India - Foreign Seated Arbitration Between Indian Parties – A Legal Quandary.
Legal News & Analysis - Asia Pacific - India - Dispute Resolution
8 April, 2020
The choice of seat is one of the most important considerations for parties entering into an arbitration agreement. A mistake in choosing the wrong jurisdiction as the seat for the arbitration may take away the benefits which accrue to the party from a systematic arbitration mechanism. A number of parties prefer to conduct their arbitration at an arbitration-friendly jurisdiction so that the arbitral award attains finality in an efficient manner.
A number of factors guide parties while deciding on the seat of arbitration. Parties might be disinclined to submit to jurisdictions where the local courts have a significant power to decide on the merits of a matter or have an intervening tendency while considering an award passed by the arbitral tribunal. Further, in cases where one of the contracting parties is a fully owned subsidiary of a foreign company, it is likely that such a party would desire to go for arbitration before a forum which it comfortable with. For example, if a Japanese company is entering into a transaction with an Indian company through its Indian subsidiary, the Japanese company may prefer to have an arbitration in Singapore, which is a neutral and arbitration-friendly territory.
The issue of whether Indian parties can mutually agree to enter into a foreign seated arbitration is a position of law which is yet to be settled under Indian law. The object of the present article is to analyze the position of law as it stands today.
ARBITRATION AND CONCILIATION ACT, 1996
The Arbitration and Conciliation Act, 1996 (Arbitration Act) is the umbrella statute in India for alternative dispute resolution mechanism which includes arbitration and conciliation. With respect to arbitration, the Arbitration Act is divided in two parts. Part I of the Arbitration Act provides the definition of arbitration agreement, the procedure for constituting an arbitral tribunal, its powers and functions and the procedure for challenging the arbitral award in India. Part II of the arbitration Act provides 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).
The Arbitration Act does not specifically define a domestic arbitration. However, it defines an “international commercial arbitration” as an arbitration arising out of a legal relationship of a commercial nature as per Indian law and where at least one of the parties is a foreign party. Further, it provides that Part I of the Arbitration Act shall apply to arbitrations which are conducted in India.
In order to understand the controversy at hand, it is necessary to clarify the concept of seat in arbitration law. Recently, on 5 March 2020, the Supreme Court of India (Supreme Court) clarified in the matter of Mankastu Impex Pvt. Ltd. v. Airvisual Ltd. that the “seat” of arbitration determines the applicable law for deciding the arbitration procedure as well as the judicial review over the arbitral award. On the contrary, “venue” is merely the physical location where the arbitration is conducted. The present article deals with cases where the seat of arbitration between two Indian parties is outside India.
Addhar Mercantile Pvt. Ltd. v. Shree Jagadamba Agrico Exports Pvt. Ltd. decided on 12 June 2015 by the Bombay High Court (Addhar Mercantile)
The Bombay High Court, placing reliance upon the case of TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd. (TDM Infrastructure) decided by the Supreme Court on 14 May 2008 held that the intention of the legislature was clear from Section 28 of the Arbitration Act that “Indian nationals should not be permitted to derogate from Indian law.
This is part of the public policy of the country.” Thus, the judgment of the Bombay High Court laid down that domestic parties cannot submit their dispute to a juridical seat of arbitration outside India.
Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd. decided on 11 September 2015 by the Madhya Pradesh High Court (Sasan Power)
However, the Madhya Pradesh High Court gave a diametrically opposite ruling to that of Addhar Mercantile and held that Part I of the Arbitration Act would be inapplicable to cases where the parties have mutually agreed to resolve their dispute through arbitration proceedings in a foreign country.
On appeal, the Supreme Court in Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd. held on 24 March 2016 that the subject agreement was a tripartite agreement between two domestic parties and a foreign party and thus, a ‘foreign element’ exists in the subject agreement and consequently, the parties may mutually agree to arbitration before a foreign juridical seat. Thus, the Supreme Court upheld 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 on 14 November 2017 by the Delhi High Court (GMR Energy)
The Delhi High Court, having the benefit of considering the abovementioned judgments, held that domestic parties are at liberty to choose a foreign juridical seat while referring their inter se disputes to arbitration.
It is pertinent to mention here that the Delhi High Court observed that the judgment passed by the Bombay High Court was per incuriam as the Bench had failed to consider the judgment passed by the Supreme Court in the matter of Atlas Export Industries v. Kotak & Company decided on 1 September 1999 (Atlas Export).
In the Atlas Export judgment, the Supreme Court held, “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.” Thus, the Delhi High Court has given credence to the fundamental principle of party autonomy, a dogma which acts as the guiding principle around which the entire ecosystem of international commercial arbitration is based.
As can be seen from above, there is a divergence of opinion with respect to the ability of domestic parties to opt for a foreign seated arbitration.
The Bombay High Court, while considering the issue in Addhar Mercantile, has relied upon Section 28 of the Arbitration Act and held that permitting domestic parties to submit to the jurisdiction of a foreign juridical seat would effectively permit such parties to steer clear of Indian law, a violation of India’s public policy. However, in our view, Section 28 (1) provides that the substantive law applicable to the arbitration ought to be Indian law and there is no fetter imposed upon parties from choosing a foreign law as the procedural law for the arbitration. Further, as stated in GMR Energy, it is unlikely that the Bombay High Court would have taken the view in Addhar Mercantile if it had an opportunity to consider the Atlas Export judgment.
The judgment in GMR Energy has considered a number of judgements passed by the Supreme Court and other High Courts to conclude that the Arbitration Act allows Indian parties to submit to the jurisdiction of a foreign juridical seat for arbitration. However, the judgment of the Delhi High Court is not a binding precedent over other High Courts in India.
In the event that a foreign seated arbitral tribunal, where both parties are Indian, has passed an award, it is likely that the same will be challenged by the losing party on the ground that the award is contrary to the fundamental policy of India and such a defense might succeed, depending on the High Court where the award is being challenged.
One may deduce from the judgment of the Supreme Court in Sasan Power that if an Indian subsidiary of a foreign company is entering into a transaction with an Indian entity, it would be advisable, if permitted by the commercials of the transactions, to include the foreign company as a party to the contract so that any ensuing arbitration would be classified as an international commercial arbitration as per the provisions of the Arbitration Act. In all other situations, it is advisable that if two domestic Indian parties are entering into an arbitration agreement, the seat be kept in India to prevent the arbitration agreement from being nullified due to the above differences in judicial approach.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law