This article has been written by Mridul Tewari, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).

Introduction

Often the arbitration clause between the parties is not drafted properly, and it misses out on the important details.  Thus, in case of any dispute, the parties are faced with many complexities such as where is the seat of arbitration, which laws will govern the arbitration, etc. Sometimes it may also happen that the arbitration clause may be ‘unworkable’ in nature. Issues may also arise as to what will be the seat of the arbitration. These are among the various issues that parties in case of International Commercial Arbitration may face if the arbitration clause is not drafted properly. 

The Supreme Court was faced with such issues in the case of Enercon (India) Ltd And Ors. vs Enercon Gmbh. And Anr. (2014)i. The Court in its judgment upheld the “unworkable” arbitration clause between the parties and also ensured the supervisory jurisdiction with Indian Courts. This judgment has been hailed by many as it promotes arbitration. 

In this article, the author will make an effort to analyze the judgment of the Supreme Court in Enercon (India) Ltd And Ors vs Enercon Gmbh And Anr (2014) and talk about  how the Court upheld an “unworkable” arbitration clause and also ensured that the supervisory jurisdiction lies with the courts in India.

Facts and background of the case

The parties entered into an Intellectual Property License Agreement (henceforth referred to as IPLA) which had an arbitration clause. It is important to note that though the arbitration clause specified that the venue of the arbitration would be in London, it did not specify the seat of arbitration and neither did any other clause of the agreement 

Consequently, in 2008, disputes arose between the parties and they referred the disputes to arbitration. Both the parties appointed their nominee arbitrators but the arbitrators declared that since the arbitration clause in the IPLA Clause is “unworkable”, they were unable to appoint a chair. 

Both the parties filed suits against each other in courts in India as well as in England, seeking declarations on the validity of the arbitration clause and asking for anti-suit injunctions. 

The appellants contended that there was no valid agreement between the parties since the IPLA was not properly concluded whereas the respondents by way of an application under Section 45 of the Arbitration and Conciliation Act, 1996 asked the court to refer the matter to arbitration. In the due course, the matter was appealed to the High Court of Bombay and then to the Supreme Court of India.

At the same time, the respondents also went to the English Court and asked it to constitute an arbitral tribunal as per the IPLA agreement. However, in light of the matter pending before the Indian Courts, the English Court refused the application. 

Finally, the appellants in an appeal to the Apex Court requested the court to hold that there was no valid arbitration agreement between the parties. 

Issues 

The Court in the present case was faced with the following issues:

  • Whether there is a properly concluded contract between the parties?
  • Whether the parties can refuse to arbitrate on grounds that there is no properly concluded contract between them?
  • Assuming the contract between the parties is properly concluded, is the arbitration clause in it “unworkable”?
  • Where would the seat of arbitration be?
  • Assuming the seat of arbitration to be in India, whether English Courts will have concurrent jurisdiction?

Contentions of the parties

Appellants 

  • Since the agreement between the parties is not properly concluded, there can be no arbitration agreement between them.
  • Parties cannot be referred to arbitration under Section 45 of the Indian Arbitration Act since the arbitration clause in IPLA is incapable of being performed. 
  • For deciding the seat of the arbitration, the Court will have to select the territory that has a close nexus with the arbitration.
  • India should be the seat of arbitration. 

Respondents

  • Court only needs to look into the intent of parties to arbitrate.
  • Since all the essentials of a valid arbitration agreement are present, any error in drafting will not matter.
  • Court, by correcting the error of omission in the arbitration agreement, should cure the lacuna.
  • England should be the seat of arbitration.

Judgment

arbitration

Properly concluded arbitration agreement between the parties

The Supreme Court held that under Section 45 of the Arbitration and Conciliation Act, 1996 it only has to look whether an arbitration agreement is “null and void, inoperative or incapable of being performed.” In the present case it is not so, and thus the Court can refer the parties to arbitration. It also stated that in this case the parties cannot avoid arbitration.

Arbitration clause is “workable”

The Supreme Court held that while interpreting an arbitration clause, it has to adopt a practical approach and not a very rigid one and think like a “reasonable business person.” It was held that a seemingly unworkable arbitration clause should not get frustrated and it is the court’s duty to make such a clause workable by making necessary corrections. 

Intent of parties to arbitrate must be looked into

The Apex Court applied the principle of separability of the arbitration clause as provided in section 16 of the Arbitration and Conciliation Act, 1996. Applying this principle it held that the intent of parties to arbitrate must be looked into.

India would be the seat

The Court held that the seat of the arbitration would be in India, since the Indian laws are governing the agreement. Further, London is only chosen as a venue of arbitration by the parties for their ease and convenience and is not the seat of arbitration.

Supervisory jurisdiction of indian courts

Finally, the Supreme Court said that the Indian Court will have supervisory jurisdiction over the arbitration as India is the seat of arbitration. Thus, it overruled the conclusion of the High Court of Bombay which said that though the seat was in India, courts in London will have supervisory jurisdiction as London is the venue. 

Conclusion

Thus, we saw how the Supreme Court upheld an “unworkable” arbitration clause by applying a practical approach and also upheld the supervisory jurisdiction of Indian Courts. We also saw that while interpreting such complex and incomplete arbitration clauses, the Court must not go by what is written but look into the real intent of the parties. 

It is very clear from the above case that the importance of a well drafted and fool-proof arbitration clause cannot be underestimated. Parties must be very careful while drafting arbitration agreements so as to avoid such problems and anomalies in the future. Seat and venue must be clearly specified in the arbitration clause in order to avoid any ambiguity. Also, the laws governing the arbitration must be mentioned. 

References


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