Written by Gautam Mohanty
Edited by: Gaurav Rai
The Hon’ble Delhi High Court on 23.09.2019, while deciding an Application under Section 45 of the Arbitration and Conciliation Act, 1996(“Act, 1996”) in the case of JES & BEN Groupo Pvt. Ltd & Ors. v. Hell Energy Magyarorzag KFT.(“Hell Energy”) was presented an opportunity to revisit the concept of forum non conveniens in the context of international arbitrations. In international arbitral jurisprudence, the concept of forum non conveniens doctrine allows Courts to decline to hear a case that would be more convenient to try in another forum, notwithstanding that the Court has jurisdiction over the Parties and the subject matter of the dispute. It is founded on the Court’s inherent authority to manage its own affairs in order to promote the orderly and efficient disposition of cases.[1]
Notably, the Court while allowing the Application filed by Hell Energy (Defendant No.1 in this case) referred the matter to Arbitration to be held in Hungary rather than in Delhi in accordance with the terms agreed between the Parties in the Exclusive Distribution Agreement. Further, the Court while adjudicating the matter before it, also discussed other issues such as (i) scope and power of the Court under Section 45 of the Act, 1996 (ii)scope and power of the Court to bind a non-signatory to the arbitration agreement[2] (iii)difference in the conceptual understanding of “seat” and “venue”. However, for the purposes of this write up the tests to determine whether there was unequal bargaining power of parties in the context of commercial transactions, will be discussed briefly in the following paragraphs.
FACTUAL BACKGROUND:
The Plaintiff in the present case was a company incorporated in New Delhi and engaged in the business of import, distribution, marketing and advertising of food and beverage products. Alternatively, the Defendant was a company incorporated under the laws of Hungary and was engaged in the business of production and sale of “Hell Energy” Drinks and development of the brand. Pursuant to an Exclusive Distribution Agreement(“Agreement”) dated 04.10.2017 entered into between Parties granting exclusive distribution rights of the product “Hell Energy” were given to Plaintiff company. Subsequently, Defendant company terminated the Agreement on 25.03.2019 due to the alleged failure of Plaintiff company to fulfill 75% of Annual Order Volume as per Clause 9.2.5 of the Agreement.
The bone of contention between the Parties arose when the Plaintiff filed a suit for injunction, cancellation, declaration, reconciliation/rendition of accounts and damages and Defendant relying upon Clause 10.13 of the Agreement contended that the present case was a foreign seated International Commercial Agreement. Clause 10.13 of the Agreement reads as below:
“10.13. The Contracting Party undertake to resolve the disputes arising in an amicable way, and if this is ineffective, the parties specify the exclusive competence of the Arbitration Court attached to the Hungarian Chamber of Commerce and Industry, which proceeds according to its rules of procedure, to resolve the dispute. The Arbitration Court is composed of three Arbitrators, and the court is sitting in Budapest and the language of the procedure shall be Hungarian. The contracting parties accept the decision of the Arbitration Court as binding on them, and the costs of the procedure shall be borne by the losing party.”
CONTENTIONS OF THE COUNSELS:
The Counsel for Defendant, inter alia, submitted that as both India and Hungary were contracting parties to the UNCITRAL Convention on the Recognition and Enforcement of Foreign Arbitral Award (“New York Convention”) and as the present case was a clear case involving International Commercial Arbitration, Part II of the Act, 1996 was applicable thereby barring the Application of Part-I of the Act, 1996. In order to buttress its contentions, the Counsel for Defendant relied upon the observations enumerated in Bharat Aluminum Company v. Kaiser Aluminum Technical Services Inc., (2012) 9 SCC 552, Shin-Etsu Chemical Co. Ltd. vs. Aksh Optifibre Ltd. and Anr., (2005) 7 SCC 234 and Chloro Controls India Private Limited vs. Severn Trent Water Purification Inc., (2013) 1 SCC 641. The Counsel for Defendant when relying upon Shin-Etsu Chemical Co. Ltd. vs. Aksh Optifibre Ltd. and Anr., (2005) 7 SCC 234, particularly focused upon the observation of the Supreme Court wherein it has been held that the correct approach to be adopted by the trial court under Section 45 of the Act at the pre-reference stage, is to draw a prima facie finding as to the validity or otherwise of the arbitration agreement and refer the parties to arbitration.
Per Contra, Counsel for Plaintiff argued that the Application filed by Defendant was misconceived and that the present suit filed by Plaintiff was the only appropriate remedy especially when Plaintiff was challenging the validity of the arbitration agreement in present proceedings on the ground of it being in contravention with the Public Policy of India. The essence of the Public Policy argument advanced by the Plaintiff essentially was premised on the fact that in view of Section 28 of the Indian Contract Act, 1872, the agreement entered into between the Parties was void and the arbitration agreement which clearly favored the Defendant in terms of geography, language and laws could not be enforced to the financial and legal determent of the Plaintiff. Pertinently, Section 28 of the Indian Contract Act, 1872 states as below:
“28 Agreements in restraint of legal proceedings, void. — 17 [Every agreement,—
(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to that extent.]
Exception 1.— Saving of contract to refer to arbitration dispute that may arise. —This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.
…”
ANALYSIS AND FINDINGS OF THE COURT
I. Scope and Power of the Court under Section 45 of the Act
Section 45 of the Act, 1996 stipulates as below:
“Section 45 - Power of judicial authority to refer parties to arbitration[3]
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, 1[unless it prima facie finds] that the said agreement is null and void, inoperative or incapable of being performed.”
The Court while elaborating and explaining the legal principles enshrined in Section 45 of the Act, 1996 held that the provision, in accordance with the New York Convention, incorporates the salutary principle that the Court should not refer the parties to arbitration, when it finds that the agreement between the Parties is null and void, inoperative and incapable of being performed. In its further analysis, Court extensively relied upon Shin-Etsu Chemical Co. Ltd. (2005) 7 SCC 234[4] and Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813 to opine that Section 45 of the Act, 1996, mandates the Court to take an objective prima facie view of the matter on the basis of the material and evidence produced by the parties on the record of the case. In its concluding paragraph, the Court by placing reliance on Sasan Power (2016) 10 SCC 813 summed up the scope of inquiry under Section 45 of the Act, 1996 as under:
“49. In our opinion, the scope of enquiry (even) under 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.”
II. Whether the Contract in the present case was inoperative and null and void?
After having defined the contours of powers of the Court under Section 45, the Court proceeded to examine the material placed on record before it to ascertain as to whether a prima facie view could be taken in the Application filed by Plaintiff. Referring to the arguments raised by Plaintiff under Section 28 of the Indian Contract Act, 1872 (arguments pertaining to the right to resort to Courts in cases of fraud and serious malpractices being taken away) the Court held that the contentions advanced by the Plaintiff were contrary to the settled principles of law laid down by the Hon’ble Supreme Court of India. The Court with a view to concretize its observation, relied upon the judgement of the Apex Court in World Sport Group(Mauritius) Ltd. v. MSM Satellite (Singapore) Pte.Ltd. (2014) 11 SCC 639[5] to observe that when the parties have expressly entered into an agreement referring any dispute to arbitration, the same cannot be held to be contrary to public policy.
Moving ahead to the next bone of contention between the Parties i.e. issues regarding fraud and serious malpractice on part of Defendants, the Court after having perused the arguments forwarded by Plaintiff held that no case in relation to fraud and malpractice was established by the Plaintiff and that the allegations of fraud were only raised to circumvent the Arbitration Clause, without any real substance. Notably, the Court also remarked that the present suit was entirely premised on Plaintiff’s allegations relating to violations of the contractual terms and the resultant damages. The Court while relying upon the ratio laid down in the case of A.Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386 reiterated the test for determining non-arbitrability of disputes in cases of fraud. The relevant portion reads as below:
“25. In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud simpliciter may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits…”
Therefore, the Court ultimately held that the allegations of the Plaintiff regarding the terms and conditions of the contract being onerous and unreasonable are also questions which would have to be examined by the Arbitrator and cannot be a ground to avoid the Arbitration Clause.
III. Court of Natural Jurisdiction
Plaintiff in the case also contended that there was no other Court which could be construed as court of “natural jurisdiction” since no part of cause of action in connection with the present suit has arisen outside India. The Plaintiff further contended that Hungarian Chambers of Commerce is not the appropriate or convenient forum to resolve the disputes between the Plaintiffs and Defendants. The Court while rejecting the submission of Plaintiff in that regard, observed that as the agreement between the Parties was valid and binding and Hungarian Chambers of Commerce at Budapest was agreed by the parties as the only appropriate forum to resolve the present disputes the principle of forum non conveniens cannot be applied to the present factual scenario. In that regard, Court referred to the decision of the Supreme Court in Harmony Innovation Shipping Ltd. Gupta Coal Indian Ltd and Ors., AIR 2015 SC 1504, relevant para of which is reproduced hereinbelow:
“50. Thus, interpreting the clause in question on the bedrock of the aforesaid principles it is vivid that the intended effect is to have the seat of arbitration at London. The commercial background, the context of the contract and the circumstances of the parties and in the background in which the contract was entered into, irresistibly lead in that direction. We are not impressed by the submission that by such interpretation it will put the respondent in an advantageous position. Therefore, we think it would be appropriate to interpret the clause that it is a proper clause or substantial clause and not a curial or a procedural one by which the arbitration proceedings are to be conducted and hence, we are disposed to think that the seat of arbitration will be at London.”
IV. Determining unequal bargaining power
Addressing the issue regarding unequal bargaining power as raised by Plaintiff, the Court observed that the plea of unequal bargaining power cannot be a ground to disallow the application under Section 45 of the Act, 1996. According to the Court, since the parties had entered into an agreement of their own volition, the sanctity of the contract has to be preserved and thus, the plea of Forum Non Conveniens being claimed on account of financial burden and legal non viability is not a question that can be entertained while deciding the application under Section 45 of the Act, 1996. For the purposes of the same, Court extensively relied upon the ratio propounded in the case of Central Inland Water Transport Corporation Limited v. Brojanath Ganguly, (1986) 3 SCC 156.
PRACTICAL TAKEAWAYS
From a practical perspective, it emanates from the above paragraphs that Practioners should in all likelihood expect the Court to rule in favour of the Party invoking arbitration provided arbitration is the agreed procedure for resolution of disputes arising between the Parties. Hence, Parties and respective Counsels must pay utmost heed to drafting of the Arbitration Clause taking into consideration the forum for settlement of disputes as recent trends illustrate the argument of Forum Non Conveniens raised by the Party against arbitration rarely withholds the scrutiny of the Court.
[1] Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 507 (1947); Piper Aircraft Co. v. Reyno, 454 U.S. 235, 241, 102 S.Ct. 252, 70 L.Ed.2d 419 (1981).
[2] The Court after having relied upon the judgements of the Supreme Court in the case of Chloro Controls India Private Limited v. Severn Trent Water Purification Inc., (2013) 1 SCC 641 and Cheran Properties Limited v. Kasturi and Sons Limited and Ors., (2018) 16 SCC 413, held that the disputes raised by the Plaintiff No.1 can be referred to Arbitration and the Tribunal can further adjudicate whether Defendant No. 2 can be arrayed as a party to the same proceedings.
[3] Substituted by Arbitration And Conciliation (Amendment) Act, 2019, w.e.f. 30.08.2019 for the following:- "unless it finds".
[4] Paras no 47, 51 and 100.
[5]Para 38 of World Sport Group(Mauritius) Ltd. v. MSM Satellite (Singapore) Pte.Ltd (2014) 11 SCC 639.