Guest Post: To be or not to be… Two Indian Parties having a Foreign Seat of Arbitration: Supreme Court’s Verdict on Sasan Power

(The following guest post is contributed by Gunjan Chhabra[1]and RV Prabhat[2])


The
much debated issue of whether two Indian parties can opt for a foreign seat of
arbitration finally, came up before the Supreme Court in Sasan Power Limited v. North
American Coal Corporation[3]
.
However, the Supreme Court dodged the bullet and chose to decide whether
the parties were in fact two Indian parties or not.

Very
recently, a Division Bench of the Madhya Pradesh High Court had ventured into
the unknown and broken new boundaries by holding that two Indian parties could
have a foreign seat of Arbitration in its Judgment of Sasan Power Limited v. North
American Coal Corporation India Pvt. Ltd.[4]

The Appeal has arisen under Section 96 of the Code of Civil Procedure, 1908
challenging an Order passed by District Judge, in a Suit filed by Sasan Power.
The North American Coal Corporation India Pvt. Ltd. (NACC-India) had filed an
application under Order VII Rule 11, objecting under Section 45 of the
Arbitration and Conciliation Act, 1996 (Hereinafter called the Act), which had
been accepted by the District Judge, resulting in the impugned order which was
a subject matter of the challenge.

The
original agreement (Agreement I) had been entered into between North American
Coal Corporation (NACC-US) and Sasan Power. Thereafter vide a separate
agreement, the NACC-US had assigned all its rights and obligations under
Agreement I to NACC-India and Sasan Power was also a party to this Agreement
(Agreement-II). Agreement I specifically provided for the seat of Arbitration
to be London. Thereafter Arbitration was invoked under Agreement I as per ICC
rules.

Subsequently,
Sasan Power filed a suit in District Court Sangrur seeking a stay on the
Arbitration. One of the prayers in the suit was also to declare the arbitration
clause and the accompanying request for arbitration as being void and
unenforceable. The NACC-India thereafter filed its objections under Section 45
of the Act, which were allowed by the District Judge, against which the Appeal
lay to the High Court.

The
Sasan
Power HC judgment
categorically notes the submission of Senior Counsel
on behalf of Sasan Power, that once NACC-India has stepped into the shoes of
NACC-US, the contract in question becomes one between two Indian Parties, ie.
NACC-India and Sasan Power and it was on that basis that the objections of
NACC-India under Section 45 were opposed. The Sasan Power HC Judgment particularly
notes Sasan Power’s submission, that section 45 would not be applicable in as
much as the arbitration could not be a foreign seated arbitration owing to the
two Indian parties involved, ie. NACC-India and Sasan Power. As a result of
these submissions, the judgment then goes on to discuss whether two Indian
Parties can have a foreign seat of Arbitration or not and gives a verdict in
the affirmative.

The
Madhya Pradesh High Court discusses two different approaches under the scheme
of Act:-
  1. Party-Centric
    Approach – Where the Nationality of the Party is relevant. This would help to
    determine whether the Arbitration is International Commercial Arbitration or a
    domestic Arbitration and is only relevant to determine the procedure of
    appointment to be adopted under Section 11 of the Act. This approach cannot
    help to determine whether Part I or Part II of the Act applies.
  2. Seat-Centric Approach – Where the seat opted by the parties is relevant. This is the approach relevant under the Scheme of the Act for determining whether Part I or Part II of the Act applies. In other words, the determination whether the award is a foreign award or a domestic award can be determined only by the Seat and not the Nationality of the Parties.

On
the basis of the above analysis, the Madhya Pradesh High Court had arrived at
the conclusion that the scheme of the Act very much provided for a Foreign Seat
to be opted without having regard to the nationality of the Parties which meant
that it was permissible under the Act for two Indian Parties to opt for a
Foreign Seat of Arbitration.

Prior
to the Sasan Power HC judgment, this issue was touched upon in TDM
Infrastructure
[5],
where the Supreme Court had held that it would not be open to two Indian
Parties to derogate from the laws of India as being against Public Policy. The
High Court however, distinguished TDM Infrastructure as being limited
in its application to only issues relating to appointment of arbitrator. TDM
infrastructure
, it said, had only to see whether the arbitration in
issue was an international commercial arbitration or not and thus to see
whether 11(6) would apply or not. This court did not succinctly rule upon the
issue of whether two Indian parties could opt for a foreign seat or not and
thus TDM
Infrastructure
was said to be inapplicable. The Madhya Pradesh High Court
further used the interpretation of Atlas Exports[6]
and BALCO[7] to hold that as long as two Indian
parties do not exclude the substantive law of the contract by agreement, they
are very much free to opt for a foreign Seat.

The
Sasan
Power HC Judgment
was the subject matter of Appeal before the Supreme
Court which was finally decided on 24.08.2016. However, surprisingly, the issue
of two Indian Parties electing for a Foreign Seat of Arbitration was expressly
given up and as a matter of fact the Supreme Court even noted that such a
submission was infact never made before the High Court and “Question no. 1 insofar as it pertains to” place of arbitration” found
its way into the written submission(before the Supreme Court) by oversight”.

After
having expressly refused to deal with the issue of Two Indian Parties electing
for a Foreign Seat, the Supreme Court confined itself to the question of
whether Two Indian Parties can enter into an agreement with a stipulation that
their Agreement be governed by and construed in accordance with laws of UK.

The
Supreme Court then went on to discuss, how the disputes and the agreement were
in fact never between two Indian Parties but between three parties, ie.
NACC-US, NACC-India as well as Sasan Power, because NACC-US, even though it had
assigned its rights and obligations could not have assigned its liabilities
under Agreement-I. The Supreme Court finally went on to observe that in order
to settle disputes under Agreement II, Agreement I will have to be looked into
and thus the question of Two Indian Parties” does not arise at all in as much
as the foreign element of NACC-US is also present, thereby falling within the
gamut of Section 2(1)(f) of the Act.

In
view of the above discussion, the Supreme Court concludes that the conclusion
arrived at by the High Court, deserves no interference and upholds the order of
the High Court.

Does the Madhya Pradesh High Court’s verdict hold
good?
A
doubt may arise, as to whether MP High Court’s observations in the Sasan
Power HC Judgment
regarding permissibility of two Indian Parties to opt
for a foreign seat still holds good or not. This is because the Supreme Court
has not dealt with this particular finding of the Madhya Pradesh High Court
(neither rejects it nor accepts it), simply saying that the question never
arose in the first place.
In
this respect, the ‘Doctrine of Merger’ would
squarely apply. The Apex Court, in a
catena of decisions has defined the ‘Doctrine
of Merger’,
to mean that when a decree or
order passed by inferior court, tribunal or authority was subjected to a remedy
available under the law before a superior forum then, though the decree or
order under challenge continues to be effective and binding, nevertheless its
finality is put in jeopardy. Once the superior court has disposed of the lis
before it, either way – whether the decree or order under appeal is set aside
or modified or simply confirmed, it is the decree or order of the superior
court, tribunal or authority which is the final, binding and operative decree
or order wherein merges the decree or order passed by the court, tribunal or
the authority below.
[8]

Applying
the ‘Doctrine of Merger’ to the
present scenario, only the Supreme Court’s judgment survives. This implies that
the Sasan
Power HC judgment
cannot be relied upon as a precedent on the issue of whether
two Indian parties can agree for a foreign seated arbitration as the question
is left unresolved by the Apex Court..

Bombay High Court’s decision – the unchallenged
champion?
Another
judgment of the single judge of Bombay High Court in Addhar Mercantile Private Limited
v. Shree Jagdamba Agrico Exports Pvt. Ltd[9].

, relying on the judgment of TDM Infrastructure, had ruled that
since both parties are Indian, they cannot derogate from the Indian Law and a
seat of Arbitration outside India would not be permitted. A valid question
which arises now is since the Addhar Mercantile judgment has not
been challenged, does it have any precedential value.

Unfortunately,
the Addhar
Mercantile
judgment suffers from the same vice as that of TDM
Infrastructure
and that is of being a judgment pronounced under an
Application under Section 11 of the Act. Even though a simultaneous petition
under Section 9 was also being considered by the Court, the Bombay High Court
specifically notes that no views were being expressed on the Section 9 Petition
and the same would simply be converted into a Petition under Section 17 to be
heard by the Arbitrator.

Under
the unamended Act[10],
since the authority of the “Chief Justice
or his designate”
under Section 11 is not considered a Court of Record, the
decisions given by the Court are of no precedential value[11].
In view of the same, even the Addhar Mercantile judgment cannot
provide a solution.

Denouement
It
appears as of now, there is no stand of Indian Courts on the issue of whether
two Indian Parties can elect for a foreign Seat of Arbitration. Even the
Supreme Court, when faced with the issue has chosen to deflect from the
subject. As of today, the question still remains shrouded as a conundrum left
to be resolved for another day.

[1] Gunjan
Chhabra is an Advocate practicing in various Courts in Delhi. She is currently
working with Singhania and Partners, LLP and can be reached at gunjanchhabra89@gmail.com
[2] RV Prabhat
is an Advocate practicing in various Courts in Delhi. He is currently working
with Singhania and Partners, LLP and can be reached at rvprabhat9@gmail.com
[3] Civil
Appeal no. 8299 of 2016, Supreme Court of India, decided on 24.08.2016

(Hereinafter referred as “Sasan Power SC Judgment)
[4] First
Appeal No. 310 of 2015, MP High Court, decided on 11.09.2015
(Hereinafter
referred as “Sasan Power HC Judgment”
[10] Prior to the Arbitration and Conciliation (Amendment) Act, 2015,
the function of Appointment of Arbitrator was entrusted to the Chief Justice of
Supreme Court/High Court or his designate. The Amendment has now inserted the
words “Supreme Court of India” in place of “Chief Justice of India” and the “High
Court” instead of “Chief Justice of the High Court”.
[11] State
of West Bengal & Ors v. Associated Contractors
(Civil
Appeal No. 6691 of 2005 and 4808 of 2013), Supreme Court of India, decided on 10.09.2014

About the author

V. Niranjan

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