TMI Blog2016 (8) TMI 1508X X X X Extracts X X X X X X X X Extracts X X X X ..... ssarily involve examination of the rights and obligations of the American company under AGREEMENT-I and AGREEMENT-II. Therefore, it is a dispute between three parties (of which one is an American company) with a foreign element i.e. rights and obligations of the American company. Hence, the stipulation regarding the governing law cannot be said to be an agreement between only two Indian companies. Section 45, permits an enquiry into the question whether the arbitration agreement is null and void, inoperative and incapable of being performed - The Appellant's case as evidenced by the plaint in its suit is that parts of the AGREEMENT-I though created valid rights and obligations between the (original) parties thereto ceased to be valid subsequent to the assignment under AGREEMENT-II. Because (according to the Appellant's understanding) the parties to AGREEMENT-II are only two companies incorporated in India. They could not have agreed that the governing law of the agreement should be the law of the United Kingdom. According to the Appellant, such a stipulation in the agreement would be contrary to the public policy and hit by Sections 23 of the Indian Contract Act, 1872. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction with this Agreement (collectively, Disputes ) which cannot be finally resolved by such parties within 60 (sixty) days of arising by amicable negotiation shall be resolved by final and binding arbitration to be administered by the International Chamber of Commerce (the ICC ) in accordance with its commercial arbitration Rules then in effect (the Rules ). The place of arbitration shall be London, England. of AGREEMENT-I provides for two things - (1) the governing law of the agreement, and (2) resolution of disputes, if any to arise between the parties, by arbitration. 4. Section 12.1 stipulates that (i) the governing law of the agreement shall be the law of the United Kingdom, (ii) the conflict of laws principles of England will have no application while interpreting AGREEMENT-I in accordance with the laws of the United Kingdom. Section 12.2 stipulates the arbitrator, seat of arbitration and the procedure to be followed in the arbitration (i) the arbitration is to be administered by the International Chambers of Commerce (the ICC) , (ii) the place of arbitration shall be London, (iii) such arbitration shall be conducted in accordance with the commercial arbitration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree signatories to the AGREEMENT-II agree that the American company is not relieved of its obligations and liabilities. 7. Disputes arose between the Appellant and the Respondent. The Respondent by its letter dated 23.7.2014 purported to terminate the AGREEMENT-I. Thereafter, the Respondent made a request for arbitration on 08.08.2014. 8. The Appellant herein filed a suit (Suit No. 4A of 2014 in the Court of the District Judge, Singrauli, Madhya Pradesh) seeking various reliefs. The reliefs insofar as they are relevant for our purpose are as follows: (i) Pass a decree of declaration in favour of the Plaintiff declaring Section 10.2 of the Agreement dated 01.01.2009 as null, void, inoperative and unenforceable. (ii) Pass a decree of declaration declaring that the invoices raised by the Defendant upon the Plaintiff dated Defendant's invoices dated 01.10.2013, 02.01.2014, 01.04.2014, 11.04.2014, 16.01.2014, 11.04.2014, and four invoices dated 21.07.2014 as also Section 10.2 of the Agreement are illegal, null and void and unenforceable. (iii) Pass a decree of declaration declaring that not even a default having occurred as per Section 8.1, the letter of termination d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Court dated 11.11.2014 and 2.12.14, 7.1.15 and 11.3.15, restraining the Defendant from proceeding further with the arbitration proceeding No. 20432/T.O. before ICC, London are set aside. Aggrieved by the same, the Appellant carried the matter to the High Court of Madhya Pradesh. The High Court dismissed the appeal and held: 71. Finally, we may observe that once it is found by us that parties by mutual agreement have decided to resolve their disputes by arbitration and when then on their own, chose to have the seat of arbitration in a foreign country, then in view of the provisions of Section 2(2) of the Act of 1996, Part 1 of the Act, will not apply in a case where the place of arbitration is not India and if Part 1 does not apply and if the agreement in question fulfills the requirement of Section 44 then Part II will apply and when Part II applies and it is found that agreement is not null or void or inoperative, the bar created Under Section 45 would come into play and if bar created Under Section 45 comes into play then it is a case where the Court below had no option but to refer the parties for arbitration as the bar Under Section 45 would also apply and the suit it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and void for being in breach of Clause (a) of Section 28 of the Indian Contract Act 1872 (not being saved by the Exception Clause), and also void because of the provisions of Section 23 of the Indian Contract Act, 1872, and hence not referable to arbitration Under Section 45 of the Arbitration and Conciliation Act, 1996? 14. We presume that Question No. I insofar as it pertains to the place of arbitration found its way into the written submission by oversight as the said submission was expressly given up at the time of the argument. From the questions projected by the Appellant, it can be seen that the entire case of the Appellant is built up on the assumption that the parties to the arbitration agreement are only two Indian companies. The substance of the other two questions is that parties herein (two Indian companies) could not enter into an agreement with a stipulation that the governing law for the construction and interpretation of the AGREEMENT-I to be the law of United Kingdom. The Appellant also raise a further question that in view of the fact that both the parties to the dispute in the arbitration Admittedly, already initiated on a request of the Respondent on 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to the aforesaid damages. The Plaintiff reserves it remedy of seeking damages under Order II Rule 2 of Code of Civil Procedure and would file proceedings once a aforesaid declaration is made by this Hon'ble Court. According to the copies of the plaint supplied to us by the Appellant, Section 10.2 of AGREEMENT-I is contrary to 5.7.3 of the Contract Act . We presume 5.7.3 refers Section 73 of the Indian Contract Act, 1872! 16. Before we examine this question of law, certain indisputable facts are to be noted: 1) The rights and obligations of the American company (under AGREEMENT-I) were purported to have been assigned in favour of the Respondent by AGREEMENT-II. 2) From a copy of the AGREEMENT-II filed along with the appeal it is clear that the representatives of all the 3 companies, i.e., the AMERICAN and the two INDIAN companies (parties herein) signed the AGREEMENT-II. 3) Under the AGREEMENT-II it is agreed that such an assignment does not release the American company from its obligations or liabilities under AGREEMENT-I. 4) Apart from that, it was agreed between the parties that certain clauses of AGREEMENT-I would be substituted with new cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween the three parties are interdependent. What exactly are such rights and obligations and their legal implications require an elaborate enquiry and no argument in this behalf has been advanced before us. The Appellant's case that the transaction covered by the AGREEMENT-II is an assignment is a question which requires examination. Because it is neither the nomenclature adopted by the parties to an agreement nor their understanding of law that determines the true nature and the legal character of the agreement. The rights and obligations created under the agreement determine the legal character of an agreement. 18. An assignment is understood to be the transfer from one person to another (referred to in law as the assignor and assignee respectively) the whole or part of an existing right or interest in intangible property presently owned by the assignor. The right or interest itself is not extinguished. See A.G. Guest and Ting Khai Liew, Guest on the Law of Assignment, 2nd ed. Pg. 1 (Sweet and Maxwell, UK). 19. It is settled law that there can only be an assignment of rights arising under a contract but not the burden of a contract . Jafer Meher Ali v. Budge-Budg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NT-II retained its rights to enforce obligations (arising under AGREEMENT-I) against the American company (See Footnote 3). AGREEMENT-II perhaps only creates an agency The Indian Contract Act though does not define the expression agency defines agent and principal Under Section 182. Section 182: An 'agent' is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the 'principal'. where the American company is the principal and the Respondent its agent or what is described in some cases as sub-contracting or an arrangement for vicarious performance . We hasten to add that we are not expressing any conclusive opinion on this question as no arguments in this behalf are advanced by either side before us. We only conclude that the transaction covered by AGREEMENT II is not an assignment. 21. However, the Appellant's suit is based on its understanding that the Respondent stepped into the shoes of the American company. Therefore, both in fact and law the AGREEMENT-II is between the parties to this appeal! (two Indian companies). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant that there was a concession by the Respondent before the High Court that AGREEMENT-II is not a tripartite agreement but a bipartite agreement. 20. That apart, Shri A. Krishnan, learned Counsel for the Respondent, at the very outset had admitted that the findings recorded by the learned District Judge to say that the Assignment Agreement is a tripartite agreement is not correct and the objection in this regard raised by Shri V.K. Tankha, learned Senior Advocate, may be accepted, he agrees that the same is a Bi parte agreement. What is the number of parties to a document is a question of fact. When a fact is in issue, The Indian Evidence Act, 1872 - Section 3. Facts in issue.- The expression facts in issue means and includes - any fact from which, either by itself or in connection with other facts, the existence, non-existence, nature, or extent of any right, liability, or disability, asserted or denied in any suit or proceeding, necessarily follows. the same is required to be proved in accordance with the provisions of the Evidence Act. Disposition of the property whether it be by way of a contract or grant or any other, if reduced to writing, parties are prohi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of an uninformed concession made at the bar. 26. Therefore, the question whether two Indian companies could enter into an agreement to be governed by the laws of another country would not arise in this case. So long as the obligations arising under the AGREEMENT-I subsists and the American company is not discharged of its obligations under the AGREEMENT-I, there is a 'foreign element' therein and the dispute arising therefrom. The autonomy of the parties in such a case to choose the governing law is well recognised in law. In fact, Section 28(1)(b) Section 28. Rules applicable to substance of dispute.- (1) Where the place of arbitration is situate in India,- (a) in an arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India; (b) in international commercial arbitration,- (i) the arbitral tribunal shall decide the dispute in accordance with the Rules of law designated by the parties as applicable to the substance of the dispute; (ii) any designation by the parties of the law or legal system o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems which could arise out of an international commercial arbitration, such as the recognition of arbitration agreements entered into and enforcement of arbitral awards made in countries other than the one in which the arbitration agreement is entered into or award is sought to be enforced. Whereas the two enactments dealt Repealed by Section 85 of the 1996 Act. with the enforcement of foreign awards and matters incidental thereto in this country. 30. With the increase of international trade and commerce in the second half of the 20th Century, all the abovementioned assignments were considered inadequate and, therefore, the United Nation Commission on International Trade Law adopted a model law on international arbitration popularly known as UNCITRAL. The General Assembly of the United Nations by a resolution dated 11.12.1985 recommended that all States give due consideration to the Model Law on an international commercial arbitration, in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of international commercial arbitration practice . Pursuant to the said recommendation, the 1996 Act came to be made by the Parliament. It is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship and the contract contained an arbitration Clause which provided that in the event of any dispute the matter would be resolved by arbitration as per the International Chamber of Commerce. Eventually, the dispute arose and the Respondent before this Court filed a request for arbitration under ICC. ICC appointed the sole arbitrator and parties agreed that the arbitration be held in Paris. The first Respondent thereafter moved an application Under Section 9 of the 1996 Act in the Court of Addl. District Judge, Indore against the Appellant. Such an application was resisted on the ground of maintainability successfully by the Appellant upto the High Court. Therefore, the appeal to this Court. On consideration of the matter, this Court held as follows: 32. To conclude, we hold that the provisions of Part 1 would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India the provisions of Part 1 would completely apply and parties are free to deviate only to the extent permitted by the derogable provisions of Part 1. In cases of international commercial arbitrations held out of India provisions of Part 1 would apply unless the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by this Court on numerous occasions. In fact, the judgment in Venture Global Engg. [(2008) 4 SCC 190] has been rendered on 10-1-2008 in terms of the ratio of the decision in Bhatia International [(2002) 4 SCC 105]. Thus, in order to do complete justice, we hereby order, that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter. 35. In view of the law laid down in BALCO, it is the submission of the Appellant that since the AGREEMENT-I and AGREEMENT-II are anterior to BALCO judgment, the case on hand is governed by the law declared by this Court in Bhatia International (supra). 36. The case of the Appellant has been that in view of the assignment under AGREEMENT-II, the dispute becomes purely a dispute between two Indian companies (parties to this appeal). Therefore, any arbitration agreement between such companies cannot be an agreement to which the (New York) Convention set forth in the First Schedule of the 1996 Act applies. If such Convention does not apply, the question of application of Section 45 does not arise. In view of the judgment of this Court in Bhatia International, only Part-I of the 1996 Act appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2002) 4 SCC 105, resurrected this doctrine of concurrent jurisdiction by holding, in para 32, that even where arbitrations are held outside India, unless the parties agree to exclude the application of Part-I of the Arbitration Act, 1996, either expressly or by necessary implication, the courts in India will exercise concurrent jurisdiction with the court in the country in which the foreign award was made. Bhatia International was in the context of a Section 9 application made under Part I of the 1996 Act by the Respondent in that case for interim orders to safeguard the assets of the Indian company in case a foreign award was to be executed in India against it. The reductio ad absurdum of this doctrine of concurrent jurisdiction came to be felt in a most poignant form in the judgment of Venture Global Engg. v. Satyam Computer Services Ltd. (2008) 4 SCC 190, by which this Court held that a foreign award would also be considered as a domestic award and the challenge procedure provided in Section 34 of Part I of the 1996 Act would therefore apply. This led to a situation where the foreign award could be challenged in the country in which it is made; it could also be challenged unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication. In substance, the plea is that the suit is barred by virtue of Section 45 of the 1996 Act and, therefore, the plaint is liable to be rejected. Section 45 reads as follows: 45. Power of judicial authority to refer parties to arbitration.- Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. It can be seen from Section 45 that a judicial authority in this country when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44 shall refer the parties to arbitration at the request of one of the parties to the agreement. The agreement referred to in Section 45 is one contemplated in Section 44. Section 44 Relevant portion of Section 44 reads as follows: 44. Definition.- In this Chapter, unless the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lateral. by which parties create contractual rights and obligations. Notwithstanding the fact that all such rights and obligations arising out of a substantive contract and the agreement to have the disputes (if any, arising out of such substantive contract) settled through the process of arbitration are contained in the same document, the arbitration agreement is an independent agreement. Arbitration agreement/clause is not that governs rights and obligations arising out of the substantive contract: It only governs the way of settling disputes between the parties. See T.W. Thomas and Co. Ltd. v. Portsea Steamship Co. Ltd. (1912) AC 1 46. In our opinion, the scope of enquiry (even) under the Section 45 is confined only to the question whether the arbitration agreement is null and void, inoperative or incapable of being performed but not the legality and validity of the substantive contract. 47. The case of the Appellant as disclosed from the plaint is that Article X, Section 10.2 is inconsistent with some provisions of the Indian Contract Act, 1872, and hit by Section 23 of the Indian Contract Act (as being contrary to public policy). It is a submission regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 45 could examine the question whether the substantive agreement (of which the arbitration agreement is a part) is a valid agreement. No doubt that HPCL case was in the context of the bar contained in Section 8 of the 1996 Act. But the same principles of interpretation apply even for the interpretation of Section 45. 49. The stipulation regarding the governing law contained in Article XII Section 12.1 is an independent stipulation applicable to both the substantive agreement and the arbitration agreement. Either of the agreements can survive in an appropriate case without the other. For example, if in a given case, (of a across border contract) parties can agree upon for the governing law but do not have any agreement for settlement of dispute through arbitration, it would not make any legal difference to the governing law Clause (if otherwise valid) and bind the parties. The judicial forum before which the dispute (if any arises) falls for adjudication is normally obliged to apply such chosen governing law-a principle of international law recognised by this Court. Reliance Industries Limited and Anr. v. Union of India (2014) 7 SCC 603 76.4 ....Therefore, the remed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utes arising out of the substantive agreement to be governed by the laws of the United Kingdom. In view of our conclusion that the dispute is not exclusively between two parties to the suit, such a relief could not be given in the suit, because the prayer itself is misconceived. 51. In view of the above, we see no reason to interfere with the conclusions recorded by the courts below. The appeal is, therefore, dismissed with costs. Abhay Manohar Sapre, J. 52. I have had the advantage of going through the elaborate, well considered and scholarly draft judgment proposed by my esteemed Brother Jasti Chelameswar, J. I entirely agree with the reasoning and the conclusion, which my erudite Brother has drawn, which are based on remarkably articulate process of reasoning. However, having regard to the issues involved, which were ably argued by learned Counsel appearing in the case, I wish to add few lines of concurrence. 53. The question that arises for consideration in this appeal is whether the Courts below were justified in allowing the application filed by the Respondent (defendant) Under Section 45 of the Arbitration and Conciliation Act, 1996 (for short The Act ) read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany) and an American Company (NAC). Secondly, the Agreement-II is styled as Assignment and Assumption Agreement . 58. The question that arises for consideration is whether Agreement-II is a Deed of Assignment ? While dealing with the principles relating to transfer of actionable claims Under Section 130 of the Transfer of Property Act, 1882, the learned author Sir D.F. Mulla in his celebrated commentary on Transfer of Property Act (11th Edition page 1028) dealt with the issue of Assignment of Contracts and explained its meaning and further explained as to what can be assigned by the contract. 59. The learned author said, The benefit of a contract can be assigned but not the burden, for the promisor cannot shift the burden of his obligation without a novation. 60. The learned author quoted a passage from an old case of Calcutta High Court authored by J Sale, J. in Jaffer Meher Ali v. Budge-Budge Jute Mills Co. (1906) ILR 33 (Calcutta) 702 which reads as under: The Rule as regards the assignability of contracts in this country is that the benefit of a contract for the purchase of goods as distinguished from the liability thereunder may be assigned, understanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eks to transfer interest in the contract with burden, i.e., obligations of a contracting party. 64. In my considered opinion, once it is noticed that firstly, the Agreement-II is a tri-partite agreement between the Appellant-an Indian company, the Respondent-an Indian company (NACC-India) and the original contractee party, i.e., an American Company (NAC) and secondly, the Agreement-II is essentially in the nature of an amendment to the Agreement-I, Sections 12.1 and 12.2(a) to (f) of Article XII of the Agreement-I become a part of Agreement-II. 65. A fortiori, all the three parties to the Agreement-II are then bound or/and become entitled to take recourse to Article XII and Sections 12.1, 12.2(a) to (f) of the Agreement-I for enforcement of their respective rights and obligations against each other in terms of respective clauses of Agreement-I and Agreement-II. 66. That apart, in my view, reading of Agreement-I and Agreement-II also does not indicate that any novation of contract has emerged inter se parties. It is for the reason that in order to constitute a Novation of contract , it is necessary to prove, in the first place, that the contract is in existence and second, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitration is held in India the provisions of Part I would compulsorily apply and parties are free to deviate only to the extent permitted by the derogable provisions of Part I. In cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case the laws or Rules chosen by the parties would prevail. Any provision, in Part I, which is contrary to or excluded by that law or Rules will not apply. (Emphasis supplied) 73. Article XII of Agreement-I deals with governing law and dispute resolution. It consists of Sections 12.1 and 12.2(a) to (f). Section 12.1 provides that the agreement shall be governed by laws of U.K. whereas Section 12.2(a) provides that firstly, all the disputes shall be resolved by ICC as per ICC rules; Secondly, the place of arbitration shall be London; and thirdly, the provisions of part I of the Act will not apply to the arbitration in question. 74. In my opinion, Sections 12.1 and 12.2(a) of Article XII are in conformity with the law laid down in Bhatia International (supra) and thus satisfy the test laid down therein. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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