6 May 2021
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Supreme clarifies legal dilemma on right of Indian parties to choose a foreign seat of arbitration
On 20 April 2021, the Supreme Court vide its judgment in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited finally laid to rest the quandary on whether two Indian parties can adopt a foreign seat of arbitration. The three-judge bench of the Supreme Court held that nothing stands in the way of party autonomy in choosing a seat of arbitration outside India even when both parties are Indian, and the ensuing award will be enforceable in India. We had covered this contested point of law in our earlier article revolving around the conflicting views take by various High Courts in India.
Factual Summary
PASL Wind Solutions Private Limited (“PASL”), a company incorporated in Gujarat, India entered into an agreement with GE Power Conversion India Private Limited (“GE Power”) incorporated in Tamil Nadu, India. Pursuant to this agreement, PASL placed orders with GE Power for converters which could be used in wind turbines. A dispute arose between the parties in relation to the expiry of the warranty of the said converters. In order to resolve these disputes, PASL and GE Power entered into a settlement agreement which consisted of a clause that provided that in case the parties are unable to amicably settle their dispute through negotiations, the dispute shall be referred to and finally resolved by arbitration in Zurich, Switzerland, in accordance with the rules of the International Chamber of Commerce (“ICC”). As talks for settlement fell through, PASL initiated arbitration proceedings for breach of contract and an arbitrator was appointed. Though the seat of arbitration was Zurich, Switzerland, the venue of arbitration i.e., the physical location where hearing was held, was Mumbai, India.
Eventually, the arbitrator passed its award (“Arbitrator’s Award”) rejecting the claim of PASL for breach of contract and damages and PASL was directed to reimburse GE Power their legal costs and expenses with accumulated interest. On refusal of PASL to make payments as per the Arbitrator’s Award, GE Power initiated enforcement proceedings under the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the High Court of Gujarat, within whose jurisdiction the assets of PASL were located. Before the High Court, PASL did a complete U-turn and took a stand that Mumbai was both the seat as well as the venue of arbitration and that two companies incorporated in India cannot choose a forum for arbitration outside India. The Gujarat High Court’s order, which was decided in favor of GE Power, was appealed before the Supreme Court by PASL.
Major issues decided by the Supreme Court
The major issues which were raised before the Supreme Court are as follows:
a. Whether the Arbitrator’s Award can be regarded as a foreign award under the Arbitration Act?
b. Whether the Arbitrator’s Award, if deemed to be a foreign award, is enforceable within the territorial jurisdiction of India and can it be enforced by the Courts in India?
c. Whether a petition filed under Section 9 of the Arbitration Act is maintainable before the High Court if the seat of arbitration is a foreign jurisdiction?
Observations and reasoning of the Supreme Court
Supreme Court was of the view that the Arbitration Act clearly demarcates between Part I of the Arbitration Act, which pertains to domestic arbitration and the International Commercial Arbitration, and Part II which specifically deals with the provisions pertaining to the enforcement of foreign awards. Therefore, to answer the question of whether an award is deemed to be regarded as a foreign award, the Courts must solely be guided by the definition of foreign awards provided under Section 44 in Part II of the Arbitration Act. For an award to fall under the scope and the ambit of Section 44, the requirements are:
a. the dispute must be considered to be a commercial dispute under the laws of India;
b. the dispute must arise between “persons”;
c. the award must be passed in pursuance of a written agreement for arbitration; and
d. the award must be passed in one of such territories notified by the Indian Government to be a territory to which the New York Convention applies.
At the outset the Court rejected the argument of PASL that Mumbai was the seat as well as the venue of the arbitration. The Supreme Court took note of the construct of the arbitration clause in the settlement agreement and concluded that both PASL and GE Power were clear with regards to the fact that the seat of arbitration was Zurich, Switzerland and that Mumbai was simply chosen as a venue which was convenient for both the parties. As Switzerland is a signatory to the New York Convention and all the other ingredients set out in Section 44 were fulfilled, the Supreme Court held that the Arbitrator’s Award is a ‘foreign award’ as defined under the Arbitration Act and the nationality or domicile or place of incorporation / residence of the parties cannot have any bearing on the definition of foreign award laid down under Section 44 of the Arbitration Act.
The Supreme Court now delved into the aspect of enforceability of a foreign award which is governed under Section 49 of the Arbitration Act. Under the Arbitration Act, the courts may refuse to enforce the foreign award if the party against whom it is invoked can prove that the award is against public policy. Under Section 28 of the Indian Contract Act, any agreement which restrains a party from enforcing their legal rights are void to that extent. It was argued by PASL that the settlement agreement which restricted two Indian parties to initiate arbitration proceeding in India would be deemed to be regarded in contravention of the Indian Contract Act. Therefore, enforcement of the Arbitrator’s Award would be contrary to the public policy in India. However, in order to prevent Section 28 from being a highly litigious provision, certain exemptions were carved out under the Indian Contract Act. Exemption no. 1 of Section 28 exempts arbitration contracts from the purview of Section 28 of the Indian Contract Act. In light of such an exemption. the Supreme Court concluded that the arbitration agreement between PASL and GE Power is not against public policy and the Arbitrator’s Award is therefore enforceable in India.
Another important question of law discussed by way of this judgement was with regards to Section 9 of the Arbitration and Conciliation Act, 1996, which deals with interim measures. The Arbitration Act enumerates that the provisions of Section 9 are applicable to international commercial arbitrations unless there exists any contract or agreement to the contrary between the parties. The Supreme Court held that Section 9 of the Arbitration Act remains available even if two Indian parties adopt a foreign seated arbitration and the courts may grant interim reliefs in such cases if the assets of one of the parties is situated in India and interim orders are required for preservation of such assets.
Our thoughts
The judgment provides much needed certainty on several points of law and the three-judge bench has provided clarification by strictly adhering to a textual interpretation of the provisions of the Arbitration Act. It is another testament to the pro-arbitration approach taken by Indian courts and throws some much-needed light on the narrow scope of Section 48 of the Arbitration Act under which courts can refuse to enforce a foreign award, while also emphasizing on party autonomy as the guiding spirit of arbitration. Given the complexities involving enforcement of contracts in India, Indian parties entering into high value contracts may prefer foreign seats of arbitration in arbitration friendly jurisdictions such as Singapore. The judgment will also be viewed favorably by multinational companies that have Indian subsidiaries and will now insist for foreign seated arbitration in hopes of speedy disposal of cases and expedited enforcement of the same by the High Courts in India. The decision laid down in this judgement would have a significant impact on the domestic arbitration regime and enforcement of contracts in India, including in initiating further reforms to make the domestic arbitration system more efficient and robust.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law
al@acuitylaw.co.in
