Thursday, February 20, 2014

Enercon India v. Enercon GmBh: Supreme Court Directs Parties to Arbitrate and Cloaks Indian Courts with Exclusive Jurisdiction

In a recent decision dated February 14, 2014, the Supreme Court of India has partly upheld the decision of the Bombay High Court in the contractual litigation between Enercon India (Indian entity) and Enercon GmBh (German entity) by holding that there exists a valid arbitration agreement entered into by and between the parties. However, the Supreme Court differed with the Bombay High Court in that it took the view that merely because the venue of arbitration is London, it did not follow that UK Courts could be approached by either party to seek interim measures during the course of arbitration.

In other words, according to the Supreme Court, “venue” of arbitration is not the same as “seat” of arbitration. While the former is merely the geographical location of the arbitration proceedings which is chosen based on convenience, the latter decides the appropriate court which shall be cloaked with exclusive jurisdiction to support the arbitration proceedings. Consequently, it is the seat of arbitration, and not the venue that must be considered in resolving the issue of appropriate Court. The exception to this approach is when the agreement is completely silent on the “seat”. In such a situation, venue may not only be a critical factor, but may also be conclusive in deciding the appropriate court.

In this case, although the venue of arbitration is London, the seat of arbitration is India since the law governing the contract as well as the arbitration clause are Indian. Further, the subject-matter of the agreements entered into between the parties pertain to setting up of Enercon India, allocation of shares of Enercon India, and transfer of know-how from the German entity to the Enercon India. Considering the India-centric nature of the transactions, the dispute between the parties too have the closest intimate connection with India. Consequently, according to the Apex Court, Indian Courts alone have jurisdiction over the arbitration proceedings.

The Apex Court further differed with the Bombay High Court on the latter’s vacation of the anti-suit injunction granted by the Daman Trial Court which restrained the German entity from pursuing judicial remedies in UK Courts. According to the Supreme Court, the anti-suit injunction was rightly granted since having decided that there exists a valid arbitration clause between the parties with India as the seat of arbitration, the German entity being a party to arbitration proceeding cannot not be allowed to pursue litigation in UK Courts.  

Severability of the Parent Contract and the Arbitration Clause
Extracted below are the relevant portions of the Intellectual Property License Agreement (IPLA), which according to the Indian entity, had not been entered into and consequently there was no concluded contract on the issue of arbitration as well. To address this issue, the Court relied on the following clauses of the agreement:

“3. Governing Law and Jurisdiction
3.1 This paragraph is legally binding.
3.2 This Heads of Agreement is (and all negotiations and any legal agreements prepared in connection with the IPLA shall be) governed by and construed in accordance with the law of Germany.
3.3 The parties irrevocably agree that Clause 18 of the proposed draft IPLA shall apply to settle any dispute or claim that arises out of or in connection with this memorandum of understanding and negotiations relating to the proposed IPLA.

...Clause 18.3---- All proceedings in such arbitration shall be conducted in English. The venue of the arbitration proceedings shall be London. The arbitrators may (but shall not be obliged to) award costs and reasonable expenses (including reasonable fees of counsel) to the Party(ies) that substantially prevail on merit. The provisions of the Indian Arbitration and Conciliation Act, 1996 shall apply

Based on the above clauses, the Apex Court took the view that the existence of an agreement on the issue of arbitration is incontrovertible. Also, extracted below is Section 16 of the Indian Arbitration and Conciliation Act, 1996:

16.Competence of arbitral tribunal to rule on its jurisdiction.- (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose------
(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause

The clear and express mandate of Section 16, according to the Supreme Court, is “that the main contract and the arbitration agreement form two independent contracts." The Court further observed as follows:

"Commercial rights and obligations are contained in the underlying, substantive, or the main contract. It is followed by a second contract, which expresses the agreement and the intention of the parties to resolve the disputes relating to the underlying contract through arbitration. A remedy is elected by parties outside the normal civil court remedy. It is true that support of the National Courts would be required to ensure the success of arbitration, but this would not detract from the legitimacy or independence of the collateral arbitration agreement, even if it is contained in a contract, which is claimed to be void or voidable or unconcluded by one of the parties.

Further, according to the Court, since the scope of the arbitration clause extends to even disputes “in connection with”/relating to the very existence of a valid IPLA, and not just disputes “arising out of” the IPLA, the arbitral tribunal is capable of deciding whether there exists a valid IPLA.

The net result for both parties to the litigation is that, the Indian entity which did not wish to take part in the arbitration will now have to be party to it, and the German entity which wanted UK Courts to be vested with simultaneous jurisdiction over the arbitration proceedings, cannot have recourse to UK Courts since Indian courts have exclusive jurisdiction over the arbitration proceedings.

I strongly recommend a reading of this decision to understand various aspects of arbitration and contractual litigation since these issues are bound to present themselves in contractual disputes relating to patent licenses as well. 

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