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Indian parties opting for foreign law to govern their arbitration agreement

Updated: Sep 2, 2022


Sakshi Shairwal


International arbitration often invites the interaction of different systems of law with one another, which although enhances the quality and scope of arbitration agreements, but also creates confusion in terms of whether even the two will complement each other, which law will have an upper hand in case a conflict between the two arises, and the like. For instance, the parties to an arbitration agreement might decide upon choosing “X” law to govern their substantive contract entailing their rights and liabilities, and “Y” law governing the arbitration clause.

High courts across the country are playing an extremely imperative role in clearing the air around the ambiguity surrounding the legality and acceptability of two Indian parties choosing a foreign seat of arbitration, which has a significant bearing on the law that will govern the agreement.

The Gujarat High Court in the case of GE Power Conversion India Pvt. Ltd. v. PASL Wind Solutions Pvt. Ltd. (2017) explicitly ruled that two Indian parties to an arbitration agreement can, well within the provisions of the Arbitration and Conciliation Act, 1996 (“Act”), opt for a foreign seat. Referring to the same, the Delhi High Court in the case of Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company India Pvt. Ltd. (2020) ruled that two Indian parties to an arbitration agreement can also apply foreign law to their agreement, provided there exists a foreign element in the same.

Understanding The Judgment Delivered By The Delhi High Court

Dholi Spintex Pvt. Ltd. (the “Plaintiff”) had entered into a contract (high seas sale basis) with Louis Dreyfus Company India Pvt. Ltd. (the “Defendant”) for the supply of 600 metric tonnes of American imported raw cotton. Two essential clauses to be noted for the purpose of understanding the judgment are Clauses 6 and 7. While the former was about how the dispute was to be resolved in accordance with what has been laid down in International Cotton Association (“ICA”) rules and arbitration procedure, the latter explicitly mentioned that only the Courts of New Delhi would have the jurisdiction.

Eventually, a dispute ensued, and an influx of arguments followed the same.

The concerned judgment was delivered by Justice Mukta Gupta J, citing and relying upon a good number of precedents to reason with the judgment.

To begin with, she referred to the judgment of the Supreme Court by the name of Atlas Export Industries v. Kotak & Company (1999) and said that just because an agreement entails the point of resolving disputes through arbitration, does not mean that recourse to legal proceedings is completely off the case.

Citing the judgment delivered by the Gujarat High Court in the case of GE Power Conversion India Pvt. Ltd. v. PASL Wind Solutions Pvt. Ltd (2017), it was established that “two Indians can agree to a foreign seated arbitration.”

Again, referring to the Apex Court’s decision in the case of Reliance Industries and another v. Union of India, (2014), it was pointed out that the presence of a foreign element in an arbitration agreement (the high seas sale agreement, in this case)allows for three different sets of laws to be, well within the realm of legality, be applied –

1. Proper law of the contract – the one that governs the substantive contract containing the rights and liabilities.

2. Proper law of the Arbitration Agreement (Lex Arbitri) – the law of the place where the arbitration is to take place.

3. Proper law of the conduct of Arbitration (Curial Law) – the law governing the procedure of the arbitration.

One of the arguments advanced by Plaintiff was how the non-application of Indian laws was violative of Section 23 of the Indian Contract Act, 1872, and Public Policy under Section 48 of the Act. Refuting the same, Justice J reasoned by saying that an arbitration agreement is an independent one, and thus, can have a proper law of its own which is different from the one governing the substantive contract.

Coming to the point of public policy being violated, by virtue of the Arbitration and Conciliation (Amendment) Act, 2015, only the following may amount to a violation of Public Policy –

1. It is violative of the fundamental policy of Indian law

2. In conflict with the most basic notions of justice or morality

3. The award rendered had a flavor of fraud or corruption or is in violation of Sections 75 and 81 of the Act.

Hence, it was not violative of either of the acts.

Again, citing the following two judgments rendered by the Apex Court in BGS SGS Soma JV v. NHPC (2019) and Mankastu Impex (P) Ltd. v. Airvisual Ltd. (2020), Justice J held that by virtue of the fact that the parties had agreed to conduct the arbitration through International Cotton Association, they had agreed that London would be the chosen seat of arbitration. The said fact remains intact despite the mentioning of the word “venue” in Clause 6, and Clause 7 which stipulates the substantive law of the contract as the Indian Laws, and that the courts of New Delhi have exclusive jurisdiction over the dispute. Furthermore, Clause 7 would be applied only when the parties would have decided to resolve their disputes through courts instead of by way of arbitration.

Lastly, the defendant had requested for the dismissal of the suit as it was not maintainable under Section 45 of the Act (power of judicial authority to refer parties to arbitration). Justice J pinning her hopes on the judgments of Sasan Power Limited v. North American Coal Corporation India Private Limited (2015), rendered by the Supreme Court and W.P.I.L Vs. NTPC Ltd. and Ors. (2009), rendered by the Delhi High Court, concluded that the interference of the courts is limited to the extent of them determining whether there exists a valid agreement between the parties, and since there existed one, on a prima facie perusal, the court held that it was valid, and not null, void, or inoperative or incapable of being performed.

The judgment not only sets another pro-arbitration precedent in motion but is also advocative of how the adversarial courts are giving arbitration, a means of alternative dispute resolution, the stature that it deserves by showing a minimal amount of interference and discretionary power.

However, it is equally important to note that the decisions rendered by the High Court only have a persuasive value, and the ultimate seal will be provided by a judgment delivered by the Apex court or an explicit mentioning of the same by way of an amendment.

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