Can Two Indian Parties Choose Foreign Law To Govern Their Arbitration Agreement? The Delhi High Court Answers In The Affirmative – Litigation,…

Introduction:

Recognising that an arbitration agreement between parties is anagreement independent of the substantive contract, the Delhi HighCourt in Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company IndiaPvt. Ltd.1 has held that two Indianparties can choose a foreign law as the law governing thearbitration between them. The Court has also reiterated the legalposition on limited interference by Courts in internationalarbitrations.

Dholi Spintex Pvt. Ltd. (the"Plaintiff") had entered into a contractwith Louis Dreyfus Company India Pvt. Ltd. (the"Defendant") for supply of 600 metrictonnes of American imported raw cotton on May 30, 2019("Contract"). The Contract was enteredinto on a high sea sales basis. Clause 6 of the Contract providedfor resolution of disputes through arbitration in accordance withInternational Cotton Association ("ICA")rules & arbitration procedure. It further provided London asthe venue of arbitration. Clause 7 of the Contract provided that'only the courts in New Delhi would havejurisdiction'. The relevant ICA rules and by-laws (beingby-laws 200, 300 and 306) inter-alia provided that (i)'The law of England and Wales and the mandatory provisionsof the Arbitration Act 1996 (Act) shall apply to every arbitrationand/or appeal under these By-laws'; (ii) 'The seatof our arbitrations is in England. No one can decide or agreeotherwise'; and (iii) 'Disputes shall be settledaccording to the law of England and Wales wherever domicile,residence, or place of business of the parties to the contractmay'.

Eventually, disputes arose between the parties with respect tothe said Contract. The Defendant invoked arbitration before the ICAand appointed its nominee arbitrator in terms of the arbitrationagreement between the parties. Thereafter, the ICA called upon thePlaintiff to appoint its arbitrator. Since the Plaintiff failed tonominate its arbitrator, the ICA stepped in and appointed anarbitrator in accordance with the ICA rules. Thereafter, theDefendant filed its claim before the arbitral tribunal. Instead offiling its reply, the Plaintiff instituted a suit before the DelhiHigh Court inter alia, seeking (i) an anti-arbitrationinjunction; (ii) a declaration that Clause 6 of the Contract wasinvalid, null & void; and (iii) a declaration that thearbitration initiated by the Defendant was null and void. TheDefendant in turn filed an application under Section 45 of theArbitration and Conciliation Act, 1996 ("ArbitrationAct") and prayed that the suit be dismissed as thesame was not maintainable in terms of Section 45 of the ArbitrationAct.

The Plaintiff contended inter alia that (i) as theContract was executed between two Indian companies in India and wasto be performed in India, the parties could not have avoided Indianlaw by choosing a foreign seat of arbitration and a specificforeign system of law; (ii) In cases where the contract is to beperformed in India, parties can choose a foreign system of law togovern their contractual relationship only in two instances,firstly, cases where conflict of law rules apply, which givesprecedence to the choice of law made by the parties and/or in caseof an International Commercial Arbitration seated in India (as setout in Section 28(1)(b) of the Arbitration Act); (iii) As perSection 23 of the Indian Contract Act, 1872, any attempt to excludethe application of Indian laws is void and against public policy;(iv) By-law 200 of the ICA by-laws is opposed to and directlycontravenes Indian public policy, which envisages that Indianparties cannot contract out of Indian law; (v) in terms of Clause 7of the Contract, the Courts at New Delhi were vested with exclusivejurisdiction and the same amounts to the parties agreeing to havethe seat of arbitration at New Delhi with venue at London; (vi) incase the plaintiff was subjected to arbitration contrary to Indianlaw, it would suffer irreparable loss.

Accordingly, the Plaintiff prayed that Clause 6 of the Contractbe declared as null and void or in the alternative, be given ameaningful interpretation by applying the 'Blue PencilTest', whereby the parties could then subject themselves to thejurisdiction of ICA. The Plaintiff also prayed that an anti-suitinjunction be granted.

The Defendant on the other hand contended that the suitinstituted by the Plaintiff was not maintainable and that ananti-arbitration injunction ought not to be granted against aforeign seated arbitration. It argued inter alia that (i)when parties had agreed that the arbitration would be conductedunder the ICA rules and procedure and would be seated at London,the Plaintiff could not wriggle out of the same; (ii) there is aforeign element in the Contract between the parties as it is a highseas sale agreement and it was agreed to be performed on high seas,i.e. outside the territorial jurisdiction of India; (iii)since at the point of actual sale as envisaged in the contract, thegoods were located in international waters, there existed potentialconflict of laws situation. Thus, the two Indian partiesvoluntarily chose to resolve all disputes by having English law asthe governing law of arbitration under the ICA by-laws and Rules;(iv) international trade in American cotton is generally conductedunder the ICA rules and procedures; (v) the principle ofkompetenz-kompetenz is universally accepted and thus, thearbitrators have jurisdiction to consider and decide the existenceand extent of their own jurisdiction; (vi) the suit is specificallybarred under Section 45 of the Arbitration Act; (vii) two Indianparties can agree to arbitrate abroad and there is no legal bar tothis extent especially where transactions involve foreignelements.

On perusing the submissions made by both parties, the Court heldthat the arbitration agreement contained in Clause 6 of theContract was neither null nor void nor inoperative nor incapable ofbeing performed.

The Court found that the parties in the Contract had clearlynoted that the property in goods would pass from the Defendant tothe Plaintiff in a place beyond the territorial waters of India. Itreiterated that in cases where there is a foreign element involved,three sets of law may apply to the arbitration, i.e. (i)the proper law of the contract (the law governing the substantivecontract); (ii) the proper law of the arbitration agreement/lexarbitri (the law governing the agreement to arbitrate and theperformance of that agreement); and (iii) the proper law of theconduct of arbitration/ lex fori/ curial law (the lawgoverning the conduct of the arbitration).

It observed that it was well-settled that even though anagreement to refer disputes to arbitration may be a part of thesubstantive contract, the said agreement is independent of thesubstantive contract and survives despite termination/ repudiation/frustration of the substantive contract. Thus, an arbitrationagreement/ clause does not govern the rights and obligationsarising out of the substantive contract and only governs the mannerof settling disputes between the parties.

Accordingly, it was held that since the arbitration agreement isan independent agreement, it may be governed by a proper law of itsown, which need not be the same as the law governing thesubstantive contract. The Court held that two Indian parties couldchoose a foreign law as the law governing arbitration. Further,there being clearly a foreign element to the Contract between theparties, the two Indian parties could have agreed to aninternational commercial arbitration governed by the laws ofEngland.

Further, the Court held that the express designation of a courtunder Clause 7 of the Contract, providing for exclusivejurisdiction at New Delhi would not be determinative of the seat ofarbitration. It found that even though in Clause 6 of the Contract,the term 'Venue' had been used, by specifically agreeingthat any dispute arising out of the Contract would be resolvedthrough arbitration, in accordance with the ICA rules andarbitration procedure, the parties had agreed that the seat ofarbitration would be London and not New Delhi.

With regard to Section 45 of the Arbitration Act, relying on theprecedents set forth by the Supreme Court2 as well as the DelhiHigh Court3, in the instant case, the Courtreiterated that the scope of interference by a Court in anInternational arbitration is limited to the Court determiningwhether a valid arbitration agreement exists between the partiesand whether the agreement is null and void, inoperative orincapable of being performed. It was observed that the Court couldnot, at this stage, enter into a full-fledged inquiry on the meritsof the matter as only a prima facie finding is required tobe arrived at.

In light of the above, the Court dismissed the suit as not beingmaintainable and refused to grant an anti-suit injunction to thePlaintiff.

Keeping up with the pro-arbitration approach being adopted byCourts across the country, the Delhi High Court in the instant casehas recognised and given primacy to the importance of partyautonomy in the field of arbitration. A recent judgment passed by asingle judge bench of the Gujarat High Court in GE PowerConversion India Private Limited v. PASL Wind Solutions PrivateLimited4 has been decided on similar lines,enabling two Indian parties to choose a foreign seat ofarbitration. This recent trend of pro-arbitration judgments willonly make it tougher for parties to wriggle out of agreedarbitration clauses.

Footnotes

1. CS(COMM) 286/ 2020 decided on 24th November2020

2. InSasan Power Limited v. North American Coal Corporation IndiaPrivate Limited (AIR2016SC3974 ), the Hon'ble Supreme Courtdealing with scope of consideration under Section 45 of the Actheld that the scope of enquiry under Section 45 is confined only tothe question whether the arbitration agreement is "null andvoid, inoperative or incapable of being performed" but not thelegality and validity of the substantive contract.

3. InW.P.I.L Vs. NTPC Ltd. and Ors. (2009 (108) DRJ 404 ), dealing withSection 45 of the Act, the Delhi High Court had held that Section45 of the Arbitration Act obligates every judicial authority inIndia to refer the parties to arbitration, if they have agreed tobe governed by arbitration agreements, which would be covered bySection 44. The obligation is an overriding one, apparent from thenon-obstante clause, and the mandatory "shall" occurringin the provision. The only qualifications, relieving the court fromits duty to refer the parties to arbitration, is if it is convincedthat the agreement is "null and void, inoperative or incapableof being performed (Section 45).

4.R/Petn. Under Arbitration Act No. 131 of 2019 with R/Petn. UnderArbitration Act No. 134 of 2019 decided on 3rd November2019

December 2, 2020

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Can Two Indian Parties Choose Foreign Law To Govern Their Arbitration Agreement? The Delhi High Court Answers In The Affirmative - Litigation,...