Gas Authority Of India Ltd. vs Spie Capag, S.A. And Others

Gas Authority Of India Ltd. vs Spie Capag, S.A. And Others

AIR 1994 Delhi 75

FACTS

Petitioner (GAIL) had entered into two agreements, for the execution of a Gas Pipe Line Project with Respondent Consortium (herein after, R), consisting of Spie Capag and others. The entire project was to be executed in accordance with the “Completion Schedule” and every task performed by agreed date.

Delay occurred and disputes arose between the parties. Petitioner claimed liquidated damages for the delay and invoked the respondent’s bank guarantee, while R demanded a further payment of U.S. $ 450 m.

R approached the Court of Arbitration, International Chamber of Commerce, Paris (herein after I.C.C.) for arbitration of its claim and also sought a declaration that GAIL did not have a right to levy liquidated damages. Upon receiving notice of this request, GAIL filed an application under Section 33[CG1] , Indian Arbitration Act, 1940 seeking-

• a declaration that R’s request for arbitration was invalid, illegal and vocative of the contract between the parties;
• a determination on the existence, validity and effect of the arbitration agreement contained in the contract between the parties, and
• a declaration that the matter was not referable to arbitration.

ISSUES

1. Whether or not Section 3[CG2]  of the Foreign Awards (Recognition and Enforcement) Act, 1961 (for short ‘FARE Act’) is applicable to the arbitration agreement contained in the underlying contract executed between them.
2. If Section 3 of the FARE Act is applicable then whether or not proceedings before I.C.C (respondent No. 4), initiated by R for appointment of three member Arbitral Tribunal for adjudication of the claims raised by it against GAIL, should be permitted to continue.

CONTENTION(S) of R

There existed between the parties a valid arbitration agreement, subject to New York convention of 1958 and therefore it was covered by Foreign Awards (Recognition and Enforcement) Act, 1961 (F.A.R.E. Act), in particular Section 3 and Article II (3) of its Schedule.

Note: The agreement (Article 5.7.1), however, stipulated a particular procedure and a time limit for notifying and lodging claims and also clearly stated that any failure as regards procedure or observance of time limit would be deemed a waiver of the claim.

HELD

The Arbitration agreements which qualify for recognition and enforcement under Article 11 of the New York Convention and Section 3 of the FARE Act should have a foreign element and relate to international commercial transactions. A commercial arbitration agreement will be international in character in the following situations.

(1) If one of the parties has business located abroad; or

(2) The agreement has to be performed abroad; or

(3) The subject matter of the transactions is located abroad; or

(4) One of the parties to the transactions is a foreigner etc.

New York Convention and FARE Act

What is an international transaction is, however, not capable of a precise definition and its meaning cannot be put in a strait jacket. According to Section 3 of the FARE Act, the courts in India are under an obligation to stay the legal proceedings in respect of the matters arising out of the arbitration agreements of the kind covered by Article 11 of the New York Convention subject to the exceptions mentioned therein. Refusal to enforce the arbitration agreement on the ground that it will not result in a foreign award cannot be sustained in view of Article 11 of the New York Convention and Section 3 of the FARE Act. The convention does not apply to an award made in the country where the enforcement is sought. It also does not apply to an award considered as domestic award in the country in which enforcement of such award is sought. The field of application of Article 1 is expressly restricted by the convention itself.

Article V(1)(a) of the New York Convention corresponding to Section 7(i)(e) of the FARE Act, which provides, inter alia, that a foreign award may not be enforced if the arbitration agreement from which it stems is not valid, under the law to which the parties have subjected it or failing any indication thereon, under the law of the country where the award was made. Though the said provision relates to the conditions for the enforcement of the arbitral award, it also helps in determining the law applicable to an arbitration agreement.

Parties to an international commercial arbitration agreement can agree to seek enforcement of an arbitral award on the basis of the domestic law instead of the New York Convention notwithstanding the fact that they may have agreed to enforce arbitration agreement under Article 11 of the Convention (vide Article VII(1) of the New York Convention).