Monday, January 17, 2011

Indowind Energy v. Wescare: The Unintended Fallout

Justice Raveendran's decision, in Indowind Energy v. Wescare (I) Ltd. & Anr., AIR 2010 SC 1793, is one which is, without doubt, a well-reasoned opinion in respect of Section 7 of the Arbitration and Conciliation Act, 1996, so long as the frame of reference is the facts of the case itself. From a practitioner's perspective, however, the decision has had some unintended consequences, and is today used extensively by Respondents in Section 11 proceedings under the Arbitration Act seeking to question the existence of an arbitration agreement.

The decision in Indowind states - "It is not in dispute that there can be appointment of an arbitrator if there was any dispute between Wescare and Subuthi. The question is when Indowind is not a signatory to the agreement dated 24.2.2006, whether it can be considered to be a 'party' to the arbitration agreement. In the absence of any document signed by the parties as contemplated under Clause (a) of Sub-section (4) of Section 7, and in the absence of existence of an arbitration agreement as contemplated in Clauses (b) or (c) of Sub-section (4) of Section 7 and in the absence of a contract which incorporates the arbitration agreement by reference as contemplated under Sub-section (5) of Section 7, the inescapable conclusion is that Indowind is not a party to the arbitration agreement. In the absence of an arbitration agreement between Wescare and Indowind, no claim against Indowind or no dispute with Indowind can be the subject- matter of reference to an arbitrator. This is evident from a plain, simple and normal reading of Section 7 of the Act."

This insistence on a signature becomes problematic in a different fact situation. Take, for instance, a scenario where party X enters into an agreement with a Consortium consisting of party A and B. Even the agreement states that A is entering into the Agreement on behalf of the Consortium, with A and B being jointly and severally liable to the extent of their interest in the Consortium. The Consortium is, however, not a separate legal entity in law. In such a scenario, given the language in the decision of Indowind, party B, arrayed as Respondent in a Section 11 petition, may take the objection that it was not a signatory to the agreement, and hence was not a "party" to the arbitration agreement. Commercially, this becomes even more problematic for party X when party A (the signatory) is a foreign party and party B is an Indian party, as X, to actually benefit from the litigation, has only two options:-

i. File a parallel suit against B to the extent of B's liability.

ii. In the event of a favourable award against A, go to A's country of incorporation and attempt to enforce the award in entirety, leaving it to A and B to apportion liability.

In my view, the situation becomes worse if B, for instance, has a hand in the breach of the agreement, as opposed to a situation where A is the Operator and the only person responsible for taking steps under the agreement with X. In this situation, even A has the opportunity to wriggle out of arbitration, by using the ratio in Sukanya Holdings v. Jayesh H. Pandya, (2003) 5 SCC 531, wherein it is stated that a cause of action cannot be bifurcated such that part of it is decided by an arbitral tribunal, and part of it is decided in a civil suit. While Sukanya Holdings was in the context of an application made under Section 8 of the Arbitration and Conciliation Act, 1996, some may argue that the principal can be extrapolated in deciding the arbitrability of a dispute in proceedings under Section 11 of the Arbitration and Conciliation Act.

I feel, therefore, that the principle enunciated in Indowind needs to be clarified and extended to the effect that a non-signatory to an arbitration agreement is deemed to be a signatory where, either expressly or impliedly, the party actually signing the agreement is representing such other party (either as agent or otherwise) for the purpose of the contract.

Friday, January 14, 2011

Contractually Restricting Interim Reliefs

Certainty, as to the result is the hallmark of any commercial document. For e.g., in the event of A the result would be B. Perhaps this is one of the prime reasons why today we see elaborate contracts, running into several clauses. Some of the terms incorporated in these contracts, are matters which traditionally vests within the discretionary domain of the judiciary (albeit a few statutory guidelines). For e.g., grant of interim/equitable relief, specific performance etc. The question therefore is how far are these terms valid in law or in other words will these terms be given effect to by the courts. In this post and subsequent posts I will make an attempt to examine this question.

 One such clause was called into question before the Bombay High Court in BCCI v. KPH Dream CricketPrivate Limited (15.12.2010). The clause in question was Clause 21.6 of the franchisee agreement which reads as under:

 “ BCCIIPL (but not the Franchisee) shall have the right to bring an action seeking injunctive or other equitable relief before the Courts of Mumbai if it reasonably believes that damages may not be an adequate remedy for the breach by the Franchisee of this Agreement."

The clause stipulates that the franchisee will have no right to bring an action seeking interim injunction even if it reasonably believes that damages may not be an adequate relief. It is to be noted that the dispute between the parties was to be settled arbitration. So, what was effectively sought to be restrained through the aforementioned clause was the franchise's right to approach the court under S. 9 of the Arbitration and Conciliation Act, 1996 (at the very least that was sought to be restrained). The Bombay High Court refused to give effect to the clause 21.6 and stayed the termination under S. 9 of the Act and held as under:

However, in our view, it would be wholly destructive of the underlying principles of Section 28 of the Contract Act to allow a party to assert that the effect of a contractual term is to prohibit access to the Court in a petition under Section 9 of the Arbitration and Conciliation Act 1996 for obtaining suitable injunctive relief even if, damages were not to provide an adequate recompense. The Court would not readily adopt such a construction of Clause 21.6 and indeed if it were to do so, there would be serious questions in regard to validity of Clause 21.6. A construction must therefore be placed on Clause 21.6 which makes business sense. After all, the franchise agreement reflects a business understanding between parties to a commercial document. When the Court construes a commercial document, the effort must be to give business efficacy to a commercial understanding between the parties. We decline to read Clause 21.6 as enabling BCCI to successfully set up the defence that the remedy of injunctive relief under Section 9 is barred even if the franchisee is able to establish that damages would not provide an adequate remedy”- para. 27

It is sufficiently clear that the Bomaby High Court refused to give effect to Clause 21.6. However, it is respectfully submitted that the reasoning of the court is not entirely clear as one cannot reasonably conclude whether such as clause is:

(a) invalid, as it falls foul of section 28 of the Indian Contract Act, 1872 or;

(b) It is not invalid in law, but in light of the commercial understanding between the parties it does not mean what the BCCI argues it to mean i.e. the franchisee is barred from approaching the court under S. 9 of the Arbitration Act, 1996.

If the reasoning of the court is based on (a) then such a clause would be invalid in all circumstances. However if the reasoning of the court is based on (b) then such a clause would be valid if pressing commercial reasons are shown in this behalf. In my view, the correct reasoning is one based on clause (a) i.e. Clause 21.6 and all such clauses are invalid in law.

Tuesday, January 4, 2011

Who is in Control! Is it mere shareholding that matters?

The hypothesis that a shareholder who holds a large percentage of shares in a corporation is actually in control of that corporation has been a subject matter of great discussion. The fundamental jurisprudence of company law is that a company is a separate legal entity i.e. it is distinct from its members. Further, the ownership and control does not ordinarily vest in the same hands. Whereas , it is the shareholders who  are technically the so called "owners" of the company, it is ultimately the board of directors who in essence control the day to day affairs of the company. The reasoning for the above conclusions can be deduced by examining several provisions of the Companies Act and judicial pronouncements related thereto [ which, I shall explore in a later post].

However, in the backdrop of the above, the Bombay High Court has made an interesting observation in BCCI v. Jaipur IPL Cricket Pvt. Ltd. ( Arbitartion Appeal No. 30472 of 2010). Here is the relevant extract:

 "As I observed in my judgment dated 8.3.2010 in KPH Dream Cricket Pvt. Ltd. versus Board of Control for Cricket in India, Arbitration Petition (Lodging) No.1303 of 2010, control is a matter of substance and not of form. A person can hold shares without any control over them or the voting rights in respect thereof. Conversely, a person can exercise control over shares, including the voting rights in respect thereof without being a registered holder thereof. The question therefore is whether the said owners in fact controlled the shares of the respondent at all material time (emphasis mine)."- Para. 32 

Thus it is safe to say that as per the above observation of the Bombay High Court, in essence who is in control of the company is a question of fact. I shall explore the correctness of this finding in a subsequent post.