Speed read

Recent conflicting Indian court judgments have given rise to concerns as to whether two Indian companies may refer disputes to arbitration seated outside of India.  We take a look at these cases and conclude that there is no provision in the 1996 Arbitration Act or the Contract Act, nor is there any general principle of public policy in India, which precludes Indian parties from resolving their disputes in foreign arbitration proceedings.  Nevertheless, it remains to be seen whether the Supreme Court of India will provide clarity to the position in the near future.

A recent decision by the Bombay High Court in Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Pvt Ltd (Addhar Mercantile)[1] has given rise to some concern as to whether, under Indian law, two Indian companies are permitted to refer disputes to arbitration seated outside India.  In that case the Court considered an agreement between two Indian parties which provided for disputes to be submitted to "arbitration in India or Singapore" and concluded that the arbitration had to be conducted in India, on the basis that, as a matter of public policy, Indian nationals should not be permitted to derogate from Indian law.

In another recent judgment, Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd.[2] (Sasan Power), the Madhya Pradesh High Court reached the opposite conclusion, and held that two Indian parties were permitted to choose a seat of arbitration in London.

In light of these conflicting judgments, this bulletin examines the caselaw and relevant provisions in the Indian Arbitration and Conciliation Act 1996 (the 1996 Act) and the Indian Contract Act 1872 (the Contract Act), and concludes that Sasan Power reflects the correct position, and Addhar Mercantile is therefore likely to be overturned on appeal.

Analysis of the Bombay High Court’s decision in Addhar Mercantile

The Bombay High Court in Addhar Mercantile was asked to decide if a clause that provided for "[a]rbitration in India or Singapore and English law to apply," constituted an agreement to arbitrate, and if so what the seat of arbitration should be.  The court found that there was a valid submission to arbitration.  In deciding whether the seat of arbitration should be India or Singapore, the court relied on s.28 of the 1996 Act and the Indian Supreme Court (Supreme Court) decision in TDM Infrastructure (P) Ltd. v.UE Development India (P) Limited ^[3] (TDM Infrastructure).

In TDM Infrastructure, the Supreme Court considered a clause which provided for arbitration in India.  Notably, this meant that Part I of the 1996 Act applied and the question as to whether or not two Indian parties could refer disputes to arbitration outside India therefore did not arise for determination.  The question before the court was whether the arbitration was an international commercial arbitration or not and therefore which court had jurisdiction to appoint an arbitrator under s. 11 of the 1996 Act.  The Supreme Court in TDM Infrastructure commented that "Section 28 of the 1996 Act is imperative in character… 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".  It is this extract which was relied upon by the Bombay High Court in Addhar Mercantile.  However, it does not support a conclusion that two Indian parties are not permitted to choose a seat of arbitration outside India, for the reasons explained below.[4]

Section 28 (which is in Part I of the 1996 Act) provides that, where the place of arbitration is in India, (i) for an international commercial arbitration the tribunal shall decide the dispute in accordance with the rules of law designated by the parties, and (ii) in all other cases the tribunal shall decide the dispute in accordance with the substantive law of India.  On its face therefore, s. 28 only applies where the seat of arbitration is in India and relates only to the substantive law to be applied by the tribunal in resolving a dispute[5]. Section 28 does not purport to have extra-territorial effect, or indeed to preclude Indian parties from choosing a seat outside India.  Lest there be any doubt as to the scope of s. 28, the combined effect of the Supreme Court decisions in Bharat Aluminum Company v. Kaiser Aluminum Technical Services (BALCO)[6] and Reliance Industries Limited and Or. v. Union of India (RIL)[7] is that, regardless of when an arbitration agreement was entered into, Part I (including s. 28) does not apply if the parties have chosen a seat outside India.

The effect of s. 28 and TDM Infrastructure is that if two companies incorporated in India refer their disputes to arbitration in India then such disputes have to be resolved by reference to Indian substantive law.  However,  if two Indian parties decide to refer their disputes to arbitration outside India, then no such restriction would apply.  As a result, the reliance placed by the Bombay High Court on s. 28 and TDM Infrastructure in the Addhar Mercantile judgment was, in our view, misplaced.  Indeed, it is notable that the Addhar Mercantile judgment refers only to TDM Infrastructure and not to a single other authority.

Analysis of the Madhya Pradesh High Court’s decision in Sasan Power

In a much more comprehensive 58 page judgment (which considers some 20 authorities), the Madhya Pradesh High Court has confirmed that it is not against public policy for two Indian parties to agree to foreign seated arbitration.  The facts in Sasan Power involved an English law governed agreement between an Indian party and the Indian subsidiary of a foreign party, which submitted any disputes to ICC arbitration seated in London.

In Sasan Power, the court held that the statements on public policy in TDM Infrastructure should be confined to "the purpose of determining the jurisdiction of this Court as envisaged under Section 11 of the 1996 Act and not for any other purpose” (emphasis in judgment).[8]  Having concluded that Part I (and the rationale in TDM Infrastructure) did not apply to foreign seated arbitrations, the court relied on a 1999 Supreme Court decision in Atlas Export Industries v Kotak & Company (Atlas Export).[9]

In Atlas Export, it was argued that the parties to the dispute in question were both Indian parties and that a contract which provided for disputes to be referred to arbitration in London should be held to be opposed to public policy.  The court considered (i) s. 23 of the Contract Act, which provides that the object of an agreement is unlawful if it is opposed to public policy; and s. 28 of the Contract Act, which provides that an agreement by which a party is restricted from enforcing his rights by usual legal proceedings is void.  However, the court relied on Exception 1 to s. 28, which provides that a contract by which parties agree to refer disputes to arbitration shall not be rendered illegal.  The judgment concluded that “[m]erely 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.”

Atlas Export was decided by a two judge bench of the Supreme Court, and therefore carries greater weight than the decision in TDM Infrastructure which was decided by a single judge.  It is therefore surprising that no reference was made to the decision in Addhar Mercantile.  Nevertheless, the scope of the conclusion in Atlas Export is arguably narrow on two grounds: (i) because the case was decided under the predecessor legislation to Part II of the 1996 Act,[10] and (ii) because the arbitration agreement in Atlas Export was contained in a contract between two Indian parties and a foreign party, albeit only the two Indian parties were involved in the dispute which subsequently arose.

The first of these limitations is somewhat illusory, because the decision in Atlas Export turned on the interpretation of the Contract Act, not the legislation relating to arbitration which preceded the 1996 Act.  The second of these limitations is important, because it is plain that where an arbitration agreement involves one or more Indian parties, and one or more non-Indian parties, they are free to select a seat outside India (among other decisions BALCO and RIL clearly support this conclusion).  It would be illogical and unworkable for the enforceability of such an arbitration agreement to turn on the nationality of the parties between whom a dispute subsequently arises, and, in our opinion, there is no support for such a finding under Indian law.

Conclusion

On a plain reading of the 1996 Act and the Contract Act, there is nothing which precludes two Indian parties from agreeing to submit disputes to arbitration with a seat outside India.  Similarly, there is no principle of public policy in India which precludes Indian parties from resolving their disputes in foreign arbitration proceedings.  Nevertheless, given the conflicting judgments rendered in Addhar Mercantile and Sasan Power, and the narrow scope of Atlas Export, it would be helpful for the Supreme Court to confirm that this is the correct position.  We understand that a Special Leave Petition has been filed in respect of the Bombay High Court’s decision in Addhar Mercantile.  Our expectation is that the decision will be overturned by the Supreme Court.

Note: Regulation prohibits foreign law firms from practising Indian law or from having our own office in India. Our India Group is made up of some 100 partners and associates who have a long track record of working on India-related matters. We have played a leading role advising international and Indian clients on international aspects of many high-profile deals and disputes in recent years. Our excellent working relationships with the leading Indian law firms allows us to provide a seamless and full range of legal services to clients.

[1]     High Court of Bombay, Arbitration Application No. 197 of 2014 and Arbitration Petition No. 910 of 2013.

[2]     High Court of Madhya Pradesh: at Jabalpur, First Appeal No : 310 of 2015.

[3]     (2008)14 SCC 271.

[4]     It is also notable that in a corrigendum to  the judgment in TDM Infrastructure it was expressly noted 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".

[5]     In Bharat Aluminum Company v. Kaiser Aluminum Technical Services (BALCO) (2012) 9 SCC 552 the Supreme Court also confirmed that the purpose of s.28 is to identify the rules that would be applicable to the substance of a dispute.  “In other words, it deals with the applicable conflict of law rules”.  Similarly the Supreme Court confirmed that s. 28 will not apply where the seat of arbitration is outside India.  See BALCO, para 118.

[6]     Ibid., fn.5.

[7]     2015 (10) SCALE 149.  See also A&O client bulletin on the case dated 30 September 2015.

[8]     See Sasan Power fn.2, para 49.

[9]     (1999) 7 SCC 61.

[10]    This argument was rejected by the court in Sasan Power, which concluded that there was "not much of a difference" between the Arbitration Act 1940 and the 1996 Act – see para 53.