The Viewpoint - The Final Word on Two Indian Parties Arbitrating Outside India: All Done & Dusted

The Supreme Court of India, in PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Pvt. Ltd recently confirmed that two Indian parties are permitted to choose a foreign seat of arbitration.
The Viewpoint - The Final Word on Two Indian Parties Arbitrating Outside India: All Done & Dusted
Vivek Joshi, Suvigya Awasthi

Introduction

The Indian arbitration law has witnessed a high tide of changes, not just judicially, but also legislatively. There has been a flurry of judgments recently streamlining the law on issues that had by and large plagued the arbitration practice in India. Interestingly, these changes in the law were warranted despite the Indian Arbitration and Conciliation Act, 1996 (“1996 Act”) being inspired and based upon the UNCITRAL Model Law on International Commercial Arbitration of 1985 (“Model Law”). Tracing to the Model Law, the secretariat of UNCITRAL had observed procedural-autonomy recognizing the parties’ freedom to lay down the rules, as the ‘Magna Carta’ of arbitral procedure. On the point concerning the parties’ freedom to choose substantive rules of law, the secretariat termed it to be a remarkable move guaranteeing party-autonomy to a great extent. Founded on these lines, the scheme of the 1996 Act replicated and reflected party-autonomy to the best of its intentions.

However, to what extent could the thin thread of party-autonomy be stretched out in a jurisdiction like India where minimal court interference is not strictly observed, came in the form of a pertinent question i.e., whether or not two Indian parties may choose to have an arbitration seated outside India. This question witnessed a variety of answers right from the Supreme Court to various High Courts mapping across India. The thread of party-autonomy was at times, culled out, and at times, strengthened but the confusion brewed and issues persisted.

Amidst a flurry of pro-arbitration judgments recently, the Supreme Court of India, in the case of PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Pvt. Ltd. (“PASL Wind”), decided to put this matter beyond all doubt by confirming that two Indian parties are permitted to choose a foreign seat of arbitration. Accordingly, this article highlights the key observations of the recent judgment. Part I addresses the discourse so far; Part II briefly touches upon the facts of the case; Part III focusses on the key aspects of the judgment; and Part IV concludes on the note that arbitration in India is now a ‘whole new ball game’.

The Discourse So Far

There have been varied decisions of courts in India regarding two Indian parties choosing a foreign seat of arbitration that has often been interpreted in a varied manner across the length and breadth of country. Thus, not to the put the cart before the horse, the present part will succinctly scan the discourse so far that will set the tone for the analysis of the recent judgment in PASL Wind.

(i) Hon’ble Supreme Court of India

The first instance wherein the apex court was confronted with the issue traces back to 1999 and under the age-old Arbitration Act of 1940. It was in the case of Atlas Export Industries v. Kotak & Co. (“Atlas”), when the Supreme Court had upheld the right of two Indian parties to arbitrate outside India. However, the confusion brewed after the decision of a learned Single Judge of the Supreme Court adjudicating a Section 11 application for the appointment of an arbitrator.

In the case of TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd. (“TDM”), the learned Single Judge had observed that Indian nationals should not be permitted to derogate from Indian law. Accordingly, the decision was interpreted to convey that Indian parties cannot arbitrate outside India.

Additionally, in the case of Reliance Industries Ltd. v. Union of India the apex court implicitly acknowledged the autonomy of Indian parties to agree on a foreign seat when the court enforced the award even though the parties were seated outside India. However, an authoritative and lucid text was lacking.

(ii) Hon’ble Delhi High Court

The Hon’ble Delhi High Court has had a few occasions to address the vexing issue of foreign seat by Indian parties. Firstly, in the case of GMR Energy Ltd. v. Doosan Power Systems India Pvt. Ltd., the Delhi High Court relied upon the decision of the apex court in the case of Atlas and allowed two Indian parties to arbitrate outside India. The second instance was recently in the case of Dholi Spintex v. Louis Dreyfus, wherein the Delhi High Court categorically observed that two Indian parties can choose a foreign law as the law governing the arbitration and upheld that Indian parties can arbitrate outside India. Thus, in a gist, the stance of the Delhi High Court has always leaned in favor of party-autonomy.

(iii) Hon’ble Bombay High Court

The High Court of Bombay on two occasions relied upon TDM and disregarded the validity of an arbitration clause/agreement where two Indian parties had opted for a foreign seat of arbitration. Firstly, in the case of Seven Islands Shipping Ltd. v. Sah Petroleums Ltd., and secondly, in M/s. Addhar Mercantile Pvt. Ltd. v. Shree Jagadamba Agrico Exports Pvt. Ltd. These two precedents added to the brewing confusion and largely deviated from party-autonomy.

(iv) Hon’ble Madhya Pradesh High Court

The Madhya Pradesh High Court had an occasion to address the moot issue in the case of Sasan Power Limited v. North American Coal Corporation (India) Pvt. Ltd., that categorically affirmed that Indian parties can choose a foreign seat outside India for the purpose of resolving their disputes. Albeit, the decision was appealed before the Supreme Court, it did not delve into the pertinent question and rather upheld the decision of the High Court and further dismissed the appeal with costs. Thus, the Supreme Court seemed satisfied with the decision of the High Court.

Factual Matrix & Procedural History

The dispute between PASL Wind Solutions Private Limited (“Appellant”) and GE Power Conversion India Private Limited (“Respondent”) arose out of a settlement agreement (“Agreement”). In order to resolve the disputes, the Parties, on 18th August 2017, pursuant to clause 6 of the Agreement, agreed to the resolve their dispute before a sole arbitrator to be appointed by the International Chamber of Commerce (ICC) wherein the seat of the arbitration would be Zurich, Switzerland.

During the course of arbitration and in terms of the Agreement, it was decided between the parties that the substantive law applicable to the dispute would be Indian law. However, the Respondent filed a preliminary application challenging the jurisdiction of the Arbitrator on the ground that two Indian parties could not have chosen a foreign seat of arbitration. The learned Sole Arbitrator vide procedural order dated 20th February, 2018 dismissed the Respondent’s preliminary application.

In the interim, and in order to save the costs, the Respondent suggested Mumbai, in India, as a convenient venue to hold arbitration proceedings. The Appellant objected to the suggestion made by the Respondent. However, the learned Sole Arbitrator acceded to the application made by the Respondent and held that though the seat is in Zurich, all hearings will be held in Mumbai. Subsequently, vide final award dated 18th April, 2019, the learned Sole Arbitrator dismissed the Appellant’s claims and rendered the final award in favour of the Respondent.

Thereafter, since the Appellant failed to oblige the award dated 18th April 2019, the Respondent initiated enforcement proceedings under Sections 47 and 49 of the 1996 Act before the High Court of Gujarat, within whose jurisdiction the assets of the Appellant were located.

The Gujarat High Court vide its judgment dated 3rd November, 2020, rendered a decision in favour of the Respondent and upheld that two Indian parties can choose a foreign seat of arbitration; however, they would be precluded from seeking interim measures under Section 9 of the 1996 Act. Aggrieved by this decision, the Appellant decided to approach the Supreme Court of India.

Analysis of the Judgment

The decision of the Supreme Court in the case of PASL Wind showcases that party-autonomy is paramount for any arbitration. It has been observed to be the ‘brooding and guiding spirit of arbitration’. In this regard, the Supreme Court relied upon Atlas at every step of the judgment and disregarded any reliance upon TDM. Accordingly, the quest of this part is to carve out a frame-by-frame analysis of the judgment and bring to light, the key takeaways.

First and foremost, the Supreme Court held Part I and Part II of the 1996 Act to be mutually exclusive. The underlying reason behind mutual exclusion points towards the substance and complete substantive and procedural aspects envisaged under both parts. Whilst Part I deals solely with domestic arbitrations it is a complete code in itself and provides for, inter-alia, appointment of arbitrations, commencement of arbitration, making of an award and challenge etc. Whereas, Part II has been adopted in view of India being a signatory to the Convention on Recognition and Enforcement of Foreign Awards (“New York Convention”).

Secondly, the primary intent behind holding Part I and Part II to be mutually exclusive, was towards distinguishing between (i) an international commercial arbitration seated in India (where one of the parties is a person who is a national of or habitually resident in any country other than India) and (ii) two Indian parties arbitrating outside India and being governed under Part II and not by Section 2(1)(f) of the 1996 Act. In simpler terms, the former being party-centric is governed by Section 2(1)(f) of the 1996 Act and whereas, the latter is governed by Part II of the 1996 Act. Thus, the definition under Section 2(1)(f) does not travel to Part II of the 1996 Act.

Thirdly, the Supreme Court observed that in order to qualify as a foreign award under Section 44 of the 1996 Act, it must consist of 4 indispensable ingredients i.e., (i) the dispute must be considered to be a commercial dispute under the law in force in India, (ii) it must be made in pursuance of an agreement in writing for arbitration, (iii) it must be disputes that arise between ‘persons’ (without regard to their nationality, residence, or domicile), and (iv) the arbitration must be conducted in a country which is a signatory to the New York Convention. These 4 ingredients are perhaps not just mere ingredients but are rather a bible for qualification of a foreign award as per Section 44.

Fourthly, and pertinently, the Supreme Court categorically observed that, there is an absence of any text on the point of prohibiting or restraining two Indian parties from arbitrating outside India under Section 28 of the 1996 Act and Section 23 and 28 of the Indian Contract Act. Even if two Indian parties decide to opt-out of Indian law, the arbitrator will be guided by the conflict of law principles at the seat of arbitration. Moreover, in case the foreign law was contrary to public policy, the same could be contested by the award-debtor at stage of enforcement under Section 48(2) of the 1996 Act. On this point, the Supreme Court concluded by observing that, there needs to a balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract.

Lastly, the Supreme Court also set aside the observation made by the Gujarat High Court regarding the non-availability of Section 9 in foreign seated arbitrations. It has perhaps been clear as noonday according to Section 2(2) of the 1996 Act that Section 9 will be available to any arbitration seated outside India that was reiterated by the Supreme Court even in the present judgment.

Conclusion

The Hon’ble Supreme Court of India by way of the present judgment has now cleared the air on a highly divisive issue. The decision of the Hon’ble Court, without an iota of doubt, is a flag bearer in terms of upholding party-autonomy. As the Hon’ble Supreme Court continues its stride of pro-arbitration, it has been instrumental in primarily settling grey areas and streamlining the arbitration law in India. Issues that had plagued the arbitration regime may have taken a long to be settled, however, the fruits of such decisions will undeniably add to the fast-paced growth that India has been witnessing.

Judgments like these reflects the efforts of the Hon’ble Supreme Court in appreciating the practical intricacies of arbitration and upholding one of the prime pillars of the arbitral process viz., party-autonomy. The judgment marks the conclusion of an important and long drawn battle as India looks to emerge as a party-autonomous jurisdiction.

Suvigya Awasthy is Associate Partner and Vivek Joshi is an Associate at PSL Advocates & Solicitors

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