Reaffirming the sanctity of party autonomy: Balaji Steel Trade v Fludor Benin SA & Ors.

The Supreme Court of India reaffirmed the principle of party autonomy in arbitration by rejecting an application to appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, emphasising that courts cannot interfere in arbitrations seated outside India. This decision highlights the importance of the arbitration seat agreed by parties in cross-border disputes.

The Supreme Court in Balaji Steel Trade v Fludor Benin SA & Ors.¹ has reinforced India’s pro-arbitration, minimal court interference approach.

In this case, the Supreme Court was deciding Balaji Steel Trade’s application requesting the appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) to adjudicate its disputes with Fludor Benin SA.

Balaji’s Section 11 application under the Arbitration Act was filed much after Fludor had already invoked arbitration, and an arbitrator was appointed under the Buyer Seller Agreement (BSA) executed between the parties, where they agreed to Benin, West Africa, as the seat.

The Supreme Court rejected Balaji’s application for appointment of an arbitrator on the ground that the parties had expressly agreed to a specific seat and had thereby excluded the Court’s jurisdiction to appoint an arbitrator under Section 11 (applicable only to India-seated arbitrations).

The Court held that the invocation of Section 11 of the Arbitration Act in respect of foreign-seated arbitrations was fundamentally misconceived, legally untenable, contrary to the statutory scheme and party autonomy.

The Supreme Court also referred to its previous decisions² to reaffirm that Indian courts have no jurisdiction to appoint an arbitrator for foreign-seated arbitrations, irrespective of the nationality or domicile of the parties.

Rejection of ‘group of companies’ doctrine

Balaji and Fludor’s arbitration agreement showed that the parties had already agreed to Benin as the seat. Subsequently, Balaji entered into other agreements with third parties to give effect to its rights and obligations under the BSA - in these later agreements, India was the agreed seat of arbitration.

Balaji invoked the ‘group of companies’ doctrine and used the agreements it had signed with third parties (in which India was the seat) to argue that Indian courts had jurisdiction to initiate Indian-seated arbitration against Fludor under the BSA.

Balaji argued that the disputes between parties arose from a composite, interlinked transaction, founded on a common commercial objective. So, the arbitration agreement executed between Balaji and other third parties should have a bearing on its disputes with Fludor.

The Supreme Court rejected this argument. The Court found that the parties unequivocally intended that Benin would be the seat of the arbitration, and that none of the contracts contained cross-references indicating that they were interlinked. This made it impossible to conclude that Balaji and Fludor had agreed to replace their agreement on a foreign-seated arbitration with an India-seated arbitration.

Balaji’s anti-arbitration injunction suit and estoppel

To prevent Fludor from continuing the arbitration, Balaji also filed an anti-arbitration injunction suit against Fludor in the Delhi High Court, which was eventually dismissed. By the time the Delhi High Court dismissed Balaji’s suit, the arbitration initiated by Fludor under the BSA culminated in a final award.

The Supreme Court relied on the Delhi High Court’s findings in the anti-arbitration injunction suit while dismissing Balaji’s Section 11 application. It held that since the Delhi High Court had dismissed Balaji’s anti-arbitration injunction suit after considering the very same issues raised by Balaji in the Section 11 application, Balaji was ‘estopped’ from raising them again.

Strategic takeaways for cross-border transactions

This judgment highlights how important it is for parties to cross-border transactions to choose their seat of arbitration judiciously, as the choice of arbitral seat is a key strategic decision and not just a drafting detail.

The choice of seat becomes even more important in cases like this, where Balaji ultimately failed in its anti-arbitration injunction suit because it had expressly agreed earlier to arbitration in Benin.

Parties should also bear in mind that the Arbitration Act (in the proviso to Section 2(2)) allows Indian courts to exercise jurisdiction even in foreign-seated arbitrations for:

• a party seeking interim relief (Section 9);
• taking evidence (Section 27); and
• appeals against orders granting or refusing interim relief (Section 37(1)b); unless parties have agreed to exclude such recourse.

If the intention of the parties is to restrict Indian judicial oversight over the arbitration, the arbitration agreement must explicitly provide for this.

However, when a foreign party is dealing with an Indian counterparty with assets in India, it may often be prudent to preserve the jurisdiction of Indian courts, as this can help safeguard assets and facilitate the enforcement of future awards.

The bottom line - an award is only as good as its enforceability, and parties’ choice of seat remains a critical factor in enabling enforcement and recovery.