Arbitration clauses in cross-border transactions – Indian perspective

22 September 2023

by Kunal Arora Archit Gupta


In the era of globalization, India has emerged as one of the fastest-growing economies in the world.  Owing to its increased consumption and a large young workforce, India has attracted interest from several multinational corporations and consumer companies who are looking to expand their business in newer territories.

This has resulted in a significant increase in the quantum of trade transactions as well as foreign direct investments (FDI) into India.  In the year 2022-23, the overall trade from and into India exceeded USD 1.1 trillion (https://tradestat.commerce.gov.in/eidb/default.asp), whereas Indian companies collectively contributed approximately USD 71 billion to the FDI inflows into India (https://www.investindia.gov.in/foreign-direct-investment).

The increased transactional landscape between Indian businesses and their foreign counterparts and investors has had an impact on contracts governing transactions between the parties.  Such contracts have become more nuanced and robust due to the increased tendency of businesses to carefully look at the implications of each of the provisions.

One of the aspects that has gained significance and is carefully considered by the parties is the ‘dispute resolution’ clause of the contract.  In the last few decades, alternative dispute resolution mechanisms have gained immense popularity in commercial transactions owing to the time efficiency and expertise offered by the relevant institutions.  Consequently, the dispute resolution provisions in commercial contracts have also become conciliation and arbitration centric.  It is fairly a standard practice in commercial contracts to give precedence to arbitration over the jurisdiction exercisable by commercial courts under the applicable laws.

Indian businesses too are aligned to this approach and prefer having expedient resolution mechanisms in commercial contracts.  The Indian courts have also, in recent years, taken a pro-arbitration approach with a view to reduce pendency and this has only accelerated the shift towards arbitration being the preferred resolution mechanism.

Provisions governing international commercial arbitrations under Indian Law

The Arbitration and Conciliation Act, 1996 (‘Act’) has also witnessed significant evolution to keep pace with the complex issues emanating from the evolving cross-border transactions and contains specific provisions governing international commercial arbitrations.  While the Act recognizes international commercial arbitrations and the right of Indian parties to submit themselves to a foreign institution for arbitration, the provisions of the Act can become applicable to international commercial transactions involving an Indian party.  Thus, it is important to understand the applicability of the provisions of the Act on international commercial arbitrations and other related critical aspects. 

Significance of ‘place of arbitration’

The Act lays a lot of emphasis on the ‘place of arbitration’ which is the determining factor for ascertaining the laws which will govern the arbitration involving an Indian party.  It clearly mandates that all the arbitration related provisions will apply to the arbitrations where the place of arbitration is in India.  Accordingly, even the international commercial arbitrations having the place of arbitration in India will attract all the relevant provisions of the Act. 

The parties to an international commercial arbitration must opt for a jurisdiction other than India as the place of arbitration to exclude the applicability of the provisions of the Act.  Further, even if the parties have chosen another jurisdiction as the place of arbitration, certain critical provisions of the Act (including for grant of interim relief) will still apply to the arbitration proceedings unless the parties expressly choose to exclude their applicability.  However, this right to exclude the applicability of such provisions vis-à-vis the international commercial arbitrations is available only in cases where the place of arbitration is outside India, and mere situs of the parties is not sufficient for this entitlement.  This position has also been affirmed by the apex court in India while stating that the corresponding provision is place-centric and not party-centric[1].  As a corollary, two Indian parties can also avail this exemption so long as they have chosen a foreign jurisdiction as the place of arbitration.

In order to completely understand the significance of the ‘place of arbitration,’ it is also pertinent to understand the meaning of the term under the Indian laws.  Contrary to common understanding of the term ‘place’ which may be understood to be the location or venue where the arbitration proceedings are intended to be held, the term has been granted a wider connotation under the Act and is used to refer to the jurisdiction whose laws and regulations are intended to govern the procedure for the arbitration.

Practical implications

For cross-border contracts involving Indian parties, it is common to have clauses providing for institutional arbitration at a place outside India due to the preference of the parties to have a neutral jurisdiction for the resolution of disputes arising out of such contracts.  Singapore International Arbitration Centre (SIAC), International Chamber of Commerce (ICC) and London Court of International Arbitration (LCIA) are some of the most popular choices for institutional arbitration in cross-border contracts involving Indian parties.  While the parties may choose to have a foreign arbitration institution for such transactions, it is imperative to understand the interplay between such contracts and the foregoing implications under Indian law about international commercial arbitrations. 

Dispute resolution clauses, which otherwise may not be viewed by contracting parties as one of the critical provisions of a contract, must be understood and carefully considered in light of the potential implications under the Act while negotiating and finalizing contracts pertaining to transactions between Indian parties and their foreign counterparts.  Any inadvertent error may result in an overlap between the jurisdiction of the chosen arbitral institution and the Indian commercial courts in respect of the disputes arising under the contract.  This can result in multiplicity of proceedings and possibly conflict outcomes, thereby adversely impacting the objective of having an efficient and expedient dispute resolution mechanism.

[The authors are Partner and Senior Associate, respectively, in the Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]


[1]               PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited [(2021) 7 SCC 1]

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