A Single Judge Bench of Justice Mukta Gupta Delhi High Court has held that two Indian parties can choose foreign law for arbitration between them. The Court order was passed in a suit instituted by Dholi Spintex Pvt. Ltd (plaintiff) against and Louis Dreyfus Company India Pvt. Ltd (defendant).
The parties in this present case of foreign law for arbitration entered into an agreement for import of American Cotton, which provided that in case of a dispute, the same shall be referred to arbitration under the rules and arbitration procedures of the International Cotton Association (ICA). Arbitration under ICA bylaws is conducted under the English Arbitration Act, 1996.
As per the plaintiff In this present case of foreign law for arbitration, such an agreement was invalid, null, and void, and therefore, the arbitration initiated by the defendant was also null and void and deserved to be permanently injuncted.
It was the plaintiff’s primary objection that since the contract was executed between two Indian companies in India and was to be performed in India, the proper/substantive law governing the parties’ obligations under the contract can only be Indian law.
Submissions by Plaintiff
– Allowing English law to govern the substantive rights in the present case is clearly impermissible and against the very fundamentals of nationality and sovereignty.
– As per Section 23 of the Contract Act, any attempt to exclude the application of Indian laws is void and against public policy in this present case of foreign law for arbitration.
– When sale and purchase of commodities is made by two Indian parties within India, parties cannot choose to exit from the applicability of Indian laws in this present case of foreign law for arbitration.
– Where performance of a contract is in India, the parties to a contract can choose a foreign system of law only on two conditions – where the conflict of law rules apply which give 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.
The defendant In this present case of foreign law for arbitration opposed the grant of any relief and stated that there was a foreign element in the contract between the parties as the agreement in question was a “high seas sale agreement”, which was agreed to be performed on the high seas.
Further, it was submitted In this present case of foreign law for arbitration:
– The suit is not maintainable in terms of Section 45 of the Arbitration and Conciliation Act, 1996.
– When parties have agreed that the arbitration would be conducted under the ICA Arbitration bylaws and would be seated at London, the plaintiff cannot now wriggle out of the same.
– Two Indian parties can agree to arbitrate abroad and there is no legal bar to this extent, especially where transactions involved foreign elements.
– Parties can agree and decide as to which law would govern the contract in principal and/or the arbitration proceedings.
Court’s Observations and Order
In this present case of foreign law for arbitration Court stated that whether two Indian parties could agree to contract out of substantive Indian law was no more res-integra, and that they could agree to a foreign seated arbitration.
In view of the decision of the Supreme Court in Reliance Industries & Anr vs Union of India, the Court observed that it was trite law that in case of arbitration having a foreign element, three sets of laws may apply to it i.e. the proper law of the contract, the proper law of the arbitration agreement/lex arbitri, and the proper law of the conduct of arbitration/lex fori/curial law.
In this present case of foreign law for arbitration Court reiterated that an arbitration agreement was independent of the substantive contract.
“..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. 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 law as governing the substantive contract.”
Relying on a Supreme Court judgment, the Court explained that the principle of party autonomy in arbitration was the basis that permitted the parties to adopt foreign law as the proper law of arbitration.
In this present case of foreign law for arbitration, It added that any disregard of applicability of foreign law must arise only when the foreign law amounts to a “flagrant or gross breach” of principles of morality and justice.
“…all statutes enacted by Parliament or the States can be said to be part of Indian public policy, but to discard a foreign law only because it is contrary to an Indian statute would defeat the basis of private international law to which India undisputedly subscribes.”
Delhi High Court
As regards the issue of foreign element, the Court observed that the same had to be seen on the basis of the terms of agreement executed between the parties.
Anaylsing the agreement at hand, the Court concluded that that there was clearly a foreign element to it.
In conclusion, the Court said In this present case of foreign law for arbitration,
“Therefore, an arbitration agreement between the parties being an agreement independent of the substantive contract and the parties can choose a different governing law for the arbitration, two Indian parties can choose a foreign law as the law governing arbitration. Further there being clearly a foreign element to the agreement between the parties, the two Indian parties, that is the plaintiff and defendant could have agreed to an international commercial arbitration governed by the laws of England. Hence Clause 6 of the contract dated 30th May, 2019 between the parties is not null or void.“
In view the of terms of the agreement, the Court also held that the seat of arbitration as well as the venue of arbitration was London.
Having held that the arbitration agreement between the parties was not null and void or inoperative, the Court stated that the scope of inquiry before it was limited in view of Section 45 of the Arbitration Act, and that no anti-arbitration injunction could be granted.
The suit was accordingly dismissed.