//
you're reading...
legal issues

Arbitration and Conciliation Act, 1996: Part I – Applicability of – Held: Would apply to all arbitrations including international commercial arbitrations and to all proceedings relating thereto – Where such arbitration is held in India, the provisions would compulsorily apply – Would also apply in case of international commercial arbitrations held out of India, unless parties by agreement, express or implied, exclude all or any of its provisions – International Commercial Arbitration. ss.34 and 48 – Arbitral award – Foreign award – Setting aside of – Right of judgment-debtor – Held: Judgment-debtor cannot be deprived of his right to invoke the public policy of India to set aside the award passed by a foreign court – Respondent no.1 in enforcing award in US Court instead of Indian court was motivated by intention of evading the legal and regulatory scrutiny to which such transaction would be subjected to had it been enforced in India – Intention of respondent no.1 was to avoid enforcement of award under s.48 of the Act which would have given the appellant benefit of the public policy Rule and for avoiding jurisdiction of Courts of India though award had an intimate and close nexus in India – Hence suit for declaration filed in Indian court to set aside the award passed by the foreign court maintainable. The appellant-company and respondent No.1 a registered company having its office in India entered into a Joint Venture Agreement to constitute respondent no.2 company (SVES) in which both the appellant and respondent no.1 had 50% equity shareholding. Another agreement was executed between the same parties on the same day being the Shareholders Agreement (SHA) which contained arbitration clause. Disputes arose between the parties. Respondent No.1 exercised its option to purchase the appellant-company’s shares in SVES at its book value on the allegation that the appellant had committed an event of default under the SHA owing to several venture companies becoming insolvent. Respondent No.1 filed a request for arbitration with the London Court of International Arbitration whereby a sole arbitrator was appointed. The sole arbitrator passed an award directing the appellant company to transfer the shares to respondent No.1. Respondent No.1 filed a petition for seeking enforcement of the award before the Eastern District Court of Michigan (US Court). The appellant entered appearance to defend this proceeding before the US Court by filing a cross petition. Thereafter, the appellant filed a suit in Indian Court for declaration to set aside the award and permanent injunction on the transfer of shares under the Award. The District Court passed an ad-interim ex parte order of injunction, restraining respondent No.1 from effecting the transfer of shares. Respondent no.1 appealed before the High Court. 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 effect the transfer of shares until further orders. In response to the summons, respondent No.1 appeared in the Court and filed a petition under Order VII Rule 11 CPC for rejection of the plaint. The trial Court, allowed the said application and rejected the plaint of the appellant. The High Court dismissed the appeal holding that the award cannot be challenged even if it is against public policy and in contravention of statutory provisions. Hence the appeal. -Allowing the appeal, the Court HELD: 1. The provisions of Part I of the Arbitration and Conciliation Act , 1996 would apply to all arbitrations including international commercial arbitrations and to all proceedings relating thereto. Where such arbitration is held in India, the provisions of Part-I would compulsorily apply and parties are free to deviate to the extent permitted by the provisions of Part-I. Even in the case 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. Such an interpretation does not lead to any conflict between any of the provisions of the Act and there is no lacuna as such. [Para 17] [521-E, F] Bhatia International v. Bulk Trading S.A. & Anr. (2002) 4 SCC 105 – relied on. Pratabmull Rameshwar v. K.C. Sethia Ltd. AIR 1960 Calcutta 702; Nirma Ltd. v. Lurgi Energie Und Entsorgung GMBH, Germany AIR 2003 Gujarat 145; Bombay Gas Company Limited v. Mark Victor Mascarenhas & Ors. 1998 1 LJ 977; Inventa Fischer Gmbh & Co., K.G. v. Polygenta Technologies Ltd. 2005 (2) Bom C.R. 364; Trusuns Chemical Industry Ltd. v. Tata International Ltd. AIR 2004 Gujarat. 274; Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical Services AIR 2005 Chhatisgarh 21; Bulk Trading SA v. Dalmia Cement (Bharat) Limited (2006) 1 Arb.LR 38(Delhi) – referred to. International Standard Electric Corp. v. Bridas Sociedad nonima Petrolera, Industrial Y Commercial 745 F.supp.172; M & C Corporation v. ERWIN BEHR GmbH & Co., KG, a foreign corporation 87 F.3d 844; Yusuf Ahmed Alghanim & Sons v. Toys “R” US. INC. Thr. (HK) Ltd. 126 F.3d 15; Karaha Bodas Co. L.L.C. v. Perusahaan Pertambangan Minyakdan Gas Bumi Negara 364 F.3d 274; C v. D (2007) EWHC 1541- referred to. 2. To apply s.34 to foreign international awards would not be inconsistent with s.48 of the Act, or any other provision of Part II as a situation may arise, where, even in respect of properties situate in India and where an award would be invalid if opposed to public policy of India, merely because the judgment-debtor resides abroad, the award can be enforced against properties in India through personal compliance of the judgment-debtor and by holding out the threat of contempt as is being sought to be done in the present case. In such an event, the judgment-debtor cannot be deprived of his right under s.34 to invoke the public policy of India, to set aside the award. The public policy of India includes – (a) the fundamental policy of India; or (b) the interests of India; or (c) justice or morality; or (d) in addition, if it is patently illegal. This extended definition of public policy can be by-passed by taking the award to a foreign country for enforcement. Respondent No.1, in enforcing the Award in the US District Court instead of Indian Courts was motivated by the intention of evading the legal and regulatory scrutiny to which this transaction would have been subject to had it been enforced in India. The effort of respondent No.1 was to avoid enforcement of the Award under s.48 of the 1996 Act which would have given the appellant the benefit of the Indian Public Policy rule and for avoiding the jurisdiction of the Courts in India though the award had an intimate and close nexus to India in view of the fact that, (a) the company was situated in India; (b) the transfer of the `ownership interests’ shall be made in India under the laws of India ; (c) all the steps necessary have to be taken in India before the ownership interests stood transferred. If, therefore, respondent No.1 was not prepared to enforce the Award in spite of this intimate and close nexus to India and its laws, the appellant would certainly not be deprived of the right to challenge the award in Indian Courts. [Paras 19-21] [522-G, H; 523-A, B; 524-B-F] Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705 – relied on. 3. Clause (c) of Section 11.05 of the Shareholders Agreement declared that, notwithstanding that the proper law or the governing law of the contract is the law of the State of Michigan, their shareholders would at all times act in accordance with the Companies Act and other applicable Acts/Rules being in force in India at any time. The said section excluded respondent No.1 approaching the US Courts in regard to the enforcement of the Award. The non-obstante clause would override the entirety of the agreement including sub-section (b) which deals with settlement of the dispute by arbitration and therefore s.3 would apply to the enforcement of the award. Necessarily, enforcement has to be in India, as declared by this very section which overrides every other section in the Shareholders Agreement. 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. [Paras 26, 27] [528-A-G] Sameer Barar and Ors. v. Ratan Bhushan Jain & Ors. (2006) 1 SCC 419; Ajay Bansal v. Anup Mehta & Ors. (2007) 2 SCC 275 – referred to. 4. The specific clause in the Shareholders Agreement (SHA), conduct of the parties have not been properly adverted to and considered by the trial Court as well as the High Court. Accordingly, both the orders passed by the City Civil Court and of the High Court are set aside. [Para 28] [528-H; 529-A] 5. It is for the concerned court to decide the issue on merits and this Court has not expressed anything on the same. If it is found that the Court in which the appellant has filed a petition challenging the Award is not competent and having jurisdiction, the same shall be transferred to the appropriate Court. Since from the inception of ordering notice in the special leave petition both parties were directed to maintain status quo with regard to transfer of shares in issue, the same shall be maintained till the disposal of the suit. Considering the nature of dispute which relates to an arbitration Award, the concerned Court is requested to dispose of the suit on merits within a period of six months from the receipt of copy of this Judgment. [Paras 22, 29] [525-A; 529-B, C, D] K.K. Venugopal, Vinay Kumar Misra, Rajat Tamni and B. Parthasarathi for the Appellant. R.F. Nariman, Subhash Chandra Birla and Subrat Birla for the Respondents. -2008 AIR 1061, 2008(1 )SCR501 , 2008(4 )SCC190 , 2008(1 )SCALE214 , 2008(1 )JT468

CASE NO.:

Ramalinga Raju, Founder and Chairman, Satyam C...

Ramalinga Raju, Founder and Chairman, Satyam Computer Services, India (Photo credit: Wikipedia)

Appeal (civil) 309 of 2008

PETITIONER:
Venture Global Engineering

RESPONDENT:
Satyam Computer Services Ltd. & Anr.

DATE OF JUDGMENT: 10/01/2008

BENCH:
Tarun Chatterjee & P. Sathasivam

JUDGMENT:
JUDGMENT

(Arising out of SLP (C) No.8491 OF 2007)

P. Sathasivam, J.
1) Leave granted.
2) Appellant – Venture Global Engineering (in short VGE),
a company incorporated in the United States of America with
its principal office at 33662, James J Pampo Drive, Fraser,
Michigan, USA 48026 through its Constituted Attorney, Mr.
Pradeep Yadav filed this appeal challenging the final order and
judgment dated 27.2.2007 passed by the High Court of
Judicature, Andhra Pradesh at Hyderabad in City Civil Court
Appeal No. 26 of 2007 whereby the Division Bench of the High
Court dismissed their appeal.
3) The facts, which are necessary for the disposal of this
appeal, are as under:
On 20.10.1999, Appellant-Company and respondent No.1-
Satyam Computer Services Limited (in short SCSL), a
registered company having its office at Mayfair Centre, S.P.
Road, Secunderabad entered into a Joint Venture Agreement
to constitute a company named Satyam Venture Engineering
Services Ltd. respondent No.2 herein (in short SVES) in
which both the appellant and respondent No.1 have 50 per
cent equity shareholding. Another agreement was also
executed between the parties on the same day being the
Shareholders Agreement (in short SHA) which provides that
disputes have to be resolved amicably 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.
In February, 2005, disputes arose between the parties.
Respondent No.1 alleged that the appellant had committed an
event of default under the SHA owing to several venture
companies becoming insolvent and they had exercised its
option to purchase the appellant-companys shares in SVES at
its book value. On 25.07.2005, respondent No.1 filed a
request for arbitration with the London Court of International
Arbitration which appointed Mr. Paul B Hannon as sole
arbitrator on 10.9.2005. The sole Arbitrator on 3.4.2006
passed an award directing the appellant  VGE to transfer the
shares to respondent No.1. On 14.4.2006, respondent No.1
filed a petition to recognize and enforce the award before the
United States District Court, Eastern District Court of
Michigan (US Court). The appellant entered appearance to
defend this proceeding before the US Court by filing a cross
petition. In the said petition, it objected to the enforcement of
the Award which ordered transfer of shares which was in
violation of Indian Laws and Regulations specifically the
Foreign Exchange Management Act, 1999 (in short FEMA)
and its notifications. The appellant filed a suit being O.S. No.
80 of 2006 before the Ist Additional Chief Judge, City Civil
Court, Secunderabad on 28.4.2006 seeking declaration to set
aside the award and permanent injunction on the transfer of
shares under the Award. On 15.6.2006, the 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. Challenging the said order, respondent No.1 filed
an appeal before the High Court of Andhra Pradesh. The High
Court admitted respondents appeal and directed interim
suspension of the order of the District Court but made it clear
that respondent No.1 would not effect 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
objection to the application. The trial Court, by its order dated
28.12.2006, allowed the said application and rejected the
plaint of the appellant. Challenging the said order, the
appellant filed an appeal before the High Court. On
27.2.2007, 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 above appeal by
way of special leave petition.
4) Heard Mr. K.K. Venugopal, learned senior counsel,
appearing for the appellant and Mr. R.F. Nariman, learned
senior counsel, appearing for respondent No.1.
5) After taking us through agreements entered into by both
the parties, subsequent developments such as alleged
violations, Award by an Arbitrator at U.K., proceedings before
the District Court, Michigan, USA and the impugned
proceedings of the Ist Additional Chief Judge-City Civil Court,
Secunderabad as well as the order of the High Court, Mr. K.K.
Venugopal learned senior counsel appearing for the appellant
has raised the following contentions:
(i) The claim that Part I of the Arbitration and Conciliation
Act, 1996 (in short the Act) applies to foreign awards is
covered by the judgment of this Court in Bhatia
International vs. Bulk Trading S.A. & Anr., (2002) 4
SCC 105.
ii) The first respondent – Satyam Computer Services Ltd.
could not have pursued the enforcement proceedings in
the District Court in Michigan, USA in the teeth of the
injunction granted by the Courts in India which also, on
the basis of the Comity of Courts should have been
respected by the District Court in Michigan.
iii) The overriding Section 11.5 (c) of the SHA would exclude
respondent No.1- Satyam Computer Services Ltd.
approaching the US Court in regard to the enforcement of
the Award.
6) On the other hand, Mr. R.F. Nariman, learned senior
counsel, appearing for the first respondent, submitted that,
(i) In view of Section 44 of the Act and the terms of the
agreement, no suit would lie in India to set aside the
Award, which is a foreign Award.
(ii) No application under Section 34 of the Act would lie to
set aside the Award.
(iii) In view of the provisions of the Act and the terms of the
agreement, the first respondent rightly sought
enforcement of the Award in Michigan, USA, hence the
civil suit filed at Secunderabad is not maintainable.
(iv) Section 11.5(c) of the SHA only deals with the rights and
obligations of the appellant and the first respondent
while acting as shareholders of the 2nd respondent it has
nothing to do with the enforcement of foreign Award.
(v) In terms of the agreement, having participated in the
arbitration proceedings in UK, filed cross-suit/objection
in the District Court, Michigan opposing the Award, the
appellant cannot agitate the very same issue in the
Indian Courts namely, District Court, Secunderabad. In
other words, the appellant, VGE, cannot ride two horses
at the same time.
7) We perused all the relevant materials, Annexures and
considered the rival contentions.
8) Since both Mr. K.K. Venugopal, learned senior counsel
for the appellant and Mr. R. F. Nariman, learned senior
counsel, for respondent No.1 heavily relied on a judgment of
this Court in Bhatia International (supra), in support of their
respective stand, let us consider the facts in that case and
ultimate conclusion arrived at therein.
9) Bhatia International filed an Appeal before this Court
against the judgment of the M.P. High Court in W.P. No. 453 of
2000. The appellant-Bhatia International entered into a
contract with the first respondent  Bulk Trading on 9.5.1997.
This contract contained an arbitration clause which provided
that arbitration was to be as per the Rules of the International
Chamber of Commerce (for short ICC). On 23.10.1997, the
Ist respondent made a request for arbitration with ICC.
Parties had agreed that the arbitration be held in Paris,
France. ICC has appointed a sole arbitrator. The first
respondent filed an application under Section 9 of the Act
before the 3rd Additional District Judge, Indore, M.P. against
the appellant and the 2nd respondent. One of the interim
reliefs sought for was an order of injunction restraining these
parties from alienating, transferring and/or creating third-
party rights, disposing of, dealing with and/or selling their
business assets and properties. The appellant raised the plea
of maintainability of such an application. The appellant
contended that Part I of the Act would not apply to
arbitrations where the place of arbitration was not in India.
The application was rejected by the 3rd Additional District
Judge on 1-2-2000. It was held that the court at Indore (M.P.)
had jurisdiction and the application was maintainable. The
appellant filed a writ petition before the High Court of Madhya
Pradesh, Indore Bench and the same was dismissed by the
impugned judgment dated 10-10-2000. Several contentions
have been raised on behalf of the appellant, namely, Part I of
the Act only applies to arbitrations where the place of
arbitration is in India and if the place of arbitration is not in
India then Part II of the said Act would apply. Sub-section (2)
of Section 2 of the Act makes it clear that the provisions of
Part I do not apply where the place of arbitration is not in
India. The Court at Indore could not have entertained the
application under Section 9 of the Act as Part I did not apply
to arbitrations which had taken place outside India. On the
other hand, on behalf of respondent No.1, it was submitted
that a conjoint reading of the provisions shows that Part I is to
be applied to all arbitrations. It was further submitted that
unless the parties by their agreement exclude its provisions,
Part I would also apply to all International Commercial
arbitrations including those that take place out of India.
10) The above contentions were considered in detail. In view
of the assertion of both the senior counsel, the decision in
Bhatia International (supra) has very much bearing on the
issue raised in this case. The relevant paragraphs are
reproduced hereunder:
14. At first blush the arguments of Mr. Sen appear very
attractive. Undoubtedly sub-section (2) of Section 2 states
that Part I is to apply where the place of arbitration is in
India. Undoubtedly, Part II applies to foreign awards. Whilst
the submissions of Mr. Sen are attractive, one has to keep in
mind the consequence which would follow if they are
accepted. The result would:
( a ) Amount to holding that the legislature has left a lacuna
in the said Act. There would be a lacuna as neither Part I or
II would apply to arbitrations held in a country which is not
a signatory to the New York Convention or the Geneva
Convention (hereinafter called a non-convention country).
It would mean that there is no law, in India, governing such
arbitrations.

( b ) Lead to an anomalous situation, inasmuch as Part I
would apply to Jammu and Kashmir in all international
commercial arbitrations but Part I would not apply to the
rest of India if the arbitration takes place out of India.

( c ) Lead to a conflict between sub-section (2) of Section 2 on
one hand and sub-sections (4) and (5) of Section 2 on the
other. Further, sub-section (2) of Section 2 would also be in
conflict with Section 1 which provides that the Act extends to
the whole of India.
( d ) Leave a party remediless inasmuch as in international
commercial arbitrations which take place out of India the
party would not be able to apply for interim relief in India
even though the properties and assets are in India. Thus a
party may not be able to get any interim relief at all.
16. A reading of the provisions shows that the said Act
applies to arbitrations which are held in India between
Indian nationals and to international commercial
arbitrations whether held in India or out of India. Section
2(1)( f ) defines an international commercial arbitration. The
definition makes no distinction between international
commercial arbitrations held in India or outside India. An
international commercial arbitration may be held in a
country which is a signatory to either the New York
Convention or the Geneva Convention (hereinafter called the
convention country). An international commercial
arbitration may be held in a non-convention country. The
said Act nowhere provides that its provisions are not to apply
to international commercial arbitrations which take place in
a non-convention country. Admittedly, Part II only applies to
arbitrations which take place in a convention country. Mr.
Sen fairly admitted that Part II would not apply to an
international commercial arbitration which takes place in a
non-convention country. He also fairly admitted that there
would be countries which are not signatories either to the
New York Convention or to the Geneva Convention. It is not
possible to accept the submission that the said Act makes no
provision for international commercial arbitrations which
take place in a non-convention country.
17. Section 1 of the said Act reads as follows:
1. Short title, extent and commencement .(1) This Act may
be called the Arbitration and Conciliation Act, 1996.
(2) It extends to the whole of India:
Provided that Parts I, III and IV shall extend to the State of
Jammu and Kashmir only insofar as they relate to
international commercial arbitration or, as the case may be,
international commercial conciliation.
The words this Act mean the entire Act. This shows that
the entire Act, including Part I, applies to the whole of India.
The fact that all Parts apply to the whole of India is clear
from the proviso which provides that Parts I, III and IV will
apply to the State of Jammu and Kashmir only so far as
international commercial arbitrations/conciliations are
concerned. Significantly, the proviso does not state that Part
I would apply to Jammu and Kashmir only if the place of the
international commercial arbitration is in Jammu and
Kashmir. Thus if sub-section (2) of Section 2 is read in the
manner suggested by Mr. Sen there would be a conflict
between Section 1 and Section 2(2). There would also be an
anomaly inasmuch as even if an international commercial
arbitration takes place outside India, Part I would continue
to apply in Jammu and Kashmir, but it would not apply to
the rest of India. The legislature could not have so intended.
21. Now let us look at sub-sections (2), (3), (4) and (5) of
Section 2. Sub-section (2) of Section 2 provides that Part I
would apply where the place of arbitration is in India. To be
immediately noted, that it is not providing that Part I shall
not apply where the place of arbitration is not in India. It is
also not providing that Part I will  only  apply where the
place of arbitration is in India (emphasis supplied). Thus the
legislature has not provided that Part I is not to apply to
arbitrations which take place outside India. The use of the
language is significant and important. The legislature is
emphasizing that the provisions of Part I would apply to
arbitrations which take place in India, but not providing that
the provisions of Part I will not apply to arbitrations which
take place out of India. The wording of sub-section (2) of
Section 2 suggests that the intention of the legislature was to
make provisions of Part I compulsorily applicable to an
arbitration, including an international commercial
arbitration, which takes place in India. Parties cannot, by
agreement, override or exclude the non-derogable provisions
of Part I in such arbitrations. By omitting to provide that
Part I will not apply to international commercial arbitrations
which take place outside India the effect would be that Part I
would also apply to international commercial arbitrations
held out of India. But by not specifically providing that the
provisions of Part I apply to international commercial
arbitrations held out of India, the intention of the legislature
appears to be to ally (sic allow) parties to provide by
agreement that Part I or any provision therein will not apply.
Thus in respect of arbitrations which take place outside
India even the non-derogable provisions of Part I can be
excluded. Such an agreement may be express or implied. 

26. Mr. Sen had also submitted that Part II, which deals
with enforcement of foreign awards does not contain any
provision similar to Section 9 or Section 17. As indicated
earlier, Mr. Sen had submitted that this indicated the
intention of the legislature not to apply Sections 9 and 17 to
arbitrations, like the present, which are taking place in a
foreign country. The said Act is one consolidated and
integrated Act. General provisions applicable to all
arbitrations will not be repeated in all Chapters or Parts. The
general provisions will apply to all Chapters or Parts unless
the statute expressly states that they are not to apply or
where, in respect of a matter, there is a separate provision in
a separate Chapter or Part. Part II deals with enforcement of
foreign awards. Thus Section 44 (in Chapter I) and Section
53 (in Chapter II) define foreign awards, as being awards
covered by arbitrations under the New York Convention and
the Geneva Convention respectively. Part II then contains
provisions for enforcement of foreign awards which
necessarily would be different. For that reason special
provisions for enforcement of foreign awards are made in
Part II. To the extent that Part II provides a separate
definition of an arbitral award and separate provisions for
enforcement of foreign awards, the provisions in Part I
dealing with these aspects will not apply to such foreign
awards. It must immediately be clarified that the arbitration
not having taken place in India, all or some of the provisions
of Part I may also get excluded by an express or implied
agreement of parties. But if not so excluded the provisions of
Part I will also apply to foreign awards. The opening words
of Sections 45 and 54, which are in Part II, read
notwithstanding anything contained in Part I. Such a non
obstante clause had to be put in because the provisions of
Part I apply to Part II. 
32. To conclude, we hold that the provisions of Part I would
apply to all arbitrations and to all proceedings relating
thereto. Where such arbitration 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.

35. Lastly, it must be stated that the said Act does not
appear to be a well-drafted legislation. Therefore the High
Courts of Orissa, Bombay, Madras, Delhi and Calcutta
cannot be faulted for interpreting it in the manner indicated
above. However, in our view a proper and conjoint reading of
all the provisions indicates that Part I is to apply also to
international commercial arbitrations which take place out of
India, unless the parties by agreement, express or implied,
exclude it or any of its provisions. Such an interpretation
does not lead to any conflict between any of the provisions of
the said Act. On this interpretation there are no lacunae in
the said Act. This interpretation also does not leave a party
remediless. Thus such an interpretation has to be preferred
to the one adopted by the High Courts of Orissa, Bombay,
Madras, Delhi and Calcutta. It will therefore have to be held
that the contrary view taken by these High Courts is not
good law.

11) Mr. K.K. Venugopal, learned senior counsel, has pointed
out that paragraph 14 of the judgment of Bhatia
International (supra) sets out four independent reasons for
arriving at the conclusion that Part I would apply to foreign
Awards that are as follows:
i) to hold to the contrary would result in a lacunae as
Non-Convention country awards cannot be enforced in
India.
ii) Section 1(2) expressly extends Part I to the State of
Jammu and Kashmir so far as it relates to
international commercial arbitration giving rise to an
anomaly so far as the rest of India is concerned unless
Part I applies to international commercial arbitrations
in the other States as well.
iii) If the word only is read into Section 2(2), it would
then render the sub-section inconsistent with sub-
sections (4) and (5) of Section 2 which apply Part I to
all arbitrations, meaning thereby, including foreign
international arbitrations.
iv) As otherwise, no relief can be sought in India even
though the properties and assets are situated in India,
merely because the arbitration is an international
commercial arbitration.
Further, by drawing our attention to the specific conclusion
arrived in paragraphs 32 and 35, he reiterated that the issue
has been very well concluded and the argument based on
paragraph 26 is not acceptable.
12) Mr. Nariman heavily relied on paragraph 26 of the
judgment in Bhatia International which we have extracted
supra. According to him, the said paragraph contains not only
the submissions of Mr. Sen, who appeared for Bhatia
International therein but also the ultimate conclusion of the
Bench. He reiterated that the Court concluded Thus Section
44 (in Chapter I) and Section 53 (in Chapter II) define foreign
Awards, as being awards covered by arbitrations under the
New York Convention and the Geneva Convention respectively.
Part II then contains provisions for enforcement of foreign
awards which necessarily would be different. For that
reason, special provisions for enforcement of foreign awards
are made in Part II. To the extent that Part II provides a
separate definition of an arbitral award and separate
provisions for enforcement of foreign awards, the provisions in
Part I dealing with these aspects will not apply to such foreign
awards. It must immediately be clarified that the arbitration
not having taken place in India, all or some of the provisions of
Part I may also get excluded by an express or implied
agreement of parties. But if not so excluded, the provisions of
Part I will also apply to foreign awards. The opening words
of Sections 45 and 54, which are in Part II, read
notwithstanding anything contained in Part I. Such a non
obstante clause had to be put in because the provisions of Part
I apply to Part II.
13) According to Mr. K.K. Venugopal, paragraphs 26 and 27
start by dealing with the arguments of Mr. Sen who argued
that Part I is not applicable to foreign awards. He further
pointed out that it is only in the sentence starting at the
bottom of para 26 that the phrase it must immediately be
clarified that the finding of the Court is rendered. That
finding is to the effect that an express or implied agreement of
parties can exclude the applicability of Part I. He further
pointed out that the finding specifically states that, But if not
so excluded, the provisions of Part I will also apply to all
foreign awards. This exception which is carved out, based
on agreement of the parties. By omitting to provide that Part I
will not apply to international commercial arbitrations which
take place outside India the effect would be that Part I would
also apply to international commercial arbitrations held out of
India. But by not specifically providing that the provisions of
Part I apply to international commercial arbitrations held out
of India, the intention of the legislature appears to be to allow
parties to provide by agreement that Part I or any provision
therein will not apply. Thus in respect of arbitrations which
take place outside India even the non-derogable provisions of
Part I can be excluded. Such an agreement may be express or
implied. He further pointed out the very fact that the
judgment holds that it would be open to the parties to exclude
the application of the provisions of Part I by express or implied
agreement, would mean that otherwise the whole of Part I
would apply. In any event, according to him, to apply Section
34 to foreign international awards would not be inconsistent
with Section 48 of the Act, or any other provision of Part II as
a situation may arise, where, even in respect of properties
situate in India and where an award would be invalid if
opposed to the public policy of India, merely because the
judgment-debtor resides abroad, the award can be enforced
against properties in India through personal compliance of the
judgment-debtor and by holding out the threat of contempt as
is being sought to be done in the present case. In such an
event, the judgment-debtor cannot be deprived of his right
under Section 34 to invoke the public policy of India, to set
aside the award. He very much relied on the judgment of this
Court in Oil & Natural Gas Corporation Ltd. vs. Saw Pipes
Ltd. (2003) 5 SCC 705 wherein particularly, in paragraphs 30
and 31, the public policy of India has been defined to include-
(a) the fundamental policy of India; or
(b) the interests of India; or
(c) justice or morality; or
(d) in addition, if it is patently illegal.
He pointed out that this extended definition of public policy
can be by-passed by taking the award to a foreign country for
enforcement. In such circumstances, according to him, there
is nothing inconsistent between Section 48 which deals with
enforcement and Section 34 which deals with a challenge to
the Award. He also relied on a decision of the Division Bench
of the Calcutta High Court in Pratabmull Rameshwar vs.
K.C. Sethia Ltd., AIR 1960 Calcutta 702. In paragraphs 45
and 63, the Calcutta High Court while dealing with Arbitration
Act of 1940 sets out the reasoning in support of a challenge
being permissible in India to a foreign award.
14) In order to find out an answer to the first and prime
issue and whether the decision in Bhatia International
(supra) is an answer to the same, let us go into the details
regarding the suit filed by the appellant as well as the relevant
provisions of the Act. The appellant VGE filed O.S. No. 80 of
2006 on the file of the Ist Additional District Court,
Secunderabad, for a declaration that the Award dated
3.4.2006 is invalid, unenforceable and to set aside the same.
Section 5 of the Act makes it clear that in matters governed by
Part I, no judicial authority shall intervene except where so
provided. Section 5 which falls in Part I, specifies that no
judicial authority shall intervene except where so provided.
The Scheme of the Act is such that the general provisions of
Part I, including Section 5, will apply to all Chapters or Parts
of the Act. Section 2(5) which falls in Part I, specifies that
this part shall apply to all arbitrations and to all proceedings
relating thereto. It is useful to refer Section 45 which is in
part II of the Act which starts with non obstante clause
namely, Notwithstanding anything contained in Part I or in
Code of Civil Procedure Section 52 in Chapter I of
Part II of the Act provides that Chapter II of this Part shall not
apply in relation to foreign awards to which this Chapter
applies. As rightly pointed out, the said section does not
exclude the applicability of Part I of the Act to such awards.
15) Part II of the Act speaks about the enforcement of certain
foreign awards. Section 48 speaks about conditions for
enforcement of foreign awards. Section 48(1) (e) read with
Section 48(3) of the Act specify that an action to set aside the
Award would lie to the competent authority. Mr. Nariman,
after taking us through the relevant provisions of Chapter I
Part II submitted 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. According to him, the phrase
the countryunder the law of which, that award was made
refers to the country of the curial law of arbitration, in the
extremely rare situation where the parties choose a curial law
other than the law of the country of the seat of arbitration. He
further pointed out that therefore such a challenge would lie
only to the competent Court of the country in which the
foreign award was made. He also submitted that the said
principle is recognized internationally by Courts in US and UK
as well as by several High Courts in India. The US decisions
which support/recognize the above principle are :
(1) International Standard Electric Corp. vs. Bridas
Sociedad Anonima Petrolera, Industrial Y Comercial, 745
F.supp.172
(2) M & C Corporation vs. ERWIN BEHR GmbH & Co., KG,
a foreign corporation, 87 F.3d 844
(3) Yusuf Ahmed Alghanim & Sons vs. Toys R US. INC.
Thr. (HK) Ltd. 126 F.3d 15
(4) Karaha Bodas Co. L.L.C. vs. Perusahaan
Pertambangan Minyakdan Gas Bumi Negara 364 F.3d 274
(5) C v. D (2007) EWHC 1541
16) Apart from the above US decisions, Mr. R.F. Nariman,
pointed out that all the Indian High Courts except the Gujarat
High Court in Nirma Ltd. vs. Lurgi Energie Und Entsorgung
GMBH, Germany, AIR 2003 Gujarat 145 have taken this
consistent view in the following judgments:
(a) Bombay Gas Company Limited vs. Mark Victor
Mascarenhas & Ors., 1998 1 LJ 977
(b) Inventa Fischer Gmbh & Co., K.G. vs. Polygenta
Technologies Ltd., 2005 (2) Bom C.R. 364
(c) Trusuns Chemical Industry Ltd. vs. Tata
International Ltd. AIR 2004 Gujarat. 274
(d) Bharat Aluminium Co. Ltd. vs. Kaiser Aluminium
Technical Services, AIR 2005 Chhatisgarh 21
(e) Bulk Trading SA vs. Dalmia Cement (Bharat)
Limited, (2006) 1 Arb.LR 38(Delhi)
17) On close scrutiny of the materials and the dictum laid
down in three-Judge Bench decision in Bhatia International
(supra), we agree with the contention of Mr. K.K.Venugopal
and hold that paragraphs 32 and 35 of the Bhatia
International (supra) make it clear that the provisions of Part
I of the Act would apply to all arbitrations including
international commercial arbitrations and to all proceedings
relating thereto. We further hold that where such arbitration
is held in India, the provisions of Part-I would compulsorily
apply and parties are free to deviate to the extent permitted by
the provisions of Part-I. It is also clear that even in the case 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. We are also of the view that such an interpretation
does not lead to any conflict between any of the provisions of
the Act and there is no lacuna as such. The matter, therefore,
is concluded by the three-Judge Bench decision in Bhatia
International (supra).
18) Learned senior counsel for the respondent based on para
26 submitted that in the case of foreign award which was
passed outside India is not enforceable in India by invoking
the provisions of the Act or the CPC. However, after critical
analysis of para 26, we are unable to accept the argument of
learned senior counsel for the respondent. Paras 26 and 27
start by dealing with the arguments of Mr. Sen who argued
that Part I is not applicable to foreign awards. It is only in the
sentence starting at the bottom of para 26 that the phrase it
must immediately be clarified that the finding of the Court is
rendered. That finding is to the effect that an express or
implied agreement of parties can exclude the applicability of
Part I. The finding specifically states: But if not so excluded,
the provisions of Part I will also apply to all foreign awards.
This exception which is carved out, based on agreement of the
parties, in para 21 (placitum (e) to (f) is extracted below:
By omitting to provide that Part I will not apply to
international commercial arbitrations which take place
outside India the effect would be that Part I would also apply
to international commercial arbitrations held out of India.
But by not specifically providing that the provisions of Part I
apply to international commercial arbitrations held out of
India, the intention of the legislature appears to be to allow
parties to provide by agreement that Part I or any provision
therein will not apply. Thus in respect of arbitrations which
take place outside India even the non-derogable provisions of
Part I can be excluded. Such an agreement may be express
or implied.
19) The very fact that the judgment holds that it would be
open to the parties to exclude the application of the provisions
of Part I by express or implied agreement, would mean that
otherwise the whole of Part I would apply. In any event, to
apply Section 34 to foreign international awards would not be
inconsistent with Section 48 of the Act, or any other provision
of Part II as a situation may arise, where, even in respect of
properties situate in India and where an award would be
invalid if opposed to the public policy of India, merely because
the judgment-debtor resides abroad, the award can be
enforced against properties in India through personal
compliance of the judgment-debtor and by holding out the
threat of contempt as is being sought to be done in the present
case. In such an event, the judgment-debtor cannot be
deprived of his right under Section 34 to invoke the public
policy of India, to set aside the award. As observed earlier, the
public policy of India includes – (a) the fundamental policy of
India; or (b) the interests of India; or (c) justice or morality;
or (d) in addition, if it is patently illegal. This extended
definition of public policy can be by-passed by taking the
award to a foreign country for enforcement.
20) Mr. K.K.Venugopal also highlighted that in Company
Law, the word transfer has a definite connotation which
would require the ownership of the shares to be transferred to
the transferee, which would involve the following steps being
taken under the Companies Act and the rules and regulations
thereunder, as well as the Foreign Exchange Management Act,
1999 (FEMA):
i) Obtaining a Share Transfer Form 7-B and having it
endorsed by the prescribed authority under the
Companies Act, 1956 in compliance with Section 108.
ii) Execution of Share Transfer Form 7-B by the appellant
and respondent.
iii) Payment of stamp duty on the transfer of shares.
iv) Sending duly executed Share Transfer Form 7-B and the
share Certificates to SVES, the respondent No.2 herein
under Section 110 of Companies Act.
v) Respondent No.2 approving the transfer of shares and
causing alternation in its Register of Members under
Section 111A.
vi) Compliance with Rules and Regulations, completing
prescribed forms, giving relevant undertakings in
accordance with Indian foreign exchange laws and
Regulations such as the Foreign Exchange Management
Act, 1999 and its notifications, given that the transaction
involved transfer of shares from a non-resident to a
resident.
By pointing out, he submitted that respondent No.1, in
enforcing the Award in the US District Court instead of Indian
Courts was motivated by the intention of evading the legal and
regulatory scrutiny to which this transaction would have been
subject to had it been enforced in India. In the light of the
statutory provisions as provided in the Companies Act and
FEMA, we agree with the submission of Mr. K.K.Venugopal.
21) As rightly pointed out the effort of respondent No.1 was
to avoid enforcement of the Award under Section 48 of the
1996 Act which would have given the appellant herein the
benefit of the Indian Public Policy rule based on the judgment
in the Saw Pipes case (supra) and for avoiding the jurisdiction
of the Courts in India though the award had an intimate and
close nexus to India in view of the fact that, (a) the company
was situated in India; (b) the transfer of the ownership
interests shall be made in India under the laws of India as set
out above; (c) all the steps necessary have to be taken in India
before the ownership interests stood transferred. If, therefore,
respondent No.1 was not prepared to enforce the Award in
spite of this intimate and close nexus to India and its laws, the
appellant herein would certainly not be deprived of the right to
challenge the award in Indian Courts.
22) Mr. R.F. Nariman by placing the factual details, namely,
filing of petition before the Michigan Court for execution of the
Award the objection petition filed by the first respondent
herein as well as the orders passed by the Court of Michigan,
US submitted that the appellant having participated and
consented in those proceedings is precluded from re-opening
the very same issue by filing a suit in a court at Secunderabad
which is not permissible either under law or in terms of their
conduct. In view of the legal position derived from Bhatia
International (supra), we are unable to accept Mr. Narimans
argument. It is relevant to point out that in this proceeding,
we are not deciding the merits of the claim of both parties,
particularly, the stand taken in the suit filed by the appellant-
herein for setting aside the award. It is for the concerned
court to decide the issue on merits and we are not expressing
anything on the same. The present conclusion is only with
regard to the main issue whether the aggrieved party is
entitled to challenge the foreign award which was passed
outside India in terms of Section 9/34 of the Act. Inasmuch
as the three-Judge Bench decision is an answer to the main
issue raised, we are unable to accept the contra view taken in
various decisions relied on by Mr. Nariman. Though in
Bhatia International (supra) the issue relates to filing a
petition under Section 9 of the Act for interim orders the
ultimate conclusion that Part I would apply even for foreign
awards is an answer to the main issue raised in this case.
23) Mr. K.K. Venugopal, learned senior counsel, next
contended that the overriding section 11.05 (c) of the
Shareholders Agreement would exclude respondent No.1
approaching the US Courts in regard to enforcement of the
Award. Section 11.05 (b) and (c) of the Shareholders
Agreement between the parties read as follows:
(b) This Agreement shall be construed in accordance with
and governed by the laws of the State of Michigan, United
States, without regard to the conflicts of law rules of such
jurisdiction. Disputes between the parties that cannot be
resolved via negotiations shall be submitted for final, binding
arbitration to the London Court of Arbitration.
(c) 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.
It was pointed out that the non-obstante clause would override
the entirety of the agreement including sub-section (b) which
deals with settlement of the dispute by arbitration. It was
further pointed out that 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. In such circumstances, it is the claim of
the appellant that necessarily enforcement has to be in India,
as mentioned in sub-section (c) which overrides every other section
in the Shareholders Agreement. Mr. K.K. Venugopal further
pointed out that respondent No.1 totally 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. On the other hand,
Mr. Nariman pointed out that Section 11.05 (b) of the
Shareholders agreement alone governs the rights and
obligations between the appellant and the first respondent
inter se and dispute resolution thereof. In view of our
discussion supra, we agree with the stand of the learned
senior counsel for the appellant.
24) Coming to the other contentions particularly the fact that
the suit has been filed before the trial Court which is a court of
competent jurisdiction under Section 2(e) of the Act and not
an application under Section 34 of the Act, Mr. K.K.
Venugopal pointed out that it would not affect the issue of
jurisdiction as this Court has upheld the conversion of a suit
into a Section 9 petition under the Act. (vide Sameer Barar
and Ors. Vs. Ratan Bhushan Jain & Ors. (2006) 1 SCC 419)
and in another instance, converted a writ petition into a first
appeal under the Civil Procedure Code. (vide Ajay Bansal vs.
Anup Mehta & Ors. (2007) 2 SCC 275). Even otherwise, if the
Court in question is not having jurisdiction in the interest of
justice the suit/proceeding has to be transferred to the court
having competent jurisdiction.
25) Learned senior counsel for the appellant submitted that
the first respondent – Satyam Computer Services Ltd. could
not have pursued the enforcement proceedings in the District
Court in Michigan, USA in the teeth of the injunction granted
by the Courts in India which also, on the basis of the Comity
of Courts, should have been respected by the District Courts
in Michigan, USA. Elaborating the same, he further submitted
that the injunction of the trial court restraining the
respondents from seeking or effecting the transfer of shares
either under the terms of the Award or otherwise was in force
between 15.06.2006 and 27.06.2006. The injunction of the
High Court in the following terms appellant (i.e. respondent
No.1) shall not effect the transfer of shares of the respondents
pending further orders was in effect from 27.06.2006 till
28.12.2006. The judgment of the US District Court was on
13.07.2006 and 31.07.2006 when the Award was directed to
be enforced as sought by respondent No.1, notwithstanding
the injunction to the effect that the appellant (respondent No.1
herein) shall not effect the transfer of shares of the
respondents pending further orders. The first respondent
pursued his enforcement suit in Michigan District Courts to
have a decree passed directing   VGE shall deliver to
Satyam or its designee, share certificates in a form suitable for
immediate transfer to Satyam evidencing all of the appellants
ownership interest in Satyam Ventures Engineering Services
(SVES), the partys joint venture company. Further, the VGE
(appellant herein) shall do all that may otherwise be necessary
to effect the transfer of its ownership interest in SVES to
Satyam (or its designee). It is pointed out that obtaining this
order by pursuing the case in the US District Courts, in the
teeth of the prohibition contained in the order of the High
Court, would not only be a contempt of the High Court but
would render all proceedings before the US courts a brutum
fulmen, and liable to be ignored. Though Mr. R.F.Nariman has
pointed out that the High Court only restrained the
respondent from effecting transfer of the shares pending
further orders by the City Civil Court, Secunderabad, after the
orders of the trial Court as well as limited order of the High
Court, the first respondent ought not to have proceeded the
issue before the District Court, Michigan without getting the
interim orders/directions vacated.
26) Finally, the overriding section 11.5 (c) of the SHA cannot
be ignored lightly. As pointed out, the said section would
exclude respondent No.1- Satyam Computer Services Ltd.
approaching the US Courts in regard to the enforcement of the
Award. Section 11.05 (b) and (c) of the Shareholders
Agreement between the parties which is relevant has already
been extracted in para 23.
The non-obstante clause would override the entirety of the
agreement including sub-section (b) which deals with
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. 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.
27) The claim of the first respondent that the section,
namely, 11.05 (c) of the SHA cannot be construed to mean
that Indian law is a substantive law of the contract or that
Indian law would govern the dispute resolution clause in
Section 11.05(b) are not acceptable. As rightly pointed out
and observed earlier, the non obstante clause would over ride
the entirety of the agreement including sub-section (b) which
deals with the settlement of the dispute by arbitration and,
therefore, section 3 would apply to the enforcement of the
award. In such event, necessarily enforcement has to be in
India as declared by the very section which over rides every
other section.
28) The above-mentioned relevant aspects, the legal position
as set out in three-Judge Bench decision in Bhatia
International (supra), specific clause in the Shareholders
Agreement (SHA), conduct of the parties have not been
properly adverted to and considered by the trial Court as well
as the High Court. Accordingly, both the orders passed by the
City Civil Court and of the High Court are set aside.
29) In terms of the decision in Bhatia International (supra),
we hold that Part I of the Act is applicable to the Award in
question even though it is a foreign Award. We have not
expressed anything on the merits of claim of both the parties.
It is further made clear that if it is found that the Court in
which the appellant has filed a petition challenging the Award
is not competent and having jurisdiction, the same shall be
transferred to the appropriate Court. Since from the inception
of ordering notice in the special leave petition both parties
were directed to maintain status quo with regard to transfer of
shares in issue, the same shall be maintained till the disposal
of the suit. Considering the nature of dispute which relates to
an arbitration Award, we 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 copy of this
judgment. Civil appeal is allowed to this extent. No costs.

About advocatemmmohan

ADVOCATE

Discussion

Comments are closed.

Blog Stats

  • 2,897,476 hits

ADVOCATE MMMOHAN

archieves

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 1,907 other followers
Follow advocatemmmohan on WordPress.com
%d bloggers like this: