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India – Delhi Airport Metro Express Pvt. Ltd. v. CAF India Pvt. Ltd.

14 October, 2014

 

Legal News & Analysis – Asia Pacific – India – Dispute Resolution

 

Facts

 
The Plaintiff, Delhi Airport Metro Express Pvt. Ltd. (the “DAMEPL”) was incorporated as a special purpose vehicle by a consortium consisting of Reliance Infrastructure Ltd. and the 2 Defendant, Construcciones Y Auxiliar De Ferrocarriles, SA, a company incorporated in Spain (“CAF Spain”). DAMEPL was incorporated for the award of a tender by the Delhi Metro Rail Corporation (“DMRC”), for the operation of the Delhi Airport Metro Express Line.

 
Pursuant to the award of the tender, DAMEPL and CAF Spain entered into a Maintenance Services Agreement (“Maintenance Agreement”), which contained an arbitration clause for resolution of disputes through arbitration under the rules of the International Chamber of Commerce, Paris (the “ICC”), with its seat in London. Part I of the Indian Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) was expressly excluded.

 
Thereafter, CAF Spain assigned the Maintenance Agreement under an Assignment Agreement to CAF India, the 1st Defendant (“CAF India”), a wholly owned subsidiary of CAF Spain.

 
Disputes arose between DAMEPL and DMRC, pursuant to which the Maintenance Agreement was terminated and CAF India invoked arbitration against DAMEPL. DAMEPL challenged the invocation by ling a suit against CAF Spain and CAF India, seeking a declaration that the arbitration agreement and the arbitral proceedings were illegal and unenforceable. This was on the basis that the Maintenance Agreement having been assigned to CAF India, the same was a novation that resulted in the Agreement now being between two Indian parties and accordingly, an arbitration clause which mandated a seat outside India was illegal and contrary to public policy. DAMEPL accordingly also prayed for a temporary and permanent injunction restraining CAF India and CAF Spain from pursuing the arbitration.

 
Arguments Of DAMEPL

 
DAMEPL argued that the assignment to CAF India resulted in a novation of the Maintenance Agreement, pursuant to which the Maintenance Agreement was now between DAMEPL and CAF India, both beingcompanies incorporated under Indian law. In such a scenario two Indian companies could not enter into an arbitration agreement with a foreign seat and exclusion of Part I of the Act.

 
Further, Indian parties cannot derogate from Indian law by excluding the applicability of Part I of the Act, which would mandatorily apply and consequently, the arbitration agreement was contrary to the public policy of India. Relying on the Supreme Court’s decision in TDM Infrastructure Pvt. Ltd. v. UE  Development India Pvt. Ltd.1 DAMEPL submitted that an arbitration between two Indian parties could not fall within the ambit of an “international commercial arbitration” as dened by Section 2(1)(f) of the Act and that this would accordingly be a domestic arbitration. Being so, which Part I of the Act could not be excluded and a foreign seat for the arbitration was not permissible.

 
Arguments Of CAF India And CAF Spain (“CAF”)

 
CAF in the rst instance, inter alia submitted that the present suit was barred under Section 5 of the Act, which limited the extent of judicial interference in arbitral proceedings and was on that basis, not maintainable.

 
CAF also submitted that the assignment was not a novation of the Maintenance Agreement and the Assignment Agreement was only supplementary thereto, inasmuch as CAF Spain still continued to be responsible and liable for the maintenance services under the Maintenance Agreement. As such, the arbitration continued to be an international commercial arbitration in respect of which a foreign seat could be mandated and Part I of the Act excluded.

 
In any event, even if CAF Spain had no role to play, an arbitration agreement between two Indian parties having seat outside India was valid and not against the public policy.

 
The argument as to Section 28 of the Contract Act was rebutted on the basis that where two entities sign an agreement with open eyes to arbitrate the disputes at the forum of their choice, the same cannot be said to be against the restraint of the legal proceedings.

 
Judgment

 
Firstly and crucially, the court held that the Assignment Agreement did not novate the Maintenance Agreement but merely supplemented it and that CAF Spain continued to be responsible and liable to DAMEPL for the maintenance services thereunder and a party to the Maintenance Agreement (and arbitration agreement). This finding the Court stated, “is crucial in nature and leads to the irresistible conclusion that the nature of the arbitration proceedings does not get altered from international commercial arbitration to domestic or local arbitration.” Therefore, this was not a situation where two Indian parties were attempting to contract out of the provisions of Indian law by expressly excluding Part I of the Act, and having a foreign seat of arbitration, thereby violating Indian public policy.

 
Accordingly, the judgment in TDM infrastructure was distinguishable and the ratio inapplicable to the current facts, as the arbitration in the present case continued to be in the nature of an international commercial arbitration. Accordingly, the prayer for interim relief seeking an anti-arbitration injunction was dismissed.

 
The Court also prima facie expressed doubts as to how the suit itself would be maintainable in view of the express wordings of the provisions of Section 5 of the Act, but did not decide the issue as it was only deciding the application for interim injunction (and there was no application seeking rejection of plaint as being barred by law).

 
Conclusion

 
The present case has been noted as being one more “pro-arbitration” ruling by an Indian court, a trend that has been increasing in India to make it a favourable destination for arbitration with minimal judicial interference.

 
That said, however, it would have been helpful had the court passed some observations or opinion on whether in fact, two Indian parties are permitted to enter into an arbitration agreement with a foreign seat. Note that Section 28 of the Act only provides that where the place of arbitration is in India and it is not an international commercial arbitration, the tribunal shall decide the dispute in accordance with Indian substantive law. Section 2(2) of the Act provides that Part I shall apply where the place of arbitration is in India. There is no provision in the Act that expressly bars or prohibits two Indian parties from arbitrating in a foreign seat.

 

End Notes:

 
1 (2008) 14 SCC 271

 

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