The High Court of Uttarakhand in the case KLA Construction Pvt. Ltd. v. Kajima India Pvt. Ltd.[1] recently elucidated that where there is no ‘foreign element’, there can be no international arbitration between the parties. In other words, a dispute cannot be referred to an international arbitration and it will be treated as a domestic dispute when there is no ‘foreign element’ between the parties in the dispute.

In this case, a contract was executed on September 09, 2015 at Delhi between the Petitioner and the Respondent. The contract between the parties was for the construction of a factory at SIDCUL, District Haridwar where the Respondent was the employer. Relevant portion of the Arbitration Clause 20.6 of the agreement read as under:

“…20.6. Arbitration. Unless settled amicably, any dispute in respect of which the DAB’s decision (if any) has not become final and binding shall be finally settled by international arbitration. Unless otherwise agreed by both the parties:

  1. The dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce…”

The Uttarakhand High Court observed that in order to decide whether any ‘foreign element’ is present in a dispute to be referred to an International Arbitration, it is essential to look at the definition of “International Commercial Arbitration” under the Arbitration and Conciliation Act[2], which reads as under:

“Sec 2(f). international commercial arbitration means an arbitration relating to dispute 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-

  1. an individual who is a national of, or habitually resident in, any country other than India; or
  2. a body corporate which is incorporated in any country other than India; or
  3. an association or a body of individuals whose central management and control is exercised in any country other than India; or
  4. the Government of a foreign country;”

The court further observed that for reference of any dispute to International Commercial Arbitration, the circumstances must meet any one of the four conditions mentioned in Section 2(f) of Arbitration and Conciliation Act, 1996. In the matter at hand, both the Plaintiff and Respondent companies were incorporated under the Indian Companies Act and the management of both the companies were managed from within India and not exercised from abroad or any country other than India. Lastly, neither of the companies is a government of a foreign country.  Hence, it could not satisfy any of the conditions as mentioned in Section 2(f) of the Arbitration and Conciliation Act, 1996.

The court also relied on the decision of SBP & Co. v. Patel Engineering Ltd. and Anr.[3] wherein it was held that “since the companies which entered into the contract are both Indian Companies and the nature of the dispute between them does not qualify the definition of Section 2(1)(f) of the Act, I am of the considered view that the case before me cannot be said to be of an ‘International Commercial Arbitration’. It is purely a domestic dispute and the matter has to be referred for a domestic arbitration, under Part I of the Act.”

The court further relied upon TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd.[4] and noted that a company incorporated in India can only have Indian nationality for the purpose of the Act. It cannot be said that a company incorporated in India does not have an Indian nationality. Hence, where both the parties have Indian nationalities, then the arbitration between such parties cannot be said to be an international commercial arbitration.

The court also relied on Ashoka Tubewell and Engineering Corporation & Others v. Union of India & Ords[5] wherein it was observed that “since there is now consent of both the parties for adjudication of the dispute by the sole arbitrator, it can be safely presumed that there is now a new contract by way of novation.”

The court thus held on the basis of the material on record that it is abundantly clear that in order to ascertain a ‘foreign element’, it is essential that some part of the contract either deals with a foreign entity, or that some part of it is dealt outside India. Since, both Petitioner and the Respondent are companies incorporated in India, the whole act was to be concluded in India, i.e., Haridwar and that no aspect of the management of either of the companies is either controlled or exercised from abroad or from any country except India, therefore, on the basis of the non-fulfillment of the conditions stipulated under section 2(f) of the Act, the dispute became void of any ‘foreign element’. Hence, the court, in the matter at hand, appointed an arbitrator on the mutual consent of the parties to the dispute and disposed off the Arbitration Petition accordingly.