rules of arbitration in India

This article is written by Ishanvi Mishra, pursuing a Certificate course in Arbitration: Strategy, Procedure and Drafting from lawsikho.com, and Dipti Khatri.

Introduction

Due to focus on speedy relief, priority to party autonomy and limited interference by courts, arbitration is becoming one of the most sought-after modes of dispute resolution mechanism. Domestic law is clear on the subject as to supervisory jurisdiction over these arbitrations, but as far as International Commercial Arbitration is concerned there is still some ambiguity.

The party autonomy allows the Parties to select their own procedural law, that is to be followed during the proceedings. But this does not mean that International Commercial Arbitrations are allowed to take place in a vacuum. Sanction of law is still a necessity for rules decided by parties to be enforceable. “Lex arbitri[1] i.e. the law of the seat or place of arbitration is the relevant law which will govern the procedural and other crucial aspects of Arbitrations.

Why did the Bombay HC in Addhar judgement get it wrong?

Addhar Mercantile Private Limited, v. Shree Jagdamba Agrico Exports Private Limited[2], (“Addhar case”) decided by the Bombay High Court, dealt with application under Section 11(6) of Arbitration and Conciliation Act, 1996, invoking arbitration agreement (that read “23. Arbitration in India or Singapore and English law to be apply”), and seeking appointment of an arbitrator. The learned counsel for the appellant argued that the choice of seat of arbitration to be Singapore along with English law for the proceedings would be derogating from Indian law, as both parties are incorporated in India.

TDM Infrastructure Private Limited v. UE Development India Private Ltd[3] (“TDM case”) was heavily relied on, in which the Apex Court decided that the intention of the Legislature was to not allow Indian nationals to derogate from Indian law, while interpreting Section 28 of the Arbitration and Conciliation Act, 1996. It was further argued by the appellants that since the agreement had a choice between India and Singapore as seat, and since both the parties are from India, they should not be allowed to derogate Indian law. The learned counsel for the respondent, raised objections to the court’s jurisdiction, by contending the possibility for two Indian parties having the right to have the seat of arbitration at Singapore and apply English law[4].

The Bombay High Court while placing heavy reliance on TDM case held that since the Parties are incorporated in India, they should not be allowed to derogate from Indian law. The Court constituted the arbitral tribunal in India, to decide the matter in terms of Section 28 (1) (a) of the Arbitration and Conciliation Act as per substantive law. “… If the seat of the arbitration would have to be in Singapore, certainly English law will have to be applied…” is observed by the Bombay High Court in para 8 of the judgement. It would seem that the Court opined that the bar placed on Indian nationals by section 28 of the Arbitration and Conciliation Act is on choosing foreign law for arbitrations in India only, and that it would be allowed for Indian parties to have foreign seated arbitration with applicable foreign law. However, further along the judgement the Court opined that the Indian parties cannot have a seat of arbitration in Singapore and choose foreign law (para 12). The Courts solely relied on the TDM case while deciding this case and laid down the law clearly.

What went wrong? How did the Bombay HC rely so heavily on the TDM case?

It should be kept in mind while reading the judgement that the arbitration clause that gave choice between India & Singapore as the seat of arbitration, is quite uncommon. Moreover, the sole reliance on the TDM case by the Bombay High Court is ill-conceived while exercising jurisdiction under section 11 of Arbitration and Conciliation Act, 1996, as other judgments of the Courts in the country were not taken into account while deciding this case. What also failed to be noted by the Hon’ble Court was that a corrigendum was added to the judgment in the TDM case, and therefore any decision given by the Court was not for any other purposes, but only for determining the jurisdiction under section 11. The Supreme Court, in the TDM case majorly dealt with the issue of whether or not the matter was within the meaning of 2(f) of Arbitration and Conciliation Act, 1996, an ‘international commercial arbitration’ and therefore triggered the jurisdiction of the Supreme Court, to constitute an arbitral tribunal. Not particularly or directly dealing with the issue of whether or not Indian parties can choose a foreign arbitration and apply foreign law, the Supreme Court only made observations on the scope of section 28 of the Arbitration and Conciliation Act. Therefore, the judgment in TDM case cannot be construed to be a conclusive decision on this issue. The heavy reliance placed by the Bombay High Court on the TDM case casts a question on the merits of the judgment in Addhar case, on this issue[5].

Issue of Seat & Place/Venue of arbitration

In International Commercial arbitration, the question arises as to which substantive law would govern the arbitration process.  To answer, generally validity of the arbitration agreement and seat or place is considered. Venue is considered simply to be a geographical location as per the convenience of the parties. However, seat decides the actual appropriate court which would have the exclusive jurisdiction to decide the case. Where a seat is specified in the agreement, generally the procedural aspects of that country are considered. However, where the parties have failed to choose the specific law, it is governed by the law of the place of arbitration. The challenge of an award is then required to be done in the Court where the seat of arbitration is located and that Court is considered to have supervisory jurisdiction.

However, after the recent amendments the Part I is to be made applicable under certain situations. Section 9 which relates to Interim Relief, Section 37(1) (a) which relates to appeal to orders, Section 27 (Court assistance for evidence) is applicable even in the foreign seated arbitration.

In Enercon Indian Ltd. and Ors. v. Enercon Gmbh the dispute arose of the non- supplies under the International property License Agreement (IPLA). It stated that the venue would be London and the governing Law would be the Indian Arbitration and Conciliation Act, 1996. The question arose whether London Court could have concurrent jurisdiction where the venue was in London. The Hon’ble Supreme Court of India distinguishing between the seat and venue of the arbitration held that “the express mention in the judgment that London was the venue of the arbitration does not lead to the conclusion that it was the seat of arbitration. Once the seat has been decided, Indian Courts will have supervisory jurisdiction and the English Court will not have jurisdiction. It is thus, not necessary for the seat and venue to be the same. The hearing even if it is taking place at a different place, the chosen seat of arbitration will remain unaffected.

However, in the absence of straight jacket provision relating to Arbitration and Conciliation Act, 1996 the controversy which has still not been resolved includes whether can two Indian parties choose the foreign seat of arbitration? The Court have tried to settle the position through a plethora of cases in the recent years however, there is no clarity provided on the same.  The Madhya Pradesh High Court in the Sasan’s case stated that party autonomy would be considered in deciding the matter. However, again the Supreme Court’s reluctance to answer on the same has let the issue unanswered.  As the Supreme Court established a foreign nexus to the dispute and allowed foreign arbitration between the two parties outside India.

Why the controversy regarding seat/venue of arbitration still remains?

In the Sasan’s Case, where the dispute arose out of a mine development agreement there were two parties Reliance-owned Sasan Power Ltd, and NAAC America (Agreement I). Later on after two years, the North America Coal Corporation India (NACC India) was formed, whereby all rights and liabilities under Agreement I were transferred from NAAC America to NACC India (Agreement II).Thus, the Supreme Court concluded that the parties had entered into two agreements (i) the bi-party agreement which was entered between the foreign element and an Indian entity; and (ii) a tripartite agreement between the foreign entity and an Indian entity, where the rights and obligations were given to the Indian entity. The Supreme Court in asserting its Judgment came to the conclusion that there was foreign element involved and thus, allowed the parties to be governed by the foreign law and appointed foreign seat. Therefore, the main questions relating to whether Indian parties can opt for a foreign seat at the autonomy of the parties were unanswered.  Supreme Court was reluctant in addressing and setting aside the judgment of the Madhya Pradesh high Court thereby leaving in the instance of a dilemma. They stated that the

“…. the question whether two Indian companies could enter into an agreement to be governed by the laws of another country would not arise in this case. So long as the obligations arising under the AGREEMENT-I subsists and the American company is not discharged of its obligations under the AGREEMENT-I, there is a ‘foreign element’ therein and the dispute arising therefrom. The autonomy of the parties in such a case to choose the governing law is well recognized in law.”

Position prior to Sasan’s Case

Prior to this, the issue has been considered in various recent Judgments. In the case of TDM Infrastructure Pvt. Ltd. V. UE Development India Ltd. that by looking at the legislature’s intention it can be concluded that Indian nationals opting for the foreign seat would derogate the Indian Law and would be against the public policy. The Judgment stated as follows:

“It held that Section 28 is imperative to Section 2(6) of the provisions of the Act. Therefore, the intention of the Legislature is that the Indian Nationals should not derogate Indian Law”. It would be called to be against the public policy of India.”

To further explain what they mean by “opposed to public policy” the Court relied on the case of Oil and Natural gas Corporation Ltd. v. Saw Pipes Ltd. It held that if it is contrary to the fundamental policy of Indian Law; the interest of India; justice and morality and patent illegality it would amount to be against the public policy. Further, the scope was enhanced in the case of Phulchand Exports Limited v. O.OO. Patriot where it was stated that Section 48 would also carry the same meaning as that of given in the Saw Pipes Case.

The Court again relied on TDM Infrastructure in the case of Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Pvt. Ltd. (Addhar Mercantile) which was related to Section 11 of the Arbitration Act. In this case, the  Court made the parties to follow the substantive Laws of India even though the parties had an agreement to contractually agree to an “ arbitration in “India or Singapore’’ with substantive Law to be taken as English Law.

Further, in Reliance Industries Limited & Anr. v Union of India, the arbitration was challenged on the ground that it was seated outside India. However, the Court without touching on this ground only upheld the foreign seated arbitration between two Indian parties.

The Supreme Court opined as follows:

“It stated that it was too late to state that the seat of arbitration is not analogous to an exclusive jurisdiction clause. Once the parties have mutually agreed that the seat will be in London, it can no longer be the content of the parties that Part I of the Arbitration agreement will be applicable”.

Also, in the case of Videocon Industries Ltd. v. UOI it was stated by the Supreme Court that appellants have nowhere claimed exemptions under the Indian Law and therefore, they see no reason why Indian Law should be exempted. Thus, the Court no where mentioned about the ‘foreign seat’. Their only concern was ‘exemption from the Laws of India’.

Further, again the same contentions were raised in the case of Delhi Airport Metro Express Pvt. Ltd. which demonstrated the uncertainty in determining the issue of whether the two parties can choose the foreign seat of arbitration. Again seeking hold of the TDM Infrastructure Case, BALCO and Aadhar the Court reached at Further, even if two Indian parties successfully obtain a foreign arbitration award, it is still possible to delay enforcement proceedings in India by claiming that the award violates public policy.

However, earlier Supreme Court in the Bharat Aluminium Company Ltd. v. Kaiser Aluminium Technical services Inc. has held that seat of arbitration inevitably imports the acceptance of the party to the substantial law of the other Country. Also, the Court made an observation that no parties can circumvent the substantive Indian Law and will not have an overriding effect contrary to the provisions of the contract.

Thus, where the above two cases establish that argument can take place abroad; the judgment of Madhya Pradesh High Court has raised the controversy again. The Reliance Industries Judgment and the Sasan’s Judgment suggest totally contrary position to that of the above case.

Is there a conclusive takeaway from these precedents though?

Even though the Supreme Court of India failed to definitively resolve the issue whether two Indian parties are permitted to choose a foreign seat in their arbitration agreements and a case can be made out in favour of such an agreement allowing foreign-seated arbitration on the basis of Sasan, Atlas, Balco and Reliance judgements. These judgements are also in consonance with the international jurisprudence on this matter which allow domestic parties to choose a foreign arbitration seat.

International Jurisprudence on allowing domestic parties to choose a foreign arbitration seat

In England, for example, section 3(a) of the Arbitration Act, 1996 explicitly recognizes the autonomy of parties to decide their seat. Similarly, Singapore does not place any restriction on the parties’ ability to choose a seat by adopting Article 20(2) of the Model Law (PT Garuda Indonesia v Birgen Air [2002] 1 SLR(R) 401 at [36])[6]. In PT Garuda Indonesia, parties entered into an aircraft lease agreement which stipulated Jakarta as the seat of arbitration. Parties conducted hearings in Singapore and awards were rendered which clearly stated that it was rendered in Jakarta. Garuda filed a notice of originating motion in Singapore to set aside the award which was granted. The other party applied to have the notice of motion set aside. The Court of Appeal found that the parties had only agreed to a change in the venue of the hearing and not the seat of arbitration and that there was a distinction between the two. It observed that the place of arbitration did not change merely because the tribunal held the hearing at a different place; it only changed where the parties had expressly agreed to it. On this basis, the court found that there was no basis to file a challenge to the award in Singapore. Though this judgement Singapore proved itself to be a much more arbitration friendly jurisdiction, than compared to what India currently is, because it doesn’t give clear liberty to Indian parties to pick foreign seat, without considering it as a derogation from Indian law.

Recent Amendment adding to the controversy

While the recent amendments have been brought in 2015 with the aim of reducing the judicial intervention and bringing about the effectiveness, however, it has not concluded on the point of whether interim reliefs by the Indian Court can be granted in a foreign seated International commercial arbitration. As, the International commercial arbitration should include at least one non- Indian Party. However, the present act does not talk about the interim relief of the same.

Conclusion

Due to the decisions like TDM and Addhar, Indian parties are still hesitant to choose a foreign seat as an element of uncertainty persists by these judgements, and due to the absence of clear decision by the Supreme Court, some courts might follow these decisions, and therefore fate of the agreement fully depends on the interpretation made by the Court. The Indian parties who hope to enforce their awards outside India may still be relatively much more confident in choosing foreign-seated arbitration, due to the lesser likelihood of the challenge on public policy. India has been making consistent efforts in promoting arbitration as an effective method of dispute resolution, in order to lessen the burden on the commercial courts. But, this uncertainty with respect to foreign seats of arbitration for domestic parties is anomalous, and this uncertainty may deter the parties while considering means of dispute resolution. This is the reason for parties to structure their agreement through holding entities in different countries, making them a foreign party, in order to avoid the risk of getting the arbitration agreement deemed unenforceable due to a foreign seat of arbitration. Indian courts or Legislature can promote India as arbitration friendly jurisdiction by removing this uncertainty of law and allow party autonomy in this regard as well. It would mark a big step forward by making laws in India consistent with its counterparts around the world, such as England and Singapore.

References

  1. Can two Indian parties opt for a foreign seat of arbitration: An unresolved question http://www.trilegal.com/pdf/create.php?publication_id=14&publication_title=can-two-indian-parties-opt-for-a-foreign-seat-of-arbitration-an-unresolved
  2. Post Balco Developments, Mondaq,
  3. Seat versus Venue, http://www.financialexpress.com/archive/seat-versus-venue/1229641/
  4. International Commercial Arbitration, Law and Recents Developments in India, Nisith Desai Associates http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/International_Commercial_Arbitration.pdf
  5. Can Indian parties choose foreign seat of arbitration? Supreme Court’s Sasan judgment fails to resolve uncertainty http://barandbench.com/can-indian-parties-choose-foreign-seat-arbitration-supreme-courts-sassan-judgment-fails-resolve-uncertainty/

[1] THE “APPROPRIATE COURTS” IN FOREIGN SEATED ARBITRATION: AN INDIAN PERSPECTIVE Singhania And Partners, https://singhania.in/arbitration-outside-india-international-arbitration-lex-arbitri-foreign-seated-arbitrations-for-indian-parties-legal-precedents-on-foreign-seated-arbitration/ (last visited Aug 7, 2020)

[2] Addhar Mercantile Pvt. Ltd. v. Shree Jagdamba Agrico Exports Pvt. Ltd., (2015) SCC OnLine Bom 7752 [hereinafter “Addhar Mercantile”].

[3] TDM Infrastructure v. UE Development India Pvt. Ltd., (2008) 14 SCC 271 [hereinafter “TDM Infrastructure”].

[4] The Unresolved Controversy – Can Two Indian Parties Choose Foreign Seated Arbitration And Foreign Law To Resolve Their Disputes? – Litigation, Mediation & Arbitration – India Welcome to Mondaq, https://www.mondaq.com/india/trials-appeals-compensation/604208/the-unresolved-controversy-can-two-indian-parties-choose-foreign-seated-arbitration-and-foreign-law-to-resolve-their-disputes (last visited Aug 7, 2020)

[5] The Unresolved Controversy – Can Two Indian Parties Choose Foreign Seated Arbitration And Foreign Law To Resolve Their Disputes? – Litigation, Mediation & Arbitration – India Welcome to Mondaq, https://www.mondaq.com/india/trials-appeals-compensation/604208/the-unresolved-controversy-can-two-indian-parties-choose-foreign-seated-arbitration-and-foreign-law-to-resolve-their-disputes (last visited Aug 7, 2020)

[6] Can two Indian parties choose a foreign seat for arbitration? Kluwer Arbitration Blog, http://arbitrationblog.kluwerarbitration.com/2016/01/21/can-two-indian-parties-choose-a-foreign-seat-for-arbitration/?doing_wp_cron=1596781800.9159450531005859375000 (last visited Aug 7, 2020)


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