Foreign Arbitrations impacting Indian public policy can be injuncted

Neerav Merchant, Associate Partner at Majmudar & Co., analyses foreign arbitrations impacting indian public policy, with emphasis on a recent Bombay High Court judgment along with reasons for the courts decision..The Board of Control for Cricket in India (the “BCCI”) had floated a tender for issuing global media rights for broadcasting the Indian Premier League (“IPL”) cricket matches. Pursuant to the tender, the BCCI executed a Media Rights License Agreement (“MRLA”) with World Sports Group (India) Pvt. Ltd. (“WSGI”) under which WSGI acquired global media rights for broadcasting IPL matches until 2017. Meanwhile, the BCCI also executed a MRLA with MSM Satellite (Singapore) Pte Ltd. (“MSM”) providing MSM broadcasting rights in relation to IPL matches in the Indian sub-continent up to 2017..Thereafter, the BCCI (through Mr. Lalit Modi, its former convenor) terminated the MRLA executed with MSM. Pursuant to this termination, MSM filed a petition in the Bombay High Court (“BHC”) under Section 9 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”) and obtained an interim injunction against the BCCI (the contents of the interim injunction are unknown). However, to defeat the purpose of the interim injunction, the BCCI (through Mr. Lalit Modi) executed a new MRLA with World Sport Group (Mauritius) Limited (“WSGM”) for the IPL broadcasting rights in the Indian sub-continent. As WSGM did not have any broadcasting channel of its own, it entered into negotiations with MSM and represented to MSM that it now had unfettered broadcasting rights in the Indian sub-continent, and was willing to relinquish its broadcasting rights in favour of MSM. Based on this, MSM could directly execute an agreement with the BCCI for obtaining IPL broadcasting rights in the Indian sub- continent. Subsequent to the foregoing representations, MSM executed a Facilitation Deed (the “Facilitation Deed”) with WSGM under which MSM was required to pay a sum of Rs.425 crores (approximately $95,731,500) to WSGM as a facilitation fee (the “Facilitation Fee”) for WSGM to relinquish its broadcasting rights and facilitate the execution of a new MRLA between MSM and the BCCI. Accordingly, MSM made a part payment of Rs.125 crores (approximately $28,148,715) to WSGM under the Facilitation Deed..Subsequent to the execution of the Facilitation Deed and the suspension of Mr. Lalit Modi by the BCCI, MSM learnt that, at the time of execution of the Facilitation Deed, WSGM did not have any IPL broadcasting rights, and all broadcasting rights had reverted back to the BCCI. The BCCI also addressed a letter to MSM stating that WSGM had no authority to relinquish any broadcast rights to MSM, and any Facilitation Fee payable to WSGM was to be directly paid by MSM to the BCCI..Therefore, MSM filed a suit in the BHC (the “First Suit”) seeking a declaration that the Facilitation Deed was illegal, null and void, and not binding on MSM and also sought a decree in the sum of Rs.147 crores (approximately $33,100,655) along with 16% interest on the Rs.125 crores (approximately $28,148,715) paid to WSGM under the Facilitation Deed. However, after MSM filed the foregoing suit, WSGM commenced arbitration proceedings against MSM before the International Chamber of Commerce (the “ICC”) in Singapore under the Facilitation Deed, seeking the balance Facilitation Fee of Rs.300 crores (approximately $67,552,353) and a declaration that the Facilitation Deed was valid (among other reliefs). Thereafter, MSM filed another suit in the BHC (the “Second Suit”) seeking an injunction against WSGM from continuing with the arbitration proceedings initiated before the ICC..A single bench of the BHC dismissed the Second Suit filed by MSM stating that the arbitration clause would survive the invalidity of the Facilitation Deed, and all contentions raised by MSM in the Second Suit could be taken up as a defence before the arbitral tribunal. MSM filed an appeal before the division bench of the BHC against the foregoing decision..Questions before the BHC.The primary question before the division bench of the BHC was whether the BHC could stay the arbitral proceedings initiated by WSGM against MSM before the ICC..Decision of the BHC.The BHC stayed the foreign arbitral proceedings initiated by WSGM against MSM before the ICC on the ground that, the dispute between WSGM and MSM in the Second Suit was exclusively linked to the dispute between BCCI and Mr. Lalit Modi and the questions/issues involved in the First Suit (which was pending before the BHC). As a result, there was a possibility that the Indian courts and the foreign arbitral tribunal could have pronounced conflicting verdicts, which would, in turn, have an adverse impact on the Indian judicial process..Reasons for the Decision.1. Section 45 of the Arbitration Act confers powers on a judicial authority to refer parties to arbitration and such power can be exercised only after the court finds that the arbitration agreement is not null and void, inoperative or incapable of being performed. The power to examine the arbitration agreement between the parties is available to Indian courts only to this extent. The BHC held that as Section 45 falls under Part II of the Arbitration Act, the applicability of the foregoing provision is not affected by Section 5 of the Arbitration Act..2. The media rights in relation to the IPL are controlled by the BCCI. Therefore, as the finances, funds and rights of the BCCI are in issue, the parties who claim through or derive such rights from BCCI, and enter into agreements where adjudication of disputes touching the contracts exclude the BCCI, cannot be held to be in public interest or in furtherance of public policy of India..3. The BHC observed that both parties to the Second Suit had consistently highlighted the role of the BCCI in the negotiations held prior to the execution of the Facilitation Deed. In the arbitration proceedings the role of the BCCI was bound to be highlighted, and therefore, the absence of the BCCI in the arbitral proceedings was a vital factor. Brushing aside such a vital party and taking the matter out of the purview of the Indian courts would have serious consequences..4. The BHC held that the manner in which television rights are dealt with by the BCCI, details of the beneficiaries of the BCCI’s transactions, and details of whether the BCCI’s officers had any involvement in such transactions are matters which must be known to the general public. However, as the arbitration proceedings before the MSM and WSGM were to be confidential proceedings, and involved serious allegations of fraud and wrongful inducement, they could not be said to be confidential, especially when a vital entity such as the BCCI was involved..5. When vital issues of fraud and public policy are raised and when interests of third parties are involved and affected, then the choice of dispute resolution is not left to the parties. It is for the court to determine as to whether it will allow the matters to be adjudicated by a domestic tribunal confidentially or whether they are fit to be decided by a court of law in an open trial. The repercussions of allowing such matters to be decided by a domestic tribunal chosen by the parties would be serious and in the long run would affect the judicial process itself..6. As the issues relating to fraud raised in the Second Suit have a bearing on the position of the BCCI in the game of cricket, the involvement of the general public in the game and the television rights which are conferred for viewing the games by the public, the presence of the BCCI is necessary in such matters, and such matters cannot be left to be decided by a tribunal chosen by the parties..7. The BHC held that there was an inter-relation between the Facilitation Deed entered into between WSGM and MSM and the MRLA between MSM and BCCI, which was the subject matter of the First Suit. Therefore, to rely on the clause relating to “Governing Law” in isolation would be improper and erroneous. Further, the BHC held that the matter to be adjudicated by the ICC was interlinked with the issues to be decided in the First Suit. Therefore, the findings of the arbitral proceedings may run counter to the findings of the BHC in the First Suit, which needed to be avoided..Majmudar & Co.’s Views.1. The BHC has stayed the foreign arbitral proceedings on the ground that the proceeding pending before the tribunal involves questions of fact relating to fraud. In the interest of conclusiveness of dispute resolution mechanisms, we agree that an arbitral tribunal is not the appropriate forum to decide on questions of fraud and public policy..2. The BHC has impliedly ruled that certain kinds of disputes between parties which implicitly affect the rights of third parties cannot be a subject matter of arbitral proceedings. In the dispute between WSGM and MSM, the BHC stayed the foreign arbitral proceedings on the ground that the foreign tribunal’s award may affect BCCI’s (the third party) media rights relating to the IPL cricket matches. We agree that parties, by arbitration, cannot affect the rights of third parties. In the interest of conclusiveness of dispute resolution mechanisms, a third party should be impleaded as a party in the arbitration proceedings, if a third party’s rights are affected..3. The foregoing judgment may open a flood gate of litigation where parties may seek to frustrate foreign arbitration proceedings on the ground that a third party’s interest is involved, and holding confidential arbitration proceedings in the third party’s absence is prejudicial to the third party’s interests..4. As the foregoing decision has been delivered by the BHC, the decision may not necessarily influence decisions of the High Courts located in other States in India. Therefore, unless the Hon’ble Supreme Court of India affirms the view taken by the BHC in the foregoing judgment, the issue of staying foreign arbitration proceedings will continue to remain a contentious issue from an Indian law standpoint..Neerav Merchant is an Associate Partner at Majmudar & Co.’s Mumbai office, where he handles the firm’s general corporate and commercial work along with litigation and disputes.