Supreme Court clarifies definition of “International Commercial Arbitration” in Amway India Enterprises Pvt. Ltd. vs. Ravindranath Rao Sindhia & Anr. (2021) INSC 105 (04 March 2021)

Date of the Judgment: 04 March 2021
Citation: (2021) INSC 105
Judges: R.F. Nariman, J., B.R. Gavai, J.
Can a dispute between an Indian company and individuals who are nationals and residents of the USA be considered an “international commercial arbitration,” even if the business is conducted in India? The Supreme Court addressed this question in a recent case involving Amway India Enterprises Pvt. Ltd. The court clarified the definition of “international commercial arbitration” under the Arbitration and Conciliation Act, 1996, emphasizing that the nationality and residency of the parties involved are key factors. This judgment, delivered by a two-judge bench of Justices R.F. Nariman and B.R. Gavai, has significant implications for determining the jurisdiction of Indian courts in arbitration matters.

Case Background

In 1998, Ravindranath Rao Sindhia and his wife were appointed as distributors for Amway India Enterprises Pvt. Ltd. They operated under the name ‘Sindhia Enterprises’ as an Amway Business Owner (ABO) / Amway Direct Seller (ADS). Over time, they built a large network of around 1500 ADSs. In 2015, Amway introduced a new Code of Ethics and Rules of Conduct governing the relationship with ADSs. In 2016, Amway introduced a new criteria requiring ADSs to make recorded re-sale related purchases in the last 12 months. In April 2019, the respondents found that they could not access their ABO account and were reclassified as a ‘Preferred Customer’ (PC) due to non-compliance with the new criteria. The respondents were not informed about the new criteria. After failed attempts to resolve the issue with Amway, the respondents invoked arbitration in July 2020, citing Clause 12 of their agreement.

Timeline

Course of Proceedings

The respondents filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996 in the Delhi High Court for the appointment of a sole arbitrator. Amway contended that the dispute was an international commercial arbitration under Section 2(1)(f)(i) of the Arbitration Act, as the respondents were nationals and residents of the USA. The Delhi High Court rejected this argument, stating that the central management of the sole proprietorship was in India, making it an “association or body of individuals” under Section 2(1)(f)(iii). The High Court appointed a sole arbitrator. Amway appealed to the Supreme Court.

Legal Framework

The core of the dispute revolves around the interpretation of Section 2(1)(f) of the Arbitration and Conciliation Act, 1996, which defines “international commercial arbitration.” According to the Act:

“Section 2(1)(f) “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; or
(ii) a body corporate which is incorporated in any country other than India; or
(iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or
(iv) the Government of a foreign country.”

The Supreme Court needed to determine whether the respondents, despite operating a sole proprietorship in India, fell under Section 2(1)(f)(i) as individuals who are nationals of and habitually resident in the USA, or under Section 2(1)(f)(iii) as an association or body of individuals with central management in India.

Arguments

Appellant’s (Amway) Arguments:

• The appellant argued that the case falls squarely under Section 2(1)(f)(i) of the Arbitration Act.
• Since the respondents are individuals who are nationals of and habitually resident in the USA, the arbitration is an international commercial arbitration.
• The appellant contended that once the conditions of Section 2(1)(f)(i) are met, it is not necessary to consider other sub-clauses of Section 2(1)(f).
• The High Court incorrectly applied Section 2(1)(f)(iii) by considering the sole proprietorship as an “association or body of individuals.”

Respondents’ Arguments:

• The respondents argued that they should be considered an “association or body of individuals” under Section 2(1)(f)(iii) because they operate their distributorship as a single entity.
• They contended that the central management and control of their business is in India.
• The respondents relied on the “Code of Ethics” which stipulates that a husband and wife shall operate their Distributorship as a single entity.
• They argued that there was no international flavour to the transaction, as the business was conducted only in India.
• They relied on the judgment of the Supreme Court in Larsen & Toubro Ltd.–SCOMI Engineering Bhd v. MMRDA, (2019) 2 SCC 271, where a consortium with an Indian company was held not to be an international commercial arbitration based on the location of central management.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the dispute between the parties is an “international commercial arbitration” under Section 2(1)(f) of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Larsen & Toubro Ltd.–SCOMI Engineering Bhd v. MMRDA, (2019) 2 SCC 271 – The Supreme Court distinguished this case, noting that it involved a consortium where a prior court judgment had established that the consortium could not rely on the independent status of its members.
• Ashok Transport Agency v. Awadhesh Kumar, (1998) 5 SCC 567 – This case was cited to clarify that a sole proprietorship is equated with the proprietor of the business.

Legal Provisions:

• Section 2(1)(f) of the Arbitration and Conciliation Act, 1996 – The court interpreted this provision to determine the definition of “international commercial arbitration.”

Judgment

How each authority was viewed by the Court:

• The Supreme Court distinguished the case of Larsen & Toubro Ltd.–SCOMI Engineering Bhd v. MMRDA, (2019) 2 SCC 271, stating that it was based on a prior judgment that consolidated the consortium as a single entity. In the current case, the respondents’ status as a sole proprietorship did not change their individual identity as foreign nationals.
• The Supreme Court relied on Ashok Transport Agency v. Awadhesh Kumar, (1998) 5 SCC 567 to emphasize that a sole proprietorship is not a separate legal entity but is equated with the proprietor.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the clear language of Section 2(1)(f)(i) of the Arbitration and Conciliation Act, 1996. The Court emphasized that the nationality and habitual residence of the parties are the determining factors for an arbitration to be considered “international commercial arbitration.” The fact that the business was conducted in India through a sole proprietorship was not considered relevant to override the explicit provisions of the Act. The court also highlighted the fact that the respondents had applied to become distributors as a sole proprietorship, acknowledging the legal implications of this choice.

Logical Reasoning

The court reasoned that the plain language of Section 2(1)(f) of the Arbitration Act clearly states that if at least one of the parties is an individual who is a national of or habitually resident in any country other than India, it qualifies as an international commercial arbitration. The court rejected the argument that the respondents should be considered an “association or body of individuals” under Section 2(1)(f)(iii), emphasizing that their status as a sole proprietorship did not override their individual status as foreign nationals. The court also distinguished the case from Larsen & Toubro Ltd.–SCOMI Engineering Bhd v. MMRDA, (2019) 2 SCC 271, stating that the facts were different. The court held that the Delhi High Court had no jurisdiction to appoint an arbitrator.

The court stated, “Indeed, 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 court also noted, “When it comes to a husband and wife’s distributorship, they are entitled not to two, but to a single distributorship, it being made clear under clause 3.17 of the Code of Ethics that they are to operate only as a single entity.”

Further, the court observed, “In this view of the matter, the argument that there is no international flavour to the transaction between the parties has no legs to stand on.”

There were no dissenting opinions in this case.

Key Takeaways

• The nationality and habitual residence of the parties are the primary factors in determining whether an arbitration is “international commercial arbitration” under Section 2(1)(f)(i) of the Arbitration and Conciliation Act, 1996.
• The fact that a business is conducted in India through a sole proprietorship does not override the individual status of the proprietor as a foreign national or resident.
• The jurisdiction for appointing an arbitrator in international commercial arbitrations lies with the Supreme Court, not the High Court.

Directions

The Supreme Court set aside the judgment of the Delhi High Court and directed the respondents to file a petition under Section 11(6) read with Section 11(9) of the Arbitration Act before the Supreme Court for the appointment of an arbitrator.

Development of Law

The ratio decidendi of this case is that the nationality and habitual residence of the parties are the primary factors in determining whether an arbitration is “international commercial arbitration” under Section 2(1)(f)(i) of the Arbitration and Conciliation Act, 1996. This judgment clarifies that the location of business operations does not override the explicit provisions of the Act regarding the nationality and habitual residence of the parties involved. This case reinforces the importance of adhering to the plain language of the statute and clarifies the jurisdictional aspects of international commercial arbitration.

Conclusion

The Supreme Court’s judgment in Amway India Enterprises Pvt. Ltd. vs. Ravindranath Rao Sindhia & Anr. clarifies the definition of “international commercial arbitration” under the Arbitration and Conciliation Act, 1996. The court emphasized that the nationality and habitual residence of the parties are the determining factors, irrespective of where the business is conducted. This decision has significant implications for determining the appropriate jurisdiction for arbitration matters involving foreign nationals and residents.