Hardy Oil & Gas Limited v. Hindustan Oil Exploration Company Limited And Ors.

A.L Dave, J.:— Present first appeal under Section 37(1)(a) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) arises out of an order rendered in Arbitration Petition No. 120 of 2005 on 16th May, 2005 by learned Joint District Judge, Vadodara. The order was passed in respect of an application preferred by Hardy Oil & Gas Ltd. - present appellant (formerly known as Jehan Energy Ltd.) under Section 9 of the Act, praying for interim reliefs in following terms:

39. The petitioner, therefore, prays that pending the arbitration proceedings between the petitioner and the respondents:

(a) the respondents, their agents, servants be restrained from acting in breach of Agreement dated 14.10.1998 and Deed of Adherence dated 30.08.2001 They be further restrained from transacting any business that may require unanimous consent of the Board as stipulated in Code of Best Practice. The respondents be further restrained from taking and/or implementing any steps that may dilute/jeopardize or otherwise affecting plaintiff's status as 8.5% shareholders on respondent no. 1 company;

(b) the respondents, their agents, servants be ordered to appoint, nominate Director representing the petitioner company as per the terms of Agreement dated 14.10.1998 and Deed of Adherence dated 30.08.2001;

(c) any other just, legal and appropriate relief may also be granted;

(d) for ad interim reliefs in terms of prayers (a), (b) and (c) above;

(e) for costs of this petition; and

(f) for such further and other reliefs as the facts and circumstances of the case may require.

2. By the impugned order, the said reliefs were refused and the application was dismissed and hence, this appeal.

3. In order that the contentions raised before this court can be better appreciated, certain facts need to be stated.

4. An agreement was entered into between Unocal Bharat Limited (Unocal), Hardy Oil & Gas Limited, Netherland B.V (Hardy), Infrastructure Leasing and Financial Services Limited (IL & FS), Housing Development Finance Corporation Ltd. (HDFC) and Hindustan Oil Exploration Company Limited (the company) on 14th October, 1998. As per that agreement, the company was floated with major shareholders being Unocal, Hardy, IL & FS and HDFC for the purpose of business of oil exploration. The said agreement carried an arbitration clause and the relevant provisions are contained in para 9.5 of the said agreement.

5. It would be appropriate to record here that although the appellant-original applicant before the district court, though name sounds very similar to Hardy in the agreement, is an altogether a different entity from Hardy in the agreement. It appears that the present appellant-Hardy Oil & Gas Limited formerly known as “Jehan Energy Ltd.” (hereinafter referred to as “Jehan”) purchased the shares of Hardy Oil & Gas Ltd., Netherland B.V (subsequently known as British Borneo Oil and Gas (Netherland) B.V) by an agreement dated 26th February, 2001. That is how, Jehan has stepped the shoes of Hardy, who was a party to the agreement by virtue of a clause contained in the said agreement itself at 5.10(a) and (b).

6. A dispute has arisen between the parties and, therefore, by virtue of arbitration clause in the agreement, same is being referred to an arbitral tribunal. However, apprehending loss of right in the management, the appellant preferred application under Section 9 before the district court, Vadodara with the prayers as stated above and that prayers having been rejected, has preferred present appeal.

7. Learned Senior Advocate Mr. Mihir Thakore appeared with learned Advocate Ms. Nair for the appellant. Respondent nos. 1 and 4 are represented by learned Senior Advocate B.J Shelat and learned Advocate Mr. Soli Cooper appearing with Mr. B.D Karia, on caveat. Respondent no. 3 is represented by learned Advocate Mr. A.R Gupta.

8. A preliminary objection as to maintainability of the application before the district court as well as this appeal on ground of jurisdiction is raised by learned advocates representing the respondents. Learned advocates for parties are, therefore, heard on this limited issue without entering into the merits of the case of rival sides. As such, this court, at present, is to address itself on question of jurisdiction only.

9. Learned Senior Advocate Mr. Shelat as well as Mr. Cooper has drawn attention of this court towards Clause 9.5 of the agreement in support of the contention that the law governing arbitration of England would be applicable to arbitral proceedings. In order that contention of both sides can be properly examined, it would be appropriate to narrate the said clause from the agreement:

“9.5 Governing Law and Arbitration—

(1) This agreement (except for the provisions of Clause 9.5.4 relating to arbitration) shall be governed by and construed in accordance with the substantive laws of India.

(2) Any dispute or difference of whatever nature arising under, out of, or in connection with this agreement, including any question regarding its existence, validity or termination, which the parties are unable to resolve between themselves within sixty (60) days of notification by one or more parties to the other(s) that a dispute exists for the purpose of this Clause 9 shall at the instance of any party be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration (“LCIA”), which Rules (“Rules”) are deemed to be incorporated by reference into this clause.

(3) The tribunal shall consist of two arbitrators who shall be Queen's Counsel, practising at the English Bar in the Commercial Division of the High Court, one to be selected by the parties invoking the arbitration clause acting unanimously and one to be selected by the other shareholders acting unanimously, and one umpire who shall also be a Queen's Counsel, practising at the English Bar in the Commercial Division of this High Court. If the parties are unable to agree on the identity of the umpire within 15 days from the day on which the matter is referred to arbitration, the umpire shall be chosen and appointed by LCIA. Notwithstanding Article 3.3 of the Rules, the parties agree that LCIA may appoint a British umpire. No arbitrator shall be a person or former employee or agent of, or consultant or counsel to, any party or any associated company or any party or in anyway otherwise connected with any of the parties.

(4) The place of arbitration shall be London and the language of arbitration shall be English. The law governing arbitration will be the English Law.

(5) Any decision or award of an arbitral tribunal shall be final and binding on the parties.”

10. Learned advocates have indicated that there are three situations emerging from this clause. The first being that the agreement in main shall be governed by and construed in accordance with the substantive laws of India with an exception of Clause 9, 5.4 relating to arbitration, the second aspect is that any dispute referred to an arbitrator shall be finally resolved by arbitration under the Rules of the London Court of International Arbitration (LCIA) and the third situation is that the place of arbitration shall be London, the language of arbitration shall be English and the law governing arbitration will be the English Law.

11. It is contended by learned advocates for the respondents that here is a situation where parties have explicitly agreed that the place of arbitration shall be London and that law governing arbitration will be the English Law. Under these circumstances, application under Section 9 of the Arbitration Act and appeal arising therefrom could not have been preferred before courts in India and would be governed by the English Law and English Courts. In support of these contentions, reliance is placed on following decisions:

(i) National Thermal Power Corporation v. Singer Company, (1992) 3 SCC 551-1992 (2) Arb. LR 154 (SC); and

(ii) Shreejee Traco (I) Pvt. Ltd. v. Paperline International Inc.., (2003) 9 SCC 79 : 2003 (Suppl.) Arb. LR 1 (SC).

12. Learned Senior Advocate Mr. Thakore appearing for the appellant submitted that the correct interpretation of para 9.5 of the agreement would be that the agreement in main shall be governed by and construed in accordance with the substantive laws of India. He submitted that para 9.5.4 has to be read to mean that English Law would govern dispute in respect of arbitration agreement itself and, therefore, although the seat of arbitration is agreed to be London and language of arbitration is agreed to be English, the proceedings would be governed by Indian Laws.

13. Mr. Thakore also contended that the arbitration proceedings are to be governed by LCIA and Rule 25.3 of LCIA permits an approach to state court or judicial authority. The decision in the case of Bhatia International v. Bulk Trading S.A, (2002) 4 SCC 105 : 2002 (1) Arb. LR 675 (SC), would rule the present situation. He submitted that any order that may be passed by way of interim reliefs by either the arbitrator or a court in England will not be executable in India and, therefore, in order to protect the interest of parties till arbitral proceedings are finally concluded, protection of Section 9 may be made available to the party. The provisions contained in LCIA are very similar to the provisions contained in ICC Rules which were considered by the Apex Court in the case of Bhatia International and, therefore, the preliminary objection regarding jurisdiction may be rejected and appeal may be entertained and decided on merits.

14. Mr. Thakore relied on the decisions in the case of Sumitomo Heavy Industries Ltd. v. ONGC Ltd., (1998) 1 SCC 305 : AIR 1998 SC 825 : 1998 (1) Arb. LR 10 (SC) and Nirma Ltd. v. Lurgi Energie Und Entsorgung GMBH, Germany, 2003 (1) GLR 438 : 2003 (2) Arb. LR 241 (Guj.) (DB), in support of his contentions.

15. In rejoinder, learned Senior Advocate Mr. Shelat submitted that in case of Sumitomo Heavy Industries Ltd. there was no clause in the agreement similar to 9.5.4 in the present case. According to him in the decision in the case of Bhatia International there was absence of specific clause similar to Clause 9.5.4 and, therefore, it was considered that in case of international commercial arbitration held out of India provisions of Part I of the Act would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. Therefore, the Bhatia International decision would strengthen the case of the respondents.

16. This court has taken into consideration the contentions raised by rival sides on question of jurisdiction,

17. There is no dispute about the fact that in such international commercial transactions/agreements providing for arbitration, it is open to the parties to decide as to which law would govern their agreement and arbitration.

18. With the above background, if the facts of the present case are seen, Clause 9.5.1 of the agreement provides that the agreement shall be governed by and construed in accordance with the substantive laws of India. However, an exception is carved out of this clause by specifically providing that the clause would apply except for the provisions of Clause 9.5.4 relating to arbitration.

19. Clause 9.5.4 provides that the place of arbitration shall be London and the language of arbitration shall be English. It specifically provides that the law governing arbitration will be the English Law. Thus, the intention of the parties is made very clear from a plain reading of Clauses 9.5.1 and 9.5.4 that the agreement in main would be governed by substantive laws of India but, when there is dispute between the parties and an arbitration is agreed upon, the arbitration will be governed by the English Law. In order to understand the intention of the parties still better, Clause 9.5.2 can be profitably referred to, where it is agreed that the dispute shall be resolved by an arbitrator under the Rules of London Court of International Arbitration (LCIA). A reliance was placed on Article 25.3 of LCIA Rules.

20. For drawing a support to show the said provision is very similar to the provisions contained in ICC Rules, considering which the Apex Court held in case of Bhatia International that provisions of Part I of the Arbitration Act would apply to all arbitrations and to all proceedings relating thereto and that where such arbitration is held in India the provisions of Part I would compulsorily apply and parties are free to deviate only to the extent permitted by the derogable provisions of Part I. The said Article runs as under:

“25.3 The power of arbitral tribunal under Article 25.1 shall not prejudice howsoever any party's right to apply to any state court or any judicial authority for any interim or conservatory measures before the formation of the arbitral tribunal and in exceptional cases, thereafter.”

21. However, Their Lordships observed in para 32 that in cases of international commercial arbitrations held in India provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case, laws or rules chosen by the parties would prevail. Any provision, in Part I, which is contrary to, or excluded by that law or rules would not apply. Thus, even as per the decision relied upon by learned advocate for the appellant, if the parties have agreed to be governed by any law other than Indian Law in cases of international commercial arbitration, same would prevail. In the case on hand, it is very clear even on plain reading of Clause 9.5.4 that the parties’ intention was to be governed by English Law in respect of arbitration. It is not possible to give a narrow meaning to this clause as suggested by learned Senior Advocate Mr. Thakore that it would apply only in case of dispute on arbitration agreement. It can be interpreted only to mean that in case of any dispute regarding arbitration, English Law would apply. When the clause deals with the place and language of arbitration with a specific provision that the law governing arbitration will be the English Law, such a narrow meaning cannot be given. No other view is possible in light of exception carved out of Clause 9.5.1 relating to arbitration. Term “arbitration” in Clause 9.5.4 cannot be taken to mean arbitration agreement. Entire arbitral proceedings have to be taken to be agreed to be governed by English Law.

22. Decision in the case of Shreejee Traco (I) Pvt. Ltd. v. Paperline International Inc.. (supra), may be referred to. In para 7, it is observed thus:

“…In the absence of express choice of the law governing the contract as a whole or the arbitration agreement as such having been exercised by the parties, a presumption may arise that the law of the country where the arbitration is agreed to be held is the proper law of the arbitration agreement. The presumption is rebuttable. The parties have the freedom to choose the law governing an international commercial arbitration agreement.”

23. Likewise, in the case of National Thermal Power Corporation v. Singer Company (supra), Their Lordships have held that the parties have freedom to choose the law governing an international commercial arbitration agreement. They may choose the substantive law governing the arbitration agreement as well as the procedural law governing the conduct of arbitration. Such choice is exercised either expressly or by implication. Where there is no express choice of law governing contract as a whole, or the arbitration agreement in particular, there is, in the absence of any contrary indication, a presumption that the parties have intended that the proper law of the contract as well as the law governing the arbitration agreement are the same as the law of the country in which the arbitration is agreed to be held. On the other hand, where the proper law of the contract is expressly chosen by the parties (as in the present case), such law must, in the absence of an unmistakable intention to the contrary, govern the arbitration agreement which, though collateral or ancillary to the main contract, is nevertheless a part of such contract.

24. Their Lordships further observed in paras 44 and 45 of the said judgment that where the arbitration agreement is contained in one of the clauses of the contract, and not a separate agreement, in the absence of any indication to the contrary, the governing law of the contract (i.e in the words of Dicey, the proper law of the contract) being Indian Law, it is that system of law which must necessarily govern matters concerning arbitration, although in certain respects the law of the place of arbitration may have its relevance in regard to procedural matters. The law governing such rights and liabilities is the proper law of the contract, and unless otherwise provided, such law governs the whole contract including the arbitration agreement, and particularly so when the latter is contained not in a separate agreement. This would be the situation where there is absence of a specific agreement to the contrary, as is the situation in the matter on hand.

25. Thus, the proposition of law which clearly emerges is that it is for the parties to decide and agree as to which law would govern the contract in principal and/or the arbitration proceedings. The parties may decide to have different laws applicable to both the cases. Where there is no separate arbitration agreement but, arbitration agreement forms part of the principal agreement as a clause thereof, if there is no specific agreement between the parties to the contrary, law governing principal agreement would govern the arbitral proceedings or arbitration. But, where parties have, in clear terms, agreed to different laws being applicable to the agreement in main and the arbitration, the said intention would govern the question of applicability of law.

26. As discussed above, it is clear from Clauses 9.5.1 and 9.5.4 of the agreement that the parties had agreed that the law governing arbitration will be the English Law. Thus, there is an explicit exclusion of applicability of Indian Law to the arbitration under the agreement. Under the circumstances, it has to be held that in the present case, arbitration would be governed by the English Law. It is not open to parties to resort to the provisions of the Act in respect of arbitration.

27. It is equally important to note that parties would not be rendered remediless by this decision for the reason that there are similar provisions in English Law governing arbitration.

28. In executability of any order that may be passed under that law cannot be factor to entertain this appeal at this stage when parties have, in explicit terms agreed to the governance of arbitration by English Law.

29. For the foregoing reasons, the appeal must fail and is dismissed. No costs. In view of the order passed in main appeal, Civil Application No. 4839 of 2005 does not survive and same stands disposed of accordingly.