ANALYSING THE ENIGMATIC THRESHOLD OF INDIAN INTERVENTION IN FOREIGN ARBITRAL SEATS

BY HARDIK SHARMA[1]


INDIA & INTERNATIONAL COMMERCIAL ARBITRATION


It is pertinent to comprehend the very need that stems as a result of rapid globalization and internationalization of traditionally proximal business models that have held themselves confined to territorial boundaries. This need is for systems and mechanisms that are able to swiftly and efficaciously deal with the disputes that arise out of legal contracts between the participating parties. While most of these contracts are bilateral, there are also instances where multilateral agreements may be drawn.


The statutory provisions for Arbitration in India can be found under the Arbitration & Conciliation Act of 1996 (hereby referred to as “the Act”). The Act finds itself based on the UNCITRAL Model Law which provides universally accepted and recognized rules for international trade while specifically catering to international arbitral processes.


Section 2(1)(f) of the Act defines ‘international commercial arbitration’ as an arbitration relating to disputes arising out of a legal relationship, whether contractual or not, which are considered as commercial under the law in force in India; where one or more of the parties are entities (personal or impersonal) which reside outside India.[2]


UNDERSTANDING ‘SEAT OF ARBITRATION’


The appropriate legislation regulating arbitration, including the procedural features, is determined by the seat of arbitration. When the parties choose a relevant legislation for the arbitration agreement, that legislation rules the arbitration. Conversely, if the stakeholders have not directly or by reason of some event chosen the law regulating the conduct and process of the arbitration, the conduct of the Arbitration shall be governed by the law of the seat of arbitration. The courts of the nation in which the seat of arbitration is situated would oversee regulating the conduct of arbitration and challenging an award, as such courts would be the regulatory body with the ability to revoke the judgment.


Often it has been observed in the Indian legal system that a literal interpretation of the word ‘seat’ was taken into consideration by lawyers. It has very well been cleared now that there exists a substantial difference between the ‘seat of arbitration’ and the ‘venue of arbitration’. The case of Bharat Aluminium Company Ltd. v. Kaiser Aluminum Technical Service Inc. [3](‘Balco’) has been of primordial importance in understanding this very concept. The Hon'ble Supreme Court ruled that the choice of another nation as the seat of arbitration would mean an acceptance of the fact that the regulations as a part of the law in that particular nation shall serve as abiding principles for the arbitration proceedings. The Supreme Court of India in the case of Enercon (India) Ltd. & Ors v. Enercon GmbH[4] reiterated the same verdict as in Balco and held that the “venue” of arbitration, which is the geographical location chosen based on the convenience of the parties is not similar to “seat” of arbitration, which works as the deciding factor on correct jurisdiction.


The judgment in Balco[5] fact went further on to elucidate that even if the arbitration agreements were found to state that Indian Arbitration Act would govern their proceedings, the courts would hold no supervisory powers if the seat of arbitration was found to exist outside India. This judgment meant a momentous shift in the very foundation of the concept of jurisdiction and exercise of judicial power.


However, the pronouncement was short-lived. The situation altered, when the Arbitration and Conciliation (Amendment) Act, 2015 (‘2015 Amendment’) came into effect. The 2015 Amendment modified the ratio decidendi established in Balco to a restricted extent, since it specifically states that a party can seek appropriate interim remedy from the Indian courts under Section 9 of the Act, even in international commercial arbitrations with a foreign seat. Section 9 of the Act allows for the protection, preservation, or temporary custody of commodities, assets, and properties, as well as the securing of sums in dispute and the appointment of interim receivers.[6]


But the evolution of international commercial arbitration in India did not end there. While the amendment per se was an integral step in arriving at a more liberally held concept of resolving business disputes across borders, it certainly was not the cessation point.


VARYING VIEWS IN THE INDIAN SCENARIO


Parties registered in the same jurisdiction may seek to have their arbitration held outside of their home country for a variety of reasons. Before the Supreme Court's ruling in PASL Wind Solutions v. GE Power Conversion India Pvt. Ltd.[7], it was uncertain whether an overseas arbitration award between two or more Indian firms would be executable in India, or if the sides could even pursue interim relief in Indian courts.


This question of arbitral awards for Indian parties having foreign seats is not new. The high courts of the nation had offered differing views on the issue. The Bombay High Court, for instance in the case of Addhar Mercantile Private v Shree Jagdamba Agrico Exports, held that two Indian parties could not choose a foreign seat because “the intention of the legislature is clear that Indian nationals should not be permitted to derogate from Indian law.”[8] The Bombay High Court relied heavily on the Supreme Court’s decision in TDM Infrastructure v. UE Development India Private Limited[9] to support its decision.


On the other hand, we have the judgment of the Madhya Pradesh High Court which ruled in the case of Sasan Power versus North American Coal Corporation[10] that “two Indian Companies are permitted to arbitrate their dispute in a foreign country[11] Here, a detailed analysis of the judgment made it evident enough that the court had considered the SC’s decision in Atlas Exports Industries v. Kotak & Company[12] of paramount significance where the bench had gone to say that merely because the arbitrators were 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.[13]


The Delhi High Court had taken the very same route when it gave its judgment in the case of GMR Energy Limited v. Doosan Power Systems India Private Limited[14] where it relied on the case of Atlas[15] to state that the very instance of choosing a foreign arbitral seat by parties that were legally Indian was in no way contrary to the public morality of India, and henceforth in no way violated Sections 23 and 28 of the Indian Contract Act, 1872. While the Delhi High Court case could not lay down a clear precedent by virtue of it being second to the apex court, it surely did lay down a new lane to walk in while pondering the very question of legality and illegality of foreign arbitral seats by parties which were Indian.


What is significant to note here is that even the Hon'ble Supreme Court had differed in its judgments. The question which arose was substantial- why were there such drastic differences on the very same issue by the very same court? The answer to the question lies within the formation of the Act itself.


The Arbitration and Conciliation Act, 1996 is divided into 4 parts. Part I deals with the arbitrations possessing Indian seats. Essentially, this means that all arbitrations whether domestic or international commercial arbitrations having their arbitral seats in India will be governed under Part I of the Act. Lucidly explaining, Part I of the Act refers to ‘international commercial arbitration’ as overseas arbitrations having their arbitral seats in India or Indian seated arbitrations with a foreign nexus.


Part II of the Act on the other hand talks about foreign-seated arbitrations or arbitrations possessing a foreign seat.


The qualm which rests here is whether the same foreign arbitral award can be considered as one under the domain of ‘international commercial arbitration’ as defined under Section 2(1)(f) since there exists no mention of the same. Therefore, this interpretation was left to the courts of the country. While there have been some provisions contained in Part I of the Act which do apply to foreign seated arbitration, owing to certain legislative amendments, both Part I and Part II of the Act exist independently of each other. This essentially means that the provisions of Part I wouldn’t apply to foreign-seated arbitration while Part II wouldn’t extend its jurisdiction to foreign arbitration with Indian seats.


PASL WIND SOLUTIONS V. G.E. POWER: LAYING FOUNDATIONS OF INDIAN LEGAL FLEXIBILITY


The question in the case of PASL Wind Solutions v. GE Power Conversion India Pvt. Ltd. was a little complex. The case first came to the Gujarat High Court which determined Zürich (Switzerland) to be the seat of arbitration. It also ruled that the Indian law, in fact, did not disallow the Indian parties to choose a foreign arbitral seat. As the award maintained its seat in Zürich, Part II of the Act which lays its claim over foreign seated arbitration was invoked. The respondent in the case demanded interim relief under Section 9, the request of which was rejected by the Gujarat High Court. The reason was evident- A provision contained in Part I of the Act could not be invoked for a matter which fell specifically under Part II.


PASL then approached the Supreme Court under Article 136 of the Constitution. The special leave petition appealed to the court to overturn the judgement of the high court. There was a tri-fundamental argumentative approach made by PASL here.


1. The seat of arbitration was argued to be Mumbai rather than Zürich;


2. Part II of the Act could only provide for those arbitrations whose awards fell under the criterion of ‘foreign awards, passed in the purview of ‘commercial international arbitration’ as defined under S. 2(1)(f) of the Act;


3. That the very act of two Indian parties choosing a foreign arbitral seat would be against Sections 23 and 28 of the Indian Contract Act, 1872 when read with Sections 28(1)(a) and 34(2A) of the Arbitration and Conciliation Act.


THE VERDICT: CHANGING CURRENTS OF INTERPRETATION


The Supreme Court gave a verdict which has now started to shape a definitive course for the way bilateral disagreements between international commercial agreements with foreign seats are to be handled. The Court, while giving its verdict, gave special emphasis on the questions raised by PASL and gave the ratio decidendi as follows:


1. The Supreme Court rejected the plea of PASL, which had stated that by the ‘closest connection test’ Mumbai was the arbitral seat. The Court elucidated that the closest connection test could only be applied to cases where the arbitral seat was not decided. Both the agreement and the Arbitration Tribunal designated the seat to be Zürich which was held rightful.


2. PASL laid emphasis on the words “unless the context otherwise requires” as mentioned in Section 44 to argue that the very presence of this phrase allows the definition of ‘international commercial arbitration’ as under Section- 2(1)(f) to be transferred to Section 44. However, the SC rejected this claim as well. The SC relied on its decision in the case of Balco[16] where it had explained the functional differences between Part I and Part II of the Act to make it clear that both of them were mutually exclusive to each other. Part I offered the term a “party-centric” meaning while when viewed under Part II of the Act, a “place-centered” focus was offered. To put it another way, whether the parties choose a foreign arbitral seat is the sole element that matters for the purposes of Part II of the Act, irrespective of whether the parties actually have any international link.


3. The Supreme Court also clarified that there are four elements that must be satisfied for an award to be designated a “foreign award” under Section 44:


(i) the dispute must be a commercial dispute as understood under Indian law;


(ii) the award must be made pursuant to a written arbitration agreement;


(iii) it must be a dispute that arises between “persons” (without regard to their nationality, residence, or domicile), and


(iv) arbitration must be conducted in a country that is a signatory to the New York Convention.


The Court found that the arbitral award, in this case, satisfied all four elements and was, therefore, a “foreign award” under Part II of the Act.


4. Another argument that had been made by PASL was regarding the public policy of the country, which it alleged, was violated when two Indian parties were allowed to choose a foreign arbitral seat. PASL brought into debate Section 23 and Section 28 of the Indian Contract Act, 1872 (‘ICA’ herein) when read with Sections 28(1)(a) and 34(2A) of the Arbitration and Conciliation Act. The Court, therefore, had two questions to answer:


a) Whether choosing a foreign arbitral seat by parties that were Indian was prohibited by Section 28 of the ICA?


b) Whether a violation of Section 33 of the ICA would take place if the parties were allowed to do so?


The court answered both in negation. The Supreme Court emphasized that Section 28 provides an unequivocal niche for arbitration agreements, based on the wording of the statute. As a result, the clause places no boundaries on the provisions of arbitration agreements, including the selection of arbitral seat. The Supreme Court concluded that there was nothing in India's public policy that prohibited party liberty in selecting a foreign arbitral seat by Indian parties under Section 23 of the Indian Contract Act. It emphasized that contract freedom must be weighed against obvious and unequivocal public damage and that enabling Indian parties to pick a foreign arbitral seat posed no such risk.


Indian substantive law is only mandatorily relevant to domestic conflicts located in India, according to statutory interpretation of Section 28(1)(a) of the Act. This does not stop two Indian parties from choosing a foreign arbitral seat. However, the Court stated that if two Indian parties choose a foreign seat on the circumstances of a matter in order to avoid Indian public policy, the implementation of any foreign award issued in those proceedings may be challenged under the Act's public policy exemption, Section 48(2)(b).


5. Another important step included within the judgment was the grant of interim relief to GE India which according to the court was focal. The court responding to the cross-objection filed by GE India against the Gujarat High Court’s refusal to grant interim relief elucidated that relief under Section 9 of the Act was valid even if the seat of arbitration was foreign. Section 9 would apply to both Part I as well as foreign arbitrations that fall under the purview of ‘international commercial arbitration’ under the Act.


Contextually, the Court determined that the lack of a foreign nexus, as required by Section 2(1)(f), was not relevant because the concept of "international commercial arbitration" under Section 2(1)(f) of the Act did not apply to foreign seated arbitrations. The court responded by making it clear that on the very basis of place of arbitration, a proceeding could be termed as ‘international commercial arbitration’ and that just because the arbitral seat was foreign, the arbitration fell under the same criterion.


COMMERCIAL INTERNATIONAL ARBITRATION: A FUTURE SECURED


The Supreme Court's judgment resolved a significant legal issue while preserving party autonomy. It also gave much-needed clarification on these concerns to firms operating in India, especially international enterprises with local subsidiaries. Even though the subject matters of their agreements and counterparties might fully lie within India, these organizations can now pick foreign arbitral seats in their arbitration agreements.


The ruling gives much-needed clarification on Indian parties' use of foreign seats. The judgment highlights the significance of party sovereignty, describing it as the "brooding and guiding spirit of arbitration."[18] As a result, Indian parties and Indian subsidiaries of international corporations now have the option of selecting a foreign arbitral seat in agreements with other Indian entities if they so wish. The Indian courts will not have an oversight function over the proceedings in such matters, and any award will not be susceptible to forgo procedures in India.


Due to the high number of cases in Indian court registries, arbitration-related judicial processes can be costly and time demanding, causing the issue to be delayed indefinitely. Picking a foreign arbitral seat allows Indian litigants to limit the possibility of concurrent court-actions that might otherwise occur in arbitrations held in India. And while it is true that the enforcement of such contracts might still require approaching the Indian judiciary (an aspect which arguably leads the litigants back to the crowd of registers they were hoping to avoid in the first place), even a single reduced trip to the court is a welcome change.


Furthermore, when selecting a foreign seat, Indian parties (and their foreign parent entities) can be certain that the Indian courts would remain accessible and prepared to give interim relief in support of their arbitration. This is significant since the parties are likely to have interests that are mostly situated in India because they hold Indian domiciles.


CONCLUSION


The judgment is a landmark one. Not just because it provides an added right of having a foreign seat of arbitration, but because of the acceptance of involvement of domestic courts to grant interim relief as well.


The decision of the court is nothing short of being monumental. The Supreme Court’s order granting interim relief comes with a formidable explanation. In lucid terms, the fact that two parties existing outside India choose a foreign arbitral seat would not matter as long as one of the parties holds assets in India. If such a case comes to light, courts would be empowered to grant interim relief to one of the parties according to the provisions of Section 9 of the Arbitration and Conciliation Act, 1996.


It is a well-understood fact that international commercial transactions demand flexibility which the interpretation behind the court’s decision has duly provided to the arbitration mechanism prevailing in the country. And while the case per se wouldn’t be the end of the evolution of international arbitration in Indian law, it certainly has provided a paved way for the positive interpretation of globalized legal culture.

 

[1] Hardik Sharma is a third-year law student pursuing B.A., LL.B (H) from Amity Law School Noida. Holding keen interest in Commercial International Arbitration and Private International Law along with Copyright Law Hardik has an array of articles and research papers published in various law journals in topics ranging from Refugee Law to IPR and the International Human Rights Law. [2] The definition qua ‘International Commercial Arbitration’ given in Article 1 (Chapter I: General Provisions) of the UNCITRAL Model Law is different from that which is adopted in the Arbitration and Conciliation Act of 1996. Article 1 (3) (a) - lays emphasis on the movement of goods across the national boundaries rather than on the character of parties. Article 1 (3) (b) & Article 1 (3) (c) refer to the occasion when the contract between two local parties can become international. Article 1 (3) (b) (i) and Article 1 (3) (c) contemplate situation wherein two local parties choose a foreign venue of arbitration in respect of a local contract. There is no implication that parties can resort to this, in order to circumvent the municipal law of the country to which they are the subjects. The courts can always refuse the enforcement. [3] Bharat Aluminium Company Ltd. v. Kaiser Aluminium Technical Service Inc. (2012) 9 SCC 552. [4] Enercon (India) Ltd. & Ors v. Enercon GmbH & Anr, (2014) 5 SCC 1. [5] Supra 4. [6] Section 9; Arbitration & Concilliation (Amendment) Act, 2015. [7] PASL Wind Solutions v GE Power Civil Appeal No. 1647 of 2021. [8] Addhar Mercantile Private v Shree Jagdamba Agrico Exports (2015) SCC OnLine Bom 7752 at para 8. [9] TDM Infrastructure v. UE Development India Private Limited (2008) 14 SCC 271. [10] Sasan Power v North American Coal Corporation (2016)(2) ArbLR 179 (MP). [11] Ibid. [12] Atlas Exports Industries v. Kotak & Company (1999) 7 SCC 61. [13] Ibid. [14] GMR Energy Limited v. Doosan Power Systems India Private Limited (2017) SCC OnLine Del 11625. [15] Supra 12. [16] Supra 4. [17] PASL Wind Solutions v. GE Power Conversion India para 60.

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