Can Indian Parties Arbitrate on a Foreign Seat?

Arjun Chakladar and Aman Kumar Yadav*

Excerpt

The Gujarat High Court ruling in the present case, has been hailed as a “pro-arbitration ruling”, by allowing two domestic entities the right to choose a foreign seat of arbitration. Whether or not, two Indian Parties can choose to arbitrate on a foreign seat has been a vexed and often debated position. In this regard, numerous High Courts in India have attempted to address this issue, however, due to an inconsistent approach they have only contributed to the existing conundrum. Due to the uncertainty caused by such judgments, there still remains lack of clarity on the question of law.  

In the article, authors have tried to trace the inconsistency in Indian judiciary on this question of law and analyzed the positive trend of pro arbitration rulings by the Judiciary in recent past.

Introduction

The Gujarat High Court in the landmark case of GE Power Conversion Pvt. Ltd. v. PASL Wind Solutions Pvt. Ltd. held that Indian parties are entitled to choose a seat of arbitration outside India as a foreign or neutral seat and such an agreement is not in violation of public policy of India.

Facts

GE Power Conversion Pvt. Ltd. (‘Petitioner/ GE Power’) filed an arbitration petition against PASL Wind Solutions Pvt. Ltd. (‘Respondent/ PASL’) before the Gujarat High Court (‘GHC’) at Ahmedabad, claiming a sum of INR 25,976,330.00 and USD$ 40,000.00(‘the Sum’) together with interest on these amounts computed in accordance with the Indian Interest Act, 1978 under the Arbitration and Conciliation Act, 1996 (‘the Act’).

The dispute was due to resultant conflicts between the parties surrounding the subject matter of purchase orders. Specifically, certain converters were being supplied by the GE Power to the PASL, wherein several free services were being provided for an extended duration of time. PASL had claimed that the warranty of the converters was continuing, while the GE Powers contested that the warranty had effectively expired and were due compensation for the same. Subsequently, the parties entered into a settlement agreement on December 23, 2014to resolve the dispute.

The clause 6 of their arbitration agreement stated that if parties fail to amicably settle the dispute arising between them in 60 days. Otherwise, it would be referred to the arbitration in Zurich, and governed in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce (‘ICC rules’).The sole arbitrator appointed in accordance with ICC rules, granted GE Power the Sum in a detailed award on April 18, 2019. Thereafter, GE Power approached the GHC for the enforcement of arbitral award, and the payment of the dues by the PASL till date.

Issue

The issue before the single judge bench of the GHC was, whether the award in question was a foreign award, and if so, was it enforceable in India? Furthermore, whether the award satisfied the prerequisite conditions of enforceability, and if the award was in contravention against the public policy in India?

Arguments on Behalf of the GE Power

The GE Power contended(a) That the award in question is conclusively a foreign award which is unaffected neither by the nationality of the parties concerned, nor by the venue of the said arbitration; (b) That “international commercial arbitration” is a misnomer and therefore section 2(2) of the act must be broadly interpreted for the application interim relief; (c) That neither of the concerned parties contested the correctness of the award granted before the Zurich Court, the award has attained finality. Furthermore, all the conditions and regulations enshrined in sections 47 and 48 of the Act have been fulfilled and complied with; the award is final and therefore enforceable by the GHC. 

Argument on Behalf of the PASL

PASL contended that since both the parties have been incorporated in India, the present arbitration could not be classified as an ‘International Commercial Arbitration’ and it is a ‘domestic award’ under Section 44.

PASL also contended the maintainability of the petition brought by GE Power. It argued that since the arbitral award is not a foreign one, hence, the filing of the petition under Section 9 of the Act seeking enforcement under Part II of the Act is not maintainable. Nevertheless, the enforcement is hit by Section 48(2) (b) of the Act as two Indian parties cannot designate a seat outside India and doing so would be against the public policy of India. The same would be violative of Section 23 of the Indian Contract Act, 1872.

Findings of the High Court

The Juridical Seat of the Arbitration is Zurich

The GHC, with reference to the transcripts of the Zurich Award and Clause 6.2 of the arbitration agreement, concluded that the juridical seat of the arbitration is Zurich. The court adjudged that as per the expression of the seat as stated in the arbitration agreement, it is inferred that the intention of both parties was to designate Zurich as the seat of the arbitration. The court relies on the MankastuImpex Private Limited v. Air Visual Limited (‘Mankastu’) to inquire into the intent of the parties for the affirmation of the same. Furthermore, the court is satisfied that arbitral award is a foreign award as it is in accordance with the New York Convention and fulfills the ingredients ordained in Section 44 of the Act.

The foreign award in question is in fact, enforceable in India

The High Court observed that both the parties fulfilled the requirement of Section 47 of the Act and the fact that the High Court possesses the original jurisdiction to decide the current subject matter to realize the fruits of the foreign award rendered. The court relies on the Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc. (‘BALCO’), wherein the conditions of enforceability were laid down and are fulfilled in the present case. Also, the court relies on the Vijay Karia v. Prysmian Cavi E Sistemi Srl (‘Vijay Karia’) with reference to section 48 of the act, to conclude that even if some grounds under Section 48 of the Act are met, it has discretion to enforce the foreign award. Thereby, conclusively declaring the foreign award to be enforceable and in consonance with the fundamental public policy of India.

The application under section 9 in the context of the agreement is not maintainable before this court

The High Court held that with understanding the language of Section 2(2), 9 and 27 of the act, it is understood that section 9 shall interalia apply to International Commercial Arbitration, even if the place of arbitration is outside India. The court held that it cannot read anything into a plain and explicit statute, and therefore rejects the argument of the GE Power with the term of International Commercial Arbitration being a “misnomer”. GHC while ruling the present case as a foreign seated arbitration noted that an interim relief and a wider connotation of the statutory interpretation would be inconsistent. Therefore, concluding that the application under section 9 is not maintainable.

Analysis of the Judgment

This GHC through the pro-arbitration ruling has cleared the contentious dilemma, with regards to the issue of foreign seated arbitration involving Indian parties and enforcement of foreign arbitral awards in India. Furthermore, the judgment fairly reiterates the position settled by the judgment of the Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited & Ors., that there is no prohibition in two Indian parties opting for a foreign seat of arbitration.

The court through this ruling has reiterated the concept of party autonomy thereby allowing Indian parties to choose a foreign seat and enforcing the foreign award for the same. Also, it reiterated the ratio of the BGS SGS SOMA JV v. NHPC (‘BGS SOMA’) that since there is nothing contrary to indicate otherwise, the seat remains at Zurich as is evident from the arbitration agreement.

The GHC also referred to the Vijay Karia to affirmatively illuminate, that a perverse interpretation of an arbitration agreement cannot be a ground for refusal of enforceability of a foreign arbitral award under the guise of it being violative of public policy of India. This judgment also revisited the conditions laid down by Vijay Karia that (a) it can only interfere in an exceptional case of blatant disregard of Section 48; (b) the court was not permitted to review the merits of the decision under the guise of public policy.

Inconsistency in the judicial trend on the present question of law

Following the Gujarat High court ruling in the present case, the Delhi HC in Dholi Spintex Pvt. Ltd v. Louis Dreyfus Corporation India Pvt. Ltd., decided on November 24, 2020, held that two Indian parties can choose a foreign law as the law governing the arbitration. The Delhi High Court also reiterated the principle of limited interference in international arbitrations by courts. The judgment also expounded on the fact, that an arbitration agreement is an independent agreement with respect to the substantive contract. Furthermore, the judgment included that there exists no such bar against two Indian parties opting for the enforcement of foreign law.

In Sasan Power Limited v North American Coal Corporation India Pvt. Ltd(‘Sasan Power’), the Madhya Pradesh High Court allowed two Indian parties to choose a foreign seat by relying on Atlas Exports Industries v. Kotak & Company(‘Atlas Exports’) in which the Supreme Court had ruled that two Indian parties could contract to have a foreign seated arbitration (it should be noted that the Atlas judgment was decided in context of the erstwhile Arbitration Act, 1940). However, on appeal, the Supreme Court in Sasan Power, examined the facts and found a foreign nexus to the dispute, i.e., the American parent company of the respondent subsidiary was still bound by the obligations and liabilities under the relevant Agreements. Therefore, the dispute involved a foreign party and the parties could choose a foreign seat and foreign governing law.

The Delhi HC in GMR Energy Limited v. Doosan Power Systems India Pvt. Ltd. &Ors., while referring to Sasan Power, ruled that there is no prohibition in two Indian parties opting for a foreign seat of arbitration and such an arrangement would attract Part II of the Act. Furthermore, in Reliance Industries Limited v Union of India, the Supreme Court implicitly acknowledged the autonomy of the Indian parties to agree on a foreign seat when in its judgment the Supreme Court enforced an award where two Indian parties were seated outside India.

However, the Bombay high court in two notable rulings, i.e., Seven Islands Shipping Ltd. v. SahPetroleums Ltd. and Addhar Mercantile Private Limited v Shree JagdambaAgrico Exports Pvt. Ltd., while referring to TDM Infrastructure Private Limited v. UE Development India Pvt. Ltd. (‘TDM Infrastructure’) made contrary observations with regard to the issue in question. In the said two cases, the Bombay High Court disregarded the validity of an arbitration clause where two Indian parties had opted for a foreign place of arbitration.

The authors believe that the Bombay HC’s reliance on TDM Infrastructure case is supposed to be misconceived as the SC in TDM Infrastructure (a) did not make any specific observations on two Indian parties choosing a foreign seat, and (b) added a corrigendum to the judgment making it clear that any observations made in the judgment was only for the purpose determining the jurisdiction of the court under Section 11 of the Act, and not for any other purpose.

Conclusion

What lies ahead for the parties is interesting to watch as it can be appealed before the division bench of the GHC and/or the Supreme Court. There was consistency in terms of enforcement of foreign arbitral award by the apex court, be it, in Vijay Karia or Shri Lal Mahal Ltd. v. Progetto Grano Spa.  However, the Hon’ble Supreme court deviated from the Vijay Karia in National Agricultural Cooperative Marketing Federation of India Ltd. v. Alimenta S.A.(NAFED) and went on to conduct a review of the case on merits.

The authors believe that the apex court in NAFED adopted a rather expansive interpretation of the public policy to hold that, “export without permission would have violated the law, thus, enforcement of such award would be violative of the public policy of India”. NAFED should be seen as an exception in the trend of enforcement of foreign award by Indian courts as there have been a couple of notable rulings by the courts post NAFED that reaffirmed the pro arbitration approach by the judiciary. These include, a Bombay High court ruling in Banyan Tree Growth Capital LLC v. Axiom Cordages Ltd. wherein it permitted the enforcement of a SIAC award, and Supreme Court’s ruling in Centrotrade Minerals & Metals Inc. v Hindustan Copper Ltd., when it reiterated the Vijay Karia, and enforced the foreign award. The latest trend of judgments with regard to the enforcement of foreign awards provides an optimistic return of path of minimal judicial intervention in the enforcement of foreign awards by the Indian courts. The existing jurisprudence on the present question of law consists mainly of High Court judgments which in itself are inconsistent, thereby adding to the persisting dilemma. The decisions rendered by the various High Courts merely possess persuasive value, and only with the intervention of the Supreme Court can a uniform rule of law be enforced and subsequently adopted.  


*Arjun Chakladar and Aman Kumar Yadav are students at National Law Institute University, Bhopal.


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