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Court Rules in Favour of Arbitration Act Despite Foreign Governing Law - International Law Office

International Law Office

Litigation - India

Court Rules in Favour of Arbitration Act Despite Foreign Governing Law

August 11 2009

Facts
Issues
Decision
Comment


In Citation Infowares Limited v Equinox Corporation the designate judge of the chief justice of India ruled that unless specifically excluded by the agreement between the parties or by implication, the provisions of Part I of the Arbitration and Conciliation Act 1996 will apply to international commercial arbitrations, even where the governing law is a foreign law.(1)

Facts

On February 9 2004 Indian company M/s Citation Infowares Ltd entered into an outsourcing agreement in Kolkata, India with the Equinox Corporation, a company incorporated in the United States. The dispute resolution clause in the agreement provided as follows:

"Any dispute between the parties hereto arising from this agreement, or from an individual agreement concluded on the basis thereof, shall be finally referred to a mutually agreed arbitrator."

The aforesaid agreement was replaced by an agreement dated January 25 2007, which was also executed in Kolkata. The dispute resolution clause in the second agreement provided as follows:

"10.1. Governing law - This agreement shall be governed by and interpreted in accordance with the laws of California, USA and matters of dispute, if any, relating to this agreement or its subject matter shall be referred for arbitration to a mutually agreed arbitrator."

Thus, while both agreements contained a dispute resolution clause, the essential difference between the two agreements was that the second agreement stipulated a governing law - the law of California, United States.

Pursuant to the agreements, M/s Citation had created infrastructure for providing customized services in Gurgaon, India for Equinox's business. However, disputes arose between the parties leading to Equinox terminating the agreement. According to M/s Citation, the termination was illegal, resulting in it making a huge loss. M/s Citation consequently claimed for damages, along with its outstanding payment. Further, M/s Citation issued a notice to arbitrate to trigger the dispute resolution mechanism and sought appointment of a sole arbitrator under the second agreement. However, the parties could not mutually agree upon a sole arbitrator to adjudicate the dispute. This resulted in the filing of an application under Section 11(5) of the Arbitration and Conciliation Act before the chief justice of India in order to appoint the sole arbitrator.(2)

Issues

Two key issues required addressing in this case. The first issue was whether the designate judge had jurisdiction to entertain an application for appointment in an agreement wherein the parties had agreed that Californian law would be the governing law of the contract. The second issue was whether Part I of the Arbitration and Conciliation Act, which applies to arbitrations seated in India and contains Section 11, was applicable where there is no agreement on the place of arbitration.

Decision

After examining the scope and extent of Part I of the Arbitration and Conciliation Act, the designate judge held that it did apply to the present case. Thus, even in respect of agreements governed by the laws of another country where the seat is not specified in the agreement itself, the provisions of Part I, including Section 11, will be available to the parties.

Relying on past Supreme Court precedents,(3) the designate judge held that the scope of presumption arising from the selection of a foreign proper law of contract is limited. Such a selection does not implicitly result in exclusion of Part I of the Arbitration and Conciliation Act. The presumption of implicit exclusion of Part I would arise only where the arbitration is agreed to be held outside India. In such a case the law of the seat would apply as the law of the arbitration agreement.

The designate judge further observed that as one of the contracting parties was an Indian party, the obligations were to be completed in India. Considering the nature of the contract, it would be difficult to read any sort of implied exclusion of Part I of the Arbitration and Conciliation Act from the arbitration clause. Accordingly, the designate judge held that notwithstanding the language of Section 2(2) of the act indicating that Part I would apply where the place of arbitration is in India, the parties would be entitled to invoke the provisions of Part I, even in respect of international commercial agreements which are to be governed by the laws of another country. Consequently, the application made under Section 11 in Part I was found to be maintainable and the default in appointment was rectified by appointing a retired chief justice of India as sole arbitrator.

Comment

This decision follows the principle of dualism in an agreement between the substantive and procedural aspects of dispute resolution. The arbitration clause (ie, Clause 10.1 of the agreement) speaks of governing law, which has been held to be limited to the substance of the contract and not extended to the procedure applicable to the arbitration. Thus, the designate judge held that the expression "reference to arbitration to a mutually agreed arbitrator" leaves scope for a further agreement distinct from the applicability of the law governing the contract. This agreement, unless specified by the parties or implied through a choice of seat of arbitration, would have to be determined by relying on the cause of action principles, such as the obligations and nature of the contract. Thus, the procedural law can be independent of proper law of contract and the mere selection of a proper law is not conclusive for the purpose of ascertaining the procedural law of the arbitration agreement. The rationale behind the decision seems to be that the arbitration clause is an integral part of the contract, yet is independent of the underlying contract.

In light of the above, the designate judge proceeded to hold that Part I of the Arbitration and Conciliation Act was available to the parties to make good the default in appointment of the sole arbitrator since:

  • the contract was signed or entered into in Kolkata, India;
  • the contract was to be performed in Gurgaon, India; and
  • one of the parties was an Indian legal entity.

Thus, the selection of a foreign proper law of contract does not exclude the selection of an arbitrator under the Arbitration and Conciliation Act. The only consequence of such selection would be that the arbitrator would look at the applicable law when deciding the dispute between the parties.

This decision seems to be a redefinition of the law laid down in Bhatia International and later confirmed in Venture Global Engineering. The decision stresses the need to spell out the exclusion of the Arbitration and Conciliation Act in the contract either in express terms or by implication through the selection of a foreign seat of arbitration. Failure to make this exclusion clear may result in intervention from the courts and authorities.

For further information on this topic please contact Vijayendra P Singh or Surjadipta Seth at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500), fax (+ 91 11 2692 4900) or email (vijayendra.singh@amarchand.com or surjadipta.seth@amarchand.com).

Endnotes

(1) 2009 (5) UJ 2066 (SC).

(2) The chief justice of India was approached as the arbitration under the agreement was an international commercial arbitration, as defined in Section 2(1)(f):

"Sec. 2(1)(f) International Commercial Arbitration means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is – (i) an individual who is national of, or habitually resident, in any country other than India; (ii) a body corporate which is incorporated in any country other than India; (iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country."

(3) Bhatia International v Bulk Trading SA, (2002) 4SCC 105, Venture Global Engineering v Satyam Computer Services Ltd, (2008) 4SCC 190 and distinguishing Indtel Technical Pvt Ltd v WS Atkins Plc Services, (2008) 10SCC308.


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