Indian Parties and Foreign Seated Arbitration: A Clear Win for Party Autonomy

The recent judgement of PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited (Pasl Wind), of the Supreme Court, finally puts to rest the much-debated question as to whether two Indian parties can arbitrate outside India. Answering the question in the affirmative, the Supreme Court gave due weight to party autonomy and held that there is no clear and undeniable harm caused to the public in permitting Indian parties/entities from designating a foreign seat of arbitration.

The court also recognised the rights of such parties to seek interim relief from Indian courts, where necessary. The question of whether two Indian parties can choose a foreign law has now been left open with clear markers guiding permissibility.

Background and History

The diverging views on this topic date back to decisions under the Foreign Awards (Recognition and Enforcement) Act, 1961. In Atlas Export Industries, (Atlas) the Supreme Court had upheld the right of two Indian parties to choose a foreign seat of arbitration primarily on grounds of party autonomy. A contrary view was taken by a Single Judge of the Supreme Court in TDM Infrastructure (P) Ltd. (TDM) in the context of the Arbitration and Conciliation Act, 1996. Rendered in the context of a S. 11 application appointing an arbitrator, the Supreme Court held that arbitrations between Indian entities/ parties, are not “international commercial arbitrations”. It further held that Indian nationals should not be permitted to derogate from Indian Law. The decision in TDM was construed as suggesting that two Indian parties cannot choose a foreign seat.

A conspectus of judgments that followed from different High Courts took opposing interpretations of these two judgments. In the case of Sasan Power Limited (Sasan I), the Madhya Pradesh High Court held that two Indian parties can choose a foreign seat. The court found that such an arbitration would result in a “Foreign Award”, which was enforceable in terms of Part II of the Arbitration Act. In doing so the Court followed Atlas (a Division Bench decision) over TDM. This view was also followed by the Delhi High Court in GMR Energy Limited and Dholi Spintex.

On the other hand, in the case of M/s. Addhar Mercantile Pvt. Ltd., the Bombay High Court took a contrary view in relying on the case of TDM, and holding that, since both the parties were Indian they could not derogate from Indian law by opting for a foreign-seated arbitration.

Decision: Choice of Foreign Seat

The Supreme Court followed Atlas on the issue and held that two Indian parties can choose a foreign seat of arbitration. The court confirmed that TDM, being a decision of a Single Judge in S. 11 proceedings was not a binding precedent and overruled all cases which had relied on TDM.

The court held that an Award between two Indian parties rendered in a foreign seated arbitration would be a “Foreign Award” for the purposes of Part II of the Act and would be enforced accordingly. The court held that Part I and II of the Act, are mutually exclusive and complete codes in themselves. The definition of “international commercial arbitration” under Part I, S. 2(1)(f) (which is based on the nationality of the parties, is party-centric) applies only to India seated arbitrations. This definition does not apply to Part II, S. 44. Relying on the New York Convention the court held that for the purposes of Part II, the term “international commercial arbitration” is a seat-oriented provision.

The court also negatived the argument that such a choice would be contrary to S. 23 of the Contract Act for being violative of public policy. It held that public policy must be balanced against party autonomy. The court held that unless there is an undeniable public harm that interdicts party autonomy, party autonomy will have to be privileged. The court found that there was no such overriding public interest against two Indian parties choosing a foreign seat.

Decision: Choice of Foreign Law

An argument that was made before the court was that a choice of foreign seat inevitably imports a foreign law and that pursuant to S. 28(1)(a) of the Arbitration Act, two Indian parties cannot choose a foreign law. The court negated this argument and held that S. 28(1)(a), which falls within Part I of the Arbitration Act, only applies to India seated arbitrations.

The court specifically left open the door for two Indian parties choosing a foreign law. The court found that while ordinarily Indian law would apply to two Indian parties, the permissibility of choosing a foreign law will depend on the conflict of law principles of the seat of arbitration. The court found that if two Indian parties chose a foreign law, then the permissibility of such choice can be tested while enforcing the Award in India – if the choice was contrary to public policy, or in violation of the fundamental policy of Indian law, then the award would not be enforced in India.

Decision: Interim Relief

The Gujarat High Court, against whose decision the present appeal was preferred, had permitted two Indian parties to choose a foreign seat, but had specifically held that no interim relief could be sought from the Indian courts in such arbitrations. The Supreme Court overruled this finding and held that reliefs under S. 9 of the Arbitration Act will continue to be available to such parties.

Analysis

The decision of the Supreme Court is very positive in the field of international commercial arbitration. It drives home the point on party autonomy and gives due recognition to legitimate commercial concerns which motivate parties to choose a foreign seat even for India related arbitrations. This is particularly true for Indian subsidiaries of multi-national corporations who now have the freedom to conduct arbitrations at neutral fora outside India. The decision also leaves room for parties to choose foreign law – especially if enforcement is not envisaged in India. This is likely to be particularly useful for parties to complex financing documents who routinely apply laws of well-known financial centres around the world, to such transactions.