In TDM Infrastructure Private Limited v UE Development India Private Limited, Arbitration Application No. 2 of 2008, the Supreme Court of India held that a company's nationality is determined primarily by its place of incorporation, and is not affected by the company's "central management and control" being located outside India.

The case concerned TDM's application for the appointment of an arbitrator in its dispute with UE. In dismissing this application, the Supreme Court held that both parties were of Indian nationality because they were both companies incorporated in India, despite the fact that TDM's Board of Directors is based in Malaysia from where its "central management and control" is exercised. The Supreme Court therefore held that the arbitration was a domestic arbitration, not an international commercial arbitration, which meant that under the Indian Arbitration and Conciliation Act, the federal courts (rather than the Supreme Court) had jurisdiction to appoint an arbitrator.

In terms of the potentially broader relevance of this ruling to India-related commercial transactions:

  • The Supreme Court also reaffirmed that, as a matter of Indian public policy, Indian nationals are not permitted to contract out of the application of Indian law. On a narrow interpretation, this merely re-affirms that Indian arbitration tribunals may not apply a foreign governing law to a contract in a dispute between two Indian parties. On a broader interpretation, however, this decision arguably represents authority that Indian public policy precludes Indian nationals (including wholly foreign owned Indian incorporated subsidiaries) from contracting out of Indian law unless they are contracting with a foreign party, even if any disputes under the relevant agreement will be resolved by arbitration outside of India.
  • Indian law (unlike, generally speaking, Chinese law – as to which, see here), however, recognises that two Indian companies may agree to arbitrate disputes outside of India. As is discussed further here, parties would be well advised (in light of the decision in the Venture Global Engineering case) to exclude the application of Part 1 of the Indian Arbitration and Conciliation Act in any such arbitration agreements.

Interestingly, and as is discussed here, many bilateral investment treaties to which India is a party do not stipulate that incorporation is the sole test by which a company's nationality is determined and instead contemplate that an Indian company controlled by foreign investors could be characterised as an investor under these treaties.

This judgment underscores the need for devising a well thought out strategy for structuring investments in India and emphasises the importance of careful drafting of arbitration agreements involving Indian parties.