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Bombay High Court rules that two Indian companies must have Indian law and not English law as applicable law for arbitration in their contract

David Bond
15/09/2015
In the recent case of M/s Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Private Limited[1], Justice R.D Dhanuka of the Bombay High Court ruled that it is against public policy for In the recent case of M/s Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Private Limited[1], Justice R.D Dhanuka of the Bombay High Court ruled that it is against public policy for two Indian parties to derogate from Indian law and apply English law as governing law for arbitration. This means that if a foreign brand owner has an Indian subsidiary or a master franchisee in India, then any agreement between the Indian subsidiary and another Indian party or between the Indian master franchisee and sub-franchisee must not provide for English law, or for that matter law of any country other than India, as the governing law for arbitration. The judgment, however, does not deal fully with the issue of whether the seat of the arbitration must also be in India or whether parties can choose to go to, for example, Singapore or London.

Justice Dhanuka's decision was based on earlier cases decided by the Supreme Court[2], which provided that according to Section 28 of the Indian Arbitration & Conciliation Act 1996, when there was a case between two Indian parties, it was a domestic arbitration and the arbitral tribunal had to decide the matter in accordance with Indian law. Further, that the aim of the legislation was to ensure that Indian parties do not circumvent the Indian substantive law by resorting to arbitrations.

The case of Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Private Limited tested whether the principal of freedom of contract and ability of parties to choose applicable law was possible between two Indian parties. The contract between the disputing parties had an arbitration clause which provided for arbitration in India or Singapore and English law to be applied. The applicant had approached the court to appoint an arbitrator and for certain interim reliefs under the Indian Arbitration Act. The Respondent had argued that even though both parties were Indian they could have the seat of arbitration in Singapore and apply English law. The applicant on the other hand, relied on existing Supreme Court decisions and contended that since both parties were Indian they could not derogate from Indian law.

Under Indian law and public policy, it is necessary for at least one party to the contract to be a foreign entity or individual for the applicable law of contract and dispute resolution clause to be other than Indian.

To be on the safe side, in a contract where all parties are Indian, it is advisable to have Indian law govern the agreement and alternate dispute resolution in India. The main reason is that even if advantage is taken of the grey area regarding the seat of the arbitration, the arbitral award may be challenged by the party against whom an award is made at the time of enforcement in India. It seems that Indian parties seeking to use another law or venue for faster resolution of their dispute face significant impediments.

[1]Arbitration Application 197/2014 and Arbitration Petition 910/2013

 

[2] TDM Infrastructure Private Limited v UE Developments Private Limited (2008) 14 SCC 271 and Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc (2012) 9 SCC 552

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