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Two Indian Parties Can Agree To Submit To Foreign Jurisdiction For Arbitration

The Court dealing with the proposition i.e. whether two Indians can agree to arbitrate out of Indian law, the Court relied on GMR Energy Limited vs. Doosan Power System India Ltd. & Ors., and held that two Indians can agree to a foreign seated arbitration in case of Dholi Spintex Pvt. Ltd vs Louis Dreyfus Company India Pvt. Ltd., CS(COMM) 286/2020 by the bench comprising of Justice Mukta Gupta.

In the present case, the plaintiff-Dholi Spintex Pvt. Ltd. has instituted the present suit, inter alia, seeking a decree of declaration, declaring Clause 6 of the contract dated 30th May, 2019 being a sale contract between the Dholi Spintex and defendant-Louis Dreyfus Company India Pvt. Ltd. providing for reference of dispute between the parties through arbitration under the rules and arbitration procedures of International Cotton Association as invalid, null & void and consequentially, a declaration of the letter dated 29th April, 2020 issued by the ICA and the reference through arbitration being initiated by the defendant as null and void besides permanent injunction restraining the defendant from proceeding/continuing with the arbitration proceedings against the plaintiff.

The issue is that whether the Indian parties can choose foreign jurisdiction and answering this issue the Supreme Court has held that it is no more res-integra having been decided by the Supreme Court. In the decision of Atlas Export Industries vs. Kotak & Company (1999) Supreme Court dealing with this issue, referring to Exception 1 to Section 28 of the Indian Contract Act held that an agreement to refer the disputes to arbitration does not imply that there is an exclusion by the agreement to have recourse to legal proceedings. It was further held that merely because arbitrators are situated in a foreign country cannot by itself be enough to nullify the arbitration agreement.

It is trite law as laid down by the Hon'ble Supreme Court in the decision Reliance Industries & Anr. vs. Union of India (2014), that when there is a foreign element to the arbitration three sets of law may apply to an arbitration, that is, proper law of the contract; proper law of the arbitration agreement/lex arbitri; and proper law of the conduct of arbitration/lex fori/curial law.

The High Court concluded that:
Therefore, an arbitration agreement between the parties being an agreement independent of the substantive contract and the parties can choose a different governing law for the arbitration, two Indian parties can choose a foreign law as the law governing arbitration. Further there being clearly a foreign element to the agreement between the parties, the two Indian parties, that is the plaintiff and defendant could have agreed to an international commercial arbitration governed by the laws of England. Hence Clause 6 of the contract dated 30th May, 2019 between the parties is not null or void.

Thus as both parties have chosen a foreign system of arbitration with open eyes, the agreement between the parties for resolution of the disputes through arbitration in accordance with ICA rules and arbitration proceedings cannot be held to be null and void or inoperative, warranting this Court to grant an anti-arbitration injunction to the plaintiff.

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