We can divide arbitration into two types – (i) Domestic Arbitration and (i) International Arbitration.
The distinction between the two is so significant that UNCITRAL Model Law is specifically created for international commercial arbitration. Though the expression domestic arbitration is not used in the Arbitration and Conciliation Act, it means an arbitration proceeding arising out of both parties from India.
Apparently the meaning of the word international seems very simple but it is not. There is no unanimity in its application. Redfern and Hunter, the leading commentary on the subject of international arbitration inform us that there are three approaches prevalent with respect to the meaning of the word international in the field of arbitration. “The first depends on the nature of the dispute. The second depends on the nationality of the parties. The third approach, which is that of the Model Law, depends upon the blending of the first two, plus a reference to the chosen place of arbitration.”
International Commercial arbitration is defined in Section 2(1) (f) of the Arbitration and Conciliation Act 1996, – “international commercial arbitration” means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is-
- an individual who is a national of, or habitually resident in any country other than India; or
- a body corporate which is incorporated in any country other than India; or
- an association or a body of individuals, whose central management or control is exercised in any country other than India; or
- the Government of a foreign country.
Thus the Indian law adopts a nationality-based approach to define international arbitration. In this respect, it deviates from the Model law. Whether arbitration is domestic or international has important consequences. For example, only in the case of international commercial arbitration, the parties have the freedom to select the substantive law of their choice; while in domestic arbitration, they do not have any such choice. The substantive law of the land is mandatorily applicable in the latter case. Similarly, the ground of patent illegality for setting aside an arbitral award is applicable to an award passed in domestic arbitration and not international arbitration.
In TDM Infrastructure Pvt. Ltd. v. UE Development, the Supreme Court had to decide whether the arbitration, in that case, was international or not? Herein there was a construction agreement between TDM, an Indian company, and UE Development, a subsidiary of a Malaysian company. An issue arose with respect to the arbitrator’s appointment. According to Section 11, in the case of domestic arbitration, the power lies with the Chief Justice of the High Court and in the case of international arbitration with the Chief Justice of India. The Malaysian company made an application to the Chief Justice which was objected to by the Indian Company on the ground that this is not the right forum since the arbitration is a domestic arbitration.
Therefore the Supreme had to determine whether the arbitration is international? UE Development argued that arbitration is international since it is a wholly-owned subsidiary of a Malaysian company, as all its shareholders and directors are from Malaysia. Notwithstanding that, the court held that it is not international arbitration as it refused to consider UE Development a foreign party, since it was incorporated in India. At that time the relevant provision i.e. Section 2 (1) (1) (iii), arbitration would be international if one of the parties is – “a company, or an association or a body of individuals whose central management and control are exercised in any country other than India.”
The Court reasoned that by incorporating itself in India it must be considered an Indian party. The fear of the Court was that otherwise, Indian parties would bypass Indian law to decide their disputes, since according to Section 28 when both parties are Indian the substantive law for the time being in force in India is mandatorily applicable. On the other hand, in international arbitration parties have the freedom to choose the law of their choice. The Court observed that allowing two Indian parties to choose foreign law would be against the public policy of the country as a dispute between Indian parties can be determined according to the substantive law of India only.
This line of reasoning is against international trends in this respect. It is common that at times foreign companies for the ease of business incorporate locally but essentially remain a foreign company which was the case with UE Development. This decision made clause 3 of Section 2 superfluous and was widely criticized. Unfortunately, here even the legislature which is generally very pro-arbitration failed as it adopted the above line of reasoning in the 2015 amendments and deleted the reference to “company” from the new provision.
- Emmanuel Gaillard and John Savage, Goldman on International Commercial Arbitration
- TDM Infrastructure Pvt. Ltd. v. UE Development – 2008 (8) SCALE 576
- Law of Arbitration and Conciliation in India, NALSAR University of Law
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