Can Indian Companies Agree to Foreign Governing Law? Supreme Court Clarifies

Introduction

The Supreme Court of India recently addressed a significant question regarding the enforceability of arbitration agreements between Indian companies that stipulate foreign governing law. In the case of Sasan Power Limited vs North American Coal Corporation India Private Limited, the Court clarified the legal standing of such agreements and the implications of the Arbitration and Conciliation Act, 1996.

Case Background

The dispute arose from an agreement between Sasan Power Limited, an Indian company, and North American Coal Corporation (NAC), a Delaware corporation. The parties entered into an agreement (AGREEMENT-I) on January 1, 2009, which included provisions for arbitration under the laws of the United Kingdom. Subsequently, a second agreement (AGREEMENT-II) was executed, purportedly assigning NAC's rights and obligations to a fully owned Indian subsidiary, North American Coal Corporation India Private Limited (NACC India).

Disputes emerged, leading to NAC's request for arbitration, which Sasan Power contested in court, seeking declarations that various clauses of the agreements were null and void. The trial court dismissed Sasan Power's suit, leading to an appeal in the High Court, which upheld the dismissal, stating that the arbitration agreement was valid and enforceable.

What The Lower Authorities Held

The trial court found that the arbitration agreement was valid and that the suit was not maintainable due to the existence of the arbitration clause. The High Court affirmed this decision, emphasizing that the parties had mutually agreed to resolve disputes through arbitration in London, thus invoking Section 45 of the Arbitration and Conciliation Act, which mandates referral to arbitration when a valid agreement exists.

The Court's Reasoning

The Supreme Court, while examining the case, focused on several key legal principles. Firstly, it reiterated that an arbitration agreement is independent of the substantive contract. This means that issues regarding the validity of the main contract do not affect the arbitration agreement's enforceability. The Court emphasized that the arbitration agreement must be evaluated on its own merits, irrespective of the substantive contract's legality.

The Court also addressed the question of whether two Indian companies could agree to foreign governing law. It concluded that such agreements are permissible, especially when the arbitration involves a foreign element, as was the case here with NAC being a foreign entity. The Court highlighted that the autonomy of parties to choose the governing law is well recognized in international commercial law.

Statutory Interpretation

The Court's interpretation of Section 45 of the Arbitration and Conciliation Act was pivotal. It clarified that this section obligates judicial authorities to refer parties to arbitration if the arbitration agreement is found to be valid. The Court noted that the language of Section 45 is mandatory, indicating that once a valid arbitration agreement is established, the court has no discretion but to refer the matter to arbitration.

The Court also referenced the historical context of the Arbitration and Conciliation Act, tracing its evolution and the influence of international conventions on its provisions. It underscored that the Act aims to facilitate arbitration as a means of dispute resolution, particularly in international commercial contexts.

Why This Judgment Matters

This ruling is significant for legal practice in India as it clarifies the enforceability of arbitration agreements involving foreign governing law. It reinforces the principle that arbitration agreements are independent and should be upheld even if there are disputes regarding the substantive contract. This decision encourages international commercial transactions by affirming that Indian companies can engage in agreements governed by foreign law, thus enhancing India's position in global trade and investment.

Final Outcome

The Supreme Court dismissed the appeal, affirming the lower courts' decisions and emphasizing the validity of the arbitration agreement. The Court's ruling underscores the importance of respecting the parties' autonomy in choosing governing law and the procedural integrity of arbitration as a dispute resolution mechanism.

Case Details

• Case Reference: Sasan Power Limited vs North American Coal Corporation India Private Limited
• Court: In The Supreme Court Of India
• Bench: Justice Jasti Chelameswar, Justice Abhay Manohar Sapre
• Date of Judgment: August 24, 2016