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Invoking International Arbitration Clause

India: Invoking International Arbitration Clause in an Agreement

Invoking International Arbitration Clause- International commercial arbitration can be understood as an arbitration process where parties are free to designate the governing law for the substance of the dispute. If the governing law is not specified, the arbitral tribunal shall apply the rules of law it considers appropriate in view of the surrounding circumstances.

Recently a question pertaining to invoking international arbitration clause in an agreement arose before the Delhi High Court. The case was related to termination of exclusive distributorship agreement of an Indian distributor of a famous energy drink company. The Indian distributor had approached the Hon’ble High Court of Delhi for injuncting the termination of the exclusive distributorship agreement. As the agreement provided for an Arbitration clause, the controversy revolved around the scope and power of the Court under Section 45 of the Arbitration and Conciliation Act, 1996. Section 45 incorporates the spirit of New York Convention, and a salutary principle that the Court should refer the parties to arbitration, provided that the agreement having the arbitration clause is not null and void, inoperative and incapable of being performed.

In the present case, the Hon’ble High Court observed that “Courts must take a prima facie view of the matter which is required to be objectively taken based on material and evidence produced by the parties on the record of the case. It must afford full opportunities to the parties to lead whatever documentary or oral evidence they want to lead and then decide the question like trial of a preliminary issue on jurisdiction or limitation in regular civil suit and pass an elaborate reasoned order. The effect of the Arbitration Agreement cannot be nullified only on the basis of an allegation of fraud simpliciter, without any corroborative material to justify such allegations. The court reiterated that even a non-signatory to the arbitration agreement can be referred to arbitration if the cause of action is arising out of one agreement and the disputes arise out of the same contract. Lastly, where both the parties are people having expertise in the field, and the contract is a commercial transaction, the plea of unequal bargaining power cannot be raised to avoid arbitration”.

Relying on various landmark cases the Court gave effect to the objects of Arbitration and restricting the interference of Courts in cases of Arbitration. It held that:

  • Shin-Etsu Chemical Co. Ltd. vs. Aksh Optifibre Ltd. and Anr.,[1] it was held that that the correct approach to be adopted by the trial court under Section 45 of the Act at the pre-reference stage, is to draw a prima facie finding as to the validity or otherwise of the arbitration agreement and refer the parties to arbitration.
  • Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd.[2] the Supreme Court held that the scope of enquiry (even) under Section 45 is confined only to the question whether the arbitration agreement is null and void, inoperative or incapable of being performed but not the legality and validity of the substantive contract.
  • Ayyasamy v. A. Paramasivam,[3] the Court held that mere allegation of fraud simpliciter may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits.

[1] (2005) 7 SCC 234

[2] (2016) 10 SCC 813

[3] (2016) 10 SCC 386

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