Choice of a Foreign Seat of Arbitration by Two Indian Parties

Contributed by: Samvad Partners






One of the controversial questions in Indian arbitration law has been whether two Indian parties can choose to have a seat of arbitration outside India. Recently, the Supreme Court in PASL Wind Solutions Private Ltd. v. GE Power Conversion India Pvt. Ltd. (Civil Appeal No. 1647 of 2021) set this controversy to rest and held that two Indian parties can choose a foreign seat of arbitration. Consequently, it held that, such an arbitration proceeding would culminate in a ‘foreign award’ under Part II of the Arbitration & Conciliation Act, 1996 (“the Act”), and would be enforceable as such. We analyze the decision.


Facts:

PASL & GE, two Indian parties had agreed to resolve their disputes by arbitration with the seat at Zurich, Switzerland. PASL initiated arbitration, and GE challenged the sole arbitrator’s jurisdiction on the ground that two Indian parties could not have chosen a foreign seat. PASL asserted the opposite, and ultimately the challenge was dismissed by the arbitral tribunal. A final award dismissed PASL’s claims, and awarded legal costs to GE. PASL failed to pay, and GE initiated enforcement proceedings under Part II of the Arbitration Act. PASL reversed its earlier position, and claimed Mumbai, which was the venue of arbitration to be the seat of arbitration. It instituted proceedings under Section 34 of the Act to set aside the award.


Analysis:

First, the Court settled an interpretational issue. PASL argued that a ‘foreign award’ under Part II of the Act could only arise from an ‘international commercial arbitration,’ as defined in Section 2(1)(f) under Part I of the Act. An international commercial arbitration requires, inter alia, that at least one party be a national or a habitual resident of a country other than India, or a body-corporate incorporated outside India. PASL argued, that since neither PASL nor GE satisfied these criteria, the award could not be a ‘foreign award’, enforceable under Part II.


The Court rejected this argument, and held Part I & Part II to be mutually exclusive. Part I was held to be a complete code, covering all aspects of an arbitration, and encapsulating only arbitrations seated in India. While Part II, barring Section 45, essentially provided for only enforcement of foreign awards (i.e. arbitrations seated abroad) in India. The Court traced the historically separate scope of the repealed Arbitration Act, 1940 and the Foreign Awards Act, 1961, and found no overlap. The Court noticed continuation of such separation between Part I & Part II, and application of the definition of ‘international commercial arbitration’ in Section 2(1)(f) was restricted only to Part I.


The Court concluded that a foreign award under Part II is not party-nationality centric, but seat-centric. This was the approach followed by the Madhya Pradesh High Court in Sasan Power Limited v. North America Coal Corporation (India) Pvt. Ltd., [2015 SCC Online MP 7417]. While considering precedents, the Court followed the Supreme Court’s decision in Atlas Export Industries v. Kotak & Co. [(1999) 7 SCC 61], which had allowed two Indian parties to choose a foreign seat. In PASL the Supreme Court also ruled a decision of a single judge of the Supreme Court under section 11 in TDM Infrastructure v UE Development [2008 (14) SCC 271], to be without precedential value. The Court also overruled a Bombay High Court decision in Seven Islands Shipping v Sah Petroleum (2012) 5 Mh LJ 822, which had declared an agreement between two Indian parties choosing a foreign seat to be invalid. The Court in the present dispute found PASL and GE’s choice of a foreign seat to be valid, and declared the final award as a foreign award under Part II.


Then, the Court considered an argument that allowing two Indian parties to choose a foreign seat violates Indian public policy, and falls foul of Section 23 of the Indian Contract Act, 1872. The Court took note of exception 1 to Section 28 of the Contact Act, and held that although Section 28 prohibits an agreement restraining enforcement of legal rights by usual legal proceedings, arbitration proceedings were excluded from its scope, without any reference to nationality of persons resorting to arbitration.


The Court also discarded an argument that Section 28(1)(a) of the Arbitration Act is a prohibition on choosing a foreign seat. Section 28(1)(a) requires the dispute submitted to arbitration to be decided in accordance with substantive Indian law, and clearly applied only to an arbitration seated in India, other than an international commercial arbitration. Additionally, Section 28(1)(a) made no reference to an arbitration conducted by two Indian parties in a foreign seat.


On the issue of choosing a substantive law different from Indian law to govern the dispute, the Court held that where the law of India prohibits a certain act, the conflict of law rules will compel an arbitrator to apply the Indian law on the ground of international comity between nations. Therefore, Indian parties will not be able to circumvent Indian law by choosing a foreign law. Even if such a circumvention occurred, on the grounds of violation of fundamental policy of Indian law, enforcement of such a foreign award could be refused under Section 48(2)(b).


The court ultimately concluded that there was no prohibition under Indian law in allowing two Indian parties to choose a foreign seat. The challenge to the award would have to be made in that foreign country, while a subsequent enforcement proceeding under Part II of the Act could be brought in India. The freedom to contract to that effect was upheld, considering the principle of party autonomy, the “brooding and guiding spirit of arbitration.”


From the policy perspective the Supreme Court’s verdict is important, because it opens the doors to Indian parties choosing to conduct their arbitration in other jurisdictions. Given the travails and delays of the Indian court system, it is expected that parties who want a speedy and effective resolution to their disputes would prefer to have arbitration clauses that designate a seat abroad. For better or for worse, this will have an impact on those who hope to see India as an arbitration ‘hub’. In some ways, the decision is also a recognition of the fact that India continues to be a difficult place to arbitrate, despite important legislative changes and a pro-enforcement stance.


Contributed by Samvad Partners


The above article has been authored by Mr. Arjun Krishnan(Partner) and Mr. Shourya Bari(Associate).