CASE COMMENT ON “ENERCON GMBH VS ENERCON

INDIA LTD. AND ORS. COMPANY LAW BOARD, 2008 (3)

CLJ 266”

Subject: 6.6 International Commercial Arbitration

Academic Year: 2022-2023

Semester: VI

Submitted by,

Deovrat Wade,

UG2020-61

Submitted to,

Dr Deesha Khaire,
Professor of Law

MAHARASHTRA NATIONAL LAW UNIVERSITY, NAGPUR

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Sr. No. CONTENTS Page No.

1. FACTS 3

2. PROCEDURAL HISTORY 4

3. ISSUES 4

4. ARGUMENTS OF APPELLANTS 5

5. ARGUMENTS OF 7
RESPONDENTS
6. JUDGMENT 8

7. ANALYSIS 11

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FACTS
In the present case the Appellant no. 2 and 3 are the members of the
Mehera family and the respondent no. 1 is a German company which is
registered and located in Germany. In the instant case, the Mehera
Family and this company have entered into a joint venture via setting up
the company Enercon Ltd. which is the appellant no. 1 in the present
case. This Company has its office registered in Daman and wants to do
business of wind turbine generators in India.
Dr. Alloys Wobben serves as the Chairman of Respondent No.1.
Respondent No.2 is a German company that holds the patent for the
technology used in the wind turbine generators (WTGs) in question. In
pursuit of their business objectives, the parties entered into several
agreements like the technical know-how agreement, share-holding
agreement, supplementary share-holding agreement, etc.

Further the parties had also agreed to the certain principles. On the 29 th
of September of 2006 the Appellants and the Respondent no. 1 had
entered into these ‘agreed principles’ for the use of the windmill
technology and on the same day had entered into a Intellectual Property
License agreement. In the instant case the Appellant No.2 has signed the
IPLA on behalf of the Appellants No. 2 and 3. However, the Appellants
have argued that this IPLA is not a finalized agreement. They contend
that Appellant No.2 only initialled the draft IPLA for identification
purposes and that the draft still contained certain discrepancies that
needed to be rectified in accordance with the Agreed Principles. As such,
the Appellants argue that the draft IPLA was not a finalized agreement.
Conversely, Respondent No.1 has taken the position that the IPLA is a
completed contract and therefore binding on the parties.

It is further the contention of the appellants that the respondents in the

February of 2007 had stopped the entire supply with the intention so as

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pressurize them to sell the share holding as desired by Dr. Wobben.
However, in March, 2007, after discussions between the parties,
Respondent No.1 resumed supplies. Thereafter, the supplies were
stopped once again in July, 2007.

PROCEDURAL HISTORY
There were various legal proceedings in this case which were initiated
simultaneously in India and England, seeking declarations on the validity
of the arbitration clause and requesting anti-suit injunctions. Enercon
India, in particular, initiated proceedings before both the Bombay High
Court and the Daman Trial Court seeking a declaration that the IPLA was
not properly concluded, and that there was no valid arbitration
agreement between the parties. In response, Enercon Germany filed
applications under Section 45 of the Indian Arbitration Act, asking the
court to refer the dispute to arbitration. The matter was later appealed to
the Bombay High Court and subsequently to the Supreme Court.

Enercon Germany also filed an application before the English High Court,
requesting it to form an arbitration tribunal under the provisions of the
IPLA. However, the English High Court suspended its proceedings due to
the ongoing legal proceedings in India and denied an application for an
anti-suit injunction, as Enercon India had given an undertaking that the
Bombay High Court and Supreme Court proceedings would be completed
expeditiously. Enercon India and the Mehra family took the case up to
the Supreme Court and sought a ruling that there was no valid
arbitration agreement between the parties.

ISSUES

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 Can the parties refuse to arbitrate on the basis that there was no validly
concluded IPLA? Additionally, is this a matter for the court to decide, or
should it be left to the arbitral tribunal to determine?
 In the event that an arbitration agreement exists, is the arbitration
clause vague and unenforceable?
 If the arbitration clause is deemed enforceable, is the seat of arbitration
in India or London?
 If the seat of arbitration is in India, do the English courts have
concurrent jurisdiction due to the choice of London as the venue of
arbitration?

ARGUMENTS OF APPELLANTS
Mr. Rohinton Nariman's primary argument is that an arbitration
agreement cannot exist if there is no concluded contract. He argued that
the Indian Purchase and Licensing Agreement (IPLA) is not a concluded
contract as it does not conform to the Agreed Principles. The parties only
agreed to the "Agreed Principles" on September 29th, 2006, to which a
draft of the IPLA was attached. Mr. Nariman argued that the Agreed
Principles were the fundamental basis on which the final IPLA was
supposed to be made and legally executed to the satisfaction of all
parties. He reiterated that there were inconsistencies between the
Agreed Principles and the IPLA. The appellant pointed out these
discrepancies in a letter dated November 3rd, 2006, which the
respondents acknowledged in a letter dated November 24th, 2006. The
respondents have never claimed that the IPLA is in compliance with the
Agreed Principles. In fact, the respondents have acknowledged the
primacy of the Agreed Principles in their letters dated October 29th,
2006, and November 24th, 2006.

Mr. Nariman contended that the absence of a concluded contract renders

the existence of an arbitration agreement impossible. He argued that the
IPLA cannot be considered a concluded contract since it deviates from
the Agreed Principles, which formed the foundation of the final IPLA to

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be executed. Mr. Nariman highlighted that the Respondents themselves
admitted the material discrepancies between the IPLA and the Agreed
Principles. Moreover, he emphasized that previous agreements or
correspondence cannot determine the conclusion of IPLA, but
subsequent correspondence and contracts may be used to determine the
same. He cited the case of Godhra Electricity Co. Ltd. And Anr. Vs.
The State of Gujarat and Anr. [(1975) 1 SCC 199] to support his
argument. Mr. Nariman claimed that the subsequent correspondence in
this case clearly indicates that IPLA was not concluded.

It was further argued that Clause 18.1 of the IPLA cannot be executed,
therefore, no arbitration can be referred to under Section 45 of the
Indian Arbitration Act, 1996. The High Court's interpretation of Clause
18.3 of the IPLA was considered incorrect by the senior counsel, as it
granted the licensors the right to appoint an arbitrator, and the licensee
also had the right to appoint an arbitrator. This contradicts the expressed
terms of Clause 18.1, according to the counsel, and the definition of
licensor and licensors, along with other provisions of the IPLA. The
respondents did not attempt to maintain the High Court's reasoning.

The counsel also noted that while the court can interpret an arbitration
clause to make it workable, it cannot rewrite it. To support his argument,
he cited Shin Satellite Public Co. Ltd. Vs. Jain Studio Ltd. and
argued that reconstructing the arbitration clause in this case is not
feasible without violating the language of the arbitration clause, which is
not permissible in law. The counsel also cited Bushwall Vs. Vortex to
support his contention that the respondents' submissions conflict with
Section 45 of the Indian Arbitration Act, 1996, which prohibits the court
from referring to arbitration if the arbitration agreement is not
executable.

It was further submitted that for fixing the issue of seat of arbitration the
court will have the task of determining the territory that has the most

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closest connection to arbitration. It was further the contention of Mr.
Nariman that the Indian Arbitration Act’s provisions would be applicable
to the present arbitration the substantive law of the contract is
predominantly Indian Law as the patent and the curial laws referred are
that of India, and the joint venture along with the IPLA are to be acted
upon in India. The counsel has further depended on the ratio that was
given in the case of Naviera Amazonica Peruana S.A. Vs. Compania
Internacional De Seguros Del Peru1 and had given the submission
that the seat of arbitration would be in India. The counsel had also
mentioned that there were clear indications that were present to show
that the parties wanted the Indian Arbitration Act’s provisions to govern
them. One of the such indicators that was cited was that the term
presiding arbitrator has been used instead of chairman. The former term
here has been used in the sections 11 and 29 of the Indian Arbitration
Agreement and the later has been used in the section 30 of English
arbitration act of 1996. This was one of the arguments that was cited by
Mr. Nariman again the contention of the respondent that London should
be the seat of arbitration.

It was argued by the Appellants that the English Courts have no

jurisdiction since the seat of arbitration is in India, citing Oil & Natural
Gas Commission Vs. Western Company of North America 2. They
also referred to Modi Entertainment Network & Anr. Vs. W.S.G.
Cricket Pte. Ltd. to support the assertion that before gr 3anting an anti-
suit injunction, the Court must confirm that the defendant is subject to
the personal jurisdiction of the Court and denying the injunction would
result in injustice. Furthermore, the Court must consider the principle of
comity of Courts and determine which forum is the most convenient if
there are several options.

1
[1988 (1) Lloyd’s Rep 116]
2
[1987 SCR (1) 1024]
3
[(2003) 4 SCC 341] [LQ/SC/2003/80]

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Mr. Nariman stated that the Appellants satisfy all the criteria for the
Indian Courts to grant necessary relief. He claimed that the English
Courts are not accessible to the Respondents since London is only a
venue. Therefore, an injunction should be granted to prohibit the
Respondents from pursuing proceedings in the English Court. Mr.
Nariman also noted that the Respondents have abandoned their
argument that both Indian and English Courts have concurrent
jurisdiction.

ARGUMENTS OF RESPONDENT
Dr. Abhishek Singhavi had appeared in this matter on the behalf of the
Respondent No. 1 and 2 and had given the submission that the over-
riding principle for the courts in the case of arbitration is that to
determine if the intention to arbitrate is present. The counsel for the
respondents has argued that that the appellants have attacked the main
contract’s existence and in the present case the court has to only concern
itself with the arbitration clause. The respondents counsel had submitted
here that in such cases the court is not required to answer the question if
the contract is concluded according to the provisions of the Indian
Contract act but is supposed to determine if there is a valid arbitration
agreement. He had further gone on to state that the arbitrator will have
the responsibility to decide the formation of the underlying contract.

Dr. Singhavi also had established the existence of an arbitration

agreement and had relied on the section 7 of the Indian Arbitration Act
which states the three essentials of aa valid arbitration agreement. There
includes the intention to arbitrate, existence of a dispute, and the
existence of a legal relationship. It is pertinent to note here that the
counsel of the respondent had also pointed out that an agreement under
the section 7 of the arbitration act doesn’t require offer and acceptance.

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Another point that was raised by the respondents was that according to
the section 16 a of the Indian arbitration act that the existence of an
arbitration agreement would not be dependent on the contract and would
be treated as an agreement that is independent from that of the contract.
The respondents counsel depended on the explanation of section 45 that
was provided in the judgment of Chloro Controls India Pvt. Ltd. v.
Severn Trent Water Purification Inc.

The counsel of the respondent after this had submitted that intention of
the parties to arbitrate could be seen by the clauses 17 and 18 of the
IPLA which is the governing law clause and the arbitration clause
respectively. Dr. Singhvi also highlighted that the Heads of Agreement
have been acknowledged as conclusive and obligatory, and that the
parties have unconditionally accepted the Arbitration Agreement as
stated in Clause 18. It was also pointed out that both Appellant No.1 and
Respondent No.1 have signed the document.

The counsel for the respondent had also submitted that all the essential
elements of the arbitration agreement are present and that poor/clumsy
drafting will not affect the interpretation of the said arbitration clause.
The Counsel for the Respondents had also argued that the arbitration
clause is not impossible to carry out. The important consideration is not
whether the clause could have been worded differently, but that it should
be interpreted as it is. Dr. Singhvi contends that there is no inconsistency
between different parts of the clause, which provides for three
arbitrators: one by the licensee, one by the licensor, and the third by the
two arbitrators. The phrase "the third arbitrator shall be appointed by
the two arbitrators" appears to have been left out by the person who
drafted the clause. The Court can add this phrase to make the arbitration
clause functional.

It is also important to note that the respondents counsel had also pointed
out that the initial Heads of Agreement dated May 23, 2006 referred to a

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 "proposed" Intellectual Property License Agreement, while the IPLA
dated September 29, 2006 did not contain the word "proposed" or
"draft". He argued that this indicates that the IPLA was a finalized and
binding contract.

Lastly, Mr. C.U. Singh, who represented Respondent no. 2, supported the
arguments presented by Counsel for the respondent no. 1 before this
court. Mr. Singh also pointed out that the Indian Arbitration Act, 1996
has blurred the distinction between seat and venue, and now uses the
term "place," which refers to the physical location of the Arbitral
Tribunal. This place determines the curial law that governs the
arbitration, but the Arbitrators can hold meetings anywhere. Mr. Singh
cited the Chloro Controls India Pvt. Ltd. judgment to emphasize that the
court's approach is to make the arbitration clause workable. He also
relied on the Reva Electric Car Company P. Ltd. v. Green Mobil judgment
to support his argument.

JUDGMENT

1. Validity of Arbitration Agreement

The Supreme Court of India has recently made a ruling that supports the
legislative mandate under Section 45 of the Indian Arbitration Act. The
Act stipulates that a court can only decline to refer a dispute to
arbitration if the agreement is deemed "null and void, inoperative or
incapable of being performed". In this context, it is necessary for a party
to prove that one of these infirmities exists. The Court ruled that simply
alleging that the underlying contract containing the arbitration clause
was not properly concluded would not be sufficient to fall within the
parameters set out under Section 45 of the Act.

In this specific case, the Court found that the signing of the Indian
Premier League Agreement (IPLA) by the parties, along with evidence of
past dealings that were all subject to arbitration, was enough to establish

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 that the parties intended to arbitrate. The Court held that it would be
unjust for the parties to avoid arbitration unless they could demonstrate
that doing so would be in the interest of all parties involved.

The Court also emphasized the importance of the concept of the

separability of the arbitration agreement. This means that even if there is
a dispute as to the validity of the underlying contract, the arbitral
tribunal still has jurisdiction to consider claims. The IPLA's arbitration
clause contained a broadly worded provision stating that all disputes,
including those relating to the IPLA's validity, should be referred to
arbitration. As a result, the Court held that the question of whether the
IPLA was properly concluded is for the arbitral tribunal to decide.

Overall, the Supreme Court's ruling demonstrates the importance of

proper drafting of arbitration clauses in contracts. It is crucial to specify
the governing law of the arbitration agreement, the seat of arbitration,
and the arbitration mechanism for appointing arbitrators. Clear and well-
written arbitration clauses can help avoid disputes and complications in
the future.

2. Arbitration Agreement is ‘workable’

According to the Supreme Court, despite some errors in the drafting of
the arbitration clause, such as the absence of a specific procedure for the
appointment of a third arbitrator, the clause was not unworkable or
pathological. In interpreting or construing arbitration clauses, courts
must adopt a pragmatic approach rather than a pedantic or technical
one, and strive to give effect to the parties' intention to arbitrate, where
it is clear. Therefore, if faced with an apparently unworkable arbitration
clause, it is the duty of the courts to make it workable within the limits
permissible under the law.

The Court considered the arbitration clause from the perspective of a

reasonable business person and noted that it was missing a crucial line

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 specifying that the two arbitrators appointed by the parties would
appoint the third arbitrator. The omission was deemed so obvious that
the Court felt it was entitled to add the missing line to the clause.
However, due to time constraints, the Supreme Court appointed the third
arbitrator itself, as the parties had already appointed one arbitrator each.

In essence, the Supreme Court emphasized the importance of

interpreting arbitration clauses in a practical and sensible way, rather
than strictly adhering to technicalities. This approach allows for the
efficient resolution of disputes and upholds the parties' intention to
arbitrate.

3. Where is the seat of Arbitration?

In this instant case, the Supreme Court relied on the precedent
established in the Naviera Amazonica Peruana S.A. v Compania
Internacional De Seguros Del Peru case to determine the seat of
arbitration. The court applied the closest and intimate connection test to
decide where the arbitration should take place. The court held that
Indian law was chosen as the law applicable to all aspects of the
agreement and the arbitration, which included the law governing the
contract, the law governing the arbitration agreement, and the
procedural law of the arbitration.

The court started with the presumption that given the parties’ choice of
Indian law, particularly for the conduct of the arbitration, the parties
were not likely to have intended to fix the seat of arbitration in London.
The court was willing to consider displacing this presumption, and it
indicated that the threshold to displace this presumption could be quite
low. A mere choice of a transnational set of arbitration rules could be
sufficient to consider a ‘venue’ as being a ‘seat’. However, the court
found no other connecting factor in favor of London. Based on this, the
court held that the ‘seat’ was India, and London was merely chosen by
the parties as a venue for the conduct of the hearings.

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 To support its conclusion, the Supreme Court also relied on the 2012
BALCO decision. The court held that since the parties had specifically
applied portions from Part I of the Indian Arbitration Act, which in the
post BALCO context was only effective where the seat of arbitration was
India, the parties must have intended for the seat to be in India.

In summary, the Supreme Court took a pragmatic approach and used the
closest and intimate connection test to determine the seat of arbitration.
The court carefully considered the parties' choice of Indian law and
concluded that India was the appropriate seat of arbitration. This case
highlights the importance of proper drafting to avoid confusion and
ensure that arbitration clauses are clear and unambiguous.

4. Do the English Courts have concurrent supervisory jurisdiction

over the arbitration?
According to the Supreme Court, the Bombay High Court had previously
decided that even though the seat of arbitration was in India, the English
courts would have concurrent jurisdiction over the dispute because the
venue chosen was London. However, the Supreme Court disagreed with
this finding and emphasized that the main purpose of arbitration is to
provide a fast, cost-effective, and final resolution to disputes. It
highlighted that allowing courts in two different countries to have
concurrent jurisdiction over the same dispute can lead to numerous
difficulties.

The Supreme Court asserted that in line with the law in most arbitration-
friendly jurisdictions, once the seat of arbitration has been established as
India, the exclusive jurisdiction to exercise supervisory powers over the
arbitration lies with the Indian courts. Therefore, the English courts
could not have concurrent jurisdiction over the dispute, and the Indian

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courts would be the ones responsible for supervising and intervening in
the arbitration proceedings, if necessary.

ANALYSIS
The Supreme Court's decision to uphold a poorly drafted arbitration
clause demonstrates their commitment to protecting the parties' intent to
arbitrate, even if the main contract contains irregularities. This decision
affirms the value of arbitration as a dispute resolution method and
encourages parties to include an arbitration clause in their contracts.

However, the Enercon case highlights the importance of careful drafting

when crafting an arbitration clause. Poorly written clauses can create
ambiguity and confusion, leading to future complications and costly
disputes. To avoid these issues, parties should take the time to ensure
that the arbitration clause is drafted with precision and clarity.

One essential component of a well-drafted arbitration clause is specifying

the seat of arbitration. This detail helps determine which country's laws
govern the arbitration proceedings and the courts with jurisdiction over
any related matters. The use of the word "seat" can avoid confusion and
clearly identify the location of the arbitration.

Additionally, parties should specify the law governing the arbitration

agreement separately or indicate that it is the same as the substantive
law of the contract. This clarification ensures that parties are aware of
which laws will apply to their arbitration proceedings and can avoid
disputes over the interpretation of governing laws.

When selecting the arbitral mechanism for appointing arbitrators, parties

should choose a process that is appropriate for their specific situation
and outline it clearly in the contract. This mechanism could be through
an established set of rules or an arbitration law, and it should be
unambiguous to prevent potential disputes.

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In conclusion, investing time in drafting well-written arbitration clauses
can save parties time and money in the long run. It ensures that parties'
intent to arbitrate is preserved, and potential ambiguities are eliminated,
which can lead to costly disputes.

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