Choice of Foreign Seat of Arbitration by Indian Parties: Scrutinizing its Validity

[Ashish Singh is an Advocate and Ex- Managing Associate at L&L Partners & Megha Shaw is a Final Year Law Student at The West Bengal National University of Juridical Sciences, Kolkata]

The long drawn battle of choosing a foreign destination, under the Indian Arbitration & Conciliation Act, 1996, as the seat of arbitration by the domestic parties has been favorably settled by the Supreme Court in PASL Wind Solution v. GE Power. The Court also held that an award which is delivered by a forum outside India will qualify as a ‘foreign award’ under Part II of the Act. This landmark judgment will play a vital role in furthering India’s pro-arbitration attitude, as it has also placed the principle of party autonomy on a higher pedestal. 

Background

PASL and the GE Power are companies having their registered offices in India. As per the agreed dispute resolution mechanism, any dispute arising between the parties would be settled by way of arbitration with Zurich as the seat of arbitration. In 2017, a dispute arose and PASL requested to initiate arbitration before the International Chamber of Commerce. Before the arbitral tribunal, GE Power contended that the two Indian parties could not choose a foreign seat of arbitration. However, the tribunal placed reliance on GMR Energy v. Doosan Power Systems and Atlas Export Industries v. Kotak to reject GE Power’s contention and uphold Zurich as the seat of arbitration. 

The tribunal passed an award in favour of GE Power. GE Power then initiated the enforcement proceedings against PASL before the Gujarat High Court. Interestingly, in the proceeding before the High Court, PASL, taking a U-turn, adopted GE Power’s contention that two Indian parties cannot choose a foreign seat of arbitration. Moreover, it also challenged the tribunal’s award under section 34, which is only applicable to domestic awards under Part I of the Act. Accordingly, two fascinating questions of law came up for consideration before the Supreme Court: 

  1. Whether two Indian parties can choose a foreign seat of Arbitration?

  2. Whether such an award delivered outside India can be governed by Part I of the Act?
Did the Supreme Court allow PASL to take a U-turn?

PASL relied upon the case of TDM Infrastructure v. UE Development, wherein it was held that two Indian parties could not be allowed to derogate the Indian law by choosing a foreign seat of arbitration as it is against the public policy of India. However, the Supreme Court rejected this line of arguments. It clarified that if a foreign award is passed in a dispute arising between two Indian parties cannot automatically be considered to be against public policy by virtue of being seated in a foreign jurisdiction, since such award could be challenged during the enforcement proceedings. 

The Court, relying on Atlas Export, held that merely choosing a foreign seat of arbitration cannot be against the public policy of India, and it will not be in violation of sections 23 and 28 of the Indian Contract Act, 1872. The Court further held that if Indian parties willingly enter into an agreement with their “eyes open” and voluntarily choose a foreign seat of arbitration then their agreement has to be enforced accordingly. The Court also clarified that merely because parties are barred from resolving their disputes in India, such an agreement is not against the public policy of India. Thus, the Court held that the division bench judgment in Atlas Export is a binding precedent and that two Indian parties are allowed to arbitrate outside India.

Whether part II of the Act will apply in cases where Indian parties arbitrate outside India?

PASL contended that Part II of the Act would not apply to arbitration taking place outside India, as it is a domestic award that involves two Indian parties whereas Part II only applies to foreign awards. The Supreme Court held that the nationality of parties has no role in determination of the applicability of Part II of the Act. Part II of the Act applies when the seat of the arbitration is outside India. However, another criterion that needs to be satisfied for the application of Part II is that the seat, where the arbitration takes place outside India, should be a party to the New York Convention. In GMR Energy, the Delhi High Court relied on Atlas Export to conclude that arbitration between two Indian parties held in Singapore, a foreign seat of arbitration, will be governed by Part II of the Act and not under Part I. However, under Part II of the Act, if a foreign award is against the fundamental policy of Indian law or the most basic notions of justice and morality, then such a foreign award cannot be enforced as per section 48 (2) (b) of the Act.

The Supreme Court finally held that when parties mutually agree to arbitrate their dispute in a place outside India, then as per section 2(2) of the Act, Part I of the Act would not apply. The court further clarified that the definition of ‘International Commercial Arbitration’ (‘ICA’), under section 2(1)(f) of the Act, should not be used while interpreting ICA under section 2(2) of the Act. It held that arbitration award rendered outside India would also come under the ambit of section 2(2) of the Act, regardless of the nationality of the parties. Additionally, as per section 2(2), in a foreign seated arbitration between two Indian parties, the parties will have the option to avail the interim relief under section 9 of the Act. Hence, even if the ICA has no international parties, interim relief would be available under section 9 of the Act, as the arbitration is foreign seated. Thus, the option of availing the interim reliefs by Indian Courts will encourage the Indian parties to choose a foreign seat of arbitration.

The judicial decision of putting the party autonomy on a higher pedestal

The Supreme Court placed reliance on Bharat Aluminium Co. v. Kaiser Aluminium and unequivocally held that party autonomy is the ‘brooding and guiding spirit of arbitration’. On this basis, the Court observed that parties are free to choose three different laws governing their entire contract i.e. proper law of contract, proper law of arbitration agreement, and proper law of the conduct of the arbitration. The said point was also discussed in the recent case of Dholi Spintex v. Louis Dreyfus, where the Delhi High Court laid down that the party autonomy is the backbone of adoption of foreign law as the proper law of arbitration. The Delhi High Court had relied on the Supreme Court decision in Centrotrade Minerals v. Hindustand Copper which highlighted the principle of party autonomy. In Centrotrade Minerals, the Supreme Court further held that just because a foreign law is in contradiction to Indian Law, the foreign law cannot be disregarded, as it is against the principles of private international law. Thus, two Indian parties have the autonomy to choose a foreign law as the law governing their arbitration agreement, which is independent of the substantive contract. 

Conclusion

The Supreme Court has settled a crucial issue surrounding a foreign award involving two Indian parties. This decision will be of immense help in cross-border transactions, as two Indian parties can now choose a foreign seat of arbitration with a liberty of availing interim reliefs under section 9 of the Act. As such, this Supreme Court judgment can safely be regarded as the authoritative legal position on a question of law which had attracted conflicting views from courts and academicians alike in the past.

– Ashish Singh & Megha Shaw

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