Spentex Industries Limited
Quinn Emanuel Urquhart & Sullivan LLP
Delhi High Court
The Plaintiff and its subsidiary i.e. Spentex Netherland B.V. had entered into investment transactions with the Republic of Uzbekistan. In lieu of disputes arising between the parties, referral to an international arbitration for resolution was expected.
The Respondent is a firm overseas lawyers located in the United States. Therefore, the Plaintiff approached the Respondent for legal services with respect to the upcoming arbitration proceedings for which a Letter of Engagement was issued on 20.05.2013 at New Delhi.
The arbitration procedure commenced on 03.09.2013 and in furtherance of the same, the Respondent raised invoices with respect to the services provided which remained unpaid every after the passing of the arbitral award on 27.12.2016 by the Plaintiff.
However, the Plaintiff stated that they were not a party to the arbitration proceedings and the Respondent never acted upon the same for the Plaintiff. As disputes arose between the parties, a tri-partite arbitration proceeding was initiated on 25.08.2017 by the Respondent as under Article 16 of the Letter of Engagement.
The Plaintiff submitted that:
i. The arbitration agreement between the Respondent and the Plaintiff is null, inoperative and void while placing reliance on Section 44 of the Arbitration & Conciliation Act, 1996 (“the Act”);
ii. The relationship between the Plaintiff and the Respondent is cannot be considered as commercial under Indian Law;
iii. The dispute is between the Plaintiff’s subsidiary and the Respondent and the Respondent did not render any services to the Plaintiff.
On the other hand, the Respondent submitted that:
i. The contract between the Plaintiff and the Respondent contains the following arbitration clause:
“16. Arbitration Although we think it is unlikely, it is possible that a dispute may arise between us regarding some aspect of the Engagement and our representation of the Clients. If the dispute cannot be resolved amicably through informal discussions, we believe that most, if not all; disputes can be resolved more expeditiously and with less expense by binding arbitration rather than on court. This provision explains the circumstances under which such disputes shall be subject to binding arbitration.
ii. The Plaintiff failed to pay the fixed fee which the Plaintiff was liable to pay at specified milestones, costs and expenses incurred during the arbitration proceedings and the fee with respect to the outcome of the proceedings;
iii. The Award was passed against the Plaintiff because of the Plaintiff and its subsidiary engaging in illegalities and corruption but they still are liable to pay the Respondent for the billable hours put in to the case by the Respondent.
The Respondent filed an interlocutory application under Order 7 Rule 11 of the Code of Civil Procedure, 1908 read with Section 45 of the Act seeking to declare the Letter of Engagement between the parties and the arbitration clause as null, void and also against the public policy of India.
ISSUES BEFORE THE DELHI HIGH COURT
The following issue were considered by the Delhi High Court:
i. Whether the present suit seeking a declaration that the Letter of Engagement dated 20.05.2013 and the arbitration clause being Article 16 of the Letter of Engagement is null and void or inoperable or incapable of being performed is maintainable?
ii. Whether the Respondent can be said to be carrying on commercial activity?
The Plaintiff relied upon the Supreme Court decision of World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) PTE Ltd., (2014) 11 SCC 639 and others to submit that the relationship between the parties were not commercial in nature and therefore, the Section 44 and 45 of the Act have no application.
Further, the contingent fees mentioned in the Contract makes it barred under the Indian Laws as laid down in the case of B. Sunitha v. The State of Telengana & Anr., (2018) 1 SCC 638 i.e. a lawyer in India is barred from charging contingent fees.
The Respondent however, relied upon the case of Clearwater Capital Partners (Cyprus) Ltd. v. Satyajit Singh Majithia & Ors., 2012 (128) DRJ 478 and others to dismiss the application at the very threshold. While emphasizing the commercial nature between the parties several other decisions were brought to light like R.D. Saxena vs. Balram Prasad Sharma (2000) 7 SCC 264. Further, the Agreement is valid and legal without any bar on contingent fees.
The Court while referring to series of precedents came to the conclusion that Section 45 of the Act allows an enquiry into the limited question of whether the arbitration agreement is null and void.
The Court went ahead for an in-dept referral of the case of World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) PTE Ltd., (2014) 11 SCC 639 wherein Section 44 and 45 of the Act were discussed at length to judge the commercial nature of the Agreement. The Court considered the interpretation of ‘commercial’ in order to understand the relationship between the parties fits such scenario or not.
The Court thereafter, referred the case of Devendra M. Surti (Dr.) v. State of Gujarat [AIR 1969 SC 63] where the Delhi High Court held that the doctor’s establishment is not covered under ‘commercial establishment’ under the Bombay Shops & Establishments Act, 1948.
The Court observed the following:
“In this context reference may be had to the judgement of the Supreme Court in the case of R.M. Investment and Trading Co. Pvt Ltd. vs. Boeing Co. & Anr., (1994) 4 SCC 541. The Supreme Court was dealing with the issue whether the agreement for consultant services for sale of Boeing aircrafts in India is a commercial agreement within the meaning of Section 2 of the Foreign Awards (Recognition and Enforcement) Act, 1961.
The term commercial has to be interpreted liberally consistent with its literal and grammatical sense.”
The Court finally opined that:
i. The Respondent initiated arbitration proceedings for the outstanding fees and the Plaintiff had failed to pay such charges. As the proceedings are substantially for recovery of money, it leads to a commercial relationship between the parties under Section 45 of the Act;
ii. The entire contract was not based on contingent fees and had aspects of fixed fees at different intervals so the Letter of Engagement is not null and void;
iii. Even though the services were delivered to the subsidiary and not the Plaintiff, the Court cannot deny reference to arbitration unless the arbitration agreement itself is null and void.
The High Court in furtherance of the discussion and series of judgments referred, held that the Plaintiff failed to establish sufficient cause of action and therefore, the arbitration agreement is not null and void, inoperative or incapable of being performed.
The Court further stated that:
“They have chosen to abstain themselves from the arbitration proceedings and the award has already been passed. They are free to take appropriate steps as per law against the award.”
With the waive amongst the Apex Court and the High Courts of pro-arbitration approach, this precedent shall become yet another example for the stance taken by the Court for not going into the merits of the issue and deciding upon the validity of the arbitration agreement only.
This shall encourage and promote the path of India matching the international standards of being a suitable seat for arbitration.
The High Court has deferred from the judgment of the Division Bench of the Bombay High Court in the case of Sakharam Narayan Kherdekar v. City of Nagpur Corporation & Ors. AIR 1964 Bom. 200, wherein it was held that:
“44. In our opinion, enough has been stated above to indicate how the profession of an advocate is of a class apart, not only from other professions but also from other commercial activity in which a person may be employed. It is possible to conceive of any commercial activities where services of a professional man like engineer, or architect or draftsman may be utilised, but we cannot conceive of commercial venture where services of a lawyer, not for his own benefit but as a means of providing advice and legal aid to others on behalf of a corporation or an organised body may be made available as part of their commercial activity. The relations between a counsel and his client are not analogous to those of a trader and his customer. The client is not his customer; there is a certain fiduciary relation between them when the counsel accepts a brief. The obligations do not end with the disposal of the case; they continue so far as the lawyer is concerned. He has obligations not only to the client but also to the Court, and generally to the administration of justice, in which he performs a healthy and necessary function. We, therefore, do not think that the profession of a lawyer is possible to be carried on as a commercial venture in any sense of the term. …..”