Choosing a Foreign Seat: A New Dilemma for Two Indian Parties?

[Tawishi Beria and Rakshit Assudani are 4th year B.B.A., LL.B. (Hons.) students at Jindal Global Law School, Sonipat, Haryana]

The Gujarat High Court in GE Power Conversion India Private Limited v. PASL Wind Solutions Private Limited (decided 3 November 2020) addressed two critical issues that have been plagued with ambiguity in the Indian arbitration framework for a long time, namely, Indian parties choosing a foreign seat as well as the applicability of interim measures in the event of such a choice. It was held that two Indian parties (here, GE Power and PASL) could choose a foreign seat (here, Zurich) for arbitration of disputes. However, they would not be entitled to seek interim protection from Indian courts under section 9 of the Arbitration and Conciliation Act, 1996 (the “Act”).

Two Indian parties choosing a foreign seat

After the arbitral proceedings were completed, GE Power approached the Gujarat High Court to enforce the award (made in Zurich) under section 47 of Part II of the Act, by considering it as a foreign award. The High Court, applying section 44, held that the award was a foreign award, excluding the application of Part I of the Act. Further, it was held that the parties are free to choose any foreign court to adjudicate their disputes by creating exclusive or non-exclusive jurisdiction.  The nationality of the parties would not have a role in determining the applicability of Parts I and II of the Act, the sole determining factor being the seat. Zurich being a New York Convention Member State, the award was enforceable in India as a foreign award. The Court also clarified that choosing a foreign seat would not be against section 28 and Section 23 of the Indian Contract Act, 1872. Accordingly, the award was not against the public policy of India.

Notably, various High Courts have previously arrived at opposing conclusions on the issue. The Madhya Pradesh High Court in Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd. and the Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited held that two Indian parties could validly choose a foreign seat and exclude applicability of Part I of the Act. On the other hand, however, in Addhar Merchantile Private Limited v. Shree Jagdamba Agrico Exports Pvt Ltd, the Bombay High Court reasoned that derogation from Indian laws by choosing a foreign seat would be against public policy. The Supreme Court has not directly addressed this issue, but had in Reliance Industries Limited v. Union of India rejected a challenge to the arbitral award, holding that Indian parties’ choice of London as the seat of arbitration was valid.

The decision of the Gujarat High Court adopts a pro-arbitration stance and is consistent with the approach adopted by a majority of the High Courts. It is also in line with the approach taken by arbitration-friendly jurisdictions like Singapore and England which allow parties to choose a foreign seat. Even though the judgment may have other implications as it allows Indian parties to oust Indian laws, this particular aspect of the judgment is highly beneficial. The judgment is in accordance with the intent of the legislature, as the reasoning is based upon the literal interpretation of the Act by adopting a strict approach. More practically, this position is highly favourable for corporate entities that are incorporated outside India but carry out operations in India through subsidiaries. This is because it will allow the Indian subsidiaries to initiate arbitration at the place where the parent company is incorporated. 

Interim measures under section 9 of the Act

The applicability of section 9 of the Act has been a contentious issue for a while now. In 2002, in Bhatia International v. Bulk Trading SA, the Supreme Court held that section 9 applies to foreign seated arbitrations too. This was in order to prevent the other party from being rendered with no remedy. However, this changed in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc(“Balco”) in 2012 wherein it was held that by virtue of being part of Part I of the Act, section 9 of the Act is applicable only to arbitrations taking place in India and, since it provides for pre-enforcement measures, it will apply only to domestic awards. Further, it was stated that the party is not left without remedy since it could validly approach the courts of the seat.

The position after Balco essentially provided for application of Part I of the Act only to arbitrations seated in India in line with the doctrine of territoriality in section 2(2) of the Act. For foreign seated arbitrations, Part II would be applicable, and accordingly section 9 of the Act could not be invoked. This made it impossible for Indian parties to approach Indian courts for interim relief if the seat was outside India. Following this, by way of the Arbitration and Conciliation (Amendment) Act, 2015, a proviso was added to section 2(2) which provided for the applicability of some provisions of Part I (including section 9) to arbitrations seated outside India, subject to any agreement to the contrary. This proviso is however only applicable to international commercial arbitration (“ICA”), leaving the position with respect to two Indian parties choosing a foreign seat unclear.

In GE Power, the Court stated that the proviso to section 2(2) applied only in case of an ICA where at least one of the parties was a foreign party within the meaning of section 2(1)(f) of the Act. Since in this case both the parties were Indian parties, effectively taking it outside the purview of being an ICA, interim measures under section 9 of the Act could not be granted. This decision of the Gujarat High Court is instrumental in providing clarity to the issue in question. By refusing to provide interim measures by the courts, Indian parties may be discouraged from choosing a foreign seat and derogating from Part I of the Act, consequently fostering arbitration in India.

Although the Court’s decision reflects a pro-arbitration approach, giving importance to party autonomy, it could also possibly raise certain concerns. By not permitting an Indian party to seek interim relief if a foreign seat is chosen, the said interpretation essentially allows the losing party to dispose of its assets before enforcement of the award, rendering the other party helpless with no remedy. In a situation where one of the parties has assets only in India, this becomes especially problematic for the other party to enforce a favourable award.

Additionally, from a logical standpoint, this judgment produces an inconsistency. If there is one Indian party and one foreign party and the seat is outside India, then they may approach the Indian courts for interim relief. However, if both the parties are Indian and the seat is outside India, then they are not allowed to approach Indian courts for interim relief. Accordingly, Indian parties would have to be careful while choosing a foreign seat for arbitration of disputes.

Conclusion

Interestingly, the Delhi High Court in Big Charter Private Limited v. Ezen Aviation Pty. Ltd., took the view that mere submission to a foreign jurisdiction (namely, Singapore), would not preclude the parties from seeking interim relief under section 9 of the Act before Indian courts. While referring to the justification for introducing the proviso to section 2(2) in the first place, the Court stated that “courts in the foreign country would not efficaciously be in a position to grant pre-arbitral interim relief, to secure assets which may be located in India.” If such reasoning is applied, then the applicability of section 9 should have been extended to foreign seated arbitrations that are not ICAs as well, taking a purposive approach rather than a literal one.

In conclusion, the Gujarat High Court’s judgment can be considered as a comprehensive attempt to deal with a rare situation (which was not contemplated by the legislature itself) by strictly following the text of the law. However, as it has been rendered by the Gujarat High Court, it merely has persuasive value. The Supreme Court, till date, has not directly considered both of the issues involved in this case. In light of this decision and those taken by other High Courts across the country, it would be interesting to see the approach taken by the Supreme Court when it is faced with these issues.

Tawishi Beria & Rakshit Assudani

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