Gavin Howe
The Indian Contract Act, 1872, outlines the circumstances under which promises made by the parties to a contract become legally binding. However, it is unclear whether Indian parties can choose a foreign law to govern their contractual relationship. While some sources suggest that Indian parties can choose a foreign law as the law governing arbitration, others argue that Indian parties cannot contract out of Indian law. This topic is further complicated by the fact that Indian courts follow the doctrine of precedents, which considers the context of the questions that come forth for determination. This article will explore the legal intricacies surrounding this issue and provide insights into how Indian courts have handled similar cases.
| Characteristics | Values |
|---|---|
| Arbitration agreement | Can be governed by a foreign law |
| Governing law | Indian law |
| Governing law for arbitration | Foreign law |
| Contractual clauses | Can exclude liability for certain types of losses |
| Contractual clauses | Cannot exclude liability for breach of contract |
| Contractual clauses | Can limit liability for breach of contract |
| Governing law for arbitration agreement | Depends on the closest and most real connection |
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What You'll Learn
Indian parties can choose foreign law in arbitration agreements
The Indian Contract Act, 1872 outlines the circumstances under which promises made by the parties to a contract become legally binding. However, Indian courts follow the doctrine of precedent, which means that the judgment of the courts must be interpreted in the context of the specific case. This has led to some ambiguity over whether Indian parties can choose foreign law in arbitration agreements.
In Sasan Power Limited v. North American Coal Corporation, the apex court clarified that when a foreign element is involved in an agreement, the parties have the autonomy to choose foreign law. This means that the Arbitration Act does not prohibit Indian parties from opting for foreign law, and there is no violation of public policy under Section 23 of the Contract Act.
The Delhi High Court in Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company India Pvt. Ltd. further supported this position, holding that two Indian parties can choose a foreign law as the law governing the arbitration between them. The Court reiterated the limited interference by Indian Courts in international arbitrations. The Court observed that an arbitration agreement is independent of the substantive contract and can, therefore, be governed by a different law.
The Gujarat High Court in GE Power Conversion India Pvt. Ltd. v. PASL Wind Solutions Pvt. Ltd. (2017) also ruled that Indian parties to an arbitration agreement can choose a foreign seat within the provisions of the Arbitration and Conciliation Act, 1996.
However, it is important to note that the choice of a foreign arbitration seat does not mean that Indian parties can contract out of Indian law entirely. The Supreme Court has ruled that parties are allowed to select three separate laws to govern their relationship: the law of the contract, the law for the arbitration agreement, and the law for the conduct of the arbitration. Additionally, the Court has clarified that a foreign award between Indian parties cannot be deemed against public policy simply because of the foreign jurisdiction, but it may be contested during enforcement if it violates the "core policy of Indian law" or "basic ideas of justice and morality".
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Indian courts follow the doctrine of precedent
The Indian judiciary has consistently upheld the right of parties to choose a governing law, following the decisions of the Supreme Court. Indian courts follow the doctrine of precedent, which states that the judgment of the courts must be interpreted in the context of the questions that arise for determination before them.
The Supreme Court has established that party autonomy in the choice of law extends to international commercial arbitration, where the doctrine has been deemed a "foundational pillar". This was illustrated in the matter of TDM Infrastructure Private Limited v UE Development India Private Limited.
In Sasan Power Limited v. North American Coal Corporation, the apex court clarified that when a foreign element is involved in an agreement, the parties have the autonomy to choose foreign law. The court observed that the Arbitration Act does not prohibit two Indian parties from opting for foreign law, thus, there is no violation of public policy under Section 23 of the Indian Contract Act, 1872.
The Delhi High Court in Dholi Spintex Pvt Ltd. V. Louis Dreyfus Company India Pvt. Ltd. held that two Indian parties can choose a foreign law as the law governing the contract with an arbitration clause, as the arbitration agreement is an independent agreement.
However, it is important to note that there are certain limitations to contracting out of Indian law. For instance, Section 23 of the Indian Contract Act, 1872 states that any attempt to exclude the application of Indian laws is void and against public policy. Additionally, clauses limiting liability are subject to considerations such as the bargaining power of the parties and public policy.
In conclusion, while Indian courts follow the doctrine of precedent and allow for party autonomy in the choice of governing law, there are certain exceptions and limitations, particularly when it comes to public policy and liability.
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Indian parties can choose a foreign court to resolve disputes
The Indian Supreme Court has confirmed that Indian parties can choose a foreign court to resolve disputes. In a judgment, the court stated that "nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when parties happen to be Indian nationals." This means that Indian parties can agree to resolve disputes through arbitration in a foreign country, such as Singapore, London, Paris, or Zurich.
The Supreme Court's judgment resolves uncertainty caused by conflicting opinions delivered by high courts in different Indian states. The court clarified that an award made in a foreign-seated arbitration between Indian parties will be considered a 'foreign award', and its enforcement in India would be governed by the New York Convention. This judgment should provide comfort for foreign businesses operating or planning to operate in India, who may be sceptical of encountering the Indian court system in the event of a dispute.
However, it is important to note that there are differing opinions on this matter. Some argue that Indian parties cannot agree to resolve disputes under foreign law as it would mean contracting out of Indian law and would be opposed to public policy. For example, in the case of Addhar Mercantile Private Limited v Shree Jagdamba Agrico Exports Pvt Ltd, the Bombay High Court held that since both parties were Indian and the agreement was executed in India, the dispute had to be resolved through arbitration in India.
On the other hand, there have been instances where Indian courts have recognised the validity of Indian parties choosing a foreign law to govern their arbitration agreement. For example, in the case of Dholi Spintex Pvt Ltd v Louis Dreyfus Company India Pvt Ltd, the Delhi High Court held that two Indian parties could choose a foreign law as the law governing the arbitration between them. The court reiterated the legal position on limited interference by courts in international arbitrations.
Therefore, while the Indian Supreme Court has confirmed that Indian parties can choose a foreign court to resolve disputes through arbitration, there may still be some uncertainty and conflicting opinions on whether they can choose a foreign law to govern the arbitration agreement.
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Indian parties can exclude liability for certain losses
The law of damages in India is codified in Sections 73 and 74 of the Indian Contract Act, 1872. Section 73 of the Act provides that a party that suffers a breach of contract is entitled to receive compensation from the party that has broken the contract for any loss or damage caused, which naturally arose in the usual course of things from such a breach or which the parties knew, when they made the contract, to be likely to result from a breach. However, Section 73 bars the grant of compensation for remote and indirect loss or damage sustained due to a breach of contract.
In Simplex Infrastructure v. Siemens Limited, the Bombay High Court considered a limitation of liability clause in a works contract. The petitioner sought interim relief, including a restraint against encashment of a bank guarantee, as the contract limited the petitioner's liability to a certain amount. The limitation of liability clause excluded the petitioner's liability for specific losses, including loss of production, loss of use, loss of profit, loss of information and/or data, and any indirect or consequential damage, and capped the petitioner's liability for all losses, claims, or damages arising out of the contract.
It is important to carefully draft and negotiate exclusion or limitation of liability clauses. A commercial contract that has been freely negotiated between the parties may specifically state that there was no unequal bargaining power. Liability should be excluded for specific types of losses (loss of profit, loss of goodwill, etc.) rather than outright exclusion of liability for any loss. While indirect and remote losses cannot be granted under Section 73 of the Contract Act, the second limb of Section 73 provides for consequential losses that the parties knew were likely to result from a breach of contract.
Indian courts have held that two Indian parties can choose a foreign law to govern their arbitration. For example, in Dholi Spintex Pvt. Ltd. v. Louis Dreyfus Company India Pvt. Ltd., the Delhi High Court held that two Indian parties could choose a foreign law as the law governing the arbitration between them since the arbitration agreement is an independent agreement. The Supreme Court has also held that party autonomy in the choice of law extends to international commercial arbitration.
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Indian parties can limit liability for breach of contract
In the case of contracts where parties are found to have unequal bargaining power, Indian courts may refuse to enforce clauses excluding or limiting liability, which are considered unconscionable. The Supreme Court introduced this principle in 1986, stating that courts will not enforce an unfair or unreasonable contract or clause in a contract between parties with unequal bargaining power. This is similar to the position in England, where the Unfair Contract Terms Act, 1977, prescribes limits on the extent to which liability for breach of contract can be contractually avoided.
In addition, Indian courts follow the doctrine of precedent, which means that judgments must be read in the context of the specific questions that were before the court. In Sasan Power Limited v. North American Coal Corporation, the apex court clarified that when a foreign element is involved in an agreement, parties have the autonomy to choose foreign law without violating public policy under Section 23 of the Contract Act.
Furthermore, subsequent decisions of the Supreme Court of India have established that party autonomy in the choice of law extends to international commercial arbitration, which has been deemed a "foundational pillar." This reinforces the parties' right to choose a governing law across India.
In summary, Indian parties can limit liability for breach of contract by excluding or limiting liability for specific types of losses. However, this is subject to considerations such as bargaining power and public policy, with courts refusing to enforce clauses deemed unconscionable or violative of public interest. The choice of law in contracts with foreign elements is generally allowed, and the governing law clause in the contract should indicate the prevailing law.
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Frequently asked questions
Yes, Indian parties can choose a foreign law as the law governing arbitration. This is because arbitration agreements are independent of the substantive contract and can be governed by a law of their own.
No, Indian parties cannot contract out of Indian law. However, they can choose a foreign law as the law governing arbitration, as mentioned above.
The law of damages in India is codified in Sections 73 and 74 of the Indian Contract Act, 1872. Section 73 provides that a party that suffers a breach of contract is entitled to receive compensation for any loss or damage caused by the breach.
