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2016 (8) TMI 1508 - SC - Indian LawsWhether two Indian companies can enter into an agreement with a stipulation that their agreement "be governed by, construed and interpreted in accordance with the laws of the United Kingdom"? HELD THAT:- In the facts and circumstances of the case on hand as indicated by the record, the AGREEMENT-II appears to be falling under the 2nd of the above mentioned two classes of the contracts. There is no discharge of the original contractee i.e., the American company's obligations. There are mutual obligations (arising out of AGREEMENT-I) still to be enforced. The American company legally cannot claim to have been discharged from the obligations arising under AGREEMENT-I and infact has not been discharged. On the other hand, the Appellant by an express covenant under AGREEMENT-II retained its rights to enforce obligations (arising under AGREEMENT-I) against the American company - Adjudication of the dispute raised by the Respondent in the arbitration would necessarily involve examination of the rights and obligations of the American company under AGREEMENT-I and AGREEMENT-II. Therefore, it is a dispute between three parties (of which one is an American company) with a foreign element i.e. rights and obligations of the American company. Hence, the stipulation regarding the governing law cannot be said to be an agreement between only two Indian companies. Section 45, permits an enquiry into the question whether the arbitration agreement is "null and void, inoperative and incapable of being performed" - The Appellant's case as evidenced by the plaint in its suit is that parts of the AGREEMENT-I though created valid rights and obligations between the (original) parties thereto ceased to be valid subsequent to the assignment under AGREEMENT-II. Because (according to the Appellant's understanding) the parties to AGREEMENT-II are only two companies incorporated in India. They could not have agreed that the governing law of the agreement should be the law of the United Kingdom. According to the Appellant, such a stipulation in the agreement would be contrary to the public policy and hit by Sections 23 of the Indian Contract Act, 1872. Therefore, the arbitration agreement initiated by the Respondent cannot be proceeded with. The principles of law in this regard are well settled. In all of the cases, the validity of either of the clauses/agreements does not depend upon the existence of the other - the examination of the question of consistency of Article X Section 10.2 (part of the substantive contract) with Section 23 of the Contract Act are beyond the scope of the enquiry while adjudicating the validity of the arbitration agreement either Under Section 45 or Section 8 (amended or original) of the 1996 Act. Therefore, the submissions of the Appellant in this regard are required to be rejected. Appeal dismissed.
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