1233 and 1253

Enercon India Ltd. vs Enercon GmBH

(2014) 5 Supreme Court Cases 1

(Term paper towards partial fulfilment of the assessment in Alternative Dispute Resolution)

Submitted By:
Sanjana Yadav and Tamizhoviya I.T.
Section B
Semester IX
B.A. LL.B. (Hons.)

Submitted To:
Mr. Abhirup Das
Faculty of Law
Case Background1

The Appellants had entered into a joint venture business with the German company, Enercon
GmBH, to set up the company Enercon India Ltd. in 1994. This new company was to
manufacture and sell wind turbine generators in India. The German company had the patent of
technology in connection with the wind turbine generators. In furtherance of their business
venture, the parties entered into shareholding and technical know-how agreements. They also
entered into what is called as Agreed Principles for the use and supply of the windmill
technology. Along with these, an intellectual property licence agreement was executed between
the parties.

Holding in the Case2

An arbitration agreement cannot be avoided on the basis that there is not concluded contract
between the parties. It can only be avoided, in the context of international commercial
arbitration, if the arbitration agreement is null and void, inoperative, or incapable of being
performed. In such circumstances, as in the present case where the IPLA was claimed to not
be a concluded contract, in the absence of a fundamental legal impediment, whether the
underlying contract is a concluded contract is required to be left to the arbitral tribunal.

In determining whether an arbitration clause is unworkable or incapable of being performed,

the Court ought to adopt the attitude of a reasonable business person, having business common
sense as well as being equipped with the knowledge that may be peculiar to the business
venture. The Court said that if detailed semantic and syntactical analysis of words in a
commercial contract is going to lead to a conclusion that flouts business common sense, it must
be made to yield to business common sense. Thus, the clause that states that each party shall
appoint an arbitrator… making it in all three arbitrators was not unworkable, and the court
would be well within its rights to set right an obvious omission.

The mention in the arbitration clause that London was the venue of the arbitration could not
lead to the inference that London was to be the seat. This was so in particular because although
London was termed as the venue, the law governing the substantive contract, the law governing
the arbitration agreement, and the law governing the conduct of the arbitration were chosen to
be Indian law, and the closest and most real connection was with India. The Court held that
venue is only a misnomer, and that it would be vexatious and oppressive if Enercon GmBH is
permitted to compel EIL to litigate in England.

The Court noted that it would be rare for the law of the arbitration agreement to be different
from the law of the seat of arbitration. This observation is of relevance in analysing the issue

1
Enercon (India) Limited vs Enercon GmBH, (2014) 5 SCC 1.
2
Enercon vs Enercon: Indian Supreme Court on Arbitration/Conflict of Laws, Mihir Naniwadekar.
of whether the law governing the arbitration agreement is to be presumptively considered as
the law of the seat or as the proper law of the underlying contract. Once the seat was in India,
Indian Courts would have exclusive supervisory jurisdiction. English Courts cannot have
concurrent jurisdiction. An anti-suit injunction was therefore granted restraining the
Respondents from continuing English proceedings.

Having supplied the omission in the arbitration clause by implying that the two party-appointed
arbitrators were to then nominate the third arbitrator, the Court decided against relegating the
parties to this procedure. Instead, the Court itself appointed the presiding arbitrator, stating that
keeping in view the peculiar facts and circumstances of this case and the inordinate delay which
has been caused due to the extremely convoluted and complicated proceedings indulged in by
the parties, it is deemed appropriate to take it upon themselves to name the third arbitrator.

Reception of the Judgment

The decision of the Supreme Court in the Enercon case is very significant for cross-border
arbitration. While it does not drastically change the law, the judgment was seen as adding to
the welcome suite of pro-arbitration decisions from the Indian judiciary, by applying the
principles of severability of the arbitration clause from the underlying contract and referring a
dispute to arbitration despite some flaws in the drafting of the arbitration clause. Thus, the
decision to uphold a poorly drafted arbitration clause was seen as an indicator of the willingness
of the Supreme Court to uphold the intention of the parties to arbitrate, despite irregularities in
the main contract.3

The pragmatic approach and the international outlook of the Supreme Court was seen as clear
evidence of the fact that arbitration law in India was finally evolving to meet the demands of
the ever-dynamic arbitration jurisprudence, thus encouraging parties to potentially choose
India as the seat of arbitration. The re-establishment of the importance of specifically
mentioning in the arbitration agreement, the law governing it and the seat, as opposed to the
venue, of arbitration in order to avoid litigation, was a welcome step.4

A big lesson to be learnt from the case was that the time spent in getting the drafting right will
invariably be lesser than the time spent in resolving disputes between parties created due to the
complexities formed by poorly drafted clauses.

3
Indian Supreme Court upholds ‘Unworkable’ Arbitration Clause while ensuring that Supervisory Jurisdiction
over the Arbitration only lies with the Indian Courts, Kritika Venugopal and Vikas Mahendra, Herbert Smith
Freehills.
4
India Arbitration Friendly: Supreme Court Brings Indian Arbitration Law up-to International Standards, Varuna
Bhanrale and Prateek Bagaria, Nishith Desai Associates.