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

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 that Agreement-II was an assignment, not a novation, as the original American company's obligations under Agreement-I remained undischarged. Since the dispute involved examination of the American company's rights and obligations, it constituted a three-party dispute with foreign elements, making the UK governing law clause valid. The court rejected the appellant's argument that the UK law stipulation violated public policy under Section 23 of the Indian Contract Act, ruling that validity of substantive contract clauses cannot be examined when determining arbitration agreement validity under Section 45.

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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.

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