14 November, 2015
The Bombay High Court Order Holding that Arbitration to be Conducted in India if Both Parties are Indian
In an application for appointment of an arbitrator, a single Judge bench of the Bombay High Court, in Addhar Merchantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd.,15 upheld an arbitration clause that permitted two Indian parties to conduct arbitration either in India or Singapore. However, Bombay High Court also opined that, if both parties are Indian, they cannot derogate from Indian law, and therefore the arbitration has to be conducted in India.
The arbitration clause contained in the contract between the parties, read as under:
‘23. Arbitration in India or Singapore and English law to be apply’
The applicant had issued notice to the Respondent to appoint an arbitrator. Upon failure of the Respondent to appoint any arbitrator, the application in question for appointment was filed before Bombay High Court.
The Respondent opposed the Application inter alia on the grounds that the parties are gov- erned by English Law and the seat of the arbitration will have to be Singapore. In response to this, the applicant relied on the judgment of Supreme Court in case of TDM Infrastructure Pri- vate Limited v. UE Development India Private Limited,16 (‘TDM Infrastructure’) wherein Su- preme Court had inter alia held that when both the parties were Indian nationals and habitual residents of India, the parties cannot derogate from Indian Law.
In the present case, Bombay High Court, relying on the reasoning given in TDM Infrastruc- ture, held that the since both parties are Indian and situated in Mumbai, they cannot derogate from Indian Law, and hence proceeded to appoint an Arbitrator in accordance with Section 11(6) of the Arbitration Act, 1996.
It is noteworthy, however, that the judgment was given in context of an arbitration clause that did not clearly spell out the parties intent as to what would be the law governing the sub- stantive contract and the arbitration. Further, the clause did provide India as a place of arbitra- tion, which could have been a relevant factor in causing the Court to ultimately hold that the arbitration will have to be conducted in India. While the Court held that the arbitration in the present case will have to be conducted in India, in paragraph 8 of the judgment, Bombay High Court has observed that ‘If the seat of the arbitration would have been at Singapore, certainly English law will have to be applied’.
Having regard to these facts, the judgment does not appear to be conclusive on whether two Indian parties can choose a seat of arbitration outside India. Further, Bombay High Court has not adjudicated on the question of validity of the arbitration clause, had the parties in the present case chosen only Singapore as the seat of arbitration.
The Madhya Pradesh High Court Holds that, Even if Both Parties are Indian, Parties Can Choose a Seat of Arbitration Outside India.
Taking a contrary view from the decision of the Bombay High Court in Addhar Mercantile Private Limited v. Shee Jagdamba Agrico Exports Pvt. Ltd. the Madhya Pradesh High Court has held in Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd.,17 that it is per- missible for two Indian companies to agree to arbitrate in a foreign country under the Arbitra- tion and Conciliation Act, 1996 (‘Act’). While dismissing an appeal from a judgment in a suit, a two judge bench of the Jabalpur seat of the Madhya Pradesh High Court has upheld an arbitra- tion agreement where the parties, both Indian, had agreed to submit all disputes between them to the International Chamber of Commerce (‘ICC’) seated in London, England.
Both the parties to these proceedings are companies incorporated in India. The appellant company is a wholly owned subsidiary of Reliance Power Ltd., and the respondent company is an Indian subsidiary of North America Coal Corporation (‘NACC’), a company incorporated in the United States of America. A contract for mine development and operation was executed between appellant company and NACC (‘Agreement’). The Agreement contained an arbitration clause, under which parties had agreed to English Law as the governing law of contract. Further, all claims, disputes and controversies involving the appellant company and NACC, arising out of, or in connection with, the Agreement, were to be resolved by final and binding arbitration to be administered by ICC, the seat being London, England. Subsequently, under an assignment agreement, NACC assigned all its rights, liabilities and obligations under the Agreement to the respondent company.
Certain disputes arose under the Agreement and respondent company filed a request for arbitration (‘RFA’) with ICC. Appellant company filed a civil suit in the District Court in Sin- grauli, Madhya Pradesh, seeking an injunction against the arbitration initiated by respondent company before ICC. Respondent Company filed an application for dismissal of suit and refer- ring parties to arbitration, on the basis of the arbitration clause in the Agreement. The District Court dismissed the suit on respondent company’s application. The District Court’s judgment was appealed by the appellant company before the Madhya Pradesh High Court.
The appellant company contended that since the appellant company and respondent com- pany are both incorporated in India, it is impermissible for them to arbitrate out of India. The High Court rejected this contention by relying on two judgments of the Indian Supreme Court – Atlas Exports Industries v. Kotak & Co.18 (‘Atlas Exports’) and Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. 19 (‘Fuerst Day’). In Atlas Exports, the Supreme Court had held under the old (Indian) Arbitration Act, 1940 (‘Old Act’) that merely because two Indian parties had cho- sen to arbitrate out of India, the arbitration agreement is not nullified. The High Court held that the decision in Atlas Exports should apply to the present case, regardless of the fact that Atlas Exports was a decision under the Old Act. The High Court relied upon the Supreme Court’s decision in Fuerst Day to say that there is not much difference between the provisions of the Old Act and Act, and therefore the decision in Atlas Exports will apply to arbitrations under the Act. On this basis, the High Court held that the arbitration clause under the Agreement was valid.
Indian Courts have held that the law of arbitration will be that of the seat of arbitration, unless a contrary intention is apparent from the contract. Since the governing law in the Agree- ment is English Law, effect of the High Court’s decision appears to be to virtually exclude ap- plicability of Indian Law to a dispute that is between two Indian parties. It is uncertain if the Supreme Court would agree with the manner in which the High Court has interpreted Fuerst Day and Atlas Exports, should the appellant choose to challenge this decision.
Supreme Court holds that Where the Seat of the Arbitration is outside India, Part I of the (Indian) Arbitration & Conciliation Act, 1996, would be Excluded by Necessary Implication
Supreme Court has, in its judgment dated September 22, 2015 in Union of India v. Reliance Industries Limited & Ors.20, clarified the position regarding applicability of Part I of the (In- dian) Arbitration & Conciliation Act, 1996 (‘Arbitration Act’), to agreements executed prior to the judgment in Bharat Aluminium Company Ltd. v. Kaiser Aluminium Technical Services, Inc.21, (‘BALCO’), where the seat of arbitration is outside India. In BALCO, Supreme Court had held that Part I of the Arbitration Act only applies to arbitrations that have their place/seat in India. Even though the BALCO decision was made applicable prospectively i.e. to agreements ex- ecuted after pronouncement of the BALCO decision, Supreme Court upheld several of its judg- ments, where it has held that Part I of the Arbitration Act is excluded by necessary implication when it is found, on the facts of the case, that either the juridical seat of the arbitration is outside India or the law governing the arbitration agreement is a law other than Indian law.
Reliance Industries Ltd (‘RIL’), the Union of India (‘UoI’), Enron Oil and Gas Limited (‘En- ron’) and Oil and Natural Gas Corporation Ltd (‘ONGC’) entered into two Production Sharing Agreements (‘PSC’) in 2000, for the exploration of certain oil fields. Enron was subsequently substituted in the PSC with BG Exploration and Production India Limited (‘BG’). The arbitra- tion clause provided for London as the venue of the arbitration and the laws of England as the governing law. Certain disputes arose between the UoI and RIL in 2010, and the UoI invoked the arbitration clause in the PSC. RIL, UOI and BG subsequently agreed to change the seat of arbi- tration to London, England and a final partial consent award was made and duly signed by the parties to this effect.
Following certain disputes under the PSC, UoI initiated arbitration proceedings in London, England. The arbitral tribunal passed a final partial award on September 12, 2012, which was challenged by UoI in India under Part I of the Arbitration Act. The legality of the challenge was ultimately decided upon by Supreme Court, in a detailed judgment dated May 28, 2014 (‘May 28 Order’), where Supreme Court held that the provisions of Part I of the Arbitration Act, were necessarily excluded, being wholly inconsistent with the arbitration agreement between the parties (which provides that the arbitration agreement is governed by English law) and since the parties had agreed that the juridical seat of arbitration is London.
Subsequently, the UoI again moved the Delhi High Court in India under Part I of the Arbi- tration Act, seeking termination of the mandate of one of the arbitrators. The Delhi High Court, by an order dated July 3, 2014 (‘Impugned Order’), dismissed the petition on the ground that Supreme Court had by its May 28 Order held that Part I of the Arbitration Act is not applicable to the present arbitration agreement. The UoI preferred a special leave petition against the Im- pugned Order, which was decided in the present decision of Supreme Court, dated September 22, 2015.
The UoI argued that since the arbitration agreement contained in the PSC is prior to the date of pronouncement of Supreme Court’s decision in BALCO, the judgment of Supreme Court in Bhatia International v. Bulk Trading S.A. & Anr.22, (‘Bhatia’) would govern, and conse- quently Part I of the Arbitration Act, 1996 would be applicable. The Bhatia decision held that unless expressly or impliedly excluded in an arbitration agreement, Part I of the Arbitration Act also applies to arbitrations seated out of India.
Supreme Court rejected UOI’s argument on the basis that even upon interpretation of the Bhatia decision, Part I of the Arbitration Act is excluded by necessary implication when it is found, on the facts of the case, that either the juridical seat of the arbitration is outside India or the law governing the arbitration agreement is a law other than Indian law. In the present case, since Supreme Court had already determined, in the May 28 Order, that (i) the juridical seat of the arbitration is at London; and (ii) since the arbitration agreement is governed by English law, it was not open to the Union of India to argue that Part I of the Arbitration Act would be applicable.
The law post BALCO is clear on the point that with respect to agreements executed post BALCO, Part I of the Arbitration Act will only apply if the seat of Arbitration is India, notwith- standing contractual terms to the contrary. Therefore, the present judgment may not have a substantial impact on the issues that come up at the time of drafting of arbitration agreements. However, along with the May 28 Order and a similar decision of Supreme Court in Harmony Innovation Shipping Ltd. v. Gupta Coal India Ltd. & Anr.23, it comprehensively settles the po- sition in India on interpreting the law governing arbitration agreements executed prior to BAL- CO, where the seat of arbitration is outside India.
15 Arbitration Application No. 197 of 2014 along with Arbitration Petition No. 910 of 213
16 2008(8) SCALE 576: (2008) 14 SCC 271
17 First Appeal No : 310 of 2015
18 (1999) 7 SCC 61
19 (2011) 8 SCC 333
20 SLP (Civil) No. 11396 of 2015
21 (2012) 9 SCC
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
