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2013 Supreme(Bom) 1576
HIGH COURT OF JUDICATURE AT BOMBAY
D.Y. CHANDRACHUD & S.C. GUPTE, JJ.
Mulheim Pipecoatings GmbH
Versus
Welspun Fintrade Limited & Another
Appeal (L) No.206 of 2013 In Arbitration Petition No.1070 of 2011 In Suit No.2287 of 2011
Decided On : 16-08-2013
For the Appellant:Ciccu Mukhopadhya, Senior Advocate with Ms. Nandini Singh i/b. M/s.Bharucha & Partners, Advocates. For the Respondents:Virag Tulzapurkar, Senior Advocate with Rahul Dwarkadas, Kingshuk Banerjee, Ms.Prachi Dhanani i/b. M/s. Wadia Ghandy & Co., Advocates.
Headnote:Arbitration and Conciliation Act, 1996 - Sections 7, 16 and 45 - Doctrine of separability. - Held, if existence of contract is brought to an end, arbitration clause would not survive and when only a further performance of contract is brought to an end, arbitration clause would be enforceable. Though an arbitration agreement is part of the main contract, the law regards it as a collateral and independent part of the contract. And for valid reason, quite apart from the need to preserve the business efficacy of commercial dealings. The main contract defines substantive obligations and corresponding rights. An arbitration agreement is an agreement on dispute resolution which is independently capable of specific enforcement. Hence, an arbitration agreement can and does survive a termination, repudiation or frustration of the contract. The law has evolved the doctrine of separability as the basis for enabling parties to arbitrate, independent of the status of their contract. Judges in the common law world - and people in India are no exception - have advanced the doctrine of separability to ensure that the sanctity of arbitration is not destroyed by disingenuous litigants.
The essential features of the doctrine of separability, are :
(i) The arbitration agreement constitutes a collateral term in the contract which relates to the resolution of disputes and not to the performance of the contract. Whereas the substantive terms of a contract define the rights and obligations of the parties, an arbitration agreement provides for modalities agreed upon by parties for the resolution of their disputes. Parties agree thereby to have their disputes resolved before an arbitral tribunal as distinct from the ordinary Courts of law in the jurisdiction;
(ii) Upon the termination of the main contract, the arbitration agreement does not ipso facto or necessarily come to an end;
(iii) The issue as to whether the arbitration agreement survives or perishes along with the main contract would depend upon the nature of the controversy and its effect upon the existence or survival of the contract itself;
(iv) If the nature of the controversy is such that the main contract would itself be treated as non est in the sense that it never came into existence or was void, the arbitration clause cannot operate, for along with the original contract, the arbitration agreement is also void. Similarly, though the contract was validly executed, parties may put an end to it as if it had never existed and substitute a new contract solely governing their rights and liabilities thereunder. Even in such a case, since the original contract is extinguished or annihilated by another, the arbitration clause forming a part of the contract would perish with it;
(v) There may, however, be cases where it is the future performance of the contract that has come to an end. Such an eventuality may arise due to a number of circumstances, in which one or both the parties may be discharged from further performance. Termination of the contract by one party, repudiation of the contract by one party and its acceptance by the other and frustration of the contract are some of the circumstances. The controversy in such matters arises upon or in relation to or in connection with the contract. In all such cases, the contract is not put an end to for all purposes because there may be rights and obligations which had arisen earlier when it had not come to an end. The contract subsists for those purposes and the arbitration clause would operate for those purposes;
(vi) The doctrine of separability requires, for the arbitration agreement to be null and void, inoperative or incapable of performance, a direct impeachment of the arbitration agreement and not simply a parasitical impeachment based on a challenge to the validity or enforceability of the main agreement. In other words, arguments for impeaching the arbitration agreement must be based on facts which are specific to the arbitration agreement. There may, of course, be facts which are specific to both the main agreement and the arbitration agreement, but there may well be facts which are specific to the main agreement, but not to the arbitration agreement. In the former case, the arbitration clause would perish with the main contract while in the latter case, it would not. Another way of considering the matter is whether it is the further performance of the contract that is brought to an end or it is the existence of the contract which is brought to an end. In the former case, where the further performance of the contract has been brought to an end, the arbitration clause would survive whereas when the existence of the contract is itself brought to an end, the arbitration clause would not survive.
Arbitration and Conciliation Act, 1996 - Section 45 - Reference to arbitration. - Held, when arbitration agreement is found null and void, inoperative or incapable of performance, subsistence and validity of arbitration clause has to be find out by Court. Section 45 requires the Court to focus upon whether the arbitration agreement is null and void, inoperative or incapable of being performed. Parliament has carefully, in selecting the language of the statutory provision, required the Court to apply its mind to the subsistence and validity of the arbitration agreement and not to whether the main contract of which the arbitration agreement is but a collateral part is valid or continues to subsist. This must, with the evolution of the law on the subject, necessarily be so because an arbitration agreement is capable of surviving the invalidation or termination of the main contract between the parties. Undoubtedly, there may be cases where the arbitration agreement may perish with the main contract itself. For instance, where the main contract between the parties is held not to have been executed at all as for instance when a party to the agreement asserts that its signature on the contract is forged, it is but evident that the arbitration agreement would not exist, if the signature of the executant on the contract itself is found to be forged. But even in such a case, the reason why the arbitration agreement perishes is because, in the finding of the Court, the arbitration agreement itself is found not to have been executed by both the parties.
Arbitration and Conciliation Act, 1996 - Section 45 - Application for reference to arbitration. - Held, since arbitration clause under Share Purchase Agreement (SPA) is found valid, operative or capable of performance hence rejection of application under Section 45 of Act improper. What the MOU between the parties has sought to achieve is to provide for the discharge of the remaining obligation under the SPA by an altered or substituted performance. It is in that sense that the SPA is stated by the parties to have been rendered null and void. Clearly, it is not that the SPA was regarded as having never come into existence at all or for the matter of being non est or void at its inception. The SPA evidently was a contract which was duly agreed upon between the parties and which had in so far as the obligation of the first respondent to transfer the shares to the appellant was concerned, been fulfilled. What the MOU did was to substitute the obligation to perform the right of pre-emption by a substituted or altered obligation, but that was to be in performance of the obligation which emanated from Clause 8 of the SPA. Hence, though the parties have used the expression that the SPA would be treated as null and void, their language must be imported a business or common sense understanding which meant that the parties envisaged that the obligation in relation to the balance performance under the SPA would stand altered or substituted by the terms of the MOU.
The arbitration agreement is distinct from the main contract of which it is an independent and separable part. Parties when they arrived at the MOU sought to settle the manner in which the pre-emptive rights under the SPA would be discharged by performance. When by their mutual agreement they purported to resolve the modalities for working out the performance of the clause on pre-emption, that did not render the arbitration agreement null and void, inoperative or incapable of performance.
The mandate of Section 45 is clear. The efficacy and sanctity of international commercial arbitration must be preserved. Once the exclusion contained in Section 45 is not attracted, parties must be referred to arbitration. The arbitration petition filed by the appellant is accordingly made absolute in terms of prayer clause (a).
Arbitration and Conciliation Act, 1996 - Section 45 - Reference to arbitration. - Held, if arbitration agreement is found valid, operative and capable of performance, Court has to refer matter to arbitration.
(Dr. D.Y. Chandrachud, J.)
Admit. The Learned Counsel for the Respondents waive service. On the request of the Learned Counsel appearing for the parties and by consent, the appeal is taken up for hearing and final disposal.
2. The appeal is from the judgment of a Learned Single Judge which has been rendered on a Petition which was filed by the Appellant under Section 45 of the Arbitration and Conciliation Act, 1996. The Appellant which is a company incorporated in Germany entered into a Share Purchase Agreement (SPA) with the Respondents. By its petition, the Appellant sought a direction under Section 45 for a reference to arbitration in accordance with an arbitration agreement embodied in clause 11.13 of the SPA. The Appellant has in pursuance of the arbitration agreement invoked arbitration by lodging a request for arbitration (RFA) to the International Chamber of Commerce, Paris. The First Respondent instituted a suit in this Court on the Original Side, for seeking a declaration that the SPA had, by mutual agreement between the Appellant and the First Respondent, been terminated/rescinded, thereby rendering it null and void and that consequently the SPA “is no longer valid, subsisting, binding and/or enforceable”. The First Respondent also seeks a declaration that an MOU which was entered into on 17 March 2010 by it with the First Respondent is valid, binding and subsisting, together with consequential reliefs, including an order of restraint preventing the Appellant from alienating the shares held by the Appellant in the Second Respondent which is a joint venture company. The Learned Single Judge has held that by the subsequent MOU between the parties, the earlier SPA is rendered null and void, parties having substituted the former for the latter. Since the SPA was held to be null and void and inoperative, the arbitration clause has in the view of the Learned Single Judge perished with the SPA. The judgment of the Learned Single Judge is called in question in appeal.
Facts :
3. On 10 December 2004, an SPA was entered into between the Appellant described there as a transferee, the First Respondent as transferor and the Second Respondent as a company called WGSRL. A joint venture company by the name of Eupec-Welspun Pipe-Coatings (India) Limited (EWPL) was promoted inter alia by the Appellant and the First Respondent. EWPL was proposed to be merged with the Second Respondent under and in accordance with the provisions of Sections 391 to 394 of the Companies' Act, 1956. Pursuant to the merger, the Second Respondent was to issue shares to the shareholders of EWPL, including the Appellant in accordance with an agreed swap ratio. Post merger, the Appellant would hold 77.66 lakh shares of the Second Respondent constituting 5.0777 per cent of the paid up share capital of the Second Respondent. The SPA envisaged that upon the scheme of merger being effective, the First Respondent would transfer to the Appellant 44.69 lakh equity shares of the Second Respondent upon which the holding of the Appellant with the Second Respondent would constitute eight per cent of the paid up share capital, post-merger. Parties envisaged that an application would be made to the High Court of Gujarat under Sections 391 to 394 of the Companies' Act, 1956.
4. The SPA stipulated that in consideration of a payment of Rs. 22.80 crores by the Appellant, the First Respondent would transfer to the Appellant 44.69 lakh shares of the Second Respondent on a spot delivery basis with a closing date no later than three months from the execution of the SPA or as would be mutually extended by the parties. Clause 5.1(c) of the SPA envisaged conditions precedent to closing; among them being the issuance of equity shares by the Second Respondent to the Appellant in terms of the scheme. Clause 7.2(c) envisaged that on the closing date, a Board meeting of the Second Respondent would be held at which inter alia note would be taken of the transfer of shares by the
