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18 August, 2016
Background
McDonald’s Corporation and its Indian subsidiary (together “McDonald’s”) had entered into a joint venture agreement (“JVA”) with a local partner, Mr Vikram Bakshi (“VB”), to operate restaurants through a joint venture company (“JVCo”). The JVA contained an Indian governing law clause, and provided for disputes to be submitted to arbitration administered by the LCIA and conducted in London before a panel of three arbitrators. Subsequently, when McDonald’s sought to exercise its right under the JVA to exercise its right to acquire VB’s shares in JVCo, VB filed a petition before the Company Law Board (the “CLB”) alleging oppression and mismanagement of JVCo.
During the CLB proceedings, McDonald’s filed an application under section 45 of Part II of the Indian Arbitration and Conciliation Act 1996 (the “Arbitration Act”) to restrain the CLB proceedings and refer the parties to arbitration. However, McDonald’s subsequently withdrew its application, terminated the JVA and issued a Request for Arbitration in London. This prompted VB to apply to Delhi High Court seeking an interim injunction to restrain McDonald’s from proceeding with the arbitration.
A single judge of the Delhi High Court in December 2014 granted the anti-arbitration injunction based on the following reasons:
- the arbitration agreement was incapable of being performed or inoperative, on a prima facie basis, at least until the CLB had ruled on the issues of oppression and mismanagement. The judge further noted that the “the proceedings before the arbitral tribunal ought to be stayed” due to the risk of conflicting decisions by the CLB and the arbitral tribunal;
- the withdrawal by McDonald’s of the application under section 45 of the Arbitration Act constituted a waiver/abandonment of the arbitration clause since it suggested that McDonald’s was submitting to the jurisdiction of the CLB and Indian courts; and
- arbitral proceedings in London would be a forum non conveniens, since the dispute involved predominantly Indian parties and Indian law.
McDonald’s appealed against the decision of the single judge, and the matter went before a division bench of the same court.
Decision of the Court
In a judgment handed down on 21 July 2016, a division bench of the Delhi High Court rejected each of the reasons given by the single judge for arriving at his decision and thus set-aside the anti-arbitration injunction. In doing so, it emphasised the need for courts to exercise circumspection when granting anti-arbitration injunctions.
While VB did not press the forum non conveniens argument before the division bench, the Court nevertheless clarified that the principle of forum non conveniens would not be applicable as the parties had consciously chosen the forum and place of arbitration.
The Court added that forum non conveniens was only relevant where there was a choice between fora to hear a particular dispute, but had no role where the parties had contractually bound themselves to submit that dispute to arbitration.
Dealing with the question of whether the arbitration clause was “inoperative” or “incapable of performance”, the Court held that the prospect of separate proceedings (i.e. proceedings before the CLB and proceedings before the arbitral tribunal) did not render the arbitration agreement inoperative or incapable of being performed, particularly as the subject matter of the dispute before the CLB (which related to oppression and mismanagement) was different from that which would be referred to the arbitral tribunal (relating to termination of the JVA).
Finally, the court held that McDonald’s withdrawal of its application under section 45 of the Arbitration Act did not amount to waiver or abandonment of the arbitration clause, given that the JVA was terminated after the application had been filed and separate arbitration proceedings had been commenced by McDonald’s shortly thereafter. That conduct was not consistent with an intention to waive its right to arbitrate.
Whilst it is not yet known whether the matter will be subject to further appeals, the decision signifies that the Indian courts will be reluctant to allow a party to escape from a contractual commitment to arbitrate. That said, where parties intend to rely on agreements to arbitrate, they should be wary of taking any steps that could in any way be seen as inconsistent with an intention to submit disputes to arbitration.
For further information, please contact:
Nicholas Peacock, Partner, Herbert Smith Freehills
nicholas.peacock@hsf.com
