2016 (8) TMI 1508 - SC - Indian Laws

Indian companies' arbitration agreement with UK governing law upheld despite public policy challenge under Section 23

Sasan Power Limited Versus North American Coal Corporation India Private Limited

The SC dismissed the appeal regarding the validity of an arbitration agreement between two Indian companies with UK law as governing law. The court held ... Legal Nature of the Transaction Covered by the Agreements - Agreement-II was an assignment or a novation - Meaning of word 'Novation' - 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'? HELD THAT:- In the facts and circumstances of the case on hand as indicated by the record, the AGREEMENT-II appears to be falling under the 2nd of the above mentioned two classes of the contracts. There is no discharge of the original contractee i.e., the American company's obligations. There are mutual obligations (arising out of AGREEMENT-I) still to be enforced. The American company legally cannot claim to have been discharged from the obligations arising under AGREEMENT-I and infact has not been discharged. On the other hand, the Appellant by an express covenant under AGREEMENT-II retained its rights to enforce obligations (arising under AGREEMENT-I) against the American company - 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 is 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 cannot be said to be an agreement between only two Indian companies. Section 45, permits an enquiry into the question whether the arbitration agreement is 'null and void, inoperative and incapable of being performed' - The Appellant's case as evidenced by the plaint in its suit is 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. Because (according to the Appellant's understanding) the parties to AGREEMENT-II are 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. According to the Appellant, 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 cannot be proceeded with. The principles of law in this regard are well settled. In all of the cases, the validity of either of the clauses/agreements does not depend upon the existence of the other - the examination of the question of consistency of Article X Section 10.2 (part of the substantive contract) with Section 23 of the Contract Act are beyond the scope of the enquiry while adjudicating the validity of the arbitration agreement either Under Section 45 or Section 8 (amended or original) of the 1996 Act. Therefore, the submissions of the Appellant in this regard are required to be rejected. Appeal dismissed. Issues Involved:1. Validity and enforceability of arbitration agreements between two Indian companies under foreign law.2. The applicability of Part I and Part II of the Arbitration and Conciliation Act, 1996.3. The legal nature of the transaction covered by the agreements.4. The validity of the substantive contract under Indian Contract Act, 1872.5. The jurisdiction of Indian courts to refer parties to arbitration under Section 45 of the Arbitration and Conciliation Act, 1996.Issue-wise Detailed Analysis:1. Validity and Enforceability of Arbitration Agreements Between Two Indian Companies Under Foreign Law:The primary argument was whether two Indian companies could agree to refer their disputes to arbitration seated outside India and governed by foreign law. The Court clarified that the dispute involved three parties, including an American company, thus introducing a foreign element. Therefore, the stipulation regarding the governing law could not be seen as an agreement solely between two Indian companies. The autonomy of parties to choose the governing law in international commercial arbitration was recognized under Section 28(1)(b) of the Arbitration and Conciliation Act, 1996.2. Applicability of Part I and Part II of the Arbitration and Conciliation Act, 1996:The Court discussed the applicability of Part I and Part II of the Act in light of the precedents set by Bhatia International and BALCO. It was noted that Part I applies to all arbitrations held in India, while Part II deals with the enforcement of foreign awards. The agreements in question were governed by the law declared in Bhatia International, as they were entered into before the BALCO judgment. The agreements excluded the application of Part I except for Section 9, thus falling under both parts of the Act.3. Legal Nature of the Transaction Covered by the Agreements:The Court examined whether the transaction under Agreement-II was an assignment or a novation. It was concluded that Agreement-II was not a mere assignment but a tripartite agreement involving the American company, which retained its obligations. The transaction was found to be an amendment rather than a novation, as it did not discharge the original contractee (American company) from its obligations.4. Validity of the Substantive Contract Under Indian Contract Act, 1872:The appellant challenged the validity of certain clauses in the substantive contract (AGREEMENT-I) under Section 23 of the Indian Contract Act, 1872. The Court held that the arbitration agreement is independent of the substantive contract. The scope of enquiry under Section 45 of the Arbitration and Conciliation Act, 1996, is limited to the validity of the arbitration agreement and does not extend to the examination of the substantive contract's legality.5. Jurisdiction of Indian Courts to Refer Parties to Arbitration Under Section 45 of the Arbitration and Conciliation Act, 1996:The Court emphasized that Section 45 mandates judicial authorities to refer parties to arbitration unless the agreement is found to be null and void, inoperative, or incapable of being performed. The Court found that the agreements in question were valid and enforceable, thus obligating the referral to arbitration. The trial court's order was modified to explicitly refer the parties to arbitration as required under Section 45.Conclusion:The appeal was dismissed, and the Court upheld the validity of the arbitration agreements, recognizing the autonomy of parties in choosing the governing law and the arbitration seat. The Court also clarified the applicability of Part I and Part II of the Arbitration and Conciliation Act, 1996, and reinforced the principle that arbitration agreements are independent of the substantive contract. The trial court's order was modified to ensure compliance with Section 45, referring the parties to arbitration.