Spentex Industries vs. Quinn Emanuel Urquhart Sullivan LLP
The Delhi High Court has held that the relationship between a client and a foreign law firm is “commercial” in nature for the purposes of sections 44 (Definition of Foreign award) and 45(Power of judicial authority to refer parties to arbitration) of the Arbitration and Conciliation Act, 1996 (“the Act”). Accordingly, it rejected the plea that the arbitration agreement between the law firm and the plaintiff/client is null and void, inoperative and incapable of being performed and allowed the defendant/ law firm’s application for rejection of the plaint under Order 7 Rule 11 of the Civil Procedure Code, 1908 .
The plaintiff and it subsidiary in Netherlands engaged the defendant, a US law firm to represent the subsidiary in an arbitration proceeding against the Republic of Uzbekistan. A Letter of Engagement was entered into between the plaintiff, Spentex Industries Ltd, its subsidiary in Netherlands and the defendant US law firm dated 20.05.2013, which contained an arbitration clause being Article 16 of the Letter of Engagement. On 27.12.2016, an award was passed in the said arbitration proceedings.
Following certain communications between the defendant and the subsidiary in respect of the fees payable to the defendant, the defendant raised a demand for an arbitration on 25.08.2017 in terms of Article 16 of the Letter of Engagement under the aegis of JAMS .
Thereafter, a suit was filed by the plaintiff seeking a decree of declaration that the Letter of Engagement as well as arbitration clause being Article 16 thereof is null and void, inoperative and incapable of being performed and also against the public policy of India. The plaintiff relied on Section 44 of the Act and contended that the relationship between the plaintiff and the defendant-Law firm cannot be considered as “commercial” under the law in force in India. It further pleaded that there was no dispute between the plaintiff and the defendant, that no services were rendered by the defendant to the plaintiff and that the dispute was between the subsidiary and the defendant. It also contended that since the Engagement Letter was based on contingency fees, which is illegal under the applicable Indian Law, that is, the Advocates Act, 1961, hence, the arbitration agreement contained therein was also rendered null and void, inoperative or incapable of being performed. Accordingly, it prayed for an anti-arbitration injunction restraining the arbitration proceedings initiated against it for non-payment of fees.
On the other hand, the Defendant contended that as per the arbitration clause, arbitration proceedings were to take place in Washington DC and the applicable law is the law of United States of America, under which there is no bar on charging of contingency fees. Hence, the agreement between the parties is legal and valid. It was submitted that the relationship between the plaintiff, its subsidiary and the defendant is commercial in nature by relying upon the judgment of the Supreme Court in the case of R.D. Saxena vs. Balram Prasad Sharma, (2000) 7 SCC 264 and of the Allahabad High Court in the case of Aditya Narayan Singh vs. State Election Commission, Uttar Pradesh & Anr., 2003 SCC OnLine All. 1118.
With respect to Issue no 1. the Court relied on the Supreme Court’s judgment in World Sport Group (Mauritius) Ltd. vs. MSM Satellite (Singapore) PTE Ltd. and held that a suit would be maintainable for the limited purpose of holding an enquiry as to whether the Arbitration Agreement is null and void, inoperative and incapable of being performed. However, the policy is that courts have to be extremely circumspect and reluctant to interfere in arbitration proceedings. The court cannot examine the legality or validity of the substantive agreement. In the facts of the instant case, the Court found that the plaintiff had failed to show or plead that the arbitration agreement is null and void, inoperative or incapable of being performed. The plaint failed to disclose any cause of action.
With respect to issue no 2, the Court examined the literal and grammatical meaning of the term “commercial” and how it had been interpreted in other judgments. It observed that the term “commerce” as defined in the Collins Concise Dictionary, Third Edition, means the activity embracing all forms of the purchase and sale of goods and services. Thus, transactions relating to services for valuable consideration would be a commercial legal relationship and would be covered by Section 44 of the Act.
The Court noted that, essentially, the defendant initiated arbitration proceedings for outstanding fees. The defendant being a law firm was advising and acting for the plaintiff’s subsidiary. It was to be paid for the services as agreed upon and as per the law firm the plaintiffs defaulted in paying its professional charges. The claim did not relate to professional issues but were proceedings that were substantially for recovery of money, therefore the same would tantamount to a commercial relationship as per section 45 of the Arbitration Act.
The court rejected the plaintiff’s plea that the agreement in question involved payment of contingency fees and such an agreement would be void in India. It observed that the Engagement Letter shows a component of fixed fee also which was payable at different stages. Other costs had also to be recovered. Hence, the entire contract was not based only on the contingency fees. Further, the agreement was governed by the laws prevailing in USA and contingency fees are not barred under US law.
Consequently, the engagement letter and the arbitration clause was held not to be null and void, inoperative or incapable of being performed.
 44.Definition.—In this Chapter, unless the context otherwise requires, ‘foreign award’ means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—
(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.
 45.Power of judicial authority to refer parties to arbitration.—Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), 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.
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