Arbitration Clause valid even if the Underlying Contract is not concluded

Enercon (India) Limited and others v. Enercon GMBH and another

In this case, the Supreme Court has dealt with certain key issues concerning commercial arbitration inter alia involving ascertaining the validity of arbitration agreement, when the underlying contract is not concluded. The Court also clarified the difference between ‘venue’ and ‘seat’ of arbitration.

FACTS

Disputes arose between the appellants and the respondents under an intellectual property license agreement (“IPLA”) alleged to have been executed between them. The IPLA contained an arbitration clause which provided for ‘arbitration’ under the Indian Arbitration and Conciliation Act, 1996 (“Arbitration Act”) with London being the venue of such arbitration.

The respondents invoked the arbitration clause and sought certain declaratory reliefs from the High Court of England. Following this suit, the appellants moved the Indian courts challenging the validity of the IPLA and alleged that the arbitration agreement therein was null and void. The appellants also sought an anti-suit injunction against the respondents barring them to pursue any proceedings in English courts since the seat of arbitration was in India. The matter was finally appealed to the Supreme Court of India.

ISSUE

The main issues in this case were twofold: (a) whether there was a valid arbitration agreement between the parties since IPLA was not a concluded contract; and (b) whether the English High Court had jurisdiction over the matter since the ‘venue’ of arbitration was London.

ARGUMENTS ADVANCED

The primary contention of the appellants was that since IPLA was not a concluded contract, the arbitration clause included therein was not a valid agreement. The appellants further argued that even if the arbitration agreement is valid, the ‘seat’ of arbitration should not be London and English Courts should not have any jurisdiction thereon since (i) the choice of law governing the IPLA is Indian law; (ii) the arbitration clause is governed by the Arbitration Act; and (iii) the subject matter concerning such arbitration is in India.

The respondents, on the other hand, contended that a valid arbitration agreement did not depend on the presence or absence of a concluded underlying contract between the parties. Only an intention to arbitrate was required to determine the validity and existence of an arbitration agreement. On the issue of the ‘seat’ of arbitration, the respondents argued that since the parties designated London as the place for resolving their disputes, London, and not India, was to be the ‘seat’ of arbitration.

JUDGMENT

Upholding the validity of the said arbitration agreement, the Supreme Court held that as per Section 16 of the Arbitration Act, the substantive agreement (being the IPLA) and the arbitration agreement formed two separate contracts. Therefore, the Supreme Court concluded that the legitimacy and validity of the arbitration agreement could not be affected even if the IPLA is void or voidable or unconcluded.

Deciding upon the ‘seat’ of arbitration, the Supreme Court stated that by choosing to apply (a) Indian law as the law governing the IPLA; and (b) the Arbitration Act as the law governing the arbitration agreement, the parties had made a choice that the ‘seat’ of arbitration is India. Consequently, the Supreme Court held that the Courts of the country where the ‘seat’ of arbitration was located as chosen by the parties would have exclusive jurisdiction to exercise supervisory powers over such arbitration.