Case Comment TDM Infrastructure Private

Introduction

The recent judgement of the Hon’ble Supreme Court of India in the case of TDM Infrastructure Private Limited vs. UE Development India Private Limited [1] has taken a controversial form. The judgement marked out the scope of International Commercial Arbitration (ICA) and domestic arbitration by testing them on the criterion of nationality and domicile. In this present era of globalisation, when the contracts between the companies are becoming more and more complex by the day and the jurisdictions are blending into each other, judgements like the one rendered in the case may not find many supporters.

To understand the main issues governing the case, it is important to look into some of the provisions of the Arbitration and Conciliation Act, 1996.

The Act

The Act has two parts. Part I provides for domestic arbitration. Any arbitration taking place in India (whether it is between Indian or Foreign parties) would be governed by Part I. Part II only provides for enforcement of certain types of foreign awards i.e. New York Convention awards and Geneva Convention awards.

Section 2(1)(f) of Part I of the Act defines International Commercial Arbitration.

(f) ‘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

A company or an association or a body of individuals whose central management and control is exercised in any country other than India; or

The Government of a foreign country.

Sections 11(1), 11(5) and 11(9) read as under:

11. Appointment of Arbitrators – (1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within 30 days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any other person or institution designated by him.

(9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the Chief Justice of India or the person or institution designated by him may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.

A short analysis of the case follows:

Background of the case

In the case, both the parties were companies incorporated under the Indian Companies Act, 1956. UE Development India Private Limited (“UED”) was awarded a contract for rehabilitation and upgrading by the National Highways Authority of India, a portion of which it subcontracted to the TDM Infrastructure Private Limited (“TDM”). The shareholders and directors of TDM were residents of Malaysia. All the board meetings and the day to day management of the company was also managed from Malaysia. The contracts between the parties contained an arbitration clause which stated that the disputes between the parties would be referred to arbitration as per the provisions of the Arbitration and Conciliation Act, 1996 (“the Act”). The seat of the arbitration was to be New Delhi.

Disputes arose between the parties with regard to the appointment of an arbitrator. TDM approached the Supreme Court for the appointment of an arbitrator in terms of Section 11(5) and Section 11(9) of the Act which inter alia authorises the Chief Justice of India or any other person or institution designated by him to appoint an arbitrator in case of an international commercial arbitration. In all other matters, the arbitrator was to be appointed by Chief Justices of the High Courts. Thus, the issue that came up in front of the court was whether the present case was a case of international commercial arbitration.

The Supreme Court held that the present case is not a case of international commercial arbitration, as both the parties have been incorporated in India and thus, it does not have the jurisdiction under the Act to nominate an arbitrator in this case.

Reasoning behind the judgement

The Supreme Court did not accept the contention of the petitioner that the court had the jurisdiction to appoint an arbitrator in the present case as the central management and control of the company was exercised in Malaysia and this would bring it under the definition of international commercial arbitration provided in section 2(1)(f)(iii). The court held that in a case where such a company is registered in India and in a dispute where the opposite party is also an Indian entity, refuge to a foreign law cannot be taken. The court was of the opinion that when both the companies are registered in India, section 2(1)(f)(ii) would be taken into account and not section 2(1)(f)(iii).

Regarding the question as to whether the arbitration agreement falls under the purview of Section 2(1)(f) of the Act, the Court held that the determination of the nationality of the parties was crucial in the matter of appointment of an arbitrator. A company that is incorporated in India can therefore only have Indian nationality and where both the parties have Indian nationalities, then the arbitration between them cannot be said to be an international commercial arbitration. Thus the question of applicability of clause (iii) of Section 2(1)(f) would not arise. Further, as per Section 11(9) of the Act, the nationality of the arbitrator should be kept in mind after having regard to the nationality of the respective parties.

Critical Reflections

The judgement has restricted the scope of international commercial arbitration in case of domestic disputes. It is also a departure from the founding premise of arbitration mechanism that the ‘party autonomy’ is superlative.

The Supreme Court went against what is expressly written in the Act. Section 2(1)(f) clearly uses the word ‘OR’ after each sub-clause. This means that arbitration is an international commercial arbitration if EITHER one of the parties is incorporated outside India OR its management is controlled from outside India. The management of TDM in the present case is situated in a country other than India. Section 2(1)(f) of the Act talks of a company which would ordinarily include a company registered and incorporated under the Companies Act but the same also includes an association or a body of individuals which may also be a foreign company. Thus, the court has failed to provide for a solid reasoning to support its decision.

Any foreign party, as a kind of company in this case, would think twice before conducting business with an Indian Company as the arbitration clause would then get subject to Indian Courts even if the place of functioning and management of the company is different.

Also, the benefit of an international commercial arbitration lies in the fact that the arbitration can take place in a neutral country and can be enforced against the parties in the countries where the particular party has its assets and management.

Conclusion

The present act of the Supreme Court restricting the express wordings of the Arbitration and Conciliation Act, 1996 has got criticism from various ends. Till now, the parties would be well advised to keep in mind that when both the parties to a dispute are Indian by virtue of their incorporation in India, the parties cannot exclude the provisions of the Act, notwithstanding the fact that the subject matter of the contract may be based outside India.

Further, even in arbitrations held outside India, the provisions of Part 1 of the Arbitration and Conciliation Act (which permits courts to set aside domestic awards on broad public policy grounds) would apply unless the parties by agreement express or implied exclude all or any of its provisions. The intention of the legislature in passing the Act is clear that the Indian nationals should not be permitted to derogate from Indian law as part of the public policy of the country. [2]