1993 Supreme(Del) 617

High Court Of Delhi
GAS AUTHORITY OF INDIA LIMITED - Appellant
Versus
SPIE CAPAG, S.A. - Respondent
Suit 1440 of 1990
Decided On : 10/15/1993

Headnote:Arbitration, International Law of — Foreign Awards (Recognition and Enforcement) Act, 1961.

       (i) FARE Act, 1961 — Purpose of.

       (ii) FARE Act, 1961 - Section 3.

       (Article II New York Convention)

       (1) Referral to Arbitration Mandatory.

       (2) Agreements covered must have foreign element and be connected with international commercial transaction.

       (3) Enforcement of arbitration agrements not capable of resulting in foreign awards — whether permitted — Yes.

       (iii) Constitution of India - Article 51(c) — Domestic Law — relevance of — Article VII (1) N.Y. Convention — validity of Multilateral and bilateral agreements re-enforcement of awards on dasis of domestic law — whether affected by provisions of convention.

       Agreements beyond scope of N.Y. Convention — whether permitted — Yes.

       (iv) Contract — Proper Law of Contract concept discussed.

       2. Practice and Procedure

       (1) Courts powers to determine existence, validity and scope of arbitration agreement — Extent of.

       (2) Contractual time limit — beneficial feature of commercial contract — should be interpreted to be mandatory — No distinction between case where time limit expired and expected matter —

       Petitioner/Gas Authority of India Ltd. (GAIL) had entered into two agreements, for the execution of "Welled Steel Gas Pipe Line Project" stretching from Hazira, Gujarat to Jagdishpur, U.P., with Respondent Consortium, consisting of Spie Capan S.A.N.K.K Corporation and TOYO Engineering Corporation in May 1986. The total contract price was U.S. $ 584 m. (Rs. 772 crores). The entire project was to be executed in accordance with the "Completion Schedule" and every task performed by 31 July 1988. Delay occurred and disputes arose between the parties. Petitioner claimed liquidated damages for the delay and invoked the respondents bank guarantee, while respondent claimed a further payment of U.S. $ 450 m. (about Rs. 775 crores at the prevailing rate).

       The respondent consortium approached the Court of Arbitration, International Chamber of Commerce, Paris (I.C.C.) for arbitration of its claim against petitioner GAIL and also sought a declaration that GAIL did not have a right to levy liquidated damages. Upon receiving notice of this request, GAIL filed an application under Section 33, Indian Arbitration Act, 1940 seeking (1) a declaration that the respondents request for arbitration was invalid, illegal and vocative of the contract between the parties, (2) a determination on the existence, validity and effect of the arbitration agreement contained in the contract between the parties, and (3) a declaration that the matter was not referable to arbitration.

       The primary argument of respondent consortium was that there existed between the parties a valid arbitration agreement, subject to New York convention of 1958 and thereforee was covered by Foreign Awards (Recognition and Enforcement) Act, 1961 (F.A.R.E. Act), in particular Section 3 and Article II (3) of its Schedule. However, the agreement (Article 5.7.1) stipulated a particular procedure and a time limit for notifying and lodging claims and also clearly stated that any failure as regards procedure or observance of time limit would be deemed a waiver of the claim.

       The Court declared (1) Indian law as the proper law of the contract, (2) the Consortiums request for arbitration regarding its claim for extra payment of U.S. $ 450 m. as invalid; (3) the levey of liquidated damages and invocation of bank guarantee by petitioner/GAIL as being covered by the arbitration clause and

       Held:

       1. The object of the FARE Act was to give legislative recognition to the New York Convention. As a successor the Geneva Convention, the New York Convention was aimed to energize and strengthen the machinery for settlement of the disputes emanating from agreements having transnational character. It was meant to remove the existing deficiencies in the previous treaties and not to demolish the mechanism for referral of disputes to arbitration arising out of such transactions. The prime object to the New York Convention was to ensure the recognition and enforcement of the commercial arbitration agreements having international features and the resultant foreign awards arising there from. For this purpose, the New York Convention lays down one uniform code. It provides a common yard stick on the touchstone of which these agreements and awards are recognised and enforced in the countries which have acceded to the same. Thus generating confidence in the parties, who may be unfamiliar with the diverse laws prevailing in different countries with which they are trading that the arbitral agreements and awards flowing there from will be respected and enforced by the courts of the States where enforcement is sought, provided the conditions laid down in Articles I and II of the New York Convention are satisfied for such enforcement.

       By looking at the convention, it is clear that it mandates by focal action :

       1. Recognition and enforcement of commercial arbitration agreements contained in international contracts (See Article II of the New York Convention);

       2. Enforcement of foreign arbitral awards (See Article 1 of New York Convention);

       From a reading of Article II of the Convention it does not appear that there is any express or implied limitation or fetter which calls for recognition and enforcement of only those arbitration agreements which will result in foreign awards. Such a construction cannot be placed upon the said article as this would go against the spirit and grain of the convention.

       2. Under Section 3 of the FARE Act and Article II(3) of the New York Convention referral to arbitration is mandatory as these provisions do not leave any discretion in the court once all the conditions for referral are fulfillled, i.e. the court does not find the arbitration agreement to be null and void, inoperative and incapable of being performed. The effect of Section 3 of the FARE Act and Article II(3) of the Convention is to deprive the court of any discretion in the matter when the aforesaid limitations are not present. This mandatory character of the referral is uniformly applicable to the convention states.

       In nutshell, the Arbitration agreements which qualify for recognition and enforcement under Article 11 of the New York Convention and Section 3 of the FARE Act should have a foreign element and relate to international commercial transactions. What is an international transaction is not capable of a precise definition and its meaning cannot be put in a strait jacket. An international commercial transaction may take myriad forms. A commercial arbitration agreement will be international in character in the following situations.

       (1) If one of the parties has business located abroad; or

       (2) The agreement has to be performed abroad; or

       (3) The subject matter of the transactions is located abroad; or

       (4) One of the parties to the transactions is a foreigner etc.

       According to Section 3 of the FARE Act, the courts in India are under an obligation to stay the legal proceedings in respect of the matters arising out of the arbitration agreements of the kind covered by Article 11 of the New York Convention subject of course to the exceptions mentioned therein. Neither Section 3 nor any other provision of the Act alludes to any limitations or exceptions calling for recognition and enforcement of only those transnational arbitration agreements which are capable of resulting in a foreign award. Refusal to enforce the arbitration agreement on the ground that it will not result in a foreign award cannot be sustained in view of Article 11 of the New York Convention and Section 3 of the FARE Act. In case such a limitation was intended, there was no reason why the convention or the FARE Act could not specifically cater for it. The convention does not apply to an award made in the country where the enforcement is sought. It also does not apply to an award considered as domestic award in the country in which enforcement of such award is sought. The field of application of Article 1 is expressly restricted by the convention itself. If the field of application of Article 11 of the Convention to be confined to only those agreements which would result in Foreign Awards, then one would have expected an express provision to the effect either in the Article itself or in any other provision of the convention. Since there is no such limitation imposed in the convention or the FARE Act restrictive construction cannot be placed upon Section 3 of the FARE Act or Article 11 of the convention.

       If the international trade has to be strengthened and given a boost then it is absolutely essential to respect the agreements of the nature covered by Article 11 of the New York Convention subject to the conditions specified therein. The concerns of international community require that there should be uniformity of treatment with regard to the interpretation of the New York Convention. The New York Convention will apply to an arbitration agreement if it has a foreign element or flavour involving international trade and commerce even though such an agreement does not lead to a foreign award but the enforcement and recognition of the agreement will of course be subject to the limitations already spelt out.

       3. It has long been recognised that the parties have a free choice to select the proper law applicable to the contract. Where there is an express choice made by the parties regarding the application of the proper law, the agreement will be governed by that law. This is indicated by Article V(1)(a) of the New York Convention corresponding to Section 7(i)(e) of the FARE Act, which provides, inter alia, that a foreign award may not be enforced if the arbitration agreement from which it stems is not valid, under the law to which the parties have subjected it or failing any indication thereon, under the law of the country where the award was made. Though the said provision relates to the conditions for the enforcement of the arbitral award, at the same time it gives the cue for determining the law applicable to an arbitration agreement.

       Some light, through in an indirect way, is also thrown by Article VII(1) of the New York Convention to the vexed question. The first paragraph of this Article, inter alia, contains a provision which leaves the parties free to enforce an arbitration award, covered by a convention agreement on the basis of the internal law of the enforcing state i.e. the law applicable to even a purely domestic award. This shows that the parties to an international commercial arbitration agreement can agree to seek enforcement of an arbitral award on the basis of the domestic law instead of the New York Convention notwithstanding the fact that they may have agreed to enforce arbitration agreement under Article 11 of the Convention.

       In case the resultant award falls within the provisions of Section 9(b) of the Act then surely it is not possible to enforce the same under the New York Convention and the FARE Act but a party can fall back upon the Arbitration Act to enforce the same. Neither the Arbitration Act, 1940 nor the FARE Act excludes its enforcement under the former Act. Thus even when the arbitration agreement does not result in an arbitral award capable of enforcement under the convention it can still be enforced under the parallel domestic law of India, the Indian Arbitration Act, 1940. In this view of the matter it is not necessary that for the application of Article 11 (3) of the Convention the arbitration agreement should lead to an arbitral award capable of recognition and enforcement under the New York Convention and the FARE Act. This type of nexus between the arbitration agreement and the arbitral award is not contemplated under the Convention as otherwise requirement of such a linkage would have been provided by specific words to that effect in the New York Convention itself. To shackle the arbitration agreements, having foreign element, by reading into the FARE Act and the New York Convention limitations not provided for expressly therein, would rob the agreements of their effectiveness and enforceability.

       4. Proper law of the contract is the law which the court is required to apply for determining the interest obligations of the parties under the same. Proper law is an expression used to describe the law that governos the contract. It provides a primary system of law under which the rules and obligations of the parties have to be worked out. In other words, the proper law governs the matters flowing from the contract executed by the between the parties. Where, choice is not expressly stated in the agreement, the intention of the parties for determining as to what law governs the transaction must still be gathered from the agreement itself. In ascertaining the proper law of the contract the court must have regard to features of the contract which serve as links between the contract and the country with which it is most closely and vitally connected, for example, the place where the agreement has been entered into by the parties, where the same is required, to be performed, the set of the forum where the disputes inter se between the parties have to be resolved etc. These connecting ties are the pointers which indicate the Country which is most closely associated and connected with the contract and in which lies the centre of gravity of the contract.

       Different and distinct laws may govern the contract, the arbitration agreement and arbitration proceedings according to the will of the parties. Normally unless there is a contrary indication in the agreement, the same law will govern the contract, the arbitration agreement and the arbitration proceedings. The Court will not readily and without good reason split a contract in this respect and usually proper law of the contract governs all matters arising out of the same, specially where the parties stipulated that the agreement shall be governed by a particular system of law without laying down any exceptions what so ever. In such a contingency the entire contract will be governed by one primary system of law.

       5. The existence, validity and effect (scope) of arbitration agreement can be determined by the court at any of the following three stages :

       1. Before the arbitration proceedings commence;

       2. During the pendency of the arbitration proceedings; and

       3. After the award is filed in the court.

       At the first and second stage a party can ask the court to determine the question in a petition under Section 3 of the FARE Act and at the third stage he can avail of the grounds mentioned in Section 7 of the FARE Act.

       6. If a claim for extra/additional payment is not raised in accordance with the provisions of Article 5.7.1, the party will not have access to to the arbitral mechanism. In other words, until a claim is made in conformity therewith, there would be no arbitration agreement between the parties. Violation of the prescribed time limit cannot be ignored as the consequence for such a failure has been stated clearly and precisely and does not leave the court or the parties quessing. These provisions have to be given the efficacy otherwise one would be doing violence to the express language of the said clause.

       Where the arbitration clause provides for compelling time limit for notifying and lodging a claim and also provides for the consequence of the failure to do so, the clause must be held to be of a mandatory character. Since in the present case the parties bargained on the footing that the claim shall be notified and quantified within a specified period of time they must abide by the same and cannot be allowed to charter a course of action which is contrary to the agreement. As is evident from the preponderance of judicial authority the claim for arbitration must be made in accordance with the provisions of the agreement and within the time limit prescribed therein and unless that is done, the arbitrator will have no jurisdiction in the matter as he derives authority only from the agreement of the parties.

       In principle no distinction can be drawn between a case where time limit for survival of the claim and its referability to arbitration is over and a case where a certain matter is excepted from the operation of the arbitration clause. Once the time limit as laid down in clause 5.7.1 is over, the matter for all intents and purposes is rendered as an Excepted Matter since the same no longer remains within the purview of the arbitration clause and is excluded from its operation.

       Article 9.1 of the GCC dealing with the appointment of arbitrators has to be read subject to clause 5.7.1. This follows from the opening words of the former article, namely, "unless otherwise specified", which limit and restrict its operation. These words cut the amplitude and width of the arbitration clause and the same is rendered dependent upon and subservient to other clauses of the agreement like Article 5.7.1 of the GCC. If the formalities laid down in Article 5.7.1 are not fulfillled by the party it will lose its right to claim adjudication of its claim by arbitration. Besides Article 5.7.1 prevails over Article 9.1 and other provisions because it also contains a non-obstants clause which uses the following expression :

       "Irrespective of any provision in the contract to the contrary".

       A conjoint reading of Articles 5.7.1 and 9.1 of the GCC leave no manner of doubt that the latter provision is not widely worded so as to fetter the jurisdiction of the court to determine the questions of existence, validity and effect of the arbitration agreement.