Sole Proprietorship Will Fall Under International Commercial Arbitration If Proprietor Is Foreign Resident : Supreme Court

The Supreme Court has held that a sole proprietorship will fall under international commercial arbitration if the proprietor is a habitual resident of a foreign country, notwithstanding the fact that the proprietary concern is carrying out business in India.

Holding this, a bench comprising Justices RF Nariman and BR Gavai set aside an order of the Delhi High Court appointing an arbitrator in the case Amway India v. Ravindranath Rao and another.

The top court held that Delhi High Court had no jurisdiction as the dispute was an international commercial arbitration within the meaning of Section 2(1)(f) of the Arbitration and Conciliation Act.

The matter arose out of a distributorship agreement between Amway and the respondents, Ravindranath Rao Scindia and Indumati Scindia. The respondents had applied for a distributorship of Amway products as a single entity under the name "Scindia Enterprises".

With respect to certain disputes which arose out of the agreement, the respondents sought arbitration and approached the Delhi High Court for the appointment of an arbitrator under Section 11(6) of the Arbitration Act. Amway opposed the maintainability of the petition by saying that the matter was an international commercial arbitration as the respondents were habitual residents of the United State of America.

The High Court held that since the central management and control of this association or body of individuals is exercised only in India under Section2(1)(f)(iii), the dispute is not an international commercial arbitration.

'International Commercial Act' as defined under the Act.

Section 2(1)(f) of the Act defines International Commercial Arbitration.

It states that an International Commercial Arbitration means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is:

(i) An individual who is a national of, or habitually resident in, any country other than India

(ii) a body corporate which is incorporated in any country other than India

(iii) An association or a body of individuals whose central management and control is exercised in any country other than India

International commercial arbitration if at least one party is a foreign resident

The Supreme Court held that the if the issue was covered under Section 2(1)(f)(i) of the Act, it was not necessary to go to Section 2(1)(f)(iii). In other words, if "at least one of the parties" was a habitual resident of a foreign nation, it will be an international commercial arbitration, regardless of the applicability of Section 2(1)(f)(iii).

Referring to the documentary evidence in the case, the Court noted that the sole proprietorship was constituted with the husband as the "primary applicant" and the wife as the "co-applicant".

In this factual background, the judgment observed :

"…an analysis of Section 2(1)(f) would show that whatever be the transaction between the parties, if it happens to be entered into between persons, at least one of whom is either a foreign national, or habitually resident in, any country other than India; or by a body corporate which is incorporated in any country other than India; or by the Government of a foreign country, the arbitration becomes an international commercial arbitration notwithstanding the fact that the individual, body corporate, or government of a foreign country referred to in Section 2(1)(f) carry on business in India through a business office in India."

The Delhi High Court had allowed the application by placing reliance on the SC precedent in Larsen & Toubro Ltd - SCOMI Engineering Bhd v. MMRDA.

In the instant case, the Supreme Court held that the decision in Larsen and Toubro was not applicable. It was a case where the Court held a consortium of companies to be compared under Section 2(1)(f)(iii).

"This case is distinguishable on facts, inasmuch as a final judgment between the parties made it clear that it would not be open for the consortium to rely upon their status as independent entities while dealing with MMRDA. This being the case, the consortium was held to be an association of persons falling under Section 2(1)(f)(iii), and that since the lead member is to lead arbitral proceedings, the central management and control of the consortium being exercised by Larsen and Toubro in India, it was held that Section 2(1)(f)(iii) would not be attracted on the facts of that case",the judgment observed.

The Court held that Delhi High Court had no jurisdiction to appoint an arbitrator in this case as it was an international commercial arbitration.

Though the counsel for the respondents requested the Court to appoint an arbitrator in the case by invoking special powers under Article 142 of the Constitution, the Court refused saying that the "drill" under Section 11(6) read with 11(9) need to be followed.

Case Details

Title : Amway India v. Ravindranath Rao and another

Bench : Justices RF Nariman and BR Gavai

Appearances : Senior Advocate Parag Tripathi for appellant; Manmeet Arora for respondent

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