[This article is authored by Sourav Paul, a Second Year Law student at WBNUJS, Kolkata]
Keywords: Foreign Seat, Interim Relief, Foreign Law.
On April 13, 2021, a three-judge bench of the Supreme Court of India, in PASL Wind Solutions Private Limited v. GE Power Conversion Private Limited, opined that two Indian parties could choose a foreign seat of arbitration, thus settling the much-deliberated question of law in the Indian arbitration landscape. The Supreme Court emphasized party autonomy and argued that there is no harm caused to the public in allowing Indian parties to designate a foreign seat of arbitration. Justice Nariman observed, “Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals.” Furthermore, the Court upheld the right of parties to seek interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”).
The Position of Law Pre-PASL Wind Solutions v. GE Power Conversion
In the absence of any clarity, either from the Supreme Court or from the Parliament, various High Courts have taken different positions with respect to the issue at hand. In the case of Sasan Power Limited v. North America Coal Corporation India Private Limited [i] (“Sasan”), the Madhya Pradesh High Court held that two Indian parties could conduct arbitration outside India with English Law governing the agreement. It relied on Atlas Export Industries v. Kotak and Company (“Atlas Export”), wherein the Supreme Court upheld the right of two Indian parties to choose a foreign seat of arbitration on the grounds of party autonomy. However, the decision was based on the earlier Arbitration Act of 1940 (which was repealed by the 1996 Act) and the Foreign Awards (Recognition and Enforcement) Act, 1961 (“Foreign Awards Act”). There is a possibility that the ratio might not hold, primarily because the 1940 Act was silent on the concept of ‘seat’ in both domestic and international arbitrations. Moreover, the Foreign Awards Act also stands repealed.
The Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited, based on the Sasan-Atlas Export line of jurisprudence, held that there is no express prohibition on Indian parties opting for a foreign seat of arbitration. This view was also reiterated by the Delhi High Court in Dholi Spintex Private Limited v. Loius Dreyfus Company India Private Limited [ii] However, in Addhar Mercantile Private Limited v. Shree Jagadamba Agrico Exports Private Limited, the Bombay High Court opined that two Indian parties choosing a foreign seat and foreign law governing the arbitration agreement is inherently opposed to the public policy of the country. A similar position was adopted by the Bombay High Court in Seven Islands Shipping Ltd. v. Sah Petroleum Ltd. [iii] In Reliance Industries v. Union of India, the Indian parties agreed to London as the seat of arbitration. The Supreme Court held that the choice of the seat as London was valid; however, it did not delve into the question of whether Indian parties can choose a foreign seat.
The Factual Matrix
The two Indian companies, i.e., PASL Wind Solution Pvt. Ltd. (“PASL”) and GE Power Conversion Pvt. Ltd. (“GE”), executed a settlement agreement which provided for arbitration in Zurich under the Rules of Conciliation and Arbitration of the International Chamber of Commerce. In 2017, PASL referred specific disputes under the settlement agreement to arbitration. During the arbitration proceedings, GE filed a preliminary application challenging the jurisdiction of the Sole Arbitrator on the ground that two Indian parties cannot choose a foreign seat of arbitration. The Sole Arbitrator rejected the objection, and the decision was not challenged by GE. The final Award was passed in favour of GE, who filed enforcement proceedings under Section 47 and 49 of the Act before the Gujarat High Court. The Gujarat High Court, in the enforcement proceedings, held that:
· Two Indian parties can validly choose a foreign seat of arbitration.
· Where two Indian parties choose a foreign seat of arbitration, the remedies available under Section 9 of the Act will not be available since it is only available to ‘international commercial arbitrations’. In this case, the definition of ‘international commercial arbitration’ pursuant to Section 2(1)(f) of the Act has not been fulfilled because at least one party must be a foreign entity in order to qualify as an ‘international commercial arbitration’.
An appeal was filed by PASL before the Supreme Court against the Gujarat High Court’s decision.
Key Findings of the Supreme Court
1. On Choice of a Foreign Seat
The Supreme Court unequivocally held that two Indian parties could adopt a foreign seat of arbitration. It argued that there is nothing in the Indian Contract Act, 1872, which bars two Indian parties from choosing a foreign seat. The court once again reiterated that freedom of contract must be balanced with public policy. The Supreme Court heavily relied on the reasoning adopted by it in Atlas Export.
However, in 2008 a contrary view was taken by a Single Judge Bench of the Supreme Court in TDM Infrastructure Private Limited v. UE Development India Limited (“TDM”), wherein in the context of a Section 11 application for appointing an arbitrator, it ruled that arbitration between Indian parties cannot be termed as ‘international commercial arbitrations’. In the present case, the court affirmed that since TDM was a decision of a Single Judge, it cannot be a binding precedent and thereby overruled all cases that relied on TDM. It referred to State of West Bengal v. Associated Contractors (“Associated Contractors”) while overruling TDM. In Associated Contractors, Justice Nariman clarified that the Supreme Court is not a ‘court ’within the meaning of Section 2(1)(e) of the Act. Therefore, the Supreme Court does not retain seisin over the proceedings after appointing an arbitrator in international commercial arbitrations pursuant to an application under Section 11 of the Act.
PASL argued that the foreign awards as envisaged under the Part II of the Act arise only from international commercial arbitrations. They further argued that in the present case, none of the parties was a foreign entity, and hence, the arbitration lacks a foreign character. Therefore, they contended that the award passed in the present case could not be termed as a foreign award under Part II of the Act. Furthermore, the proviso to Section 2(2), it was stated, furnished a bridge between Part I and Part II of the Act concluding that Section 44 refers ‘only’ to international commercial arbitrations. However, this argument falls flat primarily because Section 44 of the Act is inspired from the New York Convention, which only requires ‘persons’, both of which can be Indian, having disputes arising out of commercial legal relationships, which are to be decided in the territory of a State outside India provided that State is a signatory to the New York Convention. As Prof. E. Bergsten argues, the parties from the same State can agree to resolve their disputes in a State other than their host State, and as a result, the New York Convention will govern the foreign award.
The court observed that for an award to be a ‘foreign award’ under Section 44 of the Act, there is no mandatory stipulation that one of the parties must be a foreign entity. It held that Part I and Part II of the Act are mutually exclusive and relied on Bharat Aluminum Co. v. Kaiser Aluminum Technical Services Inc. for the same. It opined that the definition of ‘international commercial arbitration’ under Part I will not apply to Section 44, which falls under Part II of the Act. Its application is restricted only to India-seated arbitrations. It is imperative to note that Section 44 does not accord any nationality, residence or domicile. Therefore, the court stated that Section 44 is essentially a party-neutral but seat-centric provision.
2. On Availability of Interim Relief
The Supreme Court set aside the Gujarat High Court’s findings wherein it held that Section 9 remedies would not be available to Indian parties choosing a foreign seat, holding that Section 9 application for interim relief shall be maintainable in such situations.
The Court stated that the proviso to Section 2(2) of the Act makes specific sections of Part I, for instance, Section 9 of the Act, that is usually applied to only domestic arbitrations, applicable to "international commercial arbitrations, even if the place of arbitration is outside India”. It opined that the term ‘international commercial arbitration’ in the present context does not refer to the definition contained in Section 2(1)(f) of the Act; rather, it is a seat-centric terminology that relates to arbitrations taking place outside India. Therefore, in light of the aforementioned discussion, the Supreme Court ruled that in international commercial arbitrations taking place outside India involving Indian parties, the reliefs under Section 9 of the Act will remain available unless contracted to the contrary.
3. On the Choice of Foreign Law
Section 28(1)(a) read with Section 2(2), Section 2(6), and Section 4 of the Act prescribes that except in international commercial arbitration, primarily when the place of arbitration is situated in India, the arbitral tribunal shall decide the dispute in accordance with the substantive law for the time being in India. PASL raised the argument that two Indian parties cannot choose a foreign law governing their arbitration under Section 28(1)(a) of the Act. The court rejected this contention by stating that Section 28(1)(a) falls under Part I of the Act and, therefore, is only applicable to India-seated arbitrations. The court observed that generally, the Indian law would apply in such circumstances; however, if two Indian parties chose a foreign law, then the permissibility of opting for a foreign law can be evaluated while enforcing the Award in India. The Award will not be enforced in India if it is found that the choice of foreign law was contrary to the public policy of India or violative of the fundamental policy of Indian law.
PASL contended that since every factor connected to the arbitration relates to India, by applying the close-connection test, the seat of arbitration should be Mumbai and not Zurich. They relied upon Enercon (India) Ltd. v. EnerconGmBh (“Enercon”), wherein the question before the court was whether the phrase “venue shall be London” as used in the arbitration agreement implies that London was the seat law. While recognizing the test of close and intimate connection, the Supreme Court held that the Indian law governed the arbitration agreement and that the parties have agreed to designate India to be the seat of arbitration. However, this case must be distinguished considering the fact that in Enercon, neither clause 18 of the Intellectual Property License Agreement nor any other clause of the arbitration agreement specifically mentioned the seat of arbitration. In the present case, the arbitration clause in the settlement agreement, together with the procedural orders passed by the arbitrator, designated Zurich as the seat and Mumbai as the venue of the arbitration.
PASL cited an interesting example that by designating a seat outside India, the parties can bypass the provisions of the Benami Property Transactions Act, 1988, thereby circumventing the substantive law of India. However, the author argues that the contravention of any provision of an enactment is not synonymous with a contravention of the fundamental policy of Indian law, as highlighted by the Delhi High Court in Cruz City 1 Mauritius Holdings v. Unitech Limited (“Cruz City”) and later by the Supreme Court in Vijay Karia v. Prysmian Cavi E Sistemi SRL and Ors (“Vijay Karia”). In Cruz City, the court clarified that the expression ‘fundamental policy’ connotes the basic and substratal rationale, values, and principles which form the bedrock of laws in India. In Vijay Karia, the Supreme Court opined that “Fundamental Policy” refers to the core values of India’s public policy as a nation, which may find expression not only in statutes but all time-honoured, hallowed principles which are followed by the courts.” Therefore, if the Benami Property Transactions Act, 1988 or any other provision of legislation pertains to the fundamental policy of India and if the foreign award is contrary to such fundamental policy, the award will not be enforced in India.
Over the past few decades, international arbitration has experienced tremendous growth, becoming the most preferred mechanism of dispute resolution for international commercial transactions. The Supreme Court’s decision is welcomed and in harmony with the international developments in the arbitration paradigm.
The primary objective of the Act is to promote arbitration for resolving disputes, to materialize this goal, party autonomy must be the guiding force. A fundamental element of this party autonomy is allowing the concerned parties to choose their seat and law. The court, through this judgment, reinforced this idea by carefully balancing party autonomy with public policy concerns.
The court also acknowledged the legitimate commercial interests of parties. This will be highly beneficial for Indian subsidiaries of Multi-National Corporations, who will have the freedom to conduct arbitrations outside India at neutral forums. Hence, one can hope that the apex court continues to maintain this pro-arbitration approach to create an arbitration-friendly ecosystem in India.
[i] FA-310-2015. [ii] CS(COMM) 286/2020. [iii] NO.1725 OF 2012.