This article has been written by Muskan Aggarwal, pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Even as arbitration has become a popular mode of dispute resolution, there still remains a few unresolved controversies hanging around. This paper attempts to highlight and discuss one such controversy – can two Indian parties choose a foreign law arbitration to resolve disputes? This issue is yet to be settled under the Indian law. With this present article, an attempt has been made to analyze the position of law on this subject matter.
Why is the choice of the seat of arbitration so crucial?
One of the most basic aspects of any arbitration agreement is the seat of arbitration confirming party autonomy. The parties to the agreement would always prefer to conduct their proceedings in an arbitration-friendly jurisdiction in order to achieve their objective in a most effective and efficient manner. For example, Singapore arbitration jurisdiction, which is considered to operate in a neutral environment and thus uplifting party-autonomy.
In a hypothetical situation, if an American company is entering into a commercial transaction with an Indian company through its Indian subsidiary, the American company may prefer to have the arbitration in Singapore, which is a neutral and arbitration-friendly territory.
The seat of arbitration is also significant as it determines the law applicable when deciding the arbitration proceedings and procedure as well as the aspect of judicial review over the arbitral award.
The parties involved in any arbitration agreement come together with the sole purpose of opting for a seat of arbitration which assists in making the entire process more robust and the dispute resolution mechanism to be exercised in a more neutral jurisdiction, therefore confirming the underlying objective of choosing arbitration as an alternative mode of dispute resolution.
What is the position under the Arbitration & Conciliation Act, 1996?
The Arbitration & Conciliation Act, 1996 (Arbitration Act), is the statute in India which provides the mechanism for alternative dispute resolution which includes arbitration and conciliation. The emphasis of this article would be on the arbitration aspect, as per which the arbitration act would be divided in two parts.
Part I of the Arbitration Act defines arbitration agreement, including the procedure for constituting an arbitral tribunal along with the powers and functions of an arbitral tribunal and the procedure for challenging the arbitral award in India i.e. hence, it would be applicable only on domestic arbitration.
Part II of the Arbitration Act brings in the aspect for enforcement of foreign awards in India which are covered under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and Geneva Convention on Execution of Foreign Arbitral Awards of 1927 (Geneva Convention).
After a clear reading of the Arbitration Act, it can be drawn that domestic arbitration has not been specifically defined under the Arbitration Act. “International commercial arbitration” has been defined as an arbitration arising out of a legal relationship of a commercial nature as per Indian law comprising at least one of the parties to be a foreign party.
To create a better understanding of the controversy at hand, it is imperative to provide clarity on the concept of seat in arbitration law. The article attempts to discuss the cases and law involved with Seat of arbitration. The Supreme Court of India in the matter of Mankastu Impex Pvt. Ltd. v. Airvisual Ltd, took up the issue held that the seat of arbitration is responsible in determining the law which would apply for deciding the arbitration procedure and also the judicial review over the arbitral award. On the other hand, the venue is merely the location(place) where the arbitration proceeding is said to be conducted. Hence, the seat of arbitration is aspired to be a jurisdiction enjoying arbitration friendly guidelines.
What are the Precedents that would help in understanding the Jurisprudence of this issue?
Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Private Limited
The Bombay High Court (Court) in this case was dealing with the petition filed under Section 11 (6) of Arbitration Act, 1996, seeking appointment of Arbitrator, after the Arbitration agreement was invoked.
The Court while placing reliance on the case of TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd. (TDM Infrastructure), took note of the scope of Section 28 of Arbitration Act, where it can be observed that in regards to the intention of the Legislature it can be drawn that Indian parties should not be permitted to let go of Indian Law.
However, this judgement should be read keeping in mind that a corrigendum was added in the TDM case, which made it clear that this judgement was only for the purpose of determining the jurisdiction of court under Section 11 of Arbitration act, and not for any other purpose. Therefore, the judgement drawn relying on the TDA case cannot be interpreted to be an irrefutable decision on this issue. Hence, this in turn causes a shadow of doubt on the Addhar Case judgement.
Sasan Power Limited, v. North American Coal Corporation India Private Limited – decided by The Madhya Pradesh High Court.
The issue that came up for consideration was whether two Indian companies/parties can choose foreign law arbitration, as per the law of that country. The Appellant (Sasan) contended that as it would be violative of public policy of India in regards of the law laid down in the TDM case, as discussed above, two Indian companies cannot adhere to foreign law arbitration.
However, the Madhya Pradesh High Court gave an entirely opposite ruling to that of precedent discussed above and held that Part I of the Arbitration Act would not be applicable to the cases where the parties to agreement have decided on a mutual basis to resolve their dispute through arbitration proceedings in a foreign country.
The Apex Court in Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd. in an appeal, held that the subject agreement involved a foreign element leading which the parties can be given an option to mutually agree to the proceedings before a foreign arbitration seat. Thus, the Apex Court maintained the judgment of the High Court without going into the issue of whether Indian parties could choose to arbitrate before a foreign juridical seat.
GMR Energy Limited v. Doosan Power Systems India Pvt. Ltd. & Ors. – decided by the Delhi High Court (GMR Energy)
In this case, the Delhi High Court, enjoyed the opportunity of considering the precedents which have been cited above, wherein in the matter pertaining to a similar issue, it was held that domestic parties enjoy a liberty to choose a foreign seat arbitration while referring their disputes to arbitration.
It is also vital to highlight here that the Delhi High Court observed that the judgment passed by the Bombay High Court was per incuriam as they had failed to consider the issues raised and the judgment passed by the Supreme Court in the matter of Atlas Export Industries v. Kotak & Company (Atlas Export). Hence, the Delhi High Court has given credibility to the fundamental principle of party autonomy.
Besides if spoken in context of the Atlas Export case, given the facts presented and the issue raised before the Apex Court, they were bound to make the said observation in favour of the foreign arbitration, since one of the parties was based in Hong Kong. Hence, the Atlas Export case judgement cannot be completely relied on without raising any debate.
In light of the precedents cited and perspective expressed, the divergence in the opinion with respect to the choice of foreign seated arbitration of domestic parties can undoubtedly be realised. The ambiguity in law as a result of this confusion is certainly not favourable for making the arbitration mechanism in India more robust and giving parties the freedom of choice to arbitrate their disputes outside India, which ultimately is the objective of inception of arbitration as an alternate dispute resolution mechanism.
The issue thus raised yet needs to be addressed in order to provide the necessary clarity to the parties facing practical difficulty due to such ambiguity. As per the jurisprudence in India, in an instance of an agreement involving an Indian company operating as a subsidiary or a branch office to a foreign company, which (foreign company) conducts the primary operations outside the country would not attract the benefit of International Commercial Arbitration as defined in Section 2(f) of the Arbitration Act.
As long as this issue persists, the Indian parties to Arbitration Agreement cannot perform their contractual obligations incautiously. This article is thus written with the hope of a better understanding on this issue by the Apex Court in the future, thus providing the progressiveness demanded by this regime. Arbitrati
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