Below is a guest post from Ritwik Bhattacharya. Ritwik is a IV year student at NLSIU, Bangalore. He has an avid interest in arbitration law, international law and competition law.
In 2015, the Bombay High Court and the Madhya Pradesh High Court gave seemingly contradictory answers to the question - whether two Indian parties could choose to conduct arbitration in a foreign seat under a foreign governing law? The Bombay High Court decision seemed to answer the question in the negative, relying on the Supreme Court’s pronouncement in TDM Infrastructure (P) Ltd. v. UE Development India (P) Limited [“TDM”]. In contrast, the Madhya Pradesh High Court decision allowed parties to arbitrate in a foreign seat under foreign law, relying on the Supreme Court’s decision in Atlas Exports Industries v. Kotak & Company [“Atlas”]. The researcher submits that the law as it stands today, allows Indian parties to conduct arbitration in a foreign seat under foreign law. The researcher shall first briefly summarise the position under the Arbitration and Conciliation Act, 1996 [“ACA”] as well as the decisions in Addhar and Sasan. Then, the researcher shall argue that Addhar and TDM have been misunderstood and in any event, TDM has no binding value on this point of law. Thereafter, the current position of law shall be examined.
Setting the stage
The ACA makes a distinction between international commercial arbitration [“ICA”] and non-international commercial arbitration [“NICA”], based upon the nationality or residence of the parties, as the case may be. Furthermore, the ACA also makes a distinction between domestic and foreign arbitrations, depending on whether the seat of arbitration is located in India. Part I, ACA applies only to domestic arbitrations, while Part II to foreign arbitrations. Part I also provides that in domestic arbitrations between Indian parties, the dispute shall be decided in accordance with Indian law.
In Addhar, two Indian parties had agreed to arbitrate under a clause, which read “Arbitration in India or Singapore and English law to be apply.” The Court was deciding upon an application for appointment of an arbitrator and petition for interim measures. The Court determined that the seat of arbitration could be India and Indian law would apply. In doing so, the Court stated that “both the parties are Indian and cannot derogate the Indian law”. This statement seems to suggest that Indian parties cannot arbitrate in a foreign seat under a foreign governing law.
In Sasan, two Indian parties had agreed to arbitrate in London under the governing law of England. A suit filed by the appellants was dismissed by the lower court, being barred under Section 45, ACA. Section 45, ACA mandates that a dispute be referred to arbitration if an arbitration agreement exists, unless the agreement in null and void, inoperative or incapable of being performed. In appeal, it was contended that the arbitration agreement was null, void and inoperative because two Indian parties cannot agree to arbitrate in a foreign country, and therefore, the bar under Section 45 does not apply. The Court held that two Indian parties could arbitrate in a foreign country under foreign law and thereby, affirmed the lower court’s decision.
A Tale of Misunderstood Decisions
The researcher humbly submits that Addhar has been misunderstood and does not state that Indian parties, in no circumstance, can arbitrate in a foreign country. This misunderstanding extends to TDM, which was extensively relied on by Addhar and is erroneously considered the primary authority in support of this proposition.
In Addhar, the respondent had argued that since Section 28(1)(a), ACA does not permit Indian parties to arbitrate under foreign law, the part of the arbitration clause that permitted arbitration in India with the application of English law was void. Therefore, it argued that the arbitration clause should be read to restrict the place of arbitration to only Singapore and not India. According to Dhanuka J., since the clause permitted arbitration in both India and Singapore and the arbitration had been initiated in India, the arbitration had to be conducted in India. Thereafter, he stated that under Section 28(1)(a) of the Act, the law applicable would be Indian law. The confusion stems from the fact that while Dhanuka J. wanted to give effect to the intention to arbitrate and continue arbitration in India, he has not explained the manner in which he reached his decision. One explanation could be that he partially severed the arbitration clause to read that when arbitration is seated in India, the clause about English law applying is severed and when arbitration is seated in Singapore, English law would apply. Another explanation could be that he interpreted the arbitration clause to comply with the Act, by inserting a comma after “India”, such that the latter part about the governing law being English law would only apply when arbitration was in Singapore. In either case, it is clear that Dhanuka J. did not state that Indian parties can never arbitrate in a foreign country under foreign law. In fact, Dhanuka J. expressly recognized that “if the seat of the arbitration would have been at Singapore, certainly English law will have to be applied.”
In TDM, the Supreme Court was concerned with a petition under Section 11, the Act, seeking appointment of an arbitrator. The only question before the Court was whether this was an international commercial arbitration or not, since the manner of appointment would differ accordingly. Having determined this to be a non-international commercial arbitration, the Court made the following controversial remark – “The intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law.”However, this remark was made in the context of Section 28(1)(a), Part I, ACA , which the Court itself recognized would only apply to arbitrations seated in India. Therefore, the Court has not provided a similar prohibition in case of foreign arbitrations. The confusion about TDM has been exacerbated by Sasan, which instead of clarifying that TDM does not support the appellant’s contentions, sought to limit the applicability of the judgement and instead, placed reliance on Atlas.
Therefore, neither Addhar nor TDM actually support the prohibition on Indian parties from arbitrating in a foreign country under foreign law. The only prohibition is that if Indian parties seek to arbitrate in India, the law applicable would be Indian law by virtue of Section 28(1)(a), ACA.
Binding value of TDM
Even if it is assumed that TDM prohibits Indian parties from arbitrating in foreign country under foreign law, the binding value of TDM on this point of law is suspect for two reasons – first, the controversial statement was in the nature of an obiter dictum and second, TDM, being a decision on a Section 11 application, would not carry precedential value.
It is trite law that only the ratio decidendi i.e., the principle upon which the case is decided is binding, and not casual remarks, which are passed for as obiter dicta. In TDM, the primary question before the Court was who should appoint the arbitrator, which would differ depending on whether it was an ICA or NICA. Therefore, the principle upon which the case was decided concerned the nationality of a party, in order to determine the nature of arbitration. The controversial remark was therefore in the nature of an obiter and would not be binding. This aspect of the TDM judgement has been considered in Sasan, where the Court decided that TDM would have very limited applicability in the dispute before it.
Further, the Supreme Court has clarified that the decision in a Section 11 application, being the decision of the Chief Justice, and not the High Court or Supreme Court, would have no precedential value. Since TDM concerned an application to appoint an arbitrator under Section 11, it cannot serve as a precedent for this controversial position of law.
The Position of Law
Since neither Addhar nor TDM answer the question posed above and in the alternative, TDM is not binding on this point of law, the appropriate precedent to apply in such a situation would be Atlas.
In Atlas, two Indian parties had agreed to London as the seat of arbitration, with Indian law governing the contract. At the stage of enforcement of the award, the appellant contended that the award was opposed to public policy under Section 23, Contract Act and restricted enforcement of rights under Section 28, Contract Act. A two judge bench of the Supreme Court considered that the case falls within the exception under Section 28, Contract Act and mere presence of arbitrators in a foreign country does not nullify the arbitration agreement. Thus, although the ground of public policy was not specifically discussed, the Court has implicitly accepted that public policy does not prevent Indian parties from arbitrating in a foreign country.
Although Atlas was decided under the 1940 Act, the Supreme Court has clarified that cases under the 1940 Act would continue to be relevant under the 1996 Act as well. Further, in Union of India v. Reliance Industries, the position of law as stated in Atlas was implicitly affirmed. In that case, two Indian parties had agreed to arbitrate in London with governing law being English law. The Court had to decide whether a Section 14 application could be made in such a case. Answering this question in the negative, the Court held that Part I of the Arbitration Act (which includes Section 14 and 28) would not apply to foreign-seated arbitrations and thereby, implicitly affirmed that Indian parties could deviate from Indian law, if the arbitration was seated abroad.
The researcher concludes that the correct position of law is that Indian parties can arbitrate in a foreign seat under foreign governing law. In light of the uncertainty caused by contrary interpretations of Addhar and TDM, it is imperative that the Supreme Court clarify the position of law on this matter.