Can Indian parties choose foreign seat of arbitration? Supreme Court’s Sasan judgment fails to resolve uncertainty

The Supreme Court of India has recently upheld a judgment of the Madhya Pradesh High Court regarding the arbitration agreement entered into between Reliance owned Sasan Power Ltd and North American Coal Corporation (NAAC America)..The judgment was delivered by a Bench of Justices Jasti Chelameswar and AM Sapre..In October last year, the Madhya Pradesh High Court had ruled that two Indian parties can choose a foreign arbitral seat. The Supreme Court, however, did not answer this question, instead concluded that a foreign element is involved in the agreement and hence, arbitration can be under foreign law..The dispute arose out of a mine development agreement entered into between Reliance-owned Sasan Power Ltd, and NAAC America (Agreement I). Two years after the agreement was entered into, the North America Coal Corporation India (NACC India) was formed, whereby all rights and liabilities under Agreement I were transferred from NAAC America to NACC India (Agreement II)..Subsequently, disputes arose between the two parties, and arbitral proceedings were sought to be initiated. Agreement I provided that the seat of arbitration would be London and the law applicable would the law of United Kingdom..Sasan had contested the arbitration contending that Indian parties are prohibited from choosing a foreign seat of arbitration. The District judge and the High Court had dismissed Sasan’s plea whereupon an appeal was filed in the Supreme Court..The question that was put before the Supreme Court was whether two Indian parties can refer their arbitration with the place of arbitration outside India with the governing law being UK law..“The argument before us was confined only to the question whether two Indian companies can enter into an agreement with a stipulation that their agreement “be governed by, construed and interpreted in accordance with the laws of the United Kingdom.”.The Court, however, proceeded to decide the case based on the two agreements between the parties, especially Agreement II..It concluded that though NAAC America assigned its rights and obligations to NAAC India by way of Agreement II, NAAC America was not discharged of its obligations as there was an express covenant in Agreement II which empowered Sasan to enforce obligations arising out of Agreement I against NAAC America..“In the facts and circumstances of the case on hand as indicated by the record, the AGREEMENT-II appears to be falling under the 2nd of the above mentioned two classes of the contracts. There is no discharge of the original contractee i.e., the American company’s obligations. There are mutual obligations (arising out of AGREEMENT-I) still to be enforced. The American company legally cannot claim to have been discharged from the obligations arising under AGREEMENT-I and in fact has not been discharged. On the other hand, the appellant by an express covenant under AGREEMENT-II retained its rights to enforce obligations (arising under AGREEMENT-I) against the American company. AGREEMENT-II perhaps only creates an agency where the American company is the principal and the respondent its agent or what is described in some cases as sub-contracting….”.The Court held that adjudication of the dispute raised by the NAAC India in the arbitration would necessarily involve examination of the rights and obligations of the American company under AGREEMENT-I and AGREEMENT-II. Therefore, it is a dispute between three parties (of which one is an American company) with a foreign element i.e. rights and obligations of the American company..The Court, therefore concluded,.“…. the question whether two Indian companies could enter into an agreement to be governed by the laws of another country would not arise in this case. So long as the obligations arising under the AGREEMENT-I subsists and the American company is not discharged of its obligations under the AGREEMENT-I, there is a ‘foreign element’ therein and the dispute arising therefrom. The autonomy of the parties in such a case to choose the governing law is well recognised in law.”.While the MP High Court decision has been upheld, the uncertainty on the position as to whether two Indian parties can have a foreign seat of arbitration continues. More specifically, the conflict between the Bombay High Court view in M/s Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Private Ltd) and Madhya Pradesh High Court view in Sasan is yet to be resolved..Sasan was represented by senior counsel Fali Nariman briefed by Agarwal Law Associates. NAAC was represented by senior counsel Gopal Subramanium along with Anirudh Krishnan who was engaged by Jones Day..Read the judgment below.