Indian parties may opt for foreign-seated arbitrations

By Vivek Vashi and Shreya Ramesh, Bharucha & Partners
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The Supreme Court in TDM Infrastructure Private Limited v UE Development India Private Limited (2008) laid down that the legislature’s intention was to not permit Indian nationals to derogate from Indian law, as doing so would be a violation of the public policy of India. Essentially, it would not be open to two Indian nationals to circumvent Indian law by opting for a foreign seat in arbitration.

Vivek Vashi
Vivek Vashi

Yet in the recent ruling of Madhya Pradesh High Court in Sasan Power Ltd v North America Coal Corporation India Pvt Ltd, a division bench has held that there is no bar against Indian parties opting for foreign-seated arbitrations.

To summarize the events leading up to this ruling, Sasan Power and US-based North American Coal Corporation (NACC-US) executed an association agreement on 1 January 2009, which NACC-US subsequently assigned to its Indian subsidiary (NACC-India). The agreement envisaged a reference to arbitration, with the seat in London. Disputes later arose, as a result of which NACC-India terminated the agreement and invoked arbitration.

Sasan opposed the reference to arbitration and simultaneously filed a suit for an anti-arbitration injunction, which was eventually granted by a single judge. Meanwhile, NACC-US also filed a request for arbitration, and the International Council for Arbitration called on Sasan to give its response within 30 days. Consequently, a second anti-arbitration suit came to be filed by Sasan – this time against NACC-US.

NACC-India moved its application under order VII rule 11 of the Code of Civil Procedure, 1908 (CPC), for rejection of the plaint and vacation of the injunction granted by the single judge. On considering the application for rejection in light of section 45 of the Arbitration and Conciliation Act, 1996, the single judge vacated the anti-arbitration injunction and dismissed the suits filed by Sasan. Sasan then filed an appeal before the high court under section 96 of the CPC.

Sasan argued that the TDM case explicitly lays down that derogation from Indian law is impermissible and against public policy of India. Further, section 28 of the Indian Contract Act, 1872, does not permit any restraint of legal proceedings. In addition to its technical objection that an order under section 45 of the Arbitration and Conciliation Act is not appealable, Sasan contended that TDM’s scope was expressly limited, given the subsequent corrigendum of the judgement, to disputes in respect of appointment of arbitrators under section 11 of the act.

Reliance was placed on a judgment of the Supreme Court in Atlas Exports Industries v Kotak & Co (1999), passed under the Arbitration Act, 1940, where the exception to section 28 of the Indian Contract Act, which exempted references to arbitration from the bar on restraint of legal proceedings, was interpreted to permit two Indian parties to refer a dispute to a foreign-seated arbitration.

Shreya Ramesh
Shreya Ramesh

The high court declined to interfere with the single judge’s order and stated that in view of the Supreme Court’s observation in Fuerst Day Lawson Ltd v Jindal Exports Ltd (2011) that there does not appear to be much difference between the provisions of the 1996 and 1940 acts, Atlas continues to be good law and a binding precedent. Further, due regard had been paid to the overarching tendency of minimal intervention in arbitration proceedings. The high court went on to observe that since the parties’ intention to refer disputes to arbitration was clear, the principle of severability ought to be adopted, and the offending parts, if any, of the agreement may be severed from the remainder of the agreement by the arbitrators.

It will now stand to reason that the seat of arbitration will solely determine the application of Parts I or II of the 1996 act, permitting parties to evade application of Indian substantive law by choosing a foreign seat. It remains to be seen whether Sasan will appeal this order, which will undoubtedly be a watershed ruling.

Supreme Court condemns forum shopping by India

The Supreme Court’s dismissal of the Indian government’s attempts to evade arbitration proceedings seated at London in a dispute with Reliance Industries and BG Exploration and Production India will serve to caution parties against forum shopping. The government had filed a petition under section 34 of the Arbitration and Conciliation Act, against a final partial award rendered by a foreign arbitral tribunal. The court dismissed the petition owing to the inapplicability of Part I of the act, given the parties’ express agreement on London as the seat. Subsequent review and curative petitions were also dismissed by the Supreme Court.

In the arbitration proceedings, the government had preferred an application for termination of mandate before the Permanent Court of Arbitration (PCA), which was rejected. The Supreme Court came down on the government since it had already sought and been denied its remedy before the PCA, as in the section 34 petition, so res judicata would operate, and it was apparent that the special leave petition was an attempt to forum shop for relief.

Vivek Vashi is the mainstay of the litigation team at Bharucha & Partners, where Shreya Ramesh is an associate.

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