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 Balcodecision, 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.

Source: Corporate

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