CAN FOREIGN LAW GOVERN ARBITRATION BETWEEN INDIAN PARTIES: ANALYZING DHOLI SPINTEX CASE

This article has been authored by Biyanka Bhatia, a third year student at UPES, Dehradun.

Introduction

As a part of the public policy of the country, it is significant to ensure that the Indian parties do not resort to arbitration as a way to circumvent the substantive Indian law. Thus, there have been various controversies regarding the issue of foreign law regulating arbitration between Indian parties. It has been observed that the courts have been trying to ensure that the parties are not deprived of the benefits that come with a well-organized and effective arbitration process, recent example being the decision of Delhi High Court in Dholi Spintex Pvt. Ltd vs. Louis Dreyfus Company India Pvt. Ltd. Analyzing this recent pronouncement, the blog article will be answering whether Indian parties can be governed by foreign law, is it against the public policy of Indian Law and the scope of court interference in International Arbitration.

Factual Background

Dholi Spintex, an Indian registered company, had entered into a contract with Louis Dreyfus, another company registered in India, for the sale of 600 metric tonnes of American raw cotton. The said cotton was procured from overseas suppliers and was sold to buyers in India on “High Sea Sales” basis. The contract's clause 6 stipulated that any disputes must be resolved by arbitration in compliance with the rules of the International Cotton Association (ICA) whereas the Court of New Delhi was provided with the exclusive jurisdiction under Clause 7. Eventually, a dispute occurred between the parties when Dholi Spintex declined to take delivery of the products because the shipping and delivery of the raw cotton bales was delayed. As a result, Louis Dreyfus filed an arbitration complaint with the ICA, and a nominee arbitrator was appointed by ICA with regard to the terms of the agreement. The defendant submitted its claim with the arbitral tribunal, but instead of responding, the plaintiff filed a suit in the Delhi High Court challenging the maintainability of the suit under Section 45 of the Arbitration and Conciliation Act, 1996 and requesting an anti-arbitration injunction as well as a declaration that the arbitration clause, and hence the arbitration proceedings, was null and void.

Dispute over Choosing a Foreign Law to Regulate Arbitral Proceedings

The relevant rules and By-laws of ICA provided that the contract will be governed by English law, the seat of arbitration had to be in England, and disputes had to be resolved according to English law irrespective of domicile, residence or place of business of the parties to the contract. The issue to be highlighted is that just because the goods were produced in a country other than India, will that mean that an international rule of law would apply to the two Indian parties who agreed to have the contract performed in India? Is this not in violation of the public policy as it allows the two Indians to escape the rigors of Indian law?

In M.G. Brothers Lorry Services vs. Prasad Textiles, the Supreme Court held that a contractual provision which has the effect of defeating the provisions of law is void under Section 23 of the Contract Act. The plaintiff in the present case, recognized the principle regarding Section 28 as set out in, Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Inc., that only if the nationality of one of the parties is non-Indian a choice can be made to be governed by foreign law, but since both the parties are Indian, there is no such chance.

But the Court rejected such contention, relying on Atlas Export Industries vs. Kotak & Company held that two Indian parties preferring to be ruled by foreign law would not be contrary to the country's public policy. When the parties with their eyes open willingly enter into an agreement, with their arbitrator situated in foreign country, the court falls short of reasons to nullify such agreement. When the plaintiff quoted TDM Infrastructure Private Limited v. UE Development India Private Limited where the principle of party autonomy was ignored and it was held that any deviation from Indian law when the suit is between Indian parties will be arbitrary in law. The Court went onto reiterate the interpretation of the Gujarat High Court in GE Power Conversion Pvt Ltd v. PASL Wind Solution Pvt Ltd., that the rule stated must be applied strictly in the appointment of an arbitrator under Section 11(6) and therefore would have no impact on the contract in itself, nor the arbitration agreement that arises from it

The court further went on to explain the presence of “foreign element” in the contract, justifying the foreign law governance of arbitration. As the contract was a high seas sale agreement, agreed to be performed in international waters, that is, outside the territorial jurisdiction of India, a possible conflict of laws existed. In the case of Reliance Industries & Anr. vs. Union of India, the Supreme Court stated that when there is a foreign element to the arbitration, three sets of law may apply to an arbitration, that is, proper law of the contract, lex arbitri and curial law. It is open to the parties to agree that the law governing the substantive contract would be different from the law governing the arbitration agreement.

Thus, the Court justified arbitration by ICA stating that the arbitration arrangement exists independently of the substantive contract and continues to exist even though the substantive contract is terminated, repudiated, or frustrated. It regulates only the method of resolving conflicts between the parties, not the rights and obligations resulting from the substantive contract.

The court relying on Technip SA v. SMS Holding Pvt. Limited & Ors held that foreign law should only be objected to if it is a flagrant or gross violation of morality and justice, and that foreign law cannot be discarded solely because it is contrary to Indian statute, as this would undermine the foundation of private international law.

Seat of Arbitration

The arbitration seat is an important consideration in any arbitration. The seat of arbitration is significant because it sets the relevant law when determining arbitration cases and procedures, as well as judicial review of arbitration awards.

Clause 6 of the contract stated that “Any dispute arising out of this contract shall be resolved through arbitration in accordance with ICA (International Cotton Association) rules & arbitration procedure. Venue of arbitration shall be London”. And clause 7 stated that “Only the courts in New Delhi will have jurisdiction”. The contention of the plaintiff was that New Delhi would have exclusive jurisdiction making the seat of arbitration at New Delhi with venue at London, relying on BGS SGS Soma JV where it was held that where parties have selected the seat of arbitration in their agreement, such selection would then amount to an exclusive jurisdiction clause.

But the court rejected the contention and relying on Mankatsu Impex Private Limited, held that Clause 6 and Clause 7 were to be read harmoniously. Even though the term “venue” has been used in clause 6, an intention of the parties to have the seat of arbitration as London, can be observed. Thus, the plaintiff cannot wriggle out of this arbitration which will be governed by the rules and procedure of ICA. The presence of Clause 7 was interpreted that it would be applicable if both parties agreed not to resolve their disputes by arbitration and instead go to court, in this case the courts in New Delhi would have exclusive jurisdiction.

Maintainability under Section 45 of the Arbitration and Conciliation Act

The issue before the court was whether it is for this Court or the Arbitrator to determine whether the present suit is maintainable in terms of requirement of Section 45 of the Act. The court relying on Sasan Power Limited held that the scope of enquiry under Section 45 is confined only to the question whether the arbitration agreement is “null and void, inoperative or incapable of being performed” but not the legality and validity of the substantive contract. The scope of interference by the courts in international arbitration proceedings is restricted, when the arbitration by ICA is completely valid, to delve into merits of the case would be over exercising of the powers.

Analysis and Conclusion

The decision by the Delhi HC undoubtedly promotes party autonomy and respects the principles of private international law, preventing the parties to wriggle out of arbitration agreements entered with open eyes. A pro-arbitration approach has been opted in its judgment, stating that there exists no bar against two Indian parties opting for the enforcement of foreign law. But still there is ambiguity with reference to what the extent of the “foreign element” may be present in the contract to accept foreign law governance. In the future judgments, it would be interesting to observe that how the Court analyzes the foreign nature of the contract specifically by the conduct of the parties, to allow foreign law administration.

Similar approach by the judiciary has been observed in the Gujarat High Court decision of GE Power Conversion Pvt. Ltd. vs PASL Wind Solutions Pvt. Ltd., however in Seven Islands Shipping Ltd. vs Sah Petroleums Ltd. , the Bombay High Court relying on TDM Infrastructure dismissed the validity of an arbitration agreement in which two Indian parties chose a foreign arbitration seat. Though as stated above, there was a precautionary note added to the TDM judgment which makes this decision by Bombay HC questionable. There are only judgments by various High Courts in this regard and only by the intervention of the Supreme Court, a uniform law will be adopted.