BENCH:
JUSTICE R.F. NARIMAN
JUSTICE B.R. GAVAI
CASE DESCRIPTION:
The Supreme Court in the present case has held that if a sole proprietor is a habitual resident of another country, the arbitration involving that sole proprietorship is characterized as international commercial arbitration.
FACTS OF THE CASE:
From 1998, Ravindranath Rao Sindhia and his wife were involved in the distribution and marketing of Amway products under the name “Sindhia Enterprises,” which was registered as a sole proprietorship. Disputes arose between the parties about the Appellant’s operations. After failing to reach an amicable resolution, the Respondents submitted an arbitration notice on July 28, 2020, under the arbitration clause in the terms and conditions of the ‘Amway Direct Seller Application Form’. The Respondents moved the High Court of Delhi for the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, after the Appellants failed to act by the arbitration notice. The Appellants contested the maintainability of the Respondents’ petition, claiming that the current matter involved international commercial arbitration under Section 2 (1) (f) I of the Arbitration Act because the Respondents were US citizens and habitual residents. The Appellant’s objection was dismissed by the High Court, which found that the Respondents’ distributorship was managed and controlled centrally in India. As a result, the High Court appointed an arbitrator under the Arbitration Act’s Section 11(6). The Appellant appealed the judgment to the Hon’ble Supreme Court of India, claiming that the decision to appoint a lone arbitrator was unjust.
ISSUES RAISED:
Was the husband and wife’s distributorship a separate entity?
CONTENTIONS OF THE PARTIES
APPELLANT’S ARGUMENTS:
The Appellant argued that the current case met the criterion of “foreign commercial arbitration” outlined in Section 2 (1) (f) I of the Arbitration Act because the Respondents are citizens or habitual residents of a country other than India. As a result, the High Court lacked jurisdiction to allow the petition, which, as international commercial arbitration, should have been filed under Section 11 (6) read with Section 11 (9) instead.
RESPONDENT’S ARGUMENTS:
Supporting the High Court’s decision, the Respondents’ counsel argued that because the Respondents are husband and wife, they should be classified as an “association or body of individuals” under Section 2 (1) (f) (iii) of the Arbitration Act, which means an association or body of individuals whose central management and control are exercised in a country other than India. Additionally, the Respondents’ business was to be limited to India. As a result, the arbitration would be a domestic arbitration because the Respondents’ central management is based in India.
JUDGEMENT:
The Supreme Court stated that the principal question before it was within a very narrow scope, and that the evidence presented would be crucial in determining the particular clause under which the case would be classified.
The Supreme Court cited the ‘Code of Ethics of Amway Direct Sellers’ in the ‘Rules of Conduct,’ which said that a husband-and-wife distributorship would be classified as a single distributorship and operate as a single organization. Furthermore, the Respondents filled out a ‘legal entity authorization form’ to take over the Appellant’s distributorship in the guise of a sole proprietorship called ‘Sindhia Enterprises.’
The Respondents had entered the distributorship program as a sole proprietorship firm, to be operated as a single organization in their role as co-applicants, according to the aforesaid documents. The Supreme Court relied on a judgment in the case of ‘Ashok Transport Agency v. Awadhesh Kumar’2 (“Ashok Transport”), in which the Supreme Court plainly declared that a sole proprietary concern is equated with the business’s proprietor.
The Supreme Court led an in-depth discussion of the essence of a sole proprietorship and how it differs from a partnership in Ashok Transport. According to relevant portions of the judgement, a proprietary concern is simply the business name under which the proprietor of the firm conducts his or her business. Litigation brought by or against a proprietary concern is brought by or against the business’s owner. In the event of the proprietor’s death, the sole proprietorship ceases to exist, and only the proprietor’s legal representatives can be sued in this situation.
As a result, the Supreme Court ruled that the claim that the transaction between the parties before it lacked an international flavor had no merit. An examination of Section 2 (1) (f) of the Arbitration Act reveals that the arbitration becomes an international commercial arbitration if it is entered into between persons, at least one of whom is either a foreign national or habitually resident in a country other than India; or by a body corporate incorporated in a country other than India; or by a foreign government.
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