In the case of Hardy Exploration & Production (India) Inc. v. Government of India & India Infrastructure Finance Company (UK) Ltd.,  EWHC 1916 (Comm), the English Commercial High Court, in addition to other issues, addressed the subject of whether an arbitration agreement oustering the applicability of the Indian Arbitration Act is enforceable as a matter of Indian law. Read the detailed case analysis below:
India Infrastructure Finance Company (UK) Ltd. (IIFC (UK)) was a company incorporated in England and Wales. The sole shareholder of IIFC (UK) was India Infrastructure Finance Company Ltd (IIFCL), a company incorporated in India, and the sole shareholder of IIFCL was the Government of India (GOI). IIFCL provides long-term rupee loans to Indian companies implementing infrastructure projects in India and IIFC (UK) provides long-term loans in foreign currency to such companies for the import of capital equipment and machinery. All lending by IIFC (UK) is made pursuant to a scheme approved by the GOI. These activities are financed by an equity investment made by IIFCL and by bonds which IIFC (UK) issued to the Reserve Bank of India pursuant to a Bond Subscription Agreement.
The Bond Subscription Agreement between IIFC (UK) and the Reserve Bank of India provides that it is governed by Indian law and contains an Indian arbitration agreement and a New Delhi jurisdiction agreement. Under the Bond Subscription Agreement, IIFC (UK) is required to pay interest every six months from the date of the issue of the bond. Repayment of the bonds is to be secured by the guarantee of the GOI.
The Guarantee Fee Agreement between the GOI and IIFC (UK), IIFC (UK) contained the following provisions and jurisdiction and applicable law:
Jurisdiction and Arbitration Clauses
12.1 Subject to clause 12.2 hereof, the competent civil court in Delhi shall have the exclusive jurisdiction in respect of any matter, claim or dispute arising out of or in any way relating to this Agreement.
12.2 In the event of any dispute or difference between the parties hereto, such dispute or difference shall be resolved amicably by mutual consultation or through the good offices of empowered agencies of the Government. If such resolution is not possible, then, the unresolved dispute or difference shall be referred to arbitration of an arbitrator to be nominated by Secretary, Department of Legal Affairs (“Law Secretary”) … The Arbitration and Conciliation Act, 1996 (No. 26 of 1996) shall not be applicable to the arbitration under this clause. The award of the Arbitrator shall be binding upon parties to the dispute, provided, however, any party aggrieved by such award may make a further reference for setting aside or revision of the award to Law Secretary whose decision shall bind the parties finally and conclusively …”
Opinions of Parties’ Experts on Indian Law
Justice Bellur Narayanaswamy Srikrishna (IIFC (UK)’s expert)
As per Justice Srikrishna, Clause 12 confers exclusive jurisdiction on the Delhi Civil Courts. The validity or operation of clause 12.2 (the arbitration agreement) does not affect the situs of the debt.
Mr. Gopal Subramanium (Hardy’s expert)
As per Mr. Subramanium, Clause 12 deals with the determination of rights and claims under the Guarantee Fee Agreements, but not the enforcement of an award in a jurisdiction where the judgment debtor has its assets; clause 12.1 confers jurisdiction only if there is an award; as the arbitration is outside the framework of Indian law governing arbitration (by excluding the Arbitration and Conciliation Act, 1996), it is unenforceable as a matter of Indian law (Northern Coalfields Limited v Heavy Engineering Corporation Limited (2016) 8 Supreme Court Cases 685); the inoperability of clause 12.2 “attaches infirmity to the operation of clause 12.1 as well”; it follows that the exclusive jurisdiction conferred on the Delhi Courts is not valid and binding; accordingly, the second exception does not apply.
IIFC (UK) argued that by article 3 of the Rome Convention on the Law applicable to Contractual Obligations incorporated by the Contracts (Applicable Law) Act 1990 (in respect of the first Guarantee Fee Agreement) and by article 3 of the Rome I Regulation (Regulation (EC) 593/2008) (in respect of the later Guarantee Fee Agreements), clause 12 – being both a jurisdiction agreement and an arbitration agreement – demonstrated a choice by the parties that the Guarantee Fee Agreements were governed by Indian law (relying on the Giuliano-Lagarde Report on the Rome Convention, page 17, and recital (12) of the Rome I Regulation). This is further underlined by
- the disapplication of the Indian Arbitration and Conciliation Act, 1996, an Indian statute, by clause 12;
- the fact that the Guarantee Fee Agreements are related to the Bond Subscription Agreement and the Guarantee Agreements, which themselves contain Indian jurisdiction agreements and the fact that Bond Subscription Agreement is expressed to be governed by Indian law, and
- payment of the guarantee fees under the Guarantee Fee Agreements was made to the GOI in India (as per witness statement)
After analyzing the expert’s opinion, the Court found that there is no express choice of law provision in the Guarantee Fee Agreements.
As to the effect of these provisions in clause 12 under Indian law, the Court preferred Justice Srikrishna’s evidence on the validity of the jurisdiction agreement in clause 12.1 and held that as to the interpretation of the jurisdiction agreement in clause 12.1, that provision plainly provides that the civil courts of Delhi have exclusive jurisdiction in respect of disputes under the Guarantee Fee Agreements.
The Court found that that the principles of interpretation to be applied to such jurisdiction agreements are same under English law and Indian law. If the arbitration agreement is valid, the arbitral tribunal – subject to the jurisdiction of the Delhi Courts – has the jurisdiction to determine whether or not the debt is recoverable. If the arbitration agreement is invalid, the Delhi Courts have exclusive jurisdiction to determine the recoverability of the debt under the Guarantee Fee Agreements. In either case, the debt arising under the Guarantee Fee Agreements would be recoverable in India.
The Court explained that the parties’ experts do not agree whether the jurisdiction agreement in favour of the Delhi Courts is valid, according to Indian law. Further the Court was not convinced that the jurisdiction agreement is invalid under Indian law, because, although it may well be that the arbitration agreement is invalid as Mr Subramanium stated, the Court was unable to understand how the invalidity of the arbitration agreement in clause 12.2 would invalidate clause 12.1.
The Court held as under:
- that the Guarantee Fee Agreements were governed by Indian law.
- that the jurisdiction agreement in clause 12.1 is valid, because
- on its own, there is no reason to conclude that the jurisdiction agreement is invalid,
- even if the arbitration agreement in clause 12.2 is invalid, it is difficult to understand how that could undermine the jurisdiction agreement, and
- the words “Subject to clause 12.2 …” at the beginning of clause 12.1 can still be given effect, notwithstanding the possible invalidity of the arbitration agreement, not least because of the other methods of dispute resolution referred to in clause 12.2 which are not suggested to be invalid.