Whether or not, two Indian Parties may choose to have an arbitration seated outside India has been a vexed and often debated position. On one hand the Madhya Pradesh High Court in Sasan Power Limited vs. North American Coal Corporation India Pvt. Ltd.1, had allowed two Indian parties to choose a foreign seat. Though this decision was appealed to the Supreme Court of India, it did not delve into this issue. Similarly, the Delhi High Court in the GMR Energy Limited vs. Doosan Power Systems India2 had also permitted two Indian parties to choose a foreign seat. On the other hand, the Bombay High Court in Addhar Mercantile Private Limited vs. Shree Jagdamba Agrico Exports Pvt. Ltd.3, relying on TDM Infrastructure Pvt. Ltd. vs. Union of India4 held that a clause where two Indian parties had opted for a foreign seat was invalid. In TDM Infrastructure, the Supreme Court had said that two Indian parties cannot derogate from Indian substantive law. It did not make any specific observations on two Indian parties choosing a foreign seat but is often cited as a reason for them not being permitted to do so.
The debate revolves around the following issues – By choosing a foreign seat would parties be ousting a challenge under section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) apart from the other substantive provisions of law governing arbitrations seated in India contained in Part 1 of the Arbitration Act? Would such an agreement be an agreement in restraint of legal proceedings under Section 28 of the Indian Contract Act, 1872 (Contract Act), or would it be covered by the exception to Section 285? Another question that needed answering was, if two Indian parties could choose a foreign seat, then would they still be able to obtain interim reliefs from Indian Courts under Section 9 of the Arbitration Act.
In the recent case of GE Power Conversion India Private Limited vs. PASL Wind Solutions Private Limited6, the Gujarat High Court. has answered these questions This article discusses the Court's reasonings and findings on these questions.
In 2010, the Respondent, PASL Wind Solutions Private Limited (PASL) issued purchase orders to the Petitioner, GE Power Conversion Private Limited (GE) for the supply of electricity converters.
Certain disputes and differences arose between the parties in relation to these purchase orders. These disputes were resolved by the parties entering into a settlement agreement dated 23 December 2014 (Settlement Agreement). Most of the terms of the Settlement Agreement and the purchase orders are not particularly relevant to the discussions in this article. What is relevant is the clause in the Settlement Agreement titled ‘Governing Law and settlement of dispute' (Arbitration Clause). As per this clause, if parties were not able to amicably settle their disputes within 60 days, then the disputes could be referred to be resolved by arbitration in accordance with the ‘Rules of Conciliation and Arbitration of the International Chamber of Commerce' (ICC). It also said that the disputes will be ‘finally resolved by Arbitration in Zurich. The substantive law i.e., the law governing the Settlement Agreement was Indian law.
Disputes arose in relation to the Settlement Arbitration which could not be amicably resolved. Arbitration was therefore commenced by PASL in July 2017. Interestingly (and contrary to its position in the petitions under discussion), GE filed an application challenging the jurisdiction of the tribunal on the ground that since both the parties were Indian, the seat could not be outside of India. This application was rejected by the tribunal in February 2018.
An award was issued in April 2019, rejecting the claims of PASL. GE was awarded costs of the arbitration to the tune of Rs. 2,59,76,330 and USD 40,000, along with interest (Award). GE filed petitions (i) under Section 47 of the Arbitration Act, for enforcement of the award and (ii) under Section 9 of the Arbitration Act for securing the Award amounts.
The issues that the Court had to answer were if, (i) two Indian parties could have a foreign seat, and (ii) could an application under Section 9 of the Arbitration Act be filed in relation to a foreign award issued in an arbitration between two Indian parties?
- Can Two Indian Parties Choose a Foreign Seat?
The Court had to answer the following to determine the matter, (i) if the Award was a ‘foreign award' and (ii) if yes, could the Award be enforced in India.
- Is the Award a foreign award?
The Court taking notice of the Supreme Court's judgment in the Bharat Aluminium Company vs. Kaiser Aluminium Technical Services Inc7. (BALCO) came to the finding that there was a clear distinction in the scope of applicability between Part I and Part II of the Arbitration Act. Part I would apply to arbitrations having their place / seat in India8 and Part II would govern the enforcement of foreign awards.
The Court considered sections 2 (1) (e)9, 2 (2)10, 2(7)11, 2812 and 3113 of the Arbitration Act (all falling under Part I), and concluded that considerations of these sections would not arise, and to answer if the Award was a ‘foreign award', Section 44 of the Arbitration Act would need to be looked at.
Section 44 of the Arbitration Act defines a ‘foreign award' as follows:
“In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the laws in force in India, made on or after the 11th day of October 1960:
- in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies (i.e. the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)), and
- in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in their Official Gazette, declare to be territories to which the said Convention applies.”
On an analysis of the above definition, the Court did not agree with PASL that the Award should be declared as a domestic award merely because it involved Indian parties, and there was no foreign element. The Court did not feel these elements were relevant for consideration to conclude that the Award was a ‘foreign award'.
The Court noted that what was really in dispute between the parties were what it termed as the ‘territorial ingredients' of Section 44 of the Arbitration Act i.e., if the Award was made (i) pursuant to an agreement in writing for arbitration to which the New York Convention applies; and (ii) in a territory designated as a territory to which the New York Convention applies (Reciprocal Territory or Reciprocal Territories).
The Parties in the instant case differed on their understanding of the term ‘seat'. As per the GE the seat was clearly Zurich, Switzerland – a Reciprocal Territory. However as per PASL (and contrary to its position in the arbitration proceedings) that the seat was not clear. Hence the ‘closest connection test' would have to be applied and the intention of the parties would have to be seen. Which would lead to the conclusion that the seat was Mumbai (which was the venue of the arbitral hearings). The Court however relied on BALCO which said that the choice of another country as seat, imported an acceptance that the law of that country would apply to the arbitral proceedings. The Court also placed reliance on BGS SGS SOMA JV vs. NHPC Limited14 which stated that where there is an express designation of venue, but no designation of a seat, and no other significant contra indica, the venue would have to be treated as the seat of the arbitration.
Considering the above, and from the plain reading of the Arbitration Clause, the Court concluded that it was clear that the seat of arbitration was Zurich. Apart from the above reasoning, the Court also noted that PASL by its own behaviour and statements made during the arbitration had accepted Zurich as the seat. Even if intention of parties were to be seen, the conclusion would be the same.
Therefore, given the seat was in Switzerland – a Reciprocal Territory, to which the New York Convention applied, and given that there was no dispute that the other ingredients in Section 44 had been satisfied, the Court held that the Award was a ‘foreign award'
- Is the Award enforceable in India?
Having concluded that the Award was a ‘foreign award', the Court proceeded to see if it could be enforced in India. Relying upon Fuerst Day Lawson Limited vs. Jindal Exports Limited15, the Court noted that in order to answer this question, it would first have to make an inquiry into the enforceability of the Award i.e., to see if the prerequisite evidence as stipulated in Section 47 was present [a.], and then hold that the Award was enforceable or unenforceable [b.].
- Inquiry into the enforceability of the Award
To inquire into the Award's enforceability, Section 47 of the Arbitration Act would be the first port of call. As neither of the parties argued that any of the requirements of Section 47 of the Arbitration Act, the Court would have to see if it had jurisdiction to decide the application for enforcement of the Award. The Court answered this in the positive as the assets of PASL were located within the Court's jurisdiction. Hence the Gujarat High Court fell within the definition of ‘Court' in the explanation to Section 47. In view of this, the Court held that the inquiry into the enforceability of the Award had been satisfied.
- Determination of enforceability
To determine if the Award were enforceable, it had to be seen if any of the conditions set out in Section 48 for refusing enforcement had been attracted.
The Court taking notice of judgments in Shri Lal Mahal Limited vs. Progetto Grano SPA16, Renusagar Power Co. Ltd. Vs. General Electric Co.17, Vijay Karia & Ors. vs. Prysmian Cavi E Sistemi SRL & Ors.18 observed that the grounds available for challenge under Section 48 were exhaustive and narrow. In fact, as per Vijay Karia, even if some of the conditions for refusing enforcement of an award had been attracted, the Court still had the discretion to enforce such an award19. The Court also relied on Vijay Karia in as much as that in this judgment the Supreme Court had held that – perverse interpretation of an agreement20, allegations that the tribunal did not consider critical evidence, or that the tribunal's analysis of contemporaneous evidence was selective21, were not a grounds available under Section 48.
Hence, as per the Court the only ground raised by PASL relevant for consideration was – the enforcement of the Award would be contrary to the public policy of India22. As per PASL, the Arbitration Agreement was, to the extent it involved two parties agreeing to a seat outside India, inconsistent with Section 2823 of the Contract Act and hence as it was forbidden by law, it was rendered unlawful as per Section 23 of the Contract Act. PASL also relied on TDM Infrastructure (P) Ltd. vs. UE Development India (P.) Ltd.24 and argued that the applicability of Section 28 of the Arbitration Act had been excluded by the Arbitration Clause. Therefore, as per PSL, the Arbitration Clause was against the public policy of India.
However, the Court disagreed. Relying on Renusagar Power Co. Ltd. and Glencore International A.G. vs. India Potash Limited vs. Anr25, the Court held that the term public policy ought to be narrowly constructed. Contravention of law alone would not be contravention of public policy and something more than contravention of a law would be required. In any event the Explanation I to Section 28 of the Contract Act clearly stated that this section would not render an agreement to arbitrate illegal.
Lastly the Court held that the reliance placed on TDM Infrastructure (P) Ltd. by PASL was incorrect as Section 28 of the Arbitration Act (which one of the main issues in discussion in TDM Infrastructure) would not apply in case of an arbitration seated outside India and was only concerned with what the applicable substantive law would be. In support of this conclusion the Gujarat High Court relied upon the Supreme Court's findings in BALCO26 on Section 28 of the Arbitration Act which said that this section would apply only to arbitrations under Part I of the Arbitration Act and was only help identify the applicable substantive law.
The Court proceeded to hold that the Award was enforceable in India, but also went on to hold that the Arbitration Act did not per se prohibit, “two Indian parties from designating a foreign court and vesting in it exclusive jurisdiction to supervise its arbitration proceedings”27, in other words – the seat of the arbitration.
- Would An Application Under Section 9 In Such Cases Be Maintainable?
Section 9 is the only section in the Arbitration that deals with interim reliefs – be it in connection with domestic and international commercial arbitrations seated in India, or international commercial arbitration seated outside India. In the latter situation however, parties can agree that Section 9 will not apply.
The Court noted that as per the provisio to Section 2(2) of the Arbitration Act, Section 9 would apply to ‘international commercial arbitration' even if they were seated outside India and an arbitral award made or to be made in such place is enforceable and recognized under the provisions of Part II.
Section 2 (1) (f) of the Arbitration Act defines an ‘international commercial arbitrations' as:
“…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—
- an individual who is a national of, or habitually resident in, any country other than India; or
- a body corporate which is incorporated in any country other than India; or
- an association or a body of individuals whose central management and control is exercised in any country other than India; or
- the Government of a foreign country”
Hence, one of the key ingredients is that at least one party to the dispute is not an Indian Party.
The Court disagreed with GE's argument that the term ‘international commercial arbitration' seemed to be a misnomer, and this term must be read with a wider connotation taking into consideration the intent of the legislature. The Court observed that it was a settled principle of law that a Court cannot read anything into a statutory provision which is plain and unambiguous. The primary rule of statutory interpretation is that the intention of the legislation must be found in the text of the legislation as is. On a simple reading of Section 2 (1) (f) of the Arbitration Act it was clear that an arbitration where two Indian parties had chosen a foreign seat could not be called an ‘international commercial arbitration'. Therefore, the Court concluded that an application under Section 9 would not be maintainable.
- Comments And Conclusion
This Judgement will help provide some confidence in two Indian Parties selecting a foreign seat. However, naturally, one will have to wait and watch if this matter travels to the Supreme Court and becomes the law of the land or if other High Courts across the country take conflicting positions.
The Courts interpretation that in cases where two Indian parties have chosen a foreign seat, an application for interim reliefs will not be maintainable under Section 9, cannot be reasonably assailed. While it is not ideal that parties in such circumstance will have no recourse to interim reliefs under Section 9, the Court held that such arbitrations are not international commercial arbitrations as defined by Section 2 (1) (f) of the Arbitration Act. On a plain reading of the definition of ‘international commercial arbitration', it is clear that Section 9 cannot be extended to arbitrations where two Indian parties have a foreign seat via the provisio to Section 2 (2) of the Arbitration Act.
This will no doubt be a factor to be carefully considered by two Indian Parties while deciding whether to choose a foreign seat. This, all the more so given that interim relief pending a foreign seated arbitration, granted by a tribunal / emergency tribunal or foreign court may not be directly enforceable in India.
1 (2016) 10 SCC 813
2 2017 SCC OnLine Del 11625
3 Judgment dated 12 June 2015 in Arbitration Application No. 197 of 2014
4 (2014) 7 SCC 603
5 Which provides that this section would not apply to contracts that refer a dispute to arbitration
6 Petitions under Arbitration Act No. 131 and 134 of 2019
7 (2012) 9 SCC 552
8 With the exception of Sections 9, 27 and 37 (1) (b) and (3), which would be applicable to international commercial arbitrations seated in a country designated as a ‘reciprocal territory' under Section 44.
9 Defines ‘Court'
10 Sets out the scope of Part I of the Arbitration Act
11 Award made under Part I would be a domestic award
12 Details what rules would be applicable to the substance of a dispute
13 Sets out the requisite form and contents of an arbitral award
14 (2020) 4 SCC 234
15 (2001) 6 SCC 356
16 (2014) 2 SCC 433
17 (1984) 4 SCC 679
18 2020 SCC OnLine SC 177
19 Vijay Karia, para 56
20 Vijay Karia, para 106
21 Vijay Karia, para 108, 110
22 Section 48 (2) (b)
23 Agreement in restraint of legal proceedings, void
24 (2008) 14 SCC 271
25 Judgment dated 9 August 2019 in Execution Petition No. 99 of 2015
26 BALCO, para 123
27 Para 18.5
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