India: Domestic Parties And International Commercial Arbitration - Not Possible Says The Supreme Court

Last Updated: 14 November 2008
Article by Alpesh Parekh

Indian companies cannot seek to forum shop an arbitration seat to take advantage of more favourable laws of another jurisdiction, thereby indirectly circumventing Indian arbitration rules. In the recent case of TDM Infrastructure Private Limited v. UE Development India Private Limited ("the case"), the Supreme Court of India marked out the scope of international commercial arbitration and domestic arbitration by testing them on the criterion of nationality and domicile.

The Facts:

In the case, both the parties were companies incorporated under the Indian Companies Act, 1956. UE Development India Private Limited ("UED") was awarded a contract for rehabilitation and upgrading by the National Highways Authority of India, a portion of which it subcontracted to the TDM Infrastructure Private Limited ("TDM"). The shareholders and directors of TDM were residents of Malaysia. The contracts between the parties contained an arbitration clause which stated that the disputes between the parties would be referred to arbitration as per the provisions of the Arbitration and Conciliation Act, 1996 ("the Act"). The seat of the arbitration was to be New Delhi.

Disputes arose between the parties and the said arbitration agreement was resorted to, but the parties could not reach a consensus for the appointment of a nominee arbitrator. TDM approached the Supreme Court for the appointment of an arbitrator in terms of Section 11(5) and Section 11(9) of the Act which inter alia authorises the Chief Justice of India or any other person or institution designated by him to appoint an arbitrator in case of an international commercial arbitration. As per the provisions of Section 2(f) of the Act, "International commercial arbitration" means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is

(ii) A body corporate which is incorporated in any country other than India; or

(iii) A company or an association or a body of individuals whose central management and control is exercised in any country other than India...

The Case:

It was contended by TDM that the Supreme Court had the jurisdiction to appoint an arbitrator as the central management and control of TDM was exercised in Malaysia and this would bring it within the ambit of international commercial arbitration. However, the Supreme Court did not accept this contention and held that notwithstanding the fact that the control and management of a company is outside India, by virtue of such a company being registered in India makes it a domestic company and in the event of a dispute where the opposite party is also an Indian entity, recourse to foreign law as the governing law cannot be taken. The Court also said that if a company is registered in India, although having its Directors or shareholders based outside India; it would be an Indian unit for the purpose of the Act. The Court was of the opinion that when both the companies are incorporated in India, clause (ii) of Section 2(f) would apply and not clause (iii) thereof.

The Act excludes "domestic arbitration" from the purview of "international commercial arbitration" and a company which is incorporated in India cannot be included in the definition of international commercial arbitration on the premise that its central management and control is exercised in any country other than India.

Regarding the question as to whether the arbitration agreement falls under the purview of Section 2(f) of the Act, the Court held that the determination of the nationality of the parties was crucial in the matter of appointment of an arbitrator. A company that is incorporated in India can therefore only have Indian nationality and where both the parties have Indian nationalities, then the arbitration between them cannot be said to be an international commercial arbitration. Thus the question of applicability of clause (iii) of Section 2(f) would not arise. Further, as per Section 11(9) of the Act, the nationality of the arbitrator should be kept in mind after having regard to the nationality of the respective parties.

Held:

The Court held that "When both the companies are incorporated in India, and have been domiciled in India, the arbitration agreement entered into by and between them would not be an international commercial arbitration agreement."

The Court further held that the nationality of a company is determined by the law of the country in which it is incorporated and from which it derives its personality. In a matter involving jurisdiction of a Court, certainty must prevail, which cannot be determined by entering into a disputed question of fact. Therefore the Court refused to appoint an arbitrator in this case.

Implication:

While incorporating an arbitration clause, it has to be kept in mind that when both the parties to a dispute are Indian by virtue of either being incorporated in India or otherwise, the parties cannot exclude the application of the Indian Arbitration Act 1996. Notwithstanding the fact that the subject matter of the contract may be based outside India (for e.g. technology related transactions); if the parties have Indian nationality or domicile then they may not be able to subject their arbitration agreements or clauses subject to arbitration laws of other favourable jurisdiction.

Further, even in arbitrations held outside India, the provisions of Part 1 of the Arbitration and Conciliation Act (which permits courts to set aside domestic awards on broad public policy grounds) would apply unless the parties by agreement express or implied exclude all or any of its provisions. The intention of the legislature in passing the Act is clear that the Indian nationals should not be permitted to derogate from Indian law as part of the public policy of the country.

This judgment has thus restricted the scope of international commercial arbitration in case of domestic disputes. It is also a departure from the founding premise of arbitration mechanism that the "party autonomy" is superlative.

In today's commercial environment where contracts are becoming more complex by the day and boundaries of jurisdiction are blending into each other, judgments like the one rendered in the case may not find many supporters. Nevertheless, those in business must take into account the implications of the view taken by the Supreme Court of India.

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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