Effect of Seat of Arbitration outside India between Indian Companies: A Case Study of the PASL Judgment.

Introduction

The Supreme Court very recently in the case of PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, 2021 SCC Online SC 331 (for short PASL Wind Solutions)gave a positive ruling on the issue of ‘international commercial arbitration’.

In this case, the controversy revolved around the issue of the legality of two Indian parties to opt out of the Indian arbitration law for a foreign seated arbitration. The Supreme Court has resolved this issue by giving the Indian parties freedom to choose foreign law wherein the enforcement is not provisioned in India.

Foreign Award

An ‘award’ between two parties from India rendered in a foreign seated arbitration would be considered as a “Foreign Award” according to Part II of the Arbitration & Conciliation Act, 1996 (for short ‘Act’) and it would be enforced accordingly. The award passed by the foreign seated arbitration will be considered a foreign award.

According to Section44 of the Act, the following ingredients are necessary for an award to be designated as a foreign award:

• The dispute must be considered to be a commercial dispute under the law in force in India;

• It must be made in pursuance of an agreement in writing for arbitration;

• It must be a dispute that arise between "persons" (without regard to their nationality, residence, or domicile); and

• The arbitration must be conducted in a country that is a signatory to the New York Convention.

Choice of Foreign Seat

In its recent judgment of PASL Wind Solutions, the Apex Court held that two Indian parties can choose a foreign seat of arbitration.

Choice of Foreign Law

The Indian parties are free to choose a foreign law. The permissibility to choose a foreign law will depend on the conflict of law principles of the seat of arbitration. The choice of parties should not be contrary to public policy (as provisioned under the Indian Contract Act) and it should not violate the fundamental policy of Indian law.

Facts of the case

1. A dispute arose between the parties under a settlement agreement executed between GE Power Conversion India Private Limited (GE) and PASL Wind Solutions Private Limited (PASL). These companies were incorporated in India.

2. The Settlement Agreement between the parties provided for arbitration proceedings under the Rules of Conciliation and Arbitration of the International Chamber of Commerce having seat in Zurich, Switzerland, for resolution of a dispute. Both the parties further agreed that the Indian law would apply to the parties.

3. Subsequently, GE challenged the jurisdiction of the arbitrator and contended that the two Indian parties cannot choose a foreign seat of arbitration. PASL placed its argument that there is no such bar under Indian law.

4. The sole arbitrator ruled that the two Indian parties can arbitrate outside India. No challenge was filed by GE against this decision and the arbitrator confirmed that the seat of the arbitration would be Zurich.

5. Both the parties completed the arbitration and a final award was issued in favour of GE, wherein PASL was directed to make payments to GE.

6. However, PASL refused to make any payments as per the final award. Hence, GE filed a petition before the Gujarat High Court under Sections 47 and 49 of the Act. It also initiated proceeding under section 9 for security, pending enforcement of the award.

7. PASL objected to the enforcement of the award based on the ground that it was contrary to Indian public policy as Indian law bars two nationals to arbitrate at a foreign seat.

Issue

Whether or not two Indian parties can choose a foreign seat of arbitration?

The decision of the Gujarat High Court

The High Court passed the decision in favour of GE and upheld the arbitration award. However, it refused to grant interim relief to GE under section 9 of the Act mentioning that it cannot be granted in case of a foreign seated arbitration between Indian parties.

Both the parties filed an appeal against the order of the High Court. PASL challenged it on the ground that Zurich was validly chosen as the seat of arbitration whereas GE challenged it based on its refusal to grant interim relief under section 9 of the Act.

Cases referred

• Centrotrade Minerals and Metal Inc v. Hindustan Copper Ltd. (2017), 2 SCC 228- The Supreme Court emphasized the principle of party autonomy in arbitration and held that it permits parties to adopt the foreign law as the proper law of arbitration.

• Atlas Export Industries v. Kotak, (1999) 7 SCC 61- The Supreme Court held that the two Indian parties could choose a foreign arbitral seat under the predecessor legislation to the Arbitration Act and that such agreement was not contrary to public policy.

• TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd. (2008) 14 SCC 271(over-ruled)- The Supreme Court had given a contrary opinion wherein while determining the scope of section11 of the Act which deals with the application for appointing an arbitrator, the Court held that arbitrations between Indian entities/ parties are not "international commercial arbitrations". The Indian nationals should not be permitted to derogate from Indian Law and they are not permitted to choose a foreign seat.

Decision of the Supreme Court

1. Part I of the Act only applies where India is the seat. It further clarified that Part II of the Act deals with New York Convention awards are mutually exclusive.

2. If arbitration is seated outside India and an arbitration award is passed then it will be considered a foreign award and its enforcement in India would be governed by the New York Convention if the foreign territory is a signatory to the New York Convention and a reciprocating territory under Section 44 [definition of foreign award] of the Arbitration Act.

3. It clarified that the provisions of the Act and the Indian Contract Act, do not bar the Indian parties to resolve their disputes through a foreign award.

4. An arbitration agreement cannot be considered to be against the public policy as restraining a party’s right to legal proceedings under the Indian Contract Act merely because the parties have chosen a foreign arbitration seat.

5. It held that if the assets in question were located in India, then the parties are free to seek interim relief from the Courts in India.

6. The decision of the Gujarat High Court was upheld except for the finding on section9 of the Act wherein it held that the application would be maintainable.

Conclusion

The decision of the Supreme Court as discussed above may be interpreted to lead to the following conclusions-

• Foreign seated awards- If two Indian Parties choose foreign arbitration seat then such an agreement shall be valid and enforceable in India.

• Contract Act and Public Policy- The freedom of contract had to be balanced with public policy. It cannot be said that there is any public harm in allowing Indian parties to resolve their dispute through arbitration at a neutral forum outside India.

• Interim relief- Indian parties to a foreign-seated arbitration can apply for interim measures under the Act.