Supreme Court Clarifies Arbitration Law Applicability in Cross-Border Contract Dispute: Punatsangchhu Hydroelectric Project vs. Larsen & Toubro (2021)

Date of the Judgment: 22 February 2021

Citation: (2021) INSC 77

Judges: Justice Indu Malhotra and Justice Ajay Rastogi

When a contract between parties specifies that the arbitration will be guided by Indian law, but the country where the project is located enacts its own arbitration law, which law should apply? The Supreme Court of India addressed this question in a dispute between a Bhutanese hydroelectric project authority and an Indian construction company. The core issue was whether the Indian Arbitration and Conciliation Act, 1996 or the Bhutanese Alternative Dispute Resolution Act, 2013 should govern the arbitration proceedings. The bench comprised of Justice Indu Malhotra and Justice Ajay Rastogi.

Case Background

On April 14, 2009, the Punatsangchhu – 1 Hydroelectric Project Authority, Bhutan (the Appellant) and Larsen & Toubro Ltd. (the Respondent) entered into a contract for the construction of a diversion tunnel, dam, intake, and desilting arrangements for a hydroelectric project in Bhutan. The contract included an arbitration clause for resolving disputes. Clause 5(i)(b) of the contract stated that the contract would be subject to and construed according to the laws in force in Bhutan and within the jurisdiction of Thimphu courts. Clause 67 provided for dispute resolution through arbitration, specifying that in the absence of an Arbitration Act in Bhutan, the arbitral tribunal would be guided by the principles and procedures of the Indian Arbitration and Conciliation Act, 1996. It also stipulated that the arbitration would be held in New Delhi, India or Thimphu, Bhutan. Disputes arose between the parties concerning claims made by the Respondent-Contractor.

Timeline

Course of Proceedings

The Respondent-Contractor sent a notice of arbitration on 28 July 2020, nominating a retired judge of the Supreme Court as its arbitrator. The Appellant-Authority responded on 4 August 2020, agreeing to arbitration but stating that the arbitration should be governed by the Bhutan Alternative Dispute Resolution Act, 2013, and the place of arbitration should be Thimphu, Bhutan. In October 2020, the Respondent-Contractor filed an application under Section 11(6) of the Arbitration & Conciliation Act, 1996 before the Delhi High Court, seeking the appointment of an arbitrator on behalf of the Appellant-Authority. The Delhi High Court, on 11 December 2020, held that the enactment of the Bhutan Act, 2013, did not make the Indian Arbitration Act, 1996 inapplicable. The High Court appointed an arbitrator for the Appellant-Authority and directed that the arbitration would be governed by the 1996 Act. The Appellant-Authority then filed a special leave petition before the Supreme Court.

Legal Framework

The key legal provisions at play in this case are:

• Clause 5(i)(b) of the Contract Agreement, which states, “The law to which the Contract is to be subject and according to which the Contract is to be construed shall be the law for the time being in force in Bhutan and within the jurisdiction of Thimphu courts.”
• Clause 67(ii) of the Contract Agreement, which states, “Except where the decision has become final, binding and conclusive in terms of Sub Para (i) above disputes or differences shall be referred for arbitration through to an Arbitral Tribunal of three arbitrators appointed jointly by the PHPA and the Contractor. Where the mandate of an arbitrator terminates a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced. In the absence of an Arbitration Act in Bhutan, the Arbitral Tribunal shall follow / be guided by the basic principles and procedures as contained in the Indian Arbitration and Conciliation Act 1996. The parties shall be free to agree on a procedure for appointing the Arbitrators. Failing any agreement for appointment of Arbitrators, each party shall appoint one Arbitrator and the two appointed Arbitrators shall appoint the third Arbitrator, who shall act as the presiding Arbitrator.”
• Clause 67(iv) of the Contract Agreement, which states, “If either of the parties fail to appoint its arbitrators in pursuance of sub-clause (ii) above, within 30 days after the receipt of the notice of the appointment of its arbitrators or the two appointed Arbitrators fail to agree on third Arbitrator within thirty days from the date of their appointment then the appointment shall be made, upon request of a party, by the Chief Justice, Delhi High Court, India/Thimphu High Court, Bhutan or any person or institutions designated by him.”
• Clause 67(vii)(a) of the Contract Agreement, which states, “All arbitration shall be held at New Delhi, India/ Thimphu, Bhutan.”
• The Alternative Dispute Resolution Act, 2013 of Bhutan, which came into force on 14 March 2013, provides for the settlement of disputes through arbitration.
• Section 11(6) of the Arbitration & Conciliation Act, 1996, which deals with the appointment of arbitrators by the High Court when parties fail to do so.

The contract was initially governed by the laws of Bhutan, and in the absence of an arbitration law in Bhutan, the Indian Arbitration and Conciliation Act, 1996 was to guide the arbitration. However, with the enactment of the Bhutan Alternative Dispute Resolution Act, 2013, the question arose as to which law would apply.

Arguments

Appellant’s Arguments:

• The Appellant argued that Clause 67(ii) of the contract specified that the Indian Arbitration Act, 1996 would only apply in the absence of an Arbitration Act in Bhutan. Since Bhutan enacted the Alternative Dispute Resolution Act in 2013, the Indian Act should no longer apply.
• The Appellant contended that the seat of arbitration should be Thimphu, Bhutan, as per Clause 67(vii)(a) of the contract.
• The Appellant did not have any issue with the constitution of the arbitral tribunal but was concerned about the applicability of the Indian Arbitration Act and the seat of arbitration being in New Delhi.

Respondent’s Arguments:

• Initially, the Respondent argued that the Indian Arbitration Act, 1996 would continue to apply as the contract did not specify that its applicability would cease upon the enactment of a Bhutanese arbitration law.
• The Respondent had approached the Delhi High Court under Section 11(6) of the Arbitration & Conciliation Act, 1996 for the appointment of an arbitrator on behalf of the Appellant.
• However, before the Supreme Court, the Respondent agreed that the arbitration could be conducted in accordance with the Alternative Dispute Resolution Act, 2013 of Bhutan, with the seat of arbitration at Thimphu.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues but addressed the following points:

1. Whether the Indian Arbitration and Conciliation Act, 1996 or the Bhutan Alternative Dispute Resolution Act, 2013 should govern the arbitration proceedings.
2. Whether the seat of arbitration should be New Delhi, India, or Thimphu, Bhutan.

Treatment of the Issue by the Court

Authorities

The Supreme Court did not explicitly cite any case laws or books in its judgment. However, it did consider the following legal provisions:

• Clause 5(i)(b) of the Contract Agreement, which specifies the governing law of the contract.
• Clause 67(ii) of the Contract Agreement, which deals with dispute resolution through arbitration and the applicability of the Indian Arbitration Act in the absence of a Bhutanese law.
• Clause 67(iv) of the Contract Agreement, which deals with the appointment of arbitrators.
• Clause 67(vii)(a) of the Contract Agreement, which deals with the place of arbitration.
• The Alternative Dispute Resolution Act, 2013 of Bhutan.
• Section 11(6) of the Arbitration & Conciliation Act, 1996.

Judgment

The Court modified the Delhi High Court’s order based on the consensus of both parties. The Court held that the disputes arising out of the contract would be conducted in accordance with the Alternative Dispute Resolution Act of Bhutan, 2013, with the seat of arbitration at Thimphu. The tribunal was allowed to conduct some hearings at venues convenient to the parties.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the consensus reached between the parties. The Court noted that both the Appellant and the Respondent agreed to the applicability of the Bhutan Alternative Dispute Resolution Act, 2013, and the seat of arbitration being in Thimphu. The Court did not delve into a detailed analysis of the legal provisions or precedents, as the parties had already agreed on the applicable law and the seat of arbitration. The Court’s focus was on facilitating the arbitration process by accepting the parties’ mutual agreement.

The Court’s decision was based on the mutual agreement of the parties, which is a significant factor in arbitration proceedings. The Court’s role was to ensure that the arbitration proceeded smoothly, and the parties were in agreement.

Key Takeaways

• When parties agree on the applicable law and seat of arbitration, the courts will generally uphold that agreement.
• The enactment of a new arbitration law in a country can affect the governing law of contracts if the contract includes a clause that refers to the laws in force at the time.
• Parties have the autonomy to decide on the procedural aspects of arbitration.

This case highlights the importance of clear and unambiguous drafting of arbitration clauses in contracts, especially in cross-border transactions. It also underscores the principle of party autonomy in arbitration.

Directions

The Supreme Court modified the order of the Delhi High Court and directed that all disputes arising out of the Agreement dated 14.04.2009 shall be conducted in accordance with the Alternative Dispute Resolution Act of Bhutan, 2013, with the seat of arbitration at Thimphu. The tribunal was given the liberty to conduct some of the hearings, in consultation with the parties, at such venues as may be convenient.

Development of Law

The ratio decidendi of this case is that when parties mutually agree on the applicability of a specific arbitration law and the seat of arbitration, the courts will generally uphold that agreement. This case emphasizes the principle of party autonomy in arbitration proceedings and highlights the importance of the parties’ consensus in deciding the procedural aspects of arbitration. This decision does not significantly alter the existing position of law but reinforces the principle of party autonomy in arbitration.

Conclusion

The Supreme Court’s decision in the case of Punatsangchhu – 1 Hydroelectric Project Authority, Bhutan vs. Larsen & Toubro Ltd. clarified the applicability of arbitration laws in a cross-border contract dispute. The Court modified the Delhi High Court’s order, ruling that the Bhutan Alternative Dispute Resolution Act, 2013 would govern the arbitration, with the seat of arbitration at Thimphu, based on the mutual agreement of the parties. This decision underscores the importance of party autonomy and clear contractual drafting in arbitration matters.