Party Autonomy in Alternative Dispute Resolution: Is Derogation from Indian Law Permissible?

By: Akhil Mahesh and Girish Deepak

Indian Prime Minister Narendra Modi and his Cabinet have been engaged in promulgating economic changes by bringing in several reformative policies such as the Goods and Services Tax (GST) and the Land Acquisition Bill, 2015. One of the lesser known, yet significant amendments, is the Arbitration Amendment Bill, 2015, which is based on the recommendations of the Law Commission in its 246th Report. This bill is to clarify certain ambiguous provisions and codify the pro arbitration stance that the Supreme Court propounded in Bharat Aluminium Company v. Kaiser Aluminium Technical Service, (herinafter ‘BALCO’) in 2012. This move is aimed at cutting down the time and costs involved in alternative dispute resolution mechanism so as to bring India at par with global standards.

Despite these measures, the Indian judiciary and legal practitioners are yet to embrace arbitration as a practical dispute resolution mechanism, and currently, treat it as an encumbrance to the legal system. This has completely eroded the essence of arbitration and made it extremely vexatious at every step – from the appointment of arbitrators to enforcement of awards. This has been further complicated by conflicting decisions by various courts while interpreting the provisions of the Arbitration and Conciliation Act, 1996. One such issue is whether two domestic parties can enter into a dispute resolution clause which essentially excludes Indian law and only applies a certain foreign law and whether this can be barred due to the overriding public policy that Indian parties must abide by Indian law.

This issue was considered in the recent Bombay High Court decision of M/s. Addhar Mercantile Pvt. Ltd. v. Shree Jagdamba Agrico Exports Pvt. Ltd. by Justice R.D. Dhanuka. In this case, two Indian parties entered into a contract and agreed to resolve any disputes of the same via arbitration in either India or Singapore with English law being the law applicable to the arbitration proceedings. The court, in a seemingly bizarre judgement, disregarded all the established precedents of the Supreme Court and the principles of party autonomy which form the de facto globally recognized norm in arbitration. The court explicitly held that domestic parties cannot have a foreign seated arbitration under the law of the seat as that would be derogation from the Indian law as had been stated in TDM Infrastructure v UE Development.

The ratio is patently erroneous on multiple grounds. Firstly, the ratio in the TDM case was with regard to what constitutes a domestic arbitration and a foreign arbitration respectively. Portion of the judgement which was relied upon by the Bombay High Court to arrive at this judgement had in fact been delivered as an obiter by Supreme Court Justice S.V. Sinha. Secondly, Justice Dhanuka failed to take into account the highly celebrated judgement of the constitution bench in BALCO which was subsequently followed by Reliance Industries Ltd. v. Union of India. The Supreme Court in BALCO initiated India’s pro arbitration stance and adopted the territoriality principle enshrined in the United Nations Commission on International Trade Law (UNCITRAL) Model Law. As per this principle, when parties contract to choose a place of arbitration outside India, the law governing the arbitration proceeding would be the law of such country unless provided otherwise.

In Reliance Industries Ltd. v. Union of India, the Supreme Court by overruling the decision of the High Court said that despite the seat of arbitration being in England and the lex arbitri being English law, the Indian Arbitration and Conciliation Act, 1996 including Part I would still be applicable because the substantive law of the contract was Indian law. The Supreme Court further went on to say that any such foreign award can be challenged in India at the time of enforcement as per the grounds given under section 48 and section 57 of the Act if the award is sought to be enforced in India. Even in a scenario where the parties wish to enforce the award elsewhere, there would still exist a remedy against that award in the country where the seat of arbitration was decided.

In light of these two binding Supreme Court decisions which Justice Dhanuka failed to consider along with the erroneous application of the obiter given in the case of TDM Infra v. UE Development, the judgement given in this case is seen to be per incuriam.

In addition to this, the law of arbitration is premised on the fundamental principle of party autonomy i.e., the freedom of parties to contractually devise mechanisms for resolution of their disputes subject to mandatory rules of public policy. Party autonomy permits parties to select the law governing that very contract and/or the jurisdiction that the dispute should be referred to. This is fundamentally based on the principle of freedom of contracts which evolved through the ages resulting in a globally accepted doctrine of the choice of law.

Given its emphasis on the intention of the parties to contract for the applicable law, party autonomy is especially favoured by most practitioners in international business transactions. It is professed that allowing the contractual parties to determine the law that applies to the disposal of their rights and obligations will help achieve efficiency, certainty, predictability, and protection of the parties’ expectations – the values underlying conflict of laws that have particular importance in today’s global economy. Lord Wright has furthered this view by stating that the proper law of the contract “is the law which the parties intended to apply.”

Party autonomy is an accepted doctrine in England, but there is a comparative dearth of Indian case laws dealing with this issue. This has led the courts in India to fall back to English jurisprudence and give effect to the same. This has been witnessed in Andhra Bank Ltd. R. Srinivasan., where a three-judge bench of the Supreme Court relied entirely on English precedents to decide a point of law. Thus, there is an implied acceptance of English principles of conflict of laws including that of party autonomy in the Indian legal system. Additionally, the Supreme Court itself has acknowledged that the Indian Arbitration Act, 1996 envisages party autonomy.

Concluding remarks

The spirit in which the decision has been given by Justice Dhanuka is definitely laudable. However, it appears to be a hasty decision given without due consideration to judicial precedents as well as internationally accepted principles of commercial law relevant in this regard. Additionally, this decision cannot be seen to minimise the supervisory role of courts in the arbitral process which is stated to be one of the main objectives of the Arbitration Act, 1996.

As a consequence, this decision not only appears to be per incuriam, but also derogate from the pro-arbitration approach employed by the Indian courts and furthered by initiatives of the new Government. Considering the possibility that this decision is still subject to scrutiny by the Supreme Court, it is only a minor blip in the Indian arbitration regime and one can only hope that the Supreme Court seizes the initiative to correct this erroneous decision.

(Akhil and Girish are students at National University of Advanced Legal Studies, Kochi.)