On 20 April 2021, a three-judge bench of the Supreme Court of India, in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited1 (PASL Wind Solutions), conclusively decided the question of whether two Indian parties can choose a foreign seat of arbitration. Before the Supreme Court's decision, the High Courts were divided on this issue. For example, the Bombay High Court had taken the view that permitting two Indian parties to choose a foreign seat would violate the public policy of India.2 The Delhi High Court3 and the Madhya Pradesh High Court,4 on the other hand, took the view that Indian parties were free to choose any seat of arbitration, even if it is outside India.
Disputes arose under a settlement agreement executed between GE Power Conversion India Private Limited (GE) and PASL Wind Solutions Private Limited (PASL), both companies incorporated in India. The settlement agreement provided for resolution of disputes by way of arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, with the seat in Zurich, Switzerland. PASL referred its disputes with GE under the settlement agreement to arbitration. The parties agreed that the substantive law applicable to the dispute would be Indian law, which was reflected in PASL's request for arbitration and in the terms of reference to arbitration.
GE challenged the jurisdiction of the arbitrator on the ground that two Indian parties cannot choose a foreign seat of arbitration. PASL argued that there was no such bar under Indian law. The sole arbitrator dismissed GE's application and ruled that two Indian parties can arbitrate outside India. GE did not challenge this decision and the arbitrator confirmed that the seat of the arbitration would be Zurich. Following this, the parties completed the arbitration and the arbitrator issued a final award in favour of GE, directing PASL to make payments to GE.
On PASL's refusal to make the required payments as per the final award, GE commenced enforcement proceedings before the Gujarat High Court under Sections 47 and 49 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). GE also sought security pending enforcement of the award under Section 9 of the Arbitration Act. The only objection raised by PASL to the enforcement was that the award was contrary to Indian public policy since Indian law does not permit two nationals to arbitrate at a foreign seat. PASL also claimed that Mumbai ought to be treated as the seat of arbitration since hearings were held in Mumbai.
By its decision dated 3 November 2020, the Gujarat High Court decided in favour of GE and upheld the award. The High Court, however, declined to grant GE interim relief on the ground that Section 9 of the Arbitration Act was not available in a foreign seated arbitration between Indian parties.
Both PASL and GE appealed the decision of the High Court. PASL challenged the High Court's finding that Zurich was validly chosen as the seat of arbitration whereas GE's challenge was limited to the exclusion of Section 9 of the Arbitration Act.
Key Arguments before the Supreme Court
PASL primarily argued that two Indian parties cannot designate a seat of arbitration outside India as doing so would defeat the provisions of Indian law and be contrary to Indian public policy. PASL also argued that if parties were permitted to choose a foreign seat, they could potentially choose a foreign substantive law to govern their rights and obligations, which would be contrary to the provisions of the Arbitration Act.
GE refuted PASL's contentions by, inter alia, pointing out that the provisions of the Arbitration Act relied upon by PASL were only applicable to India seated arbitrations and not foreign seated arbitrations. As such, there is no bar under Indian law on two Indian parties opting for a foreign seat of arbitration.
Decision in PASL Wind Solutions
The Supreme Court held that Part I of the Arbitration Act, which only applies where India is the seat, and Part II of the Arbitration Act, which deals with New York Convention awards, are mutually exclusive. Therefore, irrespective of the nationality of parties, if an arbitration is seated outside India, an award passed in such arbitration will be considered a foreign award and its enforcement in India would be governed by the New York Convention (assuming the foreign territory is a signatory to the New York Convention and a reciprocating territory under Section 44 of the Arbitration Act.), as implemented in Indian law.
Further, the Supreme Court held that the provisions of the Arbitration Act and the Indian Contract Act, 1872 do not prohibit two Indian parties from resolving their disputes in a country other than India. The Court further clarified that an arbitration agreement would not be contrary to public policy or be construed as restraining a party's right to legal proceedings under the Indian Contract Act merely because it provided for reference to arbitration outside India.
As regards the availability of interim relief, the Supreme Court expressly held that if the assets in question were located in India, parties would be free to seek interim relief from Indian Courts notwithstanding their choice of seat, which is made clear by the proviso to Section 2(2) of the Arbitration Act. This remedy would be unavailable only if parties expressly exclude its applicability in the arbitration agreement.
The PASL Wind Solutions decision has several practical implications for arbitrations between Indian parties.
First, two Indian parties are free to choose a foreign seat of arbitration. This is especially relevant in cases concerning Indian subsidiaries of foreign companies where parties may prefer to resolve their disputes at a neutral forum. This development also assumes relevance in complex transactions involving multiple agreements between parties of different nationalities. Previously, in order to comply with Indian law, parties would often agree on different seats for different contracts even when those contracts formed part of the same transaction. For example, it was not uncommon to find that the share purchase agreement between a non-Indian investor and the Indian target company would provide for arbitration outside India, while ancillary contracts between the Indian subsidiary of the investor and the target company would provide for arbitration in India. This, in turn, would make it difficult to consolidate various disputes that may arise in relation to the suite of agreements. This is no longer the case as parties can designate a common foreign seat of arbitration across all related agreements, irrespective of their nationality.
Second, in such a case, the award passed will be considered a foreign award. Such an award would be susceptible to challenge at the seat and thereafter, its enforcement in India would be tested against the narrow grounds provided for in the New York Convention, as embodied in Part II of the Arbitration Act. In this respect, parties should be mindful of selecting a foreign seat that is a signatory to the New York Convention and a reciprocating territory under Section 44 of the Arbitration Act.
Third, while it was not specifically in issue in the present case, the Supreme Court opined that there would be no bar on two Indian parties selecting a foreign substantive law to govern their rights and obligations under the contract where they have chosen a foreign seat.
Fourth, where two Indian parties opt for a foreign seat, they would have recourse to Indian courts for the purpose of seeking interim relief if the assets against which the foreign award is to be enforced are located in India. The only exception to this remedy is if parties expressly exclude the applicability of Section 9 of the Arbitration Act. Such an application for interim relief would lie before the concerned High Court, and not the District Court as would be the case in an India seated arbitration.
Needless to say, it remains open for two Indian parties to choose India as their seat of arbitration and conduct the proceedings in accordance with Part I of the Arbitration Act. In such a situation, the substantive law governing the contract would have to be Indian law, as required by Section 28 of the Arbitration Act.
While the impact of the Supreme Court's decision remains to be seen, it has brought about an element of judicial certainty, which is always a welcome step and enables parties to plan their legal strategy and draft their arbitration agreements in an educated manner.
1 Civil Appeal No. 1647 of 2021 arising out of SLP (Civil) No. 3936 of 2021.
2 Seven Islands Shipping Ltd v. Sah Petroleum Ltd, 2012 SCC OnLine Bom 910; Addhar Mercantile Pvt Ltd. v. Shree Jagdamba Agrico Exports Pvt Ltd, 2015 SCC OnLine Bom 7752
3 GMR Energy Limited v. Doosan Power Systems India Private Limited, (2017) SCC OnLine Del 11625
4 Sasan Power Ltd v. North America Coal Corporation India Pvt Ltd, 2015 SCC OnLine MP 7417
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