India: Indian Parties Can Now Pick A Foreign Seat For Arbitration

A foreign seat of arbitration is often preferred by multinational companies in contracts involving their subsidiaries incorporated in India. However, they were dissuaded from choosing a foreign seat due to the uncertainty over whether two or more Indian parties can designate a foreign seat,¹ and if interim reliefs that are indispensable to secure assets apply to such arbitrations. These ambiguities are now resolved by the Supreme Court of India judgement in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited² ("PASL").

In PASL, both parties to the arbitration agreement were Indian companies. The dispute resolution clause read: "In case no settlement can be reached through negotiations, all disputes, controversies or differences shall be referred to and finally resolved by Arbitration in Zurich in the English language, in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce, which Rules are deemed to be incorporated by reference into this clause." An award was passed and GE filed a petition under Section 48 of the (Indian) Arbitration and Conciliation Act, 1996 (the "Act") before the Gujarat High Court for enforcement of the award and an application under Section 9 for interim measures. The High Court, while disposing of the Section 9 application, held- [A.] Two Indian parties can choose a foreign seat of arbitration; and [B.] Where two parties choose a foreign seat, they cannot seek interim reliefs under Section 9. This order was appealed before the Supreme Court of India.

The Supreme Court held that two Indian persons have the necessary party autonomy to designate a neutral forum for dispute resolution in a country other than India. This is because Part II of the Act contains "seat-oriented provisions" as opposed to "party-oriented provisions". Thus, the award rendered by such neutral forum shall be a "foreign award" in India enforceable in terms of Part II without regard to the nationality of the involved parties.

It was argued that the provisions pertaining to interim measures, taking assistance of the court and appeals apply only to an "international commercial arbitration" as the proviso³ to Section 2(2) applied to "international commercial arbitration" as defined in Section 2(1)(f)⁴. As at least one party must be foreign, two Indian parties arbitrating at a non-Indian seat is not included within the meaning of an "international commercial arbitration". However, the Supreme Court ruled that Section 2(2) includes all arbitrations seated outside India including Part II arbitrations.⁵ Therefore, provisions pertaining to interim measures, taking assistance of the Court, and appeals shall apply to such foreign awards.

While the judgement is pro-arbitration, Indian parties choosing a foreign seat should be mindful of the three considerations that follow.

First, the proviso to Section 2(2) applies if- [A.] there is no agreement to the contrary; and [B.] an arbitral award made or to be made in such place (outside India) is enforceable and recognised under Part II. As the proviso does not stipulate whether the "agreement to the contrary" must be an express or implied one, this is bound to be litigated. One view is that choice of a foreign seat per se implies exclusion of recourse to Indian courts except for recognition and enforcement purposes. Other view is that such agreement must be explicit, that is, the agreement must state something like, "the Parties agree that recourse to courts in India shall not be available except for recognition or enforcement". However, the High Courts at Bombay and Delhi have taken a view that parties cannot be said to have impliedly excluded the applicable Part I provisions merely by choosing a foreign seat.⁶

Second, it is advisable that Indian parties designate a foreign seat that is a signatory to the New York Convention and notified as a reciprocating territory⁷ by the Government of India, as Section 9 interim reliefs may be sought only if Part II applies to the award. Otherwise, a party may obtain an arbitral award in its favour only to realize that the entity against which it has to enforce the award has been stripped of its assets and converted to a mere shell. If the award is not enforceable and recognisable under Part II, there would be no cause to grant interim measures. There is, however, no general prohibition on granting interim reliefs pending enforcement of foreign award under Section 48 of the Act.⁸

Third, the Supreme Court observed that if the dispute pertains to transactions concluded in India and breach thereof, the substantive law of India will be applied by the arbitrator in accordance with the conflict of law rules of the country in which the arbitration takes place. Even otherwise, a ground may be made out under Section 48 that enforcement of foreign award would be contrary to the public policy of India. If, on the facts of a given case, it is found that two Indian nationals have circumvented a law which pertains to the fundamental policy of India, such foreign award may then not be enforced under Section 48(2)(b). Take for instance a case where parties agree sugar should be shipped from India to Iran for resale in Pakistan, as the parties are aware that the export of sugar from India to Pakistan is prohibited by Indian law at the relevant time. If an Iran seated tribunal passes an award in favour of one party, such award may not be recognized under Section 48.

In conclusion, rather than one bite at the cherry (the right to challenge a domestic award under Section 34), the judgment now allows two bites at the cherry if the parties seat the arbitration outside India. In other words, parties will first have recourse to foreign courts for setting aside the award on grounds available in that country (which may be wider), and then resist enforcement in India on grounds available under Section 48 (challenge to foreign awards).

Footnotes

1. In view of contradictory judgements in Atlas Export Industries v. Kotak & Co., (1999) 7 SCC 61; Sasan Power Limited v. North American Coal Corporation (India) Pvt. Ltd., 2015 SCC OnLine MP 7417; Sasan Power Ltd. v. North American Coal Corporation (India) Pvt. Ltd., (2016) 10 SCC 813; GMR Energy Limited v. Doosan Power Systems India, 2017 SCC OnLine Del 11625 and Dholi Spintex v. Louis Dreyfus, 2020 SCC OnLine Del 1476 on the one hand and TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd., (2008) 14 SCC 271; Seven Islands Shipping Ltd. v. Sah Petroleums Ltd., (2012) 5 Mah LJ 822; Addhar Mercantile Pvt. Ltd. v. Shree Jagadamba Agrico Exports Pvt. Ltd, 2015 SCC OnLine Bom 7752 on the other hand.

2. 2021 SCC OnLine SC 331

3. The Proviso to Section 2(2) reads, "Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act."

4. Section 2(1)(f) reads, ""international commercial arbitration" means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is- (i) an individual who is a national of, or habitually resident in, any country other than India; or (ii) a body corporate which is incorporated in any country other than India; or (iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country"

5. PASL, at ¶109

6. Heligo Charters Pvt. Ltd. v. Aircon Beibars FZE, 2018 SCC OnLine Bom 1388; Raffles Design International India Pvt. Ltd. v. Educomp Professional Education Ltd, 2016 SCC OnLine Del 5521; Goodwill Non-Woven (P) Ltd. v. Xcoal Energy & Resources LLC, 2020 SCC OnLine Del 631

7. List of reciprocating territories notified by India is available at: https://library.iccwbo.org/content/dr/COUNTRY_ANSWERS/CA_SUPP_0029_31.htm?l1=Country+Answers&l2=India (Last accessed on May 17, 2021 at 06.02pm)

8. Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd, 2020 SCC OnLine SC 656

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