India: The Unresolved Controversy – Can Two Indian Parties Choose Foreign Seated Arbitration And Foreign Law To Resolve Their Disputes?

The question of whether two Indian parties can have a seat of arbitration outside India and choose foreign law to resolve disputes continues to remain a vexed issue. The Supreme Court recently had an opportunity to decide this controversy in the case of Sasan Power Ltd., v. North American Coal Corporation India Private Limited1 ("Sasan SC case"). However, the Supreme Court did not decide the issue in the light of the facts before it. Confusion and ambiguity still persists and Indian companies/parties are not sure if they can choose a foreign seated arbitration with the choice of foreign law, and thereafter seek to enforce the foreign arbitral award in India. 

It would be useful to trace the jurisprudence on this issue. The Bombay High Court in the case of Addhar Mercantile Private Limited, v. Shree Jagdamba Agrico Exports Private Limited,2 ("Addhar case"), was dealing with a petition filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"), seeking appointment of an arbitrator, pursuant to the invocation of the arbitration agreement that read "23 Arbitration in India or Singapore and English law to be apply". The appellant contended that since both the parties are incorporated in India, they cannot derogate from Indian law and choose the seat of arbitration to be Singapore and apply English law to the arbitration proceedings. Heavy reliance was placed on the judgment of the Supreme Court in the case of TDM Infrastructure Private Limited v. UE Development India Private Ltd3 ("TDM case"), where the Supreme Court, taking note of the scope of Section 28 of the Arbitration Act, observed that the intention of the Legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. The appellant further contended that the arbitration agreement also provided that arbitration shall be in India or Singapore, and since both parties are from India, they cannot be allowed to derogate from Indian law. The respondent, in furtherance of their objections to the court's jurisdiction, contended that it is possible for two Indian parties to have the seat of arbitration at Singapore and apply English law.

While dealing with these contentions, the Bombay High Court placed reliance on the TDM case and held that Indian nationals should not be permitted to derogate from Indian law and that the same is part of the public policy of the country. On the facts of the case and more particularly the curiously worded arbitration clause that mentioned the seat of arbitration as either India or Singapore, the Bombay High Court proceeded to constitute the arbitral tribunal in India, to decide the disputes as per the substantive law of India in terms of Section 28 (1) (a) of the Arbitration Act. Interestingly, the Bombay High Court observes in Para 8 of the judgment that "... If the seat of the arbitration would have to be at Singapore, certainly English law will have to be applied..." It would appear as if the Bombay High Court acknowledges that it would be possible for two Indian parties to have foreign seated arbitration with applicable foreign law, and that the bar on Indian nationals choosing foreign law is for arbitrations in India under Section 28 of the Arbitration Act. However, at Para 12 of the judgment, the Bombay High Court negates the argument of the respondent that Indian parties can have the seat of arbitration in Singapore and choose English law. The judgment does lay down the law clearly, and relies solely on the TDM case, while deciding the case. 4

The judgment would also have to read keeping in mind the arbitration clause that vested the seat of arbitration with either India or Singapore, which is rather uncommon. Further, the Bombay High Court's reliance on TDM case is misconceived in as much as it was a judgment passed by a Single Judge of the Supreme Court exercising jurisdiction under Section 11 of the Arbitration Act, and other important judgments of Indian courts on this issue were not even considered. The Bombay High Court also failed to take note of the fact that a corrigendum was added to the judgment in the TDM case making it clear that any observations made in the judgment was only for the purpose determining the jurisdiction of the court under Section 11 of the Arbitration Act, and not for any other purpose. In the TDM case, the Supreme Court was mainly dealing with the issue of whether or not the dispute was an 'international commercial arbitration' within the meaning of Section 2(f) of the Arbitration Act, thereby triggering the jurisdiction of the Supreme Court, to constitute the arbitral tribunal. While dealing with that issue, the Supreme Court merely made certain observations on the scope of Section 28 of the Arbitration Act, and as such was not directly dealing with an issue of whether or not Indian companies/parties can choose a foreign seated arbitration and apply foreign law. Therefore, the judgment in TDM case cannot be construed to be a conclusive decision on this issue. The fact that the Bombay High Court placed heavy reliance on the TDM case casts a shadow on the decisiveness of the judgment in Addhar case, on this issue.

A few months later, the Madhya Pradesh High Court, in Sasan Power Limited, v. North American Coal Corporation India Private Limited5 ("Sasan MPHC case") was presented with the question of whether or not two India companies/parties can agree for arbitration in a foreign country, according to law of that country. The court was deciding an appeal challenging the judgment and decree passed by the lower court, whereby the suit filed by Sasan Power Limited ("Sasan") was dismissed, upholding the objections raised by North American Coal Corporation India Private Limited ("NACCIPL") under Section 45 of the Arbitration Act, for referring the dispute to arbitration. Similar contentions were taken by Sasan to the effect that two Indian companies cannot agree for arbitration in a foreign country according to law of that country, as that would be violative of public policy of India in terms of the law laid down in the TDM case. This contention was rebutted by NACCIPL by relying on the judgment of the Supreme Court in Atlas Export Industries v. Kotak & Company6 ("Atlas Exports case"), where the Supreme Court permitted two Indian companies to refer their disputes to refer their disputes to a foreign seated arbitration. The Madhya Pradesh High Court treated the observations made in TDM case to be non-binding and followed the judgment in Atlas Exports case that was passed by a larger bench. The court also briefly examined the scope of Part I and Part II of the Arbitration Act, and its effect on the seat of arbitration and the nationality of the parties, and held that two Indian companies /parties can arbitrate out of India. However, while the court elaborately discussed the right of Indian companies/parties to choose foreign seated arbitration, it did not make detailed findings on the question of whether two Indian companies/parties can apply foreign law to the arbitration proceedings.

It would be interesting to note that the Atlas Exports case involved a contract where one of the parties was a company based out of Hong Kong. Therefore, it was not a case where the contract was only between two Indian parties. There was a foreign element involved. On the facts of the case, the Supreme Court held that "...Merely because the arbitrators are situated in a foreign country cannot by itself be enough to nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement". Besides, the plea that the arbitration agreement is null and void on account of two Indian parties choosing foreign seated arbitration was not even raised before the arbitral tribunal and the party took part in the arbitration proceedings. On the facts of the case, the Supreme Court was persuaded to make the observations favouring foreign seated arbitration with choice of foreign law. Therefore, the extent to which even the Atlas Exports case can be relied on, for determining this issue, is also debatable. It would also be pertinent to note that the judgment of the Supreme Court in Reliance Industries Limited v. Union of India7 ("Reliance case") was not considered by any of the judgments above. While the judgment in the Reliance case does not deal with the issue of two Indian parties having a foreign seated arbitration, the court upheld the enforcement of such arbitral awards in India.

Sasan challenged the judgment in Sasan MPHC case before the Supreme Court, which had an opportunity to decide the issue once and for all, in the light of the confusion that still persisted. However, the Supreme Court notes that though one of the grounds of appeal is that the Madhya Pradesh High Court erroneously rejected the contention that two Indian companies cannot arbitrate their dispute through a foreign seated arbitration, from the impugned judgment, there is nothing to indicate that such a submission was made before the High Court. This may not be correct on a perusal of the judgment in Sasan MPHC case. The Supreme Court further recorded the submissions of Sasan that they are not making this argument before it. Interestingly, it appears from Para 13 of the judgment in Sasan  SC case itself, that in the written submission filed by Sasan, it had raised the question as to whether it would be permissible for two Indian companies to refer their commercial disputes with place of arbitration outside India and with governing law as English law. However, the Supreme Court notes that this submission may have crept in into the written submissions by oversight, as this submission was expressly given up by Sasan at the time of arguments.

On an analysis of facts before it, the Supreme Court held that under the agreements, North American Coal Corporation ("American company"), the American parent company of NACCIPL, did not get discharged from the contractual obligations by and between NACCIPL (the Indian subsidiary) with Sasan, and hence there is a foreign element to the dispute. As a result, the parties are at liberty to choose foreign law viz., English law, to adjudicate the dispute. Therefore, the question of whether or not two Indian companies/parties can choose a foreign seated arbitration with foreign law as the choice of law, has been has not been decided by the Supreme Court. 

In the light of the prevailing confusion in the country, it would have gone a long way had the Supreme Court decided this issue, giving clarity to Indian companies/parties on choosing a foreign seated arbitration. The ambiguity in law is certainly not conducive for making the arbitration mechanism in India more robust and giving parties the freedom of choice to arbitrate their disputes outside India. The recent amendments to the Arbitration Act8 also do not provide any clarity on this issue. Indian companies/parties are facing practical difficulties due to such ambiguity in law. In many instances, the Indian companies are set up as a subsidiary of a foreign company, where the Indian subsidiary acts as a mere branch office, with primary operations being conducted by its parent company situated outside India. The jurisprudence in India has evolved such that an agreement involving two Indian companies, where one of the companies is controlled and operated by a holding company outside India, would not get the benefit of being treated as an "international commercial arbitration" as defined under Section 2(f) of the Arbitration Act. The grounds for challenge under Section 34 of the Arbitration Act for a purely domestic arbitral award not arising from an international commercial arbitration is wider, in as much as the test of "patent illegality appearing on the face of the award" has been made applicable under the amended provisions. Therefore, it is quite common for the parent/holding foreign companies of the Indian subsidiary to insist that the seat of arbitration in disputes involving its Indian subsidiary, be outside India, in jurisdictions where arbitration mechanism is more robust such as Singapore, London and Hong Kong, to name a few, and to thereafter seek to enforce the foreign arbitral award in India, where the grounds of challenge would be comparatively limited. In the light of the ambiguity in law, companies/parties may have to rethink the strategy of having foreign seated arbitration where the agreement is between two Indian companies/parties. One way to get around this issue is to choose an Indian seated arbitration by applying foreign institutional arbitration rules, and thereafter shift the venue as per convenience of parties to a foreign jurisdiction. This would give comfort that the dispute is being adjudicated through a foreign arbitral institution with the seat of arbitration in India. However, an issue could arise if choosing foreign institutional arbitration rules amount to choosing 'foreign law', in which event there would be a bar from the Indian companies/parties from doing so in the light of Section 28 of the Arbitration Act. This could perhaps be a topic of discussion for another article.

Some critics would argue that where there is absolutely no nexus to the applicable foreign law agreed to be made applicable between two Indian companies/parties, they cannot derogate from Indian law, and choose foreign law in a foreign seated arbitration. It would be argued that there should be some nexus even from the perspective of international law as well to enable parties to choose foreign law to decide the dispute. Others would argue that party autonomy in arbitration agreements is supreme, and that the parties should be given a choice to choose the seat and law of arbitration, and the law ought to create a mechanism to enable parties to enforce such rights9, as is the norm in jurisdictions with robust arbitration mechanism.10

The challenge would also be enforcing the foreign arbitral award in India under Part II of the Arbitration Act, pursuant to an arbitration between two Indian companies/parties, in a foreign seated arbitration, by applying foreign law. At the time of enforcement of the foreign arbitral award, it could be argued that the foreign arbitral award itself is in conflict with public policy of India, in as much as two Indian parties could not have derogated from Indian law and as such the foreign arbitral award is null and void. Till such time the confusion persists, it would be a deterrent for two Indian companies/parties to choose foreign seated arbitration and apply foreign law. The Indian companies/parties wanting to choose a foreign seated arbitration with applicable foreign law ought to tread cautiously till such time there is clarity in law. This issue has turned out to be an Achilles heel in the quest for India to make the arbitration regime more progressive. In the light of the prevailing situation, one can only hope that the Supreme Court would soon be presented with another opportunity to decide this issue conclusively.

* The author is grateful for the research contribution of Ms. Prerna Ponappa and Mr. Prashant Sreenivasan, Associates at IndusLaw.

Footnotes

1. (2016) SCC 10 813.

2. 2015 SCC OnLine Bom 7752.

3. (2008) 14 SCC 271.

4. Please also see our previous publication on this judgment at http://induslaw.com/publications/pdf/alerts-2015/september-18-15.pdf

5. 2015 SCC Online MP 7417.

6. (1999) 7 SCC 61.

7. (2014) 7 SCC 603.

8. As amended by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) dated December 31, 2015.

9. GARY BORN, INTERNATIONAL ARBITRATION, CASES AND MATERIALS 901-963 (Wolters Kluwer, Aspen Casebook Series, 2011). The author notes that the overwhelming weight of authority accepts the presumptive validity of the parties' choice of law agreements and that this result is reached in both national and international authorities, in both arbitration and other contexts – 924-925).

10. MORRIS, THE CONFLICT OF LAWS 190 (David Mccclean & Kisch Beevers ed, Sweet & Maxwell, 7th ed., 2010),  – "But there is an increasing tendency for contracts between commercial parties from different countries to provide for arbitration in a third or "neutral" country, where neither resides or keeps assets, in which case the need for enforcement is the rule rather than the exception. On the other hand, parties may perhaps be more inclined to obey the award of a tribunal of their choice than they are to obey the decision of a court..."

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