Thursday, October 23, 2008

SUPREME COURT RULES ON THE MEANING OF “INTERNATIONAL COMMERCIAL ARBITRATION”, WITH CONSEQUENCES FOR FORUM SHOPPING

The case of TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd., decided by a single judge bench of the Supreme Court in May 2008, is an important judgment dealing with the issue of forum shopping with respect to seats of arbitration, and arbitration laws. In TDM Infrastructure, the facts were these: the two parties to the dispute were companies registered under the Companies Act of 1956. However, the directors and the shareholders of the petitioner company were residents of Malaysia and the Board of Directors of the petitioner also sat in Malaysia. The respondent entered into a contract with the petitioner, which also contained an arbitration clause. This arbitration clause mandated that the law applicable in case of a dispute would be the Indian Arbitration Act of 1940 and amendments thereafter.

Subsequently, differences arose between the parties. When the arbitration agreement was resorted to, the Respondent proposed an amendment to the arbitration clause by changing the venue of arbitration to Kuala Lumpur, Malaysia, and applying the law of Malaysia, and the Malaysian Arbitration Act of 2005. This proposal was rejected by the petitioner, subsequent to which both parties proposed nominees that were rejected by the other party. Therefore, an application was made under Sections 11(5) and 11(6) of the Arbitration and Conciliation Act of 1996 for the appointment of a sole arbitrator.

Section 11 of the Arbitration & Conciliation Act, 1996 deals with the procedure to appoint arbitrators. Section 11(12) states that only in cases of International Commercial Arbitration, the Chief Justice of India can exercise jurisdiction to appoint an arbitrator. In all other matters i.e. domestic arbitration, the appointment of the arbitrator has to be carried out by Chief Justices of High Courts. Thus, the matter hinged upon the issue whether this was a case of International Commercial Arbitration.

Section 2(1)(f)(ii) of the Arbitration & Conciliation Act defines International Commercial Arbitration as an arbitration where at least one of the parties is a body corporate which is incorporated in any country other than India. Section 2(1)(f)(iii) also defines International Commercial Arbitration wherein a party is a company or an association or a body of individuals whose central management and control is exercised in any country other than India.

It was contended by the UE Development group that as TDM Infrastructure Group is incorporated in India, it should also be legally deemed to be situated in India notwithstanding the fact of its directors being foreign nationals. Thereby, as both the companies would be incorporated in India, Section 2(1)(f)(ii) would not be applicable and the matter would be one of domestic arbitration. On the other hand, TDM Infrastructure raised the contention that as its central management and control is exercised from Malaysia, its day-to-day management does not take place in India. Therefore, as per Section 2(1)(f)(iii), it was International Commercial Arbitration and the Chief Justice of India could appoint the arbitrator.

The Court held that if both the companies are incorporated in India, the arbitration agreement concluded between them shall be construed to be a domestic arbitration agreement and not an International Commercial Arbitration. The Court also placed Section 2(1)(f)(ii) on a higher pedestal than Section 2(1)(f)(iii) remarking that the latter will only be applicable in cases where Section 2(1)(f)(ii) does not apply in its entirety. Thus, the Court limited the application of Section 2(1)(f)(iii) to cases where the body corporate is an association or a body of individuals unregistered or unincorporated under Indian Companies Act, 1956.

The importance of this case lies in the fact that the Court has restricted the scope for forum-shopping by companies in order to choose national arbitration laws that are most conducive to their interests. By holding that a company incorporated in India can only have Indian nationality, and therefore, an arbitration between two such companies would necessarily be a domestic arbitration, and by further observing that it is part of Indian public policy that Indian nationals should not be permitted to derogate from Indian law, the Court has made its stance clear in this regard. Also, this stance adds greater certainty and clarity to the determination of jurisdiction of the High Courts and the Supreme Court to appoint arbitrators.

By Gautam Bhatia & Venugopal Mahapatra

3 comments:

Anonymous said...

Would it be correct to say that the court went against what was expressly written under the Act? Section 2(1)(f) very clearly uses the word “or” after each sub-clause – this means that an arbitration is an international commercial arbitration if EITHER one of the parties is incorporated outside India OR its management is controlled from outside India. How did the court arrive at the conclusion that 2(1)(f)(iii) only applies where (ii) does not? If there was no solid reasoning there, would you agree that maybe the judgement deserved criticism and not praise?

gautam said...

While that it is a valid point, it must be remembered that Sections 2(f)(ii) and 2(f)(iii) are worded in such a manner that in many situations there will be an overlap. What the Court has tried to do is to harmoniously reconcile the two provisions, with a view to preventing confusion in cases of overlap and, further, to prevent forum shopping by the parties involved.

Anonymous said...

Wouldn't it would be better if you had answered the question as to what exactly did the court do which was commendable?

In my view, it clearly misinterpreted the law. Nowhere in your article do you describe the reasons for putting 2(f)(iii) over (ii). The law maker was as clear as it could be - it's an ICA if either one of the parties is foreign or foriegn managed. So if on facts the company was foreign managed, then why is it not an ICA?

There was no question "reconciling the overlap or the two provisions"! It does not require superior intelligence or some aid of statutory interpretation to know what "or" means.

If you argument is based on public policy (i.e. forum shopping) sadly again neither your article nor your reply clarify your line of argument.

Don't want to rant, but more critical look at the judgements would be helpful.