This article has been written by Shubh Gautam pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho. This article has been edited by Aatima Bhatia (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho).
Table of Contents
Introduction
Conflicts are unavoidable in any relationship but commercial interests cannot afford for these conflicts to go unresolved. Therefore, various methods have been devised to resolve conflicts or disputes arising out of contractual relationships. Traditionally, litigation in courts was the most preferred option but the fast-moving world today has, to a great extent, shifted towards alternate dispute resolution (ADR) methods like arbitration, conciliation, mediation and negotiation. The major reason for this shift has been the benefits of ADR, some of them are: (1) Saving time, (2) Parties’ control over the process (or party autonomy), (3) Confidentiality, (4) friendly atmosphere, etc.
In this article, we will look into a landmark Supreme Court Judgement wherein the court put to rest the much-deliberated question of law on parties’ autonomy in arbitration: whether two Indian parties can choose a forum for arbitration outside India. In PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, the Supreme Court has given the emphasis on party autonomy and held that two Indian parties can select a foreign seat of arbitration
Background
Facts
PASL Wind Solutions Private Limited (“PASL”) and GE Power Conversion India Private Limited (“GE Power”) are two Indian companies that entered into a settlement agreement dated December 23, 2014, over disputes in relation to the expiry of certain converters. The settlement agreement provided for disputes to be resolved by way of arbitration under the International Chamber of Commerce (“ICC”) Arbitration Rules, with Zurich as the seat.
In 2017, PASL referred the dispute for arbitration before the ICC. This was opposed by a preliminary application filed by GE Power challenging the jurisdiction of the Sole Arbitrator on the grounds that Indian parties cannot arbitrate their dispute before a foreign seat of arbitration. PASL opposed this application and argued that there was nothing in the law that barred Indian parties from doing so. The tribunal rejected GE Power’s challenge but acceded to its suggestion of shifting the venue to Mumbai. This was done in order to reduce the cost of arbitration. Tribunal held that the seat will still be Zurich and only the arbitration proceedings will be held in Mumbai. Later the Award was passed in favour of GE Power.
Enforcement Proceedings
After the Award was passed, GE Power asked PASL to pay the amount granted under the Award, however, PASL failed to oblige. GE Power initiated enforcement proceedings before the Gujarat High Court for enforcement of the Award under Section 47 and 49 of the Arbitration and Conciliation Act, 1996 (“Act”). In addition, a Section 9 application was filed for securing the award in the interim. The enforcement proceedings were opposed by PASL on the basis that Indian parties cannot choose a foreign seat of arbitration as it was against the public policy of India, starkly contradicting its earlier stand.
The High Court upheld the enforcement of the Award and held that two Indian parties can choose a foreign seat of arbitration. However, it dismissed the interim application under Section 9 filed by GE Power. The HC gave the reason that the remedies under Section 9 are available for ‘international commercial arbitration’ as specified under Section 2(2) of the Act and the definition of ‘international commercial arbitration’ under Section 2(1)(f) requires at least one foreign party. In the present case, both the parties were Indian companies.
Appeal
PASL challenged HC’s order before the Supreme Court of India and cross-objection was filed by GE Power challenging the dismissal of the Section 9 application. The present judgement emanates out of this appeal. The matter was looked into by a three-judge bench and Justice Rohinton F. Nariman authored the judgement.
PASL’s main contention was that two Indian parties cannot designate a seat of Arbitration outside India as doing so would be contrary to Section 23 of the Indian Contract Act, 1872 read with Section 28(1)(a) and 34(2-A) of the Arbitration Act. By designating a foreign seat, parties would be able to opt-out of the substantive law of India, which would be contrary to the public policy of the country.
The ruling of the Supreme Court
On designating a foreign seat by Indian parties
The Supreme Court, while considering PASL’s contention that Indian parties selecting a foreign seat would be contrary to Section 23 and 28 of the ICA, discussed the case of Atlas Export Industries v. Kotak & Company (“Atlas”)
To have a better understanding of how the Supreme Court relied on this case, let us first look at what the issue was and what was held in the Atlas case.
In the Atlas case, it was argued by the appellant that the award of an arbitral tribunal seated outside India should be held to be unenforceable. The arbitration clause of the contract which had the effect of compelling them to resort to arbitration by foreign arbitrators impliedly excluded the remedy available to them under the ordinary laws of India which is opposed to public policy. Under section 23 of the Indian Contract Act, the consideration or object of an agreement is unlawful if it is opposed to public policy.
The Division Bench of the SC held that the case at hand was covered under Exception 1 to Section 28 of the ICA. Exception 1 clearly says that in instances where the contract requires a dispute arising between parties to be referred to arbitration, the contract will not be rendered illegal as per Section 28. Justice R Lahoti observed, “Merely because the arbitrators are situated in a foreign country cannot by itself be enough to nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement”. The Court in the present case declared Atlas as a binding precedent and reiterated that if a contract has the effect of compelling the parties to resort to arbitration by foreign arbitrators and thereby implicitly excluding the remedy available to them under the ordinary law of India, the same is not opposed to public policy. The court rejected the contention raised under Section 28(1)(a) of the arbitration act stating that the said section falls under Part I of the Act which is applicable only to India-seated arbitration.
On Party Autonomy
The Court reiterated what was held in Bharat Aluminium Co. V. Kaiser Aluminium Technical Services and held Party autonomy to be the ‘brooding and guiding spirit of arbitration’. The parties have autonomy on the application of three different laws governing the entire contract: (i) proper law of contract, (ii) proper law of arbitration agreement, and (iii) proper law of the conduct of arbitration, popularly known as “curial law”.
The Court examined the conflict between freedom of contract and the check put on it by public policy. It observed that freedom of contract needs to be balanced with clear and undeniable harm to the public. The court finally held that nothing stands in the way of party autonomy in designating a seat of arbitration outside India, even when both the parties are Indian nationals.
On Maintainability of Interim order under Section 9
In the appeal filed by PASL before the Supreme Court, GE Power filed a cross-objection to the Gujarat High Court order which dismissed the application under Section 9. The Supreme Court upheld the Gujarat High Court judgement except its finding where it held that the Section 9 application was not maintainable. The Supreme Court opined that the term “international commercial arbitration” in the present context does not refer to the definition contained in Section 2(1)(f) of the Act. It is a seat-centric definition related to arbitration taking place outside India. The court held that international commercial arbitration taking place outside India, with the parties being Indian, can have interim relief under Section 9 of the Act unless the contract speaks to the contrary.
Conclusion: Highlighting the significance of the judgment
This was not the first time the Court had to deal with the question of party autonomy in designating a foreign seat; the Court in the Atlas Case upheld the right of Indian parties to choose a foreign seat. Similar views were taken by Madhya Pradesh High Court in Sasan Power Limited V. North American Coal Corporation (India) Pvt Ltd. The Delhi High Court in GMR Energy Limited V. Doosan Power Systems India Private Limited also ruled in favour of party autonomy. However, the Court in TDM Infrastructure Private Limited V. UE Development India Limited held that two Indian parties cannot be allowed to circumvent Indian laws by designating a foreign seat. This was applied by Bombay High in Addhar Mercantile Private Limited V. Shree Jagdamba Agrico Exports Private Limited. This inconsistency in decisions was finally settled and emphasis was given on the importance of party autonomy in arbitration.
The principle of party autonomy gives rights to the parties to choose applicable substantive law and these laws govern the dispute resolution process. Party autonomy is one of the major pillars for the rise of international commercial arbitration. Foreign companies with subsidiaries based in India and companies having international transactions would now find it easier to get their disputes resolved under a neutral jurisdiction. Moreover, a reading of the judgement would suggest that the court has weighed in for bolstering party autonomy. This decision is a welcome step in making India an arbitration-friendly country.
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