[Abhi Udai Singh Gautam and Mustafa Rajkotwala are third-year law students at NALSAR University of Law, Hyderabad]
The Supreme Court (‘SC’) has recently settled a fundamental question of arbitration law in PASL Wind Solutions Private Ltd v GE Power Conversion India Private Limited (‘PASL v. GE’), by determining that two Indian Parties are, in fact, capable of validly entering into a foreign seated arbitration agreement. This judgment has upheld, and strengthened the fundamental principle of party autonomy in arbitration. Interestingly, it has now affirmed that two Indian parties can completely and wholly exclude the jurisdiction of Indian Courts in the course of their arbitration proceedings.
Analysing the Legal Positions of Indian Courts with Respect to Foreign Seats and Awards
In the context of the Arbitration Act, 1940 and the Foreign Award Act, 1960 (collectively referred as the Old Regime) the SC in Atlas Export Industries v Kotak & Company (‘Atlas’) had remarked that two Indian Parties would not be stopped from entering into an arbitration agreement with a foreign seat. Such an award would then be considered a foreign award. However, the Court had primarily focused on arguments arising from section 28 of the Indian Contract Act, 1872 (‘Contract Act’) wherein it found that the right of a party to enter into an arbitration agreement was preserved by Exception 1 to section 28. This meant that an arbitration agreement, no matter the choice of seat, could not be assailed on the fact that it excluded the jurisdiction of Indian Courts.
However, in the context of the Arbitration and Conciliation Act, 1996 (‘A&C Act’), the judgemnt of the SC in TDM Infrastructure Private Limited v UE Development India Private Limited (‘TDM’) muddled the Indian position. The Court conflated international commercial arbitration with foreign arbitration, and held that any arbitration where both the parties were Indian could not be subject to a foreign seat.
By doing this, the Court undertook a party-based rather than a location-based determination of curial law, which would not have been in the spirit of section 2(2) and section 44 of the A&C Act. This is because neither section 2(2), nor section 44 refers to any special characteristics that must be present in the parties themselves (such as foreign nationality). Rather, both these provisions stress on the place of arbitration. Section 2(2) allows the parties to the exclude the application of Part I of the A&C Act by arbitrating in a place outside India, and Section 44 defines a foreign award (which is a necessary precondition to the application of Part II of the A&C Act) with reference to it being rendered in a territory which is signatory to the New York Convention.
However, in Sasan Power Ltd. v North American Coal Corporation India Private Limited (‘Sasan’), the Madhya Pradesh High Court (‘MP HC’) held that in a circumstance when parties decided to seek arbitration from a seat outside India, Part I of the A&C Act would not be applicable to the dispute. In light of this, it held that if the parties’ dispute resolution agreement satisfied the requirements of Part II of the A&C Act, Part II would be applicable, and the parties would have to be referred to arbitration as per section 45 of the A&C Act (Power of judicial authority to refer parties to arbitration). Further, an award passed in this dispute would be considered a ‘foreign award’ under Part-II of the A&C Act.
When Sasan was in appeal before the SC, the Court remained silent and did not adjudicate on the MP HC’s position with respect to the autonomy of the parties to decide a foreign seat of arbitration, which was contrary to the legal position in TDM. As per paragraph 12 of this appeal, the SC was only interested in dealing with the facts of the case in respect to the substantive law that could be operative on the two parties in the case of an “international commercial arbitration” (‘ICA’).
Further, in GMR Energy Limited v Doosan Power Systems India Private Limited and Ors. (‘GMR’), a single-judge bench of the Delhi High Court (‘DHC’) relied upon the judgment in Sasan by the MP HC that stated that Indian parties can arbitrate in a foreign seat, and an award provided in this dispute would be considered a foreign award under Part II of the A&C Act. It also relied upon the Sasan appeal before the SC, which stated that the choice of foreign seat by Indian party is not in derogation of the arbitration and dispute resolution laws in India.
However, the DHC distinguished its position from the one in TDM (wherein it was observed that the arbitration between two Indian parties having Indian nationalities cannot be considered as an “international commercial arbitration”), by stating that it had made such an observation only for the purposes of section 11 of the A&C Act (Part I), which cannot be relied on for any other purposes.
Construed this way, given that the TDM decision was rendered under section 11 of the A&C Act, it cannot have any precedential value with respect to party autonomy in choosing a foreign seat of arbitration.
Understanding the SC’s Position in PASL v. GE
In PASL v. GE, the SC upheld party autonomy and posited that two Indian parties can choose a foreign seat of arbitration. In this way, it followed the same conclusion as reached by the SC in Atlas in respect to this issue of law, even though the bench in Atlas had merely considered the question from the perspective of section 28 of the Contract Act.
In furtherance to this, this case settled the position around the interpretation of section 28(1)(a), which states that two Indian parties cannot choose a foreign substantial law for the purposes of their arbitration process. The Court held that this section falls within the scope of Part I of the A&C Act, which only applies to India seated arbitrations. The implications of this are elaborated upon in the following portions of this article.
Principle of Territorial Application of Curial Law
The Court held that an award between two Indian parties rendered in a foreign seated arbitration could be termed as a “Foreign Award” (contingent on its fulfilment of the requirements in sections 44 or 53), and would be enforced accordingly. The Court reaffirmed that Part I and II of the A&C Act are mutually exclusive and complete codes in themselves.
In this way, it affirmed a territorial approach to jurisdiction. Section 2(1)(f) of the A&C Act defines an international commercial arbitration in terms of the parties. For instance, in case of arbitration between two individuals, one of the parties needs to be a non-resident for the arbitration to qualify as an ICA. However, this should be read in with section 2(2) of the A&C Act, which limits the application of Part I to arbitrations which take place in India. Furthermore, territoriality of the arbitration forms a key part of the eligibility of a foreign award under sections 44 and 53 of the A&C Act.
Furthermore, this approach is in line with the principle affirmed in Bharat Aluminum Co v Kaiser Aluminum Technical Service, Inc. (‘BALCO’), wherein the Court affirmed that the choice of a juridical seat amounts to an exclusive jurisdiction clause. This territory-specific approach is in line with the twin judgments in Shashoua v. Sharma (one by the Indian Supreme Court, and the other by the English High Court), wherein the principle that parties are free to choose the seat, which would serve as the basis for the application of the curial law was affirmed. Notably, the Supreme Court has, time and again, allowed parties to choose foreign seats, while not delving into this question, Union of India v Reliance Industries Limited & Ors. being a key example.
So, by allowing a non-ICA arbitration to take place outside India, the court has affirmed the principle that two Indian parties can first,apply any law/legal principles to their dispute and second, they can completely exclude the jurisdiction of Indian Courts through an agreement to that effect.
A Check-list for Excluding Indian Courts in its Entirety
This decision has strengthened the position of Indian law on permitting parties to exclude the application of Part I of the A&C Act. Indian parties can effectively and entirely exclude the jurisdiction of Indian courts if two conditions are fulfilled, that is, first, the parties have selected a foreign seat, and second, the parties have excluded section 9 of the A&C Act either expressly, or by necessary implication.
To reiterate the principle in Shashoua v Sharma and BGS SGS Soma JV v NHPC Ltd., the seat of arbitration provides exclusive supervisory jurisdiction to the courts of the seat. This would ideally mean that Indian courts would not have any authority to pass orders with respect to a foreign-seated arbitration. This is also the implication of the judgemnt in PASL v. GE, where the bench states that awards from foreign-seated arbitrations between Indian parties would be treated as foreign awards. However, some aspects of jurisdiction are preserved by the proviso to section 2(2) of the A&C Act, which inter alia provides for the application of section 9 of the A&C Act to arbitrations not seated in India.
However, this jurisdiction to grant interim relief can also be excluded pursuant to an agreement to that effect. According to the DHC in Ashwani Minda v U-Shin Ltd & Ors., the application of section 9 of the A&C Act can be excluded in the presence of specific provision in the arbitration agreement to the same. It may even be excluded in case the parties opt for a foreign-seated arbitration under institutional rules which do not permit any court-sanctioned interim relief.
Analysing the Peculiarity of Section 28 of the A&C Act
The main distinguishing feature of an ICA can be found in section 28 of the A&C Act. According to section 28, the law applicable to arbitrations which are not ICA has to be Indian law. This means that contractual relationships of two Indian parties in a domestic arbitration cannot be governed by a law of their choice. Choosing an Indian seat is akin to choosing Indian law to the dispute for Indian parties.
Assuming Indian parties cannot be allowed to arbitrate in a foreign seat, their autonomy to apply legal principles of their choice is completely eroded. Therefore, by upholding the application of section 2(2), and allowing Indian Parties to escape Part I of the A&C Act, the SC has preserved party autonomy, which serves as the bedrock of arbitration law – see, Centrotrade Minerals & Metal Inc. v. Hindustan Copper Limited (2017) 2 SCC 228.
However, PASL v. GE does lead to some peculiar situations with respect to section 28(1) by confounding its meaning. To illustrate, suppose an arbitration proceeding is to take place with respect to a contract to be performed in India. The choice of substantive law will depend on the nature of arbitration, which can play out in one of the four ways: non-ICA domestic arbitration, ICA domestic arbitration, foreign-seated arbitration with all Indian parties, or a foreign-seated arbitration with all non-Indian parties. Pursuant to the judgment of the SC in BALCO and PASL v. GE,section 28 would not apply to foreign seated arbitrations. This would mean that the parties with a foreign seat (subject to the applicable curial law), would be able to apply any legal principles/systems to govern their commercial relationship. The position would be the same for ICA domestic arbitrations by virtue of section 28(2). However, two Indian parties in a domestic arbitration would not be free to do so. This seems to be an artificial restriction on the principle of party autonomy. This is because the same parties with a foreign-seated arbitration would be able to choose any substantive law that the curial law permits (which in certain cases, for instance in the case of section 46 of the English Arbitration Act, 1996, is a very broad selection). This creates a situation where the choice of Indian substantive law is unnecessarily bundled up with a choice for Indian curial law, but only for two Indian parties.
Therefore, there is no way for Indian parties to subject themselves to Indian domestic arbitration regime without also submitting themselves to Indian substantive law. As policy choice for the arbitration regime, it seems arbitrary. This is because once arbitration proceedings commence, courts lose the ability to look behind the arbitrator’s award. Section 34 of the A&C act prohibits a review of the award on its merits, and the jurisdiction of the courts is strictly limited to procedural matters (which are governed by the curial law). Therefore, there would be no practical effect of bundling Indian curial and substantive law, but it is done so in the A&C Act (even though the authors realise that it is not the place of the court to alter the interpretation of section 28 of the Contract Act merely for these reasons). The decision in PASL v. GE narrows the application of this peculiarity, and affirms the principle that two Indian parties can arbitrate a dispute which is not governed by Indian Law.
– Abhi Udai Singh Gautam and Mustafa Rajkotwala