Whether Two Indian Parties can have a Seat of Arbitration outside India?

Arbitration has emerged as one of the most favoured modes of dispute resolution in India over the course of the last few years; however, the law regulating the same has been unable to cope up with the pace of the growth of arbitration in India. Among various lacunae in the Arbitration and Conciliation Act, 1996 (“the Act”), this article examines the autonomy of Indian parties to have a foreign seat for their non-international commercial arbitrations.

I. Introduction

The seat of arbitration determines the law governing the arbitration proceedings (“curial law”); this law is, however, distinct from the law that governs the substance of dispute between the parties to the arbitration (“substantive law”). The regulation of the arbitration proceedings and recognition of the arbitral award is performed by the court within whose jurisdiction the arbitration takes place.

It follows that the seat of arbitration plays a pivotal role in determination of the law governing the arbitration proceedings and the court proceedings related thereto. Owing to the fact that the legal position in India with respect to arbitration is not settled and lack of consistency in the judicial pronouncements, Indian parties lean towards having a foreign seat for their arbitration. Therefore, the Indian parties by opting a foreign seat for their non-international commercial arbitrations, are excluding the applicability of Part I of the Act in favour of the law of the seat chosen. The question that then arises is whether two Indian parties can choose a foreign seat.

II. The tussle in Indian judiciary

The Indian judiciary has in the past given some dynamic, sometimes perplexing, precedents while touching upon the issue of whether two Indian parties can have a seat of arbitration outside India. Through the course of this section of the paper, I propose to sift through these precedents, which will help us touch the nerve of the issue and secure a relevant answer.

Atlas Export Industries v. Kotak & Co.[1] (“Atlas Export case”)

In the instant matter, the enforcement of a foreign award in India was challenged on the ground that two Indian parties cannot be permitted to resort to foreign seated arbitration, as it impliedly excluded the remedy available to them under the ordinary law of India. It was further contended that such awards are unenforceable as they are contrary to public policy under Section 23 read with Section 28 of the Contract Act, 1872 (“Contract Act”).

The Supreme Court of India held that the foreign award is enforceable in India as it is not contrary to the public policy of India, and because arbitration falls within the 1st exception provided under Section 28 of the Contract Act. It went on to state:

11. … 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.[2]

On this basis it confirmed that two Indian parties can choose a foreign seat for their arbitration, and the same will not be construed as being against the public policy of India.

TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.[3] (“TDM Infrastructure case”)

TDM Infrastructure Private Limited approached the Supreme Court of India for appointment of an arbitrator to resolve their disputes. The application was challenged on the ground that the Supreme Court was not an appropriate forum because the arbitration was not an “international commercial arbitration”.

The Court upheld this challenge and dismissed the application. The Supreme Court also observed:

23. Section 28 of the 1996 Act is imperative in character in view of Section 2(6) thereof, which excludes the same from those provisions which parties derogate from (if so provided by the Act). The intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country.[4]

In light of Section 2(2) of the Act, which provides that Part I of the 1996 Act would only apply when the place of arbitration is in India, Sections 2(6) and 28 of the 1996 Act will have no applicability when the seat of arbitration is outside India. Moreover, Section 28 of the 1996 Act states in unambiguous terms that two Indian parties shall be governed by the laws in force in India where the seat of arbitration is in India. Therefore, the aforementioned observations of the Supreme Court finds no applicability when the seat of arbitration is outside India.

However, since the findings of the Supreme Court, in this regard, are obiter dictum, it does not demand obedience under Article 141 of the Constitution of India.

Sah Petroleums Ltd., In re, Seven Islands Shipping Ltd. v. Sah Petroleums Ltd.[5]

An application under Section 45 of the Act was instituted before the Bombay High Court seeking a direction that the parties therein be referred to arbitration for resolving their disputes, in accordance with the arbitration clause referred to in the e-mail communication. The arbitration clause between two Indian parties provided for the seat of arbitration at London or New York.

The Court rejected the reference on the basis that since the parties to the arbitration were Indians, the arbitration was not an international commercial arbitration and if it is not an international commercial arbitration, the parties cannot choose a foreign seat for their arbitration because such act would be in derogation of the Indian law which is contrary to the public policy of India, in light of TDM Infrastructure case[6].

This, in my view, is a flawed conclusion as Indian parties opting to choose foreign seat for their arbitration is not in derogation of the Indian law because by choosing foreign seat for their arbitration, at the utmost, the parties could only exclude applicability of Part I of the 1996 Act. The substantive rights of the parties in dispute would still be governed in accordance with the substantive law of the contract. Secondly, applicability of TDM Infrastructure case[7] in this case is wrong because the Supreme Court of India in TDM Infrastructure case[8] specifically provided:

36. It is, however, made clear that any findings/observations made hereinbefore were only for the purpose of determining the jurisdiction of this Court as envisaged under Section 11 of the 1996 Act and not for any other purpose.”

In light of the above passage, the principle laid down in TDM Infrastructure case[9] cannot be imported to this matter as the instant matter was not with respect to Section 11 of the Act. Moreover, this judgment did not consider the law laid down in Atlas Export case[10], and should be considered per incuriam.

Addhar Mercantile (P) Ltd. v. Shree Jagdamba Agrico Exports (P) Ltd.[11]

Addhar Mercantile Private Limited filed a petition before the High Court of Bombay under Section 11 of the Act for the appointment of arbitrator and also filed an application under Section 9 of the Act for interim relief. Clause 23 of the contract provided for “Arbitration in India or Singapore and English to be apply.” Shree Jagdamba Agrico Exports Private Limited contended that the Court did not possess jurisdiction to entertain the matter.

The Bombay High Court rejected the preliminary objection on the ground that the parties to the arbitration being Indians, therefore having a seat of arbitration outside India, would be in derogation of Indian law and thereby opposed to public policy of India. Here again, the High Court relied on the principle laid down in TDM Infrastructure case[12].

The criticism made with respect to the restriction imposed by Indian law on Indian parties excluding the applicability of Part 1 of the Act, vis-à-vis the decision in Sah Petroleum case[13] holds true, in this instance also.

Sasan Power Ltd. v. North American Coal Corpn. India (P) Ltd.[14]

This matter was presented before the Division Bench of the Madhya Pradesh High Court, Jabalpur Bench against the order passed by the Single Judge dismissing the civil suit filed by Sasan Power Limited (“Sasan”), pursuant to an application filed by North American Coal Corporation India Private Limited (“NACC India”) under Section 45 of the Act read with Order 7 Rule 11 of the Code of Civil Procedure, 1908.

The facts before the Court were that North American Coal Company USA (“NACC USA”) and Sasan entered into an association agreement, wherein the dispute resolution clause provided for seat of arbitration to be London and the governing law to be English law. Subsequently, by means of an assignment agreement, the rights, liabilities and obligations of NACC USA under the association agreement was transferred to NACC India. Pursuant to the disputes that arose between the parties during the execution of the contract, NACC India invoked the arbitration clause and referred the matter to International Chamber of Commerce for settlement of disputes.

One of the crucial issues raised before the Court was as to whether two Indian parties can have a seat of arbitration outside India. The Court after taking into consideration judgments passed by the Supreme Court in Atlas Exports[15] and TDM Infrastructure[16], upheld the observations of the Supreme Court in Atlas Exports[17] and confirmed that there is no prohibition against two Indian parties choosing a foreign seat for arbitration. It distinguished the findings of the Supreme Court in TDM Infrastructure[18] stating that the principles laid in the said matter was specific to Section 11 (Appointment of arbitrators) and the said interpretation could not be imported into other matter as expressly provided by the Supreme Court.

Moreover, reliance cannot be placed on Section 28 of the Act, as the provision is placed with the condition precedent that the provision shall be applicable only when the seat of arbitration is in India.

Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd.[19] (“Sasan Power case”)

This matter was appealed before the Supreme Court of India, wherein, the said issue was given up by the appellant. In light of the common law doctrine of merger, the findings of the Hon’ble High Court of Madhya Pradesh that two Indian parties can have foreign seat for their arbitration stands fortified.

III. Conclusion

The tilting factor in this issue is that if Indian parties have foreign seat for their arbitration, will it be against public policy of India. The public policy which is alleged to have been contravened by Indian parties by having foreign seat of arbitration is that they would be circumventing Indian law. In reality, they are not circumventing Indian law.

Indian law firmly states that autonomy is the soul of the arbitration, which would be evidenced by the Supreme Courts ruling in Balco.[20] Moreover, Indian statutes do not restrict Indian parties from having their seat of arbitration at a foreign country. By choosing a foreign seat for their arbitration, the applicability of the Act is not excluded, and Part II of the Act would still be applicable in such circumstances which would act as the doorkeeper to prevent the violation of Indian law.

The confusion caused is on account of the judgment passed in TDM Infrastructure case[21], which is clarified hereunder:

The Supreme Court in the above decision held that, pursuant to Section 28 of the 1996 Act, which is a non-derogable provision, the Indian parties should not derogate from Indian law. The relevant portion of Section 28 reads as:

28. Rules applicable to substance of dispute.—(1) Where the place of arbitration is situate in India,—

(a) in an arbitration other than an international commercial arbitration, the Arbitral Tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;

                  *                      *                      *

My submission with respect to this issue is of two-folds: firstly, the condition precedent for the applicability of the aforesaid provision is that the seat of arbitration should be in India. Secondly, the provision deals with “substantive law” (and not curial law). By choosing to have a foreign seat for their arbitration, Indian parties do not influence the “substantive law” applicable; it merely determines the curial law. Hence, Section 28 of the 1996 Act is not a bar on Indian parties having foreign seat for their arbitration.

Therefore, in my view Indian parties have the autonomy to choose a foreign seat for their arbitration.

*Advocate, practising in the High Court of Madras.

[1]  (1999) 7 SCC 61.

[2]  Atlas Export case, (1999) 7 SCC 61, 65.

[3]  (2008) 14 SCC 271.

[4]  TDM Infrastructure case, (2008) 14 SCC 271, 279.

[5]  2012 SCC OnLine Bom 910.

[6]  (2008) 14 SCC 271.

[7]  (2008) 14 SCC 271.

[8]  (2008) 14 SCC 271, 283.

[9]  (2008) 14 SCC 271.

[10]  (1999) 7 SCC 61.

[11]  Adhar Mercantile (P) Ltd. v. Shree Jagdama Agrico Exports (P) Ltd., 2015 SCC OnLine Bom 7752.

[12]  (2008) 14 SCC 271.

[13]  2012 SCC OnLine Bom 910.

[14]  Sasan Power Ltd. v. North American Coal Corpn. India (P) Ltd., 2015 SCC OnLine MP 7417.

[15]  (1999) 7 SCC 61.

[16]  (2008) 14 SCC 271.

[17]  (1999) 7 SCC 61.

[18]  (2008) 14 SCC 271.

[19]  Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813.

[20]  Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552.

[21]  (2008) 14 SCC 271.

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