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PARTY AUTONOMY TO CHOOSE FOREIGN GOVERNING LAW: AN INDIAN PERSPECTIVE

Updated: Oct 21, 2021

This post was authored by Tanish Gupta and Shubham Gandhi, third and fourth-year students of B.A. LL.B. (Hons.) respectively at Dharmashastra National Law University, Jabalpur.



1. INTRODUCTION


In the noteworthy judgment of PASL Wind Solutions Private Limited v. GE Power Conversion (“PASL”), the Supreme Court (“SC”), while characterising party’s autonomy as the brooding and guiding spirit of arbitration,” affirmed the validity of the selection of a foreign seat of arbitration between two Indian nationals. This development compels arbitration enthusiasts to uncover whether Indian parties have the autonomy to select foreign law as the governing law for arbitration between them.


Recently, the Delhi High Court (“HC”), in Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company India Pvt. Ltd. (“Dholi Spintex”), upheld the choice of foreign law as the governing law of arbitration between two Indian parties. Though the parties to the dispute were Indians, they entered into a “high sea sales” contract, which was construed to bring about a foreign element in the dispute. The court, further relying on the judgment of Reliance Industries v. Union of India, noticed that the arbitration agreement, being independent of the substantive contract, can be governed by a “proper law of its own.” The above points of law, coupled with the fact that “once a place of arbitration has been chosen, it brings with it its own law,” form the basis on which the court enounced such a choice.


However, the Dholi Spintex judgment is that of a HC that does not form a binding precedent on the SC or other HCs; thus, the position on the issue remains obscure and unsettled. In this blog post, the authors attempt to explore the position of Indian arbitration law regarding two Indian parties opting for a foreign law as their governing law and make a case for how the same is allowed, both in principle and in statute.


2. INAPPLICABILITY OF SECTION 28


Section 28 of the Arbitration and Conciliation Act 1996 (“Act”) directs the application of substantive law of India on arbitration rather than the International Commercial Arbitration (“ICA”) law. It prescribes the rules applicable on the substance of the dispute in ICA and applies when the seat of arbitration is in India.


Drawing a sharp distinction between “international commercial arbitration” as defined under Section 2(1)(f) of the act and “foreign award” as under Section 44 of the act, the SC in PASL judgment, held that the former being concerned with “nationality” of the parties and the latter with “territoriality principle,” i.e., the territory where the seat of the arbitration is situated, the foreign seated arbitration even between two Indian Parties will constitute foreign award, and subsequently, will be governed by Part II of the act.


As affirmed by the judgment of Dholi Spintex, it is a settled position now that Part I and Part II of the act are mutually exclusive. Falling within the domain of Part I, Section 28 has no application on Part II, particularly on the foreign award. Moreover, the SC in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., remarked that when the seat of arbitration is outside India, the conflict of law rule of the country where the seat of arbitration is situated will come into the picture. On that account, Indian parties to a foreign seated arbitration will not be subjected to the rigour of Section 28 and will thus, be free to choose foreign law as the governing law.


3. PRINCIPLE OF PUBLIC POLICY

An apprehension, reflected in the judgment of TDM Infrastructure Private Limited v. UE Development India Private Limited, which relied upon Section 28 of the act, persists that an agreement allowing Indian parties to choose a foreign law as the governing law will amount to derogating from an Indian law which in turn, is against the public policy of India.


Section 28 falls under Part I of the act, and therefore, the judgment cannot be an authority while deciding on the foreign award, which essentially falls under Part II of the act. Moreover, the judgment never expressly remarked on the matter of “foreign award” and, by way of addition through official corrigendum, cautioned that observations made therein were only for Section 11 of the act and no other.


On the other hand, the SC in Atlas Export Industries v. Kotak & Company, considering the applicability of Section 23 and 28 of the Contract Act, observed that merely resorting to foreign arbitrators and thereby impliedly excluding the remedy under Indian Law would not be opposed to public policy. Besides, foreign law can not be disregarded solely because it is contrary to Indian law as this would defeat the basis of private international law to which India undisputedly subscribes.”


As reiterated in PASL judgment, public policy is dynamic whose content changes following people’s conscience. Unless indisputable harm is shown, in the tussle between public policy and party autonomy, the benefit of the doubt is given to the contract (p. 40). Given the above-discussed precedents, no strong case against public policy is made out.


Nonetheless, the apprehension of violation of public policy stands resolved by Section 48(2)(b) of the act, which provides a safety valve against enforcement of foreign awards when such award is contrary to the public policy of India.


4. THE COROLLARY OF PART II AND NEW YORK CONVENTION


A foreign seated arbitration award, by virtue of being a foreign award, will be governed by Section 44 of the act. Section 44 is enacted in conformity with the Convention on the Recognition and Enforcement, known as New York Convention (“NY Convention”). Therefore, the provisions are to be construed in the light of this Convention. The NY Convention grants parties the choice of law to govern their arbitration agreement, and the contracting states must respect that choice. Contrary to Section 53 of the Act, which defines “foreign award” concerning the Geneva Convention, Section 44 is not based on the nationality of the parties. NY Convention does not limit the parties to a dispute, of the same nationality, from selecting substantive law of another territory, i.e., foreign substantive law. Therefore, no such impediment can be interpreted into Section 44 of the act.


In England, the Arbitration Act 1996 does not, in practice, differentiate between domestic and international arbitration having its seat in England or Wales, and Section 46 provides that the rules applicable to the substance of the dispute shall be the law chosen by the parties. The Swiss law, though creates a dichotomy between International arbitration governed by Part 12 of Federal Private International Law Act (“PILA”) and Domestic Arbitration governed by Part 3 of Swiss Civil Procedure Code (“CCP”), it allows the parties to preclude application of applicable law and choose to be governed by the foreign substantive law. Article 187 of PILA and Article 381 of CCP provides that the applicable law to the dispute will be the rule of law chosen by the parties.


In another significant arbitration regime, i.e., Germany, the Arbitration Act, 1998 does not distinguish between domestic and international arbitration. Pursuant to Article 1051, the German tribunal has to decide the dispute according to the rule of law selected by the parties.


England, Switzerland, and Germany, contracting states to the NY Convention, do not restrict the party’s autonomy to choose the governing law of the arbitration agreement even in the case of domestic arbitration.

The United States of America, on the other hand, has enacted Section 202 of the Federal Arbitration Act, which prescribes that the award between two US citizens will not fall under NY Convention unless there is a reasonable connection with the foreign state, implying that, when both parties are US citizens, they cannot derogate from domestic laws by choosing a foreign law.


Countries such as Norway and Hungary have questioned the liberal approach of the NY Convention as this would lead to the application of the Convention in cases where both the parties are nationals of the state where enforcement is sought. However, no such objection or enactment (as executed by the US) has been attempted by India, exhibiting no intention of restricting two Indian nationals from selecting foreign law as governing law for arbitration, as can be culled out on the part of the legislature. Thus, attempts to read any such limitation, on the choice of substantive law in the act would be unwarranted and unjustified.


5. CONCLUDING REMARK


Allowing Indian parties to choose foreign law as the governing law of arbitration agreement bespeaks pro-arbitration approach adopted by Indian Courts and predominance assigned to party autonomy. The issue discussed in the article holds prominence, especially for multinational corporations with wholly-owned Indian subsidiaries who may want to select a favorable or neutral law. The PASL judgment is a celebrated one as it demonstrates the prominence of party autonomy, thereby laying the foundation for the choice of foreign governing law. Further, the Delhi HC judgment is a way forward in allowing such a choice, requiring further advancement from the Apex Court. This is essentially due to two reasons. The judgment of Dholi Spentex was pronounced in the backdrop of foreign elements. The decision leaves the extent of the “foreign element” ambiguous, i.e., whether solely executing the contract would be sufficient to constitute a foreign element. Secondly, an authoritative pronouncement by the SC on the matter is required as there is a possibility of contradictory judgments by various HCs, leading to ambiguity in the law.