| A contract(bearing No. S-142) for
supply of aluminum rods was proposed by the Respondent to
the Appellant on 31/8/1990 containing an arbitration clause.
On 25/2/1991 another contract(bearing No. S-336) was proposed
by the Respondent to the Appellant for supply of aluminum
rods. The Appellant did not sign nor return the second contract
also. However, the Appellant opened certain irrevocable letters
of credit for US $ 2,43,250 and shipments were made on the
basis of the same. In the meanwhile, a circular was issued
on 19/3/1991 by Reserve Bank of India (RBI) to all scheduled
commercial banks placing restrictions on import of goods.
On 22/4/1991 RBI modified the margins for opening letters
of credit. The Appellant sent a telex on 30/4/1991 to the
Respondent to the effect that severe restrictions had been
imposed by RBI due to unprecedented foreign exchange crisis
and RBI had not cleared their application for letter of credit.
Therefore, the Appellant wanted to invoke the force majeure
clause cancelling the April shipment for both the contracts.
The Respondent wrote to the Appellant on 30/5/1991 to the
effect that they had closed their position and initiated arbitration
proceedings with reference to both the contracts. When the
Appellant did not respond to the same, letter was received
by the Appellant from the London Metal Exchange appointing
the second arbitrator in terms of the arbitration clause.
On 30/8/1991, a suit was filed by the Appellant seeking a
declaration that there is no valid agreement between the parties
and therefore the arbitration before the London Metal Exchange
was void. The learned Single Judge of the Bombay High Court
did not grant any interim order and recorded a statement that
the Appellant would participate in arbitration proceedings
under protest. The appeal filed against it stood dismissed
by an order on 18/12/1991. In the meanwhile, the suit was
treated as a petition under Section 33 of the Arbitration
Act, 1940 which stood dismissed on the ground that the arbitration
clause bound the parties. The arbitrators published an award
on 29/7/1992 awarding damages amounting to US $ 6,76,000 including
pre-award interest but did not award post-award interest.
The Appellant filed an appeal to the Appeal Board of the London
Metal Exchange seeking to set aside the award as also dispensation
of deposit. Since the London Metal Exchange rejected the request
for waiver of deposit, the appeal could not be pursued. Thereafter,
a petition was filed in the Bombay High Court by the Respondent
under the Foreign Awards (Recognition and Enforcement) Act,
1961 (hereinafter referred to as “the Act”) for
enforcement of the award. The High Court allowed the petition
and granted the certificate under Article 134-A of the Constitution.
The High Court, while disposing of the petition, awarded interest
@ 15% for the post-award period until payment. This order
has been challenged by the Appellant.
The Appellant contended that the foreign award could be enforced
if it is in pursuance of an agreement in writing for arbitration
to which the Convention(i.e. the New York Convention) set
forth in the Schedule to the Act applies as per Section 2(a)
of the Act. The Appellant submitted that the arbitration in
the present case is not pursuant to an agreement in terms
of Article II of the Schedule to the Act, since the contracts
were not signed by them nor there was any exchange of letters
or telegrams between the parties so as to include the arbitral
clause. The Appellant referred to several decisions of foreign
courts to support their contention that in terms of Article
II of the Convention the arbitration agreement is required
to be in writing and signed by the parties, including an exchange
of letters or telegrams.
In reply, the Respondent contended that since the Bombay
High Court had already decided the case when a suit was filed
by the Appellant and treated the same as an application filed
under Section 33 of the Arbitration Act, 1940, and dismissed
it, therefore it was not open to the Appellant to urge the
same point again in these proceedings, as it amounts to res
judicata. The Respondent contended that the correspondence
between the parties and the conduct of the Appellant clearly
established that there existed an arbitration clause between
the parties and, therefore, there was full compliance with
Article II, paras (1) and (2) of the Convention which forms
part of the Schedule to the Act. The Respondent also submitted
that the definition of what constitutes a written arbitration
agreement, given in Article II(2), can be deemed to be an
internationally uniform rule which prevails over any provision
of municipal law regarding the form of the arbitration agreement
in those cases where the Convention is applicable. The courts
in the contracting States have generally affirmed the uniform
rule character of Article II(2). The Italian Courts formed
an exception to this general affirmation as they determined
the formal requirements for the arbitration agreements on
the basis of a municipal law which they found applicable according
to Italian conflict of rules. However, the Italian Supreme
Court has in recent decisions affirmed the uniform principle
of Article II(2).
The Supreme Court held in Renusagar Power Co.Ltd. v. General
Electric Co. that the New York Convention controls the proceedings
in arbitration. The Supreme Court in this case observed that
if para (2) of Article II of the Convention were to be broken
down into elementary parts, it consists of four aspects. It
includes an arbitral clause (1) in a contract containing an
arbitration clause signed by the parties, (2) an arbitration
agreement signed by the parties, (3) an arbitral clause in
a contract contained in exchange of letters or telegrams,
and (4) an arbitral agreement contained in exchange of letters
or telegrams. If an arbitration clause falls in any of these
four categories, it must be treated as an agreement in writing.
In the present case, there is no letter or telegram confirming
the contract as such but there is certain correspondence which
indicates a reference to the contract in opening the letters
of credit addressed to the bank. There is no correspondence
between the parties either disagreeing with the terms of the
contract or arbitration clause. Apart from opening the letters
of credit pursuant to the two contracts, the Appellant also
addressed a telex message on 23/4/1990 in which there is a
reference to the two contracts in question bearing nos. S-142
and S-336, in which they stated that they want to invoke force
majeure and the arbitration clauses in both the contracts
and thus it is clear that the Appellant had these contracts
in mind while opening the letters of credit in the bank and
in addressing the letters to the bank in this regard. Although
the letters were not addressed by the Appellant to the Respondent
in this regard but once the Appellants stated that they were
acting in respect of the contracts pursuant to which letters
of credit had been opened and they were invoking the force
majeure clause in these two contracts, it obviously means
that they had in mind only these two contracts which stood
affirmed by reason of these letters of credit. If the two
contracts stood affirmed by reasons of their conduct as indicated
in the letters exchanged, it must be held that there is an
agreement in writing between the parties in this regard. It
would be illogical to contend that the letters of credit though
not addressed to the Respondent would indicate that the Appellants
were not acting in pursuance of the contracts (bearing nos.
S-142 and S-336) with the Respondents and now it would not
be possible to wriggle out of the same. The Supreme Court
rejected the contention of the Appellant in this regard and
said that they reached this conclusion based on the facts
applicable to the case and did not want to widen the scope
of its consideration to interpret para (2) of Article II of
the Convention.
The Appellant contended that the principle of res judicata
is not attracted at all in this case inasmuch as the Bombay
High Court had no jurisdiction to deal with a question prior
to determination of the rights of the parties, because the
Act is applicable to an award not considered as a domestic
award and therefore an application under Section 33 of the
Arbitration Act, 1940 and a decision thereon is not a bar
on further proceedings on the principle of res judicata. The
Supreme Court in Renusagar case had occasion to consider the
scheme of the provisions of the Act and the Arbitration Act,
1940. It was noticed that the scheme under Sections 3 and
7 of the Act contemplates that questions of existence, validity
or effect of an arbitration agreement can be determined by
the arbitrator but such determination is subject to decision
of the court and such decision of the court can be had either
before the arbitration proceedings commence, or during their
pendency or after the award is made and filed in the court
and is sought to be enforced by the parties thereto. The Supreme
Court, therefore, observed in this case that independent of
the principle of res judicata, there exists an arbitration
clause in terms of the New York Convention to result in arbitration,
a view which was held by the Bombay High Court also.
The Appellant contended that the award was contrary to public
policy of India and since Reserve Bank of India had imposed
certain restriction on imports into India, the force majeure
clause was attracted. The question of what is “public
policy” has been considered by the Supreme Court in
Renusagar case by interpreting the words in Section 7(1)(b)(ii)
of the Act to mean “public policy of India and not of
the country whose law governs the contract or of the country
of the place of arbitration.” A foreign award cannot
be recognised or enforced if it is contrary to (1) fundamental
policy of Indian law or (2) the interests of India or (3)
justice or morality. Question of public policy would have
arisen if there was complete restriction on the implementation
of terms of the contract. But, on the other hand, certain
restrictions were imposed which could have been worked out
by resorting to appropriate measures in terms of the contract
as held by the arbitrators. In that view of the matter, the
Supreme Court observed that no question of public policy arises
for consideration in the present case.
The arbitrators allowed interest to be paid from the period
prior to reference in 1991 and after reference till termination
of proceedings before the arbitrators, pendente lite and after
decree. The Supreme Court in Renusagar case held that award
of such interest is permissible after the Interest Act, 1978.
However, in the present case since the High Court did not
give any direction of payment of interest pendente lite, the
Supreme Court did not find it appropriate to modify the award
made by the arbitrators or decree passed pursuant to it, as
no exceptional circumstances arose.
The appeal was dismissed on all counts.
|