Implied Exclusion of Indian Laws under Arbitration Agreements

Arbitration is an alternative dispute resolution (ADR) mechanism that allows disputing parties a different option to resolve their conflict rather than going through the tedious litigation process. It allows such parties to determine the laws that shall be applicable and the way the arbitration shall be regulated.

When figuring out if the disputing parties intend to indicate the exclusion of certain laws’ applicability in the arbitration agreement, the following provisions of arbitration agreements are taken into consideration by the Courts:

• What is the guideline in the agreement with respect to the ‘seat of arbitration,’
• What is the guideline in the agreement with respect to the ‘proper law of contract,’
• What is the guideline in the agreement with respect to the ‘agreement’s procedural law,’ and
• What is the guideline in the agreement with respect to the ‘curial law.’

The Arbitration and Conciliation Act, 1996 (hereafter referred to as ‘Act’) is divided into the following four different parts:

• Part-I is known as ‘Arbitration’
• Part-II is known as ‘Enforcement of Certain Foreign Awards’
• Part-III is known as ‘Conciliation’
  • Part-IV is known as ‘Supplementary Guidelines’

A common query that arises from these parts is: If the guidelines provided under Part-I of the Act is applicable to international commercial arbitrations that are not located in India, whether the parties may be allowed to determine if this Part-I shall be applicable to the arbitration.

Relevant Judicial Decisions

The first landmark judgement related to implied exclusion of Indian laws under arbitration agreements was made in the matter of Bhatia International vs. Bulk Trading S.A. & Ors., where the Supreme Court held that the guidelines mentioned under Part-I would be applicable to all types of arbitration. When the arbitration is being held in India, the provisions of Part-I would inarguably apply. Though when such proceedings are held outside India, the guidelines provided under Part-I would apply unless the parties through their agreement have expressed the exclusion of some or all the laws provided thereunder.

This judgement was referred to by the Supreme Court and several High Courts across the country when handling various matters pertaining to the same subject.

The Supreme Court, however, in the matter of Bharat Aluminum Company & Ors. vs. Kaiser Aluminum Technical Services, Inc & Ors., stated that the law referred to in the case of Bhatia International (mentioned above) was not the right law. It added that the provisions of Part-I of the Act shall be applicable only to arbitrations, including international commercial arbitrations, that take place in India.

However, after considering the fact that several Courts had already referred to the ruling made in the case of Bhatia International, the Supreme Court, in the case of Bharat Aluminum, stated that its judgment would be bound by certain conditions. It held that any arbitration agreement signed before 6 September 2012 (the date when the judgment for Bharat Aluminum was made) shall be regulated by the ‘Bhatia International’ mechanism.

Implied Exclusions of Indian Laws – When is this Allowed?

When there is an express provision in the arbitration agreement that the laws of India would not be applicable, the same pose no difficulty for the Courts in interpreting the applicable law to the agreement.

However, there are instances where no such categoric exclusion is mentioned and either of the party argues that the parties impliedly decided to exclude the applicability of Indian laws. It is in these instances that the Court is posed with the question whether the parties did intend to exclude the applicability of Indian laws and whether such exclusion can be implied from the various provisions of the arbitration agreement.

A matter that included a distributorship agreement was the Dozco India P. Ltd. vs. Doosan Infracore Co. Ltd., where the clause provided that the agreement would be regulated as per the laws of the Republic of Korea. In addition, it established that all disputes related to this agreement would be resolved through arbitration in Seoul in accordance with the rules of the agreement of the International Chamber of Commerce that were in force at the time.

• An application was filed by the petitioner, an Indian company, under Section 11(6) of the Act before the apex Court.
• The Supreme Court, however, denied accepting the application based on the fact that the parties to the said agreement had chosen to be bound by the Korean laws and specified that arbitral proceedings would be regulated as per the rules of the International Chamber of Commerce; implying they chose to specifically exclude the Indian laws from the arbitration.

The matter of Sakuma Exports Ltd. vs. Louis Dreyfus Commodities Suisse S.A. was a case where the contract between the parties provided that the contract was subject to the rules of the Refined Sugar Association, London. In addition, the agreement clarified that any dispute between the parties to the agreement would be referred to the same entity (Refined Sugar Association, London) for resolution through arbitration. It further noted that the contract would be regulated and interpreted as per the English Law.

• Upon the passing of an award, the Petitioner preferred a Section 34 petition before the single judge of the Bombay High Court which was held to be not maintainable since the Court had no jurisdiction over the matter. Filing an application before the division bench under Section 37 lead to similar results.
• The matter ultimately reached the Supreme Court, which upheld the judgment of the division bench and observed that since the parties had agreed that the contract was subject to the rules of the Refined Sugar Association, London and further that English Law were to apply, Courts in India would have no jurisdiction to set aside the award.

Another thing to keep in mind is that – it is established that if any arbitration agreement does not mention the law and procedure that shall be applicable to it, the laws governing the contract would become the laws governing the arbitral proceedings as well.

Therefore, if a contract states that it would be governed by England Laws and does not state anything about the applicable law and procedure for arbitral proceedings, it may be understood that considering the surrounding circumstances, the laws of England would apply to the arbitration clause as well.

In the case of Harmony Innovation Shipping Ltd. vs. Gupta Coal India Ltd & Ors., the dispute resolution clause provided for arbitration in London and the contract was to be governed and construed according to English Law.

• After conducting an extensive review of the arbitration clause and realizing no other guideline in the agreement pointed to any other law that could govern the arbitration clause, the Supreme Court concluded that the legal seat of arbitration would be London, England.
• As a result, the Supreme Court held that the courts in India would have no jurisdiction as there is an implied exclusion of Indian laws in the arbitration agreement.

In the case of Union of India v. Reliance Industries Limited and Ors., the apex Court concluded that Part-I of the Act could be excluded through mandatory implication if, based on the details of the case:

• The judicial seat of arbitration is located somewhere outside India, or
• The governing law for the arbitration was chosen to be a law other than the laws of India.

Conclusion

As concluded by the Courts at different instances, Indian laws shall only be excluded from an arbitration agreement when an exclusive note for this has been agreed upon by both parties. If the agreement disallows Indian laws to interfere with any disputes arising out of such an agreement, Courts shall not accept any arbitration applications for the said agreement due to this requirement.