Can two Indian parties have a foreign seated arbitration? This familiar question has till date remained unsettled, and is perplexing in light of conflicting decisions of the Supreme Court and High Courts. The recent decisions of the Madhya Pradesh High Court in Sasan Power Ltd. v. North American Coal Corporation India Pvt. Ltd. (Sasan), and the Bombay High Court in M/s Addhar Mercantile Private Limited v. Shree Jagadamba Agrico Exports Pvt. Ltd.,(Addhar), may appear to be contradictory, yet, seem to point towards an answer.
Sasan was heard as an appeal to a Section 45 application where the district judge had dismissed the suit between the two Indian Parties on the ground that it was not maintainable, and referred them to a foreign seated arbitration.It was argued in this appeal, that the district judge erred in referring the parties to arbitration under Section 45 since the arbitration agreement was null, void and inoperative on the ground that two Indian parties could not agree for an arbitration in a foreign country according to the laws of that country. The Appellants argued that referring two Indian parties to a foreign seated arbitration would be in violation of Section 23 of the Indian Contract Act, and in violation of the Supreme Court’s decision in TDM. The Respondent argued that TDM was not applicable and relied on Atlas, to convince the Court that two Indian parties could enter into an arbitration agreement choosing to have the seat in a foreign country.
The Court noted the observation of the Supreme Court in TDM that “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.” However, the Court chose to counter the applicability of TDM on two points. First, that Supreme Court had itself cautioned that its observations and findings were only for the purpose of determining the jurisdiction of the Court under Section 11 and not for any other purpose. Second, that Atlas, which was a larger bench than TDM and thus a binding precedent, considered the applicability of Section 23 and 28 of the Contract Act and held that merely because the arbitrators are situated in a foreign country would not by itself be enough to nullify the arbitration agreement when the parties have with their eyes open, willingly entered into the agreement.
Addhar was heard as an application filed under Section 11(6) for the appointment of an arbitrator with an application under Section 9 for interim measures. The arbitration agreement mentioned in Clause 23 stipulated for “arbitration in India or Singapore and English law to be apply.”
The relevant paragraphs from Addhar have been extracted below:
“8. It is not in dispute that both parties are from India. A perusal of clause 23 clearly indicates that intention of both parties is clear that the arbitration shall be either in India or in Singapore. If the seat of the arbitration would have be at Singapore, certainly English law will have to be applied. Supreme Court in case of TDM Infrastructure Private Limited has held that the intention of the legislature would be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country.
9. Insofar as submission of the learned counsel for the respondent that if such provision is interpreted in the manner in which it is canvassed by the learned counsel for the applicant, it would be in violation of section 28(1) (a) is concerned, since I am of the view that the arbitration has to be conducted in India, under section 28(1) (a), the arbitral tribunal will have to decide the disputes in accordance with the substantive law for the time being in force in India. In my view the said agreement which provides for arbitration in India thus does not violate section 28(1) (a) as canvassed by the learned counsel for the respondent.”
On this the Court did not hold that the arbitration agreement was null, void or inoperative. Rather, the court held that the arbitration agreement existed, and held that the application under Section 11 was maintainable.
The arbitration agreement was prima facie vague because it did not specify whether the place/seat of arbitration is India or Singapore. Moreover, since English Law was specified as the substantive law, the clause should have been declared null, void and inoperative, due to the reason that TDM prohibits two Indian parties to have a foreign law as the substantive law. (see analysis of TDM below).
However, in its zeal to make the arbitration agreement workable, the court assumed in paragraph 8 extracted above,that if Singapore was decided as the seat of arbitration, then English Law would be applicable as the substantive law (the Court implicitly interpreted, that Singapore as the seat and English Law as the substantive law would go hand in hand).After making this assumption, it observed that since TDM prohibits two Indian parties from having a foreign substantive law, it concluded that since English Law could not be the substantive law, Singapore could not be the seat of arbitration, and thus as per the arbitration agreement, India would be the seat of arbitration. And by virtue of Section 28(1)(a) if India would be the seat of arbitration, then Indian substantive law would be applicable.
The relevant paragraphs of TDM have been extracted below:
“18. Chapter VI of the 1996 Act dealing with making of an arbitral award and termination of proceedings in this behalf plays an important role. In respect of `international commercial arbitration’, clause (b) of Sub-section (1) of Section 28 of the 1996 Act would apply, whereas in respect of any other dispute where the place of arbitration is situated in India, clause (a) of Sub-section (1) thereof shall apply.
19.When, thus, both the companies are incorporated in India, in my opinion, clause (ii) of Section 2(1)(f) will apply and not the clause (iii) thereof.
20. 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.”
In paragraph 20 of TDM, as extracted above, the Supreme Court has held that “the intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law” by solely relying on Section 28 of the 1996 Act. Section 28 of the 1996 Act is titled “Rules applicable to the substance of the dispute” and is applicable to the substantive law (also known as the governing law of the contract). Section 28 has nothing to do with the seat or law of arbitration (also known as the lex arbitri). Thus, the judgment, reasoning and rationale in TDM is confined to stating that two Indian Parties cannot have an arbitration where Indian substantive law does not apply. In other words, if two Indian parties were allowed to contract out of the substantive laws of India, that would be contrary to the public policy of India. Thus, in conclusion, TDM does not prohibit two Indian parties to have an arbitration which is foreign seated, the lex arbitri is a foreign law, as long as the substantive law applicable between the parties is Indian law.
In both Sasan and Addhar, the arbitration clauses reflect that the parties intended that both, the lex arbitri and the substantive law will be foreign laws (and not Indian laws). The prohibition in TDM, would only apply if the substantive law is a foreign law. Thus, in both Sasan and Addhar, TDM played a role. However, the arguments raised in making TDM applicable to the lex arbitri were irrelevant.
The reasoning in Sasan points to the conclusion that the prohibition that TDM casts, only applies to Section 11 applications and nothing more, and for cases which are not under Section 11, two Indian parties could have an arbitration where the lex arbitri is foreign, the seat is foreign and the substantive law is also foreign.
It is thus possible to reconcile Sasan with Addhar. Since, Addhar was a Section 11 application, it came under the prohibition cast by TDM. In light of TDM, it can be said that the Bombay High Court was bound to decide that the substantive law could not be English Law and thus, the seat of arbitration could not be outside India. Thus, Sasan and Addhar are not contrary to each other.
In conclusion, the position of law as clarified by Sasan and Addhar is as follows:
- General Rule: Foreign seated arbitrations with a foreign lex arbitri and a foreign substantive law are permissible.
- Exception: Foreign seated arbitrations with a foreign lex arbitri are not permissible in a situation where a Court is faced with a Section 11 application and the substantive law is not Indian.
First Appeal No. 310/15, 11.09.15, High Court of Madhya Pradesh at Jabalpur.
Arbitration Application 197/14 along with Arbitration Petition No. 910/13, 12.06.15, High Court of Judicature at Bombay.
TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd., (2008)14 SCC 271
Atlas Exports Industries v. Kotak & Company, (1997) 7 SCC 61.
TDM, Supra note 3 at para 20.