Anti-arbitration Injunctions: Mixed Signals From India

The Indian judiciary has increasingly adopted a pro-arbitration stance, particularly since the landmark Supreme Court judgment in the BALCO case. However, the High Court of Delhi has recently granted an injunction against a London-seated arbitration for reasons which diverge from other recent Indian cases. Ben Giaretta and Akshay Kishore discuss the implications of this judgment.

Background

Prior to 2012, there was criticism of India from other countries as a result of a series of judgments concerning arbitration. While these judgments were often in favour of foreign investors and strived to do justice in the particular cases, they exposed weaknesses in the Arbitration and Conciliation Act, 1996 (Arbitration Act) and stretched the boundaries of concepts, such as public policy, beyond what has been accepted in other parts of the world.

Then, in September 2012, the Supreme Court of India issued the BALCO judgment.¹ It turned the tide of perception, bringing India in line with other countries on the question of the supervisory power of the courts. The Supreme Court ruled, in particular, that the Indian courts had no power over foreign-seated arbitrations (albeit that this ruling only had prospective effect).

There followed a series of judgments that demonstrated a pro-arbitration approach on the part of the Indian judiciary, including Shri Lal Mahal Limited -v- Progeto Grano SpA,² World Sport Group (Mauritius) Ltd -v- MSM Satellite (Singapore) Pte Ltd³ and Reliance Industries Limited & Another -v- Union of India.⁴ Recently, the Law Commission of India has proposed revisions to the Arbitration Act and the Government has indicated it will bring these before Parliament.

The judgment of the High Court of Delhi (High Court) in Vikram Bakshi -v- McDonald's India Pvt Ltd⁵ runs counter to this tide. The High Court has granted an interim injunction to stop an arbitration proceeding seated in London, for reasons that are strikingly different from the approach manifested in other cases.

Facts

In 1995, McDonald's India Pvt Ltd (McDonald's India) and Mr Vikram Bakshi entered into a Joint Venture Agreement (JVA) relating to McDonald's restaurants in north and east India. They established a joint venture company, Connaught Plaza Restaurants Pvt Ltd (CPRL). CPRL became an additional party to the JVA, along with a company incorporated by Mr Bakshi, Bakshi Holdings Pvt Ltd (BHPL). The JVA was governed by Indian law and provided that disputes would be submitted to LCIA arbitration in London. Mr Bakshi was appointed managing director of CPRL, until 2013 when he ceased to hold this position.

In August 2013, McDonald's India exercised a right under the JVA to acquire the shares in CPRL held by Mr Bakshi and BHPL. In response, Mr Bakshi and BHPL filed a petition before the Company Law Board (CLB) under the Companies Act, 1956, challenging the actions of McDonald's India and CPRL, and seeking the reinstatement of Mr Bakshi as managing director. The CLB ordered that the status quo be maintained while it considered the petition. McDonald's India applied under section 45 of the Arbitration Act to stay those proceedings and refer the dispute to arbitration. However, this application was subsequently withdrawn.

McDonald's India next terminated the JVA and started an arbitration. It applied to the High Court for interim relief in support of the arbitration, but that application was also subsequently withdrawn. Mr Bakshi and BHPL then applied to the High Court for an injunction to restrain the arbitration.⁶

The High Court's decision

The High Court granted the interim injunction that was requested by Mr Bakshi and BHPL. It did so on a number of grounds:

• firstly, the High Court ruled that the application that had been made to the CLB could not be referred to arbitration, and the arbitration agreement was prima facie incapable of being performed or was inoperative until the CLB had decided on that application;
• secondly, the arbitration would be forum non conveniens (i.e. not the place best suited to hear the case) because most of the parties were in India, the dispute concerned a business in India, and the governing law was Indian law. The arbitration was therefore "vexatious" and "oppressive";
• thirdly, there was a risk that the arbitration award and the CLB judgment might conflict; and
• finally, McDonald's India and CPRL had waived their right to rely on the arbitration agreement, as a result of having filed and then withdrawn their previous applications under the Arbitration Act.

Analysis

There are a number of exceptional aspects to this decision. It is unusual, to begin with, for a court to grant an anti-arbitration injunction because the arbitration agreement is prima facie invalid (rather than referring a dispute to arbitration because the arbitration agreement is prima facie valid).

Further, the ruling that an arbitration agreement is incapable of being performed because a separate application was being made to the CLB appears to conflict with the Supreme Court ruling in the World Sport Group case that a court cannot refuse to refer a dispute to arbitration on the grounds that a related application is the subject of court proceedings.

In addition, it is surprising that the High Court took the view that an arbitration award might conflict with a judgment of the CLB concerning certain rights under the Companies Act, when it said those rights were not arbitrable and therefore would impliedly not overlap with an arbitrable dispute under the JVA.

The view that an injunction could be granted because an arbitration agreement had been waived is also striking, since this does not fall within section 45 of the Arbitration Act. The Supreme Court in the World Sport Group case had indicated that such an allegation would have to be raised with a tribunal, in accordance with the principle of kompetenz-kompetenz.

Finally, it is remarkable that the arbitration in London would be a forum non conveniens. This appears to conflict with the principle that parties are free, within certain defined limits, to refer disputes to arbitration and to choose the seat of arbitration.

Practical Implications

It is unlikely that the judgment of the High Court is the last word on these issues. McDonald's India and CPRL can appeal to the Supreme Court of India, and one would expect them to do so unless a commercial settlement is concluded in the meantime.

Even if there is no appeal, the binding value of this judgment is open to doubt since it appears to conflict with earlier judgments of the Supreme Court. Another court in India may not reach the same conclusion when faced with a similar case.

Nonetheless, this is a reminder that exceptional judgments still arise in India, despite the change in approach in recent years. Parties might also note the significance of the withdrawal by McDonald's India and CPRL of their earlier applications under the Arbitration Act. It is important to maintain a consistent position, since it appears that failing to do so made it more difficult for McDonald's India and CPRL to rely on the Arbitration Act in the High Court proceedings.

_Notes

_{¹ 2012 (9) SCC 552. Please see our briefing on this case here.}

_{² Civil Appeal No. 5085 of 2013. Please see our briefing here.}

_{³ 2014 (1) Arb. Law Reporter 197 (SC). Please see our briefing here.}

_{⁴ Civil Application No. 5765 of 2014. Please see our briefing here.}

_{⁵ Interim Application No. 62017 of 2014 in Civil Suit (Original Side) No. 962 of 2014.}

_{⁶ Since the underlying agreement pre-dated the BALCO judgment, the Supreme Court ruling that Indian courts do not have jurisdiction over foreign-seated arbitrations was not applicable in this case.}