Arbitration with Indian subsidiary of foreign company can be conducted outside India

Sasan Power Limited v. North American Coal Corporation India Private Limited


The Appellant, a company registered under the laws of India and an American company known as North American Coal Corporation (A Delaware Corporation) entered into an agreement for mine and development operations (AGREEMENT-I). Under AGREEMENT-I, the American company agreed to provide certain consultancy and other onsite services for a mine to be operated by the appellant herein in India.

Article XII of AGREEMENT-I provided for two things – (1) the governing law of the agreement, and (2) resolution of disputes, if any to arise between the parties, by arbitration. Section 12.1 stipulated that (i) the governing law of the agreement shall be the law of the United Kingdom, (ii) the conflict of laws principles of England will have no application while interpreting AGREEMENT-I in accordance with the laws of the United Kingdom. Section 12.2 stipulated the arbitrator, seat of arbitration and the procedure to be followed in the arbitration (i) the arbitration is “to be administered by the International Chambers of Commerce (the ICC)”, (ii) the place of arbitration shall be London, (iii) such arbitration shall be conducted in accordance with the commercial arbitration rules of the ICC, in effect at the time of the arbitration.

Later the appellant, the American company and the respondent which is an Indian Company and a fully owned subsidiary of the American company entered into an agreement (AGREEMENT-II). By the said agreement, the American company purported to assign all its

rights and obligations with the consent of the appellant to the Indian Company. All the three signatories to the AGREEMENT-II agreed that the American company was not relieved of its

obligations and liabilities.

When disputes arose between the appellant and the respondent, the respondent purported to terminate the AGREEMENT-I and made a request for arbitration. But the appellant filed a suit. The appellant’s case was that parts of the AGREEMENT-I though created valid rights and obligations between the (original) parties thereto ceased to be valid subsequent to the assignment under AGREEMENT-II. As the parties to AGREEMENT-II were only two companies incorporated in India they could not have agreed that the governing law of the agreement should be the law of the United Kingdom. Such a stipulation in the agreement would be contrary to the public policy and hit by Sections 23 of the Indian Contract Act, 1872. Therefore, the arbitration agreement initiated by the respondent couldnot be proceeded with.

The question to be decided before the Supreme Court was whether two Indian companies can enter into an agreement with a stipulation that their agreement “be governed by, construed and interpreted in accordance with the laws of the United Kingdom”. The Supreme Court observed that the adjudication of the dispute raised by the respondent in the arbitration would necessarily involve examination of the rights and obligations of the American company under AGREEMENT-I and AGREEMENT-II. Therefore, it was a dispute between three parties (of which one is an American company) with a foreign element i.e. rights and obligations of the American company. Hence, the stipulation regarding the governing law could not be said to be an agreement between only two Indian companies. So long as the obligations arising under the AGREEMENT-I subsisted and the American company was not discharged of its obligations under the AGREEMENT-I, there was a ‘foreign element’ therein and the dispute arising therefrom. The autonomy of the parties in such a case to choose the governing law is well recognised in law. In fact, Section 28(1) (b) of the 1996 Act expressly recognises such autonomy.

On the question whether the arbitration agreement in question was one falling exclusively under Part-I of the 1996 Act or falling under both parts of the 1996 Act, the Supreme Court observed that Bhatia International v. Bulk Trading S.A. & Another, (2002) 4 SCC 105 never declared that the arbitration agreement falling under the scope of Part-I would automatically cease to fall under Part-II. On the other hand there were observations to the contra. However, with reference to the agreements entered into subsequent to Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. etc., (2012) 9 SCC 552, the question did not arise. It is only for the interregnum between the date of the 1996 Act and the date of the judgment, in BALCO such a question arise.

The Supreme Court observed that the arbitration agreement is independent and apart from the substantive contract. The scope of enquiry under the Section 45 does not extend to the examination of the legality of the substantive contract. The language of the Section is plain and does not admit of any other construction. For the purpose of deciding whether the suit filed by the appellant herein is maintainable or impliedly barred by Section 45 of the 1996 Act, the Court is required to examine only the validity of the arbitration agreement within the parameters set out in Section 45, but not the substantive contract of which the arbitration agreement is a part. The Supreme Court thus held that as the dispute was not exclusively between two parties to the suit, the suit was rightly dismissed.