a foreign award to
be one pertaining to difference between persons arising out of
legal relationship, whether contractual or not, which is in
pursuance to an agreement in writing for arbitration, to which
the convention set forth in the first schedule applies."
31.7 The decision in Sasan Power Limited (supra) was taken in
appeal to Supreme Court, however, the Supreme Court did not deal with the
said issue as the same was given up by learned counsel for Sasan Power
Limited.
31.8 This Court dealing with the same proposition i.e. whether two
Indians can agree to arbitrate out of Indian law in the decision reported as
2017 (6) ArbLR 447 (Delhi): 2017 SCC OnLine Del 11625 GMR Energy
Limited vs. Doosan Power System India Ltd. & Ors. following the decision
of the Supreme Court in Atlas Exports (supra) and in Sasan Power Limited
(supra) held that two Indians can agree to a foreign seated arbitration.
31.9 It is trite law as laid down by the Hon'ble Supreme Court in the
decision reported as 2014 (7) SCC 603 Reliance Industries & Anr. vs. Union
of India that when there is a foreign element to the arbitration three sets of
law may apply to an arbitration, that is, proper law of the contract; proper
law of the arbitration agreement/lex arbitri; and proper law of the conduct of
arbitration/lex fori/curial law. It was held:
69. Mr Ganguli has next sought to persuade us that the seat
of arbitration shall be in India as the PSC is governed by the
law of India. According to Mr Ganguli, laws of India would
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include the Arbitration Act, 1996. Therefore, irrespective of the
provisions contained in Article 33.12 of the Arbitration Act,
1996 would be applicable to arbitration proceedings. The
English law would be applicable only in relation to the conduct
of the arbitration up to the passing of the partial final award.
We are unable to accept the aforesaid submissions of Mr
Ganguli. As noticed earlier, Article 32.1 itself provides that it
shall be subject to the provision of Article 33.12. Article 33.12
provides that the arbitration agreement contained in this
article shall be governed by the laws of England. The term
"laws of England" cannot be given a restricted meaning
confined to only curial law. It is permissible under law for the
parties to provide for different laws of the contract and the
arbitration agreement and the curial law. In Naviera
Amazonica SA [Naviera Amazonica Peruana S.A. v. Compania
Internacional De Seguros Del Peru, (1988) 1 Lloyd's Rep 116
(CA)] , the Court of Appeal in England considered an
agreement which contained a clause providing for the
jurisdiction of the courts in Lima, Peru in the event of judicial
dispute and at the same time contained a clause providing that
the arbitration would be governed by the English law and the
procedural law of arbitration shall be the English law. The
Court of Appeal observed as follows:
"All contracts which provide for arbitration and
contain a foreign element may involve three
potentially relevant systems of law: (1) the law
governing the substantive contract; (2) the law
governing the agreement to arbitrate and the
performance of that agreement; (3) the law governing
the conduct of the arbitration. In the majority of cases
all three will be the same. But (1) will often be
different from (2) and (3). And occasionally, but
rarely (2) may also differ from (3)."
70. From the above, it is evident that it was open to the
parties to agree that the law governing the substantive contract
(PSC) would be different from the law governing the
arbitration agreement. This is precisely the situation in the
present case. Article 32.1 specifically provides that the
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performance of the contractual obligations under the PSC
would be governed and interpreted under the laws of India. So
far as the alternative dispute redressal agreement i.e. the
arbitration agreement is concerned, it would be governed by
the laws of England. There is no basis on which the
respondents can be heard to say that the applicability of laws
of England related only to the conduct of arbitration reference.
The law governing the conduct of the arbitration is
interchangeably referred to as the curial law or procedural
law or the lex fori. The delineation of the three operative laws
as given in Naviera Amazonica [Naviera Amazonica Peruana
S.A. v. Compania Internacional De Seguros Del Peru, (1988) 1
Lloyd's Rep 116 (CA)] has been specifically followed by this
Court in Sumitomo [Sumitomo Heavy Industries Ltd. v. ONGC
Ltd., (1998) 1 SCC 305] . The Court also, upon a survey, of a
number of decisions rendered by the English courts and after
referring to the views expressed by learned commentators on
international commercial arbitration concluded that:
(Sumitomo Heavy Industries Ltd. case [Sumitomo Heavy
Industries Ltd. v. ONGC Ltd., (1998) 1 SCC 305] , SCC p. 315,
para 16)
"16. The law which would apply to the filing of the
award, to its enforcement and to its setting aside
would be the law governing the agreement to
arbitrate and the performance of that agreement."
71. In coming to the aforesaid conclusion, this Court relied on
a passage from Law and Practice of Commercial Arbitration in
England, 2nd Edn., by Mustill and Boyd which is as under:
"An agreed reference to arbitration involves two groups
of obligations. The first concerns the mutual obligations
of the parties to submit future disputes, or an existing
dispute to arbitration, and to abide by the award of a
tribunal constituted in accordance with the agreement. It
is now firmly established that the arbitration agreement
which creates these obligations is a separate contract,
distinct from the substantive agreement in which it is
usually embedded, capable of surviving the termination
of the substantive agreement and susceptible of
CS(COMM) 286/2020 Page 32 of 60
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premature termination by express or implied consent, or
by repudiation or frustration, in much the same manner
as in more ordinary forms of contract. Since this
agreement has a distinct life of its own, it may in
principle be governed by a proper law of its own, which
need not be the same as the law governing the
substantive contract.
The second group of obligations, consisting of
what is generally referred to as the „curial law‟ of the
arbitration, concerns the manner in which the parties
and the arbitrator are required to conduct the reference
of a particular dispute. According to the English theory
of arbitration, these rules are to be ascertained by
reference to the express or implied terms of the
agreement to arbitrate. This being so, it will be found in
the great majority of cases that the curial law i.e. the law
governing the conduct of the reference, is the same as
the law governing the obligation to arbitrate. It is,
however, open to the parties to submit, expressly or by
implication, the conduct of the reference to a different
law from the one governing the underlying arbitration
agreement. In such a case, the court looks first at the
arbitration agreement to see whether the dispute is one
which should be arbitrated, and which has validly been
made the subject of the reference, it then looks to the
curial law to see how that reference should be conducted
and then returns to the first law in order to give effect to
the resulting award.
***
It may therefore be seen that problems arising out
of an arbitration may, at least in theory, call for the
application of any one or more of the following laws:
1. The proper law of the contract i.e. the law
governing the contract which creates the
substantive rights of the parties, in respect of
which the dispute has arisen.
2. The proper law of the arbitration agreement i.e.
the law governing the obligation of the parties to
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submit the disputes to arbitration, and to honour
an award.
3. The curial law i.e. the law governing the
conduct of the individual reference.
***
1. The proper law of the arbitration agreement governs
the validity of the arbitration agreement, the question
whether a dispute lies within the scope of the arbitration
agreement; the validity of the notice of arbitration; the
constitution of the tribunal; the question whether an
award lies within the jurisdiction of the arbitrator; the
formal validity of the award; the question whether the
parties have been discharged from any obligation to
arbitrate future disputes.
2. The curial law governs the manner in which the
reference is to be conducted; the procedural powers and
duties of the arbitrator; questions of evidence; the
determination of the proper law of the contract.
3. The proper law of the reference governs the question
whether the parties have been discharged from their
obligation to continue with the reference of the
individual dispute.
***
In the absence of express agreement, there is a strong
prima facie presumption that the parties intend the
curial law to be the law of the „seat‟ of the arbitration
i.e. the place at which the arbitration is to be conducted,
on the ground that that is the country most closely
connected with the proceedings. So in order to determine
the curial law in the absence of an express choice by the
parties it is first necessary to determine the seat of the
arbitration, by construing the agreement to arbitrate."
(emphasis supplied)
31.10 In the decision titled Indus Mobile Distribution Private
Limited vs. Datawind Innovations Private Limited and Ors. (supra),
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the Supreme Court referring to the decision in Eitzen Bulk A/S v.
Ashapura Minechem Ltd. has held as under:-
"15. ... The following passage from Redfern and Hunter on
International Arbitration contains the following explication of
the issue:
„It is also sometimes said that parties have selected
the procedural law that will govern their
arbitration, by providing for arbitration in a
particular country. This is too elliptical and, as an
English court itself held more recently in Breas of
Doune Wind Farm it does not always hold true.
What the parties have done is to choose a place of
arbitration in a particular country. That choice
brings with it submission to the laws of that
country, including any mandatory provisions of its
law on arbitration. To say that the parties have
"chosen" that particular law to govern the
arbitration is rather like saying that an English
woman who takes her car to France has "chosen"
French traffic law, which will oblige her to drive on
the right-hand side of the road, to give priority to
vehicles approaching from the right, and generally
to obey traffic laws to which she may not be
accustomed. But it would be an odd use of language
to say this notional motorist had opted for "French
traffic law". What she has done is to choose to go
to France. The applicability of French law then
follows automatically. It is not a matter of choice.
Parties may well choose a particular place of arbitration
precisely because its lex arbitri is one which they find
attractive. Nevertheless, once a place of arbitration has been
chosen, it brings with it its own law. If that law contains
provisions that are mandatory so far as arbitration is
concerned, those provisions must be obeyed. It is not a
matter of choice any more than the notional motorist is free
to choose which local traffic laws to obey and which to
disregard."
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31.11 It is thus well settled that even though an agreement to refer
disputes to arbitration may be a part of the substantive contract, however,
the said agreement is independent of the substantive contract and survives
despite termination or repudiation or frustration of the substantive contract.
Thus an arbitration agreement/clause does not govern the rights and
obligations arising out of the substantive contract and only governs the
manner of settling disputes between the parties. Since the arbitration
agreement is an independent agreement, it may be governed by a proper law
of its own which need not be the same law as governing the substantive
contract.
31.12 Though learned counsel for the plaintiff strongly refutes that
there is no foreign element in the present contract and thus two Indian
parties cannot contract out of Indian law however, the relationship between
the parties has to be seen on the basis of the terms of agreement executed
between the parties and not the breach thereof. The contract dated 30th May,
2019 executed between the plaintiff and defendant notes supplier as the
defendant and recipient as the plaintiff. The delivery terms clearly note CIF
CY Mundra, India on High-Seas Sales Basis, final place of delivery ICD
Ahmedabad on cost and risk of recipient, risk and title of goods passes from
supplier to recipient upon signing of high-seas sales agreement. The terms
of the payment provide (a) 10% of the contract value shall be paid by the
recipient to supplier within three days from contract date on the mean
contract quantity, as initial margin money towards performance of this
contract; (b) balance payment to be remitted by way of Bank Transfer/RTGS
10 days prior to arrival of the carrying vessel at the discharge port and prior
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to signing of high seas sale agreement. Other terms and conditions of the
contract dated 30th May, 2019 are:
1. All duties, taxes, market cess/fees or any other statutory
levies and expenses at the destination port whether
present or future will be on Recipient's account
2. USDA government class final as per recap(s). No quality
claim.
3. All Shipping line charges such as THC charges, Delivery
order charges, Container cleaning & repair charges,
etc. at destination port will be on recipient's account.
4. Goods being sold on high seas, recipient shall make
their own arrangements for customs & port clearance of
the goods at their own cost & responsibility, recipient
shall provide to SUPPLIER the original Exchange
Control Copy of Bill of Entry within 15 days of
clearance of the goods from Customs/Ports.
5. In the event of non-payment for the goods by the
recipient to supplier either in full or part as per terms of
this contracts supplier may take steps at their own
discretion as appropriate to protect their interests
including but not limited to sale of the goods covered
under this contract in the market and recover the market
price difference, other costs in doing so from the margin
money deposit.
6. Any dispute arising out of this contract shall be resolved
through arbitration in accordance with ICA
(International Cotton Association) rules & arbitration
procedure. Venue of arbitration shall be London.
7. Only the courts in New Delhi will have jurisdiction.
31.13 It is thus evident that the complete payment was to be made
when the goods were in transit and 10 days prior to the arrival of the vessel
carrying at the discharge port and thus not in the territorial waters of India.
The plaintiff having breached the contract at that stage and not having paid
the balance consideration, consequently, no high seas sales agreement was
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entered into. However, a subsequent breach will not modify the terms and
conditions of the agreement between the parties. Further, if the general
practice for trading in American Cotton is that parties subject themselves to
arbitration under the ICA byelaws, it cannot be held that the two Indian
parties, were precluded from entering into an agreement for a foreign seated
arbitration under the ICA byelaws.
31.14 Learned counsel for the plaintiff has heavily relied upon
Section 23 of the Contract Act which provides for considerations and object
which are lawful and which are not, thus emphasizing that two Indian parties
contracting out of Indian law would defeat the provisions of the law and
would be opposed to public policy. Learned counsel for the plaintiff seeks
either declaration of Clause 6 of the agreement between the parties as null
and void or by applying the Blue Pencil Test give meaningful interpretation
to clause-6 whereby the parties can then subject themselves to the
jurisdiction of Indian Cotton Association. Three Judge Bench of the Hon'ble
Supreme Court in 2017 (2) SCC 228 Centrotrade Minerals and Metal
Inc.vs. Hindustan Copper Ltd. emphasized the principle of party autonomy
in arbitration and held that the same is virtually the backbone which permit
parties to adopt the foreign law as the proper law of arbitration. In (2005) 5
SCC 465 Technip SA vs. SMS Holding Pvt. Limited & Ors., a three Judge
Bench of the Hon'ble Supreme Court dealing with the conflicts of law held
that disregard of applicability of foreign law must relate to basic principles
of morality and justice and only when the foreign law amounts to a flagrant
or gross breach of such principle that power should be exercised to hold
inapplicability of foreign law that too, exceptionally and with great
circumspection. It was held that in a sense all statutes enacted by Parliament
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or the States can be said to be part of Indian public policy, but to discard a
foreign law only because it is contrary to an Indian statute would defeat the
basis of private international law to which India undisputedly subscribes.
31.15 Contention of learned counsel for the plaintiff is that the
reference to high seas sales agreement in the contract is only there from the
perspective of determining under Indian Law which party bears the
incidence of tax when the goods are imported and delivered at Mundra,
India and this mechanism is simply a trade facilitative mechanism
recognized under Indian law. The plaintiff has relied upon the decision of
the Constitution Bench reported as 1960 (2) SCR 852 J.V. Gokal vs.
Assistant Collector of Sales Tax (Inspection) & Ors. in this regard. In J.V.
Gokal (supra) Supreme Court dealing with the question as to when it can be
said that sales take place in the course of import journey, noted the
distinction when the goods were sold through agents viz-a-viz goods sold
directly. It was held that in the case of goods purchased when they are on
the high seas and shift from foreign country to India and a commission agent
takes delivery of the shipping documents, the commission agent merely
acted as agent of the respondents therein and the said purchases occasioned
the import. However, this principle would not apply to a case where the
goods were sold by an importer in India to a third party when the goods
were on the high seas. In the present case, the parties in the contract dated
30th May, 2019 clearly noted the place beyond the territorial waters of
Indian where the property in goods would pass from the defendant to the
plaintiff. In view of the express terms stipulated, no further interpretation as
to when the property in the goods was to pass on the plaintiff is required to
be adverted to.
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31.16 Learned counsel for the plaintiff rebutting the arguments of the
learned counsel for the defendant relying upon the decision of the Calcutta
High Court in the decision reported as 1997 SCC OnLine Cal 240 Punit
Beriwala vs. Suva Sanyal & Anr. has canvassed that a mere agreement to
agree is not enforceable in a Court of Law. He thus contends that since
there was merely an agreement to enter into a high seas sales agreement,
which was never entered into, the same was akin to an agreement to agree
which is unenforceable in the Court of law. Hence the reliance of the
defendant that the agreement between the parties was a high seas sales
agreement is erroneous. This contention of the learned counsel for the
plaintiff ignores the fact that pursuant to the contract dated 30th May, 2019
between the parties, the plaintiff had paid the advance payment in terms of
sub-clause (a) and pursuant thereto the goods had been shipped by the
defendant. The property in the goods was to pass within ten days prior to
the arrival of the goods at Mundra Port in India and the defendant having
complied with his terms of the contract by shipping the goods to the
plaintiff, the agreement to enter into a high seas sales agreement pursuant
thereto was one of the obligations under the contract and not merely an
agreement to agree and thus unenforceable.
31.17 Learned counsel for the plaintiff further relies upon the so
called admission as also a sub-silencio novation of the contract, for the
reason the custom clearance was done by the defendant who was storing the
goods in its warehouse as also the bill of lading was in the name of the
defendant. As per the agreement between the parties the goods were then to
be transferred to the plaintiff. The plaintiff further contends that the sale of
transfer of goods from original importer, that is, the one whose name was on
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the bill of lading, to another is an inter-state sale/local sale and not a high
seas sale. The fact whether the plaintiff and defendant performed a high seas
sales agreement or not would not determine the ambit of Clause-6 of the
agreement between the parties. Intention of the parties as on the date when
they entered into the contract dated 30th May, 2019 has to be deciphered
from which it is evident that the parties were performing a high seas sales
agreement. The plaintiff having not fulfilled its obligation of making
payments ten days prior to the reaching of the goods at the Mundra Port, the
fact that subsequently custom duty was paid by the defendant or that the bill
of lading was entered into in the name of the defendant would not furnish a
contrary intention to the terms of agreement between the parties that the
agreement was for a high seas sales agreement. The plaintiff having
committed breach of contract, the plaintiff cannot take the plea of
subsequent novation of the contract and thereby contend that the agreement
between the parties was not a high seas sales agreement.
31.18 Therefore, an arbitration agreement between the parties being
an agreement independent of the substantive contract and the parties can
choose a different governing law for the arbitration, two Indian parties can
choose a foreign law as the law governing arbitration. Further there being
clearly a foreign element to the agreement between the parties, the two
Indian parties, that is the plaintiff and defendant could have agreed to an
international commercial arbitration governed by the laws of England.
Hence Clause 6 of the contract dated 30th May, 2019 between the parties is
not null or void.
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Issue No.2:-
32.1 Learned counsel for the plaintiff further contends that in terms
of Clause 7 of the contract "only the Courts in New Delhi will have the
jurisdiction". Thus the Courts at New Delhi being vested with the exclusive
jurisdiction, the same amounts to the parties agreeing to have the seat of
arbitration at New Delhi with venue at London. According to learned
counsel for the plaintiff this is the only harmonious and logical construction
of Clause 6 and 7 of the contract dated 30th May, 2019 between the parties
and to give a harmonious interpretation to Clause 7 of the contract, this
Court will strike down the illegal portion of Clause 6 of the contract by
applying the Blue Pencil Test laid down by the Supreme Court in 2006 (2)
SCC 628 Shin Satellite Public Co. Ltd. vs. Jain Studios Ltd.
32.2 Rebutting the contentions of learned counsel for the defendant
that there is no reason to read down Clause 7 as the same covered only
ancillary issues which were not covered by the scope of Clause 6, learned
counsel for the plaintiff relies upon the decision in BGS SGS Soma JV
(supra) wherein the Hon'ble Supreme Court referring to the Constitution
Bench decision in BALCO in respect of seat of arbitration, held in para 38
that where parties have selected the seat of arbitration in their agreement,
such selection would then amount to an exclusive jurisdiction clause, as the
parties have indicated that the courts at the "seat" would alone have
jurisdiction to entertain challenges against the arbitral award which have
been made at the seat. However, in the decision Hon'ble Supreme Court
further held:
"76. It must be pointed out that the law of the seat or place
where the arbitration is held, is normally the law to govern that
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arbitration. The territorial link between the place of arbitration
and the law governing that arbitration is well established in the
international instruments, namely, the New York Convention of
1958 and the UNCITRAL Model Law of 1985. It is true that the
terms "seat" and "place" are often used interchangeably.
In Redfern and Hunter on International Arbitration [ Blackaby,
Partasides, Redfern and Hunter (Eds.), Redfern and Hunter on
International Arbitration (5th Edn., Oxford University Press,
Oxford/New York 2009)] (Para 3.51), the seat theory is defined
thus:„The concept that an arbitration is governed by the law of
the place in which it is held, which is the "seat" (or "forum"
or locus arbitri) of the arbitration, is well established in both
the theory and practice of international arbitration. In fact, the
Geneva Protocol, 1923 states:
„2. The arbitral procedure, including the
constitution of the Arbitral Tribunal, shall be governed
by the will of the parties and by the law of the country in
whose territory the arbitration takes place.‟
The New York Convention maintains the reference to „the
law of the country where the arbitration took place‟
[Article V(1)(d)] and, synonymously to „the law of the
country where the award is made‟ [Articles V(1)(a) and
(e)]. The aforesaid observations clearly show that the
New York Convention continues the clear territorial link
between the place of arbitration and the law governing
that arbitration. The author further points out that this
territorial link is again maintained in the Model Law
which provides in Article 1(2) that:
„1. (2) the provision of this Law, except Articles 8,
9, 35 and 36, apply only if the place of arbitration is in
the territory of the State.‟
Just as the Arbitration Act, 1996 maintains the territorial
link between the place of arbitration and its law of
arbitration, the law in Switzerland and England also
maintain a clear link between the seat of arbitration and
the lex arbitri. The Swiss Law states:
„176(I). (1) The provision of this chapter shall apply to
any arbitration if the seat of the Arbitral Tribunal is in
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Switzerland and if, at the time when the arbitration
agreement was concluded, at least one of the parties had
neither its domicile nor its habitual residence in
Switzerland.‟ [See the Swiss Private International Law
Act, 1987, Ch. 12, Article 176 (I)(1).]
These observations were subsequently followed in Union
of India v. McDonnell Douglas Corpn. [(1993) 2 Lloyd‟s
Rep 48]
xxx
82. On a conspectus of the aforesaid judgments, it may be
concluded that whenever there is the designation of a place of
arbitration in an arbitration clause as being the "venue" of the
arbitration proceedings, the expression "arbitration
proceedings" would make it clear that the "venue" is really the
"seat" of the arbitral proceedings, as the aforesaid expression
does not include just one or more individual or particular
hearing, but the arbitration proceedings as a whole, including
the making of an award at that place. This language has to be
contrasted with language such as "tribunals are to meet or
have witnesses, experts or the parties" where only hearings are
to take place in the "venue", which may lead to the conclusion,
other things being equal, that the venue so stated is not the
"seat" of arbitral proceedings, but only a convenient place of
meeting. Further, the fact that the arbitral proceedings "shall
be held" at a particular venue would also indicate that the
parties intended to anchor arbitral proceedings to a particular
place, signifying thereby, that that place is the seat of the
arbitral proceedings. This, coupled with there being no other
significant contrary indicia that the stated venue is merely a
"venue" and not the "seat" of the arbitral proceedings, would
then conclusively show that such a clause designates a "seat"
of the arbitral proceedings. In an international context, if a
supranational body of rules is to govern the arbitration, this
would further be an indicia that "the venue", so stated, would
be the seat of the arbitral proceedings. In a national context,
this would be replaced by the Arbitration Act, 1996 as applying
to the "stated venue", which then becomes the "seat" for the
purposes of arbitration.
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xxx
We are of the opinion, the term "subject-matter of the
arbitration" cannot be confused with "subject-matter of the
suit". The term "subject-matter" in Section 2(1)(e) is confined
to Part I. It has a reference and connection with the process of
dispute resolution. Its purpose is to identify the courts having
supervisory control over the arbitration proceedings. Hence, it
refers to a court which would essentially be a court of the seat
of the arbitration process. In our opinion, the provision in
Section 2(1)(e) has to be construed keeping in view the
provisions in Section 20 which give recognition to party
autonomy. Accepting the narrow construction as projected by
the learned counsel for the appellants would, in fact, render
Section 20 nugatory. In our view, the legislature has
intentionally given jurisdiction to two courts i.e. the court
which would have jurisdiction where the cause of action is
located and the courts where the arbitration takes place. This
was necessary as on many occasions the agreement may
provide for a seat of arbitration at a place which would be
neutral to both the parties. Therefore, the courts where the
arbitration takes place would be required to exercise
supervisory control over the arbitral process. For example, if
the arbitration is held in Delhi, where neither of the parties are
from Delhi, (Delhi having been chosen as a neutral place as
between a party from Mumbai and the other from Kolkata) and
the tribunal sitting in Delhi passes an interim order Under
Section 17 of the Arbitration Act, 1996, the appeal against such
an interim order under Section 37 must lie to the courts of
Delhi being the courts having supervisory jurisdiction over the
arbitration proceedings and the tribunal. This would be
irrespective of the fact that the obligations to be performed
under the contract were to be performed either at Mumbai or at
Kolkata, and only arbitration is to take place in Delhi. In such
circumstances, both the courts would have jurisdiction i.e. the
court within whose jurisdiction the subject-matter of the suit is
situated and the courts within the jurisdiction of which the
dispute resolution i.e. arbitration is located.
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32.3 However, in BGS SGS Soma JV (supra) Supreme Court further
reiterated the law that the judgements of the Court are not to be construed as
statutes nor are they to be read as Euclid's theorems. On reading paras 75,
75, 96, 110, 116, 123 and 194 of BALCO, Supreme Court held that Section
2(1)(e) has to be construed keeping in view Section 20 of the Arbitration
Act, 1996 which gives recognition to party autonomy, the Arbitration Act,
1996 having accepted the territoriality principle in Section 2(2) following
UNCITRAL Model Law and that a narrow construction of Section 2(1)(e) was
expressly rejected by the Constitution Bench in BALCO. Noting the
distinction between 'venue' and 'seat', Supreme Court in para 60 and 61
finally held as under:-
" Tests for determination of "seat"
60. The judgments of the English courts have examined the
concept of the "juridical seat" of the arbitral proceedings, and
have laid down several important tests in order to determine
whether the "seat" of the arbitral proceedings has, in fact,
been indicated in the agreement between the parties. The
judgment of Cooke, J., in Shashoua [Shashoua v. Sharma, 2009
EWHC 957 (Comm) : (2009) 2 Lloyd's Law Rep 376] , states:
"34. London arbitration is a well-known phenomenon
which is often chosen by foreign nationals with a
different law, such as the law of New York, governing the
substantive rights of the parties. This is because of the
legislative framework and supervisory powers of the
courts here which many parties are keen to adopt. When
therefore there is an express designation of the
arbitration venue as London and no designation of any
alternative place as the seat, combined with a
supranational body of rules governing the arbitration
and no other significant contrary indicia, the inexorable
conclusion is, to my mind, that London is the juridical
seat and English Law the curial law. In my judgment it is
clear that either London has been designated by the
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parties to the arbitration agreement as the seat of the
arbitration, or, having regard to the parties' agreement
and all the relevant circumstances, it is the seat to be
determined in accordance with the final fall back
provision of Section 3 of the Arbitration Act."
61. It will thus be seen that wherever there is an express
designation of a "venue", and no designation of any alternative
place as the "seat", combined with a supranational body of
rules governing the arbitration, and no other significant
contrary indicia, the inexorable conclusion is that the stated
venue is actually the juridical seat of the arbitral proceeding.
32.4 In Mankatsu Impex Private Limited (supra), clause 17.1 of the MoU
between the parties stipulated that the MoU was governed by the laws of
India and the Courts at New Delhi have the jurisdiction. Contention of
learned counsel for the petitioner therein was that the parties agreed to Hong
Kong as the venue of arbitration only and not the juridical seat of arbitration.
Supreme Court thus noted the question of law before the Court in the said
decision as under:-
"15. The question falling for consideration in the present
case is, in view of Clause 17.2 of the MoU whether the
parties have agreed that the seat of arbitration is at Hong
Kong and whether this Court lacks jurisdiction to entertain
the present petition filed under Section 11 of the Arbitration
and Conciliation Act, 1996."
32.5 Noting clause 17 of the MoU which was relevant for the decision,
Hon'ble Supreme Court in Mankatsu Impex Private Limited (supra) held that
the words "place of arbitration shall be Hong Kong" have to be read with
Clause 17.2 which provides that any dispute transferred, difference arising
out of or relating to the MoU shall be referred to and finally resolved by
arbitration administered in Hong Kong. It was thus held:
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"17. In the present case, Clause 17 of MoU is a relevant
clause governing the law and dispute resolution. Clause 17
reads as under:
17. Governing law and dispute resolution
17.1. This MoU is governed by the laws of India, without
regard to its conflicts of laws provisions and courts at New
Delhi shall have the jurisdiction.
17.2. Any dispute, controversy, difference or claim arising out
of or relating to this MoU, including the existence, validity,
interpretation, performance, breach or termination thereof or
any dispute regarding non-contractual obligations arising out
of or relating to it shall be referred to and finally resolved by
arbitration administered in Hong Kong.
The place of arbitration shall be Hong Kong.
The number of arbitrators shall be one. The arbitration
proceedings shall be conducted in English language.
17.3. It is agreed that a party may seek provisional, injunctive,
or equitable remedies, including but not limited to preliminary
injunctive relief, from a court having jurisdiction, before,
during or after the pendency of any arbitration proceeding.
xxx
19. The seat of arbitration is a vital aspect of any arbitration
proceedings. Significance of the seat of arbitration is that it
determines the applicable law when deciding the arbitration
proceedings and arbitration procedure as well as judicial
review over the arbitration award. The situs is not just about
where an institution is based or where the hearings will be
held. But it is all about which court would have the supervisory
power over the arbitration proceedings. In Enercon (India)
Ltd. v. Enercon GmbH [Enercon (India) Ltd. v. Enercon
GmbH, (2014) 5 SCC 1 : (2014) 3 SCC (Civ) 59] , the Supreme
Court held that : (SCC pp. 43 & 46, paras 97 & 107)
"[T]he location of the seat will determine the courts
that will have exclusive jurisdiction to oversee the
arbitration proceedings. It was further held that the
seat normally carries with it the choice of that
country's arbitration/curial law."
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(emphasis supplied)
xxx
21. In the present case, the arbitration agreement entered
into between the parties provides Hong Kong as the place of
arbitration. The agreement between the parties choosing
"Hong Kong" as the place of arbitration by itself will not lead
to the conclusion that the parties have chosen Hong Kong as
the seat of arbitration. The words, "the place of arbitration"
shall be "Hong Kong", have to be read along with Clause 17.2.
Clause 17.2 provides that "... any dispute, controversy,
difference arising out of or relating to MoU shall be referred to
and finally resolved by arbitration administered in Hong
Kong....". On a plain reading of the arbitration agreement, it is
clear that the reference to Hong Kong as "place of arbitration"
is not a simple reference as the "venue" for the arbitral
proceedings; but a reference to Hong Kong is for final
resolution by arbitration administered in Hong Kong. The
agreement between the parties that the dispute "shall be
referred to and finally resolved by arbitration administered in
Hong Kong" clearly suggests that the parties have agreed that
the arbitration be seated at Hong Kong and that laws of Hong
Kong shall govern the arbitration proceedings as well as have
power of judicial review over the arbitration award.
22. As pointed out earlier, Clause 17.2 of MoU stipulates
that the dispute arising out of or relating to MoU including the
existence, validity, interpretation, breach or termination thereof
or any dispute arising out of or relating to it shall be referred to
and finally resolved by the arbitration administered in Hong
Kong. The words in Clause 17.2 that "arbitration administered
in Hong Kong" is an indicia that the seat of arbitration is at
Hong Kong. Once the parties have chosen "Hong Kong" as the
place of arbitration to be administered in Hong Kong, the laws
of Hong Kong would govern the arbitration. The Indian courts
have no jurisdiction for appointment of the arbitrator.
xxx
25. Clause 17.1 of MoU stipulates that MoU is governed by
the laws of India and the courts at New Delhi shall have
jurisdiction. The interpretation to Clause 17.1 shows that the
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substantive law governing the substantive contract are the laws
of India. The words in Clause 17.1, "without regard to its
conflicts of laws provisions and courts at New Delhi shall have
the jurisdiction" has to be read along with Clause 17.3 of the
agreement. As per Clause 17.3, the parties have agreed that the
party may seek provisional, injunctive or equitable remedies
from a court having jurisdiction before, during or after the
pendency of any arbitral proceedings.
In BALCO [BALCO v. Kaiser Aluminium Technical Services Inc.,
(2012) 9 SCC 552 : (2012) 4 SCC (Civ) 810] , this Court held
that : (SCC p. 636, para 157)
"157. ... on a logical and schematic construction
of the Arbitration Act, 1996, the Indian courts do
not have the power to grant interim measures
when the seat of arbitration is outside India."
If the arbitration agreement is found to have seat of arbitration
outside India, then the Indian courts cannot exercise
supervisory jurisdiction over the award or pass interim orders.
It would have, therefore, been necessary for the parties to
incorporate Clause 17.3 that parties have agreed that a party
may seek interim relief for which the Delhi courts would have
jurisdiction.
26. In this regard, we may usefully refer to the insertion of
proviso to Section 2(2) of the Arbitration Act, 1996 by the
Amendment Act, 2015. By the Amendment Act, 2015 (w.e.f. 23-
10-2015), a proviso has been added to Section 2(2) of the Act
as per which, certain provisions of Part I of the Act i.e. Section
9 -- interim relief, Section 27 -- court's assistance for evidence,
Section 37(1)(a) -- appeal against the orders and Section 37(3)
have been made applicable to "international commercial
arbitrations" even if the place of arbitration is outside India.
Proviso to Section 2(2) of the Act reads as under:
"2. Definitions.--(1) * * *
(2) Scope.--This Part shall apply where the place of arbitration
is in India:
Provided that subject to an agreement to the contrary, the
provisions of Sections 9, 27 and clause (a) of sub-section (1)
and sub-section (3) of Section 37 shall also apply to
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international commercial arbitration, even if the place of
arbitration is outside India, and an arbitral award made or to
be made in such place is enforceable and recognised under the
provisions of Part II of this Act."
It is pertinent to note that Section 11 is not included in the
proviso and accordingly, Section 11 has no application to
"international commercial arbitrations" seated outside India."
32.6 In IMAX Corporation (supra) Supreme Court further held:
35. The relationship between the seat of arbitration and the law
governing arbitration is an integral one. The seat of arbitration
is defined as the juridical seat of arbitration designated by the
parties, or by the arbitral institution or by the arbitrators
themselves, as the case may be. It is pertinent to refer to the
following passage from Redfern and Hunter on International
Arbitration [Redfern and Hunter on International Arbitration,
5th Edn. (Oxford University Press, 2009)]:
"This introduction tries to make clear, the place or
seat of the arbitration is not merely a matter of
geography. It is the territorial link between the
arbitration itself and the law of the place in which
that arbitration is legally situated:
When one says that London, Paris or Geneva is the
place of arbitration, one does not refer solely to a
geographical location. One means that the
arbitration is conducted within the framework of
the law of arbitration of England, France or
Switzerland or, to use an English expression,
under the curial law of the relevant country. The
geographical place of arbitration is the factual
connecting factor between that arbitration law and
the arbitration proper, considered as a nexus of
contractual and procedural rights and obligations
between the parties and the arbitrators.
The seat of arbitration is thus intended to be its
centre of gravity."
32.7 Thus even if in Clause 6 of the agreement between the parties the
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term 'Venue' has been used, by agreeing to conduct the arbitration through
ICA the parties have agreed that the seat of arbitration would be London and
not Delhi even though by Clause 7 the Substantive Law of the contract is
Indian Law and parties have agreed to exclusive jurisdiction of the Courts at
Delhi. Since as per clause 6 of the contract between the parties it has been
specifically agreed that any dispute arising out of this contract shall be
resolved through arbitration in accordance with International Cotton
Association Rules and arbitration procedure, the parties have thus agreed to
abide by the rules and byelaws of the ICA which provide that the seat of
arbitration is in London and the law of England and Wales shall apply to
every arbitration and/or appeal under these byelaws. Clause 7 entered into
between the parties would be relevant if by an agreement both parties decide
not to settle their disputes through arbitration but by approaching the Court
of law, in which case the exclusive jurisdiction would be of the Courts at
New Delhi.
32.8 Therefore, in view of the above discussion, express designation
of jurisdiction of a Court at New Delhi under Clause 7 of the contract dated
30th May, 2019 is not determinative of the seat of arbitration.
Issue No.3:-
33.1 Having held that two Indian parties can agree to submit to
foreign jurisdiction for arbitration and in terms of Clause 6 of the contract
between the parties, the seat of arbitration and not merely the venue is at
London, the issue which would thus arise is whether the present suit is
maintainable in terms of requirement of Section 45 of the Act i.e. whether it
is for this Court or the Arbitrator to determine whether the agreement
between the plaintiff and defendant is a high seas sale agreement or not or
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whether any foreign element is involved or not in the agreement between
parties.
33.2 To contend that the validity of the arbitration agreement has to
be gone into by this Court, learned counsel for the plaintiff relies upon the
decision in SBP & Co. Vs. Patel Engineering (supra), wherein, in para 19, it
was held as under:-
"19. It is also not possible to accept the argument that there
is an exclusive conferment of jurisdiction on the Arbitral
Tribunal, to decide on the existence or validity of the
arbitration agreement. Section 8 of the Act contemplates a
judicial authority before which an action is brought in a
matter which is the subject of an arbitration agreement, on
the terms specified therein, to refer the dispute to
arbitration. A judicial authority as such is not defined in the
Act. It would certainly include the court as defined in
Section 2(e) of the Act and would also, in our opinion,
include other courts and may even include a special
tribunal like the Consumer Forum (see Fair Air Engineers
(P) Ltd. v. N.K. Modi [(1996) 6 SCC 385] When the
defendant to an action before a judicial authority raises the
plea that there is an arbitration agreement and the subject-
matter of the claim is covered by the agreement and the
plaintiff or the person who has approached the judicial
authority for relief, disputes the same, the judicial authority,
in the absence of any restriction in the Act, has necessarily
to decide whether, in fact, there is in existence a valid
arbitration agreement and whether the dispute that is
sought to be raised before it, is covered by the arbitration
clause. It is difficult to contemplate that the judicial
authority has also to act mechanically or has merely to see
the original arbitration agreement produced before it, and
mechanically refer the parties to an arbitration. ...".
33.3 Learned counsel for the plaintiff also relies upon the decision in
Sabbagh Vs. Khoury & Others (supra), wherein, it was held:-
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"1. This is an appeal against the grant of an injunction to
restrain the appellants from pursuing an arbitration in
Lebanon. The judge held that the claims made in the
arbitration were not within the arbitration agreement relied
upon by the appellants and duplicated claims made in
proceedings properly brought by the respondent in England.
The injunction was granted on the basis that continuation of
the arbitration would thus be vexatious and oppressive. The
issues raised on the appeal include whether the court has
jurisdiction on these grounds to grant an injunction to
restrain an arbitration with a foreign seat and, if so, whether
the jurisdiction is limited to cases where England is the
natural forum for the underlying dispute.
XXX XXX XXX
115. For the reasons given above, I reject the submissions,
first, that the English court has no jurisdiction to grant an
anti-arbitration injunction on grounds that the arbitration is
or would be vexatious and oppressive and, second, that any
such jurisdiction is exercisable only if England is the natural
forum for the dispute."
33.4 Even if the contentions of the plaintiff is accepted that the contract
stood novated by the parties whereby instead of a high seas sale, the contract
can be considered as a local sale as the defendant by its e-mail dated 10th
September, 2019 admitted that the sale was local sale and the plaintiff was
to pay defendant price of the goods along with the custom duty and 5%
GST, the issue before this Court is not whether it is a high seas sale or local
sale, but, whether the Arbitral Tribunal has jurisdiction to decide the issue
or not. In this regard, it would be appropriate to note Section 45 of the
Arbitration and Conciliation Act, which reads as under:
"45. Power of judicial authority to refer parties to
arbitration. --Notwithstanding anything contained in Part I
or in the Code of Civil Procedure, 1908 (5 of 1908), a
judicial authority, when seized of an action in a matter in
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respect of which the parties have made an agreement
referred to in section 44, shall, at the request of one of the
parties or any person claiming through or under him, refer
the parties to arbitration, unless it finds that the said
agreement is null and void, inoperative or incapable of
being performed".
33.5 In Sasan Power Limited (supra) Hon'ble Supreme Court dealing with
scope of consideration under Section 45 of the Act held:
49. In our opinion, the scope of enquiry (even) under Section
45 is confined only to the question whether the arbitration
agreement is "null and void, inoperative or incapable of being
performed" but not the legality and validity of the substantive
contract.
50. The case of the appellant as disclosed from the plaint is
that Article X Section 10.2 is inconsistent with some provisions
of the Indian Contract Act, 1872, and hit by Section 23 of the
Indian Contract Act (as being contrary to public policy). It is a
submission regarding the legality of the substantive contract.
Even if the said submission is to be accepted, it does not
invalidate the arbitration agreement because the arbitration
agreement is independent and apart from the substantive
contract. All that we hold is that the scope of enquiry under
Section 45 does not extend to the examination of the legality of
the substantive contract. The language of the section is plain
and does not admit of any other construction. For the purpose
of deciding whether the suit filed by the appellant herein is
maintainable or impliedly barred by Section 45 of the 1996
Act, the Court is required to examine only the validity of the
arbitration agreement within the parameters set out in Section
45, but not the substantive contract of which the arbitration
agreement is a part.
xxx
52. The stipulation regarding the governing law contained in
Article XII Section 12.1 is an independent stipulation
applicable to both the substantive agreement and the
arbitration agreement. Either of the agreements can survive in
an appropriate case without the other. For example, if in a
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given case, (of a cross-border contract) parties can agree upon
for the governing law but do not have any agreement for
settlement of dispute through arbitration, it would not make
any legal difference to the governing law clause (if otherwise
valid) and bind the parties. The judicial forum before which the
dispute (if any arises) falls for adjudication is normally obliged
to apply such chosen governing law--a principle of
international law recognised by this Court [Reliance Industries
Ltd. v. Union of India, (2014) 7 SCC 603 : (2014) 3 SCC (Civ)
737"76.4. ... Therefore, the remedy against the award will
have to be sought in England, where the juridical seat is
located. However, we accept the submission of the appellant
that since the substantive law governing the contract is Indian
law, even the courts in England, in case the arbitrability is
challenged, will have to decide the issue by applying Indian
law viz. the principle of public policy, etc. as it prevails in
Indian law." (SCC p. 639, para 76.4)] . Similarly, it is possible
in a given case, parties to a substantive contract in a cross-
border transaction agree for the resolution of the disputes, if
any, to arise out of such contract through arbitration without
specifying the governing law. In such case, it would be the duty
of the arbitrator to ascertain the "proper law" applicable to
the case in terms of the established principles of international
law. It is also possible that in a given case parties agree that
the governing law of the substantive contract be that of one
country and the governing law of the arbitration agreement be
of another country [ In fact, the transaction which was the
subject-matter of dispute in Union of India v. Reliance
Industries Ltd., (2015) 10 SCC 213 is one such. The substantive
agreement is governed by the Indian law and the arbitration
agreement by the law of England. See para 2 of the said
judgment.] . The principles of law in this regard are well
settled. In all of the cases, the validity of either of the
clauses/agreements does not depend upon the existence of the
other.
53. Therefore, the examination of the question of consistency of
Article X Section 10.2 (part of the substantive contract) with
Section 23 of the Contract Act is beyond the scope of the
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enquiry while adjudicating the validity of the arbitration
agreement either under Section 45 or Section 8 (amended or
original) of the 1996 Act. Therefore, the submissions of the
appellant in this regard are required to be rejected.
33.6 This Court in the decision reported 2009 (108) DRJ 404 W.P.I.L Vs.
NTPC Ltd. and Ors. dealing with Section 45 of the Act, held as under:-
"26. ... Now, Section 45 obligates every judicial authority in
India (which, concededly this court is) to refer the parties to
arbitration, if they have agreed to be governed by arbitration
agreements, which would be covered by Section 44. The
obligation is an overriding one, apparent from the non-
obstante clause, and the mandatory "shall" occurring in the
provision. The only qualifications, relieving the court from its
duty to refer the parties to arbitration, is if it is convinced that
the agreement is "null and void, inoperative or incapable of
being performed (Section 45). Shinetsu Chemical Co. Ltd. v.
Aksh Optifibre Ltd. & Anr., 2005 (7) SCC 234 is a three judge
decision on the overriding nature of the court's obligation;
though there is a plurality of views in the Bench decision on
other issues, on this question, the judges were unanimous."
33.7 The Division Bench of this Court McDonalds India Pvt. Ltd. vs.
Vikram Bakshi & Ors. (supra) held:
44. In another decision referred to by the respondents, which
was of a learned single Judge of the High Court in Calcutta in
the case of the Board of Trustees of the Port of Kolkata v. Louis
Dreyfus Armatures SAS: G.A. No. 1997/2014 in CS No.
220/2014, the circumstances under which an anti-arbitration
injunction could be granted were summarised as under:-
"(i) If an issue is raised whether there is any valid
arbitration agreement between the parties and the Court is of
the view that no agreement exists between the parties.
(ii) If the arbitration agreement is null and void,
inoperative or incapable of being performed.
(iii) Continuation of foreign arbitration proceeding
might be oppressive or vexatious or unconscionable."
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45. It would be noticed straightaway that the points (i) and
(ii) extracted above are essentially taken from Section 45 of the
1996 Act. The only addition being point No. (iii) where it was
submitted that an anti-arbitration injunction could be granted
if the continuation of „foreign‟ arbitration proceedings were to
be oppressive, vexatious or unconscionable.
52. It is also important to note that although the competence-
competence principle was applicable and the arbitral tribunal
had the requisite competence to determine its own jurisdiction,
the courts in England retained the jurisdiction to determine the
issue as to whether there was ever an agreement to arbitrate.
In our view, the same principle would apply insofar as the
courts in India are concerned. The courts in India would
certainly have the jurisdiction to determine the question as to
whether an arbitration agreement was void or a nullity. But,
that is not the case here.
33.8 In the decision reported as 2011 SCC OnLine Del. 3050
Devender Kumar Gupta vs. Reaology Corporation the Division Bench of
this Court held:
"13. In the impugned Judgment, the learned Single Judge has
applied the Division Bench Judgment in Spentex as also the
Single Judge decision in Roshan Lal Gupta v. Parasram
Holdings Pvt. Ltd., 2009 (157) DLT 712. The first feature to be
noted is that Roshan Lal deals with a domestic arbitration and,
therefore, Section 45 of the A & C Act was not in
contemplation. The learned Single Judge, inter alia, concluded
that the word „party‟ in Section 8 of the A & C Act refers to a
party to the suit in contradistinction to a party to the
arbitration agreement. The learned Single Judge, in the
impugned Judgment, has dismissed the applications seeking
interim relief but inexplicably has kept the Suit alive for further
consideration. The learned Single Judge was statutorily bound
to return a finding with regard to whether or not the action or
suit was the subject, matter of an arbitration agreement. In the
facts of the case before us, since we are dealing with an
international commercial arbitration, Section 45 of the A & C
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Act comes into play. After considering all the complexities in
the case, one of us had concluded in Bharti that a formal
application under Section 45 of the A & C Act was not
necessary, since it is incumbent for a Court seised of an action
in a matter in respect of which the parties have made an
arbitration agreement as envisaged in Section 44, to refer the
parties to arbitration except if the Court finds that the said
agreement is null and void, inoperative and incapable of being
performed. The dismissal of the Suit or the rejection of the
application for interim relief under Order XXXIX Rules 1 and 2
of the Code of Civil Procedure, 1908 (CPC) has the effect of
referring the parties to arbitration. By sagaciously not making
a statement under Section 8 of the A & C Act, the Defendant
has achieved indirectly what he could not have achieved
directly, namely, making it inevitable for the Plaintiff to join
arbitral proceedings without any consideration or adjudication
of its plea that no arbitration agreement exists between the
parties. It is for this reason that it seems to us essential that the
Court should have proceeded under Section 8 or Section 45 of
the A & C Act, as the case may be and with a view to return a
finding on the existence of an arbitration agreement between
the parties. If the prima facie finding is in favour of the
existence of an arbitration agreement, the Court would rightly
leave it to the Arbitral Tribunal to go into and determine the
details and the minute objections raised by the Plaintiff. The
Court ought not to skirt this issue, as it would tantamount to
running counter to the decisions of the Supreme Court in I
vaerner, SBP and Sukanya."
33.9 As noted above, the scope of interference by the Court in an
International Arbitration is limited to the Court determining, whether a valid
arbitration agreement exists between the parties and that the agreement is
null and void, inoperative or incapable of being performed and the Court
cannot, at this stage, enter into a full-fledged inquiry on merits of the matter
as only a prima facie finding is required to be arrived at. Indubitably, an
arbitration agreement exists between the parties and this Court has already
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held that Clause 6 of the Contract between the plaintiff and defendant is
neither null nor void nor inoperative nor incapable of being performed, thus
this Court cannot go into any further inquiry.
34. The plaintiff and the defendant, thus, having chosen a foreign system
of arbitration with open eyes, the agreement between the parties for
resolution of the disputes through arbitration in accordance with ICA rules
and arbitration proceedings cannot be held to be null and void or
inoperative, warranting this Court to grant an anti-arbitration injunction to
the plaintiff.
35. Hence, the suit and I.A. 6298/2020 under Order XXXIX Rule 1 and 2
CPC and I.A. 6299/2020 under Order II Rule 2 CPC are dismissed as not
maintainable and I.A. 6701/2020 under Section 45 of the Arbitration and
Conciliation Act is disposed of.
(MUKTA GUPTA)
JUDGE
NOVEMBER 24, 2020
'vn/akb'
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