In a win for party autonomy, a three-judge bench of the Supreme Court, comprising Mr Justice RF Nariman, Mr Justice BR Gavai and Mr Justice Hrishikesh Roy, has settled a longstanding and controversial question of law by holding that two entities or companies incorporated in India can opt for foreign-seated arbitration and that an award passed in such arbitration would be enforceable in India (PASL Wind Solutions Private Limited v GE Power Conversion India Private Limited, 20 April 2021).
The parties were companies incorporated in India. In 2010 the appellant issued three purchase orders to the respondent for the supply of specified converters. Certain disputes arose between the parties in relation to the expiry of the converters' warranties. The parties then entered into a settlement agreement, dated 23 December 2014, to resolve the disputes. Clause 6 of the settlement agreement contained the dispute resolution clause which stipulated that if the parties were unable to reach any settlement, the dispute would be referred to arbitration in Zurich in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC). It was further agreed that the substantive law applicable to the dispute would be Indian law.
Further disputes arose between the parties relating to the converters' warranties. On 3 July 2017 the appellant submitted a request for arbitration with the ICC. In August 2017 the parties agreed to the appointment of a sole arbitrator as appointed by the ICC.
Thereafter, the respondent filed a preliminary application challenging the arbitrator's jurisdiction on the ground that two Indian parties could not choose a foreign seat of arbitration. The sole arbitrator, by way of a procedural order dated 20 February 2018, relied upon case law (eg, Reliance Industries Ltd v Union of India ((2014) 7 SCC 603) and Sasan Power Limited v North American Coal Corporation India Private Limited ((2016) 10 SCC 813)) and dismissed the respondent's preliminary application.
In another application made by the respondent, the arbitration venue was changed to Mumbai. Zurich remained the seat of arbitration as per the settlement agreement.
The final award was passed on 18 April 2019, wherein the appellant's claim for breach of contract, damages and interest thereon was rejected. Instead, the appellant was directed to pay the respondent Rs25,976,330 and $40,000 on account of legal costs, expenses and interest thereon.
On failure of payment by the appellant, the respondent initiated enforcement proceedings under Sections 47 and 49 of the Arbitration and Conciliation Act before the Gujarat High Court, within whose jurisdiction the appellant's assets were located. In its judgment of 3 November 2020, the high court held that two Indian parties can choose a foreign seat of arbitration but cannot make an application under Section 9 of the Arbitration and Conciliation Act for interim relief. Aggrieved by said judgment, the appellant challenged it before the Supreme Court.
The appellant also challenged the final award under Section 34 of the Arbitration and Conciliation Act. It asserted that the seat of the arbitration was Mumbai, where all of the proceedings had taken place. The proceedings under Section 34 of the Arbitration and Conciliation Act and the respondent's application for execution of the final award are pending before the Supreme Court.
In light of the above, the Supreme Court was asked to consider the following issues:
- Can two companies in India choose a forum for arbitration outside India?
- Can an award made outside India to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention) applies be considered a foreign award under Part II of the Arbitration and Conciliation Act?
The appellant argued that allowing two Indian parties to designate a seat of arbitration outside India would be contrary to Section 23 of the Contract Act 1872 as read with Sections 28(1)(a) and 34(2A) of the Arbitration and Conciliation Act, and that allowing Indian parties to opt out of the substantive law of India would be contrary to the public policy of India.
It was further submitted in respect of foreign awards' enforceability that foreign awards under Part II of the Arbitration and Conciliation Act arise only from 'international commercial arbitration', which is defined in Section 2(1)(f) of the act. As per the definition, there must be a foreign element, which the appellant argued means that at least one party must be a foreign party. Since in the current case both parties were Indian, the award from the arbitral proceedings could not be considered a foreign award. The appellant referred to Section 44 of the Arbitration and Conciliation Act and stressed the expression "unless the context otherwise requires" to support its contention. Alongside this, the appellant presented judgments to demonstrate that Section 44 of the Arbitration and Conciliation Act deals with international commercial arbitration which requires a foreign element and that the same could not apply in the current case, which involved two Indian parties.
In support of its contention, the appellant also referred to Section 10 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act 2015, which recognises only two categories of arbitration:
- international commercial arbitration; and
- arbitration other than international commercial arbitration.
It was submitted that this was in conflict with Section 47 of the Arbitration and Conciliation Act and that, in such cases, Section 10 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act prevails. The appellant proposed that the present case fell within the category of 'arbitration other than international commercial arbitration' and that, as a result, only the district court had jurisdiction.
Relying on Enercon (India) Ltd v Enercon GmbH ((2014) 5 SCC 1), the appellant argued that by applying the closest connection test, the seat for arbitration was Mumbai since every factor connected the arbitration to India.
The respondent highlighted that the appellant was arguing and seeking the exact opposite of what it had sought before the sole arbitrator, which had led to the passing of the procedural order dated 20 February 2018.
It then argued that neither Section 23 nor Section 28 of the Contract Act proscribe the choice of a foreign seat in arbitration. The exception to Section 28 of the Contract Act based on party autonomy explicitly excludes arbitration from the purview of the section. The respondent also relied on Sasan Power Limited v North American Coal Corporation (India) Pvt Ltd (2015 SCC OnLine MP 7417) and referred to the United Nations Conference on Trade and Development Commentary of International Commercial Arbitration to argue that parties belonging to the same state can agree to have disputes resolved by another state.
In respect of the foreign award's enforceability and the appellant's argument based on the definition of international commercial arbitration in Section 2(1)(f) of the Arbitration and Conciliation Act, the respondent argued that Parts I and II of the act are mutually exclusive and that it is fallacious to try and import the definition of international commercial arbitration from Part I of the act into Section 44 thereof. It was further argued that unlike the definition of international commercial arbitration contained in Section 2(1)(f) in Part I of the act, parties' nationality, domicile and residence are irrelevant for the purpose of the applicability of Section 44 of the Arbitration and Conciliation Act. The respondent relied on Atlas Export Industries v Kotak & Co ((1999) 7 SCC 61) and submitted that it was no longer res integra, as it has been decided under pari materia provisions of the Foreign Awards (Recognition and Enforcement) Act 1961 that two Indian parties can agree a seat of arbitration outside India and that an award passed in such proceedings would be enforced as a foreign award.
With respect to the appellant's argument that Mumbai was the seat of arbitration when applying the closest connection test, the respondent contended that the test comes into play only when the seat must be determined in the absence of a predetermined seat. In the current case, the arbitration clause in the settlement agreement and the procedural order dated 20 February 2018 already stipulated that Zurich was the seat of arbitration.
The Supreme Court upheld the impugned judgment passed by the high court to the extent that, according to the facts of the case, the seat of arbitration was Zurich as per Clause 6 of the settlement agreement and the award could be enforced in India. Reference was made to Mankastu Impex (P) Ltd v Airvisual Ltd ((2020) 5 SCC 399), which held, in similar circumstances, that as per the arbitration clause, any dispute arising was to be resolved by arbitration administered in Hong Kong. When the same was challenged, the court examining the agreement and the dispute resolution clause held that on a plain reading of the arbitration agreement, it was clear that the parties had agreed that the arbitration would be seated in Hong Kong and that the laws of Hong Kong would govern the arbitration proceedings.
The appellant's argument regarding the closest connection test was held to be irrelevant to the facts and circumstances of the present case since the test applies only when it is unclear whether a seat has been designated. In the current case, the dispute resolution clause in the settlement agreement clearly stipulated the seat to be in Zurich.
The court went on to distinguish the context and definition of international commercial arbitration contained in the proviso of Section 2(2) of the Arbitration and Conciliation Act (as inserted by the Arbitration and Conciliation (Amendment) Act 2015 after Bhatia International v Bulk Trading SA ((2002) 4 SCC 105) and Section 2(1)(f) of the Arbitration and Conciliation Act. In the Arbitration and Conciliation (Amendment) Act, it is clear that:
the expression 'international commercial arbitration' is specifically spoken of in the context of a place of arbitration being outside India, the consequence of which is an arbitral award to be made in such place, but which is enforced and recognised under the provisions of Part II of the Arbitration Act.
Whereas in the latter, it is in the context of such an arbitration taking place in India, which only applies "unless the context otherwise requires".
It was held that Parts I and II of the Arbitration and Conciliation Act are mutually exclusive and that Section 44 of the act is pari materia with Section 2 of the Foreign Awards Act. The court examined Section 44 by breaking it down into various fragments which form the basis of determining whether an award qualifies as a foreign award – namely:
- the dispute must be considered a commercial dispute under Indian law;
- the dispute must be in pursuance of an agreement in writing for arbitration;
- the arbitration must be conducted in a country which is a signatory to the New York Convention; and
- the dispute must be between persons (without regard to their nationality, residence or domicile).
Therefore, in this context, it was held that a dispute does not require at least one party thereto to be a foreign party, as argued by the appellant. Rather, and the party merely needs to be a person. Thus, the foreign element required under this section was satisfied in this case as the seat was outside India.
In relation to Sections 23 and 28 of the Contract Act and the argument that two Indian parties opting out of Indian substantive law is against public policy, the court examined a series of judgments and made the following observations:
- Freedom of contract must be balanced with clear and undeniable harm to the public, and the same balancing act must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian nationals to avail of a challenge procedure in a foreign county. This is particularly relevant when the enforcement of the same in India can be challenged or resisted under Section 48 of the Arbitration and Conciliation Act.
- Two Indian parties opting out of Indian substantive law is not against public policy. It was clarified on reading Section 28(1)(a) with Sections 2(2) and 2(6) of the Arbitration and Conciliation Act that an arbitral tribunal will decide the dispute in accordance with the substantive law in India when the place of arbitration is situated in India in an arbitration other than an international commercial arbitration.
- Relying upon Atlas Export, the court agreed with the respondent's argument that the exception to Section 28 of the Contract Act based on party autonomy explicitly excludes arbitration from its purview. The court found that there is nothing in either Section 23 or 28 of the Contract Act which interdicts two Indian parties from getting their disputes arbitrated at a neural forum outside India.
The Supreme Court concluded that two companies incorporated in India can choose a forum for arbitration outside India and that an award made at such forum, to which the New York Convention applies, can be said to be a foreign award under Part II of the Arbitration and Conciliation Act and is consequently enforceable. This question of law has long been mired in confusion and controversy with the jurisprudence developing in two directions – with some judgments holding that Indian parties can choose a foreign seat and some holding otherwise. With this judgment, the apex court has not only settled this critical and significant question of law with far-reaching and epoch-making consequences at a time where India is keen on becoming a leading arbitration hub, but also cleared the path to give effect to party autonomy in arbitration, which is the spirit of arbitration. This decision will allow India to be more enforcement friendly and a jurisdiction which recognises party autonomy.
For further information on this topic please contact Ajay Bhargava, Shivank Diddi or Khushbu Singh at Khaitan & Co by telephone (+91 11 4151 5454) or email ([email protected], [email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.
An earlier version of this article was published in Sunday Guardian Live.