[This guest post is authored by Sourav Paul, a first year law student at West Bengal National University of Juridical Sciences]
On April 13, 2021, a three-judge bench of the Supreme Court of India, in its recent pro-arbitration case 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 on 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, it upheld the right of parties to seek interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 [“Act”].
The Story So Far
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 [“Sasan”], the Madhya Pradesh High Court held that two Indian parties can conduct arbitration outside India with English Law governing the agreement. It relied on Atlas Export Industries v. Kotak and Company [“Atlas Export”], wherein it 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 However, the decision was based on the earlier Arbitration Act of 1940 (which was repealed by the 1996 Act) and the Foreign Awards (Recognition and Enforcement) Act, 1961.
The Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited relied on the Sasan-Atlas Export line of jurisprudence and held that there is no express prohibition in Indian parties opting for a foreign seat of arbitration. This view was also reiterated in Dholi Spintex Private Limited v. Loius Dreyfus Company India Private Limited. 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. 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 seat as London was valid, however, it did not delve into the question 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 favor of GE and, therefore, 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 will not be available since it is only available to ‘international commercial arbitration’. In this case, the definition of ‘international commercial arbitration’ pursuant to Section 2(1)(f) of the Act has not been fulfilled as at least one party must be a foreign entity.
An appeal was filed before the Supreme Court against the Gujarat High Court’s decision.
The Key Findings of the Supreme Court:
- On Choice of Foreign Seat
The Supreme Court unequivocally held that two Indian parties could choose a foreign seat of arbitration. It argued that there is nothing in the Indian Contract Act, 1872, which bars two Indian parties from adopting 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 the court previously in Atlas Export. 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 appointing an arbitrator, it ruled that arbitration between Indian parties cannot be termed as ‘international commercial arbitrations’. In this 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 while overruling TDM.
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 argued that Part I and Part II of the Act are mutually exclusive and relied on Bharat Aluminum Co. v. Kaiser Aluminum Technical Services Inc. 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 argued that Section 44 is essentially a party-neutral but seat-centric provision.
- 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. The court held that Section 9 application for interim reliefs shall be maintainable to Indian parties who choose to adopt a foreign seat of arbitration.
The court argued that the proviso to Section 2(2) of the Act makes specific sections of Part I, for instance, Section 9 of the Act, that are usually applicable to only domestic arbitrations, applicable even 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.
- On the Choice of Foreign Law
Section 28(1)(a) read with Section 2(2), Section 2(6), and Section 4 prescribes that except in an 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 this 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, only applicable to India-seated arbitrations. The court observed that generally, the Indian law would apply in such circumstances, however, if two Indian parties choose a foreign law, then such a choice can be evaluated while enforcing the Award in India. The Award will not be enforced in India if found the choice of foreign law was contrary to the public policy of India or in violation of the fundamental policy of Indian law.
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. This move by the Supreme Court could be viewed as a robust step in fulfilling the dream of making India an international arbitration hub.
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 particularly beneficial for Indian subsidiaries of Multinational Corporations, who will have the freedom to choose a seat 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.