The Supreme Court on Tuesday held that two Indian parties are entitled to choose a foreign seat of arbitration. (PASL Wind Solutions Private Ltd v. GE Power Conversion India Private Limited).
In this regard, the Court emphasised on the significance of party autonomy to arbitration.
“Party autonomy has been held to be the brooding and guiding spirit of arbitration. Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals,” the Court said.
An arbitral award arising from such an arbitration would be a foreign award, the Court further said.
Consequently, an arbitration resulting in a foreign award, as defined under Section 44 of the Arbitration Act, will be enforceable only in a High Court under Section 10(1) of the Commercial Courts Act, and not in a district court under Section 10(2) or Section 10(3) of the Commercial Courts Act.
That being the case, Section 9 remedy is available for such foreign seated arbitrations between two Indian parties, the Court added.
The judgment was delivered by a three-judge Bench of Justices Rohinton Nariman, BR Gavai and Hrishikesh Roy in an appeal filed against a judgment of the Gujarat High Court.
A Cyril Amarchand Mangaldas team led by Partner Shaneen Parikh, Principal Associate Shalaka Patil and Associate Surya Karan Sambyal represented the Respondent, GE Power Conversion India Pvt. Ltd. with Senior Counsel Nakul Dewan leading the arguments for GE. Senior Counsel Tushar Hemani led arguments for PASL.
The appellant and the respondent, both Indian incorporated companies, had chosen Zurich as the seat of arbitration.
When dispute arose, the respondent 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. Importantly, the appellant opposed the said application and asserted that there was no bar in law from this being done.
The same was, however, dismissed by the sole arbitrator. Subsequently, hearings were held at Mumbai which was agreed by the parties as the venue of arbitration.
The arbitrator passed an award against the appellant.
After the passing of the final award, the respondent called upon the appellant to pay the amounts granted vide the said award. As the appellant failed to oblige, the respondent initiated enforcement proceedings under sections 47 and 49 of the Arbitration Act before the High Court of Gujarat, within whose jurisdiction the assets of the appellant were located.
At this stage, the appellant did a complete volte-face and asserted that the seat of arbitration was really Mumbai, where all the hearings of the arbitral proceedings took place.
Before the Supreme Court, the appellant’s counsel, Senior Advocate Tushar Himani contended 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 Section 34(2A) of the Arbitration Act.
It was further argued that foreign awards contemplated under Part II of the Arbitration Act arise only from international commercial arbitrations. “International commercial arbitration”, as has been defined in section 2(1)(f) of the Arbitration Act, would make it clear that there has to be a foreign element when parties arbitrate outside India, the foreign element being that at least one of the parties is, inter alia, a national of a country other than India, or habitually resident in a country other than India, or a body corporate incorporated outside India. For this reason, the award passed in the present case cannot be designated as a foreign award under Part II of the Arbitration Act.
In this regard, the appellant also adverted to the language of Section 44 of the Arbitration Act, stressing upon the expression “unless the context otherwise requires” and cited several judgments to show that the context of Section 44 is that of an international commercial arbitration and cannot, therefore, apply to a foreign award between two Indian parties without the involvement of a foreign element.
Senior Advocate Nakul Dewan, representing the respondent pointed out that the argument of the appellant before the Supreme Court was the exact opposite of its argument before the arbitrator before whom it was the respondent who had opposed Zurich as the seat of arbitration.
He submitted that Part I and Part II of the Arbitration Act have been held to be mutually exclusive and that the definition of international commercial arbitration from Part I of the Arbitration Act cannot be imported into Section 44 via the expression “unless the context otherwise requires” contained in Section 44.
According to him, section 44 is modelled on the New York Convention which only requires “persons”, both of whom can be Indian, having disputes arising out of commercial legal relationships, which are to be decided in the territory of a State outside India, which State is a signatory to the New York Convention. He then argued that any attempt to breach the wall created between Part I and Part II, which have been held to be mutually exclusive in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (BALCO), cannot be countenanced by this Court.
He then went on to argue that neither section 23 nor section 28 of the Contract Act proscribe the choice of a foreign seat in arbitration. As a matter of fact, the exception to section 28 of the Contract Act expressly accepts arbitration from the clutches of section 28, which is an express approval to party autonomy which is the very basis of the Arbitration Act. He also argued that section 23 of the Contract Act, when it speaks of “public policy”, must be confined to clear and incontestable cases of harm to the public.
On seat of arbitration
Clause 6 of the settlement agreement extracted above would show that arbitration is to be resolved “in Zurich” in accordance with the Rules of Conciliation and Arbitration of the ICC, the Court said.
The closest connection test strongly relied upon by Himani would only apply if it is unclear that a seat has been designated either by the parties or by the tribunal. In this case, the Court said, the seat has clearly been designated both by the parties and by the tribunal, and has been accepted by both the parties.
“For this reason, it is not possible to accept Mr. Himani’s contention that the seat of arbitration ought to be held to be Mumbai in the facts of the present case,” the judgment said.
On Part I and II of Arbitration Act and International Commercial Arbitration
The Court held that the two parts have been held to be mutually exclusive. Hence, the argument that proviso to section 2(2) of the Arbitration Act is a bridge which connects the two parts must, thus, be rejected, the Court said.
“As a matter of fact, the reason for the insertion of the proviso to section 2(2) by the Arbitration and Conciliation (Amendment) Act, 2015 was because the judgment in Bhatia International v. Bulk Trading S.A had muddied the waters by holding that section 9 would apply to arbitrations which take place outside India without any express provision to that effect. The judgment in Bhatia has been expressly overruled a five-Judge Bench in BALCO. Pursuant thereto, a proviso has now been inserted to section 2(2) which only makes it clear that where, in an arbitration which takes place outside India, assets of one of the parties are situated in India and interim orders are required qua such assets, including preservation thereof, the courts in India may pass such orders,” the judgment said.
On international commercial arbitration, the Court said 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 a place, but which is enforced and recognised under the provisions of Part II of the Arbitration Act.
The context of this expression is, therefore, different from the context of the definition of “international commercial arbitration” contained in Section 2(1)(f), which is in the context of such arbitration taking place in India, which only applies “unless the context otherwise requires”, the Court said.
The four sub-clauses contained in section 2(1)(f) would make it clear that the definition of the expression “international commercial arbitration” contained therein is party-centric in the sense that at least one of the parties to the arbitration agreement should, inter alia, be a person who is a national of or habitually resident in any country other than India.
“On the other hand, when “international commercial arbitration” is spoken of in the context of taking place outside India, it is place-centric as is provided by section 44 of the Arbitration Act. This expression, therefore, only means that it is an arbitration which takes place between two parties in a territory outside India, the New York Convention applying to such territory, thus making it an “international” commercial arbitration,” the Court concluded.
Since the context of section 44 is party-neutral, having reference to the place at which the award is made, it is not possible to accede to the argument that the very basis of section 44 should be altered when two Indian nationals have their disputes resolved in a country outside India, the Court added
The decks have now been cleared to give effect to party autonomy in arbitration and party autonomy has been held to be the brooding and guiding spirit of arbitration, the Court said referring to the judgment in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [(2016) 4 SCC 126].
Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals, the Court ruled.
In this regard, the Court placed strong reliance on the judgment in Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd. [(2017) 2 SCC 228], it which the Supreme Court had held that a two-tier arbitration, namely, an arbitration at an original forum followed by an appeal at an appellate forum, would not be interdicted by the Arbitration Act, given the free party autonomy for parties to enter into an agreement as to the choice of fora and procedure at such fora.
On Section 10 of Commercial Courts Act
The appellant relied upon Section 10 read with Section 21 of the Commercial Courts Act to argue that in all cases between Indian nationals which result in awards delivered in a country outside India, section 10(3) would apply, as a result of which the impugned judgment having been made by a High Court, was made without jurisdiction.
The Court noted that when a foreign award is sought to be enforced under Part II of the Arbitration Act, the explanation to section 47 makes it clear that it is the High Court alone which is the court on whose doors the applicant must knock.
Himani had, however, countered this by stating that since the explanation to Section 47 is in direct collision with section 10(3) of the Commercial Courts Act, vide section 21 of 100 the Commercial Courts Act, section 10(3) would prevail over the explanation to section 47.
The Court countered this by adverting to the scope of the expression ‘international commercial arbitration’.
“International commercial arbitration”, when used in the proviso to section 2(2) of the Arbitration Act, does not refer to the definition contained in section 2(1)(f) but would have reference to arbitrations which take place outside India, awards made in such arbitrations being enforceable under Part II of the Arbitration Act.
Section 10(1) applies to international commercial arbitrations, and applications or appeals arising therefrom, under both Parts I and II of the Arbitration Act, the judgment noted.
“When applications or appeals arise out of such arbitrations under Part I, where the place of arbitration is in India, undoubtedly, the definition of “international commercial arbitration” in section 2(1)(f) will govern. However, when applied to Part II, “international commercial arbitration” has reference to a place of arbitration which is international in the sense of the arbitration taking place outside India”, it was observed.
Thus construed, there is no clash at all between section 10 of the Commercial Courts Act and the explanation to section 47 of the Arbitration Act, as an arbitration resulting in a foreign award, as defined under section 44 of the Arbitration Act, will be enforceable only in a High Court under section 10(1) of the Commercial Courts Act, and not in a district court under section 10(2) or section 10(3), the Court concluded.