Sponsored briefing: Section 2(1)(f) 'international commercial arbitration' - is it as simple as it looks?

Singhania & Partners LLP discuss section 2(1)(f) ‘international commercial arbitration’

In India, section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (‘Act’), as amended w.e.f. 23rd October 2015, ‘international commercial arbitration’ means an arbitration relating to a commercial dispute where at least one of the parties is:

‘(i) an individual who is a national of, or habitually resident in, any country other than India; or

(ii) a body corporate which is incorporated in any country other than India; or

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

(iv) the Government of a foreign country.’

Post the amendment, the words ‘a company or’ were omitted from section 2(1)(f)(iii) of the Act.

Prior to the amendment, a dispute revolving around the interpretation of section 2(1)(f)(ii) and (iii) had arisen before the Supreme Court of India in TDM Infrastructure v UE Development India¹. A landmark judgment laying down the ‘place of incorporation’ principle, which paved the way for the above-mentioned amendment. A petition seeking appointment of an arbitrator was filed on the ground that the present arbitration was an international commercial arbitration and the exclusive jurisdiction to appoint an arbitrator lies with the Supreme Court of India and not the High Courts. Both the petitioner and respondent companies were registered and incorporated in India. However, the directors and shareholders of the petitioner company were residents of Malaysia. Based on section 2(1)(f)(iii) (unamended) as it stood then, it was pleaded that since the central management and control of the petitioner company is exercised in Malaysia, and does not take place in India, therefore, the petitioner would qualify under 2(1)(f)(iii). Per contra, it was contended that the petitioner company was registered in India and it would be a domestic arbitration. The Supreme Court while resolving the dichotomy regarding the aforesaid sub-clauses (ii) and (iii) of section 2(1)(f), observed that the word ‘means’ ought to be given a restrictive meaning and held that a body corporate should receive a construction similar to that of ‘nationality’ or being ‘habitually resident’ as contained in 2(1)(f)(i). Therefore, a company incorporated in India can only have Indian nationality for the purposes of the Act. The court held that the word ‘or’ being disjunctive, clause (iii) of section 2(1)(f) (unamended Act) would come into play only in a case where clause (ii) otherwise does not apply in its entirety.

The Law Commission of India in its Report No. 246 of August 2014, inter alia, took into account the reasoning given in the judgment of TDM Infrastructure (supra) for recommending deletion of the words ‘a company or’.

An association as referred to in section 2(1)(f)(iii) would therefore include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country outside India.

The interpretation of section 2(1)(f)(iii) was again considered by the Supreme Court in L&T Limited Scomi Engineering BHD v MMRDA². A contract was executed between MMRDA and a consortium comprising of: (a) L&T, an Indian company and (b) M/s. Scomi, a Malaysian company. When disputes arose between the parties, the consortium filed a petition contending that one of the parties being a body corporate incorporated in Malaysia, it would attract section 2(1)(f)(ii). The Supreme Court held that section 2(1)(f)(iii) refers to two different sets of persons, an ‘association’ as distinct and separate from a ‘body of individuals’. An association as referred to in section 2(1)(f)(iii) would therefore include a consortium consisting of two or more bodies corporate, at least one of whom is a body corporate incorporated in a country outside India. The Apex Court decided that it was a case of domestic arbitration since the central management and control of this consortium appeared to be exercised in India because L&T which was the lead member, was an Indian company having the consortium’s office in Mumbai, India.

In a recent judgment of Amway (India) Enterprises v Ravindranath Rao Sindhia³, the Supreme Court examined the nature of arbitration having regard to the nationality of the proprietors and their business enterprise having operations in India. The sole proprietorship of the respondents was appointed as a distributor for the Petitioner in India. While contesting the petition for appointment of arbitrator, the respondents contented that the same would be subject to domestic arbitration, however, the main plea of the opposite side was that since the parties to the dispute, are husband and wife, who are both nationals of and habitual residents in the United States of America, the dispute relates to an international commercial arbitration, being covered under section 2(1)(f)(i). This plea was rejected by the Delhi High Court holding that since the central management and control of this association or body of individuals is exercised only in India under section 2(1)(f)(iii), the dispute is not an international commercial arbitration. Thereafter, the appeal reached the Hon’ble Supreme Court. Reliance was placed on the L&T judgment (supra) and Ashok Transport Agency v Awadhesh Kumar⁴, wherein it was held that a sole proprietorship is equated with the proprietors of the business and reversed the judgment of the Delhi High Court. The Supreme Court opined that if at least one of the parties is either a foreign national, or habitually resident in, any country other than India; or by a body corporate which is incorporated in any country other than India; or by the Government of a foreign country; the arbitration becomes an international commercial arbitration irrespective of the fact that the individual, body corporate, or government of a foreign country carry on business in India through a business office in India.

In view of the above judgments, it is concluded that the nature of arbitration in the case of the individuals would be based on their nationality or habitual residence and for body corporate, it would be the place of its incorporation. Where one of the parties to the dispute is an unincorporated consortium or joint venture of two or more entities, the identity of the lead member would decide the nature of arbitration.