SUPREME COURT ON THE ‘COMMERCIAL’ CLAUSE UNDER THE ARBITRATION ACT

In a recent judgment, in Comed Chemicals Ltd. v. C.N. Ramchand, the Supreme Court has provided an expansive scope to the phrase “commercial” in International Commercial Arbitration. The importance of this lies in the fact that, keeping in with the rise of international commercial arbitration as an effective, alternative means of dispute resolution, most jurisdictions around the world are expanding its scope to include disputes which were hitherto considered fit for resolution only by the municipal Courts. An example of this is that European Courts and arbitral tribunals have included within the definition of “arbitrable disputes” matters involving corruption and bankruptcy proceedings, which were, until recently, considered to be dealing with matters of public policy, and therefore outside the scope of private dispute resolution.

Another method of achieving the goal of expanding the scope of arbitration is to interpret the word “commercial” broadly, and so to bring a broader variety of disputes within the ambit of international commercial arbitration. The Supreme Court has taken this welcome step in the judgment of Comed Chemicals.

In Comed Chemicals, respondent contended that his agreement with Comed Chemicals was solely for the purpose supplying technical know-how and expertise for which he was remunerated with ‘fees’. Therefore, the agreement, devoid of any commercial attributes, could not be referred for arbitration. He placed reliance on the pre-Act apex Court rulings in Kamani Engineering and Mukesh H. Mehta.

In Kamani Engineering, the Court had laid down that if the nature of work does not inculcate any element of business or trade and is exclusively of a ‘professional character’, then it is not commercial in nature. There should be no ‘element of participation in commercial activity’ and the remuneration, if any, should be limited to only ‘fees’. In that event, the commercial reservation clause comes into effect and the disputes arising out of such agreements cannot be referred to arbitration.

However, in Boeing Co., the Supreme Court departed from its constricted approach to arbitration to toe a much more liberal line by conferring a broad construction upon ‘commerce’. In Boeing, the parties had entered into an agreement for rendition of consultancy services. The Court remarked that the matter was commercial in nature and could be referred to arbitration. It also observed that the word ‘commercial’ must be construed broadly to promote arbitration, which in turn would facilitate international trade through faster resolution of disputes.

Placing reliance on the UNCITRAL Model Law which recommends giving a wide construction to the term ‘commercial’, the Court remarked that commercial contracts must be liberally interpreted and narrow pedantic approaches to the same must be rejected.

Coming back to the instant case, the apex Court stated that if the nature of work undertaken by the respondent is such that “it is inextricably linked with functions which could be undertaken by a businessman or by a Company and such activities form an integral part of his activities, there is element of `commerce’”. Thus, the Court propounded a new test to bring professional services under the ambit of ‘commerce’ i.e. if the work discharged by the professional can be done by companies or a businessman and such work forms the core of his activities, then the contract is invariably commercial in nature.

However, the Court refused the blanket extension of ‘commerce’ to all employment contracts stating that if the contract is merely that of a employee-employment or master-servant, then the matter cannot be referred to Arbitration Tribunal.

In light of the worldwide trend in favour of expanding the scope of arbitration, and more particularly in light of the rather regressive judgments of the Supreme Court in the interpretation of other Sections of the Arbitration Act dealt with previously, this judgment is indeed very welcome; both for its positive impact upon the functioning of international commercial arbitration in India, as well as a sign that the Courts are now prepared, after the days of Bhatia International and Patel Engineering, to interpret the Arbitration Act broadly and constructively.

By

Gautam Bhatia & Venugopal Mahapatra