Indian Parties Agreeing on Foreign Seat: Sasan Power v North American Coal: Part II

In the previous post on this topic, we had given an introduction to Sasan Power Ltd. v. North American Coal Corporation India Private Limited, a recent ruling of the Supreme Court on an interesting issue. Readers not familiar with the facts are advised to have a look at the previous post. For those who don't want to do so, we'll try to touch upon facts as and when they become relevant for the discussion.

In this post, we provide a descriptive comment of the decision of the Madhya Pradesh High Court:

Proceedings before the District Court, Singrauli:

Readers would recollect that an Indian Company ("Sasan Power Ltd." or "Sasan") and an American company ("North American Coal Corp." or "NACC" or "American Coal") entered into an Agreement in January 2009 for mine development ("Agreement I"). Article XII of the Agreement provided that the Governing Law would be the laws of the United Kingdom" (whatever it meant!- England & Wales, North Ireland or Scotland?) and that dispute resolution would be by ICC Arbitration in London as seat. American Coal established a full owned Indian subsidiary which, for the sake of convenience can be referred to as "American Indian". Sasan, American Coal and American Indian entered into an Agreement ("Agreement II") whereby North American purported to assign all its rights and obligations with the consent of Sasan to American Indian. Agreement II also provided that American Coal was not relieved of its obligations and liabilities although Sason agreed to the transfer and assignment of the rights of American Coal to American Indian. These facts were noted in the previous post itself. 

When disputes arose, American Coal wrote to Sasan terminating Agreement I (July 2014) and made a request to the ICC for arbitration (August 2014). Sasan approached the District Court seeking several reliefs against American Indian (not American Coal). Sasan sought the relief of declaration holding Article XII of the Agreement as null, void, inoperative and unenforceable. There was absolutely no relief claimed in respect of Agreement II. The District Court passed an ex-parte order in November 2014 injuncting the ICC from proceeding with the arbitration. This was intimated by Sasan to ICC. Interestingly, American Coal wrote to the ICC in December 2014 requesting arbitration and stating that Sasan's letter about the ex pare injunction should be seen as a reply to the request for arbitration.

Subsequently, the District Court extended the injunction. American Indian filed two interlocutory applications, one for rejection of plaint on the ground that the suit was barred by law, and the other for vacating the interim injunction. Meanwhile American Indian filed an appeal to the High Court against the grant of injunction. The High Court directed (January 2015) the District Court to dispose of the applications within a month. 

The District Court passed an order (March 2015) allowing the Interlocutory applications of American Indian. As can be deciphered from the judgement of the Supreme Court and the High Court of MP, it appears that the District Court held that the court was bound by a decision of a two-judge Bench of the Supreme Court in Atlas Exports Industries v. Kotak & Company and not by the decision of a Single Judge of the Supreme Court in TDM Infrastructure (P) Ltd. Vs. UE Development India (P) Limited. The District Court relied on Section 45 of the Arbitration and Conciliation Act, 1996 and held that it was bound to refer the dispute to arbitration and therefore rejected the Plaint. It appears that the District Court also held that Agreement II was a tripartite agreement and that therefore the arbitration was an international commercial arbitration. It also appears that the District Judge held that the decision of the Supreme Court in Enercon and Chloro Controls bound the court to refer the dispute to arbitration.

Proceedings before the High Court: 

Against the decision of the District Court, Sasan appealed to the High Court. 

Contentions of behalf of Sasan: Sasan, the appellant contended:

• Once under the Assignment Agreement all the rights and liabilities were transferred from American Coal to American Indian, the agreement was between two Indian parties. Therefore, there was no question of agreeing to have their dispute seated abroad and that therefore, the arbitration agreement was null and void.
• The District Court could not have rejected the plaint under Order VII Rule 11(d) since Section 45 was not a bar for maintainability of the suit. Section 45 did not bar a suit as such and a court if it finds the conditions in Section 45 satisfied can only refer the parties to arbitration.
• Section 45 was applicable only in case of a foreign award or agreement and did not concern a case where there was an agreement between two Indian parties.
• Agreement II was not a tripartite agreement but only a bipartite agreement, between Sasan and American Indian. 
• Further, Section 12  of Agreement I was null and void as it provided for foreign arbitration between two Indian parties and allowed two Indian parties to agree on a foreign substantive law. 

On behalf of American Indian the following were argued:

• The Appeal was not maintainable in view of Section 50 of the 1996 Act against the decision under Section 45 of the said Act.
• Since the matter came under Part II of the 1996 Act, Section 45 created a bar against a suit.
• Atlas Export will apply since there is not much of difference between the relevant provisions of the 1996 Act and the law as it stood before.
• Section 28 of the Act is in Part I and is not applicable where Part II is applicable.
• TDM Infrastructure was decided by a Single Judge while Atlas Export was a two-judge Bench decision. Therefore, Atlas Export will prevail over TDM infrastructure.
• An order passed under Section 11 is not an order of the Court and therefore is not law declared by the Supreme Court for the purposes of Article 141 of the Constitution of India.
• The District Court has correctly rejected the Plaint.
• However, Agreement II is not a tripartite agreement but is a bipartite agreement. However, even if it is a bipartite agreement, the same will not affect the end result of the District Court.
• The arbitration agreement under Agreement II imports the arbitration agreement found in Agreement I and therefore it is an agreement between two Indian Companies agreeing to resolve all their disputes though arbitration with London as the seat of arbitration.

(certain other contentions were made by American Indian which are either referred to subsequently whenever relevant or not referred to)

Decision of the Madhya Pradesh High Court

The High Court's decision is summarised below:

• The decision of the Supreme Court in Bharat Aluminium v. Kaiser Aluminium (as contained in Para 118 thereof) that if the arbitration is not an International Commercial Arbitration as per Section 2(1)(f), the court does not have any choice but to decide the dispute as per Indian substantive law is not applicable in case of arbitrations seated outside India. In such a case, the conflict of laws rules of the seat will apply. The converse interpretation would amount to extra-territorial operation of Part I of the 1996 Act.  In fact, Supreme Court in the same paragraph has said that Section 28 r/w 2(1)(f) modifies the conflict of laws rule as applicable when the place (seat) of arbitration is in India.
• TDM Infrastructure, although contains observations contra to the eventual decision of the Court, is a proceeding under Section 11 of the 1996 Act and also provides that the observations contained therein pertained only to determining the jurisdiction of the court and not for any other purpose. However, in Atlas Exports case, the Supreme Court held that an agreement providing for arbitration between two Indian parties by foreign arbitrators is valid. Thus, from the case, it appears that an agreement providing for arbitration between two Indian companies in a foreign seat is valid. Given that the provisions of the 1940 Act and 1996 Act are similar, there is no reason why Atlas Exports, a decision by a Bench larger than TDM Infrastructure, and under the 1940 Act, should apply. Besides, a corrigendum was added in TDM Infrastructure subsequent to its pronouncement that the observations in the decision would apply only for the determining the court's jurisdiction. Therefore, the decision is not law declared by the Supreme Court for the purpose purposes of Article 141 of the Constitution.
• Atlas Exports has held valid a contract between Indian parties agreeing to a foreign seat. Such an arbitration is governed by Section 44 of the 1996 Act. For such an arbitration, it has to be established under Section 45 that the arbitration agreement is null & void or inoperable or incapable of being performed. The question on nationality of the parties is to be considered only for the purposes of Part I and not for the purposes of Part II as applicability of Part II is determined based solely on the seat of arbitration.
• Once it is determined that Section 45 is applicable, the judicial authority has no other choice but to refer the matter to arbitration.
• The contention that a plaint cannot be rejected under Order VII Rule 11 CPC on the ground of Section 45 of the 1996 Act is not correct. Once Section 45 is attracted, the suit is not maintainable. Under Section 9 CPC, the suit is not maintainable if it is expressly or impliedly barred. The suit in such a case has to be dismissed even as per the Madras High Court in Adam & Coal Resources case. An appeal from such a decision would be hit by Section 50 of the 1996 Act. 
• The crucial test as per Enercon case is whether the parties intended to arbitrate. If the parties intended to arbitrate, then it is the "bounden duty" of the judicial authority to refer the parties to arbitration.
• As regards the two agreements, although Agreement II permitted American Indian to step into the shoes of American Coal, Agreement I between Sasan and American Coal still subsisted. Therefore, the contention that the entire Agreement I stood novated by Agreement II is incorrect. The nature of the transaction itself is akin to Section 43 which contemplates two joint promisors making a promise. In such a case, any of the parties can compel performance of the agreement.
• Once parties themselves have chosen a foreign seat, Section 2(2) of the 1996 Act is inapplicable. In such a case, Part I of the 1996 Act will not apply. Part II will come into play since the agreement complies with Section 44 of the 1996 Act and therefore Section 45 will bar the suit.

On the basis of the aforesaid reasoning, the High Court dismissed the appeal by Sasan. The decision of the High Court can be accessed from here.

In the next posts, we will look at the decision of the Supreme Court and our take on the entire case.