“Party autonomy has been held to be the brooding and guiding spirit of arbitration” – Rohinton F. Nariman

A bench of three judges of the Supreme Court of India (“SC”) settled a much-debated question in the Indian arbitral landscape – “Can two Indian parties choose a seat of arbitration outside of India?” The High Courts in the country have been divided on this question. Whilst the Bombay High Court had answered this question in negative^[1] in 2015, the Madhya Pradesh High Court in 2016 gave an affirmative judgment^[2] by prioritising party autonomy in arbitration. Finally, the SC has put to rest the uncertainty and held that two Indian parties, even where there is no foreign element involved, can choose a foreign seated arbitration.

Factual Matrix

Certain disputes arose out of a supply agreement between PASL Wind Solutions Private Limited (“PASL”) and GE Power Conversion India Private Limited (“GEPL”). A settlement agreement was entered into between GEPL and PASL, specifying Zurich, Switzerland as the seat of the arbitration proceedings, to be conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (“ICC”). Another dispute arose under the settlement agreement, which was referred to a sole arbitrator appointed by the ICC. Substantive law applicable to the dispute was Indian law and the venue of the arbitral proceedings was Mumbai, India. The arbitrator in his arbitral award held that two Indian parties could arbitrate outside India and held that the seat of arbitration was Zurich. GEPL filed proceedings under Sections 47 and 49 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the High Court of Gujarat (“Gujarat HC”), to enforce the arbitral award. GEPL also sought interim relief from the Gujarat HC under Section 9 of the Arbitration Act. PASL asserted that the seat of arbitration was Mumbai (and not Zurich), where the hearings of the arbitral proceedings took place and filed proceedings under Section 34 of the Arbitration Act, challenging the award. The Gujarat HC affirmed that Zurich was the seat of the arbitration and Indian law did not prevent two Indian parties from choosing a foreign arbitral seat. Further, it held that the award was a ‘foreign award’ under the Arbitration Act, and subject to the enforcement regime in Part II of the Arbitration Act. However, it rejected GEPL’s request for interim relief on the basis that Section 9 of the Arbitration Act only applied to ‘international commercial arbitrations’ defined in the Arbitration Act (which must involve a non-Indian party). Thereafter, an appeal was filed by PASL before the SC against the judgment of the Gujarat HC.

Judgment

The SC held that two Indian parties could choose a foreign seat for arbitration and are also eligible to obtain interim relief under Section 9 of the Arbitration Act. The particulars of the judgment are as follows:

1. Seat of Arbitration: SC rejected the ‘closest connection test’ and held Zurich to be the seat of arbitration, as was specifically agreed in the settlement agreement. It also clarified that the closest connection test could only be applied where the parties or the tribunal had not designated an arbitral seat.
2. Foreign Awards v. International Commercial Arbitration: Relying on the judgment in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.^[3], SC held that Part I and Part II of the Arbitration Act are mutually exclusive and the definition of ‘international commercial arbitration’ (a party-centric definition in Part I of the Arbitration Act) cannot be imported into the definition of ‘foreign award’ (a place-centric definition in Part II of the Arbitration Act). PASL had contended that irrespective of the definition of ‘foreign award’ as per the Arbitration Act, such award arises only from an ‘international commercial arbitration’ (which necessarily must involve a non-Indian party). Since neither PASL nor GEPL was inter alia, (i) a national of a country other than India, (ii) habitually resident in a country other than India, or (iii) a body corporate incorporated outside India (as per the definition of ‘international commercial arbitration’) in the Arbitration Act, the arbitral award was not enforceable under Sections 47 and 49 of the Arbitration Act, as it was not a ‘foreign award’.

The SC, rejecting the contentions of PASL, held that the only four ingredients of a ‘foreign award’ are: (i) the dispute is a commercial dispute under Indian law; (ii) it is in pursuance of an agreement in writing for arbitration; (iii) the dispute arose between “persons” (without regard to their nationality, residence, or domicile); and (iv) the arbitration was conducted in a foreign country which is a signatory to the New York Convention, all of which ingredients were present in the case.

3. Validity of Contracts and Governing Substantive Law: PASL argued that two Indian parties designating a seat of arbitration outside India would result in such Indian parties opting out of the substantive law of India which would be contrary to the public policy of India and Section 23 of the Indian Contract Act, 1872 (“Contract Act”) read with Sections 28(1)(a) and 34(2A) of the Arbitration Act. Section 23 of the Contract Act provides for grounds on which a contract will be held to be void. Section 28(1)(a) of Arbitration Act provides that the governing substantive law of a domestic arbitration i.e., an arbitration seated in India which is not an international commercial arbitration must be Indian law. Section 34(2A) of the Arbitration Act provides for setting aside arbitral awards rising out of arbitrations other than international commercial arbitrations due to patent illegality appearing on the face of the award.

The SC, rejecting this contention, held that nothing in Section 23 of the Contract Act or the public policy of India interdicts the party autonomy of two Indian parties referring disputes to a neutral forum outside India. It further held that Section 28(1)(a) of the Arbitration Act was only applicable if the seat of arbitration was situated in India in an arbitration other than an international commercial arbitration, which was not the case at hand. The SC also held that both PASL and GEPL had, by agreeing to a neutral forum outside of India, lawfully waived their right under Section 34 of the Arbitration Act (given that Section 34 refers to the grounds for challenging an arbitral award where the seat of arbitration is in India).

4. Interim Relief under Section 9 of the Arbitration Act: The Gujarat HC found that the application for interim relief made by GEPL (to prevent PASL from dissipating its assets) under Section 9 of the Arbitration Act was not maintainable. As per the Gujarat HC, ‘international commercial arbitration’ appearing in the proviso to Section 2(2) of the Arbitration Act (which clarifies that the provisions of inter alia, Section 9 of the Arbitration Act apply to international commercial arbitrations), had the meaning ascribed to it by Section 2(1)(f) of the Arbitration Act (i.e., its definition). Accordingly, interim relief could not be sought in a foreign seated arbitration between two Indian parties, such arbitration not being an ‘international commercial arbitration’ as per Section 2(1)(f) of the Arbitration Act.

The SC, overruling the finding of the Gujarat HC, observed that the intention of the proviso to Section 2(2) of the Arbitration Act was to only make it clear that in a foreign seated arbitration, where the assets of one of the parties are situated in India and interim orders are required qua such assets, courts in India may pass such orders. The proviso to Section 2(2) of the Arbitration Act did not prohibit a party from applying for interim relief in an arbitration where the parties had no foreign element.

5. Party Autonomy: Finally, citing the full bench decision of the Supreme Court in Centrograde Minerals and Metal Inc. v. Hidustan Copper Ltd.^[4], the SC affirmed that party autonomy is virtually the backbone of arbitration which provides Indian parties the choice of seat.

Footnotes:

[1] Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd., (2015) SCC OnLine Bom 7752.

[2] Sasan Power v. North American Coal Corporation, (2015) SCC OnLine MP 7417.

[3] (2012) 9 SCC 648.

[4] (2006) 11 SCC 245.