Recently, during a discussion with few friends, a point came up whether two Indian parties can have arbitration seated outside India. This post is to put things in perspective as to how law stands as of today.
In TDM Infrastructure Private Limited vs. UE Development India Private Limited, the court had in clear terms held 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.” Thus, two Indian parties cannot use law of a different country so as to bypass the Indian law.
The ratio of the court was that "When both the companies are incorporated in India, and have been domiciled in India, the arbitration agreement entered into by and between them would not be an international commercial arbitration agreement." Doing so would mean going against the public policy of the nation.
NTPCv Singer also stated that the choice of law could be invalidated if it was against the public policy. The judgment stated that: “The concept of party autonomy in international contracts is respected by all systems of law so far as it is not incompatible with (...) any overriding public policy.”
Even the revolutionary BALCO judgment has not changed this position of law where it was in fact discussed in a detailed manner by the counsel and it was also taken into account by the bench that:
“In other words, two Indian parties involved in a purely domestic dispute cannot contractually agree to denude the Courts of this country of their jurisdictions with respect to a legal dispute arising between them in India.”
“…when both the parties are Indian, the substantive law governing the dispute must necessarily be Indian irrespective of the situs of the arbitration and irrespective of any provision in the contract between the parties to the contrary….the same principle applies with equal force to the arbitration law too, that is to say, that if it is not open to two Indian parties with regard to an entirely domestic dispute to derogate from the Indian laws of contract, evidence etc., it is equally not open to them derogate from the Indian arbitrational law either.” Reliance has been placed on TDM Infrastructure.
Only in the following two ways can this stance be changed now:
1) A new case on this point is decided by the SC, or 2) an explanation is introduced in the Act through an amendment.