Tag: arbitration

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Statutory reform alone will not make domestic arbitration more efficient – A closer look at the Law Commission’s 246th Report

SindhuSivakumar_DraftingForArbitrationThat arbitration in India is a costly, time-consuming, and inefficient affair is well known. Excessive court applications, exorbitant arbitrator fees, and respondent recalcitrance are the norm and in many ways, arbitrations do not provide a better and more efficient alternative to the courts for the resolution of commercial disputes. Only if this important objective is achieved can arbitration promote trade, commerce, and investment.

The Law Commission of India, on August 7, 2014, released its 246th report (“Report”), suggesting amendments to the Arbitration and Conciliation Act, 1996 (“ACA”) to make arbitration in India more efficient. With the Union government indicating that it will implement statutory reforms to the ACA soon, let us first look at some aspects of arbitration practice in India that the Report has identified as being at the root of the inefficiency.

No ‘institutional’ arbitration

‘Institutional’ arbitration is carried out under the administration of a specialised institution, like the London Court of International Arbitration (“LCIA”) or the Singapore International Arbitration Centre (“SIAC”) and in accordance with their rules. In ‘ad hoc’ arbitrations, the parties determine all aspects of the arbitration themselves. Institutional arbitrations typically tend to be better regulated and therefore, less inefficient as they involve detailed procedural rules, tighter timelines, reasonable (arbitrator) fee schedules, and administrative oversight.

Exorbitant ‘per sitting’ fees

The fees that are typically charged by arbitrators in Indian ad hoc arbitrations not only drive up costs, but also disincentivises arbitrators from conducting arbitrations speedily (that is, with fewer sittings).

Adjournment culture

Parties seek and receive too many adjournments over the course of the arbitration and arbitrators do not use cost sanctions to check any wasteful or dilatory conduct.

Wide scope of judicial enquiry

The judiciary has unnecessarily widened the scope of judicial enquiry when hearing arbitration applications. For instance, Section 11 appointments have been characterised as a ‘judicial’ function. This has subjected them to the lengthy Special Leave Petition process. Similarly, when hearing set-aside applications under Section 34, awards are re-opened and reviewed on merits based on the ‘public policy’ ground.

Perverse statutory incentives that increase arbitration-related court applications

A party who challenges an award under Section 34 can obtain the statutorily created ‘stay’ of the enforcement of the award under Section 36. This has led to losing parties routinely filing set-aside proceedings to delay the enforcement of an award.

Let us delve deeper into the Report’s recommendations to disentangle arbitration from the courts, specifically its recommendations to reduce the scope of judicial enquiry in arbitration-related court applications.

The first problem is one of ‘judicial overreach’, that is, the trend of Indian courts expanding the scope of judicial review in arbitration-related court proceedings, undercutting the spirit of judicial minimalism in the ACA. The other is the volume of arbitration-related court proceedings in domestic arbitration in India. We will concentrate on the first problem.

Expansive judicial review in arbitration-related court proceedings

There has been a lot of academic and practitioner-led literature in this regard, particularly in the context of:

– Section 5 of the ACA, which has been read down to make it subject to the inherent powers of the civil courts under Sections 9 and 151 of the Code of Civil Procedure, 1908;

– Section 8 of the ACA, which has also been interpreted to allow the courts to get into issues relating to the validity, operability, and enforceability of the arbitration agreement notwithstanding its express exclusion by the drafters of the ACA, worsened by the fact that the courts often encroach upon the jurisdiction of the tribunals and decide substantive issues in dispute when hearing challenges to the arbitration agreement;

– Section 11 of the ACA, under which the arbitrator-appointment function of the courts has been converted from an ‘administrative’ function to a ‘judicial’ decision, which can be subject to lengthy appellate proceedings through the SLP route; and

– Section 34 of the ACA, under which the ‘public policy’ ground for challenging awards has been expanded to such an extent that it is now essentially the same as a regular appeal on law under the Code of Civil Procedure, 1908.

The Report echoes existing popular opinions and recommends on reducing the scope of judicial review in these proceedings. For example, it clarifies that Section 11 appointments should be regarded as administrative acts (not subject to review through the SLP process).

Judicial review of issues related to the validity of arbitration agreements and the arbitrability of disputes

Further, the questions that a court can get into when hearing Section 11 and Section 8 (stay) matters should be limited to issues regarding the existence or validity of the arbitration agreement as well as issues of arbitrability, but not questions regarding the scope of the arbitration agreement or the merits of the dispute (which includes issues relating to the validity of the underlying contract). Essentially, the Report echoes the position taken by the Supreme Court in National Insurance Co. Ltd. v. M/s. Boghara Polyfab Pvt. Ltd. (September 18, 2008) and other such cases.

The Report also clarifies what matters the court can and cannot determine when hearing challenges to the arbitrability or the arbitration agreement under Sections 8 and 11. Again, it echoes what was said in Boghara Polyfab Pvt. Ltd., that is, that the court can decide questions of (i) whether it (the relevant court) has jurisdiction to hear the application; (ii) whether there is a valid and enforceable arbitration agreement; (iii) whether the party who has applied is a party to such an agreement; (iv) whether the claim that is subject to arbitration is a dead claim (barred by limitation) or a live claim; and (v) whether the disputes subject to arbitration have been settled.

Tightening the ‘public policy’ ground used to set aside awards

In relation to Section 34, the Report seeks to tighten the ‘public policy’ ground for setting aside arbitral awards to discourage the courts from interpreting this ground widely and reviewing awards on merits. The Report refers to Renusagar Power Co. Ltd. v. General Electric Co. (1994), where the Supreme Court, in relation to a challenge to the enforcement of a foreign award, interpreted the meaning of the ground, “in conflict with the public policy of India”. The Court held that the term ‘public policy’ meant: (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality. The Court categorically held that contravention of law alone will not attract the bar of public policy.

The Report suggests that ‘public policy’ be confined to (i) and (iii) above in the context of international arbitrations seated in India, that is, that challenges based on the award being against the interests of India be disallowed. For domestic awards however, courts should be permitted to check the award for “patent illegality” when there is a challenge under Section 34.

These suggestions are commendable and mostly in line with what practitioners and commentators suggest. However, it is not clear whether they will make a difference in practice, as their application and interpretation remains at the hands of the judiciary, which has traditionally expanded the scope of its role in arbitration-related court hearings.

For example, in relation to challenges to the arbitration agreement, it is not difficult to envisage a situation where a court decides to delve into the substantive issues in dispute, such as the validity of the underlying contract, when it is framed as part of a challenge to the validity of the arbitration agreement (as the lower courts did in Enercon), or declare an agreement “inoperable” when there are pending proceedings before the courts relating to matters subject to the arbitration agreement (as the Delhi High Court did in Vikram Bakshi and Another v. Mc Donalds India Pvt. Ltd. and Others, I.A. No.6207/2014). Likewise, the public policy criteria in Section 34 – “justice or morality” and “fundamental policy of Indian law” can easily be interpreted by the courts in a wide manner. The point is simple. Statutory reforms by themselves do not protect against an interfering judiciary; much of the effectiveness of these reforms depends upon the judicial approach to arbitration-related court proceedings.

The large volume of arbitration-related court applications is another, and perhaps even more important aspect, of the problem of arbitration-court entanglement in India. This not only slows down arbitration, but also adds to the arrears before our already overburdened civil courts. The suggestions in the Report in this regard are quite far reaching and deserve closer attention.

(Sindhu Sivakumar is a solicitor on the rolls of England and Wales and qualified as an advocate in India.)

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Arbitration appointments and appointing authorities – Drafting to prevent court involvement in arbitrator appointments

SindhuSivakumar_DraftingForArbitrationMostly of the ad hoc kind, domestic arbitrations in India regularly break down and seek assistance from the courts. The process breaks down almost as soon as it is commenced, when parties cannot constitute the tribunal on their own. They invoke Section 11 the Arbitration and Conciliation Act, 1996 (“ACA”) to have a high court make the appointments for them. As the annual reports of various high courts will testify, a significant volume of Section 11 applications are pendingclogging up before them . and Arbitration practitioners too corroborate that a domestic arbitration that does not involve a Section 11 application is rare.

Section 11 proceedings are not efficient by any means. While practitioners suggest that the duration of these proceedings depends on the high court in question and on the complexity of each case, they have been known to sometimes stretch up to five years. They are also potentially subject to long review proceedings before the Supreme Court through the Special Leave Petition process. A 2013 survey conducted by Price Waterhouse Coopers found that the constitution of the arbitral tribunal consumed the most amount of time in the arbitral process in India, more than other time-consuming factors such as the discovery and inspection of documents and the enforcement of awards.

Here, we will discuss the need to contractually avoid requiring the support of the courts in the constitution of the tribunal and the means of doing so.

Judicial overreach is not the reason for the glut of Section 11 applications

Most literature on arbitration in India posits the problem of the involvement of courts in arbitrator appointments as one of ‘judicial overreach’, that is, the judiciary is seen as unnecessarily ‘interfering’ in the appointments process. Judicial overreach is undoubtedly a part of the problem and is the reason arbitrator appointments are subject to the special leave petition review process. Ultimately however, it is the parties who are responsible for the large number of Section 11 applications pending before the courts. Section 11, after all, requires an application from a party to initiate the process; the proceedings are not suo motu. Thus, merely changing judicial attitudes (of interference) towards arbitration is unlikely to be the only answer to the problem of arbitration-court entanglement in arbitrator appointments in India; rather, we need to understand what drives the practice of parties routinely approaching courts to appoint arbitrators, and what can be done to avoid this.

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The real reasons

Both statute and arbitral infrastructure (or lack thereof) create the perverse incentive structures that drive the frequent invocation of Section 11. For one, there is a lack of awareness amongst practitioners of simple drafting practices than can avoid the need to resort to a Section 11 application. Most arbitration clauses we have examined do not provide for either institutional arbitration or an appointing authority in case of ad hoc arbitration, both of which can avoid the need to approach a high court when, as is often the case, a respondent fails to cooperate in the constitution of the tribunal.

Secondly, there is a perception that Section 11 is not the most time-consuming or costly affair. This is partially true in the sense that the court fees involved in Section 11 (only Rs. 500 in Karnataka) are likely to be lower than what an arbitral institution or trade body will charge to act as an appointing authority; however, when one factors in counsel fees as well as the potential duration of Section 11 proceedings (especially when SLP proceedings are also involved), the costs become significant.

Statute panders to the ‘uncooperative respondent’

Another important driver of the large number of Section 11 applications seems to be statute itself. The ACA does not provide for the eventuality of one of the parties turning uncooperative (in appointing arbitrators), even though recalcitrant behavior is quite typical in adversarial proceedings (one party usually always stands to benefit from engaging in dilatory tactics). Under the ACA, if one of the parties does not cooperate in appointing the arbitrator(s), the court is automatically called into play. In England, by contrast, the default provision provides for the other side’s appointment to be final, thereby eliminating the need for court intervention in typical cases of respondent non-cooperation. A simple correction of the default rule of arbitrator could go a long way in reducing the number of Section 11 applications, especially since practitioners suggest that the ‘uncooperative respondent’ is common feature of arbitration appointments in India.

Drafters should opt for institutional arbitration or provide for an appointing authority

The court fee required to file a Section 11 application before the Karnataka High Court (above) is only five hundred rupees. That should not obscure the fact that proceedings can drag on for years and drive up legal costs.

The court fee required to file a Section 11 application before the Karnataka High Court (above) is only five hundred rupees. That should not obscure the fact that proceedings can drag on for years and drive up legal costs. Image above is from Börkur Sigurbjörnsson’s photostream on Flickr. CC BY 2.0

While statutory reform is out of a contractual drafter’s control, drafters can choose to opt in for institutional arbitration (whose rules will inevitably provide that the institution will act as appointing authority should the parties be unable to agree on the tribunal within a stipulated timeframe) or provide for an appointing authority as a fallback in their ad hoc arbitration clauses to avoid the need to go to the courts under Section 11. There are several trade bodies and arbitral institutions willing to act as appointing authorities, and any costs incurred in making use of these facilities is likely to be offset by the costs saved in going through the Section 11 process.

(Sindhu Sivakumar is a solicitor on the rolls of England and Wales and qualified as an advocate in India.)

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Supreme Court of India

The role of courts in arbitrator appointments – Patel Engineering and beyond

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What questions can the Chief Justice entertain while appointing arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”)? In 2005, in SBP and Company v. Patel Engineering Ltd. (“the Patel Engineering case”), a seven-judge bench of the Supreme Court issued determinative dicta in relation to this function of the court. In this post, we examine a series of subsequent cases where the Supreme Court has interpreted and given effect to its dicta in the Patel Engineering case.

Background

Section 11 of the Act provides that when the parties fail to appoint one or more arbitrators according to the terms of the arbitration agreement, or when two arbitrators fail to choose the third or presiding arbitrator, or the designated appointment mechanism otherwise fails, the parties can approach the Chief Justice to resolve the stalemate and appoint an arbitrator.

Section 11 is based on Article 11 of the UNCITRAL Model Law, 1985 (“the Model Law”). Similar to the Model Law, Section 11 envisages the Chief Justice performing a fairly routine, administrative function in making the appointment, similar to the appointing role that arbitral institutions take on. All that is required is a request from a party to the Chief Justice to appoint the arbitrator, usually in the form set out in Notification No F22/1/95/SCA/Genl.The extent of enquiry in making the appointment should include checking for the impartiality and independence of the appointee and the qualifications specified in the agreement.

However, in the Patel Engineering case, the Supreme Court held that the appointing function in Section 11 is a judicial function where the Chief Justice should examine certain jurisdictional questions like the existence and validity of the arbitration agreement. The exact scope of enquiry of the Chief Justice was set out by the Supreme Court as follows:

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“It is necessary to define what exactly the Chief Justice, approached with an application under Section 11 of the Act, is to decide at that stage. Obviously, he has to decide his own jurisdiction in the sense, whether the party making the motion has approached the right High Court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question whether the claim was a dead one; or a long barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of the arbitration clause. It will be appropriate to leave that question to be decided by the arbitral tribunal on taking evidence, along with the merits of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act…”

Further, the Court in this case also held that the court’s decision on any of these preliminary matters would be final and not open for subsequent examination by the arbitral tribunal.

In subsequent cases, questions have arisen in relation to this dicta – in relation to whether the Chief Justice or his designate has to examine all the preliminary issues laid down in Patel Engineering or whether he can set aside some of these preliminary issues for the arbitral tribunal to decide. Questions have also been raised about the extent to which courts can examine the scope of the arbitration agreement while dealing with a Section 11 application.

Discretion to leave issues to the arbitral tribunal

In National Insurance Company Ltd. v. Boghara Polyfab Pvt. Ltd., (2009) 1 SCC 267, a two-judge bench of the Supreme Court held that the Chief Justice, in exercising his powers under Section 11, does not have to decide all the preliminary questions set out in Patel Engineering.

The Court segregated the preliminary issues into three categories, that is, “(i) issues which the Chief Justice or his designate is bound to decide; (ii) issues which he can also decide, that is, issues which he may choose to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide.”

The first category included the Chief Justice’s territorial jurisdiction as well as the issue of whether there was an arbitration agreement and whether the Section 11 applicant is indeed a party to the agreement. The second, optional category included issues of whether claim is a dead (barred by limitation) claim or a live claim and whether the parties have concluded their contract by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection. If the Chief Justice did decide to rule on these optional issues, his decision would be final and cannot be reopened by the tribunal. However, the court urged the Chief Justice to exercise caution in exercising this option and to be guided by the objective of the Act of “expediting the arbitration process with minimum judicial intervention”. The last category of issues which the Chief Justice should not decide included issues of “(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration)” or “(ii) Merits or any claim involved in the arbitration.”

SupremeCourtofIndia_Section11ArbitrationandConciliationAct_appointmentofarbitrator.jpg.jpgThe categorisation of the Court in this case is interesting, especially in relation to the second category, because in a previous case, Shree Ram Mills Ltd. v. Utility Premises (P) Ltd., (2007) 4 SCC 599, the Supreme Court had suggested that the second category of cases, involving the decision of whether the claim is a live claim or not, has to be decided by the court as it is only by deciding this limitation issue that the court can decide whether to constitute a tribunal or not. The Court said: “… the Chief Justice has to record satisfaction that there remains a live issue in between the parties…” and that “where the Chief Justice comes to a finding that there exists a live issue, then naturally this finding would include a finding that the respective claims of the parties have not become barred by limitation.”

In Chloro Controls India Private Ltd v. Severn Trent Water Purification Inc., (2013) 1 SCC 641, a three-judge bench of the Supreme Court said that there is no variance between the Shree Ram Mills Ltd. and Boghara Polyfab Private Limited judgments; both judgments were in line with the law declared in the Patel Engineering Case. Quoting from Shree Ram Mills, the Court clarified that it laid down that “it is only for the purpose of finding out whether the arbitral procedure has to be started that the Chief Justice has to record satisfaction that there remains a live issue in between the parties.

… The Chief Justice only has to record his satisfaction that prima facie the issue has not become dead by the lapse of time or that any party to the agreement has not slept over its rights beyond the time permitted by law to agitate those issues covered by the agreement….”

Thus, “…the Chief Justice may not decide certain issues finally and upon recording satisfaction that prima facie the issue has not become dead even leave it for the Arbitral Tribunal to decide.”

The Court also upheld the categorisation laid down in Boghara Polyfab Private Limited: “We have no reason to differ with the classification carved out in National Insurance Co. as it is very much in conformity with the judgment of the Constitution Bench in SBP.”

The scope of the arbitration agreement

In Arasmeta Captive Power Company Private Limited v. Lafarge India Private Limited, the Supreme Court in December, 2013, reiterated another aspect of the Patel Engineering decision, namely that the Chief Justice should not decide on whether the claim in question is one which comes within the purview of the arbitration clause or not. In 2005, the Supreme Court had said: “It will be appropriate to leave that question to be decided by the arbitral tribunal on taking evidence, along with the merits of the claims involved in the arbitration.”

In 2013, the question was whether the claims raised by the parties fell within the definition of a ‘billing dispute’ and thus, within the scope of the arbitration agreement. The Supreme Court categorically stated that the question fell to be determined by the arbitral tribunal and not the courts.

The Court said, “….the designated Judge… while dealing with an application under Section 11(6) of the Act, on an issue raised with regard to the excepted matters, was not justified in addressing the same on merits whether it is a dispute relating to excepted matters under the agreement in question or not…..The designated Judge has fallen into error by opining that the disputes raised are not “billing disputes”, for the same should have been left to be adjudicated by the learned Arbitrator…”

Thus, the third category of issues (under Boghara) are strictly for the tribunal to decide. With Arasmeta, the Supreme Court has shown that it is prepared to strictly enforce the jurisdictional line (between the court and the tribunal) and not further encroach upon the jurisdiction of the tribunal apart from what is necessary to appoint an arbitrator under Section 11.

(Sindhu Sivakumar is part of the faculty on myLaw.net.)

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Supreme Court of India

The choice-of-seat dilemma and the separability question in Enercon

SindhuSivakumar_DraftingForArbitrationThe previous post discussed the Supreme Court’s views in Enercon (India) v. Enercon GmBH (dated February 14, 2014) on how arbitration clauses ought to be interpreted. In this post, we will look at two other issues related to the arbitration clause – namely, the choice-of-law issues that the vaguely drafted Clause 18 (the arbitration clause) in the Intellectual Property Licence Agreement (“IPLA”) gave rise to, and the discussion on separability that the challenge to the IPLA led to.

On the choice of seat

“18.3 All proceedings in such arbitration shall be conducted in English. The venue of the arbitration proceedings shall be London… The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply.”

It is really difficult to work out what the parties intended when they were drafting this clause. Did they intend for London to be the seat, using the word “venue” as an alternative for “seat”? But if that were the case, why insert the words, “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply”? Was it merely a reference to Part II of the Arbitration and Conciliation Act, 1996, inserted to ensure that an English award is enforceable in India? It is a very real possibility, as many India related foreign-seated arbitration clauses expressly include the application of Part II (and expressly exclude Part I).

The net result of this clause was confusion about what the seat was, whether the seat was different from the curial (that is, procedural) law, and what the law governing the arbitration agreement was.

On this point, we are not entirely in agreement with the reasoning of the Supreme Court. The Supreme Court believed that the parties had made no choice on the seat. They disregarded the language “The venue of the arbitration proceedings shall be London” holding that this sentence only indicated the parties’ choice of a convenient “venue” for their hearings, never mind the fact that there was no indication in the current case that suggested that London would be convenient. The obiter views of Eder J. in the English High Court proceedings in the same case, [2012] EWHC 689 (Comm), illuminate this point.

“London was not a convenient geographical venue for disputes concerning an Indian joint venture; intellectual property in India; an Indian and German company; where the evidence would be located in India and possibly to some extent in Germany. In my judgment, the designation of London therefore had to have some other function for it to be explicable.”

Having decided that the parties had only designated a venue and not a seat in Clause 18.3, the Supreme Court went on to consider the jurisdiction with which the arbitral proceedings had its closest connection – the ‘closest connection’ test is what is generally used by tribunals and courts to determine the seat in the absence of a choice by the parties. The Court cited Dicey and Morris on the Conflict of Laws in this regard.

This is where things get murky. The Court seems to assume that the words, “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply” indicate that the parties have chosen Indian law to govern the arbitration, that is, they have chosen Indian law (including Part I of the Arbitration and Conciliation Act, 1996) as the “curial” or “procedural” law. Having come to the conclusion that the procedural law was Indian law, the Court found that designating London as the seat would lead to an absurdity – as Part I of the Indian Arbitration and Conciliation Act, 1996 cannot apply to a foreign-seated arbitration (following BALCO), and further, English law itself does not allow for the procedural law to be different from the law of the seat. In other words, the designation of London as a seat would render what the Court believed was the parties’ choice of curial law (the words “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply”) redundant.

As far as the proper law of the arbitration agreement was concerned, the Court understood this to be Indian law without too much reasoning on the point, although one can argue that the proper law of the arbitration agreement follows the substantive law of the contract (the NTPC v. Singer argument) and as Indian law was the governing law of the IPLA (Clause 17), the proper law of Clause 18 should also be Indian law.

Having worked out that the curial law, the proper law of the arbitration agreement, and the governing law were all Indian law, the Court held that the seat should also be India, as the arbitration as a whole has its closest connection with India.

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While we agree that the arbitration had its closest connection with India, we are not sure that there was a need to resort to this test in this first place. In other words, we do not entirely agree with the Court’s dismissal of the commonsense understanding of the parties’ designation of London as the “venue” to mean the “seat”, especially in light of the fact that London would not have been a “convenient” geographical venue.

The Court also discussed and distinguished several English judgments that supported the argument that the words, “The venue of the arbitration proceedings shall be London”, indicated the parties’ choice-of-seat.

One very similar case was Shashoua v. Sharma [2009] EWHC 957, where Cooke J. had held that in an ICC arbitration clause that provided that “the venue of arbitration shall be London, United Kingdom”, meant that London was the juridical seat and English law was the curial law.

“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…”  (Para 30)

The Supreme Court believed that this reasoning was not applicable in the Enercon case, as the parties had not designated any supranational body of rules like the ICC Rules to govern the arbitration; instead they had chosen the India’s arbitration statute (Para 118). This reasoning (for distinguishing Enercon from Shashoua) is not entirely convincing.

Another case worth mentioning is Union of India v. McDonnell, [1993] 2 Lloyd’s Rep 48 where, similar to the Enercon clause, the arbitration agreement contained conflicting provisions: “The arbitration shall be conducted in accordance with the procedure provided in the Indian Arbitration Act of 1940 …” and “The seat of the arbitration proceedings shall be London, United Kingdom.” Saville J. held that the reference to the Indian Arbitration Act, 1940, did not have the effect of changing the “seat” designated by the parties. Rather, the phrase was only a reference to the internal conduct of the arbitration. The Supreme Court mentions this case in Para 119, but does not really distinguish it.

The Court also discussed a few other recent English cases on the proper law of the arbitration agreement and the “closest and most real connection” test (we have discussed these at length in a previous post). We won’t spend too much time on all the cases discussed by the Court (Paras 100 to 125) – but it is interesting to note that the Court seems to use the test prescribed in these cases on the proper law of the arbitration agreement – to work out the choice-of-seat.

The assumption that the parties designated Indian law as the curial law is also curious, and there is not enough discussion in the judgment on the possible alternative constructions of the sentence, “The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply”. It can be read as referring simply to Part II of the Indian 1996 Act, that is, the enforcement provisions, which is something international arbitration clauses often have to clarify.

On separability

One of the issues in dispute was whether the IPLA was a valid and enforceable contract. Enercon India argued that the IPLA had not been executed properly and on this basis, argued that the arbitration agreement, which was contained in Clause 18 of the IPLA, was also not valid or enforceable.

The Supreme Court dismissed this argument and rightly so. The Court discussed how Enercon India’s argument was not that the arbitration agreement was “null and void, inoperative and incapable of being performed” (Section 45) but that “ the matter cannot be referred to arbitration as the IPLA, containing the arbitration clause/agreement, is not a concluded contract.” (Para 75)

FUND-Legal-Writing-and-Professional-Communication-PLThe logical leap Enercon Indian made in making that submission was incorrect as the arbitration agreement is a separate agreement (‘separate’ from the underlying contract) that is not affected by the lack of validity of the underlying contract. Here, there was absolutely no question that the arbitration agreement alone (that is, Clause 18) was agreed to by the parties (Para 76). Accordingly, the arbitration agreement in this case was valid, and unaffected by any ruling to the contrary in relation to the IPLA.

Since the validity of the IPLA was a substantive issue in dispute and formed part of the parties’ reference to arbitration, the Court left this issue to be decided by the arbitral tribunal in accordance with this arbitration agreement.

Drafting lessons

The drafting lessons from Enercon are fairly simple and easy to implement, but, as this dispute reflects, it is very important to get them right.

– One, specify the seat. And use the word, “seat”. This case, as well as the Shashoua case, highlights the confusion that can be caused by calling the “seat” by some other name.

– Secondly, think through the arbitral process that you spell out in your agreement. What is the appointment mechanism? Who appoints the chairman? Ensure that you don’t have an unworkable mechanism like under Clause 18.1 in this case — you don’t want to have to depend on a court to make sense of your drafting.

(Sindhu Sivakumar is part of the faculty on myLaw.net.)

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Enercon Case: Supreme Court breathes life into ‘unworkable’ arbitration clause

SindhuSivakumar_DraftingForArbitrationThe Supreme Court’s decision in Enercon (India) v. Enercon GmBH (dated February 14, 2014) is pretty significant for cross-border arbitration. While it does not drastically change the law the way BALCO for example did, it discusses (at length – the judgment is forty-odd pages) several issues of drafting, interpretation, and choice-of-law that we do not have too much jurisprudence on. In this post, we will go over the issues related to the drafting of the arbitration clause.

But first, the facts

The dispute between Enercon (India) and Enercon GmBH was a long-standing one. It started in 2008 and involved a number of courts along the way – the trial and appellate courts of Daman, the Bombay High Court, and the English High Court. We won’t get into the proceedings at length here; suffice to know that all these proceedings were procedural in nature, and did not involve a substantive decision on merits. Those keen to know more can read Paras 3 to 31 of the Supreme Court judgment.

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The dispute was over a wind energy joint venture in India between a German and an Indian party. The German entity alleged that royalties and damages amounting to approximately Euros 89 million were due to it under an agreement that the parties had allegedly executed, the Intellectual Property Licence Agreement (“IPLA”).

The IPLA, in clause 18, was subject to an arbitration agreement:

“18.1 All disputes, controversies or differences which may arise between the Parties in respect of this Agreement including without limitation to the validity, interpretation, construction, performance and enforcement or alleged breach of this Agreement … any Party may refer … for resolution to an arbitral tribunal ….”

The arbitration clause (which we haven’t reproduced in full here – we’ll set them out in the context of the different points we will discuss) raised a number of issues that came up before the Supreme Court. There were arguments that the clause was invalid, and that even if it was valid, it was unworkable. There were also several arguments about the choice-of-laws of the parties, as the choice-of-law language in the clause was very poorly drafted.

The unworkability of the arbitration clause

In a previous post we had discussed how courts sometimes construe arbitration clauses in a narrow and semantic manner, drawing distinctions between references to arbitration containing the words “all disputes arising out of or in connection with this agreement” on the one hand and “all disputes under this agreement” on the other. This approach, you may remember from reading that post, was severely criticised and rejected in England for being antithetical to the pro-arbitration policy in place in most modern legal systems. The pro-arbitration policy requires courts to enforce arbitration clauses whenever possible – interpret them to ‘make them work’.

SupremeCourtofIndia_ProArbitrationPolicy.jpgThe Indian Supreme Court, in the Enercon case, adopted a similar stance and said that interpretation should be approached in a commercial manner, adopting “the attitude of a reasonable business person”, and not in a legalistic or semantic manner. In other words, if the clause indicates a clear intention to arbitrate, then that intention should not be voided simply because the drafters did not articulate this intention well.

In this case, a part of clause 18, the part dealing with arbitrator appointments, was drafted in an unworkable manner. It read:

“… any Party may refer dispute(s), controversy(ies) or difference(s) for resolution to an arbitral tribunal to consist of three (3) arbitrators, of whom one will be appointed by each of the Licensor [Enercon] and the Licensee [EIL] and the arbitrator appointed by Licensor shall also act as the presiding arbitrator.”

On a plain reading, this language makes no sense whatsoever. It starts off by saying that the tribunal will “consist of three (3) arbitrators”. In the very next breath however, it talks about the licensor and the licensee each appointing one arbitrator and for the licensor’s arbitrator to be the presiding arbitrator. This would mean that the tribunal would have only two members.

ADV-Drafting-And-Reviewing-Commecrial-Contracts-PLThe Court was however, prepared to give effect to this clause. It did so by essentially severing the problematic words, “and the arbitrator appointed by Licensor shall also act as the presiding arbitrator” from the clause, and allowing the default mechanism set out in Section 10 of the Arbitration and Conciliation Act, 1996 — that of having the two party-appointed arbitrators choose the presiding arbitrator or the chairman — to operate in its place.

The Supreme Court has taken a very positive stance in enforcing such a difficultly worded arbitration clause. That the court is committed to a pro-arbitration policy that was set in motion by BALCO is a source of comfort.

In the next post, we will look at some of the choice-of-law questions that clause 18 threw up, as well as the Supreme Court’s discussion on separability of the arbitration clause.

(Sindu Sivakumar is part of the faculty at myLaw.net.)