Indian parties opting for a foreign governing law: Analyzing the Dholi Spintex Judgment

Indian parties opting for a foreign governing law: Analyzing the Dholi Spintex Judgment

The blog attempts to assess whether two Indian Parties can choose a foreign law as the governing law in arbitral disputes in light of the judgment rendered by a single-judge bench of the Delhi High Court in Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company India Pvt. Ltd. (“Dholi Spintex”) on November 24, 2020. The blog further discusses the reasoning of the Court in establishing the necessity of a foreign element in such a contract and attempts to infer the stance of the courts in such matters.

I. Factual matrix of the Case

Dholi Spintex Pvt. Ltd. (“Plaintiff”) and Louis Dreyfus Company India Pvt. Ltd. (“Defendant”) entered into an agreement on a High Sea sales basis for the supply of American-imported raw cotton. Clause 6 of the agreement stated that disputes arising out of the contract will be settled by arbitration in conformity with International Cotton Association (“ICA”) Bylaws & Rules and Arbitration Process, and the venue shall be London. Whereas, Clause 7 conferred exclusive jurisdiction upon the Courts of New Delhi.

Disputes arose when the Plaintiff refused to accept the consignment, to which, the Defendant invoked the arbitration clause before the ICA. Claims were filed before the arbitral tribunal by the Defendant, and on the other hand, the Plaintiff moved the Delhi High Court challenging the maintainability of the suit under Section 45 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), and additionally seeking an anti-arbitration injunction on the grounds that the agreement gave exclusive jurisdiction to the courts of New Delhi. Due to this reason, Clause 6 of the agreement, as well as the arbitration initiated by the Defendant arising out of the same, were sought to be declared null and void.

II. The Conflict on Choosing a Foreign Law to Govern the Arbitral Dispute

The Plaintiff contended that choosing a foreign law to govern disputes between two Indian parties would be in contravention to Section 23 of the Indian Contract Act, 1872 (“Contract Act”) wherein, a contract shall be deemed void if it specifically bars the application of Indian Laws. Relying on the judgment of the Apex Court in Bharat Aluminium Company v. Kaiser Aluminium Technical Services  the Plaintiff further submitted that Section 28 of the Arbitration Act can only be invoked where one of the parties is a foreign party. In the present case, both the parties to the contract were Indian parties and the place where the contract was entered into was India, therefore the contract must be governed by Indian Law.

The High Court rejected the contention of the Plaintiff and held that Clause 6 of the agreement was not “null and void”. The Court relying on the judgments rendered in Sasan Power Limited v. North American Coal Corporation (“Sasan Power”) and Atlas Export v. Kotak & Company  held that two Indian Parties choosing to be governed by a foreign law would not be against the public policy of the country. While stating that the arbitration agreement between the parties is independent of the parent contract, the Court went on to elaborate that the parties had entered into an agreement on High Sea sales basis, wherein, the goods were to be transferred to the Plaintiff outside the territorial waters of India. This sufficiently established a “foreign element” in the terms of the agreement, thus validating the application of the conformity to ICA rules. It is also relevant to note that the Arbitration Act does not prohibit two Indian parties from opting for a foreign law, thus negating any violation of public policy under Section 23 of the Contract Act.

III. The Contention to the Exclusive Jurisdiction Clause

The Plaintiff, in arguing that New Delhi courts were to have jurisdiction, placed reliance on the judgment of Apex Court in BGS SGS Soma JV v. NHPC Limited wherein, the Court held that where the parties had chosen a seat of arbitration for their agreement, such selection would amount to an exclusive jurisdiction clause as the parties had indicated that only the courts of the chosen “seat” would have jurisdiction to entertain the challenges against arbitral award.

The High Court rejected the contention of Plaintiff by relying on the Apex Court’s judgment in Mankatsu Impex Private Limited v. Airvisual Limited. The Court noted that Clause 6 and Clause 7 of the agreement were meant to be read in harmony. The implications of Clause 6 conspicuously dictated an intention of the parties to have the seat of arbitration be London, as well as the jurisdiction of the arbitral proceedings being invested entirely in the courts of England.

IV. Court’s Observation on Maintainability of the Suit under Section 45 of ACA

The judgments in Sasan Power and W.P.I.L. v. NTPC Ltd. clarified that the scope of interference by the courts in international arbitration proceedings is restricted under Section 45, wherein, the court must mandatorily refer the parties to arbitration unless it can be established that the arbitration agreement is inoperable. Aligning with the set precedent, the Court in the present case observed that an operative arbitration agreement governed by ICA rules and capable of being performed existed between the parties, and if the same is established, one does not need to delve into the merits to determine the validity or invalidity of the arbitration agreement.

V. Derogation from Indian Law and Public Policy

The concerns regarding possible conflicts between adopting a foreign law in a suit between two Indian parties and its exploitation of public policy were elaborated upon in the Supreme Court’s recent decision in TDM Infrastructure Private Limited v. UE Development India Private Limited (“TDM Infrastructure”). The judgement held that in a case where both the parties are companies registered in India, it would be erroneous for Indian Courts to apply a foreign law. The ruling challenged the precedent of party autonomy set by prior judgements, holding that any derogation from Indian law when the suit is between Indian parties would be bad in law.

However, the Delhi High Court in the present judgement set aside the contention, reiterating an important aspect of the judgement in TDM Infrastructure highlighted by the Gujarat High Court in GE Power Conversion Pvt Ltd v. PASL Wind Solution Pvt Ltd. The ruling observed that the judgement itself delivers a precautionary note in this regard, holding that the aforementioned rule restricting derogation from Indian law was meant to be applied strictly in the appointment of an arbitrator under Section 11(6) of the Arbitration Act. The judgement therefore would have no impact on the contract in itself, nor the arbitration agreement that arises from it. It is crucial to assess the exception to Section 28 of the Contract Act in this regard, which reinforces the observation of the Gujarat High Court and states that any such conferment of jurisdiction would not hold the arbitration illegal.

VI. Analysis

The Supreme Court in National Thermal Power Corporation v. Singer Company emphasized that proper law of contract must be inferred from the intention of the parties. The Dholi Spintex judgment further strengthens this position and additionally clarifies that the substantive law of a contract as a whole is capable of being governed by a law different from the law governing the arbitration agreement. This leaves room for arbitration to be governed by foreign law even when the contract in itself ought to be governed by Indian jurisdiction. In addition to emphasizing the intention of the contracting parties, the judgment predominantly relied on Clause 6 to establish that the agreement shall mandatorily have a “foreign element” to it.

However, there still exists some ambiguity with reference to what the extent of the “foreign element” may be – in so far as whether it would be sufficient for the contract which only has a part of its execution outside India to be subject to foreign law. It would be relevant to refer to the judgment’s observation that the terms of the contract were performed by both parties, and the same could be an instance of both parties agreeing to the foreign nature of the contract. If there does appear to be an acceptance of said foreign element through the performance of the contract, it would validate the seat of arbitration being outside India.

The Supreme Court elaborated on the need to respect private international law in Alcon Electronics Private Limited v. Celem S.A., stating that unless a foreign order was directly limited by Section 13 of the Code of Civil Procedure, 1908, it would be imperative for such an order to be enforced in India as well.  It would have been inept to provide New Delhi courts due jurisdiction when the contract, as well as its execution as done by both parties, abides by private international law and appears to have no direct conflict with public policy. Furthermore, this would have set back the progress of arbitration in India.

VII. Conclusion

The Dholi Spintex judgment gives an important observation on the point of whether two Indian parties can opt for a foreign law to govern arbitration proceedings between them. The Court, while answering the aforementioned in the affirmative, noted that foreign law may be applicable to an arbitration between two Indian parties, as long as said law is not a blatant breach of principles of morality and justice. It is also relevant to note that in order for the application of a foreign seat, it is important for the substantive contract to have a foreign element in its application as well. The judgment is a settling example of private international law being promoted by Indian courts, as well as pertinently separating arbitration clauses from being limited by the shackles of its substantive contract.

This article has been authored by Malika Singh and Shivang Mukherji, students at Symbiosis Law School, Noida.

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