Spentex Industries Ltd. v. Quinn Emanuel Urquhart & Sullivan LLP, CS (OS) 568/2017: Delhi High Court (decided on 12 May 2020)

Relevant Facts:

The Plaintiff (“Spentex India”) is an Indian manufacturer of cotton and synthetic yarns. Its subsidiary, Spentex Netherlands B.V. (“Spentex Netherlands”) is a Netherlands based investment company (Spentex India and Spentex Netherlands together as “Spentex”). The Defendant (“QE”) is a law firm in the USA.

Spentex approached QE to represent Spentex Netherlands in an International Centre for Settlement of Investment Disputes (ICSID), treaty arbitration against Uzbekistan. An Engagement Letter was executed with QE which was signed by Spentex in Delhi.

QE raised invoices on Spentex which were not paid. So, QE initiated arbitration proceedings under the Engagement Letter to claim damages for inter alia unpaid fees and expenses. The seat of arbitration was Washington D.C in accordance with JAMS Arbitration Rules and Procedures.

The arbitration commenced, but Spentex refrained from participating in it. Spentex India filed the present anti-arbitration Suit before the Delhi High Court, seeking (i) a declaration that the Engagement Letter and the arbitration agreement therein are null and void, inoperative and incapable of being performed; and (ii) a permanent injunction restraining QE from proceeding with the arbitration.

QE filed an application under Order 7 Rule 11 of the Civil Procedure Code, 1908 read with Section 45 of the Arbitration and Conciliation Act, 1996 (“Act”) for rejection of the Plaint on the ground that it is not maintainable and is barred under Section 45 of the Act.

During hearing of IA, QE secured a final award in arbitration. Even though practically, the Suit became infructuous, Spentex India claimed that it is still maintainable as regards prayer (a) in the Suit. Hence, the arguments continued.

Issue:

Whether the Suit is null and void or inoperable or incapable of being performed under Section 45 of the Act?

Judgement:

Section 45 of the Act permits an enquiry into the question whether the arbitration agreement is null and void, inoperative and incapable of being performed. The Courts have to be extremely circumspect and reluctant in any manner to interfere in arbitration proceedings. The mandate is to refer parties to arbitration unless the arbitration agreement is on the face of it null and void, inoperative or incapable of being performed.  The court is not to examine the legality or validity of the substantive agreement. (Relied on World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) PTE Ltd. (2014) 11 SCC 639; Clearwater Capital Partners (Cyprus) Ltd. v. Satyajit Singh Majithia & Ors. 2012 (128) DRJ 478; Sasan Power Ltd. v. North American Coal Corporation (India) Pvt. Ltd. (2016) 10 SCC 813; Himalaya International Ltd. v. Simplot India Foods Pvt. Ltd & Anr., 2014 SCC Online Del. 217 (Jayant Nath, J.); McDonald’s India Private Ltd. v. Vikram Bakshi & Ors. 2016 SCC OnLine Del 3949)

As per Section 44, a foreign award would mean an arbitral award arising out of a legal relationship considered as commercial under the law in force in India. Spentex India contended that the present arbitration is not commercial in nature under Section 44 of the Act as the agreement between a client and a lawyer which is the subject matter of the present dispute, ‘cannot be considered as commercial under the law in force in India’.

Spentex India relied on M.P. Electricity Board and Ors. v. Shiv Narayan & Anr. (2005) 7 SCC 283 wherein the tenant was an advocate and was using the office in a tenanted premises and appellant sought to levy charges for a commercial connection. The High Court held it is professional activity and not of a commercial character. The High Court observed that M.P. Electricity does not have any application to the present facts. Reliance was placed by the High Court on R.M. Investment and Trading Co. Pvt Ltd. v. Boeing Co. & Anr., (1994) 4 SCC 541 wherein it was held that “the expression “commercial” should, therefore, be construed broadly having regard to the manifold activities which are integral part of international trade today”.

The Court observed that clearly transactions relating to services for valuable consideration would be a commercial legal relationship and would be covered by Section 44 of the Act. Also, it held that it cannot be urged that such an agreement was completely bereft of elements of commerce. Spentex has defaulted in paying its professional charges and other aspects. QE’s claim does not relate to professional issues. As the proceedings are substantially for recovery of money, the same would tantamount to a commercial relationship as per section 44 [sic.] of the Act. Hence, the plea of Spentex India that the agreement is null and void, inoperative or incapable of being performed, is without merits.

Another plea of Spentex India that agreement in question involves payment of contingency fees and such an agreement would be void in India, is misplaced as the entire contract is not based only on the contingency fees and, importantly, the agreement is governed by the US laws which does not bar contingency fees.

Another argument of Spentex India was that QE has done no professional work for them, but for the subsidiary company – Spentex Netherlands. This plea is at best on the merits of the claim of QE before the arbitral tribunal.

The Court held that the plaint fails to disclose any cause of action. Spentex India chose to abstain from the arbitration and the award was passed. They can take appropriate steps as per law against the award.

The Court allowed QE’s application and dismissed the Suit being without any cause of action.

Comments:

The relief to restrain arbitration was rendered infructuous as the final arbitral award was already passed. The question that High Court decided on Spentex’s insistence, purely premise the requirement of Section 44 of the Act, hence the test of Section 45. The High Court did not consider a significant aspect in the matter, i.e. the test of Section 44 presupposes the award is to be enforced in India. Therefore, whether the relation between the parties is commercial or not under Section 44 is immaterial at the stage when the Suit was filed. The issue was premature requiring decision from the Indian Court, as the award could very well be enforced outside India.

Also, Spentex India based its argument that the main contract (Engagement Letter) is null and void, inoperative and incapable of being performed, whereas the test of Section 45 concerns the ‘arbitration agreement’, which Spentex India demonstrably failed to establish. High Court overlooked this aspect despite stating the principle in the beginning, perhaps with the efflux of time. The Judgement was reserved on 15 March 2019 and delivered after more than a year time, on 12 May 2020.

Though the Judgement can not be reckoned as setting any principle on anti-arbitration injunction, it merely adds on that the relation between the law firm and client can be called commercial under Section 44 of the Act if it concerns claim for unpaid fee.