November 2020 welcomed a flurry of decisions demonstrating the increasingly pro-arbitration approach of courts in India. The proposition of whether two Indian parties may choose a foreign law to govern the arbitration and a foreign seat of arbitration has drawn much debate over the years. The Delhi High Court in Dholi Spintex Pvt. Ltd vs Louis Dreyfus Corporation India Pvt. Ltd.[1]answered the question in the affirmative and held that two Indian parties can choose a foreign law as the law governing the arbitration. The Delhi High Court also reiterated the principle of limited interference in international arbitrations by courts.

A recent judgment by the Gujarat High Court in GE Power Conversion Pvt. Ltd. v. PASL Wind Solution Pvt. Ltd.[2]has now also issued a decision along similar lines, favouring the autonomy of two Indian parties to choose a foreign seat of arbitration and holding that such an agreement would not violate the public policy of India. The Gujarat High Court also held that the nationality of the parties is irrelevant when considering the enforceability of foreign awards. While the Gujarat High Court opined that an award that is passed in a foreign seat is a foreign award and may be enforced under Part II of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), the Court also held that such parties may not seek interim relief in India.

Dholi Spintex Pvt. Ltd vs Louis Dreyfus Corporation India Pvt. Ltd.

Background Dholi Spintex Pvt. Ltd. (“Plaintiff”) had entered into a contract with Louis Dreyfus Company India Pvt. Ltd. (“Defendant”) for the supply of American imported raw cotton. Clause 6 of the contract provided for the resolution of disputes through arbitration in accordance with the International Cotton Association (“ICA”) rules and specified London as the venue. Clause 7 of the contract provided that ‘only the courts in New Delhi would have jurisdiction’. The relevant ICA rules and by-laws (by-laws 200, 300 and 306) provided that (i) ‘The law of England and Wales and the mandatory provisions of the Arbitration Act 1996 (Act) shall apply to every arbitration and/or appeal under these By-laws’; (ii) ‘The seat of our arbitrations is in England. No one can decide or agree otherwise’; and (iii) ‘Disputes shall be settled according to the law of England and Wales wherever domicile, residence, or place of business of the parties to the contract may’.

Disputes arose between the parties and the Defendant invoked arbitration before the ICA and filed its claim. The Plaintiff initiated legal proceedings before the Delhi High Court seeking: (i) an anti-suit injunction; (ii) a declaration that Clause 6 of the contract was invalid, null & void; and (iii) a declaration that the arbitration initiated by the Defendant was null and void. The Defendant countered with an application for suit to be dismissed.

The Defendant argued, amongst other grounds, that: (i) the parties had agreed to the arbitration being conducted in accordance with the ICA rules and seated in London, (ii) there is a foreign element to the contract between the parties as it is a high seas sale agreement and it was agreed to be performed on high seas, i.e. outside the territorial jurisdiction of India; (iii) international trade in American cotton is generally conducted under the ICA rules and procedures; (iv) the arbitrators are empowered to consider and decide the existence and extent of their own jurisdiction; and (v) two Indian parties can agree to arbitrate abroad and there is no legal bar especially where transactions involve foreign elements.

The Delhi High Court’s findings The Delhi High Court held that the arbitration agreement contained in Clause 6 of the contract was neither null nor void nor inoperative nor incapable of being performed.

The Delhi High Court reiterated that in cases where there is a foreign element involved, three sets of law may apply to the arbitration: (i) the proper law of the contract; (ii) the proper law of the arbitration agreement/lex arbitri; and (iii) the proper law of the conduct of arbitration/ lex fori/ curial law. Accordingly, it was held that since the arbitration agreement is an independent agreement, it may be governed by a proper law of its own, which need not be the same as the law governing the substantive contract.

The Delhi High Court reasoned:

“Therefore, an arbitration agreement between the parties being an agreement independent of the substantive contract and the parties can choose a different governing law for the arbitration, two Indian parties can choose a foreign law as the law governing arbitration. Further there being clearly a foreign element to the agreement between the parties, the two Indian parties, that is the plaintiff and defendant could have agreed to an international commercial arbitration governed by the laws of England. Hence Clause 6 of the contract dated 30th May, 2019 between the parties is not null or void”

The Delhi High Court limited its decision to determining whether a valid arbitration agreement exists between the parties and whether the agreement is null and void, inoperative or incapable of being performed. In light of these findings, the Court dismissed the suit and refused to grant an anti-suit injunction to the Plaintiff.

GE Power Conversion Pvt. Ltd. v. PASL Wind Solution Pvt. Ltd.

Background Disputes arose between two Indian parties, GE Power Conversion Pvt. Ltd. (“Petitioner”) and PASL Wind Solution Pvt. Ltd. (“Respondent”) concerning converters in wind turbine generators supplied by the Petitioner to the Respondent. The parties had agreed that any disputes between them would be settled by arbitration under Swiss Law, with Zurich being the seat of the arbitration. The arbitration took place in Mumbai and the Petitioner received an award in its favour.

The Petitioner approached the High Court of Gujarat seeking enforcement of the arbitral award under Part II (enforcement of foreign awards) of the Arbitration Act. The Respondent contended that the award was domestic since the arbitration involved two Indian parties and the proceedings had taken place in India. On this basis, the arbitration would fall within the scope of Part I (general provisions, procedure and enforcement of Indian seated awards) of the Arbitration Act.

The Respondent asserted that the award was domestic since neither of the parties were outside India and Mumbai being closely connected to the proceedings, should be deemed the seat of the arbitration. The Respondent also claimed that the Petitioner had effectively restricted legal recourse by claiming that the seat of arbitration was outside India, which voided the contract and violated public policy.

The Petitioner argued that neither the nationality of the parties nor the venue of the arbitration affected the foreign nature of the arbitral award. Simply put, the award was foreign since the seat of the arbitration was Zurich and accordingly Part II of the Arbitration Act was applicable. The Petitioner also asserted that the award could be enforced in India since the relevant assets were in India and neither of the parties had contested the award before a court in Zurich thereby resulting in the finality of the award.

The seat of arbitration determines the nature of the award The Gujarat High Court categorically ruled that the Arbitration Act did not preclude two Indian parties from designating a neutral, foreign court to oversee its arbitration. The Gujarat High Court found that the parties intended for the arbitration to be seated in Zurich and this was confirmed by the arbitrator. Accordingly, the Gujarat High Court established that the award could be enforced under section 47 of the Arbitration Act and held:

“…nationality of the parties has no relevance for considering the applicability of Part II of the Arbitration Act. Applicability of Part II is determined solely based on what is the seat of arbitration, whether it is in a country which is signatory to the New York Convention. If this requirement is fulfilled, Part II will apply”

Two Indian parties with a foreign award may not claim interim relief under section 9 Along with an application to enforce the award, the Petitioner sought an injunction against the disposal of assets by the Respondent under Section 9 (Interim measures by the Court) of the Arbitration Act. However, the Respondent argued that the proviso of section 2(2) of the Arbitration Act states that section 9 may apply to international commercial arbitration, even if the place of arbitration is outside India and an arbitral award is enforceable under Part II of the Arbitration Act. International commercial arbitration as defined by section 2 (1) (f) of the Arbitration Act requires at least one foreign party which did not exist in the present case. Thus, a conjoint reading of sections 2(1)(f) and 2(2) precluded the Petitioner from invoking section 9 of the Arbitration Act. On this point, the Delhi High Court favoured the Respondent’s contentions and held that the Petitioner’s application under section 9 was not maintainable.

In effect, the Gujarat High Court’s decision clarifies that if two Indian parties arbitrate outside India, then neither party would be able to seek interim relief. The key outcome of this ruling may alert parties to take a closer look at the choice of seat. Indian parties may opt for a foreign seated arbitration where assets of the counterparty are located outside of India and the arbitral award can be enforced against such assets. However, if the assets are all situated in India then it is worth considering the consequences of the absence of interim relief.

Concluding remarks While the recent decisions by the High Courts of Delhi and Gujarat are path breaking, the judicial stance on the question of whether two Indian parties may choose a foreign seat of arbitration remains in a state of flux.

The Madhya Pradesh High Court allowed two Indian parties to choose a foreign seat (Sasan Power Limited v. North American Coal Corporation India Pvt. Ltd.[3]). Subsequently, the Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited & Others,[4] ruled that there is no prohibition in two Indian parties opting for a foreign seat of arbitration and such an arrangement would attract Part II of the Arbitration Act. The Supreme Court implicitly acknowledged the autonomy of two Indian parties to agree on a foreign seat when its decision in Reliance Industries Limited v. Union of India,[5] enforced an award where two Indian parties were seated outside India.

However, the Bombay High Court in Seven Islands Shipping Ltd. v. Sah Petroleums Ltd[6] and Addhar Mercantile Pvt. Ltd. v. Shree Jagdamba Agrico Exports Pvt. Ltd.,[7] contradicted these views by disregarding the validity of an arbitration clause where two Indian parties had opted for a foreign seat of arbitration.

The decisions of High Courts are not binding precedents and only the Supreme Court of India may weigh in on this issue albeit the Arbitration Act itself does not expressly preclude two Indian parties from choosing a foreign seat of arbitration.

The authors expect the counterparties to appeal the decisions of the Delhi and Gujarat High Courts before the Supreme Court of India and will monitor and report on any significant developments.