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Legality and Validity of substantive contract cannot be enquired under Arbitration Act

The benefit of a contract can be assigned but not the burden, for the promisor cannot shift the burden of his obligation without a novation.


The Supreme Court has upheld a Madhya Pradesh High Court decision holding that two Indian firms, Sasan Power Ltd and North American Coal Corporation India Pvt Ltd, may conduct arbitration outside India and under a foreign law if there was an agreement to that effect.

The Supreme Court has upheld a Madhya Pradesh High Court decision holding that two Indian firms, Sasan Power Ltd and North American Coal Corporation India Pvt Ltd, may conduct arbitration outside India and under a foreign law if there was an agreement to that effect.
“We see no reason to interfere with the conclusions recorded by the courts (HC) below. The appeal is, therefore, dismissed with costs,” a bench of Justices J Chelameswar and A M Sapre said while dismissing the plea of Reliance Power-owned Sasan Power Ltd which operates Ultra Mega Power Project (UMPP) at Singrauli district in Madhya Pradesh.

The UMPP has a dispute over certain clauses of agreement executed between it and the North American Coal Corporation India Private Limited (NACCIPL).
Sasan Power Ltd had moved the apex court challenging the High Court verdict holding that when parties have agreed to resolve all their disputes through arbitration, they cannot be permitted to avoid arbitration.

The UMPP took the stand that the arbitration proceedings between two Indian entities cannot be seated in a foreign country and the arbitration Act is quite clear on domestic arbitration between two Indian parties.
The apex court did not find fault with the decision of the High Court that the arbitration proceedings between the firms can be undertaken in London and under the English law.
“It is settled law that an arbitration agreement is an independent or ‘self contained’ agreement. In a given case, a written agreement for arbitration could form part of another agreement, described by Lord Diplock as the ‘substantive contract’ by which parties create contractual rights and obligations.
“Notwithstanding the fact that all such rights and obligations arising out of a substantive contract and the agreement to have the disputes (if any, arising out of such substantive contract) settled through the process of arbitration are contained in the same document, the arbitration agreement is an independent agreement. Arbitration agreement/clause is not that governs rights and obligations arising out of the substantive contract…,” the apex court said.
The 3,960 MW ultra mega project was set up by Reliance Power-owned Sasan Power Ltd, which had executed a Memorandum of Understanding with NACC-US in January 2009 for technical consultancy related to coal mining and related activities.
Based on this, in April 2011, the US firm assigned its rights, liabilities and obligations under the agreement to its Indian subsidiary — North American Coal Corporation India Private Limited (NACCIPL).
Later, NACCIPL issued a letter of termination in respect of the associate agreement and filed a request for arbitration with the International Council for Arbitration (ICC), claiming a compensation of over 17 million USD along with compound interest.
Sasan Power challenged this before a district court at Singrauli which dismissed the plea.
Sasan Power argued that the dispute between the two Indian companies should be decided by the Indian judicial system and not the arbitral tribunal in London under the auspices of the ICC.
North America Coal Corporation, on the other hand, argued that it has to be heard at the ICC. It was permissible for two Indian parties to have a foreign seat and this is was contemplated within the scheme of the Arbitration and Conciliation Act, 1996, its Indian subsidiary had argued.

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