Recognising that an arbitration agreement between parties is an agreement independent of the substantive contract, the Delhi High Court in Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company India Pvt. Ltd.1 has held that two Indian parties can choose a foreign law as the law governing the arbitration between them. The Court has also reiterated the legal position on limited interference by Courts in international arbitrations.
Dholi Spintex Pvt. Ltd. (the "Plaintiff") had entered into a contract with Louis Dreyfus Company India Pvt. Ltd. (the "Defendant") for supply of 600 metric tonnes of American imported raw cotton on May 30, 2019 ("Contract"). The Contract was entered into on a high sea sales basis. Clause 6 of the Contract provided for resolution of disputes through arbitration in accordance with International Cotton Association ("ICA") rules & arbitration procedure. It further provided London as the venue of arbitration. Clause 7 of the Contract provided that 'only the courts in New Delhi would have jurisdiction'. The relevant ICA rules and by-laws (being by-laws 200, 300 and 306) inter-alia provided that (i) 'The law of England and Wales and the mandatory provisions of the Arbitration Act 1996 (Act) shall apply to every arbitration and/or appeal under these By-laws'; (ii) 'The seat of our arbitrations is in England. No one can decide or agree otherwise'; and (iii) 'Disputes shall be settled according to the law of England and Wales wherever domicile, residence, or place of business of the parties to the contract may'.
Eventually, disputes arose between the parties with respect to the said Contract. The Defendant invoked arbitration before the ICA and appointed its nominee arbitrator in terms of the arbitration agreement between the parties. Thereafter, the ICA called upon the Plaintiff to appoint its arbitrator. Since the Plaintiff failed to nominate its arbitrator, the ICA stepped in and appointed an arbitrator in accordance with the ICA rules. Thereafter, the Defendant filed its claim before the arbitral tribunal. Instead of filing its reply, the Plaintiff instituted a suit before the Delhi High Court inter alia, seeking (i) an anti-arbitration injunction; (ii) a declaration that Clause 6 of the Contract was invalid, null & void; and (iii) a declaration that the arbitration initiated by the Defendant was null and void. The Defendant in turn filed an application under Section 45 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") and prayed that the suit be dismissed as the same was not maintainable in terms of Section 45 of the Arbitration Act.
Arguments advanced by the parties:
The Plaintiff contended inter alia that (i) as the Contract was executed between two Indian companies in India and was to be performed in India, the parties could not have avoided Indian law by choosing a foreign seat of arbitration and a specific foreign system of law; (ii) In cases where the contract is to be performed in India, parties can choose a foreign system of law to govern their contractual relationship only in two instances, firstly, cases where conflict of law rules apply, which gives precedence to the choice of law made by the parties and/or in case of an International Commercial Arbitration seated in India (as set out in Section 28(1)(b) of the Arbitration Act); (iii) As per Section 23 of the Indian Contract Act, 1872, any attempt to exclude the application of Indian laws is void and against public policy; (iv) By-law 200 of the ICA by-laws is opposed to and directly contravenes Indian public policy, which envisages that Indian parties cannot contract out of Indian law; (v) in terms of Clause 7 of the Contract, the Courts at New Delhi were vested with exclusive jurisdiction and the same amounts to the parties agreeing to have the seat of arbitration at New Delhi with venue at London; (vi) in case the plaintiff was subjected to arbitration contrary to Indian law, it would suffer irreparable loss.
Accordingly, the Plaintiff prayed that Clause 6 of the Contract be declared as null and void or in the alternative, be given a meaningful interpretation by applying the 'Blue Pencil Test', whereby the parties could then subject themselves to the jurisdiction of ICA. The Plaintiff also prayed that an anti-suit injunction be granted.
The Defendant on the other hand contended that the suit instituted by the Plaintiff was not maintainable and that an anti-arbitration injunction ought not to be granted against a foreign seated arbitration. It argued inter alia that (i) when parties had agreed that the arbitration would be conducted under the ICA rules and procedure and would be seated at London, the Plaintiff could not wriggle out of the same; (ii) there is a foreign element in the Contract between the parties as it is a high seas 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, the goods were located in international waters, there existed potential conflict of laws situation. Thus, the two Indian parties voluntarily chose to resolve all disputes by having English law as the governing law of arbitration under the ICA by-laws and Rules; (iv) international trade in American cotton is generally conducted under the ICA rules and procedures; (v) the principle of kompetenz-kompetenz is universally accepted and thus, the arbitrators have jurisdiction to consider and decide the existence and extent of their own jurisdiction; (vi) the suit is specifically barred under Section 45 of the Arbitration Act; (vii) two Indian parties can agree to arbitrate abroad and there is no legal bar to this extent especially where transactions involve foreign elements.
Findings of the Court:
On perusing the submissions made by both parties, the Court held that the arbitration agreement contained in Clause 6 of the Contract was neither null nor void nor inoperative nor incapable of being performed.
The Court found that the parties in the Contract had clearly noted that the property in goods would pass from the Defendant to the Plaintiff in a place beyond the territorial waters of India. It reiterated 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 substantive contract); (ii) the proper law of the arbitration agreement/lex arbitri (the law governing the agreement to arbitrate and the performance of that agreement); and (iii) the proper law of the conduct of arbitration/ lex fori/ curial law (the law governing the conduct of the arbitration).
It observed that it was well-settled that even though an agreement to refer disputes to arbitration may be a part of the substantive contract, the said agreement is independent of the substantive contract and survives despite termination/ repudiation/ frustration of the substantive contract. Thus, an arbitration agreement/ clause does not govern the rights and obligations arising out of the substantive contract and only governs the manner of settling disputes between the parties.
Accordingly, it was held that since the arbitration agreement is an independent agreement, it may be governed by a proper law of its own, which need not be the same as the law governing the substantive contract. The Court held that two Indian parties could choose a foreign law as the law governing arbitration. Further, there being clearly a foreign element to the Contract between the parties, the two Indian parties could have agreed to an international commercial arbitration governed by the laws of England.
Further, the Court held that the express designation of a court under Clause 7 of the Contract, providing for exclusive jurisdiction at New Delhi would not be determinative of the seat of arbitration. It found that even though in Clause 6 of the Contract, the term 'Venue' had been used, by specifically agreeing that any dispute arising out of the Contract would be resolved through arbitration, in accordance with the ICA rules and arbitration procedure, the parties had agreed that the seat of arbitration would be London and not New Delhi.
With regard to Section 45 of the Arbitration Act, relying on the precedents set forth by the Supreme Court2 as well as the Delhi High Court3, in the instant case, the Court reiterated that the scope of interference by a Court in an International arbitration is limited to the Court determining whether a valid arbitration agreement exists between the parties and whether the agreement is null and void, inoperative or incapable of being performed. It was observed that the Court could not, at this stage, enter into a full-fledged inquiry on the merits of the matter as only a prima facie finding is required to be arrived at.
In light of the above, the Court dismissed the suit as not being maintainable and refused to grant an anti-suit injunction to the Plaintiff.
Keeping up with the pro-arbitration approach being adopted by Courts across the country, the Delhi High Court in the instant case has recognised and given primacy to the importance of party autonomy in the field of arbitration. A recent judgment passed by a single judge bench of the Gujarat High Court in GE Power Conversion India Private Limited v. PASL Wind Solutions Private Limited4 has been decided on similar lines, enabling two Indian parties to choose a foreign seat of arbitration. This recent trend of pro-arbitration judgments will only make it tougher for parties to wriggle out of agreed arbitration clauses.
1. CS (COMM) 286/ 2020 decided on 24th November 2020
2. In Sasan Power Limited v. North American Coal Corporation India Private Limited (AIR2016SC3974 ), the Hon'ble Supreme Court dealing with scope of consideration under Section 45 of the Act 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.
3. In W.P.I.L Vs. NTPC Ltd. and Ors. (2009 (108) DRJ 404 ), dealing with Section 45 of the Act, the Delhi High Court had held that Section 45 of the Arbitration Act obligates every judicial authority in India to refer the parties to arbitration, if they have agreed to be governed by arbitration agreements, which would be covered by Section 44. The obligation is an overriding one, apparent from the non-obstante clause, and the mandatory "shall" occurring in the provision. The only qualifications, relieving the court from its duty to refer the parties to arbitration, is if it is convinced that the agreement is "null and void, inoperative or incapable of being performed (Section 45).
4. R/Petn. Under Arbitration Act No. 131 of 2019 with R/Petn. Under Arbitration Act No. 134 of 2019 decided on 3rd November 2019
December 2, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.