Approach arbitrator, court tells Sundaram Brake

The Madras High Court has directed Sundaram Brake Linings (SBL) to take up its case against Kotak Mahindra Bank in the dispute over forex derivatives contracts with the arbitrator as provided in the agreement between the two parties.

The ruling by the Madras High Court could set a precedence to several other cases pending in courts across the country, where exporters and companies have sued half a dozen banks over the issue of losses suffered on account of derivatives contracts sold by them.

In a 100-page order passed by Justice V Ramasubramanian in this case that was admitted in the Madras High Court in December 2007, the plaintiff (SBL) has been redirected to represent its views to Justice B N Srikrishna (retired), who is the official arbitrator named in the agreement.

The order passed by the Madras High Court said, “In the light of my conclusion that in an application under Section 8 (as distinguished from the application under Section 45), the judicial authority cannot go into the question as to whether the agreement is null and void, inoperative or incapable of being performed, the plaintiff should only raise these issues before the arbitrator, Justice B N Srikrishna (retd), who has already entered reference.”

SBL had in its original petition also contended that the employees of the companies who had acted on behalf of the company did so without the approval of the board of directors. Further, it had also contended that the nature of the contacts were speculative and “that the agreement in question is nothing but a wagering contract declared by statute to be void ab initio under Section 30 of the Indian Contracts Act, 1872.”

The order passed by the court effectively states that this contention made by SBL cannot be addressed by the court since an arbitrator has been appointed by both parties at the time of entering into the contract.

The last few months have witnessed several companies and exporters dragging banks to courts, challenging the validity of the forex derivatives contracts that have turned out to be a source of massive losses with the fluctuations in the global foreign exchange markets. Exporters in Tirupur (Tamil Nadu) alone claim that their collective loss on account of these forex derivatives contracts could be to the tune of Rs 400 crore.

Banks in the past have said their clients did not complain when they made profits under similar contracts. However, SBL in its original petition had said wrong accounting by two of its employees, (defendants in the case) escaped the knowledge of the management as well as statutory auditors.