The controversy

Arbitration as an alternative dispute resolution is premised on the principle of party autonomy. Yet it is uncertain if the principle of party autonomy can be extended in its application to two Indian parties designating a foreign seat of arbitration and/or a foreign law for the resolution of disputes through arbitration. Some argue that this is possible because the freedom of parties to determine the choice of law and/ or the seat of arbitration must be recognised. However, the more conservative view has been that Indian parties cannot designate a foreign seat and/or a foreign law, as that would mean contracting out of Indian law, which could potentially be challenged for being opposed to Indian public policy. This question has come up before various courts in India; however, we await a conclusive determination on the position of law under the Indian Arbitration and Conciliation Act 1996 (the 'Act'). A review of the current trends of the judicial decisions on the issue is therefore relevant.

Decision of the Supreme Court in TDM Infrastructure Pvt Ltd v UE Development India Pvt Ltd

It is well settled that an arbitration between two Indian nationals will not be an international commercial arbitration. In 2008, the Supreme Court of India (the 'Supreme Court') in TDM Infrastructure Pvt Ltd v UE Development India Pvt Ltd1 ('TDM') held that an arbitration involving companies incorporated in India would not be an international commercial arbitration, even when the central management and control of one such company are in a foreign country. The Supreme Court's decision in TDM has now been reinforced by the recent amendments to the Act that came into force on 23 October 2015 (the 'Amendments').

The implication of the Supreme Court's decision in TDM and the Amendments reinforcing the decision is that the flexibility afforded to parties to international commercial arbitration, such as autonomy over the choice of law, will not be available to Indian parties. Hence, when both parties to an arbitration agreement are Indian (by virtue of either being incorporated in India or otherwise) and the seat of arbitration is in India, the parties cannot exclude the application of the substantive laws of India. Whether Indian parties, by designating a foreign seat of arbitration, could contract out of Indian substantive law, or for that matter only Part I of the Act, is significant not only to Indian entities, but also to foreign entities that may need to incorporate special purpose vehicles or Indian subsidiaries to establish and/or operate their businesses in India.

Few indicative decisions

In August 2014, the High Court of Delhi in Delhi Airport Metro Express Pvt Ltd v CAF India Pvt Ltd2 ruled on the issue of whether two Indian parties could agree to settle their disputes through arbitration seated outside India. This case related to an arbitration agreement providing for an arbitration seated in London and pursuant to the arbitration rules of the International Chamber of Commerce (ICC). One of the parties filed a suit seeking an anti-arbitration injunction, and questioned whether the arbitration agreement was unlawful and unenforceable, as two Indian parties cannot enter into a contract to have the seat of arbitration outside India. However, that question did not require determination because the High Court found that the underlying contract was a tripartite agreement that also imposed certain performance obligations on a particular foreign party. The involvement of the foreign party in this arbitration rendered the question regarding the lawfulness and enforceability of the arbitration agreement an academic one.

The decision of the Supreme Court in Reliance Industries Ltd v Union of India3 ('Reliance Industries') is also relevant. This case related to a petition filed under section 34 of Act for the setting aside of a foreign arbitral award and involved two contracts. One of those contracts was between two Indian entities. The contract between the two Indian entities provided for arbitration to be seated in London, whereas the governing law of the contract was Indian and the law of the arbitration agreement was English. The Supreme Court held that the seat of arbitration being in London coupled with English law governing the arbitration agreement impliedly excluded the jurisdiction of Indian Courts to hear objections for setting aside the award under section 34. It is noteworthy that section 34 comes under Part I of the Act.

While some may argue that the decision of the Supreme Court in Reliance Industries gave a green flag to an arbitration between two Indian parties being held in a foreign country with a foreign law governing the arbitration agreement and the resultant award being a foreign award, in fact, there was no specific argument or finding on the permissibility of two Indian parties agreeing to arbitrate outside India. Hence, the Supreme Court's decision in Reliance Industries did not provide a conclusive determination on the specific question.

Decision of the High Court of Bombay

Thereafter, in June 2015, a single judge bench of the High Court of Bombay in M/s Addhar Mercantile Pvt Ltd v Shree Jagdamba Agrico Exports Pvt Ltd 4 ('Addhar Mercantile') held that companies incorporated in India cannot be permitted to derogate from Indian substantive law as it forms a part of the public policy of India. This case related to a dispute between two companies incorporated in India, where the underlying contract contained a vague arbitration clause that read: 'Arbitration in India or Singapore and English Law to be applicable.' The High Court of Bombay observed that English law will certainly have to be applied if the seat of the arbitration would be in Singapore. This, according to the High Court of Bombay, was not permissible in light of the decision of the Supreme Court in TDM. Accordingly, the High Court of Bombay concluded that that the arbitration had to be conducted in India and the arbitral tribunal, once constituted, must decide the dispute in accordance with the substantive law in force in India.

It is noteworthy that while the High Court of Bombay was categorical in concluding that Indian substantive law would necessarily have to apply in a dispute involving two Indian parties, it did not make a finding on whether it was permissible for two Indian parties to designate a foreign seat of arbitration.

Decision of the High Court of Madhya Pradesh

As recently as September 2015, this question again came up before a two-judge bench of the High Court of Madhya Pradesh in Sasan Power Ltd v North American Coal Corporation India Private Ltd5 ('Sasan Power'). In this case, the underlying contract provided for laws of the United Kingdom as the governing law of the contract, and resolution of disputes by way of arbitration to be held in London and administered in accordance with the ICC rules of arbitration. The primary issue before the High Court of Madhya Pradesh was whether a purely domestic dispute involving two Indian parties could be settled by way of arbitration seated outside India. The High Court of Madhya Pradesh, while taking note of preceding judgments of the Supreme Court and various High Courts, including the decision of the Supreme Court in TDM, upheld the validity of the arbitration agreement. The High Court was of the view that it is permissible for two Indian parties to arbitrate outside India and found support in the decision of the Supreme Court in Atlas Exports Industries v Kotak & Company6, where it was held that just 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.

Interestingly, the High Court of Madhya Pradesh went a step further by holding that two Indian parties can also agree to a foreign law governing the underlying dispute.

The decision of the High Court of Madhya Pradesh in Sasan Power has recently been challenged before the Supreme Court. 7 It will be interesting to see how the Supreme Court rules on the issue.

Implications of permitting two Indian parties to arbitrate outside India

By and large, the Act is divided into two parts. Part I addresses domestic arbitrations as well as international commercial arbitrations seated in India and confers jurisdiction on Indian courts for, inter alia: (1) grant of interim reliefs under section 9 of the Act; (2) appointment of arbitrators under section 11 of the Act; (3) the court's assistance in taking evidence under section 27 of the Act; and (4) setting aside of the arbitral award under section 34 of the Act.

Part II of the Act applies to arbitration proceedings seated outside India, thus providing the applicable rules when parties are seeking enforcement of foreign arbitral awards in India. In light of the Amendments, parties to a foreign seated arbitration could now seek (1) interim reliefs from Indian courts under Section 9 of the Act; and (2) the court's assistance in taking evidence under section 27 of the Act, unless they have expressly excluded the applicability of Part I of the Act. Thus, Indian parties, if permitted to arbitrate outside India, could choose to agree and exclude the jurisdiction of Indian courts under Part I of the Act to pass interim orders and/or seek the court's assistance in taking evidence. More significantly, Indian parties could contract out of the role accorded to courts in India to review and set aside domestic awards under section 34 of the Act, including in relation to awards passed in a dispute between two Indian parties. In such a scenario, while parties could file objections against the enforcement of the foreign award under section 48 of the Act, such parties will be precluded from approaching Indian courts under section 34 of the Act to set aside the said foreign award.

In this regard, it may be noted that, after the Amendments, section 34 of the Act provides for an additional ground for set aside of patent illegality in a domestic arbitration involving two Indian parties. Conversely, if Indian parties are permitted to arbitrate outside India, the enforcement of the resultant foreign award cannot be resisted on the additional ground of patent illegality, as such a challenge would only be applicable to arbitrations seated in India.

Conclusion

Where there is a total absence of any connection or nexus with the cause of action or the underlying transaction to the putative foreign seat, it could be argued that foreign courts do not possess any jurisdiction and Indian courts have the natural jurisdiction over the matter. Indian courts may not give effect to the choice of law (other than Indian law), if the intention of parties is to evade the mandatory provisions of the Act. In such cases, Indian courts may apply the laws of India, as it will have the most substantial connection with the underlying contract and transaction, and in the absence of an express or implied choice of law, Indian law would have ordinarily applied. 8 Furthermore, if Indian parties are permitted to designate a foreign seat of arbitration in relation to their disputes with other Indian parties, the role of Indian courts in relation to such disputes will be significantly minimised. It could thus be argued that the jurisdiction of Indian courts, in particular, the jurisdiction of Indian courts to set aside an arbitral award under section 34 of the Act, could be abrogated by Indian parties designating a foreign seat of arbitration. In this regard, it is pertinent to note that section 34 of the Act, in its applicability to Indian parties, has been held to be a non-derogable substantive provision. 9 Hence, whether a contractual arrangement to opt out of certain substantive non-derogable provisions of the Act and exclude the jurisdiction of Indian courts under section 34 of the Act, would run the risk of being in violation of the public policy of India and hence be void, will have to be considered. This may also require a decision on whether the statutory provisions in section 34 of the Act exists for any public purpose and is hence incapable of being waived by an agreement between the parties. 10

In our view, the decision as to whether a dispute originating domestically within India, and involving only Indian parties, could be arbitrated in a foreign seat, leading to a foreign award, would require a choice between two competing principles – on one hand, the primacy to be accorded to party autonomy in arbitration and, on the other hand, the public purpose inherent in the role given to, and the power conferred upon, domestic courts to review awards that are essentially domestic in nature to examine, inter alia, whether an award involving only Indian parties is patently contrary to Indian law.

Footnotes

1 2008 (2) ARBLR 439 (SC).

2 2014 (4) ARBLR 273 (Delhi).

3 2014 (2) ARBLR 423 (SC).

4 Arbitration Application No 197 of 2014 and Arbitration Petition No 910 of 2013.

5 First Appeal No 310 of 2015.

6 AIR 1999 SC 3286.

7 Special Leave Petition (Civil) No 33227 of 2015.

8 Rabindra N Maitra v LIC, AIR 1964 Cal, 141, at 146.

9 Nirma Ltd v Lurgi Energie Und Entsorgung GMBH and Ors, AIR 2003 Guj 145.

10 Krishan Lal v State of J & K, (1994) 4 SCC 422.

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