Can Indian parties choose foreign seat of arbitration? Supreme Court’s Sasan judgment fails to resolve uncertainty

The Supreme Court of India has recently upheld a judgment of the Madhya Pradesh High Court regarding the arbitration agreement entered into between Reliance owned Sasan Power Ltd and North American Coal Corporation (NAAC America).

The judgment was delivered by a Bench of Justices Jasti Chelameswar and AM Sapre.

In October last year, the Madhya Pradesh High Court had ruled that two Indian parties can choose a foreign arbitral seat. The Supreme Court, however, did not answer this question, instead concluded that a foreign element is involved in the agreement and hence, arbitration can be under foreign law.

The dispute arose out of a mine development agreement entered into between Reliance-owned Sasan Power Ltd, and NAAC America (Agreement I). Two years after the agreement was entered into, the North America Coal Corporation India (NACC India) was formed, whereby all rights and liabilities under Agreement I were transferred from NAAC America to NACC India (Agreement II).

Subsequently, disputes arose between the two parties, and arbitral proceedings were sought to be initiated. Agreement I provided that the seat of arbitration would be London and the law applicable would the law of United Kingdom.

Sasan had contested the arbitration contending that Indian parties are prohibited from choosing a foreign seat of arbitration. The District judge and the High Court had dismissed Sasan’s plea whereupon an appeal was filed in the Supreme Court.

The question that was put before the Supreme Court was whether two Indian parties can refer their arbitration with the place of arbitration outside India with the governing law being UK law.

“The argument before us was confined only to the question whether two Indian companies can enter into an agreement with a stipulation that their agreement “be governed by, construed and interpreted in accordance with the laws of the United Kingdom.”

The Court, however, proceeded to decide the case based on the two agreements between the parties, especially Agreement II.

It concluded that though NAAC America assigned its rights and obligations to NAAC India by way of Agreement II, NAAC America was not discharged of its obligations as there was an express covenant in Agreement II which empowered Sasan to enforce obligations arising out of Agreement I against NAAC America.

“In the facts and circumstances of the case on hand as indicated by the record, the AGREEMENT-II appears to be falling under the 2nd of the above mentioned two classes of the contracts. There is no discharge of the original contractee i.e., the American company’s obligations. There are mutual obligations (arising out of AGREEMENT-I) still to be enforced. The American company legally cannot claim to have been discharged from the obligations arising under AGREEMENT-I and in fact has not been discharged. On the other hand, the appellant by an express covenant under AGREEMENT-II retained its rights to enforce obligations (arising under AGREEMENT-I) against the American company. AGREEMENT-II perhaps only creates an agency where the American company is the principal and the respondent its agent or what is described in some cases as sub-contracting….”

The Court held that adjudication of the dispute raised by the NAAC India in the arbitration would necessarily involve examination of the rights and obligations of the American company under AGREEMENT-I and AGREEMENT-II. Therefore, it is a dispute between three parties (of which one is an American company) with a foreign element i.e. rights and obligations of the American company.

The Court, therefore concluded,

“…. the question whether two Indian companies could enter into an agreement to be governed by the laws of another country would not arise in this case. So long as the obligations arising under the AGREEMENT-I subsists and the American company is not discharged of its obligations under the AGREEMENT-I, there is a ‘foreign element’ therein and the dispute arising therefrom. The autonomy of the parties in such a case to choose the governing law is well recognised in law.”

While the MP High Court decision has been upheld, the uncertainty on the position as to whether two Indian parties can have a foreign seat of arbitration continues. More specifically, the conflict between the Bombay High Court view in M/s Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Private Ltd) and Madhya Pradesh High Court view in Sasan is yet to be resolved.

Sasan was represented by senior counsel Fali Nariman briefed by Agarwal Law Associates. NAAC was represented by senior counsel Gopal Subramanium along with Anirudh Krishnan who was engaged by Jones Day.

“ADRs – a choice or a compulsion?”

The arbitration and conciliation act, 1996 relates to the domestic arbitration, International commercial arbitration and enforcement of foreign arbitral awards so as to define the law relating to conciliation and for matters connected therewith or incidental thereto. Thus, in other words we can say that arbitration was designed so as to provide an effective and pocket friendly remedy to the aggrieved, which is off course an alternate to the litigations.

The American arbitration Association defines Arbitration as “the reference of a dispute by voluntary agreement of the parties to an impartial person for determination on the basis of evidence and argument presented by parties, who agree in advance to accept the decisions of the arbitrator as final and binding.” Arbitration, in other words, can be called as a trade-off process, with parties to dispute, so as to resolve the dispute in a less formal way and in such a manner that both the parties get benefited without going into cumbersome law proceedings thus, saving their time and hard earned cash.

In arbitration the two parties enter into a contract, and in that contract they decide that all the disputes arising out of the contract would be resolved through arbitration proceedings by appointing an arbitrator. The aforesaid arbitrator could be a person decided by the parties in advance or as in when need arises. The appointed arbitrator has to make conscious decisions and settle the dispute in a quicker and cheaper way so as to resolve the problems of the parties. The reason people choose arbitration with open arms is the pre conceived notion that they carry regarding the lengthy trials in overcrowded judicial system. Thus, aggrieved parties, at initial stage itself, choose their arbitral option and believe that the arbitration decision will result positively in a more definite and quick manner.

Over a period of time the arbitral goals have been well documented and developed. The reason behind developing arbitration was to avoid excessive formalities, avoid delay hurdles, high costs and time consumed in carrying out the judicial proceedings in the court of law. The use of arbitration proceedings is to resolve commercial disputes without going to the courts. Such proceedings continue to be on a rise in recent past. The reason behind overburdened courts is the increasing awareness and complex issues raised by marketplace and increasing education at large. People, who are not ready to accept the delays inherited in judicial proceedings, generally go for Arbitrations and Conciliations. Arbitration and Conciliation proceedings have thus become most widely utilized alternative source when it comes to solving of disputes.

Alternative Dispute resolution procedure, commonly known as ADRs, is being embraced by all as they reduce the judiciary’s workload , which on one hand ,seems to increase year by year. ADRs include all the alternative ways in which the disputes can be resolved. The main characteristic of ADR procedure is that they are voluntary, private, fast, informal and inexpensive. These practices discourage lawyer participation, application of substantive law and judicial involvement by encouraging party participation. Of course some of the best-known ADR mechanicals include processes such as negotiation, mediation, arbitration and conciliation. It is however important to note that mediation is a conciliatory process with an aim to achieve settlement either by way of an adjustment or by way of compromise. Compromise is generally a win-win situation where there is a choice, for both the disputants, which is not at all likely to happen in case of judicial Court proceedings.

Arbitration is coupled with all earnestness in order to ensure that litigant does not lose its faith in the speedy process of resolving disputes. In order to be successful in arbitration, the arbitrator has to create a confidence in the minds of public at large. The confidence of public would depend upon the credibility, impartiality, quick approach and speedy disposal of the person who is called upon to arbitrate the matter. The dedication and devotion of the arbitrator along with the quickness of perception and perfection and his eagerness to dispose of the case is the only way to develop and bring upon an image, reputation and fame to oneself.