A Case Of Not An International Commercial Arbitration Rendering A Foreign Award

"(i) an individual who is a national of, or habitually resident in, any country other than India; or

(ii) a body corporate which is incorporated in any country other than India; or

(iii) an association or a body of individuals whose central management or control is exercised in any country other than India; or

(iv) the Government of a foreign country;"

Thus, the test for determining whether an arbitration is an international commercial arbitration is nationality of at least one of the parties to the dispute. Interestingly, even though the purpose of the Act is to "consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral award…", it omits defining "domestic arbitration". Even "domestic award" has been defined to be an award passed under Part I of the Act. This is especially noteworthy in the light of Section 2(2) of the Act which stipulates that Part I of the Act would apply where the place of arbitration is in India while Part II has been exclusively incorporated in the statute for enforcement of foreign award.

The nationality test for determining the international nature of arbitration combined with the freedom of parties to agree on a place of arbitration, granted under section 20 of the Act, has created a dichotomy. The question of whether two Indian parties to a dispute can choose a foreign seat of arbitration has, time and again, come up for consideration before courts but remains unanswered in full.

The issue once again came up recently before the High Court of Delhi in Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company Pvt. Ltd.. In a comprehensive opinion analysing the law and judgments on the point, the court ruled in favour of two Indian parties choosing a foreign seat of arbitration. The Plaintiff had argued, relying on section 23 of the Indian Contract Act, that two Indian parties contracting out of Indian law would defeat the provisions of the law and would be opposed to public policy. However, the court relying on its earlier decision in GMR Energy Limited v. Doosan Power System India Ltd. & Ors., reiterated its earlier stance that two Indian parties are free to choose a foreign seat of arbitration. The Court reasoned that an arbitration agreement between the parties being an agreement independent of the substantive contract, it can be governed by a different law.

Earlier in the year, the same issue had also been raised before the Rajasthan High Court in Barminco Indian Underground Mining Services LLP v. Hindustan Zinc Limited. The service contract entered into between the parties, in this case, had an arbitration clause which stated that "the disputes shall be referred to and finally resolved by arbitration administered by Singapore International Arbitration Centre (SIAC) in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (SIAC Rules) for the time being in force." The question that fell for the consideration of the High Court was to determine if it had the jurisdiction to provide interim relief under section 9 of the Act, when two Indian parties had chosen a foreign-seated arbitration to resolve their disputes. To determine if the High Court of Rajasthan would indeed be the correct forum to seek interim relief from, the Court first needed to examine true import of the term "International Commercial Arbitration".

The High Court acknowledged that the term International Commercial Arbitration" has been expressly defined in Section 2(1)(f) of the Act and the definition is nationality-centric. Since both the parties to the dispute were incorporated in India, the Court concluded that arbitration in question cannot be termed as International Commercial Arbitration "as it does not satisfy the conditions catalogued in clause (i) to (iv) of Section 2(1)(f)." Moreover, the High Court agreed with the previous decisions of the High Court of Delhi and the High Court of Madhya Pradesh wherein it was held that seat of arbitration being outside India, Part I of the Act would not apply and the award would be enforced under Part II of the Act which regulates foreign awards. The High Court went on to observe,

"A close and conjoint reading of the provisions contained in Section 2(1)(e) & 2(1)(f) of the Act of 1996 makes it abundantly clear that for the purpose of determining the jurisdiction of the court with respect to an application under Section 9 of the Act of 1996, the sole factor to be looked at, is, as to whether the arbitration in question is International Commercial Arbitration or not. The seat of arbitration and/or place of arbitration is absolutely inconsequential, rather irrelevant for the purpose of determining the jurisdiction of the Court. May be in a contract having place of arbitration abroad, the award would be a foreign award; such being the case, if a party seeks to challenge the award or prefer an application for setting aside the award, the seat/venue may be relevant, but then in that case, the Courts in India per-se would not be available as forum.

…

The case before this Court is a bit peculiar. As the seat and place of arbitration is Singapore, it cannot be said that the arbitration is a domestic arbitration. Nor can it be said that the award which would be passed will be a domestic award. It is a third situation – where the arbitration is not International Commercial Arbitration, but the award will be a foreign award."

The High Court correctly observed that where Indian parties choose foreign seat of arbitration, the arbitration cannot be called an International Commercial Arbitration but the award so rendered will be a foreign award. Nevertheless, since the arbitration is not international commercial arbitration, an application for seeking interim awards would rightly lie before the Principal Civil Court as identified under Section 2(1)(e)(i) of the Act.

The position of law on this question is quite uncertain given the varying opinions of different High Courts. While the Bombay High Court in Adhaar Mercantile Private Ltd v. Shree Jagdamba Agrico Export Private Ltd.(Adhaar) 2015 SCC OnLine Bom 7752 forbids Indian parties from choosing a foreign seat of arbitration, the Delhi High Court has in GMR Energy Limited v Doosan Power Systems India Private Limited and Ors. 2017 SCC OnLine Del 11625 and now in Dholi Spintex held the parties' freedom to choose any seat of arbitration.

The Supreme Court of India, admittedly, upheld an arbitration agreement between two Indian parties with a foreign seat in M/s Atlas Export Industries v. M/s Kotak Company, (1999) SCC 61. However, that decision was so rendered because the challenge to foreign seated arbitration was raised only at the final stage of litigation before the apex court. The Court has, since then, only further contributed to the uncertainty by not expressly striking or upholding Indian parties' right to choose a foreign seat of arbitration in TDM Infrastructure Private Limited v. UE Development India Private Limited (TDM) (2008) 14 SCC 271. It, nevertheless, did observe that the intention of the legislature was to not permit Indian nationals to derogate the Indian law, which they potentially can, by choosing a foreign-seated arbitration. Again in 2016, the apex court had the opportunity to deal with the issue and spell out the law in Sasan Power Ltd., v. North American Coal Corporation India Private Limited (Sasan Power) (2016) 10 SCC 813. However, the Court delved into the facts to establish that the arbitration agreement in question was a tripartite agreement with one not being a national of India and therefore, the arbitration was international in nature. Thus, an opportunity to settle the law was lost.

The uncertainty in law, as it stands, has not only led to ambiguity but has also acted as a restrain on the exercise of this most basic feature of arbitration viz, party autonomy. Moreover, the Supreme Court has recognised the legislative intent behind the A&C Act to promote it. The absence of clarity on the law from the Supreme Court of India and lack of a mitigating provisions in the statute has led to High Courts adopting contradictory views.

It is worth noting here that section 44 of the Act provides for enforcement of "foreign award" to which the New York Convention applies. Article 1 of the New York Convention, pertinently, provides that the convention "shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought." Thus, if two Indian parties choose a foreign seat of arbitration and if the award so rendered is not contrary to or repugnant to any other Indian law, the Act certainly envisages within its ambit enforcement of such an award.

Today, with the High Courts of Delhi, Madhya Pradesh, Rajasthan aligned in their understanding even as High Court of Bombay holds a contrary position, a case can be made for allowing Indian parties to arbitration dispute to choose a foreign seat of arbitration. Should the recent decisions rendered by the High Court of Delhi and the Rajasthan High Court be challenged, the Supreme Court would have an excellent opportunity to clarify the position of the law regarding Indian parties' right to choose a foreign seat of arbitration, which may be "not-international commercial arbitration" but renders a foreign award