Case Comment on:

TDM Infrastructure Private Limited

Versus

UE Development India Private Limited

Arbitration Application No. 2 of 2008

Name: Suryakiran G

Registration No.: 1316259

Class: 8 BALLB "C"

Subject: Interpretation of Statutes

 Table of Content

Facts .......................................................................................................... 3

The Applicable Law .................................................................................. 3

Judgement and reasoning of the Court....................................................... 4

Critical Analysis of the Judgement............................................................ 5

Conclusion.................................................................................................. 6
 Facts

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 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 of Mr. Justice S. B. Sinha was whether
the present case was a case of international commercial arbitration.

The Applicable Law

Section 2(1)(f) of Part I of the Arbitration and Conciliation Act, 1996 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) of the Arbitration and Conciliation Act, 1996 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.

Judgement and Reasoning of the Court

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.

The 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 Analysis of the Judgement

This judgement rendered by the Apex Court of India was widely criticised by the jurists, scholars
and legal counsels working in the arena of international commercial arbitration laws. 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 roots of international commercial arbitration or the founding premise of this mechanism is
the concept of party autonomy. This principle ensures the faith of parties from different nations
in the dispute resolution system. The quantum of international trade and commerce is
accelerating and in the process of supporting the same, the international community fostered the
idea of promoting international commercial arbitration. This mechanism ensures that any dispute
between parties belonging to varied nationality could be resolved by the law that parties opt for
and it does not become the victim of biased judgement given by the respective national courts.
The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(hereinafter, New York Convention) and the United Nations Commission on International
Trade Law Model Arbitration Law (hereinafter, Model Law) have been very fundamental in
promoting the mechanism of international commercial arbitration.
The Model Laws provide a standard format of laws as guidelines for the contracting states. The
law governing arbitration in India was adopted from this very Model Law. According to the
Model Laws, an arbitration in international if either of the parties have their place of business or
place of performance of substantial obligation in different state. However, the Indian law
deviated from the verbatim of Model laws in defining internationality of a commercial
arbitration. The Indian law expressly stated that for a commercial arbitration to be international
the parties should be incorporated in a different state or have the central management in a
different state. This would ensure that even the sham companies incorporated in India but have
their central management beyond the Indian territories are governed by the international
commercial arbitration law.

However, the Apex Court in the instant case vitiated this intention of the legislature and wrongly
interpreted the law. 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. However, the same has been annihilated post this
judgement. The court should have given a purposive interpretation to the ambiguity in the statute
rather than narrowing the perspective of international commercial arbitration.
 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. This approach of India is
contrary to the global movement of interpretation in favour of international commercial
arbitration. The entire intent behind having section 2(1)(f)(iii) is rendered futile after this
judgement as parties incorporated in India would be governed by domestic law of arbitration
even if the such a party is merely a shadow of a foreign entity and has no independent existence
of its own.

Such an approach showcased by the Indian judiciary is rather repressive than fostering
international commercial arbitration. This would in turn discourage the injection of foreign
capital into the Indian markets which is essential for the domestic economy to prosper.