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ANALYSING THE APPLICABILITY OF FOREIGN JURISDICTION CLAUSES IN INDIA

[Jayanti Dhingra is a second year B.A. LL.B.(Hons.) student at O.P. Jindal Global University]


In contracts with foreign entities, parties usually incorporate a foreign jurisdiction clause and take up the alternative dispute resolution mechanisms to address their disputes in order to avoid traditional court systems. Indian Courts have stated that parties can grant exclusive jurisdiction to a foreign court where at least one of the parties is not an Indian. However, the Courts have taken a very restrictive approach in deciding the applicability of foreign jurisdiction clauses. In India, the case of Bhatia International v Bulk Trading SA (Bhatia) changed the arbitration regime substantially and has become the focal point of many low point precedents. It gave the Indian Courts wide powers to adjudicate despite the existence of a mutually agreed jurisdiction clause. The 2012 case of Bharat Aluminium v Kaiser Aluminium Technical Services (Balco), which intended to overrule Bhatia, could not resolve the ambiguity on the applicability of dispute resolution clauses on foreign parties.


This article analyses the different approaches taken by the Indian Courts in analysing foreign jurisdiction clauses which has clouded the foreign parties with uncertainty on whether such contractual clauses will be taken as determinative or non-determinative by the Indian Courts.

 

Navigating the Foreign Jurisdiction Clauses


Part 1 of the Arbitration and Conciliation Act 1996, (Act) which comprises of Section 2 to Section 43, deals with the place of domestic arbitrations. Section 42 deals with the conferment of jurisdiction and any subsequent proceedings to that specific Court only.  Further, Section 2(2) of the Act provides that “This Part shall apply where the place of arbitration is in India”. These Sections clearly provide the legality of domestic arbitration agreements.


Moreover, Section 20 of the Code of Civil Procedure 1908 (CPC) lays down that the place of jurisdiction would be where the defendant has his principal place of business, or where he resides, or where the cause of action arises. The proceedings for arbitral award under the Arbitration Act are governed by the provisions of CPC. However, it has been held that where a specific Court does not have the jurisdiction under CPC, the parties cannot confer the jurisdiction on that Court. Section 28 of the Indian Contract Act 1872 makes “Agreements in restraint of legal proceedings void”. Therefore, there is a limit on the powers of parties to stipulate jurisdiction on any court which otherwise would not have under these Sections. However, exclusive jurisdiction clauses are not barred as the legal maxim of “expressio unius est exclusio alterius” goes, which means “the expression of one thing is the exclusion of the other". The Supreme Court has ruled that the parties are bound by the jurisdiction clause mutually agreed by them and that Section 28 of the Indian Contract Act will only apply where there is an absolute restraint imposed, and not a partial one.


The Courts have generally construed exclusive jurisdiction from the intention of the parties and in situations where at least one of the parties is not an Indian. They relied on reasonable foreseeability or contemplation of the parties regarding the place of jurisdiction. Therefore, the intention of the parties is a primary benchmark and in cases where such clauses are there, the Court should also adhere to it.

 

Institutionalising Arbitration since the Bhatia case


In 2002 came the case of Bhatia International v Bulk Trading SA (Bhatia), where the Supreme Court held that the Indian Courts would have jurisdiction despite the existence of an agreed foreign jurisdiction clause. The Court read Section 2 of the Arbitration Act to mean that Part 1 of the Act would apply to parties even though the arbitration proceedings are seated outside India. This substantially changed the arbitration mechanisms fundamentally and gave Courts a wider power to adjudicate and intervene in foreign proceedings. In the case of Reliance Industries Limited & Anr v Union of India (Reliance), the Delhi High Court took the matter despite accepting that the actual seat of the arbitration proceeding was in London. The Court largely relied on public policy considerations to adjudicate and relied on non-excludability of Part 1 of the Act. The Supreme Court, on an appeal, overruled the Delhi High Court ruling and held that the intention of the parties demonstrated that Part 1 is to be excluded. However, since the arbitration agreement was entered in 1994, there wasn’t any exact criteria to determine the exclusive jurisdiction and it was largely left to the Court to interpret the arbitration agreement and the intention of the parties.


In 2002 came the Bhatia case, where the Supreme Court introduced the concept of “implied exclusion”. The SC ruled that “In cases of international commercial arbitrations held out of India provisions of Part one would apply unless the parties by agreement, express or implied, exclude all or any of its provisions.” This statement has formed the bedrock of various cases before the court in order to resolve the ambiguity of the term “implied exclusion”. This judgement gave the Court wide powers to adjudicate and intervene in foreign proceedings. This is similar to the reasoning adopted by the Delhi High Court in the Reliance case when it raised public policy considerations and the non-excludability of Part 1 of the Act. The Bhatia case added confusion as to what should be the terms agreed by the parties which would amount to “implied exclusion” of Part 1. The same line of argument has been adopted in cases like Venture Global Engineering v Satyam Computer Services Ltd and Indtel Technical Services Pvt Ltd v WS Atkins Plc and held that a mere choice to adopt the foreign law will not imply excludability of Part 1. In Citation Infowares Ltd. v. Equinox Corporation, the agreement clause 10.1 stated that "Governing law- This agreement shall be governed by and interpreted in accordance with the laws of California, USA and matters of dispute, if any, relating to this agreement or its subject matter shall be referred for arbitration to a mutually agreed Arbitrator." But the Supreme Court still interpreted such clause to mean that there is no “implied exclusion”, and therefore, Part 1 is applicable. These judgements have provided focal points for low point precedents in the arbitration regime, and was followed by Courts till the 2012 judgement of Bharat Aluminium v Kaiser Aluminium Technical Services (Balco).


Balco case overruled the Bhatia case and held that Part 1 of the Act would only apply in domestic seated arbitrations and not foreign seated ones. However, this judgement solved only partial loopholes by stating that the provision would have prospective application, and will not be applied retrospectively. The case created a cut-off date of 6 September 2012 after which the Indian courts would not have jurisdiction when there is a foreign seated arbitration. But before this cut-off date, the ruling of the Bhatia case and the necessity of “implied exclusion” still holds true. Although, this case did not completely overrule the Bhatia case, yet it did give a sense of certainty and sought to curb the wide-ranging powers of the Court held by Part 1 of the Act. In line with implementing an arbitration pro approach, Courts began to follow the Balco case; thereby bringing up jurisprudence which is arbitration oriented and has helped in streamlining foreign companies’ interests. After that, there have been many cases when the courts have upheld the arbitration clause regarding foreign jurisdiction and have supported the decisions given by foreign seated proceedings.


Looking at the acts applicable to foreign countries regarding exclusive jurisdiction clauses, it would be seen that their own laws prohibit conferment of jurisdiction on a court which would otherwise not have under their respective laws. Foreign seated arbitrations like in London are governed by the English Arbitration Act 1996 (English Act). In order to set aside the arbitral awards, due regard has to be given to Sections 67, 68 and 69 of the Act. Contrasting it with Section 34 of the Arbitration and Conciliation Act, 1996 would render the latter irreconcilable with the English Act. Therefore, a clause specifically meant to confer jurisdiction on a particular Court would render English laws incompatible with Part 1 of the Act.

 

Conclusion


There are now majorly two scenarios coming up – first that the foreign parties would seek remedy from foreign court, while on the other hand, the Indian courts would declare the foreign judgement as inconclusive, as per Section 13 of CPC. Therefore, foreign parties will eventually end up before the Indian Courts. However, looking at international laws like the English Arbitration Act, 1946, it does not matter whether the parties had any intention to exclude Part 1 of the Act, or whether they did incorporate a clause for the same. In Union of India v McDonnell, even though the case came much before the Indian and English laws of arbitration came into being, the parties had mutually agreed that Indian law would apply while the seat would be in London. However, despite the existence of such clause, the English Courts held that the laws of that country would apply where the seat is situated. Therefore, some incompatibility can arise between foreign courts and Indian courts, on whether to go by the intentions of the parties alone, or to take into consideration the location of the seat as well.


Moreover, the Indian Courts did try to solve the loopholes of the Bhatia case in the Balco, but rejecting the retrospective application from 6 September 2012, did not explicitly overrule Bhatia. This can create problems which can lead to reluctance among foreign parties to invest in India. A contract can be fundamentally defeated if one of the parties is able to prove lack of consensus ad-idem regarding jurisdiction clause. So, while India is still mulling to give due recognition to such clauses, there is a need to incorporate a liberal approach rather than imposing Indian law on foreign parties so that there is a further push to promote arbitration.

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