Indian Parties May Choose Foreign Seat
By Abhinav Hansaraman
On April 20, a 3-Judge Bench of the Supreme Court of India ruled that Indian parties may choose a foreign seat to arbitrate. In PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, the Court affirmed that two Indian companies could choose a foreign seat for arbitration and a consequent award would be a foreign award under Part II of the act. This judgment settles a long standing controversy in Indian jurisprudence.
PASL was an Indian company and GE Power was an Indian company which was a 99% subsidiary of a French company. The parties had contracted for the supply of converters in 2010. Disputes arose regarding expiry of warranty for the same. Subsequently, they entered in to a settlement agreement in 2014. The settlement agreement provided that any dispute would be resolved by arbitration in Zurich under the rules of the ICC. In 2017, PASL issued a notice for arbitration to ICC and a sole arbitrator was appointed. The parties also agreed that the substantive law applicable would be Indian Law.
Before the tribunal, GE Power contended that two Indian parties could not arbitrate in a foreign seat. However, the arbitrator held that there was no such bar. The tribunal pointed out that unlike in TDM Infrastructure (2008), here the parties did not derogate from Indian substantive law. Neither of the parties challenged this order. Based on GE Power’s application, hearings were held in Mumbai. The tribunal rejected the claims and awarded legal costs and interest. As PASL failed to pay, GE Power initiated enforcement proceedings under Sections 47 and 49 of the Act before the High Court of Gujarat. Subsequently, a Special Leave Petition was filed before the Supreme Court.
Indian jurisprudence on this question has a chequered history. An earlier case where this issue arose was Atlas Exports (1999). There, the Court held that merely because arbitrators were situated in a foreign country, the arbitration agreement could not be set aside. Where parties had chosen to arbitrate outside India, appointed arbitrators, and participated in proceedings, they could not subsequently plead that such an arbitration would be against the public policy of India.
While appointing an arbitrator under Section 11 of the Arbitration Act, in TDM Infrastructure, the Court opined that two Indian Parties should have their agreements governed by Indian Law and must arbitrate in India, considering Sections 2(2) and 28 of the Arbitration Act. However, in West Bengal v. Associated Contractors (2015) the Supreme Court held that remarks made as a delegate of the Chief Justice of India under Section 11 of the Act had “no precedential value”. This chipped away at the precedential value of TDM Infrasstructure.
Subsequently, in Sasan Power (I) (2015) the High Court of Madhya Pradesh held that two Indian parties may arbitrate outside India, disapproving the remarks in TDM Infrastructure. However, in [Sasan Power (II) (2016)], and in Reliance Industries (2015) the Court refused to answer the question of whether two Indian parties may arbitrate outside India.
In such a vacuum, High Courts have held contradicting views. While the Delhi High Court permitted it in GMR Energy (2017) , the Bombay High Court refused it in Seven Islands Shipping (2012).
Court’s Reasoning in PASL Wind Solutions
Determination of Seat
Relying on Mankatsu Impex (2020), the Court held that the settlement agreement provided that the arbitration was to be resolved “in Zurich” and the parties had agreed during the Case Management Conference. The tribunal had ruled that the seat would be Zurich. The Court refused to apply the closest connection test (Enercon).
Applicability of Part II
On applicability of Part II, the Court held that Part II deals only with enforcement of arbitral awards and not with arbitral proceedings. The phrase ‘international commercial arbitration’ in Sections 2(2) and 44 of the Arbitration Act would mean arbitration outside India but enforced under Part II of the Act. However, the same phrase in Section 2(1)(f) was party-centric in nature. The Court held that an award would be a ‘foreign award’ under Section 44 if the dispute was commercial, in pursuance of a written agreement, between persons, and conducted in a New York Convention signatory. In this case, all four conditions were satisfied. The Court rejected the argument that the phrase ‘unless the context otherwise requires’ in Section 44 would import the party-centric definition of ‘international commercial arbitration’ used in Part I. Further, a foreign award would not become unenforceable merely because it was between two Indian parties. The Court pointed out that the term ‘persons’ in Section 44 does not refer to nationality, residence, or domicile as some other domestic laws (like Section 202 Federal Arbitration Act, US) do. The Court affirmed the decision in Sasan (I) and reaffirmed that TDM Infrastructure was not binding precedent.
The Court then addressed whether two Indian parties choosing a foreign seat would be antithetical to the public policy of India. Relying on Atlas Exports,the Court held that neither Section 23 nor Section 28 of the Contract Act prohibit it, as exception 1 to Section 28 “specifically saves the arbitration of disputes” irrespective of the nationality of parties who may resort to arbitration.
The Court held that as Section 28(1)(a) of the Arbitration Act read with Sections 2(2), 2(6) and 4 clarify that where an arbitration is situated in India and is not an international commercial arbitration, the tribunal shall decide the dispute in accordance with the substantive law of India. Importantly, this section does not refer to arbitrations between two Indian parties outside India. As an example, the Court pointed out that a dispute between an Indian national who is habitually resident outside India and an Indian national who is habitually resident in India would attract Sections 2(1)(f)(i) and 28(1)(b) and could arbitrate with a substantive law other than Indian law. The Court also pointed out that Section 28(1)(a) would not apply where the seat was outside India, as was held in BALCO and in Sasan I, as conflict of law rules of the country in which the arbitration was seated would apply. The Court also held that in cases where two Indian nationals circumvented a law pertaining to the fundamental policy of India, it would become unenforceable under Section 48(2)(b) of the Act.
Applicability of Section 34(2A)
The Court held that where parties agreed to arbitrate outside India, Section 34(2A) would not apply. The parties may approach the Court of the seat or resist enforcement under Section 48 of the Arbitration Act. There was no ‘clear and undeniable harm to the public’ as parties could avail the challenge procedure at the seat of the award and resist enforcement under Section 48, including on the grounds that the foreign award was contrary to the public policy of India. Thus, the Court gave due credence to autonomy and intention of the parties.
Section 10 of the Commercial Courts Act
The Court held that as per BGS SGS Soma JV (2020), the substantive law applicable to appeals and applications is the Arbitration Act, while the procedure governing it would be the Commercial Courts Act. The Court held that there is no clash between Section 10 of the Commercial Courts Act and the explanation to Section 47 of the Arbitration Act. A foreign award under Section 44 of the Arbitration Act would be enforceable only in a High Court under Section 10(1) of the Commercial Courts Act.
Applicability of Section 9 for Interim Measures
Regarding Section 9 of the Act which permitted parties to approach Indian Courts seeking interim relief, the Court held that as per BALCO, even when an arbitration is seated outside India, if assets of the parties qua which interim orders are required are in India, Indian Courts had the authority to grant interim relief. Therefore, in this case, the Court held that the parties could approach Indian Courts under Section 9 of the Act.
This judgment addresses two important questions. Two Indian parties may choose a foreign seat of arbitration and where the parties seek interim measures relating to assets located in India, Indian Courts have the authority to grant it. This clarifies the law on the first question and assuages concerns regarding availability of interim measures. Not only does this judgment resolve the quagmire of decisions which multiple High Courts took on the question of foreign seat, it improves India’s image of being an arbitration friendly jurisdiction while continuing to assure parties of assistance that Courts may provide in the form of interim relief. Another important facet of the judgment is on the non-applicability of Section 34 and that Indian parties with a foreign seat have the option to pursue remedies at the Court of the seat and to oppose enforcement proceedings in India. Even in the proceedings before the High Court, a cause for concern was the ruling that 2 Indian parties who had chosen a foreign seat could not avail the remedies of interim measures. This judgment is therefore welcome.