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May 28, 2008
Domestic arbitration and Foreign
Law? Not possible: SC
Are you an Indian national or is your company incorporated in
India? Are you entering into any commercial transaction with
another Indian national or a company incorporated in India? Are
you choosing the recourse to arbitration in the event of any
dispute which may in the future? If the answer to all the
questions is YES; have you given a proper thought as to what law
will govern any dispute which may arise in the transaction in
the future? Well there is no option.
Recent Supreme Court (SC) case
On May 14, 2008 the apex court has laid
down a landmark judgment in the case of TDM Infrastructure Pvt.
Ltd. (“TDM”) v. UE Development India Pvt. Ltd.
(“UED”), wherein it is held that two Indian
companies locked in a dispute cannot seek international
commercial arbitration (“ICA”) defined under
the Indian Arbitration and Conciliation Act, 1996 (“the
Act”) as it tantamount’s to condoning the home
country’s law. The Hon’ble Judge held that “the intention of the
legislature appears to be clear that Indian nationals should not
be permitted to derogate from Indian law. This is part of the
public policy of the country.”
Facts of the case
In the abovementioned case, both the parties were companies
incorporated under the Indian Companies Act, 1956. UED was
awarded a project for rehabilitation and upgradation by the
National Highway Authority of India. UED subcontracted some
portion thereof to TDM. Disputes arose between the two companies
and a consensus on a common arbitrator could not be reached
between the parties. TDM approached the SC seeking the
appointment of an arbitrator by virtue of Section 11(5) and
11(9) of the Act, under which the Chief Justice of India (CJI)
or any person or institution designated by CJI could appoint an
arbitrator.
The reasoning of TDM in approaching the CJI was that since the
control and management of TDM was in Malaysia, the dispute was
an ICA. UED resisted this request, arguing that since TDM was
incorporated and registered in India, the dispute does not fall
under the purview of ICA and that the SC had no jurisdiction to
pass an order for appointing an arbitrator. It insisted that TDM
in law must be held to be situated in India notwithstanding that
the directors are foreign nationals. The court was of the same
view and rejected the applicability of Section 2(f)(iii) of the
Act to the dispute.
Section 2(f)(iii) of the Act defines ICA as “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 … a
company or an association or a body of individuals whose central
management and control is exercise in any country other than
India.”
Judgment
SC has further laid down that no matter even if the control and
management of a company is outside India; just by the virtue of
having the entity registered in India makes it a domestic
company and in the event of a dispute such a company cannot take
recourse to foreign law as the governing law where the opposite
party is also an Indian national or entity. The court in its
dicta held that that if a company is registered in India,
although having its director’s based abroad, it would be an
Indian unit for the purpose of Arbitration and Conciliation Act,
1996. When both the companies are incorporated in India, Clause
(ii) of Section 2(1)(f) will apply and not the clause (iii)
thereof.
Further interpreting the law at hand, the SC has held that only
in case where a body corporate which need not necessarily be a
company registered and incorporated under the Indian Companies
Act, as for example, an association or a body of individuals,
the exercise of central management and control in any country
other than India may have to be taken into consideration.
The SC further explained that ICA meant arbitration between
parties at least one of which is a body corporate which is
incorporated in any country other than India. Court held that
the incorporation in India was sufficient to determine the
nationality of the Company. Therefore, it declined to nominate
an arbitrator in the current judgment.
Drawing attention to the fact that Indian Income Tax Act, 1961
contains a similar provision to Section 2(1)(f) of the Act; the
court further observed that the tax statute and the Arbitration
and Conciliation Act were not in pari materia, thereby
concluding that taxation statue could not be used to interpret
the Arbitration and Conciliation Act.
Analysis
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This case law lays down the boundaries
for determination of the nationality and domicile of the
company. It clarifies the position of law that in case of
any domestic arbitration, the arbitral tribunal shall
determine the dispute in accordance with the substantive law
of India in force at that time and restricts from using the
law of any other country.
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In cases where both the parties are
Indians and even if the subject matter of the transaction is
based outside Indian borders e.g. technology related
transactions; there might be a case that any other country’s
law if more favourable to the transaction instead of the
Indian law, however, in light of this judgment the parties
would not be able to refer to that law which plays as a
hindrance over the parties choice. This seems not to be in
consonance with the premise of arbitration mechanism that
the ‘party autonomy’ is above all and central to a healthy
business atmosphere.
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