The Delhi High Court has held that two Indian parties may normally choose foreign law to govern the substantive dispute between them in arbitration proceedings, and the Court's right to set aside the choice of foreign law should be used sparingly and only when the choice amounts to a “flagrant and gross breach” of principles of morality and justice.
The parties entered into a sale/purchase contract for American imported raw cotton. The Plaintiff refused to accept delivery of the shipment and therefore delivery was delayed. The contract provided for arbitration under the rules of the International Cotton Association. The International Cotton Association bylaws provided for arbitration under the English Arbitration Act 1996.
The Defendant invoked arbitration and the International Cotton Association directed the Plaintiff to appoint its nominee arbitrator. The Plaintiff refused to participate in the arbitration stating that: (a) as the contract was executed between two Indian parties and was to be performed in India, only Indian law could apply; (b) the contract also provided for the New Delhi Courts to have exclusive jurisdiction, and (c) the International Cotton Association bylaws are opposed to and contravene Indian public policy, which envisages that Indian parties cannot contract out of Indian law.
Proceedings before the Delhi High Court
The Plaintiff sought a declaration that the contract was invalid, null and void. The Delhi High Court had to decide whether two Indian parties could choose foreign law, and whether the express designation of a court, in this case, the Courts at New Delhi, was determinative of the seat of arbitration.
The Plaintiff said that:
- As per §23 of the Indian Contract Act 1872, any attempt to exclude Indian law is void.
- As per §28 of the of the Arbitration & Conciliation Act 1996, foreign law can only be chosen if one of the parties is non-Indian.
- Where the parties have selected a seat of arbitration, this is an exclusive jurisdiction clause.
The Defendant said that:
- The parties had freely agreed to refer disputes to the International Cotton Association, which provided for the application of the English Arbitration Act 1996.
- 45 of the Arbitration & Conciliation Act 1996 limits a Court's injunctive powers when there are arbitration proceedings.
- The Contract had a foreign element.
The Court found for the Defendant. It reiterated that an arbitration agreement is an agreement independent of the substantive contract, and it said that the parties can choose a different governing law for the arbitration agreement. Accordingly, there was no bar to two Indian parties choosing foreign law. Taking note of the additional (though not determinative) factor of a foreign element to the contract, it was held that the parties could have agreed to an arbitration governed by the laws of England. As to the seat, it was held that both parties had agreed to submit all disputes to the International Cotton Association, and therefore they had agreed that the seat would be London. Giving jurisdiction to the New Delhi Courts was therefore not determinative of the seat.
The Supreme Court decision in TDM Infrastructure was that it would be against the public policy of India to permit Indian parties to derogate from Indian law. This has been substantially diluted by numerous subsequent judgments. The Delhi High Court decision continues this trend of allowing Indian parties to choose foreign law to govern an arbitration between them.
1 2008 (14) SCC 271
Originally Published by Tuli & Co, January 2021
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