The High Court of Delhi (Court) in Spentex Industries Ltd. v. Quinn Emanuel Urquhart & Sullivan LLP has ruled that the contractual relationship between a client and foreign law firm is a commercial relationship for the purpose of Section 44 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The Court has also recorded its observations on the scope of interference that may be exercised by a court when it is presented with an application for reference to arbitration under Section 45 of the Arbitration Act.
FACTUAL BACKGROUND
The Plaintiff, Spentex Industries Limited, is a manufacturer of cotton and synthetic yarns, and it has a Netherlands based subsidiary. The Defendant, Quinn Emanuel Uruquhart & Sullivan LLP, is a law firm based in Washington DC, USA.
Certain disputes had arisen between the Plaintiff and its subsidiary on one hand, and the Republic of Uzbekistan on the other. Therefore, the Plaintiff approached the Defendant for its legal services in connection with arbitration proceedings to resolve such disputes. The Defendant issued an engagement letter dated 20 May 2013 (Engagement Letter) in respect of the same, which the Plaintiff and its subsidiary duly signed. Thereafter, disputes arose between the Plaintiff, its subsidiary and the Defendant (Parties) in relation to the memos/invoices raised by the Defendant on the Plaintiff, the Defendant initiated arbitration in terms of Clause 16 of the Engagement Letter between the Parties, under the aegis of JAMS. On 01 September 2017, JAMS issued a notice for commencement of tripartite arbitration to the Parties.
The Plaintiff, in turn approached the Court, seeking a declaration that the Engagement Letter, as well as the arbitration clause contained therein are null and void, inoperative, incapable of being performed and are also against the public policy of India. The Defendant responded with an application under Order 7 Rule 11 of the Civil Procedure Code, 1908 read with Section 45 of the Arbitration Act for rejection of the plaint and reference of Parties to arbitration.
ARGUMENTS OF THE PARTIES
The Plaintiff contended that the relationship between the Plaintiff and the Defendant cannot be considered as 'commercial', in terms of Section 44 of the Arbitration Act and the arbitration agreement between the Parties is therefore null and void, inoperative and non-est. It also pleaded that there was no dispute between the Plaintiff and Defendant, and that the dispute was between the Plaintiff's subsidiary and the Defendant, since no services had been rendered by the Defendant to the Plaintiff. Further, the Plaintiff argued that the Engagement Letter was on a contingency fee basis, and is hence barred by law in India.
The Defendant argues that a valid and binding commercial contract came into existence between the Parties when the Plaintiff and its subsidiary signed the Engagement Letter issued by the Defendant on 20 May 2013. The Engagement Letter is governed by laws in place in USA, where charging of contingency fee is not prohibited. The Defendant therefore contended that there is no question of illegality of the Engagement Letter. In terms of the Engagement Letter between the parties, the Plaintiff and its subsidiary became liable to pay the Defendant unpaid fees based on the hours that the Defendant firm had invested in their case, as per regularly billed hourly rates. However, since the Plaintiff and its subsidiary failed to pay the Defendant's fee, the Defendant invoked arbitration under the arbitration agreement contained in Clause 16 of the Engagement Letter.
ISSUES BEFORE THE COURT
- Whether the suit brought by Plaintiff, seeking declaration that the Engagement Letter, as well as the arbitration clause contained therein are null and void, inoperative, incapable of being performed, is maintainable?
- Whether there exists a 'commercial' relationship between the Parties, being a client and law firm?
- Whether the agreement is void on account of being a contingency fee agreement, which is barred by law in India?
FINDINGS OF THE COURT
The Court answered the first question in the affirmative, but clarified that such a suit would be maintainable, only for the limited purpose of holding an enquiry as to whether the arbitration agreement in question is null and void, inoperative and incapable of being performed. It also noted that courts have generally frowned upon suits containing vague, evasive and bald allegations to claim that the arbitration agreement between parties is null and void.2 It observed that the clear practice being followed by Indian courts is to be extremely circumspect and reluctant in any manner to interfere in arbitration proceedings, and that the mandate is to refer parties to arbitration unless the arbitration agreement is on the face of it null and void, inoperative or incapable of being performed.
The Court then proceeded to discuss the nature of contractual relationship between the Parties, to determine whether it would qualify as a 'commercial' relationship. In terms of Section 44 of the Arbitration Act, a foreign award would mean an arbitral award arising out of a legal relationship considered as commercial under the law in force in India. However, the word 'commercial' has not been defined in the Arbitration Act. The Court looked into a plethora of judgments cited by the Parties,3 discussing the meaning of 'commercial', and finally concluded that transactions relating to services for valuable consideration would be clearly qualify as commercial legal relationships, and would be covered by Section 44 of the Arbitration Act.
The Defendant being a law firm, was advising and acting for the Plaintiff's subsidiary. It was providing services for a certain consideration, as agreed between the Parties. The claim of the law firm is that the Plaintiff has defaulted in paying its professional charges. Since the proceedings are substantially for recovery of money, the Court found that the same would tantamount to a 'commercial' relationship as per Section 45 of the Arbitration Act. Hence, the Court rejected the Plaintiff's argument that the relationship established under the Engagement Letter was completely bereft of elements of commerce and that Sections 44 and 45 of the Arbitration Act are not attracted.
Charging of contingency fee by lawyers is prohibited under the Advocates Act, 1961 and the rules and regulations framed thereunder. However, in the present case the Defendant is a foreign law firm, not governed by the statutory regime prevailing in India, in relation to advocates. The Engagement Letter is also governed by the laws prevailing in the USA. Charging of contingency fee is not prohibited by law in the USA. Hence, the fact that the fee arrangement between the Parties involved a contingency fee is not reason to discard the Engagement Letter as being null and void.
The Court declined to go into the argument of the Plaintiff, that the Defendant has done no professional work for the Plaintiff, and whatever work was done was only done for its subsidiary company. The Court was of the opinion that this is a plea on the merits of the claim of the Defendant, and is not meant for consideration of the Court at this stage.
COMMENTS
The Court has yet again reiterated the minimal interference rule when it comes to arbitration matters, while also granting legitimacy to contracts between foreign law firms and their Indian clients. On another note, it will be interesting to see how the Court deals with the contingency fee aspect, if and when the award is sought to be enforced in India, given the express bar in Indian law against charging of contingency fee. The contingency fee argument may have to be revisited at that stage, and may affect the enforceability of the foreign award.
Footnotes
1 Spentex Industries Ltd. v. Quinn Emanuel Urquhart & Sullivan LLP, CS (OS) 568/2017.
2 See World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) PTE Ltd., (2014) 11 SCC 639; and Sasan Power Ltd. v. North American Coal Corporation (India) Pvt. Ltd., (2016) 10 SCC 813.
3 See R.M. Investment and Trading Co. Pvt Ltd. vs. Boeing Co. & Anr., (1994) 4 SCC 541; and New Delhi Municipal Council v. Sohan Lal Sachdev, (2000) 2 SCC 494.
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