India: Unresolved Uncertainty on Choice of a Foreign Seat by two Indian Parties to a Domestic Dispute?

Last Updated: 12 September 2016
Article by Kudrat Dev

INTRODUCTION

In the recent years, particularly 2014 and 2015, the High Courts of different States in India were faced with the submission or issue: 'Whether two Indian parties to a dispute can choose a foreign seat' ("the unresolved issue"). The different views taken by the High Courts of different States, set the stage for the Hon'ble Supreme Court to be approached to finally resolve the unresolved issue.1 On 24 August 2016, the Hon'ble Supreme Court pronounced the much awaited judgement in Sasan Power Ltd v. North America Coal Corporation India Pvt Ltd.2 ("the Sasan Power Judgment") and interestingly, it expressed that the unresolved issue was not pressed, as such a submission was not made before the Madhya Pradesh High Court and that the Counsel for the Appellant categorically submitted during the course of the arguments that "he is not making that submission before us".3

ANALYSIS OF THE SASAN POWER JUDGMENT

In view of the aforesaid, it is pertinent to analyse the facts of the case, the reasoning behind the findings of the Hon'ble Supreme Court to understand why the unresolved issue was not adjudicated upon as well as the way forward for two Indian Parties who wish to choose a foreign seat for arbitration of their domestic disputes.

Key Facts and the Dispute Resolution Clause

The dispute arose out of a mine development agreement being Agreement I entered into between Reliance-owned Sasan Power Ltd., and NACC America. Subsequently, all rights and liabilities under Agreement I were transferred from NACC America to its fully owned subsidiary NACC India by way of Agreement II.4 Thereafter, as per the understanding of Sasan Power Ltd. and NACC India, disputes arose only between Sasan Power Ltd. and NACC India being two Indian parties (as NACC America was not made a party to the suit or High Court proceedings), and NACC India initiated arbitration proceedings which was opposed by Sasan Power Ltd. by way of a suit and then appeal to the Madhya Pradesh High Court.5

Agreement I provided the governing law clause and arbitration clause under Article XII, 12.1 and under Section 12.2, respectively as follows6:

"This Agreement shall be governed by, and construed and interpreted in accordance with the laws of the United Kingdom without regard to its conflict of laws principles."

"(a) Any and all claims, disputes, questions or controversies involving Reliance (i.e. SASAN) on the one hand and NAC on the other hand arising out of or in connection with this Agreement (collectively, "Disputes") which cannot be finally 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."

Finding of Foreign Element: No occasion to resolve un-pressed, Unresolved Issue?

The Hon'ble Supreme Court has categorically reiterated and has identified as an indisputable fact the existence of the "foreign element" being NACC America in the contract and dispute between the parties before the court as follows: "All the three signatories to the AGREEMENT- II agree that the American Company is not relieved of its obligations and liabilities"7 and to find that "NAC is an American company and being a party to Agreement-I as also Agreement-II along with two Indian Companies (appellant and respondent), a fortiori, Agreement-I and Agreement-II become an "international commercial arbitration" within the meaning of Section 2(f) of the Act which, in clear terms, provides that if one of the parties the agreement is a foreign company then such agreement would be regarded as "international commercial arbitration"". Moreover, the Hon'ble Supreme Court has prima facie recognized Agreement-II as an Agency Agreement between NACC America and NACC India as opposed to an Assignment Agreement8, hence, identified a foreign element  to further opine that: "whether two Indian Companies could enter into an agreement to be governed by the laws of another company would not arise in this case"9Furthermore, the Hon'ble Supreme Court has also stated that the unresolved issue found its way into the written submission "by oversight as the said submission was expressly given up at the time of the argument."10

Thus, to the disappointment of interested stakeholders, interestingly the Hon'ble Supreme Court's interpretation of "foreign element" played the wild card entry and completely washed away the real unresolved issue framed/ submitted (even in writing) by the parties.

Refining or Rectifying Supreme Court's approach in M/s. Atlas Export Industries v. M/s. Kotak & Company6?

In the year 1999, even prior to the revolutionary BALCO judgment11, a submission on the unresolved issue was advanced before the Hon'ble Supreme Court in M/s. Atlas Export Industries v. M/s. Kotak & Company12" (Atlas Judgment) as follows: "Atlas 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."13

The Hon'ble Supreme Court noted the facts as follows:

"The appellant, the Atlas Export Industries, Junagadh (hereinafter `Atlas', for short) entered into a contract dated 3rd June, 1980 with M/s Oceandale Company Limited, Hongkong (hereinafter`Oceandale', for short). The agreement was for the supply of 200 MT of Indian groundnut extractions of the specifications as to quantity, quality and packages detailed in the contract and to be shipped on or before 30th June, 1980. The price was agreed at US $200 per M.T. The goods were to be supplied through M/s Kotak and Company, Bombay (hereinafter `Kotak', for short). M/s Prashant Agencies, Bombay were the brokers. The existence of the contract, to which Atlas, Oceandale and Kotak were the parties, is not in dispute. Kotak were at all times responsible for the performance on behalf of the final buyers Oceandale."

The Apex Court responded to the objection on enforcement of an award stating 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."14

Thus, in the said case, the arbitral award arising out of a foreign-seated arbitration (London) between two Indian parties was held to be enforceable, not opposed to the public policy read with Sections 23 and 28 of the Indian Contract Act, 1872. It is pertinent to highlight the existence of the "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. The contract between Kotak and Oceandale (foreign entity) may be construed to be in the nature of an agency agreement (as done in the Sasan Power Judgment) depending on a closer scrutiny of the facts involved therein. However, the Hon'ble Supreme Court then, did not find it necessary to emphasize on the "foreign element" or go behind the nature of the transaction before expressing its view in favour of upholding the choice of a foreign seat agreed between two Indian parties but only stated that: "The existence of the contract, to which Atlas, Oceandale and Kotak were the parties, is not in dispute. Kotak were at all times responsible for the performance on behalf of the final buyers Oceandale".15

Thus, the Hon'ble Supreme Court has dealt with the unresolved issue in the Sasan Power Judgment differently from its approach in the Atlas Judgment, without categorically dealing with the same even though the Madhya Pradesh High Court relied upon and dealt with the same extensively.16

CONCLUSION

The Hon'ble Supreme Court viewed the Sasan Power Judgment dispute as one with "foreign element" and expressed that the occasion to adjudicate upon the unresolved issue had not arisen and could not find basis in the factually wrong presumptions and (mis)concessions of the parties that the foreign entity was not involved in the dispute.17 It is pertinent to mention that the Hon'ble Supreme Court has interestingly dealt with the concession that Agreement- II was not a tripartite agreement by terming the same as an "uninformed concession"18, which incidentally may have opened the Pandora's Box for misuse of the allowance to take an inconsistent stand before the Apex Court from the stand/ concession made before a lower court.

Moreover, the issue for adjudication was further narrowed down (referring to the limited scope of Section 45 of the Arbitration and Conciliation Act, 1996) to only examine the validity of the arbitration agreement (and not validity of substantive law of the main agreement), and was eventually dealt with by finding that the prayer: "there could not be an agreement between them for arbitration of their disputes arising out of the substantive agreement to be governed by the laws of United Kingdom"19 is itself misconceived.

Thus, the uncertainty on choice of a foreign seat by two Indian Parties remains unresolved even though, the Hon'ble Supreme Court seems to have re-defined its approach from the Atlas Judgment (without categorically dealing with the same even though the Madhya Pradesh High Court relied upon and dealt with the same20). Consequently, the arguments in favour and 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, have not found their way into the Sasan Power Judgment. Thus, the choice of a foreign seat by two Indian Parties will now depend on: (a) their willingness to risk refusal of enforcement of the award by Indian Courts21 on the ground of the same being opposed to the Indian public policy22 and (b) factual existence of a proximate foreign element to add the flavour of an "international commercial arbitration".

In view of the foregoing, the wait of the Indian parties for the Hon'ble Supreme Court to adjudicate upon the unresolved issue which could have been ended by an observation (even if not a categorical finding) or exercise of wide powers vested in the Apex Court, continues despite the trend of the Indian parties' choice of a foreign seat, ambiguity in Arbitration Laws and stage set by the different views adopted by High Courts.

Footnotes

1. 'Whether Two Indian Parties Can Choose A Foreign Seat And Exclude The Applicability Of Part I Of The Arbitration And Conciliation Act, 1996', Kudrat Dev (Mondaq, 20 August 2015), Available at- http://www.mondaq.com/india/x/415868/Arbitration+Dispute+Resolution/ Whether+Two+Indian+Parties+Can+Choose+A+Foreign+Seat+For+Arbitration
+And+Exclude+The+Applicability+Of+Part+I+Of+The+Arbitration+And+Conciliation+Act+1996

Relevant excerpt:

"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"

2. Civil Appeal No. 8299 of 2016 (Arising out of SLP (C) No. 3327 of 2015) against impugned judgment dated 11 September 2015, passed by the Madhya Pradesh High Court in Sasan Power Ltd v. North America Coal Corporation India Pvt Ltd. (FA No. 310 of 2015) in favor of NACC, India upholding the judgment dated 19 March 2015 (in Civil Suit No. 4A of 2014, Singrauli) which dismissed a suit allowing objections under Section 45 of the Arbitration and Conciliation Act, 1996

3. Judgment dated 24 August 2016 in Civil Appeal No. 8299 of 2016, paras 11 (Justice Chelameshwar)

4. Ibid at paras 2, 6, 7, 8, 9

5. Ibid

6. Supra Note 3 at para 5

7. Supra Note 3, paras 6, 16, 26 (Justice Chelameshwar), para 20 (Justice Sapre)

8. Supra Note 3, para 2-23; Supra Note 1, Relevant excerpt:

"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"

9. Supra Note 3, para 26 (Justice Chelameshwar)

10. Supra Note 3, paras 13 and 14 (Justice Chelameshwar)

11. (2012) 9 SCC 552, 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.

12. (1999) 7 SCC 61, paras 10-11

13. Ibid

14. Ibid

15. Supra note 12, para 1

16. Judgment dated 11 September 2015, passed by the Madhya Pradesh High Court in Sasan Power Ltd v. North America Coal Corporation India Pvt Ltd. (FA No. 310 of 2015) [parties refer under paras 2, 12, 19, 29 and Court refers under paras 2, 50-59]

17. Supra Note 3, paras 21, 25 (Justice Chelameshwar)

18. Ibid ; Also see- Madhya Pradesh High Court's Judgment dated 11 September 2015 in Sasan Power Ltd v. North America Coal Corporation India Pvt Ltd. (FA No. 310 of 2015) in favor of NACC, paras 20-23

19. Supra Note 3, para 50 (Justice Chelameshwar)

20.Supra Note 16

21. 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)

22. Section 48(1)(a) and Section 48(2)(b) of the Arbitration and Conciliation Act, 1996

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