Liberty of Indian Parties to choose a foreign seat of Arbitration: PASL solutions Pvt. v. GE Power

- Utkarsha Singh[1] & Iesha sharma[2]


Introduction


In India, the enforcement of arbitral awards is covered in two parts by the Indian Arbitration and Conciliation Act 1996. Part I of the act applies to the arbitration proceedings seated in India and includes purely domestic arbitrations (between Indian parties) as well as international commercial arbitrations (where at least one party is foreign). Part II of the law applies to foreign arbitration and is concerned with the recognition and enforcement of foreign awards. In addition, the Act specifies that arbitration between an Indian and a foreign party may be governed by foreign law and may have a foreign seat. However, the question of whether two parties of Indian origin can agree on a foreign seat of arbitration is not expressly addressed by the Act. Multinational companies often prefer a foreign arbitration venue for contracts involving their subsidiaries incorporated in India. However, they were discouraged from choosing a foreign seat due to uncertainty regarding the stand of the Indian laws and courts regarding this matter. These ambiguities stand resolved after the latest landmark judgment of the Supreme Court of India.


Factual Background


The parameters for choosing a foreign seat of arbitration were set in the recent case of PASL Wind solutions Private Limited V. GE Power conversion India Private Limited[3]the two companies were incorporated under the Companies Act, 1956. The facts of the case arose from the order placed by PASL for the purchases of three converters (used for wind turbines) involving the dispute regarding the Warranty (Quality) of goods supplied. The settlement agreement between the parties consisted of the clause for Dispute resolution if at all the settlement lapsed between the parties. The Clause also reflected that such matter should be resolved by an “Arbitration Proceeding in Zurich, Switzerland” with adherence to the rules by the International Chamber of commerce (ICC).


The imperative understanding of the Agreement which the parties entered was incorporated under the Indian Contract Act, 1872. The parties failed to resolve the issue, and went ahead to settle the dispute through arbitration. PASL filed for the arbitration proceedings on grounds that GE did not adhere to the agreement. The seat for arbitration was decided to be in Mumbai, India. During the pendency of the arbitral proceedings, GE believed that the ICC Tribunal had no jurisdiction when it comes to determining the proceedings of two Indian corporations for the foreign seat of arbitration. PASL argued that there was no such bar in the Indian Law. GE did not challenge such a decision, the final award was in the favor of GE, and PASL refused the payment of the final award.


However, in consonance with this award, GE filed for interim measures before the Honourable Gujarat High Court to enforce the award passed by the Tribunal under Section 47 and 49 of Arbitration and Conciliation Act, 1996 also for pending enforcement of an award under Section 9 of Arbitration Act. The PASL objected to the enforcement of the award as it was in contravention of the public policy and did not permit arbitration in a foreign seat and that the seat of arbitration should be in Mumbai. The Gujarat High Court enumerated that a petition under Section 9 of the Act was not maintainable and upheld the award in favour of GE. Both PASL and GE challenged the High court’s decision on the validity of the seat of arbitration.


Pronouncement of the Case


The Key arguments raised by the Parties in the Supreme Court concerning the designation of the seat of the arbitration outside India as read-in with the provision of the Indian laws.


The Indian parties are free to choose the foreign seat of the arbitration, wherein the Indian company is a subsidiary of a foreign company, it may prefer to resolve the dispute at a neutral forum. The complexity of the transition contained therein is “Party-Centric” - which involves the agreements between the parties to select a substantive and procedural law for governance during their arbitration proceeding. The development resolves to assume the relevance of such cases for mutual exclusivity, where it complies with the Indian laws, the parties can have different seats for different contracts that are part of the same transaction. The choice of the commonly designated seat for the arbitration across the agreement is no longer applicable, irrespective of their nationality. The award passed outside India will be considered as a foreign award, it would be susceptible to be challenged in India during the execution proceeding in Indian Court on the narrow grounds of the New York Convention, Part II of the Arbitration Act, with the respect to the foreign award under Section 44 of the Arbitration Act.


The Indian parties can opt for the foreign seat, and they have the recourse for interim relief in the Indian courts if the asset against which the foreign award is given for seeking the interim relief, is in India. There is an Exception that if the parties are in the agreement which is contrary as specified in Section 2(2), then parties are prevented from taking recourse under section 9 of the Arbitration Act. The option for the Indian parties to choose India as the seat for the arbitration remains open under Part I of the arbitration act and would be governed under Section 28 of the Arbitration act. The Court relented that the test of the seat for the applicability of section 28 of the Indian contract act is restricted to the substantive law of the contract and does not apply to the seat of the arbitration[4].


The Indian Contract Act does not expressly define the term “public policy” or “opposed to public policy”. Exception 1 of Section 28 of the Contract Law specifically and expressly saves the arbitration of disputes between two persons without reference to the nationality of the persons who may resort to arbitration where parties get the freedom of contract and it creates a balance with clear and undeniable harm to the public, even if the facts of a particular case do not fit within the crystallized principles listed in well-established "heads" of public policy. The court in the case Atlas Export Industries v. Kotak & Co[5], referred to the said exception to Section 28 and found that there is nothing in section 23 or section 28 that prohibits two Indian parties from having their disputes arbitrated in a neutral forum outside India. Therefore it can be clearly understood that the doctrine of public policy provided in the Indian substantive law does not prevent two Indian parties from referring their disputes to arbitration in a neutral forum outside India while exercising their right of party autonomy.


Conclusive Analysis and Way Forward


The decision in the case came as a relief on various fronts. Firstly, it provided recognition to the doctrine of party autonomy and highlighted the fact that the Indian laws do not place any bar over the parties to choose a foreign seat of arbitration.


Secondly, the decision, in this case, brought to rest many conflicting decisions of the High Courts and of the Supreme Court itself.


Thirdly, it is possible to infer from the judgment that there is no obstacle for two Indian parties while choosing a foreign substantive law to govern their contract, as long as the arbitration proceeding is seated outside India.[6] In this context, it is relevant to mention the recent decision of the Delhi High Court in the case of Dholi Spintex Pvt Ltd v. Louis Dreyfus Company India Pvt Ltd, according to which two Indian parties can normally choose a foreign law to govern arbitration proceedings. The Court relied on the decision of three Supreme Court justices in Centrotrade Minerals and Metal Inc. v. Hindustan Copper Ltd. which emphasized the principle of party autonomy in arbitration and came to the conclusion that parties are allowed to adopt foreign law as their own arbitration law. The Delhi High Court, therefore, held that to reject a foreign law only because it is contrary to an Indian law would go against the very basis of private international law, to which India unquestionably and undisputedly subscribes.


The question regarding the possibility for Indian parties to choose a foreign seat was critical for foreign companies (such as GE France and GE USA) which had their subsidiaries in India. The decision, in this case, came as a turning point in the history of foreign arbitration. These foreign companies preferred settling the disputes between Indian subsidiaries and other Indian parties outside India for various reasons such as neutrality, efficient supervision of courts, speedy and efficient disposal of cases in the court in case a challenge regarding the arbitration award arises. While the impact of the Supreme Court decision, in this case, remains to be seen, it has immensely contributed to generating an element of judicial certainty.

[1] The name of the author of this article is Utkarsha Singh. She is a Fourth-Year student studying at the University of Petroleum and energy studies, Dehradun Email id- Utkarshasingh669@gmail.com [2] The name of the author of this article is Iesha Sharma. She is a Fourth-Year student studying at the University of Petroleum and energy studies, Dehradun Email id- ieshasharma2000.5678@gmail.com [3]SLP (CIVIL) NO.3936 OF 2021 [4] Bharat Aluminium Co. V Kaiser Aluminium Inc. (2012)9 SCC 552 [5] Atlas Export Industries v. Kotak & Co (1999) 7 SCC 61 [6] Paragraph 51 of the Judgment

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