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Ergo Update

23-May-2020

Introduction

The Delhi High Court (Court), in its judgment dated 12 May 2020 in Spentex Industries Ltd v Quinn Emanuel Urquhart Sullivan LLP, has inter alia held that the legal relationship between a law firm and client is commercial in nature and accordingly covered by Sections 44 and 45 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Further, the Court, while dismissing the anti-arbitration suit filed by the Plaintiff, has reiterated the principle that courts have to be extremely circumspect and reluctant to interfere in arbitration proceedings and shall refer parties to arbitration unless the arbitration agreement is on the face of it null and void, inoperative or incapable of being performed.

Background

The Plaintiff and its subsidiary, namely Spentex Netherland B.V. (Subsidiary), had entered into investment transactions with the Republic of Uzbekistan (Uzbekistan). The Plaintiff anticipated international arbitration proceedings in relation to certain disputes which arose between the Plaintiff and its Subsidiary on one hand and Uzbekistan on the other. Accordingly, the Plaintiff approached the Defendant law firm for its legal services in connection with the possible arbitration proceedings. In this regard, an engagement letter dated 20 May 2013 (Engagement Letter) was issued by the Defendant which was signed by the Plaintiff and its Subsidiary. Hence, it was claimed that a concluded contract came into existence between the Plaintiff, its Subsidiary and the Defendant. Some amendments to the Engagement Letter were subsequently executed as well.

The arbitration proceedings between the Subsidiary of the Plaintiff and Uzbekistan commenced on 3 September 2013. It is the case of the Plaintiff that it was not a party to these arbitration proceedings and the Defendant did not act on its behalf in these proceedings. During the proceedings, the Defendant raised certain invoices for professional work done by the Defendant in the arbitration on the Subsidiary. The award dated 27 December 2016 was passed in the arbitration proceedings, after which correspondence was exchanged between the Subsidiary and Defendant regarding the fees of the Defendant. Due to non-payment of its fees, the Defendant raised a demand for an arbitration on 25 August 2017 under the aegis of JAMS (an arbitration institution) in terms of Article 16 of the Engagement Letter, and consequently JAMS issued notice for commencement of a tripartite arbitration.

A suit was filed by the Plaintiff before the Delhi High Court, seeking a declaration that the Engagement Letter and the arbitration clause therein at Article 16 were null and void, inoperative, incapable of being performed and against the public policy of India. Accordingly, an application was filed by the Defendant under Order 7 Rule 11 of the Civil Procedure Code, 1908 read with Section 45 of the Arbitration Act for rejection of the plaint, which was the subject matter of the present decision.

Issues

The issues on which the Court rendered its findings were as follows:

Ø   

Whether the suit filed by the Plaintiff seeking a declaration that the Engagement Letter and arbitration clause therein were null and void or inoperable or incapable of being performed was maintainable or not;

Ø   

Whether the legal relationship between the Defendant and Plaintiff was commercial in nature and accordingly whether the same was covered under Section 44 of the Arbitration Act;

Ø   

Whether the contract between the Plaintiff and Defendant was void on account of contingency fees prescribed therein; and

Ø   

Whether the Defendant had done any professional work for the Plaintiff or the entire work was done for the Subsidiary.

Arguments of the Plaintiff

The Plaintiff argued the arbitration agreement / Engagement Letter entered into was null and void, inoperative and non-est. No services were rendered by the Defendant to the Plaintiff and thus, there was no dispute between the Plaintiff and Defendant and the dispute was between the Subsidiary and Defendant. Reliance was placed on M.P. Electricity Board and Ors v Shiv Narayan & Anr (2005) 7 SCC 283 and Sakharam Narayan Kherdekar v City of Nagpur Corporation & Ors AIR 1964 Bom. 200, to submit that the relationship between the Plaintiff-client and the Defendant-firm could not be considered as ‘commercial’ and hence, Sections 44 and 45 of the Arbitration Act would not apply. Reliance was placed on World Sport Group (Mauritius) Ltd. v MSM Satellite (Singapore) PTE Ltd., (2014) 11 SCC 639 (World Sport Group Decision) to argue that the suit filed for injunction was maintainable and not barred under Section 45 of the Arbitration Act. It was further argued that the agreement between the Plaintiff and Defendant was barred by Indian Law as it had a provision of contingency fees. Reliance was placed on B. Sunitha v The State of Telengana & Anr (2018) 1 SCC 638 to support that a lawyer in India was barred from charging contingency fees.

Arguments of the Defendant

The Defendant argued that the Plaintiff and Defendant had entered into a concluded contract with a valid arbitration agreement. The Plaintiff failed to pay the Defendant’s fee for the arbitration proceedings. In terms of the contract / Engagement Letter, the Plaintiff and its Subsidiary became liable to pay the Defendant the unpaid fees. Relying upon the decisions in R.D. Saxena v Balram Prasad Sharma (2000) 7 SCC 264 and Aditya Narayan Singh v State Election Commission, Uttar Pradesh & Anr 2003 SCC OnLine All. 1118, it was submitted that the relationship between the Plaintiff, its Subsidiary and Defendant was commercial in nature and hence, Section 44 of the Arbitration Act was attracted. Further, relying upon the decisions in Clearwater Capital Partners (Cyprus) Ltd v Satyajit Singh Majithia & Ors 2012 (128) DRJ 478 (Clearwater Decision), the World Sport Group Decision, Sasan Power Ltd v North American Coal Corporation (India) Pvt. Ltd (2016) 10 SCC 813 (Sasan Power Decision) and McDonald’s India Private Ltd v Vikram Bakshi & Ors 2016 SCC OnLine Del. 3949 (McDonalds Decision), it was pleaded that the suit filed by the Plaintiff was not maintainable and liable to be dismissed at the threshold. It was also submitted that as per the arbitration clause, the arbitration proceedings were to take place in Washington DC and the applicable laws were the laws of USA. Thus, as per the applicable law i.e. the laws of the USA, there was no bar on charging of contingency fees. Hence, the agreement between the parties was legal and valid.

Decision

With respect to the issue as to whether the anti-arbitration suit of the Plaintiff was maintainable, the Court analysed the judgments in World Sport, Sasan Power, Clearwater Capital, McDonald’s (supra) and Himalaya International Ltd v Simplot India Foods Pvt Ltd & Anr 2014 SCC Online Del. 217, to hold that courts have to be extremely circumspect and reluctant to interfere in arbitration proceedings. The mandate is to refer parties to arbitration unless the arbitration agreement is, on the face of it, null and void, inoperative or incapable of being performed. The court is not to examine the legality or validity of the agreement.

With respect to the issue as to whether the relationship between the Defendant and Plaintiff was ‘commercial’ in nature, the Court placed reliance on the definition of the word ‘commerce’ in Collins Concise Dictionary (3rd edition) as well as the decisions in R.M. Investment and Trading Co Pvt Ltd v Boeing Co & Anr (1994) 4 SCC 541 and New Delhi Municipal Council v Sohan Lal Sachdev (2000) 2 SCC 494, to hold that transactions relating to services for valuable consideration would be a commercial legal relationship and would be covered by Section 44 of the Arbitration Act. The agreement between the Plaintiff and Defendant had elements of commerce and since the claim of the Defendant pertained to recovery of money, the same would tantamount to a commercial relationship as per Section 45 of the Arbitration Act.

With respect to the question on validity of the contract on account of contingency fees, the Court observed that the Engagement Letter contained components of fixed fees and accordingly held that the entire contract was not based only on contingency fees. In any case, the agreement was governed by the laws of the USA and the question, if any, would have to be about whether contracts containing contingency fees were void in the USA, and not India. Accordingly, it was held that the Engagement Letter and the arbitration clause therein were not null and void or inoperative or incapable of being performed.

With respect to whether the Defendant had done any professional work for the Plaintiff or the entire work was done for the Subsidiary, the Court held that this issue was on the merits of the claim and should be determined by the arbitral tribunal.

Conclusion

The Court allowed the application of the Defendant and accordingly dismissed the suit of the Plaintiff as the Plaintiff failed to show that the arbitration agreement was null and void, inoperative or incapable of being performed and the plaint failed to disclose any cause of action. Moreover, since the award was already passed, the Plaintiff was free to take appropriate steps as per law against the award.

Comments

This decision assumes significance because it has been rendered in the context of an international commercial arbitration. Thus, parties may be mindful of the fact that for the purpose of Sections 44 and 45 of the Arbitration Act, the legal relationship between an Indian party and a foreign law firm or a foreign party and Indian law firm would be considered commercial in nature and as such, either party may invoke the arbitration agreement, if any, against the other in which an award may be validly passed and enforced in India. In the Indian scenario, the tendency is to assume that disputes between law firms and clients are unlikely to take place and thus, dispute resolution clauses are often not inserted in engagement letters. This may also be the case as law firms are looking to protect their relationship with clients. However, law firms and clients may consider incorporating an alternate dispute mechanism clause in their agreements/engagement letters like mediation, conciliation or arbitration which would spare both sides the expense and aggravation of a civil lawsuit.

As far as the decision of the Court with respect to rejection of the anti-arbitration suit of the Plaintiff is concerned, we strongly agree with the same. The Court has systematically analysed past precedents and correctly held that a court’s interference in arbitration proceedings should be rare, minimum and restricted to analysing whether an arbitration agreement on the face of it is null and void, inoperable or incapable of being performed. Parties are increasingly resorting to anti-arbitration tactics before courts to delay arbitration proceedings, but courts have repeatedly taken a strong stand against the same. Parties must, thus, think twice before approaching courts to suspend arbitration proceedings, as the courts are very likely to reject the same. While courts do have the power to injunct arbitration proceedings, the same should be exercised in accordance with law and past judicial pronouncements.

-          Chakrapani Misra (Partner), Kathleen Lobo (Principal Associate) and Saasha Malpani (Associate)

For any queries please contact: editors@khaitanco.com

Chakrapani Misra (partners)

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