Authored By: Pankaj Kumar
Court: The Hon’ble Supreme Court of India
Citation: [(2008) 4 SCC 190]
Date of Judgment: 10 January 2008
Division Bench: Justice Tarun Chatterjee & Justice P. Sathasivam
Introduction:
We live in an era where globalization, far from being a fashionable economic ideology, is more an indispensable international imperative. Today, no country, however powerful can afford to remain economically isolated. Every country endeavours to make its domestic markets capable of attracting foreign investment. But due to some laws, there was a general perception amongst the international business community that India’s domestic markets were not as receptive to foreign investment as were the markets of other countries in Asia. The International community as well as the national community with the view to resolve commercial disputes introduced arbitration law. Arbitration fundamentally is a method of settlement of disputes by which litigants to the disputes get the same resolved through a third person called arbitrator without having recourse to a court of law. The Arbitration and Conciliation Act, of 1996, is based on the UNCITRAL Model law which is suited to contemporary requirements and plays a key factor to increase the level of foreign investment in our domestic economy.
Facts:
· Venture Global Engineering, the appellant, in this case, was a company incorporated in the United States of America with its principal office at 33662, James J Pampo Drive, Fraser, Michigan, USAfiled this appeal challenging the final order and judgment dated 27.2.2007 passed by the High Court of Andhra Pradesh, whereby the Division Bench of the Andhra Pradesh High Court dismissed their appeal.
· Appellant-Company and Satyam Computer Services Limited (hereinafter called the respondent No.1-in this case), a registered company having its office at Mayfair Centre, S.P. Road, Secunderabad, Telangana entered into a Joint Venture Agreement to constitute a company named Satyam Venture Engineering Services Ltd. (hereinafter called respondent No.2) herein in which both the appellant and respondent No.1 have 50 percent equity shareholding.
· Another agreement was also executed between the parties on the same day being Shareholders Agreement (hereinafter called SHA)which provides that disputes have to be resolved politely between the parties and failing such resolution, the disputes are to be referred to arbitration. Section 11.05 of the SHA provides for certain terms and conditions as regards the resolution of the disputes. According to clause(c) of Section 11 of the SHA which stated that notwithstanding anything to the contrary in this agreement, the Shareholders shall at all times act in accordance with the Companies Act and other applicable Acts/Rules being in force, in India at any time.
· Respondent No.1 alleged that the appellant had committed an event of default underthe Shareholders Agreement owing to several venture companies becoming bankrupt and they had also exercised its option to purchase the appellant-companyshares in Satyam Venture Engineering Services Ltd.at its book value.
· Respondent No.1 filed a request for arbitration with the London Court of International Arbitration and which appointed Mr. Paul B Hannon as sole arbitrator on 10.9.2005. The sole Arbitrator on 3rd April 2006 passed an award directingVenture Global Engineeringto transfer the shares to respondent No.1. On 14.4.2006, respondent No.1 filed a petitionbefore the United States District Court, Eastern District Court of Michigan (US Court) to recognize and enforce the award.
· The appellant company objectedbefore the US Court by filing a cross-petition to nullify the enforcement of the Award and he contended that the order of transfer of shares in favor of respondent No. 1violated Indian Laws and Regulations specifically the Foreign Exchange Management Act, 1999 and its notifications.
· The appellant filed a suit before the Ist Additional Chief Judge, City Civil Court, Secunderabad on 28.4.2006 seeking a declaration to set aside the award and permanent injunction on the transfer of shares under the Award, andthe District Court passed an ad-interim ex parte order of injunction, inter alia, restraining respondent No.1 from seeking or effecting the transfer of shares either under the terms of the Award or otherwise.
· In response to that, respondent No. 1 filed an appeal before the High Court of Andhra Pradesh and the High Court admitted the appeal and directed interim suspension of the order of the District Court but made it clear that respondent No.1 would not affect the transfer of shares until further orders.
· On 13.07.2006, in response to the summons served upon the respondents, respondent No.1 appeared in the Court and filed a petition under Order VII Rule 11 C.P.C. for rejection of the plaint. The appellant filed an objection to the application. The trial Court allowed the said application and rejected the plaint of the appellant.
· Challenging the said order, the appellant filed an appeal before the High Court, and the High Court dismissed the appeal holding that the award cannot be challenged even if it is against the public policy and in contravention of statutory provisions.
· Against the said order, the appellant preferred the appeal by way of a special leave petition.
Key contentions/ Issues raised:
· Whether the Indian Courts have jurisdiction under Arbitration and Conciliation Act, 1996 to set aside the foreign arbitral award?
· Whether Part I of the Arbitration and Conciliation Act, 1996 would apply where the seat of arbitration is outside India?
· Whether the aggrieved party entitled to challenge the foreign award which was passed outside India in terms of Section 34 read with section 9 of the Act?
Arguments advanced:
1. Arguments presented by the appellant:
A. The learned counsel for the appellant contended that the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and all proceedings relating thereto and Part-I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. He heavliy relied on the decision given in the case of Bhatia International vs. Bulk Trading S.A. & Anr.(2002).
B. The learned counsel for the appellant further pointed out that respondent No.1 violated the agreement between the parties by seeking enforcement of the transfer of the shares in the Indian company by approaching the District Court in the United States.
2. Arguments presented by respondents:
A. The learned counsel for the respondent contended that Section 48(1)(e) read with Section 48(3) of the Act specifies that an action to set aside a foreign award within the meaning of Section 44 of the Act would lie to the competent authority of the country in which, or under the law of which, that award was made.
B. No application under Section 34 of the Act would lie to set aside the award and hence the civil suit filed at Secunderabad is not maintainable.
Judgment:
The Supreme Court follow the dictum laid down by the three-judge bench in the case of Bhatia International vs. Bulk Trading S.A. & Anr. and stated that the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and all proceedings unless the parties by agreement, express or implied, exclude all or any of its provisions. Court further held that the overriding section 11.5 (c) of the SHA cannot be ignored lightly. The non-obstante clause would override the entirety of the agreement including sub-section (b) which deals with the settlement of the dispute by arbitration. Sub-section (c), therefore, would apply to the enforcement of the Award which declares that, notwithstanding that the proper law or the governing law of the contract is the law of the State of Michigan, their shareholders shall at all times act in accordance with the Companies Act and other applicable Acts/Rules being in force in India at any time. Necessarily, enforcement has to be in India, as declared by this very section which overrides every other section in the Shareholders Agreement.
The court held that respondent No.1, therefore, totally violated the agreement between the parties by seeking enforcement of the transfer of the shares in the Indian company by approaching the District Courts in the United States. Accordingly, both the orders passed by the City Civil Court and of the High Court are set aside. The court further held thatwe request the concerned Court to dispose of the suit on merits one way or the other within a period of six months from the date of receipt of a copy of this judgment. The Civil appeal is allowed to this extent. No costs.
Precedent mentioned:
· Bhatia International vs. Bulk Trading S.A. & Anr. [1]
· Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. [2]
Case analysis:
The SupremeCourt in the case of [ONGC v. SAW PIPES][1]expand the meaning of the term ‘Public Policy of India’. Moreover, this interpretationhas provided limitless judicial intervention in the arbitral award, something that has not been intended by the legislature, and the same is very much criticized within and outside India. However, the term ‘Public Policy of India’ is nowhere defined in the Act of 1996, though it is used in section 34(2)(b)(ii) and section 48(2)(b) of the Act. The term “Public Policy of India” for the purpose of this section refers to the principles and standards constituting the general or fundamental policy of the State established by the Constitution and the existing law of the country, and the principles of justice and morality. The Court in the present case shows a serious concern by an implication that Indian public policy might be by-passed if an arbitral award in respect of properties situated in India were sought to be enforced abroad and a debtor residing in that foreign country was to personally comply with the award for fear of sanctions for contempt of court.
The Court concluded that the Indian courts had jurisdiction to set aside a foreign arbitral award simply by following the reasoning of its earlier decision, Bhatia International[2],regarding the scope of Part I of the Indian Act 1996. The decision given in the present case has somehow shown the indication that the trend of the Indian Courts to subject foreign arbitral award to greater scrutiny and interference, even though the Act itself curtail to a greater extent the power of the Courts to interfere in the foreign award passed by the foreign seated arbitration.
Conclusion:
The very fundamental aspect of the Arbitration Act is that the party's autonomy is of the utmost importance and the law governing arbitration proceedings is the law of the choice of the parties, or, in the absence of an agreement, the law of the country in which the arbitration is held. The Act itself provides that judicial intervention shall be very minimal but over time, arbitration proceedings have become susceptible to the same ailments which afflict normal legal processes. The language employed by the Parliament in drafting sub-section(2) of Section 2 is clear and unambiguous. Saying that Part I would apply where the place of arbitration is in India tantamounts to saying that it would not apply where the place of arbitration is not in India.Thus the courts must refrain from examining the correctness of the validity of the award on any ground other than enumerated in section 34 of this Act.
Bibliography:
[1] (2002) 4 SCC 105
[2] (2003) 5 SCC 705
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