1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO.1092 OF 2006 IN SUIT NO.961 OF 2006 Ms.Rashmi Mehra & Ors. ....Plaintiffs. V/s. The EAC Trading Ltd. & Ors. ....Defendants. Mr.S. K. Sen i/b M/s. D.H. Law Associates for the Plaintiffs. Mr.F. E. DeVitre, Senior Counsel with Mr.Kamal Khata i/b M/s.Federal & Rashmikant for Defendant Nos.1 and 2. Mr.M. S. Doctor i/b Kartikeya & Associates for Defendant No.3. CORAM : S.J. VAZIFDAR, DATED : 8TH NOVEMBER, 2006. ORAL JUDGMENT : 1. Defendant Nos.1 and 2 have taken out this Notice of Motion for an order under Section 45 of the Arbitration and Conciliation Act, 1996, referring the disputes raised in the plaint to arbitration in accordance with the arbitration agreement contained in an Agreement to Invest dated 16.12.1994, a Shareholder's Agreement dated 16.12.1994 and a Foreign Collaboration Agreement 2 dated 4.4.1995. 2. The disputes arise under the said agreements as also under a buy back agreement dated 1.6.1996 as amended/modified by an agreement dated 6.12.2000. The buy back agreements do not contain an arbitration clause. The question is whether in the facts and circumstances of the case the arbitration agreements in the other agreements apply to the disputes and differences under the buy back agreement. 3. Mr.Sen opposed the Notice of Motion on the following grounds :- I. The provisions of section 45 are not applicable in the present case as Defendant Nos.1 and 2 do not belong to contracting states as contemplated in the Act and the First Schedule thereto. II. There is no arbitration agreement between the parties in respect of the disputes and differences raised in the plaint. While considering the second submission it will be necessary first to decide whether a derivative action can be referred 3 to arbitration. I have answered this question in the affirmative. I have rejected both the grounds of challenge and allowed the Notice of Motion. 4. Defendant No.4 is the Plaintiff's husband. Plaintiff Nos.2, 3 and 4 are the daughters of Plaintiff No.1 and Defendant No.4. Defendant No.1 is a company incorporated under the laws of Denmark. It was previously known as Bloch & Behrens ApS. It is referred to in the agreements by its previous name. Defendant No.2, GTM (Asia) Investment Holding Ltd. is a company incorporated under the laws of the British Virgin Islands. Defendant No.3 Global Wool Alliance Pvt. Ltd., (previously known as Mehra Wool Alliance Pvt. Ltd.) is incorporated under the Companies Act, 1956. The Plaintiffs and Defendant Nos.1 and 2 are shareholders of Defendant No.3. Defendant Nos.4 to 7 are/were the Directors of Defendant No.3. 5. The suit is filed as a derivative action in respect and on behalf of Defendant No.3 as well as for the Plaintiffs personal reliefs. The derivative action is on the basis that Defendant Nos.1 and 2 are 4 in control of Defendant No.3, who have mala-fide not taken any action to enforce the rights of Defendant No.3, inter-alia, including to claim compensation. The cause of action regarding the personal reliefs is based on the allegation that Defendant Nos.1 and 2 induced the Plaintiff to inter-alia enter into contracts to reduce their shareholding and to expand the capacity of Defendant No.3 by misrepresentation and fraud with the intention of gaining control of Defendant No.3. Re : SUBMISSION I : The provisions of section 45 are not applicable in the present case as Defendant Nos.1 and 2 do not belong to contracting states as contemplated in the Act and the First Schedule thereto. 6. This submission is based on the presumption that there exists a valid arbitration clause in respect of the subject matter of the suit. The arbitration clauses in the three agreements are as under :- (i). Clause 15 of the Agreement to Invest : “15. ARBITRTION Any dispute or difference arising out of or in relation to this Agreement or any 5 obligation set out herein, which cannot be settled by mutual negotiations, shall be resolved by arbitration. The arbitration shall be conducted in accordance with the Rules of Arbitration of the International Chamber of Commerce, Paris. The arbitration shall be held in London, England. This arbitration agreement and the arbitration proceedings shall be governed by English Law. For the removal of doubt, it is clarified that such arbitration shall not be regarded s an arbitration under the Indian Arbitration Act, 1940.” (ii). Clause 17 of the Shareholders Agreement : “17. ARBITRATION Any dispute or difference arising out of or in relation to this Agreement or any obligation set out herein, which cannot be settled by mutual negotiations, shall be resolved by arbitration. The arbitration shall be conducted in accordance with the Rules of Arbitration of the International Chamber of Commerce, Paris. The arbitration shall be held in London, England. This arbitration agreement and the arbitration proceedings shall be governed by English Law. For the removal of doubt, it is clarified that such arbitration shall not be regarded as an arbitration 6 under the Indian Arbitration Act, 1940.” (iii). Foreign Collaboration Agreement : “7. Arbitration Any dispute or difference arising under or in connection with this Agreement which cannot be settled by friendly negotiations and agreement between the parties shall be finally settled by Arbitration to be held in London under the rules of the International Chamber of Commerce. The law governing the arbitration proceedings will be the law of the forum where the arbitration will be held.” 7. Sections 44 and 45 of the Arbitration and Conciliation Act, 1996 read as under :- 44. Definition.—In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960— (a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and (b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies. 7 45. Power of judicial authority to refer parties to arbitration.—Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (V of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. 8. Mr.Sen submitted that the agreement must be one to which the convention applies. The present agreements do not come within the scope of section 45 as, according to him, the parties thereto do not belong to territories declared by the Central Government by notification in the Government Gazette, to be territories to which the convention applies. Defendant No.1 is incorporated in Denmark and Defendant No.2 is incorporated under the laws of the British Virgin Islands. The British Virgin Island at least is not a reciprocating territory. The submission is not well founded. 9. Firstly, it must be noted that section 44 specifies what a “foreign award” means. In addition to it being an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after 11th October, 1960 two further 8 requirements are necessary viz. (i) the award must be in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies and, (ii) it must be made in one of such territories as the Central Government declares by notification in the Official Gazette, to be a territory to which the said convention applies. 10. Section 45 stipulates the requirements for a judicial authority when seized of an action to refer the parties to arbitration. The section stipulates that the action must be in a matter in respect of which the parties have made an agreement referred to in section 44. (As observed earlier, for the purpose of this submission I have proceeded on the basis that such an agreement exists.) Further the reference should be made at the request of one of the parties. This condition too is satisfied by virtue of the present application having been filed by Defendant Nos.1 and 2, requesting for a reference, referring the parties to arbitration. This is subject only to the agreement being found by the judicial authority to be null and void, inoperative or incapable of being performed. With this reservation/limitation, we are not concerned in the present matter. It 9 is not the Plaintiff's case that the agreements for arbitration are null and void, inoperative or incapable of being performed. 11. Thus, in the present matter, the question of applicability of section 45 is limited to a consideration of whether in respect of the subject matter of the suit the parties have made an agreement, referred to in section 44. Section 45 does not require the existence of the conditions referred to in section 44(b). It naturally cannot, for section 44(b) deals with a situation after the award is made whereas, section 45 deals with the position prior to even the reference being made. 12. This leads to a consideration of whether the differences between the parties hereto pertain or are pursuant to an agreement in writing for arbitration, to which the convention set forth in the First Schedule applies. The answer, I find, must be in the affirmative having regard to Article II of the First Schedule which is as follows : “Article II 1. Each Contracting State shall recognise an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of defined legal relationship, whether contractual or not, concerning a subject-matter capable of settlement by arbitration. 10 2. The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. 3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this Article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. 13. Incidentally the title to the First Schedule and the New York Convention - “CONVENTION ON THE RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS” – is restrictive and limited as the Convention/First Schedule also deals with and provides for the recognition and enforcement of arbitration agreements. This is clear for instance from Article II (3) reproduced earlier. This aspect has also been recognised in Law and Practice of International Commercial Arbitration, Alan Redfern and Martin Hunter, Third Edition, page 455, 10-24. 14. An analysis of Clause 1 of Article II indicates three requirements viz. i) An agreement in writing; ii) The parties having undertaken under the agreement to submit to arbitration all or any differences which have arisen or may 11 arise between them in respect of a defined legal relationship and ; iii) The differences concern a subject matter capable of settlement by arbitration. There is no dispute that these requirements are fulfilled in the present case. The only contention on behalf of the Plaintiffs is that the Applicants (Defendant Nos.1 and 2) do not belong to countries which are contracting states. 15. Article II however does not require a Contracting State to recognise such an agreement only if all the parties thereto belong to Contracting States. Nor was my attention invited to any provision in the Act which mandates such a requirement. To reiterate, Section 45 incorporates only clause (a) and not clause (b) of Section 44. 16. It is pertinent to note that a Contracting State may limit the applicability of the convention to the recognition and enforcement of awards made only in the territory of another Contracting State. The First Schedule does not contemplate such a limitation in respect of arbitration agreements. In respect of arbitration agreements, a Contracting State may apply the convention only qua the nature of differences viz. to those considered commercial under the national 12 law of such State. As far as the agreement for arbitration is concerned, section 44 (a) and correspondingly section 45 of the Act do not limit the recognition or enforcement of the arbitration agreement qua the nationality of the parties. Indeed the Convention/First Schedule to the Act does not contemplate such a limitation qua arbitration agreements. 17. This interpretation of section 44(a) read with section 45 and Article II of the First Schedule is supported by contrasting the provisions thereof on the one hand with section 53 of the Act and clause 1 of the Second Schedule thereto on the other. Section 53 deals with the Geneva Convention Awards and reads as under :- 53. Interpretation.—In this Chapter “foreign award” means an arbitral award on differences relating to matters considered as commercial under the law in force in India made after the 28th day of July, 1924,— (a) in pursuance of an agreement for arbitration to which the Protocol set forth in the Second Schedule applies, and (b) between persons of whom one is subject to the jurisdiction of some one of such powers as the Central Government, being satisfied that reciprocal provisions have been made, may, by notification in the Official 13 Gazette, declare to be parties to the Convention set forth in the Third Schedule, and of whom the other is subject to the jurisdiction of some other of the powers aforesaid, and (c) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made, may, by like notification, declare to be territories to which the said Convention applies, and for the purposes of this Chapter an award shall not be deemed to be final if any proceedings for the purpose of contesting the validity of the award are pending in the country in which it was made. Clause 1 of the Second Schedule reads as under :- “1. Each of the Contracting States recognises the validity of an agreement whether relating to existing or future differences between parties subject respectively to the jurisdiction of different Contracting States by which the parties to a contract agree to submit to arbitration all or any differences that may arise in connection with such contract relating to commercial matters or to any other matter capable of settlement by arbitration, whether or not the arbitration is to take place in a country to whose jurisdiction none of the parties is subject. Each Contracting State reserves the right to limit the obligation mentioned above to contracts which are considered as commercial under its national law. Any Contracting State which avails itself of this right will notify the Secretary-General of the League of Nations in order that the other 14 Contracting States may be so informed.” (emphasis supplied) 18. The present case is covered by section 44 as an award, if made would be one after 11.10.1960, Section 53 applies to cases after 20.7.1924 but before 11.10.1960. 19. Clause 1 of the Second Schedule contemplates the recognition of an arbitration agreement “between parties, subject respectively to the jurisdiction of different Contracting States”. This provision is absent in the First Schedule, which is based on the New York Convention. In fact, this is a distinction which has been noted in the Law and Practice of International Commercial Arbitration, Alan Redfern and Martin Hunter, page 68, 1-20 where, it is observed : “Unlike the Geneva Protocol of 1923, the New York Convention does not provide that the parties to an arbitration agreement to which the Convention applies shall be “subject respectively to the jurisdiction of different contracting states”. 20. It is thus clear that where the provisions of Section 45 apply it is not necessary that the parties should be subject respectively to the jurisdiction of different contracting states. Mr.Sen's submission is therefore rejected. 15 21. Mr.Sen referred to Article XIV of the First Schedule in support of his contention. Article XIV reads as under : “Article XIV A Contracting State shall not be entitled to avail itself of the present Convention against other Contracting States except to the extent that it is itself bound to apply the Convention.” 22. Whatever be the ambit of Article XIV, it certainly does not support Mr.Sen's submission. The Article deals with the Contracting States and not parties belonging to Contracting States. Mr.Sen submitted that the expressions in Article XIV, “A Contracting State” and “other Contracting States”, ought to be read as “A party belonging to a Contracting State” and “parties belonging to other Contracting States” respectively. Accordingly, he further submitted that the term “it” refers to the former party viz. “a party belonging to a Contracting State”. This is neither permissible nor warranted. 23. Article XIV pertains to the Contracting States applying the convention. The Contracting States are not bound to apply the convention in its entirety. They are entitled to limit the applicability of the convention as provided in the convention itself. Article XIV prescribes a limitation upon the Contracting States availing the 16 convention against other Contracting States. The limitation being the extent to which the Contracting States availing of the convention is itself bound to apply the convention. 24. Article XIV of the First Schedule read as it is and not as suggested by Mr.Sen, is not meaningless. The submission is based on the erroneous presumption that Contracting States themselves do not enter into arbitration agreements with other Contracting States. The presumption is unfounded. There is nothing in the Act which suggests that Governments of Contracting States cannot enter into an arbitration agreement or that the Act is inapplicable to such arbitration agreements. In fact, the Act contemplates the Government of a foreign country being a party to an arbitration agreement. This is clear from section 2(f) of the Act which reads as under :- 2. Definitions.—(1) In this Part, unless the context otherwise requires,— (f) “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is— (i) an individual who is a national of, or habitually resident in, any country other than India; or 17 (ii) a body corporate which is incorporated in any country other than India; or (iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country; (emphasis supplied) 25. Mr.Sen relied upon a judgment of the Supreme Court in Ramji Dayawala & Sons (P.) Ltd. v. Invest Impor, (1981) 1 SCC 2085. Section 3 of the Arbitration (Protocol and Convention) Act, 1937 fell for consideration of the Supreme Court. Paragraphs 32 and 33 read as under :- “32. India and Yugoslavia have ratified the protocol. The question, however, is whether Section 3 is attracted in this case. The important expression in Section 3 to be noted is: “If any party to a submission made in pursuance of an arbitration agreement to which the protocol set forth in the First Schedule as modified by the reservation subject to which it was signed by India applies”. This expression postulates an agreement to which the protocol set forth in the First Schedule as modified by the reservation subject to which it was signed by India applies and a submission made in pursuance of such agreement. Now, both India and Yugoslavia have ratified the protocol modified by the reservation subject to which it was signed by India. It may be assumed that arbitration agreement between the parties to this appeal is governed by the 1937 Act. Section 3 is, however, not attracted merely where an 18 agreement as set forth in the First Schedule is subsisting between the parties but the next step ought to have been taken before proceeding can be stayed in exercise of the power conferred by Section 3 viz. submission made in pursuance of such an agreement. A reference to Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961, (“1961 Act” for short), prior to its amendment by the amending Act of 1973 and a decision of this Court interpreting the expression: “If any party to a submission made in pursuance of an agreement to which” would clearly establish that mere existence of an agreement as envisaged by the First Schedule would not attract Section 3 of the 1937 Act but it would only be attracted where there is a submission pursuant to that agreement. Section 3 of the 1961 Act prior to its amendment in 1973 read as under: “Stay of proceedings in respect of matter to be referred to arbitration.— Notwithstanding anything contained in the Arbitration Act 10 of 1940 or in the Code of Civil Procedure, 1908, if any party to a submission made in pursuance of an agreement to which the Convention set forth in the Schedule applies, or any person claiming through or under him, commences any legal proceedings in any court against any other party to the submission or any person claiming through or under him in respect of any matter agreed to be referred, any party to such legal proceedings may at any time after appearance or before filing a written statement or taking any other steps in the proceedings, apply to the Court to stay the proceedings and the Court, unless satisfied that the agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between 19 the parties with regards to the matter agreed to be referred, shall make an order staying the proceedings. “But in the present case a suit is being tried in the courts of this country which, for the reasons already stated, cannot be stayed under Section 3 of the Act in the absence of an actual submission of the disputes to the arbitral tribunal at Moscow prior to the institution of the suit.” “33. Section 3 of 1937 Act is in pari materia with Section 3 of 1961 Act. It, therefore, becomes crystal clear that Section 3 of the 1937 Act would only be attracted if there is a submission pursuant to an agreement to that effect. In fact, the decision in V/0 Tractoroexport, Moscow10, made it necessary for the Parliament to amend Section 3 of the 1961 Act. In this case we are concerned with Section 3 of the 1937 Act which is not amended. It must, therefore, receive the same interpretation which an identical provision received at the hands of this Court. Viewed from that angle, in this case while there is an agreement as contemplated by First Schedule to 1937 Act, there is no submission made in pursuance of such agreement and, therefore, the application of the respondent could not have been entertained under Section 3 of the 1937 Act. As far as the 1961 Act is concerned, Mr.Majumdar conceded that Yugoslavia has not ratified the protocol pursuant to which 1961 Act was enacted and, therefore, the respondent cannot maintain its application under Section 3 of 20 the 1961 Act.” (emphasis supplied) 26. In paragraph 32, the Supreme Court observed that both India and Yugoslavia had ratified the protocol and, therefore, assumed that the arbitration agreement between the parties was governed by the 1937 Act. The question before me is whether it is also necessary for the applicability of section 45 that