1 arbp1291-10 vai IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION ARBITRATION PETITION (LODGING) NO.1291 OF 2010 Essar Wind Power Private Limited, a Company incorporated under the provisions of the Companies Act, 1956 and having its registered office at Essar House, 11 Keshav Rao Khadye Marg, Mahalaxmi, Mumbai-400 034. ....Petitioner V/s. Repower Systems AG. A company incorporated under the laws of Germany and having its registered office at Uberseering 10/Oval Office D-22297, Hamburg ....Respondent Mr.Virag Tulzapurkar, Senior Counsel with Mr.Nikhil Sakhardande, Mr.Abhishek Tewari and Ms.Sonali Mathur i/b AZB & Partners for the Petitioner. Mr.Aspi Chinoy, Senior Counsel with Mr.F.E. De’Vitre, Senior Counsel, Mr.Atul Sharma, Mr.Milanka Choudhary, Mr.Shrikant Doijode, Mr.Parag Kabadi and Ms.Falguni Thakkar i/b Doijode Associates for the Respondent. CORAM : S.J. VAZIFDAR, J. DATE : 1ST FEBRUARY, 2011. ORAL JUDGMENT :- 1. This is a petition under section 11 of the Arbitration and Conciliation Act, 1996. The petitioner has sought an order restraining the respondent from granting any third party any license or right, to manufacture, distribute, sell, install or service in the contract territory the 2 arbp1291-10 contract product or the respondents’ product RE-power 48/750 or any products the respondent seeks to introduce whether or by way of license or otherwise in the contract territory. The petitioner has also sought an order restraining the respondent from investing in any subsidy or any other joint venture to manufacture, develop, market, distribute or sell the contact products in breach of article 2 of the contract. The petitioner has further sought orders, restraining the respondent from invoking the bank guarantees issued in terms of the contract. 2. There is no dispute between the parties that an agreement dated 15.9.2006 was entered into between them and that article 15 thereof contains an arbitration agreement. The petitioner has agreed and undertaken to the Court to abide by the arbitration agreement and to take all steps for the implementation thereof. The undertaking is accepted. 3. The parties entered into an agreement dated 15.9.2006 titled “Repower MD 70/77 Wind turbine Know-how and License Contract”. The preamble to the agreement states that the respondent had developed the Wind Turbine REpower MD 70/77 (referred to as the contract product) and that the respondent though desirous of directly manufacturing and marketing the contract product and to establish itself as the supplier thereof in the contract territory, inter-alia due to limited resource, was not prepared then to enter into the contract territory which included India by itself. The pre-amble further stated :- “With the aim of establishing and creating a long-term relationship between the Licensor and the Licensee, Essar Power Holdings Ltd. - the 100 per cent shareholder of the Licensee – and Repower agree that if for a period of one year from the Effective Date, none of them default any of 3 arbp1291-10 the provision of this Contract, the Parties intend,, before the expiry of the one year from the Effective date, to convert the Licensee into a joint venture company which will manufacture and market the Contract Product in the Contract Territory.” Articles 2, 3, 8, 9, 11, 16 and 18 in so far as they are relevant, read as under :- “ Article 2 Granting and Scope of License In consideration of the Licensee making payment of the License Fee and royalty as per Article 9, the Licensor hereby grants to the Licensee, subject to the limitations and restrictions herein contained, an exclusive, non- transferable license to produce, distribute, sell, install and service the Contract Product in the Contract Territory by using the Know-how (the "License") on the terms, conditions and covenants contained hereinafter: The effective date of the License ("Effective Date") shall be the date on which all of the following events shall have occurred: (a) Receipt by the Licensee of necessary Government approval, if required, for transfer of technology contemplated under this Contract; (b) Signing of the Shareholders Agreement and (c) Signing of the MM License Agreement (2 megawatts). 2.3 Subject to Article 2.1, the License is exclusive in the sense that the Licensor will not grant the same or similar license to any third party (or use it itself or through its Affiliates) for the Contract Product in the Contract Territory. During the term of this Contract, the Licensor will not invest in any subsidiary or any other joint venture company other than the intended joint venture to manufacture, develop, formulate, produce, market, distribute and sell the Contract Product in the Contract Territory or transfer and/or license its technology and trade mark therefore to any subsidiary or any other joint venture entity to manufacture, develop, formulate, produce, market, distribute and sell the Contract Product in the Contract Territory. In consideration therefore, the Licensee shall not procure simil1 m any third parry for the manufacture, development, production, marketing, distributing or selling of wind turbines in the range from 600 to 3,000 kW rated 4 arbp1291-10 power. 2.4 Without prejudice to the rights of the Licensee under Articles 11.4 and 11.5, the Licensee provides a no objection certificate to the licensor to license its technology to third parties for products other than the Contract Product other than any further Products that will have been licensed to the Licensee in the Contract Territory or for the Contract Products after termination of this contract either Party. In these cases, the Licensor shall also be entitled to set up its own 100 per cent subsidiary Indian company or a Joint Venture. Article 3 Technical Documentation. 3.1 The Licensor must make available to the Licensee the drawings necessary for production with parts lists and component specifications for all parts of the installation above the top flange of the foundation, including the foundation built-in part and foundation design, in each case with a statement of compliance (certification of conformity) of Germanischer Lloyd according to their guidelines and to international guidelines regarding power output, noise emission and grid quality measurements, in accordance with the list in Annex 2. 3.2 The Licensor shall hand over the Technical Documents according to Annex 2 following the procedures of Annex 3, within two weeks from the payment of the first installment of the License Fee (Article 9.2 a). The Licensee shall examine the documents handed over to him for compliance with the content described in Annex 2 directly after they are handed over to it and shall notify the Licensor of any concerns immediately and in any case within two weeks after handing over. The Licensor will then be obliged to complete the documents at the latest within two weeks. Article 4 Technical Support 4.1 The Licensor shall provide the senior staff of the Licensee with instruction and training on the technical documentation and qualify them so as to enable the Licensee to effect the installation of the Contract Product on its own and in accordance with Annex 5. Article 8 Duties of the Licensee 8.9 The Licensee will provide the Licensor within 5 arbp1291-10 nine months from the Effective Date with a concept for servicing and repairing of installed Contract Product which is suitable to keep up a high quality condition of the turbines. Article 9 Deliveries and License Fees 9.1 For the granting of the License herein and for the transfer of the Know-how, the Licensee shall pay the Licensor a license fee amounting to 3,000,000 E (three million Euros) (the "License Fee") in three equal installments as set out in Article 9.2. 9,2 The Licensee shall pay the License fee in the following manner : (a) First installment of Euro One Million (1 Million) shall be payable within 14 days of the signing or of the receipt of any necessary government approvals for transfer of technology in terms of this Contract, whatever is later; (b) Second installment of One Million (I Million) Euro within 14 days of delivery and receipt of the documentation as per Annex 2; (c) Third installment of One Million (1 Million) Euro upon successful installation and commissioning of the first eight (8) Contract Products excluding the assembled turbines supplied by the Licensor, but at the latest within six (6) months from the supply of all the components which the Licensee requires to be supplied from the Licensor for the eight (8) Contract Products.. The Licensee is obliged to pay royalty for each Contract Product sold as under: No. of Contract Product Royalty amount for each Sold Contract Product sold Terms 1 – 50 Euro 17,500 With an estimated medium term sales invoice of Euro One Million per Contract Product, the Royalty amount works out to roughly 1.75% of the Sales. 51 – 100 Euro 13,750 With an estimated 6 arbp1291-10 medium term sales invoice of Euro One Million per Contract Product, the Royalty amount works out to roughly 1.375% of the Sales. 101 and above Euro 8,750 With an estimated medium term sales invoice of Euro One Million per Contract Product, the Royalty amount works out to roughly 0.875% of the Sales. These royalties apply irrespective of a domestic sale or an export of the Contract Products. Moreover, these royalties apply also if the Licensee manufactures, installs or sells any turbine in the range of 600 kW to 3,000 kW using the Know-how or the technology of the Contract Product. Article 11 Future Co-operation 11.1 The Licensee or Essar Power Holdings or any Affiliate will place within two weeks from the Effective Date an order of at least two MD turbines without tower and tower foundation inlay for installation in India at a mutually agreed price for the purpose of a local show-case and thereby accelerate market introduction of the Contract Product in India as also for acceleration of the absorption of the technology by imparting training to the Licensee's staff. The Licensor shall supply these turbines FAS Brunsbuttel harbour at the latest in March 2007. 11.2 The Licensor shall supply in the year 2007 up to 34 component sets of the Contract Products completely knocked down (CKD) to the Licensee at a mutually agreed price to enable it to assemble / manufacture the Contract Product. The terms and conditions of this supply shall be defined within one month from the Effective Date. 11.3 The Licensor moreover applies its best efforts to supply also after 2007 critical components required by the Licensee. The broad terms and conditions of this supply shall be defined within one month from the Effective 7 arbp1291-10 Date. 11.4 During the term of this Contract, the Licensee has a right of first refusal in the Contract Territory for the REpower 48/750. The Parties will discuss the possibilities to achieve a certification of the REpower for the Indian market. 11.5 The Parties moreover intend to cooperate on future products of REpower. During the term of this contract, the Licensor will first discuss and give such opportunity to the Licensee before granting a license on any future product for the Contract Territory. 11.6 If Licensor is satisfied with the quality, supply conditions and price, it shall market the Contract Product in its worldwide sales other than the Contract Territory or shall mediate their distribution in these countries. Article 16 Contract Duration 16.1 The right / License according to Article 2.1 are granted for a period of ten years from the Effective Date (Contract Duration). The Licensor can terminate the Contract if the Licensee will not have paid license royalty for altogether at least one hundred eighty (180) produced Contract Products to the Licensor within the Contract Duration. However, the Licensor does not have this right if the Licensee will not have been able to produce this number of Contract Products because REpower will not have given sufficient support to do so. The Parties agree that upon expiry of the Contract Duration, the Licensee shall be entitled to manufacture the Contract Products on its own without being liable to make any royalty payment to the Licensor. Correspondingly, the Licensor is not obliged to give technical support any more. 16.4 Otherwise the Contract can only be cancelled for a material breach. A material breach is considered to apply especially if one of the contracting Parties infringes essential contractual obligations provided in this Contract. This is particularly the case if the Licensee has infringed a. the confidentiality obligations under Article 12; b. its obligation to report the Licensor about the dispatch of Contract Product under Article 9.5; c. its obligations as specified in Clause 8 or 8 arbp1291-10 d. it obligation not to supply turbines outside the Contract Territory without consent according to Article 2.6. Article 18 Miscellaneous 18.10 With regard to the License Fees under Article 9.2 and the penalties and compensations under this Contract as well as any other monetary claim of the Licensor arising from this Contract, the Licensee shall provide the Licensor with (a) an escrow deposit amounting to Euro 1,000,000 in a bank account of a mutually agreed bank according to the draft escrow agreement attached as Annex 12 B simultaneously with the first installment according to Article 9.2. This escrow agreement will terminate if either the Licensor exercises the JV Option or the Licensee provides the bank guaranty according to the clause below and the deposited amount shall be returned to the Licensee. In pursuance of the above, the Licensor and the Licensee hereby agree to make, based on the principal terms of Annex 12 B, the necessary modifications to this Agreement as per the specifications provided by the bank selected as the escrow agent under the escrow agreement. The Licensee can instead of the escrow deposit provide the Licensor with a bank guarantee of 1,000,000 Euro according to Annex 12 A. (a) a bank guarantee: If the Licensor does not exercise its JV Option until two weeks before the expiry of the JV Option, the Licensee shall provide the Licensor at the latest within one week before the expiry of the JV Option with a bank guaranty amounting to EURO 1,500,000. The guaranty must be issued by a German bank or a German branch or subsidiary or by one of the leading Indian business banks to be agreed upon by the parties. It must be non-terminable, payable upon first request of the Licensor (independently of the contract) and valid for a revolving period of one year. The text of the Guarantee is attached in Annex 12 A; modifications of this text can only be made with the consent of Licensor. Upon termination of this period or if Licensor acknowledges in writing that none of his claims are open any more, the licensor has to cancel and return the guaranty deed. The bank guaranty shall be cancelled and returned by the Licensor as soon as the Licensor exercise his option to 9 arbp1291-10 create a Joint Venture with the licensor. In pursuance of the above, the Licensor and the Licensee hereby agree to make, based on the principal terms of Annex 12 A, the necessary modifications to the text of the Guarantee as per the specifications provided by the bank selected as the escrow agent under the Guarantee. 4. The respondent by a letter dated 9.11.2010, alleged that the petitioner had committed various breaches of the terms of the said agreement, as a result whereof, it had not only suffered damages inter-alia by way of loss of earning but that the same had also led to a failure of consideration of the agreement. The respondent contended that the agreement was void on account of approval from the Secretariat of Industrial Approvals having lapsed and in view of the provisions of section 3 of the Competition Act, 2002. Various other contentions were raised, which were reiterated during the hearing. I will deal with the same later. The respondent accordingly terminated the agreement. The petitioner, contending that the termination was illegal, filed the above petition. 5. It is not necessary, to refer to the provisions of an agreement dated 6.6.2006 titled “Framework Agreement”. It was pursuant thereto that the said agreement dated 15.6.2006 was entered into between the parties. The learned counsel addressed me on the basis of the provisions of the agreement dated 15.9.2006 alone. 6. A shareholder agreement also dated 15.9.2006 was to come into effect only if the respondent exercised its option to enter into the joint venture agreement. The respondent admittedly did not exercise this option. The shareholder agreement therefore did not come into effect. The parties had also entered into an agreement dated 29.12.2006 titled “Knowhow and 10 arbp1291-10 Licence Agreement” in respect of the respondent’s product RE-power MM 70/82/92. The same was however, subject to the condition that the respondent exercised its joint venture option and the petitioner expressed its desire in writing within six months from the expiry of the joint venture option to obtain a license for its product provided the petitioner duly fulfilled its obligations under the said MD contract dated 15.9.2006. Mr.Tulzapurkar agreed that M.M. Contract never came into force and the joint venture option had not been exercised. He submitted however, that the same are not subject matter of this petition. The present petition is based only on the MD contract dated 15.9.2006. 7. The petitioner had alleged in paragraph 6(h) of the petition that it had placed the order for the supply of 2 MD turbines under the terms of the agreement in the year 2006 itself. The respondent in paragraph 37 of its affidavit in reply denied the same and contended that consequently the products could not be supplied by it. The petitioner thereafter in paragraph 10 of its affidavit in re-joinder admitted that it had not placed the order for the products and that it had been inadvertently stated in the petition to the contrary. The petitioner thereafter contended that it had not placed the orders due to inordinate delays on the respondent’s part to provide the petitioner with a complete proposal/quotation to enable it to place the final orders. In paragraph 5(d) of its sur-rejoinder, the respondent referred to the correspondence which indicated that the respondent had in fact kept the equipment ready since March, 2007, but that the petitioner did not respond or take any steps in regard thereto. I will refer to the 11 arbp1291-10 correspondence in this regard shortly which prima-facie supports the respondent’s case in this regard. 8. In the notice of termination dated 9.11.2010, the respondent inter-alia alleged that the petitioner had failed to place within two weeks from the effective date an order of at least 2 MD turbines for installation in India and that the petitioner thereby committed a breach of article 11.1 ; provide the complete concept for the service and repairs as required by article 8.9 ; start the production of the contract product within the year 2007 and provide the production facility for starting the production of the contract products even four years after the agreement. The respondent alleged that the petitioner had made a false representation about its capability of producing the contract product and had committed a breach of the confidentiality obligations under articles 1.1, 2.11 and 2.12 of the agreement by entering into a consultancy agreement dated 1.4.2010 with another party. The respondent alleged that the bank guarantee under article 18.10.(b) was provided by the petitioner only on 20.5.2010 instead of by 2.1.2008. 9. Mr.Tulzapurkar submitted that even assuming that there was a breach regarding the payment under article 18 and/or furnishing the bank guarantee within the stipulated period, the respondent had waived the objections in this regard. He submitted therefore that the termination on the basis of such breaches was illegal. He further submitted that under an agreement/arrangement entered into between the parties on 8.7.2009, the respondent was required to make an offer for the supply of 2 MD turbines which it had failed and neglected to do. Consequently, he submitted, 12 arbp1291-10 unless the respondent made an offer as per this arrangement, there could be no question of the petitioner having failed and neglected to enter into a purchase agreement for the same. Relying upon the correspondence in this regard after the date of the said arrangement, he submitted that there was no binding, concluded offer made by the respondent regarding the products. He further submitted that assuming that there was any delay on the part of the petitioner in placing the order for the said turbines, the same had been waived by virtue of this fresh arrangement. 10. Mr.Chinoy on the other hand apart from reiterating the breaches alleged in the respondent’s termination notice, submitted that the petitioner had delayed the implementation of the agreement for over four years during which time, the respondent had suffered enormous losses and that grant of an injunction would cause irreparable harm and injury to the respondent as the effect of an order in terms sought in this petition would be to prevent the respondent from entering the Indian market altogether. He submitted that as a result of the petitioner’s conduct, the respondent had not only been denied the opportunity of earning the amounts mentioned in the agreement but had been prevented from entering into the Indian market. He submitted that the entire purpose of the said agreement had been frustrated. Mr.Chinoy contended that the extension of time referred to by Mr.Tulzapurkar was not unconditional, but that the same was conditional inter-alia upon the petitioner furnishing a no objection certificate to which I will refer shortly. The petitioner having failed to furnish the N.O.C., the termination of the contract was valid. 11. The petitioner admits that there was a delay in payment of the 13 arbp1291-10 amounts under the contract and in furnishing the bank guarantee. The main question is whether the extension of time granted by the respondent in this regard was unconditional or whether it was conditional inter-alia upon the petitioner furnishing an N.O.C. as required by the respondent. I say as required by the respondent for I have assumed that the format thereof is different from the N.O.C. referred to in the contract and the circumstances for the issuance thereof as stipulated in the contract did not exist. If circumstances arose entitling the respondent to terminate the contract, it was within its rights to agree to waive the breaches upon such conditions as it desired. If there was no breach the respondent was not entitled to terminate the contract at all. I have come to the conclusion in the respondent’s favour in this regard. 12. The SIA by a letter dated 2.1.2007 conveyed the approval of the Government of India for the foreign collaboration subject to various terms and conditions. The respondent was admittedly informed about the same. However, a copy of the approval was forwarded later as an attachment to the petitioner’s e-mail dated 21.8.2009. The approval was subject to various conditions in addition to those contained under the agreement dated 15.9.2006. Clause 15 of the approval, stated that the approval was also subject to the same being made a part of the Foreign Collaboration agreement to be executed between the parties and that only those provisions of the agreement covered by the approval or which were not at variance with the approval would be binding on the Government of India or the Reserve Bank of India. Admittedly, the Foreign Collaboration agreement was not entered into. The approval was valid only for two years. 14 arbp1291-10 It was however renewed on 11.8.2009. The time to submit the SIA approval was extended by two years i.e. till August, 2011. Suffice it to note at this stage that with effect from 16.12.2009, the SIA’s approval was not required. 13. Pausing here, it may be noted that although the SIA approval was necessary when the agreement dated 15.9.2006 was entered into, with effect from 16.12.2009, it was not required. Thus if the agreement dated 15.9.2006 stood extended unconditionally as contended by Mr.Tulzapurkar, the fact that the SIA approval was not obtained prior to the alleged extension, would not render the agreement void or unworkable. Even assuming that at any point of time, the agreement had become unworkable or ceased to operate between