Party autonomy in arbitration – Indian parties at liberty to select foreign seat of arbitration

In a landmark judgement in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited[1], the Supreme Court has given vital impetus to party autonomy, calling it the ‘brooding and guiding spirit of arbitration’, and resolved the hugely deliberated question of whether two Indian parties can choose a forum for arbitration outside India. It has been held that two Indian parties are, without qualification, entitled to select a foreign seat of arbitration, and such right shall not impede either parties’ right to seek interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 (“A&C Act”).

BACKGROUND

Arbitration Proceedings – PASL Wind Solutions Private Limited (“PASL”) and GE Power Conversion India Private Limited (“GE Power”) (collectively, “Parties”) are Indian companies that executed a settlement agreement dated December 23, 2014 (“Settlement Agreement”), which provided for disputes to be resolved by way of arbitration conducted in accordance with the International Chamber of Commerce (“ICC”) Arbitration Rules, and specified Zurich as seat of arbitration. Pursuant to disputes between the Parties under the Settlement Agreement, PASL requested for arbitration before the ICC. This was opposed by GE Power on the basis that Indian parties cannot arbitrate their disputes before a foreign seat. The arbitral tribunal rejected GE Power’s challenge, but accepted its application for shift of venue of arbitration to Mumbai citing cost considerations. Upon conclusion of proceedings, arbitral award dated April 18, 2019 (“Award”) was passed against PASL.

Enforcement Proceedings – GE Power initiated proceedings before the Gujarat High Court[2] for enforcement of the Award under Sections 47 and 49 of the A&C Act. It also filed an interim application under Section 9 of the A&C Act for securing the Award. PASL opposed the enforcement proceedings by contending, contrary to its prior stance, that the arbitration was conducted in Mumbai, and choice of foreign seat by Indian parties was against public policy of India. The Gujarat High Court upheld the enforcement of the Award, but dismissed the interim application filed by GE Power, basing its decision on the ground that recourse to filing application under Section 9 is available for ‘international commercial arbitration’ as specified in proviso to Section 2(2) of the A&C Act. ‘International commercial arbitration’, as defined under Section 2(1)(f) of the A&C Act requires atleast one foreign party, whereas both Parties in this case were Indian companies.

Appeal before SC – The present case[3] sources out of appeal filed by PASL before the Supreme Court against order of the Gujarat High Court, and cross-objection filed by GE Power challenging dismissal of the interim application by the Gujarat High Court.

SUPREME COURT RULING ON MAJOR ISSUES

Seat of Arbitral Proceedings

The Supreme Court pointed out that the arbitral tribunal had specifically decided that venue of hearing would be Mumbai owing to cost considerations, but Zurich would remain the seat of arbitration. This arrangement was accepted by both Parties. Therefore, the ‘closest connection test’ strongly relied on by PASL would only apply if it is unclear that a seat has been designated either by the Parties or the tribunal, and for this reason, PASL’s contention that the seat of arbitration ought to be held to be Mumbai, was not accepted by the Supreme Court.

Mutual exclusivity of Part I and Part II of the A&C Act

It was held that Part I is a complete code in itself that deals with arbitrations where the seat is in India and has no application to a foreign-seated arbitration. On the other hand, Part II is not concerned with the arbitral proceedings at all, but only with the enforcement of a foreign award in India. The only exception to this is carved out under Section 45, which deals with referring parties to arbitration in the circumstances mentioned therein. The Supreme Court thus, concluded that Part I and Part II of the A&C Act are mutually exclusive.

PASL’s argument that the proviso to section 2(2) of the A&C Act is a bridge which connects the two parts was rejected. In this regard, the Supreme Court opined that Section 2(2) specifically states that Part I applies only where the place of arbitration is in India. It is settled law that a proviso cannot travel beyond the main enacting provision. The term ‘international commercial arbitration’ as used in Part I under Section 2(1)(f) differs from the context in which it is used in Part II under Section 44. The four sub-clauses contained in section 2(1)(f) make it clear that the definition of the expression ‘international commercial arbitration’ contained therein is party-centric in the sense that at least one of the parties to the arbitration agreement should, inter alia, be a person who is a national of or habitually resident in any country other than India. On the other hand, when ‘international commercial arbitration’ is spoken of in the context of taking place outside India, it is place-centric as is provided by Section 44 of the A&C Act.

Right of Indian parties to select foreign seat vis-à-vis Public Policy

As against PASL’s contention that Indian parties selecting a foreign seat would be contrary to Sections 23 and 28 of the Indian Contract Act, 1872 (“ICA”), the Supreme Court held that freedom of contract needs to be balanced with clear and undeniable harm to the public, even if the facts of a particular case do not fall within the crystallized principles enumerated in well-established ‘heads’ of public policy. The Supreme Court further made reference to the decision in Atlas Export Industries v. Kotak & Company[4] (“Atlas”), which referred to the exception to Section 28 of ICA and found that there is nothing in either Section 23 or Section 28 of the ICA which interdicts two Indian parties from getting their disputes arbitrated at a neutral forum outside India.

The Court further held that the balancing act between freedom of contract and clear and undeniable harm to the public in this case, must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian nationals to avail of a challenge procedure of a foreign country. This is specially because after a foreign award passes muster under foreign procedure, its enforcement can be resisted in India on the grounds contained in Section 48 of the A&C Act, which includes foreign award being in contravention of public policy of India.

Party Autonomy

The Supreme Court reiterated that party autonomy is the brooding and guiding spirit of arbitration. The parties are free to agree on application of three different laws governing their entire contract, viz. (i) proper law of contract, (ii) proper law of arbitration agreement, and (iii) proper law of the conduct of arbitration.[5] It was further reiterated that two-tier arbitration, namely, arbitration at an original forum followed by an appeal at an appellate forum, would not be interdicted by the A&C Act, given the free party autonomy for parties to enter into an agreement as to choice of fora and procedure at such fora.[6] The Supreme Court held that nothing stands in the way of party autonomy in designating a seat of arbitration outside India, even when both parties are Indian nationals.

International commercial arbitrations and Section 10 of the Commercial Courts Act, 2015 (“CCA”)

PASL also argued that since Section 10(3) of the CCA states that in all applications or appeals that arise out of arbitrations other than international commercial arbitrations, the principal civil court of original jurisdiction in a district would have the jurisdiction; and also since two Indian parties choosing a foreign seat of arbitration cannot be termed as an international commercial arbitration; therefore, Section 10(3) of the CCA would apply, and consequently, the Gujarat High Court did not have the requisite jurisdiction to adjudicate the case. In this regard, the Court pointed out that when a foreign award is sought to be enforced under Part II of the A&C Act, the explanation to Section 47 makes it clear that it is the High Court alone shall have jurisdiction. Thus, rejecting PASL’s argument, the Supreme Court stated that there is no clash between Section 10 of the CCA and the explanation to Section 47 of the A&C Act, as an arbitration resulting in a foreign award will be enforceable only in a High Court under Section 10(1) of the CCA, and not in a district court under Section 10(2) or Section 10(3) of the CCA.

Maintainability of Interim Applications

GE Power, by way of cross objection, challenged dismissal of its Section 9 application by the Gujarat High Court. The Supreme Court opined in this regard that the view of the law adopted by the Gujarat High Court in rejecting the interim application is incorrect. The proviso to Section 2(2) of the A&C Act makes it clear that where, in an arbitration which takes place outside India, assets of one of the parties are situated in India and interim orders are required qua such assets, including preservation thereof, the courts in India may pass such orders. The Supreme Court reasoned that the term ‘international commercial arbitration’ as used in Section 2(2) does not refer to the definition contained in Section 2(1)(f), which requires a foreign party, but instead refers to arbitrations that take place outside India. Basis this, the Supreme Court held that in international commercial arbitrations with seats outside India, interim relief would ordinarily remain available, even if there are no foreign parties. Consequently, this part of the Gujarat High Court judgment[7] was set aside, it being held that the application made by GE Power under Section 9 would be maintainable.

DECISION

The three judge bench comprising Justice Rohinton Fali Nariman, Justice B.R. Gavai and Justice Hrishikesh Roy upheld the impugned judgment of the Gujarat High Court[8], except for the finding on the Section 9 application of GE Power being held to be non-maintainable.

A POSITIVE OUTCOME

The significance of this decision in relation to international commercial arbitrations is manifold. This case finally settles the inconsistency in decisions rendered by several High Courts and the Supreme Court of India on this topic. The first of these decisions was pronounced under the Foreign Awards (Recognition and Enforcement) Act, 1961 in Atlas[9]by the Supreme Court, where party autonomy and right of Indian parties to choose a foreign seat was upheld. Similar views were taken by Madhya Pradesh High Court in Sasan Power Limited v. North American Coal Corporation (India) Private Limited[10], and the Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited[11]. Contrary to the decision in Atlas, a Single Judge of Supreme Court in TDM Infrastructure Private Limited v. UE Development India Limited[12] held that arbitrations between Indian parties are not ‘international commercial arbitrations’, and two Indian parties could not be permitted to derogate Indian law by agreeing on a foreign seat. This view was adopted by the Bombay High Court in Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Private Limited[13]. These conflicting views have now been ironed out, and a binding precedent set for similar future disputes.

Additionally, the decision offers portentous boost to party autonomy in arbitrations and establishes that two Indian parties are at liberty to elect a foreign seat and be governed by foreign substantive law during arbitration proceedings. It emphasizes that to discard a foreign law only because it is contrary to an Indian statute would defeat the basis of private international law to which India undisputedly subscribes, and could not be considered to be in derogation of public policy.[14] Moreover, the party against whom award is passed will now have the option to avail two recourses, i.e. challenge the award at the foreign seat, and oppose enforcement of such foreign award in India; while also having the right to seek interim reliefs under Section 9.

From the perspective of foreign companies with Indian subsidiaries and parties having transnational presence, this decision has come as a positive step that paves way for disputes to be adjudicated uniformly by deciding on a common neutral seat across countries.

Watch this space for more.

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Authors:

Hardeep Sachdeva, Senior Partner
Isha Singh, Associate

Footnotes:

[1] Civil Appeal No. 1647 of 2021.
[2] R/Petn. under Arbitration Act Nos. 131 and 134 of 2019 (Gujarat High Court).
[3] Supra Note 1.
[4] (1999) 7 SCC 61.
[5]Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2016) 4 SCC 126.
[6]Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228.
[7] Supra Note 2.
[8] Ibid.
[9] Supra Note 4.
[10] (2016) 10 SCC 813.
[11] 2017 (6) ARBLR 447 (Delhi).
[12] (2008) 14 SCC 271.
[13] (2015) SCC OnLine Bom 7752.
[14] Supra Note 6.

Date: May 3, 2021