Indian Supreme Court upholds 'unworkable' arbitration clause while ensuring that supervisory jurisdiction over the arbitration only lies with the Indian Courts

Adding to the welcome suite of recent pro-arbitration decisions from the Indian judiciary, the Indian Supreme Court in Enercon (India) Ltd and Ors v Enercon Gmbh and Anr,¹ applied the principles of severability of the arbitration clause from the underlying contract and referred a dispute to arbitration despite some flaws in the drafting of the arbitration clause.

On the facts, the Indian Supreme Court retained the Indian judiciary's supervisory jurisdiction over the dispute by holding that the seat of arbitration was in India, despite London being chosen as the 'venue' of the arbitration. In making this determination, the Court was heavily swayed by the fact that the laws specifically chosen by the parties in the contract to apply to different aspects of the dispute were Indian laws, and that besides being designated as the 'venue' there was no other factor connecting the dispute to London. On this basis the court held that the English courts did not have concurrent jurisdiction over the dispute.

Background

The facts giving rise to the various proceedings in Enercon (India) Ltd and Ors v Enercon Gmbh and Anr. are somewhat complex. The dispute between the parties is a long-standing one and began in 2008. Enercon (India) Ltd (Enercon India) is a joint venture company that was set up pursuant to an agreement between the members of the Mehra family (Appellants 2 and 3 in the case) and Enercon Gmbh (Enercon Germany).

A dispute arose around the non-delivery of supplies - allegedly governed by an Intellectual Property Licence Agreement (the IPLA). Enercon India and the Mehra family contended that the IPLA was not concluded and did not bind the parties. Further, as the arbitration clause in question was in the IPLA, they also contended that there was no binding arbitration agreement.

The relevant aspects of the governing law and the arbitration clause in dispute are:

• the governing law of the IPLA was Indian law;
• the arbitration clause covered all disputes, controversies or difference including the validity, interpretation, construction, performance and enforcement of the IPLA,
• the arbitral tribunal was to consist of 3 arbitrators of whom one was to be appointed by each of the two parties to the IPLA and the arbitrator appointed by Enercon Germany would act as the presiding arbitrator- the question of how the third arbitrator would be appointed was not dealt with by the arbitration clause,
• the venue of the arbitration was London, and
• the provisions of the Indian Arbitration Act were to apply. 

Parallel Court Proceedings

There were a series of parallel proceedings initiated both in India and in England seeking declarations on the validity of the arbitration clause and asking for anti-suit injunctions. Of relevance to the present discussion, Enercon India commenced proceedings before the Bombay High Court and the Daman Trial Court asking for a declaration that the IPLA was not properly concluded and that there was no valid arbitration agreement between the parties. Enercon Germany in response filed applications under section 45 of the Indian Arbitration Act asking the court to refer the dispute to arbitration. The matter was subsequently appealed to the Bombay High Court and then to the Supreme Court.

Enercon Germany, simultaneously, filed an application before the English High Court asking it to constitute an arbitration tribunal under the provisions of the IPLA. The English High Court stayed its proceedings in light of the pending proceedings in India and refused an application for an anti-suit injunction based on an undertaking from Enercon India that it would ensure that the Bombay High Court and subsequently the Supreme Court proceedings would be completed expeditiously.

Enercon India and the Mehra family appealed up to the Supreme Court where they requested the court to hold that there was no valid arbitration agreement in place.

Issues before the Indian Supreme Court

1. Whether the Parties can refuse to arbitrate on the grounds that there was no validly concluded IPLA? Further, whether the Court decides this issue or if it is an issue that is to be left for the Arbitral Tribunal to decide?
2. Assuming that there is an arbitration agreement in place, whether the arbitration clause is vague and 'unworkable'?
3. Assuming that the arbitration clause is 'workable' whether the seat of arbitration is in London or India?
4. Assuming that the seat is India, whether the English Courts would have concurrent jurisdiction as the venue of arbitration is in London?

Decision of the Indian Supreme Court

1.   Arbitration Agreement is valid and existing

The Supreme Court started out by stating that the legislative mandate under section 45 of the Indian Arbitration Act only allowed the court to decline referring a dispute to arbitration if the agreement was found to be "null and void, inoperative or incapable of being performed". A party is required to contend and prove that one of these infirmities exist and the mere allegation that the underlying contract containing the arbitration clause (here the IPLA) was not properly concluded would not be enough to fall within the parameters set out under section 45 of the Indian Arbitration Act. The Supreme Court held that the signing of the IPLA by the parties together with evidence of past dealing – all of which were subject to arbitration – was enough for the court to arrive at a prima facie conclusion that the parties intended to arbitrate and on that basis refer the parties to arbitration.

The Supreme Court supported its above conclusion by asserting that parties cannot be permitted to avoid arbitration without satisfying the court that it would be just and in the interest of all the parties not to proceed with arbitration. The Court also considered the widely worded arbitration clause where all disputes (including those with regard to the validity of the IPLA) were to be referred to arbitration. The Court reiterated the concept of separability of the arbitration agreement and held that an arbitral tribunal had jurisdiction to consider claims even where there is a dispute as to the validity of the underlying contract. The Supreme Court went on to hold that in the present case, the issue as to whether the IPLA was properly concluded would be one for the Arbitral Tribunal to decide.

2.   Arbitration Agreement is not 'unworkable'

The Supreme Court held that although there were some errors in the drafting of the clause – such as the clause's failure to specify the procedure for appointment of a third arbitrator – the clause was not 'unworkable' or pathological. The Supreme Court held that courts are required to adopt a pragmatic approach and not a pedantic or technical approach while interpreting or construing arbitration clauses and must try to give effect to the intention of the parties to arbitrate – where this is clear. Therefore, when faced with a seemingly unworkable arbitration clause, it is the courts' duty to make the same workable within the limits permissible under the law. On the facts, the court interpreted the arbitration clause from the point of view of a 'reasonable business person'. The Court held that the arbitration clause in the IPLA was missing a line to the effect that the two arbitrators appointed by the parties shall appoint the third arbitrator. The Court felt that this omission was so obvious that the court was entitled to legitimately supply the missing line in the clause. In the interests of time however the Supreme Court appointed the third arbitrator itself, as the parties had already appointed an arbitrator each.

3.   Seat of arbitration is India

The Supreme Court relied heavily on the ratio of the case of Naviera Amazonica Peruana S.A. v Compania Internacional De Seguros Del Peru² and applied the closest and intimate connection test to determine the seat of arbitration.

The Supreme Court held that Indian law was chosen as the law applicable to all aspects of the agreement and the arbitration; i.e. the law governing the contract, the law governing the arbitration agreement and the procedural law of the arbitration were all Indian law. The court started with the presumption (based on various English cases) that given the parties' choice of Indian law particularly for the conduct of the arbitration,  the parties are not likely to have intended to have fixed the seat of arbitration in London. The Court was willing to consider displacing this presumption – it indicated that the threshold to displace this presumption could be quite low – a mere choice of a transnational set of arbitration rules could be sufficient to consider a 'venue' as being a 'seat'.  However it found no other connecting factor in favor of London. On that basis, the court held that the 'seat' was India and London was merely chosen by the parties as a venue for the conduct of the hearings.

The Supreme Court also relied on the 2012 BALCO decision support its conclusion. It held that since the parties has specifically applied portions from Part I of the Indian Arbitration Act – which, in the post BALCO context was only effective where the seat of arbitration was India – the parties must have intended for the seat to be in India.

4.   English Courts do not have concurrent supervisory jurisdiction over the arbitration

The Bombay High Court had concluded that although the seat of arbitration was in India, the English courts would have concurrent jurisdiction over the dispute as the venue chosen was London. The Supreme Court disagreed with this finding and held that the overarching aim of arbitration is to enable the parties to resolve the disputes speedily, economically and finally and there are several difficulties that can be caused by courts in two countries exercising concurrent jurisdiction over the same subject matter. The court held that (consistent with the law in most arbitration friendly jurisdictions) once the seat of arbitration has been fixed as India, then it is the Indian courts that would have the exclusive jurisdiction to exercise supervisory powers over the arbitration.

Analysis

The decision to uphold a poorly drafted arbitration clause is another welcome indicator of the Supreme Court's willingness to uphold the intention of the parties to arbitrate, despite irregularities in the main contract.

There are, of course, some drafting lessons to be learnt from the Enercon case. These are fairly simple but as this dispute demonstrates, the time spent in getting the drafting right will invariably be lesser than the time spent in dis-entangling parties from the complexities created due to poorly drafted clauses.

1. Always specify the seat in the arbitration clause and use the word "seat" to avoid any confusion.
2. Specify the law governing the arbitration agreement separately or at least state that the law governing the arbitration agreement is the same as the substantive law of the contract if this is the intention.
3. Carefully think of the arbitral mechanism you choose to adopt in your contract as regards the appointment of arbitrators. Ensure that this is clearly set out or set out by reference to an established set of rules or an arbitration law. 

For further information, please contact Nicholas Peacock, Partner, Kritika Venugopal, Associate, Vikas Mahendra, Associate, or your usual Herbert Smith Freehills contact.