Enforcement of Foreign Award, Public Policy: Penn Racquet

A recent post on the Kluwer Arbitartion Blog whilst discussing the recent judgment of the Delhi High Court in Penn Racquet Sports v. Mayor International Limited has sought to argue that the Delhi High Court has taken a contrary approach (according to the post, rightly so) to that of the supreme Court in ONGC v. Saw Pipes Limited ((2003)5 SCC 705). The Kluwer post argues that in Penn Racquet the court has attempted to assign a narrow meaning to the term “Public Policy” as opposed to a wider meaning assigned to the same by the Supreme Court in Saw Pipes. In this post I shall attempt to demonstrate that the abovementioned interpretation of the ruling in Penn Racquet is incorrect.

Before discussing the ruling of the Delhi High Court on the term “public policy”, it would be appropriate to discuss the relevant facts and the contentions of the parties. Penn Racquet Sports (“decree holder”), a company incorporated in the United States had entered into a Trademark License Agreement (“TLA”) with Mayor International Limited (“judgment debtor”), a Company incorporated in India, whereunder the decree holder had granted the judgment debtor license to use the trademark “Penn” for use in certain territories and for certain products. In consideration of the license the judgment debtor agreed to pay an annual royalty to the decree holder. The dispute arose when the judgment debtor refused to pay the annual royalty on the ground that the decree holder had breached the contract by granting a similar license to Nebus Loyalty Limited (“Nebus”). Subsequently the dispute was referred to arbitration and thereafter the decree holder obtained an award in his favour. It is for the enforcement of this award that the decree holder preferred the present enforcement application u/s 47 of the Arbitration and Conciliation Act (“Act”). Needless to state, the judgment debtor challenged the enforcement of the award u/s 48 of the Act.

The judgment debtor contented before the Delhi High Court that the impugned award was against public policy as (i) the award was against the express terms of the contract which rendered it patently illegal and (ii) the arbitral tribunal refused to entertain the counter claim of the judgment debtor, denying it an opportunity to present its case. The judgment debtor relied on Venture Global Engineering v. Satyam Computer Services Limited (AIR 2008 SC 1061) to contend that the foreign award is subject to challenge u/s 34 of the Act, and then relied on Saw Pipes to contend that since the award was patently illegal it could not be enforced. Contrarily, the decree holder contented that while enforcing an award u/s 47-49 of the Act, the court is not mandated to adjudicate on the merits of the dispute. The decree holder further contended that the law laid down in Saw Pipes is only applicable to domestic awards and that the term “Public Policy” has a different connotation u/s 48(2)(b) to that in S. 34(2)(b)(ii) of the Act.

The Delhi High Court upholding the contention(s) of the decree holder, held that the term “public policy” in S. 48(2)(b) of the Act carries a narrower meaning when compared to the meaning assigned to the same term u/s 34(2)(b)(ii) of the Act. The court relied on the Supreme Court decision in Furest Day Lawson v. Jindal Exports (AIR 2001 SC 2293) and its own decision in Jindal Exports v. Furest Day Lawson to hold that a narrow meaning must be given to the term “public policy” u/s 48(2)(b) and only when the most “basic notions of morality and justice” are violated should the court refuse the enforcement of the foreign award. Having drawn a distinction between s. 48(2)(b) and s. 34(2)(b)(ii), as far the tem “public policy” is concerned, the court further seems to have agreed that the ratio of Venture Global was not applicable to the present case as the substantive law governing the contract was not Indian Law (arguably suggesting an implied exclusion of Part I of the Act).             

On a close scrutiny the Delhi High Court’s judgment in Penn Racquet may arguably be in conflict with the ruling in Venture Global, wherein the Supreme Court had held that there is no distinction between s. 34 and s. 48. However, it is incorrect to argue that it tried to assign a narrow meaning to the term “public policy” u/s 34 (which would be the natural conclusion, if one was to argue that the Delhi High Court deviated from the ruling in Saw Pipes). In essence the Delhi High Court never went into scope and ambit of the term “Public Policy” u/s 34 and rightly so. On the contrary, the Court seems to have followed Saw Pipes. In Saw Pipes the appellant had argued that the narrow meaning assigned to the term “public policy” in Renusagar was in context to the fact that the question involved in that case was with regard to the execution of the award which had attained finality. It was further argued that the scheme of S. 34 which deals with setting aside of arbitral award and S. 48 which deals with enforcement of arbitral award are not identical (para. 20). The Supreme Court in Saw Pipes responded to the above argument in the following manner:

“The aforesaid submission of the learned senior counsel requires to be accepted. From the judgments discussed above, it can be held that the term 'public policy of India' is required to be interpreted in the context of the jurisdiction of the Court where the validity of award is challenged before it becomes final and executable. The concept of enforcement of the award after it becomes final is different and the jurisdiction of the Court at that stage could be limited. Similar is the position with regard to the execution of a decree. It is settled law as well as it is provided under Code of Civil Procedure that once the decree has attained finality, in an execution proceeding, it may be challenged only on limited grounds such as the decree being without jurisdiction or nullity. But in a case where the judgment and decree is challenged before the Appellate Court or the Court exercising revisional jurisdiction, the jurisdiction of such Court would be wider.” (para. 22)(emphasis mine) 

In conclusion it is submitted that Penn Racquet does not in essence deviate from the trend that has been pursued by Indian Courts on previous occasions in relation to challenge or enforcement of awards in general and the term “public policy” in particular.

S. 11 of the Arbitration Act, 1996: Is the Law Finally Clear!

S. 11 of the Arbitration and Conciliation Act, 1996 (Hereinafter “the Act”) has given rise to a great deal of controversy. There is catena of decisions of the Supreme Court wherein the Apex Court has examined the nature and scope of the enquiry and the jurisdiction of the Chief Justice or his designate while dealing with petitions under Section 11 of the Act. In Alva Aluminium Ltd., Bangkok v. Gabriel India Limited (16.11.2010), the Supreme Court has once again reiterated the law on this subject. The Court in ALVA cited with approval the judgment of the Supreme Court in National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (2009(1) SCC 267) wherein the Apex Court had categorized the issue(s) that may arise for consideration before the Chief Justice or his designate in a petition under Section 11 of the Act. In Boghara Polyfab the Court had stated the following proposition of law:

“1. The issues (first category) which the Chief Justice/his designate will have to decide are:

(a) Whether the party making the application has approached the appropriate High Court.

(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.

2. The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:

(a) Whether the claim is a dead (long-barred) claim or a live claim.

(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.

3. The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:

(a) 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).

(b) Merits or any claim involved in the arbitration.”

The other decisions of the Supreme Court which have enunciated the law on this subject are mentioned hereunder:    

• A.P.Tourism Development Corporation v. Pampa Hotels Ltd., 2010 (5) SCC 425
• SBP. v. Patel Engineering Ltd., AIR 2006 SC 540
• Shivnath Rai v. Gaffar, AIR 2008 SC 1906

   

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.

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.

Arbitration Act Extends to Civil Disputes: H Srinivas Pai

In H Srinivas Pai v. H.V.Pai, (dated 9.07.2010) the Supreme Court has observed that the Arbitration and Conciliation Act, 1996 extends to "civil disputes" and is not limited merely to "commercial disputes". Here is the relevant extract from the order:

"There is absolutely no basis for the observation of the High Court that Arbitration and Conciliation Act, 1996 will not apply to 'civil disputes', but will apply only to 'commercial disputes' or international commercial disputes. The Act applies to domestic arbitration's, international commercial arbitration's and conciliation's. The applicability of the Act does not depend upon the dispute being a commercial dispute. Reference to arbitration and arbitability depends upon the existence of an arbitration agreement, and not upon the question whether it is a civil dispute or commercial dispute. There can be arbitration agreements in non-commercial civil disputes also."- para. 5

Amendments required in Indian Arbitration and Conciliation Act

Government’s proposal to amend the Arbitration and Conciliation Act comes out at a time when Arbitration laws across the globe (Australia, UK, Eastern Europe) are experiencing an overhaul. This comes at a time when our law has seen decisions like the Bhatia’s and the Saw pipes which were retrogressive, and made the law look very different from what it reflected back in 1996. The amendments have been proposed to the Act in almost all the crucial areas right from its application to interventions by the courts. In this post I would like to point out the need of understanding two concepts in the realm of ADR in India, in the way they are so understood internationally.

The proposed amendment to Section 2(2) of the Act inserts the word ‘only’ into the Section. It reads “This part shall apply only where the place of Arbitration is in India”. The amendment is aimed to cease the discussion as to the applicability of Part I to arbitrations which happen outside India, but it does leave a scope of mischief by using the word place instead of seat. Most of the legal regimes in the context of Arbitration use the words place and seat interchangeably. Even the UNCITRAL Model Law seems to use the word place. The difference between venue and seat of arbitration is well recognized in International Commercial Arbitration and it is the seat to which a substantive legal significance is attached, the venue being a mere locale where proceedings may be carried on account of convenience. The Act also lacks provisions which may help to determine as to where an award is made (in cases where it is signed by arbitrators in respective countries, telephone, emails etc.) so it does not endeavor to address the difference between venue and seat. This difference may not be well understood in the scheme of the Act and may cause, or restrict the application of the Act as lex loci arbitri in certain cases.

Also, the concept of mediation and conciliation is understood interchangeably across legal regimes. Part III of the Act deals with conciliation but does not refer to mediation. After the amendment to S.89 of the CPC, courts can refer certain disputes to mediation where it appears that there exists an element of a settlement which may be acceptable to the parties. Extending the provisions of Part III of the Act to mediation referred to by a court would address different issues which are encountered in court annexed mediations.