Indian Parties Choosing a Foreign Seat of Arbitration: Few Words of Caution

Updated: Jun 28

-Rohan Gulati*


INTRODUCTION


While unraveling the curtains of party autonomy in arbitration, the aspect of two Indian parties selecting a foreign seat of arbitration had always been a hard tussle. This tussle was solely attributed to conflicting judgments delivered by the courts in India. Varied interpretations, fallacies, and at times, overlooking logical intricacies, the issue of selecting a foreign seat has certainly been a book with many chapters. Fortunately, the Hon’ble Supreme Court of India (“Court”) decided to write the last chapter of this book and settle all mounting issues on the subject once and for all.


Recently, in the case of PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Pvt. Ltd.[1] (“PASL Wind”) the Court has affirmed that two Indian parties may select a foreign seat of arbitration and that nothing would stand in the way of brooding party autonomy. Whilst the judgment is laudable in every sense, there are a few red flags that stakeholders must be aware of as a result of this decision and moving forward.


As a caveat, the purpose of this article is not to dim the lights upon the arbitration landscape in India and neither to portray a critique of the judgment in the case of PASL Wind.


FLAGGING CERTAIN WORDS OF CAUTION


The judgment of the Court in PASL Wind is certainly a flag bearer of the pro-arbitration stance that has been maintained by the Court. However, there exist certain pivotal aspects that may hinder and disrupt two Indian parties arbitrating outside India. These facets are predominantly an offshoot of the judgments in the past. Accordingly, this part succinctly discusses certain facets that stakeholders must be cautious of, in light of the recent decision in PASL Wind.


A. The Absence of Patent Illegality in International Commercial Arbitration


Section 34(2A) encapsulates Patent Illegality as a ground for setting aside an arbitral award under Part I of the Arbitration and Conciliation Act, 1996 (“1996 Act”). Before deep-diving into the moot point, it is perhaps appropriate to first understand the concept of Patent Illegality. An authoritative explanation of Patent Illegality was given by the Court in the case of Associate Builders v. DDA[2] (“Associate Builders”) wherein it observed that Patent Illegality would mean (i) contravention to the substantive law of India, (ii) contravention of the 1996 Act itself, or (iii) in case the arbitrator construes the terms of the contract in a way that no reasonable person could do.


However, Section 34(2A) being exclusive to Part I of the 1996 Act, does not apply to Part II, as provided by the Arbitration and Conciliation (Amendment) Act, 2015. Section 48 is based on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) replicates Article V for refusing enforcement of foreign awards.


Due to the absence of Patent Illegality under Section 48, the parties could potentially escape the scrutiny of such ground as Section 34(2A) would have no operation in a foreign seated arbitration. This may have certain ramifications to an extent. For instance, an arbitral award that lacks reasoning and is essentially a non-speaking award is considered to be perverse and liable to be set aside on the ground of being patently illegal. This finds support from the case of Ssangyong Engg. & Construction Co. Ltd. v. NHAI[3] (“Ssangyong”)wherein the Court observed as follows:


“41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders… while no longer being a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterised as perverse.”


Notably, transporting the afore-stated observation and applying the same to the case of Campos Brothers Farms v. Matru Bhumi Supply Chain Pvt. Ltd.[4], the Delhi High Court, while adjudicating upon a foreign award that lacked reasons, had refused to enforce the award on the ground being contrary to the public policy of India. At this stage, considering the absence of Patent Illegality under Section 48 and its components thereof, was the decision necessitated to be forced into the head of public policy?


On this point, the decision in the case of Ssangyong had observed – what cannot be found to be contrary to the public policy of India certainly cannot be brought in by the backdoor of patent illegality.


When read with the decision of the Court in PASL Wind, in case two Indian parties decide to arbitrate outside India, the parties would be able to escape the ground of Patent Illegality. Prima facie, this may not seem problematic. Albeit, from the afore-stated instance and the precedents so far, it is likely to raise certain questions as to the facets that parties could potentially derogate from. These facets perhaps reflect pertinent principles of arbitration law in India and at times the non-availability of such a ground may trouble the award-debtor and preclude him from pleading the same.


Therefore, it remains indispensable that stakeholders are conscious and well aware of not being able to rely upon Patent Illegality as a ground for resisting enforcement under Section 48 of the 1996 Act. On the other hand, the courts must be cautious about trying to fit square pegs in a round hole.


B. The Choice of Institutional Rules vis-à-vis Interim Relief under Section 9


Notably, the Delhi High Court in the case of Ashwani Minda v. U-Shin Ltd.[5] (“Ashwani Minda”), had made certain interesting observations concerning the choice of institutional rules and its effect on the availability of Section 9 of the 1996 Act. The Delhi High Court while dismissing the Section 9 petition had observed that as the parties agreed to arbitrate in accordance with the Japanese Commercial Arbitration Association (“JCAA”) Rules, and that there was an ‘implied’ essence of an agreement to exclude Part I of the 1996 Act in its entirety. Whereas, under Section 2(2) of the 1996 Act, there must be an [express] agreement to the contrary i.e., an agreement between parties to exclude the availability of reliefs that could be claimed under Section 9 of the 1996 Act in a foreign seated arbitration.


Interestingly, there never existed any agreement to the contrary between the parties,[6] and neither did the JCAA Rules preclude parties from seeking interim relief from a national court. Thus, the Delhi High Court impliedly observed that the choice of institutional rules may potentially disentitle the parties from seeking relief under Section 9 of the 1996 Act in case of international commercial arbitration.[7]


Given the judgment in the case of PASL Wind, two Indian parties arbitrating outside India under the aegis of certain institutional rules could very well be impacted by the decision in the case of Ashwani Minda. For instance, in case two Indian parties select the JCAA Rules for arbitration, and due to the absence of any rules qua the compatibility of JCAA Rules with interim relief from national courts, by applying the judgment of Ashwani Minda, such parties may not be able to seek interim reliefs from courts in India. On the other hand, in case two Indian parties decide to arbitrate as per the Singapore International Arbitration Centre (“SIAC”) Rules, they may be safeguarded by neatly drafted provisions such as Rule 30.3 of SIAC Rules allowing parties to seek interim relief from national courts that reads as follows:


“30.3 A request for interim relief made by a party to a judicial authority prior to the constitution of the Tribunal, or in exceptional circumstances thereafter, is not incompatible with these Rules.”


Therefore, while the decision of PASL Wind may seem lucrative enough, it remains imperative for parties to be cautious of institutional rules that are silent upon compatibility with claiming interim relief from national courts. Judgments like Ashwani Minda must be learning lessons and precursors to decisions like PASL Wind and the parties being inspired by the same.


C. Indian Courts must not revive the Doctrine of Double Exequatur


Interestingly, in the decision of PASL Wind, the Court observed that award-debtors will have ‘two bites at the cherry’ i.e., (i) when availing recourse to a court or tribunal in a country outside India for setting aside the award, and (ii) when resisting enforcement under Section 48 of the 1996 Act in the Indian courts. The point that the parties could have two bites at the cherry could perhaps lead to the revival of the Doctrine of Double Exequatur.


Under the Convention on Execution of Foreign Arbitral Awards (“Geneva Convention”) 1927, there existed a requirement that the award-holder must obtain leave from the court at the seat of arbitration first, and only then could the award be enforced in the secondary jurisdiction. This prerequisite under the Geneva Convention was termed as Double Exequatur. However, this requirement was done away with by the New York Convention, which superseded the Geneva Convention and does not require the award-holder to obtain leave from the court of the seat, under the laws of which, the award was made.


Under the Indian framework, Section 48(1)(e) 1996 Act replicated Article V(e) of the New York Convention that dispenses the requirement of Double Exequatur. On the international front, the New York Convention did away with the concept, and in India, it was expressly put to rest in the case of Escorts Ltd. v. Universal Tractor Holding[8] (“Escorts Ltd”). The Court had held that Double Exequatur is not applicable in India in light of the 1996 Act and rejected the argument that a foreign award could not be enforced in India unless the relevant foreign court affirms the same.


Pertinently, it is not necessary for the Indian court to adjourn the enforcement proceedings on account of the award-debtor having merely filed an application to set aside the award before the court at the seat of the arbitration. If it is done, it would lead to the revival of Double Exequatur that is incompatible with not only the New York Convention but also contrary to the judgment in Escorts Ltd.

Therefore, merely because two Indian parties are arbitrating outside India and have impliedly agreed to have two bites at the cherry, must not put the Indian courts in a situation that may revive Double Exequatur. If there really exists a brooding sense of party autonomy, in appropriate cases, foreign awards must be enforced in India notwithstanding any judicial review before the court at the seat of arbitration.


D. The (mis)use of Right to Appeal under Section 50


Section 50(1)(b) of the 1996 Act is a statutory sword essentially for the award-holder in a case where the court in India may decide to refuse enforcement of the award. However, this statutory sword has often been deployed by the award-debtor in light of sub-section (2) attached to Section 50 by way of a Special Leave to Appeal under Article 136 of the Constitution of India.

The words – ‘right to appeal’ under Section 50 has been wrongly construed by award-debtors on several occasions. In this regard, the Court in the case of Shin-Etsu Chemical Company Ltd. & Ors. v. Vindhya Telelinks Ltd. & Ors.[9] had categorically observed that, in the absence of a constitutional or statutory provision for an appeal as of right, an appellant could not contend that it had a right to appeal to the Court. Article 136 does not confer a right to appeal but rather a discretion on the Court to grant leave in appropriate cases.

Insofar as the contours of Section 50 are concerned, in the case of Vijay Karia & Ors. v. Prysmian Cavi E Sistemi SRL & Ors.[10], the Court authoritatively observed that, firstly, as per the travaux préparatoires, there ought to be only shot that the award-debtor may have i.e., at the instance of resisting enforcement under Section 48. Secondly, the Court’s jurisdiction under Article 136 cannot be used to circumvent the legislative policy and would only be open when there arises a sui generis question of law that has previously not been answered by the Court.

Through a combined reading of the afore-stated decisions on Section 50, the avenue remains narrow and exceptional, and given the direction of precedents so far, the Court is likely to adjudicate with a mindset to not interfere with the foreign award on the first instance. Unnecessarily circumventing the law without any prospect of success, and utilizing the same as a dilatory tactic may attract heavy costs on the award-debtors as evidenced in the case of Responsive Industries Ltd. v. Banyan Tree Growth Capital LLC & Ors.[11] (“Responsive Industries”).

In light of two Indian parties arbitrating outside, and enforcing the foreign award in India, must be alive to the fact that the contours of Section 50(2) must not be abused to flood the docket of the Court under Article 136 without any possibility of success. This must be a strong caveat to all award-debtors given the turn of events in the case of Responsive Industries.


CONCLUSION


The decision of PASL Wind gives strength and clarifies the position regarding two Indian parties arbitrating in a foreign jurisdiction of their choice. However, there are multiple stakeholders that range from the judiciary to the litigants and to the multi-national corporations who must be aware of the caveats concerning two Indian parties arbitrating outside India. Indian courts must be cautious during enforcement proceedings to not create unnecessary hurdles and impediments in enforcing foreign awards. Concurrently, award-debtors must not unnecessarily tangle genuine award-holders in several rounds of litigation as it may lead to adverse orders. It is imperative that all stakeholders understand the nuances carefully, stand well versed with the red flags, observe caution where needed, as arbitration in India is now ‘a whole new ball game.’

* Rohan Gulati is a Junior Staff Editor for the Arbitration Workshop Blog. He is currently a fourth-year law student pursuing BB.A LL.B at Symbiosis Law School, Hyderabad. His primary area of interest is Alternative Dispute Resolution (ADR) with a specific focus on arbitration law. He can be contacted at rohan.gulati@student.slsh.edu.in [1] 2021 SCC OnLine SC 331. [2] (2015) 3 SCC 49. [3] (2019) 15 SCC 131. [4] 2019 SCC OnLine Del 8350. [5] 2020 SCC OnLine Del 1648. [6] Ratan K. Singh and Gracious Timothy Dunna, “India and Interim Measures in International Commercial Arbitration: Impressions from Bitter Experience” (Scconline.com, 17 April, 2021) <https://www.scconline.com/blog/post/2021/04/17/international-commercial-arbitration/#_ftnref11> accessed April 28, 2021. [7] Id. [8] (2013) 10 SCC 717. [9] (2009) 14 SCC 16. [10] 2020 SCC OnLine SC 177. [11] Special Leave Petition (SLP) Nos. 11404-11405/2020.

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