India: Indian Parties To A Foreign Arbitration – Madhya Pradesh HC Breaks New Ground

Last Updated: 17 November 2015
Article by Phoenix Legal

In a recent ground-breaking decision in Sasan Power Limited vs. North American Coal Corporation India Private Limited1, a division bench of the Madhya Pradesh High Court has held that an arbitration agreement requiring two Indian parties to arbitrate disputes by way of a foreign seated arbitration and in accordance with the substantive laws of a country other than India is valid and legal.

The rationale of the decision of the Madhya Pradesh High Court is based upon the landmark judgment of the Supreme Court of India in Bharat Aluminium Company vs. Kaiser Aluminium Technical Service Inc.2 (Balco), and is firmly rooted in the principle of party autonomy in arbitration.

The contract and arbitration agreement:

The dispute arose from a contract entered into between Sasan Power Limited (Sasan), a wholly owned subsidiary of Reliance Power Ltd. incorporated in India, and North American Coal Corporation India Private Limited (NACC-India), also incorporated in India. NACC-India is a subsidiary of North American Coal Corporation (NACC-US), an entity incorporated in Delaware, U.S.A.

The initial association agreement for mine development was entered into between Sasan and NACC-US and subsequently, by an assignment agreement, NACC-US assigned all its rights, liabilities and obligations under the association agreement to NACC-India. The parties also entered into an amendment agreement to amend certain clauses of the association agreement but pertinently, the arbitration and governing law clauses in the agreement remained unaltered and read as follows:

"Section 12.1 – Governing Law. This Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the United Kingdom without regard to its conflicts of law principles.

Section 12.1 – Dispute Resolution Arbitration. (a) Any and all claims, disputes, questions, or controversies involving Reliance on the one hand and NAC on the other hand arising out of or in connection with this Agreement (collectively, Disputes) which cannot be resolved by such parties within 60 (sixty) days of arising by amicable negotiation shall be resolved by final and binding arbitration to be administered by the International Chamber of Commerce (the ICC) in accordance with its commercial arbitration rules then in effect (the Rules). The place of arbitration shall be London, England....."

Eventually, disputes arose between Sasan and NACC-India over the performance of the contract, and NACC-India referred the disputes to the International Chamber of Commerce (ICC) for arbitration in accordance with the arbitration agreement. In response, Sasan filed a civil suit in the Madhya Pradesh High Court with respect to the disputes and obtained an ex-parte injunction preventing NACC-India from proceeding with the arbitration before the ICC. NACC-India objected to the civil suit and sought its dismissal on the ground that in light of Section 45 of the Arbitration and Conciliation Act, 1996 (the Act) (read with Order VII Rule 11 of the Code of Civil Procedure, 1908), the disputes between the parties ought to be referred to arbitration. Ultimately, NACC-India's objections were upheld and the civil suit came to be dismissed by a single judge, and hence the present appeal before the division bench.

The issue at hand:

The key question of law before the division bench was whether the arbitration between Sasan and NACC-India would be governed by the provisions of Part I of the Act, or by Part II of the Act. More specifically, the question was whether the arbitration agreement pertains to an international commercial arbitration subject to the jurisdiction of the courts in India, or whether the arbitration would be covered by the provisions of Section 45 and Part II of the Act and be treated as a foreign arbitration.

The court observed that for the arbitration to be governed by Part I of the Act, it is evident from Section 2 (2) and Section 28 (1) of the Act that the arbitration would have to take place within India. However, Sasan argued that the arbitration agreement does not meet the requirements of Section 2 (1) (f) of the Act, and therefore cannot be considered to be an international commercial arbitration. For such reasons, Sasan contended that the arbitration has to be governed by Part I of the Act.

Nationality of parties vs. Seat of arbitration:

The reasoning of the judgment relies on the law laid down by the Supreme Court in Balco. The Supreme Court held in Balco that Part I and Part II of the Act are exclusive of each other and that Part I of the Act applies only to arbitrations where the seat of arbitration is India. Balco also specifically holds that the provisions of Part I of the Act cannot apply to arbitrations where the seat is outside India.

The most crucial observation in Balco which the Madhya Pradesh High Court relied on is the interpretation of Section 28 of the Act. The Supreme Court has held that it is evident from Section 28 (1) (a) that in an arbitration taking place in India and which is not an international commercial arbitration as per Section 2 (1) (f), the Arbitral Tribunal has no choice but to apply Indian substantive law. This is to ensure that two or more Indian parties do not circumvent Indian law by resorting to arbitration. However, this would not be the case in arbitrations where the seat is outside India as the conflict of law rules and principles of that country in which the arbitration takes place would have to be applied.

Although the Supreme Court's interpretation in Balco appears to be unabiguous, the judgment of the Supreme Court in TDM Infrastructure (P) Ltd. vs. UE Development India (P) Limited3 (TDM) was relied on by Sasan to suggest that when both parties to an arbitration are of Indian nationality, it cannot be an international commercial arbitration under Section 2 (1) (f) of the Act, and therefore cannot attract the provisions of Part II of the Act. However, the Supreme Court was quick to clarify in TDM that its observations were only for the purpose of determining the court's jurisdiction under Section 11 of the Act and not for any other purpose.

The leap of logic attempted by Sasan by relying on TDM in this manner is ambitious to say the least and the division bench was quick to see through it. In an earlier decision in Atlas Exports Industries vs. Kotak & Company4 (Atlas) the Supreme Court has upheld the proposition that two Indian parties may enter into a contract which compels them to arbitrate any disputes arising from the contract before foreign arbitrators and in accordance with the substantive laws of the country where such arbitration takes place. Atlas holds that such a contract would not be against the public policy of India under Section 23 of the Indian Contract Act, 1872 (ICA) as the same would be protected and covered by Exception 1 to Section 28 of the ICA. The Supreme Court expressly observed in Atlas that an arbitration agreement between two Indian parties cannot be nullified merely because the arbitrators are situated in a foreign country since the agreement has been entered into by the parties of their own accord and free will.

Although Sasan raised objections to the applicability of the judgment in Atlas as it considered an issue under the earlier Arbitration Act, 1940; the Madhya Pradesh High Court has, and rightly so, held Atlas to be binding precedent and upheld the decision of the District Judge in dismissing the suit and referring the matter to arbitration under Section 45 of the Act.

Towards a "seat-centric" approach:

The decision of the Madhya Pradesh High Court has shed light on many unanswered questions pertaining to the complex workings of conflict of laws rules in arbitration. The judgment has drawn a very important distinction between the nationality of parties and the seat-centric nature of arbitration.

By applying and following the law laid down in Atlas, the judgment has clarified that it is permissible for two Indian parties to arbitrate out of India if the seat of arbitration is outside India. If two Indian parties agree to have the seat of arbitration outside India, the provisions of Part II of the Act would apply and the award would be a foreign award under Section 44 of the Act.

The judgment also clarifies (as has the Supreme Court in TDM) that although there is a distinction between an arbitration which is an international commercial arbitration as under Section 2 (1) (f) of the Act and one that is not, this distinction is based on the nationality of the parties to the arbitration and is relevant only for the purposes of Section 11 of the Act (appointment of arbitrators under Part I of the Act). The judgment holds that the nationality of the parties has no bearing or applicability for arbitrations under Part II of the Act and the applicability of Part II of the Act is solely based on the seat of arbitration and whether the country which is the seat of the arbitration is a signatory of the New York Convention or the Geneva Convention. Therefore, a court which is required to decide an issue between two Indian parties to an arbitration agreement with the seat of arbitration outside India is duty bound to refer the same to the agreed forum of arbitration if the arbitration agreement is not otherwise null and void as contemplated by Section 45 of the Act.

The decision of the Madhya Pradesh High Court is big step towards harmonising India's arbitration laws with international best practices. Most importantly, the judgment gives paramount importance to party autonomy and the right of Indian parties to choose the forum, manner and the proper laws of arbitration. While the judgment is firmly rooted in the findings of the five-member constitution bench judgment in Balco, it would be most interesting to see how the Supreme Court of India would decide the decision on appeal.

Footnotes

1. Judgment dated September 11, 2015 in First Appeal No. 310 of 2015

2. (2012) 9 SCC 552

3. (2008) 14 SCC 271

4. (1999) 7 SCC 61

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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