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Agreement between indian parties under foreign law?

Bhaven (Entrepreneur) (42 Points)

31 December 2016

Can two Indian parties to a contract choose a governing law which is a foreign law?

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Bhaven (Entrepreneur) (42 Points)
Replied 27 February 2017

Got my hands on this opinion. Interesting analysis so I thought of sharing.

A commercial contract entered between two contracting parties provides for the terms on which the business has to be conducted. A commercial contract contains a governing law clause. However, at times, the parties to the contract do not agree to the governing law clause or it is intentionally omitted. In these situations, some rules exist to determine where the governing law of the contract should be.

The most significant principle of private international law is that the contracting parties have a right to choose the governing law of a contract. It is a common practice for foreign companies entering into contracts with Indian companies to stipulate that the agreement will be governed by a foreign law and be enforceable in a foreign court.

But the question arises whether two or more Indian parties to a contract can opt for a foreign law to govern their contract?

The Supreme Court of India in the case of National Thermal Power Corporation v. Singer Company, stated that the decisive factor in determining the “proper law of contract” is the expressed intention of the parties. The only limitation to this rule is that the intention of the parties must be expressed bona fide and should not oppose public policy. Proper law is, thus, the law which the parties expressly or impliedly choose or which is imputed to them by reason of its closest and most intimate connection with the contract.

Further, in the matter of TDM Infrastructure Private Limited v UE Development India Private Limited, the Supreme Court of India established that as a matter of Indian public policy, Indian nationals contracting between themselves are not permitted to contract out of the application of Indian law. However, India follows the doctrine of precedents i.e. judgement of the courts has to be read in the context of questions which arose for determination before it. The observation made in the above case were made with respect to an application under section 11 of the Arbitration and Concealment Act, 1996 concerning appointment of an arbitrator. The case never concerned the question whether two Indian parties can contract out of Indian law or in other words can adopt foreign law to govern their contract. Thus the observation were merely obiter dicta.

The Supreme Court of India in the case of Sasan Power Limited vs. North American Coal Corporation did not throw light on the question whether two Indian parties could enter into an agreement to be governed by the laws of another country. The Supreme Court however concluded that since a foreign element was involved in the agreement and the issue arising out of it, the autonomy of the parities in such case to choose foreign law is recognized in law.

Thus in the absence of any clarity provided by the Supreme Court, a conclusion can be drawn that no law in India explicitly restricts the Indian parties to a contract to opt for a foreign law to govern their contract. But the question arises whether Indian Courts will enforce such a foreign law?

The parties to the contract can by agreement confer jurisdiction on a foreign court which will have jurisdiction over the subject matter under the foreign law governing the contract provided such foreign law permits so and the Indian Courts do not have the jurisdiction to entertain such suits.

The parties cannot, by agreement, confer jurisdiction on a court which does not have any jurisdiction over the subject matter. In case of a contract specifying a foreign court as having exclusive jurisdiction, the Indian Court will have jurisdiction to entertain the suit if the cause of action arises wholly or in part within the local limits of the Indian Courts jurisdiction as per the Code of Civil Procedure, 1908. Additionally, the Indian Courts has jurisdiction to try all cases of a civil nature, unless expressly or impliedly barred from doing so.

Thus where the Indian Court has jurisdiction to entertain the suit, if a party to the contract wants to rely on a foreign law, such foreign law should be pleaded like any other fact and be proved by evidence of experts in that law since the Indian Evidence Act, 1872 provides that if a court does not take judicial notice of a fact, such fact shall be proved. An Indian court will take judicial notice of only the laws which are in force in India. The requirement to prove foreign laws under rules of evidence has been upheld by the Supreme Court of India in Harishankar Jain vs. Sonia Gandhi, where the court held that it would be able to interpret the agreement’s choice of law provisions only if the parties adduced evidence thereof.

Therefore, in the light of the above reasonings, it can be concluded under the given circumstances that two or more Indian parties to a contract can opt for their contract to be governed by a foreign law provided the foreign law under which the party wants to have its jurisdiction must permit so and such fact is stated under the governing clause to the contract.