Whether two Indian parties can derogate from domestic law in the context of arbitration

[The following guest post is contributed by Abhik Chakraborty, Fourth Year, NUJS,
Kolkata]
In September 2015, the Madhya Pradesh High Court in Sasan Power Ltd. v North American Coal
Corporation
held
that two Indian parties can opt out of domestic law in the context of
arbitration. On the contrary, in June 2015, the Bombay High Court in Adhar Mercantile Pvt. Ltd. v Shree Jagdamb,[1]
followed the Supreme Court of India’s decision in the
TDM Infrastructure and held that if the Indian parties choose foreign law,
then, it would be opposed to public policy. In both these decisions, the
parties had designated a country other than India as the seat of arbitration,
thus, by implication as per the
Balco
decision
, adopting the curial
law of that other country. These two judgments have brought to the fore an
undecided issue regarding whether two Indian parties can choose to derogate
from domestic law (both curial and substantive) if the seat is outside India.
In this post, I will argue that, despite the Supreme Court’s decision in TDM Infrastructure, there is no such bar
on Indian parties to deviate from domestic law if they decide to arbitrate
abroad.
As far as the seat being in India is concerned, it is clear
from the wording of Section 28(1)(a) of the Arbitration Act, 1996 (“the Act”)
that no derogation from substantive law can take place. Before I get to my
arguments, let me throw some light on the TDM
Infrastructure
case. Here, both the parties were companies registered in
India; however, one of the companies was being managed and controlled from
Malaysia. An application was filed before the designate of the Chief Justice as
per Section 11 of the Act to appoint an arbitrator. The primary issue which the
Court had to decide was whether the arbitration was an international commercial
arbitration or a domestic arbitration. If it was the latter, then, the correct
authority to file this application would be the Chief Justice of the concerned
High Court or his nominee. The Court eventually held that it was indeed a
domestic arbitration and that it did not have jurisdiction to hear this
application.
Additionally, the Court observed in paragraph 20 that Section
28 of the Act showed that if two Indian nationals derogate from provisions of
domestic law, then, it would be opposed to public policy. It is this part of
the judgment that the Bombay High Court used to justify its holding that two
Indian parties cannot chose a foreign seat. My first argument is that this
observation of the Supreme Court in TDM Infrastructure
was made as a passing reference and was part of obiter dictum. The ratio of
the judgment was with respect to what constituted an international commercial
arbitration.
At this juncture, I would like to bring to attention of
readers to a three judge bench decision of the Supreme Court in
State of West Bengal v
Associated Contractors
. The
Court held that the judgments decided as per Section 11 would not have
precedential value as it is not a decision rendered by a Court of record. This
was on the basis of the fact that the provision gave power to the “Chief
Justice” or “his designate” to appoint arbitrators as opposed to “Court”. An
argument could have been made to the effect that the TDM Infrastructure case, thus, was not binding as it was a Section
11 application. However, post the promulgation of the
Arbitration
Ordinance in October 2015
,[2]
the legislation has changed this stance and given the power to “Court” to
appoint arbitrator. I am not going to debate on the merits of this change of
wording of Section 11 in this post, but this change may have diluted the ratio
of Associated Contractors.
My second argument is that the single bench decision in the TDM Infrastructure case is not binding
in light of a division bench judgment of the Supreme Court in
Atlas Exports v Kotak Company. In this case, the Indian parties had chosen the
seat of arbitration as London, thereby, excluding foreign law. The Madhya
Pradesh High Court, in Sasan Power, relied
on this decision to hold that arbitration between Indian parties can be administered
by the International Chamber of Commerce (ICC).  The seat was designated as London and the
parties had also chosen the law of United Kingdom to govern the contract. If
there is any conflict between the rules of the ICC and the law of the seat i.e.
England, then, the latter will prevail. Moreover, the Courts of England would supervise
the arbitration. One may contend that since the Atlas Exports case is based on the Arbitration Act, 1940, it would
not apply in the present circumstances. However, in
Fuerst Day Lawson Ltd. v Jindal Exports, it has been held that cases decided in the
context of the 1940 Act can be used for the purpose of interpreting the 1996
Act.
Nevertheless, I have to add a qualifier and state that in Atlas Exports, the Court did not
explicitly hold that it would not be opposed to public policy if two Indian
parties arbitrate abroad. In this case, the Court refused to entertain this
plea at the enforcement stage as the parties had willingly arbitrated and the
award had already been passed. However, the impression this judgment gives is
that it is not necessary for Indian parties to apply domestic laws if the
arbitration is seated outside India. Moreover, a recent division bench judgment
of the Supreme Court, in
Reliance Industries v Union of India based on the 1996 Act, also allowed the Indian
parties to deviate from domestic curial law by choosing to arbitrate in London.
My third argument is that TDM Infrastructure’s observation in paragraph 20 based on Section
28 of the Act, even if it is considered binding, has to be restricted to
arbitrations seated in India. Section 28(1) of the Act provides that “where the
seat of arbitration is India”, two Indian parties cannot derogate from
substantive Indian law. Thus, one can certainly infer that it is not necessary
for Indian parties to stick to substantive Indian law if the seat of
arbitration is outside India.
The Constitution bench decision in Balco has interpreted this provision in the following manner.
“The section merely shows that the legislature has
segregated the domestic and international arbitration. Therefore, to suit
India, conflict of law rules have been suitably modified, where the arbitration
is in India. This will not apply where the seat is outside India. In that
event, the conflict of laws rules of the country in which the arbitration takes
place would have to be applied.”
Furthermore, as per the same judgment, Part I of the Act (Indian
curial law) will not apply to any arbitration seated outside India and Section
28 falls within Part I. Thus, the application of Indian curial law to parties
only depends on the place of arbitration and not on the nationality of the
parties. Therefore, according to me, the TDM
Infrastructure’s
observation should only be restricted to arbitrations
seated in India.
I hope the three arguments that I have advanced in this post
help to explain why it is not a bar for Indian parties to choose non-domestic
curial and substantive law provided the arbitration is seated outside India. Arbitration
is a private process and the parties should indeed have the right to choose the
law that they desire to be bound by. The Indian Supreme Court, of late, in
decisions such as
Chatterjee International v Haldia
Petrochemcials
has
also commented that the Courts should always strive to give effect to the free
will of the parties to arbitrate.
However, public policy considerations are indeed legitimate
and my interpretation of this issue can potentially allow Indian nationals to
arbitrate on subject matters that may not be arbitrable in India. In such
cases, Indian courts may refuse enforcement of such awards on grounds of
violation of public policy.
I have to admit that there no unequivocal judgment of the
Supreme Court settling this issue. Such a decision is eagerly awaited in this
regard as a lot Indian corporations have a global personality and there has
been a recent trend to choose foreign law in the context of arbitration.
– Abhik Chakraborty



[1] (Arbitration Application No 197 of 2014 along with Arbitration
Petition No 910 of 2013).
[2]
This has subsequently been enacted by Parliament in the form of the  Arbitration and Conciliation (Amendment) Act,
2015.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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