SUPREME COURT OF INDIA ON DEPARTMENTAL DISPUTE RESOLUTION CLAUSES AND ARBITRATION CLAUSES IN AGREEMENTS

INTRODUCTION

The Hon’ble Supreme Court of India (“SC”) by its judgment dated October 04, 2013 has dealt with the issue whether a departmental dispute resolution clause which is inserted in the contract for smooth execution of works would qualify to be an arbitration clause and after carefully perusing Clause 30 as mentioned in the agreement have held as under:

The Superintending Engineer was made overall in-charge of all works to be executed under the contract, he was considered by the parties to be the best person who could provide immediate resolution of any controversy relating to specifications, designs, drawings, quality of workmanship or material used, etc.

It was felt that if all this was left to be decided by the regular civil Courts, the object of expeditious execution of work of the project would be frustrated. This is the primary reason why the Superintending Engineer of the Circle was entrusted with the task of taking decision on various matters.

As such there is nothing in the language of Clause 30 from which it can be inferred that the parties had agreed to confer the role of arbitrator upon the Superintending Engineer of the Circle.

BRIEF FACTS

a) The Appellant submitted tenders for the “Tondapur Medium Project”, Jalgaon and Hatnoor Canal Division No. 3, Chopda, District Jalgaon which were accepted by the Competent Authority and five agreements (“B-1 Agreements”) were executed between the parties i.e. the appellant and the competent authority on May 19, 1983 and October 5, 1983.

b) Thereafter the Appellant in January 1985 abandoned the work and submitted bills for the work already done and claimed damages in lieu of the alleged loss suffered by the Appellant.

c) The Appellant, four (4) years thereafter, sometime in 1989 served a notice under Section 80 Code of Civil Procedure and filed Civil Suit before the trial Court for declaring the recovery proceedings initiated against the Appellant by the Defendants as illegal, and null and void.

d) During the pendency of the suit, the Appellant filed an application under Section 21 of the Arbitration Act, 1940 (“the 1940 Act”) and prayed that the matter may be referred to an Arbitrator by appointing the Superintending Engineer or any other Arbitrator as the sole Arbitrator in terms of Clause 30 of B-1 Agreement.

e) The application under the 1940 act was dismissed by the trial Court vide order dated July 29, 1994 on the ground that both the parties had not given consent for making a reference to an Arbitrator.

f) Soon thereafter, the Appellant filed an application under Order VI Rule 17 Code of Civil Procedure for leave to amend the plaint and incorporate an additional prayer for reference of the dispute to an Arbitrator.

g) The application was allowed by the trial Court vide order dated September 27, 1994.

h) The Respondents challenged the aforesaid order in Civil Revision Application No. 153/1995, which was partly allowed by the learned Single Judge of the High Court and the order of the trial Court granting leave to the Appellant to amend the prayer clause was set aside.

i) In the meanwhile, the Appellant filed application dated February 3, 1995 under Section 20 of the 1940 Act for settlement of accounts and prayed that Respondent No. 3 and 4 be directed to file Arbitration Agreement in terms of Clause 30 of B-1 Agreement executed between the parties and an Arbitrator be appointed to decide all the disputes.

j) On June 17, 1995, the trial Court directed the parties to adduce evidence on the nature of Clause 30 of B-1 Agreement.

k) After considering the evidence adduced by the parties and by placing reliance on some judgments of the High Courts, the trial Court allowed the application and declared that Clause 30 of B-1 Agreement is an arbitration clause and appointed Shri D.G. Marathe, Chief Engineer (PWD) as an Arbitrator.

l) A Civil Revision Application was filed by the Respondents against the order of the trial Court, which was allowed by the learned Single Judge of the Bombay High Court and it was held that Clause 30 of B-1 Agreement cannot be treated as an arbitration clause.

m) In support of this conclusion, the High Court relied upon the judgment of the SC i.e. State of Maharashtra v. Ranjeet Construction.

n) That being aggrieved by the order of the High Court, the appellant herein preferred a Special Leave Petition wherein the Honorable SC was kind to issue notice.

RELEVANT CLAUSES

Clause 29 of the Agreement

All works to be executed under the contract shall be executed under the direction and subject to the approval in all respects of the Superintending Engineer of the Circle for the time being, who shall be entitled to direct at what point or points and in what manner they are to be commenced, and from time to time carried on.

Clause 30 of the Agreement

Except where otherwise specified in the contract and subject to the powers delegated to him by Government under the Code rules then in force the decision of the Superintending Engineer of the Circle for the time being shall be final, conclusive, and binding on all parties to the contract upon all questions, relating to the meaning of the specifications, designs, drawings, and instructions, herein before mentioned and as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter, or thing whatsoever, if any way arising, out of, or relating to or the contracts designs, drawings, specifications, estimates, instructions, orders, or these conditions or otherwise concerning the works, or the execution, or failure to execute the same, whether arising, during the progress of the work, or after the completion or abandonment thereof.

Paragraph 224 of the Maharashtra Public Works Manual, as amended by Government CM. No. CAT-1070/460-DSK. 2, dated: May 09, 1977, reads as under:

Para 224-Clause 30 of B-1 and B-2 Agreement forms lays down that the decision of the Superintending Engineer in certain matters relating to the contract would be final. The Superintending Engineer's decision taken under this clause should be considered as that taken as an Arbitrator and this should be considered as the decision taken under the Arbitration Act. The decisions taken by the Superintending Engineer under the other clauses should be considered different from his decision taken under Clause 30 of B-1 and B-2 tender agreement as an arbitrator.

LEGAL ISSUE

Whether Clause 30 of B-1 Agreements entered into between the Government of Maharashtra and the Appellant is in the nature of an arbitration clause?

ARGUMENTS ADVANCED

The Appellant argued that the impugned order is liable to be set aside because the High Court's interpretation of Clause 30 of B-1 Agreement is contrary to the law laid down in Mallikarjun v. Gulbarga University (2004) 1 SCC 372 and Punjab State v. Dina Nath (2007) 5 SCC 28 and emphasized that Clause 30 of B-1 Agreement makes the decision of the Superintending Engineer binding on all parties to the agreement and, therefore, the trial Court was right in treating the same as an arbitration clause.

The Appellant further argued that in view of circulars dated May 09, 1977, August 12, 1982 and May 21, 1983 issued by the State Government, Clause 30 of B-1 Agreements has to be treated as an arbitration clause and the Respondents had no right to challenge the reference made by the trial Court and thereby question the wisdom of the State Government.

The Respondents relied upon the judgments of this Court in State of U.P. v. Tipper Chand (1980) 2 SCC 341, State of Orissa v. Damodar Das (1996) 2 SCC 216 and Bharat Bhushan Bansal v. U.P. Small Industries Corporation Ltd., Kanpur (1999) 2 SCC 166 and argued that Clause 30 of B-1 Agreement cannot be construed as an arbitration clause simply because the decision of the Superintending Engineer is made binding on all parties to the contract.

The Respondents further submitted that the judgment in Mallikarjun v. Gulbarga University (supra) is clearly distinguishable because Clause 30 of the Agreement, which was interpreted in the case was substantially different from the one under consideration as  the Superintending Engineer of Gulbarga Circle was not directly involved in the execution of contract between the University and the Appellant, whereas Superintending Engineer, who has been named as the officer in Clause 30 of B-1 Agreement entered into between the Appellant and the State Government was overall in charge of the work.

ANALYSIS OF PAST PRECEDENT WITH REFERENCE TO THE CASE AT HAND

STATE OF U.P v. TIPPER CHAND

The SC after perusing the contents of the necessary clauses and hearing both the parties, were in agreement with the view taken by the High Court as the clause did not contain any express arbitration agreement and further no arbitration agreement could be spelled out from the terms by implication.

The SC observed that the purpose of the clause clearly appears to be to vest the Superintending Engineer with supervision of the execution of the work and administrative control from time to time.

STATE OF MAHARASHTRA v. RANJEET CONSTRUCTION

Two Judge bench of the SC interpreted Clause 30 of the agreement entered into between the parties, which is almost identical to the clause under consideration, relied upon the judgment in State of U.P. v. Tipper Chand and held that Clause 30 cannot be relied upon for seeking a reference to an Arbitrator of any dispute arising under the contract.

STATE OF ORISSA v. DAMODAR DAS

Three Judge Bench of the SC interpreted Clause 21 and referred to Clause 25 of the agreement, relied upon the judgment in State of U.P. v. Tipper Chand and held that the said clause cannot be interpreted as providing resolution of dispute by an Arbitrator.

K.K. MODI v. K.N. MODI

The SC while discussing the essentials that conclude the existence of an arbitration agreement, interpreted Clause 9 of the Memorandum of Understanding (“MOU”) signed by the parties and held that Clause 9 of the MOU was not an agreement to refer disputes to arbitration but was an agreement to refer disputes to an expert for his decision.

PUNJAB STATE v. DINA NATH

Two Judge Bench of the SC after noticing the words “any dispute” in Clause 4 of the work order and referring to the judgment in K.K. Modi v. K.N. Modi held that on the basis of the materials produced by the parties in support of their respective claims a decision can be arrived at in resolving the dispute between the parties. Hence Clause 4 may be held to be a binding arbitration agreement.

BHARAT BHUSHAN BANSAL v. U.P. SMALL INDUSTRIES CORPORATION LIMITED, KANPUR

Two Judge Bench of the SC interpreted Clauses 23 and 24 of the agreement entered into between the parties for execution of work of construction of a factory and allied buildings and observed that the Managing Director is more in the category of an expert who will decide claims, rights, or matters in any way pertaining to the contract and the intention appears, to be, more to avoid disputes than to decide formulated disputes in a quasi-judicial manner.

Thus it was held that this clause was not an arbitration clause and that the duties of the Engineer were administrative and not judicial.

MALLIKARJUN v. GULBARGA UNIVERSITY

The three judge bench of the SC after analyzing the necessary clause and making a reference to essential elements of arbitration agreement enumerated in Bihar State Mineral Development Corporation v. Encon Builders (I)(P) Limited observed that the agreement executed between the parties is in the form of an arbitration agreement, as it postulates that present or future differences in connection with some contemplated affairs, in as much as there also was an agreement between the parties, were to be settled by a private tribunal, namely, the Superintending Engineer, Gulbarga Circle, Gulbarga. The parties were also ad idem as it was also agreed that both parties would be bound by the decision of the Tribunal.

Note:The Superintending Engineer, Gulbarga Circle, Gulbarga was not an officer of the University and he did not have any authority or jurisdiction either to supervise the construction work or issue any direction to the contractor in relation to the project.

DECISION OF THE COURT

A two (2) judge bench of the SC discussed the submission of the parties at considerable length and held as under:

A conjoint reading of Clauses 29 and 30 of B-1 Agreements entered into between the parties shows that the Appellant had to execute all works subject to the approval in all respects of Superintending Engineer of the Circle, who could issue directions from time to time about the manner in which work was to commence and execute.

By virtue of Clause 30, decision of the Superintending Engineer of the Circle was made final, conclusive and binding on all the parties in respect of all questions relating to the meaning of the specifications, designs, drawings, quality of workmanship or materials used on the work or any other question relating to claim, right, matter or things arising out of or relating to the contract designs, drawings, specifications, estimates, instructions, orders, etc.

These two clauses by which the Superintending Engineer was given all supervisory control were incorporated for smooth execution of the works in accordance with the approved designs and specifications and also to ensure that quality of work is not compromised.

The power conferred upon the Superintending Engineer of the Circle was in the nature of a departmental dispute resolution mechanism and was meant for expeditious sorting out of problems which could crop up during execution of the work.

Since the Superintending Engineer was made overall in-charge of all works to be executed under the contract, he was considered by the parties to be the best person who could provide immediate resolution of any controversy relating to specifications, designs, drawings, quality of workmanship or material used, etc. It was felt that if all this was left to be decided by the regular civil Courts, the object of expeditious execution of work of the project would be frustrated. This is the primary reason why the Superintending Engineer of the Circle was entrusted with the task of taking decision on various matters. However, there is nothing in the language of Clause 30 from which it can be inferred that the parties had agreed to confer the role of arbitrator upon the Superintending Engineer of the Circle.

The issue deserves to be looked into from another angle. In terms of Clause 29 of B-1 Agreement, the Superintending Engineer of the Circle was invested with the authority to approve all works to be executed under the contract. In other words, the Superintending Engineer was to supervise execution of all works. The power conferred upon him to take decision on the matters enumerated in Clause 30 did not involve adjudication of any dispute or lis between the State Government and the contractor. It would have been extremely anomalous to appoint him as Arbitrator to decide any dispute or difference between the parties and pass an award. How could he pass an award on any of the issues already decided by him under Clause 30? Suppose, he was to decline approval to the designs, drawings etc. or was to object to the quality of materials etc. and the contractor had a grievance against his decision, the task of deciding the dispute could not have been assigned to the Superintending Engineer. He could not be expected to make adjudication with an un-biased mind. Even if he may not be actually biased, the contractor will always have a lurking apprehension that his decision will not be free from bias. Therefore, there is an inherent danger in treating the Superintending Engineer as an Arbitrator. This facet of the problem was highlighted in the judgment of the two Judge Bench in Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I)(P) Limited (2003) 7 SCC 418.

In view of the above discussion, the SC was pleased to hold that the High Court had rightly held that Clause 30 of B-I Agreement is not an Arbitration Agreement and the trial Court was not right in appointing the Chief Engineer as an Arbitrator as a clause which is inserted in a contract agreement for the purpose of prevention of dispute will not be an arbitration agreement.

The SC further observed that the circulars issued by the State Government may provide useful guidance to the authorities involved in the implementation of the project but the same are not conclusive of the correct interpretation of the relevant clauses of the agreement and, in any case, the Government's interpretation is not binding on the Courts.

CONCLUSION

In light of the facts of this case, the SC while keeping in mind the essentials of an Arbitration Agreement and differentiating between the powers conferred on an interested party under the terms of the contract for expeditious resolving of problems, which could crop up during execution stage of work, and an arbitration agreement, have rightfully held that a clause which is inserted in a contract for the prevention of disputes and expeditious implementation of the project shall not be treated as an arbitration agreement.

Also the courts have rightfully held that since the Superintending Engineer was to supervise execution of all works, it would have been extremely anomalous to appoint him as an Arbitrator to decide any dispute or difference between the parties wherein he could not be expected to adjudicate with an un-biased mind. That even if the Superintending Engineer may not be biased, the contractor will always have a lurking apprehension that the decision of the Superintending Engineer will not be free from bias. Therefore, there is an inherent danger in treating the Superintending Engineer as an Arbitrator.

NEWS FOR FOREIGN UNIVERSITIES DESIROUS OF SETTING UP INDEPENDENT CAMPUS IN INDIA

As per the powers vested with the Central Government to make rules under the University Grants Commission Act, 1956, the Ministry of Human Resource Development (“HRD”) is in the process of finalizing the UGC (Established and Operation of Campuses of Foreign Educational Institutions) Rules.

The HRD Ministry issued a Press Release[1]  dated September 10, 2013 which puts out pre-conditions for foreign universities desirous of setting up independent campuses in India.

PRECONDITIONS

A Foreign Education Institute (“FEI”) desirous of setting up and operating a campus in India to offer foreign degrees without having a local partner should:

a) Get itself registered as a not for profit entity[2];

b) Maintain a corpus of not less than INR. Twenty five crores (25,00,00,000.00); and

c) Get itself notified as Foreign Education Provider (“FEP”) with University Grants Commission (“UGC”);

Further the FEI should:

a) have been in existence for at least twenty (20) years in the country of origin; and

b) be ranked in the top four hundred (400) colleges in one of three global rankings being:

i)        Times Higher Education ranking (UK);

ii)       Quacquarelli Symonds ranking (UK); and

iii)      Shanghai Jiao Tong University ranking (China).

THE WAY FORWARD

The Ministry of HRD had sought comments and observations of the Department of Industrial Policy and Promotion (“DIPP”) and the Department of Economic Affairs (“DEA”) on the Rules.

Once the executive order is notified, it will render the Foreign Educational Institutions (Regulation of Entry and Operations) Bill, 2010 irrelevant and desirous FEI’s shall, only after due compliance with and fulfillment of the criteria mentioned above, be eligible to independently operate and set up campuses in India[3].

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[1] The press release is effectively an executive order which does not need to be approved by the Parliament and also the details of the press release are being vetted by the law ministry and an official notification will be published soon.

[2] Non profit Companies cannot distribute profits or dividend among members, thus depriving such companies from repatriating money.

[3] Currently, a foreign university needs to join hands with a local education provider to offer courses.

ENFORCEMENT OF FOREIGN AWARDS IN INDIA

INTRODUCTION

The Hon’ble Supreme Court of India (“SC”) by its judgment dated July 03, 2013 has dealt with the subject of "Enforcement of Foreign Awards" and held as under:

While considering the extent to which foreign awards are enforceable, the court does not exercise appellate jurisdiction over the foreign award nor does it en quire as to whether, while rendering foreign award, some error has been committed.

Under Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 (“the 1996 act”) the enforcement of a foreign award can only be refused if such enforcement is found to be contrary to:

i)                    fundamental policy of Indian law;

ii)                  the interests of India; or

iii)                justice or morality.

BRIEF FACTS

A contract for the supply of twenty thousand (20,000) metric tons of Durum Wheat of Indian Origin at the price of $ One hundred and sixty two (162) per metric ton was executed on May 12, 1994 between Shiv Nath Rai Harnarain (India) Company, New Delhi (“sellers”) and Italgrani Spa, Naples, Italy (“buyers”). 

The buyers nominated M.V. Haci Resit Kalkavan as the vessel for loading of the goods. The ship completed loading on August 13, 1994 and the Bill of Lading was dated August 08, 1994.

The sellers faxed a copy of SGS India Certificate ("the certificate") of weight, quality and packing to the buyers on August 16, 1994.

The buyers passed a copy of the certificate to SGS, Geneva requesting them to issue the necessary certificate under the sale contract which the buyers had entered with Office Alegerien Inter-professional das cereals (“OAIC”).

After the goods reached the destination, the buyers sent a fax to the sellers on August 23, 1994 informing that that analysis carried out by S.G.S. Geneva showed the wheat to be soft common wheat and not durum wheat as required under the contract.

The buyers considered the sellers to be in breach of the contract for shipping un-contractual goods and held sellers responsible for all losses / damages both direct and indirect arising out of and the consequence of such breach.

The sellers on August 31, 1994 responded and asserted that S.G.S. India inspected the wheat at the time of procurement and also before loading the vessel and confirmed that the wheat met typical characteristics of Indian Durum wheat as per the specifications provided for in the contract. 

The buyers then served a notice of arbitration upon the sellers where the tribunal pronounced the final award in favour of the buyers. 

The sellers thereafter preferred an appeal before the Board of Appeal which disposed off the appeals and awarded damages and costs to the buyers.

The sellers challenged the appeal award in the High Court of Justice at London. The appeal was dismissed on December 21, 1998 and both awards attained finality.

The buyers then instituted a suit in the High Court at Delhi for enforcement of the awards where the sellers raised diverse objections that the appeal awards passed by the Board of Appeal which are sought to be enforced are contrary to the public policy of India in as much as they are contrary to the express provisions of the contract entered into between the parties as the Board of Appeal erred in accepting the test report by S.G.S. Geneva whereas under the contract, it was the test report of S.G.S. India that was material.

The High Court while dealing with the submissions made on behalf of the parties observed that there is no serious defense in opposing the enforcement of foreign awards as there is nothing contrary to the terms of the contract or to the public policy of India in the awards and held that they were enforceable under Part II of the 1996 Act.

RELEVANT CLAUSES OF THE AGREEMENT

Commodity	Durum Wheat Indian Origin New Crop
Test Weight	80 KG/HL.MIN
Moisture	12 PCT.MAX Vitrious 80 PCT
MIN Broken	3 PCT
MAX Proteine	12 PCT
MIN Foreign Matter	2 PCT
MAX Sprouted/Spotted	1 PCT
MAX Soft Wheat	1.5 PCT
MAX Quantity	20,000 MT With 5%+/- Sellers Option in 1 single shipment
Shipment	1-30/June 1994 Quantity final at loading Quality
Conditions	All final at time and place of loading As per first class Intl Company Cert. S.G.S. , nominated by the buyers certificate and quality showed at the certificate will be the result of an average samples taken jointly at port of loading by the representatives of the sellers and the buyers
Price	USD 162,00 Per Metric Ton FOB stowed Kandla, Buyers to give 10 days pre advise of vessels arrival
Payment	Against 100 PCT L/Credit irrevocable and confirmed for 100 PCT payable at sight against Foll
Shipping docs Other conditions	All other terms and conditions not in contradictions with the above to be as per G.A.F.T.A Rules, 64/125 and its successive Amendments (In force at time and place of shipment date) which the parties admit that they have knowledge and notice.

LEGAL ISSUES

While referring to and discussing various precedents cited by the parties the SC answered the following question:

Whether the appeal awards passed by the Board of Appeal of the Grain and Feed Trade Association (“GAFTA”), London in favour of the respondent is enforceable under Section 48 of the 1996 Act?

ARGUMENTS ADVANCED

The sellers vehemently contended that in light of the decision of the SC in ONGC v. Saw Pipes Ltd. and Phulchand Exports v. OO. Patriot, that the Court can refuse to enforce a foreign award if it is contrary to the contract between the parties and / or is patently illegal as the expression public policy of India in Section 48(2)(b) is an expression of wider import than the expression public policy in Section 7(1)(b)(ii) of the Foreign Awards (Recognition and Enforcement) Act, 1961 and the expansive construction given by the SC to the term public policy of India in Saw Pipes must also apply to the use of the same term public policy of India in Section 48(2)(b).

The buyers placed heavy reliance upon the decision of the SC in Renusagar Power Company limited v. General Electric Company and submitted that what has been stated by the SC while interpreting section 7(1)(b)(ii) of the Foreign Awards Act is equally applicable to section 48(2)(b) of the 1996 act and the expression public policy of India in Section 48(2)(b) must receive narrow meaning than Section 34 as the decision in saw pipes never meant to give wider meaning to the expression, public policy of India in so far as section 48 of the 1996 was concerned.

ANALYSIS OF PAST PRECEDENT

Renusagar Power Company Limited v. General electric Company [1994 Supp (1) SCC 644]

A clear and fine distinction was drawn by the SC while applying the rule of public policy between a matter governed by domestic laws and a matter involving conflict of laws. It has been held in unambiguous terms that the application of the doctrine of public policy in the field of conflict of laws is more limited in domestic law and the courts are slower to invoke public policy in cases involving a foreign element than when purely municipal legal issues are involved.

The SC held that the words public policy used in Section 7(1)(b)(ii) of the Foreign Awards Act should be construed narrowly and contravention of law alone will not attract the bar of public policy and held that the enforcement of a foreign award would be refused on the ground that it is contrary to public policy if such enforcement would be contrary to:

a)  fundamental policy of Indian law;

b) the interests of India; or
c)    justice or morality.

Oil and Natural Gas Corporation Limited v. Saw Pipes [2003 (5) SCC 705]

The SC while considered the meaning that could be assigned to the phrase "public policy of India" occurring in Section 34(2)(b)(ii) held that the term public policy of India in Section 34 was required to be interpreted in the context of the jurisdiction of the court where the validity of the award is challenged before it becomes final and executable in contradistinction to the enforcement of an award after it becomes final.

Having that distinction in view, with regard to Section 34 the SC said that the expression public policy of India was required to be given a wider meaning.

Phulchand Exports Limited v. O. OO. Patriot [2011 (10) SCC 300]

A two Judge Bench of the SC accepted the submission that the meaning given to the expression public policy of India in Section 34 in Saw Pipes must be applied to the same expression occurring in  Section 48(2)(b) of the 1996 Act.

Note:  The SC has over ruled its earlier conclusion by saying - “the expression public policy of India used in Section 48(2)(b) has to be given a wider meaning and the award could be set aside, if it is patently illegal does not lay down correct law and is overruled”.

DECISION OF THE COURT

The three judge bench of the SC comprising of Justice Kurian Joseph, Justice Madan B. Lokur and Justice R.M. Lodha discussed the submissions of the parties and held as under:

The grounds enumerated in Section 48 of the 1996 Act are meant to be construed narrowly and does not permit a review of the foreign award on merits.

Section 48 of the 1996 Act does not give the SC a second opportunity to look into a foreign award at the enforcement stage as the SC does not exercise appellate jurisdiction over foreign awards and cannot be called upon to re-determine the questions of fact.

Procedural defects (like taking into consideration inadmissible evidence or ignoring / rejecting the evidence which may be of binding nature) in the course of foreign arbitration do not lead necessarily to excuse an award from enforcement on the ground of public policy.

Moreover, if a ground supported by decisions of that country was not considered to be good enough to set aside the award by the competent court, a fortiori, such ground can hardly be a good ground for refusing enforcement of the award.

  

CONCLUSION

The SC seems to have put an end to the hostility surrounding the enforcement of foreign arbitral awards in India by according narrow interpretation to the words “public policy” as used in Section 48 of the 1996 act and affirming that the Section does not give the courts a second opportunity to determine the question of fact in foreign awards at the enforcement stage.

This decision has surely ushered positive confidence among parties seeking enforcement of foreign awards in India and would go a long way in strengthening the confidence of the international business community in the Indian Judicial system.

NOVATION OF AGREEMENTS AND ARBITRATION CLAUSES

INTRODUCTION

The Hon’ble Supreme Court of India (“SC”) by its judgment in Young Achievers v. IMS Learning Resources Private Limited [2013 (10) SCALE 531] dated August 22, 2013 while dealing with the subject of "Novation and Arbitration Clauses" held as under:

“An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded / novated by a later agreement”.

BRIEF FACTS

IMS Learning Resources Private Limited (“IMS”) filed a Civil Suit in the High Court of Delhi at New Delhi for a permanent injunction restraining Young Achievers (“YA”) from infringing its registered trademark, copyright, passing off of damages, rendition of accounts of profits and also for other consequential reliefs.

YA preferred an Interim Application under Section 8, read with Section 5 of the Arbitration and Conciliation Act, 1996 (“the 1996 act”) for rejecting the plaint and referring the dispute to arbitration and also for other consequential reliefs.

IMS raised an objection to the said application stating that the suit is perfectly maintainable.

The High Court rejected YA’s application vide its order dated April 16, 2012 holding that the earlier agreements dated April 01, 2007 and April 01, 2010 which contained an arbitration clause stood superseded by a new contract dated February 01, 2011 arrived at between the parties by mutual consent.

YA being aggrieved by the said order preferred an appeal before the Division Bench of the Delhi High Court, which confirmed the order of the learned Single Judge and dismissed the appeal.

YA further preferred an appeal against the above order by special leave.

RELEVANT CLAUSES OF THE AGREEMENT

The agreement dated April 01, 2010 contained the following arbitration clause:

Clause 20 - Arbitration

All disputes and questions whatsoever which may arise, either during the substance of this agreement or afterwards, between the parties shall be referred to the arbitration of the managing director of IMS Learning Resources Pvt. Ltd. Or his nominee and such arbitration shall be in the English language at Mumbai.

The arbitration shall be governed by the provisions of the Arbitration and Conciliation Act, 1996 or any other statutory modification or reenactment thereof for the time being in force and award or awards of such arbitrator shall be binding on all the parties to the said dispute.

Relevant portion of the Exit paper are as follows:

With reference to your mail/letter dated 1st February, 2011 on closing the center, from the aforesaid date with mutual consent we have agreed on the following:

1. Enrolled students

All enrolled students of IMS with you will be serviced by you with respect to their classes, workshops and conduct of test series, GD/PI and any other servicing required as per the product manual.

2. Premises

IMS will reserve the first right of utilization to occupy the premises. In an eventuality of IMS exercising the right to use the premises, then IMS will reimburse the monthly rent for the corresponding months before changing the rental agreement onto IMS name.

3. Marketing

From the above-mentioned date you are not eligible to do any marketing and promotional activities in the name of IMS.

4. Brand

From the above-mentioned date you are not eligible to use IMS brand in any form.

5. Monthly claims

The partner abides to deposit all the course fees collected for any of IMS programs till now as per the deposit policy of IMS. All monthly claims will be settled till 31st January, 2011 and the claims would be - released after the date of termination of the partner agreement.

6. Security Deposit

The security deposit amount will be refunded back to you after the completion of servicing of all enrolled IMS students. In case of any due on partner to the company (unsettled fees, loan or advance for centre activities etc.), same amount will be deducted from the security deposit.

7. Non Compete Clause

The partner has averred that neither he, nor his family members are directly or indirectly interested in any business in direct competition with that of IMS and the partner agrees and undertakes to ensure that neither he nor his family members shall be involved in or connected to any business in direct competition with that of IMS at any time during the currency of this agreement and for a further period of six months therafter.

8. Full and final settlement

I/We accept all the above-mentioned points and confirm that upon receipt of the sum stated hereinafter in full and final settlement of all my/our claims, neither me/we nor any person claiming by or through me/us shall have any further claims against IMS whatsoever.

Any violation of points 1,3,4,5 & 7 from the partner’s end will attract legal course of action and penalties from IMS ranging from forfeiture of the security deposit & pending claims.

LEGAL ISSUES

While referring to and discussing various precedents cited by the parties the SC answered the following question:
  

      a) Whether the Arbitration Clause contained in the first agreement, being severable, survives for the purpose of resolution of disputes arising under or in connection with the agreement even if the performance of the agreement comes to an end on account of repudiation, frustration of breach of contract, in the light of a new agreement entered into between the parties which does not contain an arbitration clause?

ARGUMENTS ADVANCED

YA raised the following question of law:

 
a) Whether an arbitration clause is a collateral term in the contract, which relates to resolution of disputes, and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract?

      b) Whether the impugned judgment is contrary to the law settled by this Hon’ble Court in Branch Manager (Magma Leasing & Finance Limited) and another v. Potluri Madhavilata and another (2009) 10 SCC 103 and National Agricultural Cooperative Marketing Federation India Ltd. v. Gains Trading Ltd. (2007) 5 SCC 692?

      c) Whether the Hon’ble High Court is correct in holding that the law settled by this Hon’ble Court in the Branch Manager (Magma Leasing & Finance Limited) and another v. Potluri Madhavilata and another (2009) 10 SCC 103 and National Agricultural Cooperative Marketing Federation India Ltd. V. Gains Trading Ltd. (2007) 5 SCC 692 is applicable in case of unilateral termination of agreement by one of the parties and not in mutual termination for accord and satisfaction of the earlier contract?

YA submitted that arbitration clause is a collateral term in the contract, which relates to resolution of disputes and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.

YA submitted that the court has erroneously held that the case of the appellant is not a case involving the assertion by the respondent of accord and satisfaction in respect of earlier contracts, especially when the sole purpose of the Exit paper dated February 01, 2011 was to put an end to the contractual relationship between them under the aforesaid earlier contracts.

IMS placing reliance on the detailed counter affidavit filed on behalf of the respondent submitted that the arbitration clause in the agreements dated April 01, 2007 and April 01, 2010 cannot be invoked since both the above-mentioned agreements were superseded and abrogated by the new agreement dated February 01, 2011.

IMS submitted that in the new agreement it was mutually decided by the parties that any violation of the respondent’s trade mark IMS would entitle the respondent to take legal recourse against the appellant.

IMS submitted that the suit restraining YA from using its trademark and copyright was based on prior trade mark rights and not on the agreements dated April 01, 2007 and April 01, 2010.

Further IMS pointed out that the new agreement dated February 01, 2011 records the mutual agreement between the parties that the appellant shall not be eligible to use the trade mark IMS in any form and any breach thereof entitles respondent to seek legal recourse on violation of trade mark IMS.

ANALYSIS OF PAST PRECEDENT

Union of India v. Kishorilal Gupta and Bros. [AIR 1959 SC 1362].

Q)        The SC examined the question whether an arbitration clause can be invoked in the case of a dispute under a superseded contract.

Ans)    The SC said that if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it. But where the dispute is whether such contract is void ab intio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existence of the contract and its validity.

DECISION OF THE COURT

Justice K.S. Radhakrishnan and Justice A.K. Sikri discussed the submission of the parties and held as under:

"We may indicate that so far as the present case is concerned, parties have entered into a fresh contract contained in the exit paper which does not even indicate any disputes arising under the original contract or about the settlement thereof, it is nothing but a pure and simple novation of the original contract by mutual consent".

An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded / novated by a later agreement.

CONCLUSION 

The judgment has brought about clarity on a fairly complex prospect of law and would ensure the rightful interpretation of Arbitration Clauses in an agreement and their applicability to later agreements entered into by the parties, which do not provide for a Arbitration clause.