The Supreme Court of India decision on TDM Infrastructure Private Limited Vs. UE Development India Private Limited has taken a controversial turn.
The decision distinguished between International Commercial Arbitration and Domestic Arbitration by putting them to the test of nationality and domicile. The parties to this agreement are corporation registered and incorporated undcorporationsanies Act of 1956.
The petitioner’s Board of Directors is based in Malaysia and the petitioner’s directors and shareholders, are said to be Malaysian. In this age of globalization, when contracts between companies are becoming increasingly complex and jurisdictions are merging, decisions like the one rendered in the case may not find many supporters.
To understand the main situation of the governing case, it is important to look into the main aspects of the Arbitration and Conciliation Act, of 1996.
The Acts of Arbitration and Conciliation Act, 1996.
The Acts are divided into two parts. First, domestic arbitration and second, provide some types of foreign awards.
Section 2(1)(f) of domestic arbitration defines International Commercial Arbitration which means an arbitration relating disputes arising out of a legal relationship, whether contractual or not, considered commercial under Indian law and where at least one of the parties is- an individual who is a national or habitually resident in, any country other than India; or a body corporate which is incorporated in any country other than India; or a company, an association, or a body of individual whose central management and control is exercised in any country other than India; or a body corporate which is incorporated in any other.
Section 11(1), 11(5) and 11(9) are as follows –
11- Appointment of arbitrators; (1) Unless the parties agree otherwise, any person of any nationality may serve as an arbitrator.
(5) In the absence of any agreement referred to in sub-section (2), in an arbitration with a subsection or, if the parties fail to agree on the arbitrator within thirty days of receipt of a request by one party from the other party to do so, the appointment shall be made by the Chief Justice or any person or institution designated by him, upon request of a party.
(9) In the case of appointing a sole or third arbitrator in an international commercial arbitration, the Justice of India or the person or institution designated by him may appoint an arbitrator of a nationality other than the parties’ nationalities.
According to the facts of this case, the companies that posed as disputants were incorporated under the Indian Companies Act of 1956. It is worth noting that the petitioner was the company’s Director, Shareholders, and Board of Directors, all of whom lived in Malaysia.
The National Highway Authority of India awarded the respondent company a rehabilitation and upgrading contract, a portion of which was subcontracted to TDM Infrastructure Private Limited (the ‘petitioner’). The company’s board meetings and daily operations were managed from Malaysia. An arbitration clause was also included in the parties’ contract.
This clause required that all or any disputes between the parties be resolved through arbitration, which would be governed and regulated in accordance with the Arbitration and Concby (‘The Act’). The arbitration seat was supposed to be in New Delhi (India). Following that, a disagreement arose between the parties regarding the appointment of an arbitrator.
As a result, the Apex Court applied for the appointment of an arbitrator under the terms of Section 11 Clause 5 and Section 11 Clause 6 of the Act, which, among other things, authorize the Chief Justice of India or any other person or institution designated by him to appoint an arbitrator in the case of an International Commercial Arbitration. The Supreme Court ruled that it lacks jurisdiction to appoint an arbitrator.
BACKGROUND OF THE CASE
Both parties in the case were corporations formed under the Indian Companies Act of 1956. The National Highways Authority of India awarded UE Development India Private Limited (‘UED’) a contract for rehabilitation and upgrading, with a portion of the work subcontracted to TDM Infrastructure Private Limited (‘TDM’). TDM’s shareholders and directors were Malaysians. All board meetings and day-to-day management of the company were also managed from Malaysia.
The contracts between the parties included an arbitration clause that stated that any disputes between the parties would be resolved through arbitration in accordance with the provisions of the Arbitration Act, 1996 (‘the Act’). The arbitration would be held in New Delhi.
There were disagreements between the parties regarding the appointment of an arbitrator. TDM petitioned the Supreme Court for the appointment of an arbitrator under Sections 11(5) and 11(9) of the Act, which, among other things, authorize the Chief Justice of India or any other person or institution designated by him to appoint an arbitrator in the case of international commercial arbitration.
The arbitrator was to be appointed by the Chief Justices of the High Courts in all other matters. As a result, the court was asked whether the current case was a case of international commercial arbitration.
The Supreme Court ruled that the current case is not one of international commercial arbitration because both parties have been incorporated in Indi. Thus it lacks jurisdiction under the Act to appoint an arbitrator in this case.
When drafting an arbitration clause, remember that if both parties to a dispute are Indian, either by being incorporated in India or otherwise, the parties cannot exclude the application of the Indian Arbitration Act 1996.
Regardless of whether the subject matter of the contract is located outside of India, if the parties have Indian nationality or domicile, they may be unable to subject their arbitration agreements or clauses to arbitration laws of another favourable jurisdiction.
Furthermorfavorable arbitrations held outside India, the provisions of Part 1 of the Arbitration and Conciliation Act (which allows courts to set aside domestic awards on broad public policy grounds) would apply unless the parties expressly or implicitly agreed to exclude all or any of its provisions.
The legislature’s intent in passing the Act is clear: Indian nationals should not be allowed to deviate from Indian law as part of the country’s public policy. As a result of this decision, the scope of international commercial arbitration in domestic disputes has been narrowed. It contradicts the arbitration mechanism’s founding premise that ‘party autonomy’ is superior.
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