Introduction
Recently, Supreme Court of India in Enercon India vs Enercon GmBH1 revisited the laws which are largely applicable to the arbitration agreement. In this case, the arbitration agreement contained the following clause:
“A proceedings in such arbitration shall be conducted in English. The venue of the arbitration proceedings shall be in London. The arbitrators may (but shall not be obliged to) award costs and reasonable expenses (including reasonable-fees of counsel) to the Party (ies) that substantially prevail on merit. The provisions of Indian Arbitration and Conciliation Act, 1996 shall apply. (emphasis added)”
The Supreme Court of India, whilst analyzing an ideal arbitration clause in an arbitration agreement, kept in mind that there are three potential laws applicable to an arbitration agreement:
- The proper law of the agreement containing arbitration clause, which is the substantive law;
- The law of the arbitration agreement, which is the governing law; and
- The law of the seat of arbitration, which is regarded as the procedural law.
An ideal arbitration agreement will contain each of the aforesaid laws. However, in case the governing law is not defined, the substantial law is regarded as the governing law. This principle was held by the Supreme Court in National Thermal Power vs Singer Company & Ors.2
Validity of arbitration agreement
The Supreme Court found that an arbitration agreement cannot be void on the basis that there is no concluded contract between the parties. In case the arbitration agreement is ‘null and void, inoperative or incapable of being performed, the parties have the right to avoid it. The Supreme Court further held that if the contract containing the arbitration clause is null and void, the arbitration agreement will still remain enforceable and valid. Therefore, it can be inferred that the arbitration agreement is a separate agreement between the parties than the underlying contract which contains the arbitration agreement. It was also held in this case that in the absence of a “fundamental legal impediment”, whether the underlying contract is a concluded contract or not is required to be left to the arbitral tribunal. The apex court held that the arbitration agreement remains valid in case the intention to arbitrate has continued without waiver.
Incapable or unworkable arbitration clause
Whilst determining the issue of whether an arbitration agreement is unworkable or incapable of being performed, the Supreme Court relied upon Lord Diplock’sstatement in Salen Rederiema3 wherein it was held that “If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense…”. The Court held that this reasonable business person’s approach has its legal mandate under section 5 of the Arbitration and Conciliation Act, 1996 which bars the judicial intervention in arbitration proceedings. The Court, therefore held that the clause ‘each party shall appoint an arbitrator… making it in all three arbitrators’ was not unworkable; and the missing line that ‘the two Arbitrators appointed by the parties shall appoint the third Arbitrator’ can be read into the arbitration clause and that the court would be well within its rights to set right an obvious omission.
‘Venue’ and ‘Seat’ of arbitration
The Supreme Court this case tried to apply the closest connection test inversely. The aforesaid dispute resolution clause clearly designated Indian law as the substantive law. It further contained the Indian Arbitration and Conciliation Act, 1996 as the applicable law. However, the clause also stated that the venue for the arbitration proceedings would be London. The issue before the Supreme Court was to consider if the word ‘venue’ was intended to be used interchangeably with ‘seat’ or ‘place’ of arbitration or whether London was designated as only the venue of the hearings as against the ‘seat’ or ‘place’ of arbitration.
Keeping reliance upon the decisions of Naviera Amazonica v. Compania Internacional4, C v. D5 and the decision in Sulamerica6 , the apex court concluded that since the governing law was Indian and the Indian Arbitration Act was expressly made applicable, all three laws in the arbitration agreement with potential applicability were Indian and therefore, it was only reasonable that parties intended New Delhi be the seat of arbitration and vesting the courts in India with exclusive supervisory jurisdiction. It appears that the Court assumed that by expressly making the Indian Arbitration Act applicable, Indian law was recognized as both the governing law and the curial law. The basis of this decision is as follows-
- the court opined that the word ‘venue’ was used in reference to London; and
- the Court further said that an “absurd” situation would arise as “the Indian Arbitration Act, 1996 would apply to the process of appointment under Section 11; English Arbitration Act, 1996 would apply to the arbitration proceedings (despite the choice of the parties to apply Chapter V to the Part I of the Indian Arbitration Act, 1996); challenge to the award would be under English Arbitration Act, 1996 and not under the Part I of the Indian Arbitration Act, 1996; Indian Arbitration Act, 1996 (Section 48) would apply to the enforcement of the award.”
The apex court stated that the parties “would not have intended to have created an exceptionally difficult situation, of extreme complexities” by mentioning London as the seat of arbitration, therefore, the court found that London was designated only as a convenient place for hearings by virtue of the use of the word ‘venue’.
Conclusion
This judgment appears to be a result of the pro-arbitration position of the Indian courts in the post-BALCO era of Indian arbitration. The Supreme Court emphasized on the necessity of the concept of separability of the arbitration agreement addressing the issues with respect to the conclusion of the contract and the implication of dispute resolution clause. This decision also suggests to specifically mention the ‘seat’ of arbitration proceedings in the arbitration agreement.