Case: Burn Standard Company Limited Vs. Mcdermott International Inc. And Another

e petitioner is a government company incorporated under the Companies Act, 1956, having its registered office at 10-C, Hungerford Street, Calcutta, whereas the respondent is a Corporation organised and existing under the laws of the Republic of Panama with its executive office at P. O. Box 61961, 1010 Common Street, New Orleans, Louisiana 70161, USA, with a branch office at P.O. Box 3098, Dubai, UAE. On September 25, 1984 the said parties entered into an agreement, styled "Technical Collaboration Agreement", for the fabrication of off-shore platform structure, including but not limited to jackets, piles, decks, modules, platform and pipeline components, including their sub-components, for the oil and gas industry which required the high degree of expertise and experience as well as the technical know-how possessed by the respondent. The duration of the agreement was fixed under Article VIII to be five years from the effective date or five years after commencement of commercial production, whichever is greater, or until otherwise terminated earlier under the agreement. The expression effective date as defined in Article I means the date on which notification is received by the respondent that all governmental approvals relating to the agreement have been secured; provided that if such approvals are not secured within 180 days from the signing of the agreement, the agreement, upon notice pursuant to Article XVII of the agreement by either party may be made ineffective whereupon the agreement shall be treated as null and void. Obviously the purpose of the agreement was to establish the basis whereunder the respondent was to provide and the appellant was to receive technology and special technical services related to the establishment and operation of Fabrication Yard for fabricating off-shore platform structures and additional special technical services for any contracts related to marine construction activities that are awarded to the appellant. Article X of the agreement enjoins upon the appellant to apply for necessary registration and/or governmental approval of the agreement in India within 60 days after the agreement is signed by both parties and is delivered to the appellant. A duty is cast on the appellant to furnish satisfactory evidence of receipt of the required governmental approval. The next important clause in the contract which needs to be notice at this stage is ArticleThe aforesaid agreement was entered into after it was approved by the Secretariat for Industrial Approvals (SIA) by their letter dated June 18, 1984. After the execution of the agreement it was filed with the Government of India on October 5, 1984. By the letter dated December 15, 1984 of the Ministry of Industry, Department of Heavy Industry, New Delhi, addressed to the appellant it was pointed out that clauses 3.2 and 4.2 of the agreement were not consistent with the terms and conditions of collaboration approved by Secretariat letter dated June 18, 1984, in that, clause 3.2 should contain a clause that any additional payment made for specific technical services would be subject to prior approval of Government of India and in clause 4.2 the payment expressed in U. S. dollars 298, 200 should be 298, 500 and the figure of the third instalment should be 99, 450 instead of 99, 400 U.S. dollars. To carry out these changes, the parties entered into a supplementary agreement on December 29, 1984 and filed it with the Government of India on January 9, 19854. Under Article IV of the agreement, in consideration of the respondent having agreed to transfer technology to the appellant, the latter undertook to pay a lump sum of US $ 298, 200 in three instalments, the first payment of US $ 99, 400 within thirty (30) days of the signing of the agreement or receipt of approval from the Government of India, whichever is later; the second payment US $ 99, 400 upon completion of Items 1 to 10 of clause 3.4 of Article III and the third payment of US $ 99, 400 upon the commencement of commercial production of the Fabrication Yard or four years after the effective date, whichever is earlier. As stated earlier the figure 298, 200 was replaced by the figure 298, 250 and the amount of third instalment was raised from US $ 99, 400 to US $ 99, 450 under the supplementary agreement dated January 9, 1985. After this supplementary agreement was filed with the Government of India, the latter took the collaboration agreement on record under the communication dated January 15, 1985. A copy of the Government of Indias letter along with a copy of the collaboration agreement was received by the RBI on January 21, 1985. In para 7 of its affidavit dated September 18, 1990, the RBI has clarified as under"However, the Banks letter of authorisation indicating the terms and conditions to be fulfilled for remittances falling due under collaboration agreement remained to be issued to the petitioner company. Hence the Banks approval under Section 28(1) (b) of the Act for rendering technical etc. services under the collaboration agreement also remained to be communicated to the petitioner company. Later, when the petitioner company applied for remittance of the first instalment under the collaboration agreement, the Bank being satisfied that the remittance was strictly in accordance with the terms and conditions approved by the government, allowed the same." *On February 5, 1985, the appellant made an application to the income tax authorities for determination of income tax deduction for the payment of the first instalment of fees. The order passed under Section 195(2) of the Income Tax Act determining the tax at 40 per cent of consideration proceeds on the premise that the agreement was approved by the Government of India. Soon thereafter the appellant applied on February 14, 1985 to the United Bank of India for remitting the first instalment of fees minus 40 per cent chargeable as income tax. The United Bank of India intimated the rate of exchange on the very next date. The Income Tax Officer issued the No-objection certificate on February 19, 1985 whereupon the RBI issued the permit dated March 6, 1985 for remittance of U. S. $ 59, 640 ($ 99, 400 - 40 per cent = $ 59, 640). By the appellants letter dated March 18, 1985 the appellant enclosed a draft for the said amount to the respondent5. After the payment in respect of the first instalment was thus made, the respondent wrote a letter dated September 6, 1986 invoking clause 8.2 of the agreement. That clause reads thus"8.2. In the event of any breach of this Agreement not cured within sixty (60) days after notification thereof, in addition to all other rights and remedies which either party may have in law or equity, the party not in default may at its option terminate this Agreement by written notice. Such termination shall become effective on the date set forth in such notice of termination, but in no event shall it be earlier than sixty (60) days from the mailing thereof. Any waiver of the right of termination for default shall not constitute a waiver of the right to claim damages for such default or the right to terminate for any subsequent breach." *By the said letter the respondent laments lack of payment of instalments due from the appellant and consequential breach of the terms of the contract. The respondent then puts the appellant to notice as per clause 8.2 reproduced above of its right to terminate the agreement if the appellant fails to cure the breach within 60 days of the receipt of the communication. The appellant by its reply dated December 12, 1986 questioned the respondent"s right to invoke clause 8.2 of the agreement since in its view there was no breach of agreement and called upon the respondent to discharge its obligations under clause 3.4 of the agreement and receive payment of the second instalment thereafter. On receipt of this reply, the respondent by their advocates letter dated September 27, 1988 invoked the arbitration clause extracted earlier for referring the disputes and differences to the arbitration of International Chamber of Commerce. At the same time the respondent claimed that it was entitled to recover US $ 621, 777.09 with 15 per cent per annum interest from the appellant for services actually rendered. On the same day the respondent wrote to the International Chamber of Commerce informing it of its decision to invoke the arbitration agreement. The appellant responded by its letter dated October 11, 1988 stating that the collaboration agreement dated September 25, 1984 was void ab initio and not binding on the parties thereto and, therefore, clause 12.1 of Article XII of the agreement was non est and legally unenforceable. On the other hand the appellant blamed the respondent for breach of contract, in that, there was failure to comply with clause 3.4 of the agreement, and stated that no disputes or differences of the type which could be referred to arbitration had arisen between the parties. Thus by challenging the legality and validity of the agreement and branding it void ab initio the appellant also challenged the arbitration clause as similarly void. This was followed by the appellant filing an application under Section 33 of the Arbitration Act inter alia contending (i) that the agreement in question being a contingent one which was to commence from the effective date and since the necessary approvals had not been secured, the agreement had not commenced and as the arbitration clause was a part of the very same agreement it too had not commenced and hence the respondent was not entitled to invoke the said clause and (ii) since under the agreement the respondent was appointed as Technical or Management Adviser in India within the meaning of Section 28(1) (b) of FERA, in the absence of valid permission from the RBI, the agreement was clearly void by the thrust of Section 28(2) of the said enactment. The respondent countered these contentions (i) by pointing out that the necessary government approvals were obtained and hence the effective date was reached and (ii) under the Exchange Control Manual (1978 Edition) only the Indian company could apply to SIA for approval and once such approval was accorded as in the present case, the foreign collaborator to the contract was not expected to secure the RBI permission under Section 28(1)(b) since under the manual SIA approval was to be deemed to be RBIs permission also. It was, therefore, contended that the agreement was legal and valid and the respondent was entitled to seek its enforcement. The arbitration clause being a part of the agreement, it was imperative on the part of the respondent to follow that course in the event of a dispute or difference arising between the parties concerning any matter covered by the agreement6. The High Court on a proper construction of clause 8.1 of the agreement held that the principal duties and obligations incorporated in clauses 1.3 and 1.4 commence after governmental approvals are obtained. The obligation to secure necessary registration and governmental approvals is cast by virtue of clause 10.1 on the appellant. Obviously the said clause comes into operation immediately on the execution of the agreement since clause 1.2 clearly contemplates that if governmental approvals are not obtained within 180 days, the parties will be entitled to put an end to the agreement. It is thus manifest from the terms of the agreement that some of its provisions come into effect on the execution of the agreement and remain in force for 180 days till the contract is terminated by either party. But if the parties choose to continue the contract even beyond the period of 180 days notwithstanding the right to terminate the same, there is nothing in the agreement prohibiting the same and, therefore, on a true interpretation of the contract it must be held to be voidable at the discretion of either party. The High Court further held on a reading of Sections 39 and 56 of the Contract Act that even if the contract is terminated or rendered void the arbitration clause therein does not perish ipso facto for even in contingent contracts there exists a distinction between principal obligation and subsidiary obligations. After referring to the case law in detail, the High Court observed"In my opinion the arbitration clause in the instant case is wide enough to include "any claim, dispute or controversy arising out of or relating to this agreement" so as to mean any dispute as to the interpretation itself including the validity thereof. Therefore, if there is any dispute relating to the interpretation of Article 8.1 of the agreement the same can also be decided by the arbitrator." *Pointing out that an agreement of arbitration, though a contract, is different in its nature from the main contract of which it may form a part, the High Court held that the breach of the obligation and liabilities arising under the main contract may bring about termination of the main contract but not of the arbitration agreement. Indeed, the arbitration agreement would be invoked only when disputes arise under the main contract including a repudiation of the main contract by any of the parties and in that sense the arbitration agreement is remedial while the main contract is substantive. The High Court, therefore, held that in law the jurisdiction of the arbitrator under the arbitration clause would cover the decision as to voidability of the main contract also. The High Court then concluded as under"It is apparent from the sequence of events appearing from the list of dates already noted hereinbefore that the petitioner really made an application to the secretariat for Industrial Approvals, Department of Industrial Development and a letter of approval was issued. Thereafter the agreement dated September 25, 1984 was executed. The government pointed out certain deficiencies as a result of which the supplementary agreement dated September 28, 1984 was executed. The said documents were all filed with the government and thereafter the government took the agreement on record and nothing was really required to be done by the respondent. In fact paragraph 11 at Chapter III of Guidelines for Industries of the Government of India provide for such a procedure for taking the agreement on record after the approval is given for foreign collaboration." *After quoting paragraph 11 of the said guidelines the High Court referred to the appellants application to the Income Tax Officer for payment of the first instalment under clause 4.1 of the agreement and concluded that such an application could not have been made unless the necessary approvals were obtained. After the Income Tax Officer made the order, the RBI granted permission to remit the instalment money (fee) on March 6, 1985. It was only on account of this payment that the respondent furnished the technology and provided the technical services to the appellant in pursuance of Article III of the contract. The High Court dismissed the application holding that on the appellants failure to pay the subsequent instalments, a dispute had clearly arisen between the parties which had to be resolved through arbitration

Court's reasoning:
e think there is considerable force in this contention for the simple reason that we are concerned with the factum of permission and not the procedure followed by the RBI for granting the same. The prescription of the form is merely to aid the RBI to process the application for permission. Emphasis must be laid on substance and not on mere form. If there has been substantial compliance, as in this case, the mere lapse on the part of the RBI in failing to communicate its decision should make no difference. Paragraph 25-A. 2 is not in derogation of paragraph 24-A. 11(i) nor does it dilute the requirement of Section 28(1). In any case the facts of the present case clearly reveal that the RBI had applied its mind to the question of grant of permission and had only thereafter permitted remittance on the first instalment of the fees payable to the foreign collaborator. Merely because application for such permission was not made FNC5 form cannot cloud the fact that the decision to grant the permission was actually taken but the ministerial function of communicating the same remained to be done by oversight. This lapse cannot erase the decision already taken. We are, therefore, of the opinion that the RBI had granted the permission contemplated by Section 28(1) and hence the agreement cannot be voided by virtue of Section 28(2) of FERA. It is not the case of RBI that it at any time had second thoughts about its action. It never contemplated withdrawal of the permission at any point of time thereafter. Once the decision to grant the permission is taken, whether through the course charted by paragraph 24-A. 11(i) or 25-A. 2, that decision stands unless rescinded and the authorities are bound to act in aid thereof14. In the view that we take it is unnecessary to examine the question whether clause 12.1 of the agreement would stand or perish if the agreement is rendered void under Section 28(2) for failure to secure permission under Section 28(1). Since we have come to the conclusion that the RBI permission was in fact secured under Section 28(1), the second question recedes in the background. We, therefore, need not examine the same15. Before we part we are constrained to observe that we were pained at the attitude of the appellant company attempting to thwart a valid agreement, part performed by the payment of the first instalment, on hyper-technical grounds, an attitude which would scare away collaborators and tarnish the image and credibility of our entrepreneurs abroad. We do hope the appellant company will honour its obligations under the agreement and settle its differences with the respondent across the table in a businesslike manner rather than litigate