India: Granting Anti-arbitration Injunctions: Madras High Court Reiterates The Threefold Test

The Madras High Court (High Court), in a recent decision in ADM International Sarl v. Sunraja Oil Industries Pvt. Ltd. and Ors.¹, had the opportunity to discuss the principal conditions for granting an anti-arbitration injunction. The High Court reiterated the findings of the Delhi High Court in McDonald's India Pvt. Ltd. v. Vikram Bakshi and Ors.,² wherein it was held that the court would grant an anti-arbitration injunction only when the arbitration agreement is (i) null and void, (ii) inoperative or (iii) is incapable of being performed. The present article briefly examines the findings of the High Court in the matter mentioned above.

Brief Facts

Two parties, namely, Sunraja Oil Pvt. Ltd. (Sunraja) and Gem Edible Oil Pvt. Ltd. (Gem), had entered into contracts for the purchase of Crude Sunflower Oil (CSFO) of edible grade from ADM International Sarl (ADM), a company based in Switzerland. However, disputes emerged amongst the parties regarding the contracts for the sale of CSFO. Accordingly, Sunraja and Gem filed two separate suits against ADM, which was arrayed as the first defendant in each suit, while the second defendant was the Federation of Oil Seeds and Fats Association (FOSFA).

The suits were filed for a declaration that the arbitration proceedings instituted by ADM against Sunraja and Gem, respectively, before FOSFA – an arbitral institution were void and against the public policy. The suits also prayed for a declaration that the contracts entered into between the plaintiffs (i.e., Sunraja or Gem, as the case may be) and ADM are null and void. A permanent injunction to restrain ADM from initiating or continuing any arbitration proceeding was also sought by the plaintiffs apart from damages to the tune of INR 1,00,01,000 (One crore and one thousand).

The plaintiffs submitted that only a handful of companies sold CSFO, out of which they were constrained to procure CSFO only from ADM. The plaintiffs further submitted that as per the terms of the contracts, the buyer of the CSFO was entitled to exclusivity in the sense that the vessel transporting the CSFO could only carry cargo meant for the respective plaintiff and not other buyers. However, according to the plaintiffs, this condition of exclusivity was repeatedly breached by ADM. In addition, the plaintiffs alleged that there were various quality-related issues that they were facing concerning the CSFO bought.

As per the contracts, the seller could terminate the contracts while a corresponding right was not vested in the buyer. Resultantly, even though there were significant quality issues and repeated breaches of the exclusivity condition, the plaintiff in each case was constrained to continue procuring the CSFO from ADM. Thus, the plaintiffs alleged that the contracts were unconscionable since they were discriminatory against the buyer. The plaintiffs also alleged that the arbitration clause was void and could not be enforced since FOSFA was an organisation fully controlled by the prominent sellers of oilseeds, including ADM, and the rules of FOSFA did not permit a party to be represented by advocates.

In each suit, the respective plaintiff had filed an application for an interim injunction to restrain ADM and FOSFA from proceeding with the arbitration proceedings. By separate orders, an order of injunction was granted restraining FOSFA, which was extended until 14 November 2019. In such circumstances, as a countermeasure, ADM filed applications in each suit to vacate the interim injunction and refer the dispute for arbitration. The present matter deals with the applications filed by ADM.

Arguments of the parties at dispute

ADM argued that the contracts admittedly provided that the governing law is English law and that any court proceedings would be instituted before the appropriate courts in England. Therefore, the suits filed by the respective plaintiffs were not maintainable, leaving the interim injunction liable to be dismissed. To buttress the submission on the maintainability, ADM relied upon the case of the Hon'ble Supreme Court in Modi Entertainment Network v. W.S.G Cricket Pte. Ltd.³

ADM also stated that Sunraja and Gem, the respective plaintiffs in the two suits challenged specific provisions of the contracts executed by them to contend upon the non-enforceability of the same. However, it was a well-settled principle that the arbitration agreement was separate and distinct in itself as compared to the underlying contract. Therefore, ADM relied upon a catena of decisions to contend that the principle of severability would protect the arbitration proceedings even if the contract was void.⁴

The plaintiffs in the two suits, Sunraja and Gem, contended that they could not terminate the contracts despite repeated breaches of the exclusivity requirement by ADM, as evidenced by the correspondence between the parties. The plaintiffs, therefore, submitted that the termination clause was unconscionable.⁵ In addition, Sunraja and Gem also contended that the arbitration agreement is also void since FOSFA is controlled by oilseed producers such as ADM, and it does not qualify as a neutral arbitral institution. Finally, as regards the test of bias, it was submitted that it was not necessary to prove actual bias and that it was sufficient to establish justifiable doubt of bias,⁶ which threshold had been satisfied by the respective plaintiffs.

Held

The High Court at the outset examined the preamble of the FOSFA Rules of Arbitration and Appeal. The High Court observed that three aspects were evident from the preamble. Firstly, the parties had agreed to resolve disputes through arbitration. Secondly, the parties agreed that the arbitration would be governed by the Arbitration Act 1996 (English Arbitration Act). Lastly, the juridical seat had been designated as England in terms of the English Arbitration Act. The High Court also noted that the governing law clause stated that the contracts would be construed in accordance with the English law.

Further, a clause concerning "domicile" read that the contract shall be deemed to have been made in England and therefore governed in all respects by English law. Based on the provisions mentioned above, the High Court held that the disputes emerging out of the contracts would fall within the jurisdiction of the arbitral tribunal and thereafter, any challenge would lie before the English courts. The only exception being the interim measures to secure the claim or counterclaim as the case may be.

However, the High Court noted that the respective plaintiffs sought complete anti-arbitration injunctions. Therefore, the moot question in the instant matter was whether a case was made out to grant an anti-arbitration injunction. The High Court referred to the case in Modi Entertainment to reiterate that an anti-suit injunction would not be granted to forbear the exercise of jurisdiction by the forum chosen by the parties. Likewise, a reference was made to the decision in McDonald's India Pvt. Ltd. v. Vikram Bakshi and Ors.⁷ wherein a division bench of the Delhi High Court held that the principal considerations for anti-arbitration injunction would be those underpinning Section 45 of the Arbitration and Conciliation Act, 1996 (Indian Arbitration Act).⁸ In other words, an anti-arbitration injunction could be granted based on whether there is a proper arbitration agreement and whether such agreement is null and void, inoperative or incapable of being performed.

As regards the contention that the contract was unconscionable because it permits termination by the seller but not by the buyer, the High Court held that such contention was untenable given the incorporation of the FOSFA Form 54 in executed contracts which allowed termination by both parties.

On the respective plaintiffs' contention that the arbitral institution was biased, the High Court held that the test of "justifiable doubts of bias" as laid in the case of Laker Airways Inc v. FLS Aerospace Ltd.⁹ was a valid test. However, a higher threshold must be satisfied for an anti-arbitration injunction because the plaintiff should justify the departure from the contractual dispute resolution mechanism. The High Court held that there were several arbitral institutions spread across the world which would represent the interest of a specific trade. The rationale for establishing such arbitral institutions is that the domain expertise is necessary to adjudicate such disputes and trade practices effectively. The High Court concluded that, in the present case, unless it was ex facie evident that the contractual remedy is unconscionable and illusionary, there was no basis to interfere with the contractual dispute resolution process.

Based on the aforementioned findings, the High Court found no reason to continue the anti-arbitration injunction. Consequently, the order of interim injunction granted in the instant matter was vacated.

Comments

The instant matter reinforces the position in law that the focus needs to be on minimising the courts' interference with the arbitration process. It is only in furtherance of the object of the Indian Arbitration Act that the courts be extraordinarily circumspect and reluctant to thwart arbitral proceedings. Hence, while the courts may grant an anti-arbitration injunction, the same must happen rarely on the basis of the threefold test that the arbitration agreement is either (i) invalid, (ii) inoperative, or (iii) incapable of being performed.

Footnotes

1 ADM International Sarl v. Sunraja Oil Industries Pvt. Ltd. and Ors., Application Nos. 5723 to 5730 of 2019, O.A. Nos. 644, 645 of 2019 in C.S. Nos. 406 and 407 of 2019.

2 McDonald's India Pvt. Ltd. v. Vikram Bakshi and Ors., 2016 SCC Online Delhi 3949.

3 Modi Entertainment Network v. W.S.G Cricket Pte. Ltd., 2003 4 SCC 341.

4 Sasan Power Ltd. v. North American Coal Corporation (India) Pvt. Ltd., 2016 10 SCC 813; World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd., 2014 11 SCC 639.

5 Unikol Bottlers Ltd. v. Dhillon Kool Drinks, AIR 1995 Del 25; Classic Motors Ltd. v. Maruti Udyog Ltd., 1995 SCC

Online Del 94.

6 Laker Airways Inc v. FLS Aerospace Ltd., (1992) 2 Lloyd's Report 45.

7 McDonalds India Pvt. Ltd. v. Vikram Bakshi and Ors., 2016 SCC Online Delhi 3949.

8 The decision in McDonalds India Pvt. Ltd. v. Vikram Bakshi and Ors. referred to principles analogous to those found in sections 8 and 45, as the case may be.

9 Laker Airways Inc v. FLS Aerospace Ltd., (1992) 2 Lloyd's Report 45.

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