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Brawn Laboratories Limited. v. Fittydent International Gmbh And Another.
Factual and Procedural Background
On 20.5.1994 the plaintiff and defendant No. 1 entered into a licence agreement under which the plaintiff was granted the exclusive right to manufacture and market denture cleansing tablets and adhesive powder in India, with technical know-how and trade marks to be provided by defendant No. 1. Clause 18.5 of the agreement made the agreement subject to requisite approval of the Government of India and/or the Reserve Bank of India. The plaintiff applied to the Secretariat for Industrial approvals on 25.3.1994. The plaint alleges that defendant No. 1 breached the agreement by failing to supply the technical know-how and that the required government approval was not given. Defendant No. 1 terminated the agreement on 25.4.1996, alleging that the plaintiff did not commence commercial production or use its best efforts.
Defendant No. 1 initiated arbitration proceedings before the International Court of Arbitration (ICC), Paris, claiming US $175,000 plus interest and seeking to restrain use of the trade mark "Fittydent". The plaintiff filed suit in Indian court seeking a declaration that, because the licence agreement had not come into existence for want of government approval under clause 18.5, the dispute could not be referred to ICC arbitration; the plaintiff also sought a mandatory injunction restraining the defendants from proceeding with ICC arbitration. Along with the suit the plaintiff applied under Order 39 Rules 1 & 2 CPC for an ad interim injunction.
Defendant No. 1 filed a reply and an application under Order 7 Rule 11 CPC read with sections 44 and 45 of the Arbitration & Conciliation Act, 1996 seeking rejection of the plaint and/or stay of the suit. The court heard and decided the plaintiff's application for interim injunction and defendant No. 1's application under Order 7 Rule 11 and for a stay under the Arbitration Act provisions.
Legal Issues Presented
- Whether the licence agreement dated 20.5.1994 was non-est and ineffective in the absence of required approval of the Central Government and/or Reserve Bank of India (clause 18.5), such that no arbitration agreement could subsist.
- Whether, even if the main agreement were ineffective for want of the approvals, the arbitration clause in clause 18.4 could nonetheless be treated as independent and binding on the parties and therefore be looked into by an arbitral tribunal.
Arguments of the Parties
Plaintiff's Arguments
- The licence agreement dated 20.5.1994 never came into existence because requisite approvals from the Government of India and the Reserve Bank of India were not granted; therefore there exists no valid arbitration agreement.
- Proceedings before the ICC, Paris are a nullity and not maintainable as they are based on a non-existent licence agreement.
- If the arbitration agreement is illegal and legally non-existent, the arbitrator's jurisdiction disappears — the arbitration clause cannot be relied upon.
- The validity of the alleged arbitration agreement should be considered by a court of law and not by the arbitrator (the plaintiff contended that the arbitrator has no power to decide his own jurisdiction in this circumstance).
- The plaintiff relied on the judgment Alliance Mills (Lessees) Pvt. Ltd. v. M/s Madan Gopal & Sons (AIR 1982 Calcutta 282) to support the proposition that where a contract is void the arbitration clause cannot be enforced.
- The plaint (paragraph 18) set out specific grounds: (a) no valid arbitration agreement because the licence never came into existence; (b) request for arbitration based on the non-existent licence; (c) no basis for instituting arbitration; (d) settled law that where arbitration agreement is illegal the arbitrator's jurisdiction disappears; (e) validity of arbitration agreement is a matter for the court.
Defendant No. 1's Arguments
- The claim arises out of the licence agreement dated 20.5.1994 under which the plaintiff was provided technical know-how and trade mark rights; in consideration the plaintiff was to pay US $175,000. The plaintiff committed breach and the licence was terminated on 25.4.1996.
- Defendant No. 1 asserted that the plaintiff had not objected to arbitration and had sought time to deposit arbitration fees and to raise claims/counterclaims; the plaintiff allegedly suppressed earlier correspondence.
- The licence agreement was valid and enforceable and did not require approval from the Central Government; alternatively, Section 47 of the Foreign Exchange Regulation Act, 1973 (FERA) permits legal proceedings to recover sums due even if permission under the Act was not granted, though enforcement of any judgment may require permission.
- The defendant sought dismissal/rejection of the plaint under Order 7 Rule 11 CPC and a stay of the suit under Sections 44 and 45 of the Arbitration & Conciliation Act, 1996, arguing that the dispute falls for arbitration under clause 18.4.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Alliance Mills (Lessees) Pvt. Ltd. v. M/s Madan Gopal & Sons, AIR 1982 Calcutta 282 | Holds that if the contract itself is void, the arbitration clause forming part of it cannot be enforced; arbitration clause cannot be severed when the agreement is illegal (as interpreted under the old Arbitration Act, 1940). | The court considered this authority as relied upon by the plaintiff but held it not applicable to the present facts because it was decided under the Arbitration Act, 1940 and does not take into account Section 47 of FERA or the changes effected by the Arbitration & Conciliation Act, 1996. |
| AIR 1962 SC 1810 | Authority cited in Alliance Mills as part of the Supreme Court decisions relied upon for the proposition that a void contract renders the arbitration clause unenforceable. | The court noted that this Supreme Court decision was relied upon by the Calcutta High Court in Alliance Mills; the present court did not apply it directly but discussed its role in Alliance Mills' reasoning. |
| AIR 1963 SC 90 | Authority cited in Alliance Mills as supportive of the proposition that arbitration clause cannot be enforced when the substantive contract is illegal. | The court recorded that this Supreme Court decision was relied upon by the Calcutta High Court in Alliance Mills; it distinguished Alliance Mills (and therefore the use of these earlier authorities) in light of statutory provisions now in force (FERA s.47 and the Arbitration & Conciliation Act, 1996). |
Court's Reasoning and Analysis
The court proceeded by identifying the narrow questions to be decided: whether the licence agreement (dated 20.5.1994) was ineffective in absence of required Government of India / Reserve Bank of India approvals and, if so, whether the arbitration clause in clause 18.4 could still subsist independently.
1. Statutory context under the Foreign Exchange Regulation Act, 1973 (FERA): the court examined Section 47(2) and (3) of FERA as set out in the opinion. The court observed that Section 47(2) provides that a contractual term making performance subject to permission of the Central Government or Reserve Bank does not render the agreement invalid. Section 47(3) allows legal proceedings to be brought in India to recover sums due even where permission has not been granted, though enforcement of any resultant judgment may require permission. On a plain reading of Section 47 the court concluded that proceedings before the arbitrator could not be stayed on the ground that a permission required under FERA had not been obtained.
2. Applicability of Alliance Mills and the older arbitration law: the plaintiff's reliance on Alliance Mills (and the underlying Supreme Court authorities) was considered. The court distinguished Alliance Mills because that case was decided under the Arbitration Act, 1940 and did not involve the statutory scheme now reflected in Section 47 of FERA or the provisions of the Arbitration & Conciliation Act, 1996.
3. Arbitration & Conciliation Act, 1996: the court emphasized the change in law brought by the 1996 Act. Under section 5 judicial intervention in arbitration proceedings is permissible only as provided in the Act. Under section 16 the arbitral tribunal has the power to rule on its own jurisdiction, including objections regarding the existence or validity of the arbitration agreement; the arbitration clause is to be treated as an agreement independent of other terms of the contract and a finding that the contract is null and void does not ipso jure invalidate the arbitration clause.
4. Conclusion on jurisdictional competence: applying the independence principle in section 16, the court held that even if the main agreement were invalid for want of approvals, that circumstance would not automatically invalidate the arbitration clause. It is for the arbitral tribunal to decide the validity and survivability of the arbitration agreement. Consequently, the court declined to interfere with the arbitration proceedings and left it open to the plaintiff to raise all relevant pleas before the arbitrator.
5. Disposition of interlocutory relief and plaint-challenge: the court found that the plaintiff had not made out a case for interim injunctive relief and held that the suit was misconceived and barred by section 16 of the Arbitration & Conciliation Act, 1996. Therefore the plaintiff's application for injunction was dismissed and defendant No. 1's application under Order 7 Rule 11 CPC was allowed.
Holding and Implications
HOLDING: The court dismissed the plaintiff's application for an ad interim injunction and allowed defendant No. 1's application under Order 7 Rule 11 CPC; the suit was dismissed with no order as to costs.
Implications:
- The proceedings before the International Court of Arbitration, ICC, Paris were not to be stayed by this court; the arbitral tribunal has jurisdiction to rule on its own jurisdiction and on the validity of the arbitration agreement.
- The court held that Section 47 of the Foreign Exchange Regulation Act, 1973 permits legal proceedings for recovery even where statutory permission has not been granted, and that Alliance Mills (decided under older law) did not govern the present situation; the Arbitration & Conciliation Act, 1996 (particularly sections 5 and 16) significantly constrains judicial intervention in arbitration matters.
- Direct effect on the parties: the plaintiff's suit in India was dismissed and the defendant's arbitration proceedings could continue; the plaintiff remains free to raise its objections and defenses before the arbitral tribunal.
- No broader precedent beyond the application of the relevant statutory provisions was announced by the court beyond the reasoning contained in this opinion.
S.K Mahajan, J.— On 20.5.1994 the plaintiff entered into an agreement with defendant No. 1 whereby the plaintiff was granted the exclusive right to manufacture and market denture cleansing tablets and adhesive powder in India on the technical know-how, trade marks and trade names of the product being provided to the plaintiff by defendant No. 1. The agreement was subject to terms and conditions contained therein. According to clause 18.5 the agreement was subject to requisite approval of Government of India and/or Reserve Bank of India as the case may be. Plaintiff is stated to have applied to the Secretariat for Industrial approvals of the Government of India for approval of the licence agreement vide its letter dated 25.3.1994 It is alleged in the plaint that in complete breach of the agreement defendant No. 1 failed to supply the technical know-how for manufacturing adhesive powder and denture cleansing tablets. The government also did not give requisite approval to the agreement. On 25.4.1996 the agreement was terminated by defendant No. 1 on grounds that the plaintiff did not commence commercial production nor did it use its best efforts to promote the sales and use of the products in India. The plaintiff has alleged this termination of the agreement to be false and frivolous and according to the plaintiff the fact was that it was defendant No. 1 who had committed breach of the agreement inasmuch as it had failed to provide required technical know-how for commencement of commercial production. On account of the alleged illegal termination of the agreement the plaintiff is alleged to have suffered losses and it is slated in the plaint that it contemplates to take legal action to recover a sum of Rs. 1 crore alongwith. interest from defendant No. 1.
2. In the meantime, it appears that defendant No. 1 had initiated proceedings for arbitration before the international Court of Arbitration of I.C.C, Paris raising a demand of US $ 1,75,000 plus 8% interest thereon towards lumpsum licence fee and for restraining the plaintiff from using the trade mark “Fittydent”. On receipt of this notice from the I.C.C of Paris the plaintiff filed this suit for a declaration that as no concluded agreement for want of government approval, required to be obtained under clause 18.5 of the agreement, had come into existence between the parties the matter could not be referred to the International Court of Arbitration under clause 18.4 A mandatory injunction restraining the defendants from proceeding with the arbitration proceedings in ICC case No. 9714.JK. based on the alleged non- concluded contract was also claimed in the suit. Alongwith the suit the plaintiff also filed an application under Order 39 Rules 1 and 2 of the Code of Civil Procedure for an ad interim injunction restraining the defendants from proceeding with the arbitration case before the International Court of Arbitration, I.C.C, Paris.
3. Summons of the suit having been served upon the defendants, defendant No. 1 besides filing reply to the application of the plaintiff under Order 39 Rules 1 & 2 c.p.c for the grant of ad interim injunction, also filed an application under Order 7 Rule 11 of the code of civil procedure read with sections 44 and 45 of the arbitration & conciliation act, 1996 for rejection of the plaint or dismiss the suit and/or in the alternative to stay the suit of the plaintiff under Sections 44 and 45 of the Arbitration & Conciliation Act, 1996.
4. By this order, 1 propose to dispose of all these applications, namely, the application filed by the plaintiff for the grant of ad interim injunction and the application of defendant No. 1 for rejection of the plaint and/or for stray of the suit.
5. The case set up by the defendant in the application is that disputes having arisen between the parties under the arbitration agreement as contained in clause 18.4 of the agreement dated 20.5.1994 the suit was not maintainable and in any case was required to be stayed. Under section 45 of the arbitration &, conciliation act, 1996 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. The arbitration agreement as contained in clause 18.4 of the agreement dated 20.5.1994 between the parties was as under:
“18.4 Arbitration-All disputes and differences of any kind arising under this agreement, or arising between the parties including the existence or continued existence of this agreement and the arbitrarbility of a particular issue which cannot be settled amicably by the parties shall be submitted to arbitration. The arbitration shall be conducted in Vienna, Austria and shall finally be settled in accordance with the Rules of Arbitration of the International Chamber of Commerce in Vienna by one or more arbitrators appointed in accordance with the above mentioned rules. The decision of the arbitration tribunal shall be final and binding upon the parties and may be enforced in any court of competent jurisdiction, and no party shall seek redress against the other in any court or tribunal except solely for the purpose of obtaining execution of the arbitral award or of obtaining a judgement consistent with the award.”
It is, therefore, not disputed between the parties that in case this court holds that the parties are governed by the agreement dated 20.5.1994 and this agreement was binding between the parties inspite of the permission alleged to have not been given by the Government or by the Reserve Bank of India under the Foreign Exchange Regulation Act, 1973, the suit cannot proceed and the parties will be bound by the aforesaid arbitration agreement. The only question, therefore, before the court is whether the agreement in the absence of approval of the Central Government and permission from the Reserve Bank of India is non-est and was not effective. Another question which may also arise is even if the agreement between the parties was not effective, whether the arbitration agreement as contained in clause 18.4 of the said agreement could still be looked into by the court and can still be held to be binding between the parties.
6. Clause 18.4 of the agreement provided that the agreement was subject to requisite approval of the Government of India and/or Reserve Bank of India as the case may be. This being an industrial licence it requires the approval of the Central Government under the Industrial Policy Resolution 1991, of the Government of India. This also requires approval of the Reserve Bank of India under sections 8 and 9 of Foreign Exchange Regulation Act, 1973. It is not denied that an application for approval was made with the Government of India in 1994, however, no approval was received till 1998. It is the case of the plaintiff that when this application was followed in 1998 the Government of India rejected the application for approval vide its letter dated 1.9.1998 Contention of Mr. Chaudhary, learned Advocate appearing on behalf of the plaintiff, therefore, is that as the agreement itself was not effective because of the approval having not been granted by the Government of India in terms of clause 18.5 of the agreement the arbitration agreement as contained in clause 18.4 cannot be looked into and as such the matter could not be referred to the arbitration of the International Court of Arbitration, ICC, Paris. Mr. Chaudhary has relied upon the judgment reported as Alliance Mills (Lessees) Pvt. Ltd. v. M/s Madan Gopal & Sons. AIR 1982 Calcutta 282 in support of his submission that if the agreement itself is void the arbitration clause contained therein cannot be relied upon.
7. In Alliance Mills (Lessees) Pvt. Ltd. (Supra) the Calcutta High Court relying upon the judgments of the Supreme Court reported as AIR 1962 SC 1810 and AIR 1963 SC 90 held that if the contract itself was void, the question of submitting to the jurisdiction of arbitrator was of no avail and that the arbitration clause cannot be enforced when the agreement of which it forms an integral part is held to be illegal. Mr. Chaudhary. therefore, contends that even assuming that the plaintiff has submitted to the jurisdiction of the arbitrator as contended by the defendant, the same would be of no avail and this court, therefore, should stay the proceedings before the International Court of Arbitration.
8. Before I deal with the contentions raised by Mr. Chaudhary it will be useful to give herein below the grounds on which the plaintiff has challenged the existence of the arbitration agreement.
9. In paragraph 18 of the plaint it is stated that the proceedings before the ICC, Paris is a nullity and not maintainable for the following reasons:
(a) that there exists no valid Arbitration Agreement between the parties as the proposed License Agreement of May 20, 1994 had never come into existence.
(b) that the request for arbitration by the Defendant No. 1 is based on the Licence Agreement of May 20, 1994. That the said Agreement had never come into existence as requisite approvals from the Government of India and the Reserve Bank of India had not been given by these authorities to the proposed Agreement.
(c) That the Defendant No. 1 has no basis for instituting the arbitration proceedings as the Arbitration Agreement itself does not exist.
(d) That it is the settled law that if the Arbitration Agreement is illegal and therefore legally non-existent the fountain head of the Arbitrator's jurisdiction disappears.
(c) That it also lies for consideration that the validity of the alleged Arbitration Agreement has to be taken up in a Court of Law and the Arbitrator has no power to decide its own jurisdiction.
In Paragraph 2 of its reply to the application of the plaintiff under Order 39 Rules 1 and 2, defendant No. 1 has stated as under:
“The claim of the Defendant No. 1 arises out of the Licence Agreement dated May 20, 1994 under which the plaintiff was provided by Defendant No. 1 with certain rights to manufacture and market Fittydent products (adhesive powder and denture cleansing tablets), technical know-how on the concerned Fittydent denture cleansing tablets and adhesive powder as well as applicable Trade Mark were also provided to the Plaintiff. In consideration of the said licence, the plaintiff was to pay a sum of US $ 1,75,000. The plaintiff had committed breach of this licence agreement which was terminated on April 25, 1996. As a result of the said breach, the reference to arbitration was made by the answering Defendant against the plaintiff. It is denied that Plaintiff had objected to the said arbitration proceedings as alleged or at all. As a matter of fact, he had sought time to deposit the arbitration fee and also to raise their claim/counter claim. The plaintiff has deliberately suppressed their earlier letters dated February 25, 1998 and March 26, 1998 and therefore, they in any event are not entitled to the discretionary relief. The plaintiff has also not disclosed the letter dated September 3, 1998 written by the Learned Arbitrator to the parties, which was sent in reply to the Plaintiff's communication of April 6, 1998. The alleged letter dated September 1, 1998 filed by the plaintiff alongwith the application for approval which was alleged to have been filed on March 25, 1994 was responded only on September 1, 1998. The plaintiff has deliberately suppressed the other records and correspondence during intervening period. It is denied that the Licence Agreement between the parties is not valid and/or enforceable without the approval of Reserve Bank of India and/or Central Government as alleged. The plaintiff cannot be permitted to benefit from their own wrong. They had acted under the Agreement and taken all the benefits under the Licence Agreement and when the question of payment under the said Agreement comes, the plaintiff cannot urge that the Agreement was void because of non-approval by the Central Government, which approval was the obligation of the plaintiff only. In any event, it is stated that the licence Agreement is valid and enforceable and did not require any approval from the Central Government. Further, in any event, section 47 of the foreign exchange & regulation act, makes it clear that proceedings for recovery of any amount which is due whether as debt or damages shall not be barred and/or prevented, even if the permission, if any, required under the said Act by the Central Government or Reserve Bank of India is not granted. Such a permission, if any, may be required and/or granted by the Central Government of Reserve Bank of India at the time and for the purpose of enforcing any judgment or order for payment of any sums and not otherwise.”
The plaintiff has not filed any rejoinder to this reply inspite of an opportunity having been given for the same. It can, therefore, be taken that defendant No. 1 had provided to the plaintiff the technical know-how on the Fittydent adhesive powder and denture cleansing tablets as well as applicable trade marks. In consideration of this technical know-how and trade marks having been provided by defendant No. 1, the Plaintiff was required to pay a sum of US $1,75,000 to the said defendant. It is for the recovery of this amount that defendant no. 1 has initiated proceedings before the ICC, Paris.
10. Under Section 47(2) of the Foreign Exchange Regulation Act, 1973 any provision of, or having effect under the Act that a thing shall not be done without the permission of the Central Government or the Reserve Bank, shall not render invalid any agreement by any person to do that thing, if it is a term of the agreement that that thing shall not be done unless permission is granted by the Central Government or the Reserve Bank as the case may be. Under sub-section(3) of section 47 of the Act neither the provisions of the Act nor any term contained in any contract that anything for which the permission of the Central Government or the Reserve Bank is required by the said provisions shall not be done without that permission, shall prevent legal proceedings being brought in India to recover any sum which, apart from the said provisions and any such term, would be due, whether as debt, damages or otherwise. Under clause (b) of Section 47(3) of the Act, the judgment or order for payment of any sum, to which the Act applied, cannot be enforced without permission of the Central Government or the Reserve Bank, as the case may be. The effect of sub-Section (3) of Section 47 is that legal proceedings can be brought to recover from the debtor a sum due as a debt, damages or otherwise but no step will be taken for enforcing the judgment passed pursuant to such proceedings having been taken by the creditor. A plain reading of Section 47 of the Act, therefore, shows that the proceedings before the Arbitrator cannot be stayed. The judgment in Alliance Mills (lessees) Pvt. Ltd. (supra) cited by Mr. Chaudhary is, therefore, not applicable to the facts of this case inasmuch as the judgment in that case was passed by interpreting the provisions of the Arbitration Act, 1940.
11. Moreover, a sea-change has been made in the law of arbitration after the passing of the arbitration & conciliation act, 1996. under section 5 of the arbitration & conciliation act no judicial authority shall intervene in the proceedings except where so provided in the Act. Moreover, while under the old Arbitration Act, a question relating to the jurisdiction of the Arbitrator could not be decided by him except when it was referred to him as a specific question of law, under section 16 of the new Arbitration Act, the arbitral tribunal has the power to rule on its own jurisdiction including ruling on any objection with respect to the existence or validity of the arbitration agreement, and for that purpose an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract and a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause, it is, therefore, clear that even assuming for the sake of arguments that the agreement dated 20.5.1994 between the parties was illegal and non-est, the same shall not on its own render the arbitration clause invalid and it is still within the competence of the Arbitrator to decide the validity of the same, it is, therefore, for the Arbitrator to decide as to whether the arbitration agreement between the parties still survives even assuming that the agreement dated 20.5.1994 was rendered invalid because of non-approval of the Government of India. In my opinion, this Court will not interfere in the proceedings before the Arbitrator and it will be open for the plaintiff to take all such pleas before he Arbitrator as it may be advised to lake and have a decision thereon.
12. In my opinion, the plaintiff has not been able to make out any case for the grant of any relief in his application for injunction and this court will not interfere with the proceedings before the Arbitrator. In my opinion, the suit by the plaintiff is also misconceived and is barred by the provisions of section 16 of the Arbitration and Conciliation Act. While, therefore, dismissing the application of the plaintiff for the grant of injunction, I allow the application of defendant No. 1 under Order 7 Rule 11 and dismiss the suit with no order as to costs.
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