India: Whether Two Indian Parties Can Choose A Foreign Seat And Exclude The Applicability Of Part I Of The Arbitration And Conciliation Act, 1996

Last Updated: 20 August 2015
Article by Kudrat Dev

It is well settled law that two Indian parties cannot exclude the applicability of mandatory Indian substantive law as the same would be opposed to Indian public policy.1 However, the issue whether two Indian parties can exclude the applicability of Part I of the Indian Arbitration and Conciliation Act, 1996 ("the Act") in relation to an entirely domestic transaction/ dispute, or the same would be void for being opposed to Indian public policy, has not been settled in clear and categorical terms by the Apex Court or the Indian High Courts ("the unaddressed issue"). Hence, for Indian parties intending to choose a foreign seat for arbitration, it is pertinent to examine the existing judicial approach in order to predict the potential judicial approach to resolve the unaddressed issue .

As recently as on 11th September 2015 the Hon'ble Madhya Pradesh High Court, on 12th June 2015 the Hon'ble Bombay High Court2 and a year ago on 14th August 2014 the Hon'ble Delhi High Court3 were respectively faced with the unaddressed issue. The Hon'ble Madhya Pradesh High Court rejected the submission that the arbitration agreement between two Indian parties (foreign seat at London) was null and void stating that the principle has been settled that two Indian parties can agree to have a seat of arbitration outside India and the same is not against public policy. The Hon'ble Bombay High Court rejected the submission that the arbitration clause (seat of the arbitration at Singapore and applicability of the English law to such proceedings) is workable stating that both the parties are Indian and cannot derogate from the Indian law.4 The Hon'ble Delhi High Court did not find it necessary to address the unaddressed issue in clear and categorical terms in light of its finding that the second Defendant was a Spanish party making the arbitration an international commercial arbitration.5 However, the decisions or observations of the Hon'ble High Courts are not binding on the entire country and hence, the Apex Court's judicial approach needs to be examined . Hence, for Indian parties intending to choose a foreign seat for arbitration, it is pertinent to examine the existing judicial approach and predict the potential judicial approach to resolve the unaddressed issue.

As early as in the 1990s , a submission was made before the Apex Court in M/s. Atlas Export Industries v. M/s. Kotak & Company6 that: ".... the award should have been held to be unenforceable inasmuch as the very contract between the parties relating to arbitration was opposed to public policy under Section 23 read with Section 28 of the Contract Act. It was submitted that Atlas (Appellant seller) and Kotak, the parties between whom the dispute arose, are both Indian parties and the contract which had the effect of compelling them to resort to arbitration by foreign arbitrators and thereby impliedly excluding the remedy available to them under the ordinary law of India should be held to be opposed to public policy....".7 The Apex Court responded to the submission holding that: "Merely because the arbitrators are situated in a foreign country (London) cannot by itself be enough to nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement."8 Thus, in the said case, the arbitral award arising out of a foreign-seated arbitration (London) between Indian parties was not held to be unenforceable or opposed to the public policy read with Sections 23 and 28 of the Indian Contract Act, 1872. It is pertinent to mention the existence of a foreign element in the said case being the foreign party M/s Oceandale Company Limited, Hongkong (final buyer from Atlas) for whose performance, one of the Indian Parties (Kotak) was responsible and the fact that Counsel for the Appellant had not raised the aforesaid objection at an earlier stage. Although, the unaddressed issue was not settled in categorical terms by the Apex Court, the judicial approach was in favour of party autonomy to contract and of giving effect to the contractual terms willingly entered into by the parties.

The judicial approach in favour of giving effect to contractual terms willingly entered into by parties and against wriggling out of contractually agreed terms (choice of law or arbitration other than Part I of the Act) saw the light again in a 2012 pre-Balco judgment, namely Yograj Infrastructure Ltd. v. Ssangyong Engineering and Construction Company Limited.9 In the said 2012 judgment the Apex Court clarified its observations in the 2011 judgment in Yograj Infrastructure Ltd. v. Ssangyong Engineering and Construction Company Limited,10 ("Yograj") on where the issue of was whether the Indian Courts having would have jurisdiction to entertain an appeal under Section 37 of the 1996 Act against an interim order of the Arbitral Tribunal, despite the parties having expressly agreed that the seat of arbitration would be in Singapore and the Curial law of the arbitration proceedings would be the laws of Singapore. The Apex Court clarified its observations stating that as the parties had agreed to be governed by SIAC Rules, 2007 then as per rule 32, if the seat of arbitration is Singapore then the law of arbitration would be the Singapore International Arbitration Act, 2002.11 However, the Yograj judgment arose out of an international commercial arbitration (between an Indian party and Korean party) and not a foreign-seated arbitration between two Indian Parties and hence did not resolve the unaddressed issue.

Even in the revolutionary and pro-international commercial arbitration judgment of the Apex Court in 2012 in Bharat Aluminium Company and Ors. v. Kaiser Aluminium Technical Service, Inc. and Ors12 ("Balco"), the unaddressed issue was touched upon and raised by the Counsels13. It was submitted that when both the parties are Indian, the substantive law governing the dispute must necessarily be Indian irrespective of the situs of the arbitration and irrespective of any provision in the contract between the parties to the contrary.14 It was further submitted that the same principle applies with equal force to the arbitration law too, that is to say, that if it is not open to two Indian parties with regard to an entirely domestic dispute to derogate from the Indian laws of contract, evidence etc., it is equally not open to them to derogate from the Indian arbitrational law either. The Counsel had relied upon the Apex Court's judgment in the case of TDM Infrastructure Pvt. Ltd. v. U.E. Development India Pvt. Ltd.15 and pointed out that the issue at hand was not adjudicated upon therein as it was a case under Section 11 of the Act. The Apex Court relying upon Balco judgment and applying an inverse logic in Enercon (India) Ltd. And Ors. v. Enercon GBMH and Anr.16, has held that if the parties have chosen Indian Arbitrational law i.e. Part I of the Act to apply then they have chosen India as the seat of arbitration. Thus, even in the much appreciated Balco judgment, the Apex Court left the unaddressed issue open. However, it may not be too far-fetched to apply the decision17 in the Balco judgment that Part I of the Indian Arbitration Act, 1996, will not apply to arbitrations seated beyond the territory of India,18 to a scenario where the foreign-seated arbitration is between Indian parties (even though Balco primarily focused on international commercial arbitration19).

A recent 2014 judgment of the Apex Court in Reliance Limited v. Union of India & Anr20 wherein, two agreements under question were between Union of India and Reliance India Limited as well as between Union of India and BG Group (foreign party) respectively throws some light on the unaddressed issue. In the said case, at least in relation to one agreement, both the parties were Indian, the seat was London, the proper law of the contract was Indian and the law of arbitration agreement was English. The Apex Court held that seat of arbitration is analogous to exclusive jurisdiction clause21. Moreover, the argument that the issues involved in the case at hand related to violation of public policy of India and hence, the applicability of Part I of the Indian Arbitration Act cannot be excluded even if the seat of arbitration is London was rejected.22 The Apex Court noted that the law of arbitration being agreed upon as English Laws coupled with the choice of a foreign seat is a strong indicator that the parties deliberately and intended to exclude the applicability of Part I of the Act.23

In view of the foregoing judgments of the Apex Court, moreover, assuming the observation/ law laid down by the Apex Court in arbitrations involving a foreign party i.e. international commercial arbitration, is also applicable to an arbitration between Indian parties (at least in absence of any categorical judgment of the Apex Court on the same), then there are two potential ways for excluding the applicability of Part I of the Act: (a) Indian parties choose a foreign seat and/or (b) Indian parties choose a foreign arbitration law as the law of arbitration.

The arguments in favour of considering the choice of Indian parties of a foreign seat for arbitration and excluding the applicability of Part I of the Act in relation to an entirely domestic transaction/ dispute as lawful and not void for being opposed to public policy include: (a) free will of parties to a contract, (b) reduction in burden of cases under Part I of the Act on Indian Courts, (c) parity in logic applicable to international commercial arbitration and foreign seated arbitration between Indian parties and (d) liberal pro-arbitration approach setting international standards.

The arguments against considering the choice of Indian parties of a foreign seat for arbitration and excluding the applicability of Part I of the Act, in relation to an entirely domestic transaction/ dispute as lawful and not void for being opposed to public policy include: (a) non-convenient forum for Indian Parties, (b) misuse of bargaining position between parties to exclude Part I of the Act, (c) slippery slope of escaping from Indian Laws and Indian Courts' jurisdiction, (d) disadvantages of de-localization, and (e) the conundrum of categorizing arbitrations into 'international commercial arbitration' or 'domestic arbitration' or 'foreign seated arbitration'.

Moreover, the two main determinative factors for Indian parties to decide whether to choose a foreign seat and to agree upon excluding the applicability of Part I of the Act will be (a) their willingness to risk refusal of enforcement of the award by Indian Courts24 on the grounds including the same being opposed to Indian public policy25, and (b) willingness of Foreign States policy/ law to bear the burden and to earn revenue of 'foreign nationals' litigation'.

The occasion for the Apex Court to adjudicate upon the unaddressed issue may not arise at all, as arguably two Indian parties in an entirely domestic transaction/ dispute may not choose a foreign seat and exclude the applicability of Part I of the Arbitration and Conciliation Act, 1996 for various reasons including convenience and costs. However, this seems to be an orthodox view, especially for giant Indian Companies, in the present age of globalization, coupled with increased adherence to the concept of party autonomy in contract law and the pro-arbitration approach of what may be termed as 'dispute resolution sans borders'. Moreover, the same is corroborated by the recent case adjudicated upon by the Hon'ble Bombay High Court which is an example of the choice exercised by two Indian Companies to have the option of a foreign seated arbitration (Singapore) .26 Thus, the wait of Indian parties for an occasion for the Hon'ble Supreme Court to adjudicate upon the unaddressed issue may not be a long one, in view of the onset of the trend of the Indian parties' choice of a foreign seat and the possibility of different views being adopted by High Courts.

Footnotes

1. TDM Infrastructure Pvt. Ltd. v. U.E. Development India Pvt. Ltd , 2008 (14) SCC 271 [paras19, 20 and 23]

2. Sasan Power Ltd v. North America Coal Corporation India Pvt Ltd. (First Appeal No. 315/2015 [paras 2, 18, 19, 24, 33, 38, 47, 48, 51, 53-58 and 68] before Madhya Pradesh High Court) and M/ s. Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd. (Arbitration Application No. 197/2014 along with Arbitration Petition No. 910/2013 [paras 3,8,9 and 12] before Bombay High Court)

3. In Delhi Airport Metro Express Pvt. Ltd. v. CAF India Pvt. Ltd & Construcciones Y Auxiliar De Ferrocarriles , SA [I.A. No. 10776/2014 in CS (OS) 1678/2014, paras 10-13, 31-32] the argument was advanced that two Indian parties cannot choose a foreign seated arbitration (London) and exclude the applicability of Part I of the Act as the same is void for being opposed to public policy. Also available at:- http://lobis.nic.in/dhc/MAN/judgement/16-08-2014/MAN14082014S16782014.pdf

4. Supra note 3. [ para 12]

5. Supra note 4. [ paras 35, 38, 45 and 51-53]

6. (1999) 7 SCC 61 [ para 10]

7. Ibid [ para 10]

8. Ibid [ para 11]

9. (2012) 12 SCC 359

10. (2011) 4 SCC 105 [ paras 35 and 37]

11. Supra note 10 [ para 8]

12. (2012) 9 SCC 552

13. Ibid . See Para 29- " He submits that the UNCITRAL Model Law has defined the term " international " in a broad and expansive manner allowing full sway to " party autonomy ". Under the Model Law, it is open to the parties to give international flavour to an otherwise purely domestic relationship, merely by choosing a situs of arbitration abroad [Article 1(3)(b)(i)] or even merely by labelling the arbitration an international one. [Article 1(3)(c)].The Indian law has consciously and correctly departed from the same and chosen only the nationality test for defining an arbitration as "international" as is apparent from Section 2(1)(f) of the Arbitration Act, 1996. Relying on the provision of Sections 2(2) , 20 and 28 , he further submits that Arbitration Act, 1996 precludes Indian parties to a purely domestic dispute from choosing a place of arbitration outside India." The Apex Court in paras 63 to 74 held that the territorial test is adopted in India and rejected the argument of the Counsel advanced in para 29.

14. Ibid [ para 29-30]

15. 2008 (14) SCC 271 [ Paras 19, 20 and 23 ] hold that the intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country. It is pertinent to note that in the said case the argument advanced was that the arbitration between the two Indian parties be considered as international commercial arbitration under Section 2(1)(f) of the Act, however, the same view is not being ascribed to in the present article.

16. (2014) 5 SCC 1 [ paras 97-101, 103-105, 133, 137-145]

17. Supra note 13 [ paras 196 and 199]

18. Section 2(2) of the Arbitration and Conciliation Act, 1996

19. Section 2(1)(f) of the Arbitration and Conciliation Act, 1996

20. (2014) 7 SCC 603 [holding in paras 57,59, 74]

21. Ibid [ para 45]

22. Supra note 21

23. Ibid.

24. See Section 44 of the Arbitration and Conciliation Act, 1996 and Article I of Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958)

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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