In a win for party autonomy, a three judge Bench of the Supreme Court, comprising of Hon’ble Mr. Justice RF Nariman, Hon’ble Mr. Justice BR Gavai, Hon’ble Mr. Justice Hrishikesh Roy, vide judgement delivered on 20 April 2021 in PASL Wind Solutions Private Limited v GE Power Conversion India Private Limited has settled a long awaited and controversial question of law by holding that two entities/companies incorporated in India, can opt for a foreign seated arbitration and the award passed in such an arbitration would be enforceable in India.
The parties involved in this matter are companies incorporated in India. The Appellant in 2010, issued three purchase orders to the Respondent for supply of specified converters. Certain disputes arose between the parties in relation to the expiry of warranty of the converters. The parties then entered into a Settlement Agreement dated 23 December 2014 (“Settlement Agreement”) to resolve the disputes. Clause 6 of the Settlement Agreement contained the dispute resolution clause which stipulated that if the parties are unable to reach any settlement then they will 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.
Pursuant to the Settlement Agreement, further disputes arose between the parties relating to the warranties of the converters. On 3 July 2017, the Appellant issued a request for arbitration to the ICC. In August 2017, the parties agreed to the appointment of a sole arbitrator as appointed by the ICC.
The Respondent, thereafter, 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 Sole Arbitrator, vide a Procedural order dated 20 February 2018, relying upon 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 among others, dismissed the Respondent’s preliminary application.
On another application made by the Respondent, the venue of the arbitration was changed to Mumbai, while the seat of arbitration continued to be Zurich 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 to the Respondent INR 2,59,76,330 and US$ 40,000 on account of legal costs and 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 (“Act”) before the High Court of Gujarat, within whose jurisdiction the assets of the Appellant were located. The High Court held vide judgement dated 3 November 2020 that two Indian parties can choose a foreign seat of arbitration, however, they cannot make an application under Section 9 of the Act for interim relief. Aggrieved by the said judgement, the same was impugned by the Appellant before the Supreme Court.
On the other hand, the Appellant challenged the final award under Section 34 of the Act. It was asserted by the Appellant that the seat of the arbitration was actually Mumbai, where all the proceedings had taken place. Currently, the proceedings under Section 34 of the Act and the Respondent’s application for execution of final award are at a standstill in view of the current appeal which was pending before the Supreme Court.
In light of the above factual background, the Supreme Court was asked to consider the following issues:
Whether two companies in India can choose a forum for arbitration outside of India?
Whether an award made outside of India to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”) applies, is considered a foreign award under Part II of the Act?
Submissions by the parties Appellant’s Contention-
It was argued by the Appellant that allowing two Indian parties to designate a seat of arbitration outside India would be contrary to Section 23 of the Indian Contract Act, 1872 (“Contract Act”) read with Section 28(1)(a) and Section 34(2A) of the 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 enforceability of foreign awards that foreign awards under Part II of the Act only arise from international commercial arbitrations and the same has been defined in Section 2(1)(f) of the Act. As per the definition there needs to be a foreign element which as per the Appellant translated to at least one party being a foreign party and since in the current case, both parties involved are Indian parties, the award from the arbitral proceedings cannot be considered to be a foreign award. Supplementing this, the Appellant referred to Section 44 of the Act and stressed on the expression “unless the context otherwise requires” supporting its contention with various judgements to demonstrate that Section 44 of the Act deals with international commercial arbitration which requires a foreign element and the same cannot apply in the current context with the involvement of two India parties.
The Appellant in support of its contention also referred to Section 10 of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (“Commercial Courts Act”) which recognises only two categories of arbitration – international commercial arbitration and other than international commercial arbitration. It was submitted that this was in conflict with Section 47 of the Act, in such a case, Section 10 of the Commercial Court Act shall prevail. The present case fell within the category of “other than international commercial arbitration” as a result of which only the district court has jurisdiction.
Finally, relying on Enercon (India) Ltd. v. Enercon GmbH, (2014) 5 SCC 1 it was argued that by applying the closest connection test, the seat for arbitration is Mumbai since every single factor connected the arbitration to India.
To begin with, the Respondent first highlighted and pointed out that the Appellant is arguing and seeking the exact opposite of what it had sought under before the Sole Arbitrator which led to the passing of the Procedural order dated 20 February 2018.
It was then argued that neither Section 23 nor Section 28 of the Contract Act proscribe the choice of a foreign seat in arbitration. In fact, 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 made reference to UNCTAD 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 enforceability of the foreign award and the Appellant’s argument of using the definition of international commercial arbitration in Section 2(1)(f), the Respondent argued that Part I and Part II of the Act are held to be mutually exclusive and that it is fallacious to try and import the definition of international commercial arbitration from Part I of the Arbitration Act into Section 44 of the Act. It was further argued that unlike definition of “international commercial arbitration” contained in section 2(1)(f) in Part I, nationality, domicile or residence of parties is irrelevant for the purpose of applicability of section 44 of the Act. The Respondent placed reliance 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 on a seat of arbitration outside India, and an award passed in such proceedings would be enforced as a foreign award.
Lastly with respect to the Appellant’s argument of Mumbai being the seat of arbitration by applying the closest connection test it was contended that the test only comes into play when the seat needs to be determined in absence of predetermined seat and in the current case, the arbitration clause in the Settlement Agreement and the Procedural Order dated 20 February 2018 already stipulates Zurich as the seat of arbitration.
The Supreme Court upheld the impugned judgement passed by the High Court to the extent that, in the facts of the case, the seat of arbitration is Zurich as per Clause 6 of the Settlement Agreement and that the award can be enforced in India. Reference was made to the judgement in Mankastu Impex (P) Ltd. v. Airvisual Ltd., (2020) 5 SCC 399, where in a set of similar circumstances as per the arbitration clause any dispute arising was to be resolved by arbitration administered in Hong Kong and 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 is clear that the reference the parties have clearly agreed the arbitration will be seated at Hong Kong and that the laws of Hong Kong shall govern the arbitration proceedings.
The Appellant’s argument of closest connection test was held to not to the facrs and circumstance of the present case since the test only applies when it is unclear and ambiguous whether a seat has been designated. In the current case, the dispute resolution clause contained in the Settlement Agreement clearly stipulates the seat to be in Zurich.
The Court further went on to distinguish the context and definition of “international commercial arbitration” contained in the proviso of Section 2(2) of the Act [inserted by the Arbitration and Conciliation (Amendment) Act 2015 after Bhatia International v Bulk Trading S.A. (2002) 4 SCC 105] and Section 2(1)(f) of the Act. In the former, 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 arbitration taking place in India, which only applies “unless the context otherwise requires”.
It was held that Part I and II of the Act are mutually exclusive and 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 in various fractions, which formed the basis of determining whether an award qualified as a foreign award. The following ingredients were identified:
The dispute must be considered to be a commercial dispute under the laws of India,
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 that arises must be between “persons” (without regard to their nationality, residence or domicile).
Therefore, in this context it is held that the dispute arising between parties does not require at least one party to be a foreign party, as argued by the Appellant and that the party merely needs to be a “person” and that the foreign element needed under this section has been satisfied in this case in the form of the seat being outside India.
In relation to Section 23 and 28 of the Contract Act and two Indian parties opting out of Indian substantive law being against public policy, the Court examined a series of judgements and made the following observations:
Freedom of Contract needs to be balanced with clear and undeniable harm to the public and that 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 of a foreign county. More so when the enforcement of the same in India can be challenged or resisted under Section 48 of the 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 Section 2(2) and Section 2(6) of the Act, that the arbitral tribunal shall 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.
Further, relying upon Atlas Export (supra), the Court agreed with the Respondent’s argument that the exception 1 to Section 28 of the Contract Act based on party autonomy explicitly excludes arbitration of disputes from the purview of Section 28 and 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 an award made at such forum situated outside India, to which the New York Convention applies, can be said to be a “foreign award” under Part II of the Act and is consequently enforceable. This question of law has long been mired in confusion and controversy with the jurisprudence developing in two direction with some judgements holding that Indian parties can choose a foreign seat and some holding otherwise. With this judgement not only has the Apex Court settled this critical and significant question of law with far reaching and epoch-making consequences in a time where India is keen on becoming a leading hub of arbitration but via this judgement the decks have also further been cleared to give effect to party autonomy in arbitration, which is the spirit of arbitration. The consequences will certainly include reflecting India to be more enforcement friendly and a jurisdiction recognising the autonomy of parties.
Ajay Bhargava (Senior Partner), Shivank Diddi (Senior Associate) and Khushbu Singh (Associate) are part of the Dispute Resolution practice of Khaitan & Co, New Delhi