The Supreme Court recently in PASL Wind Solutions (P) Ltd. v. GE Power Conversion (India)(P) Ltd.1 (hereinafter referred to as “PASL Wind Solutions”) has clarified that two Indian parties can choose a foreign arbitral seat. The issue before the Supreme Court was “whether two companies incorporated in India can choose a forum for arbitration outside India and whether an award made at such forum outside India, to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the New York Convention or NYC) applies, can be said to be a “foreign award” under Part II of the Arbitration and Conciliation Act, 19962 (the Arbitration Act) and be enforceable as such”.
The dispute arose between two Indian parties pertaining to supply and warranties of certain converters. It is pertinent to mention here that PASL Wind Solutions Pvt. Ltd. (PASL), the appellant, and GE Power Conversion India Pvt. Ltd. (GE), the respondent, both are companies incorporated under the Companies Act, 19563 with their registered office at Ahmedabad, Gujarat and Chennai, Tamil Nadu respectively. Further, GE is a 99% subsidiary of General Electric Conversion International SAS, France, which in turn is a subsidiary of the General Electric Company, United States.
When the disputes arose between the parties, PASL issued a request for arbitration to the International Chamber of Commerce as per Cl. 6 of the settlement agreement. The relevant portion of Clause 6 is reproduced hereinunder:
6.2. In case no settlement can be reached through negotiations, all disputes, controversies or differences shall be referred to and finally resolved by arbitration in Zurich in the English language….
A preliminary objection with respect to the seat of arbitration was raised by GE, however the arbitrator ruled that the seat of the arbitration is Zurich, Switzerland. GE suggested Mumbai as the convenient venue to hold arbitration proceedings so as to reduce the cost. PASL objected to the suggestion. However, the Tribunal acceded to the suggestion and held that though the seat will be Zurich, all hearings would be held in Mumbai. The arbitral award was passed in favour of GE.
After the passing of the final award, GE called upon PASL to pay the amounts granted vide the said award, however, PASL failed to oblige and GE 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, PASL resisted the enforcement of arbitral award on the ground that the seat of arbitration was Mumbai, where all the hearings of the arbitral proceedings took place. The said argument of PASL was rejected by the Gujarat High Court which upheld the enforcement of the arbitral award, against which PASL filed special leave petition before the Supreme Court.
Arguments of the parties before the Supreme Court
PASL contented that two Indian parties cannot designate a seat of arbitration outside India—
(i) As the same would be contrary to Section 23 of the Contract Act, 18726 (the Contract Act) read with Sections 28(1)(a) and 34(2-A) of the Arbitration Act;
(ii) That by designating a foreign seat, parties would be able to opt out of substantive law of India, which would be contrary to the public policy of the country;
(iii) That foreign awards as contemplated under Part II of the Arbitration Act can arise only from international commercial arbitrations. Reliance was placed on the definition of “international commercial arbitration”, contained in Section 2(1)(f) of the Arbitration Act (Part I), as per which at least on the parties to the arbitration is a foreign national or a company incorporated in a country other than India, or an association whose central management or control is outside India or Government of a foreign country; and
(iv) That since there was no foreign element involved and the dispute between the two parties arose out a contract to be performed solely in India, by applying the closest connection test, the seat of the arbitration would necessarily be Mumbai and not Zurich.
GE argued that the Arbitration Act does not bar Indian parties from choosing a foreign seat—
(i) That it is a settled position of law10 that Parts I and II of the Arbitration Act are mutually exclusive and hence, the definition of international commercial arbitration (ICA) cannot be imported from Part I of the Act into Section 44 via the expression “unless the context otherwise requires” contained in Section 44;
(ii) That unlike the definition of “international commercial arbitration” contained in Section 2(1)(f) in Part I, nationality, domicile or residence of parties is irrelevant for the purpose of applicability of Section 44 of the Arbitration Act;
(iii) Neither Section 23 nor Section 28 of the Contract Act prescribe the choice of a foreign seat in arbitration. In fact, the exception to Section 28 of the Contract Act expressly excepts arbitration from the clutches of Section 28, which is an express approval to party autonomy which forms the basis of the Arbitration Act; and
(iv) The arbitration clause in the settlement agreement, together with the procedural orders passed by the arbitrator, designated Zurich as the seat and Mumbai only as a convenient venue, which has been accepted by both parties, and must govern the arbitral proceedings in this case.
Analysis of the judgment in PASL Wind Solutions
i) Determination of the seat on the basis of the closest connection test
PASL’s argument that by applying closest connection test as followed in Enercon (India) Ltd. v. Enercon GmbH13 the seat of arbitration is Mumbai (India) was rejected. The Court also held that the closest connection test would apply only if it is unclear that the seat has been designated either by the parties or by Tribunal.
In Enercon14, the arbitration clause provided London as the venue and not the seat. The Court in the said judgment pointed out various factors connecting the dispute to India and the absence of any foreign factors connecting the dispute to England. However, in the instant case, the parties by their express consent designated Zurich as the seat of arbitration and Mumbai as the venue.
ii) Part I and Part II are mutually exclusive and there is no overlapping
The Court reiterated the established position of law that Part I and Part II of the Arbitration Act are mutually exclusive and that the provisions of Part II are not supplementary to Part I. Part I deals with arbitrations situated in India irrespective of whether the arbitration is purely domestic or an ICA i.e. where one of the parties is foreign. Part I is a complete code in itself as it deals with appointment of arbitrator, commencement of arbitration, making of an award, its challenge and execution.
Part II on the other hand is concerned only with enforcement of foreign arbitral award. Thus, the applicability of Part II is solely dependent upon the fact that place where the arbitral award is made is outside India, in a country signatory to the New York Convention.
The Court rejected the contention of PASL that the proviso to Section 2(2) of the Arbitration Act15, which was introduced by the Arbitration and Conciliation (Amendment) Act, 201516 and which envisages that subject to the agreement to the contrary, Section 9 (interim measures), Section 27 (taking of evidence) and Sections 37(1)(a), & 37(3) shall also apply to ICA, even if the seat of arbitration is outside India, is a bridge which connects the two Parts of the Act viz. Parts I and II. The Court clarified that the proviso was introduced by way of amendment to deal with the confusion created by the judgments in Bhatia International v. Bulk Trading SA20 and Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.21 The proviso to Section 2(2) makes it clear that even in cases where the arbitration takes place outside India and the assets of one of the parties is situation in India, interim orders qua such assets, can be passed by the courts in India. Although the expression “international commercial arbitration” has been used in the proviso, it has been used to refer to arbitration seated outside India. The context of the expression “international commercial arbitration” used in the proviso to Section 2(2) is different from the definition of “international commercial arbitration” under Section 2(1)(f). Thus, the Court clarified that when the expression “international commercial arbitration” is spoken in the context of arbitration taking place outside India, it is place-centric, as provided in Section 44 (Part II) of the Arbitration Act as opposed to the party-centric definition of “international commercial arbitration” contained in Section 2(1)(f).
iii) Distinction between international commercial arbitration and foreign award
The Court clarified that ICA and foreign award are not the same. An award made in a State other than the State where the enforcement is sought is a foreign award. The nationality, domicile, residence of parties is irrelevant to determine whether an award is a foreign award or not. However, nationality domicile, residence of parties would be relevant to determine whether an award is an ICA or not. That majority of the contracting States of NYC consider “seat” chosen by the parties or the tribunal as the place where the award is made. The concept of foreign award is thus “seat-oriented” rather than “party-oriented”.
iv) The awards covered under NYC in contradistinction to Geneva Convention
The Court relied on the article written by Pieter Sanders22 and book by Gary Born23 to hold that scope of NYC Convention is wider than that of the Geneva Convention24. The Geneva Protocol was limited to agreements to arbitrate between parties that were nationals of different contracting parties, whereas Article II of the NYC does not expressly address the categories of arbitration agreements which are subject to the Convention, instead, it refers to arbitration awards which are governed by NYC. As per Article II, NYC applies in two cases:
a. If the award is made in a territory of a State other than the State where the recognition and enforcement is sought.
b. Awards which are not considered as domestic awards in the State where its recognition and enforcement is sought.
Thus, there is no reference to nationality, domicile or place of residence of parties at all.
v) Definition of foreign award as contained in Section 44 of the Arbitration Act
The definition of foreign award contains four ingredients:
a. the dispute must be considered to be a commercial dispute under the law in force in India;
b. it must be made in pursuance of an agreement in writing for arbitration;
c. it must be disputes that arise between persons (without regard to their nationality, residence, or domicile); and
d. the arbitration must be conducted in a country which is a signatory to the New York Convention.
Apart from the fact that Parts I and II are mutually exclusive and the definition of Part I will have no significance while interpreting the provisions of Part II, a bare perusal of Section 44 would make it clear that a foreign award has no correlation with the definition of international commercial arbitration as contained in Section 2(1)(f). In fact, the term “International commercial arbitration” is conspicuous by its absence. The Court while taking note of the aforesaid, observes that inserting the concept of “international commercial arbitration” in the definition of foreign award contained in Section 44, would alter the very basis of Section 44. In any event, bodily importing the expression international commercial arbitration into Section 44 cannot be done because of the opening words of Section 44.
vi) Provision of the Arbitration Act as opposed to Federal Arbitration Act of USA (FAA)
During the course of arguments, attention was drawn by PASL to Section 202 of the Federal Arbitration Act which specifically provides that an agreement or award arising out of such a relationship which is entirely between citizens of the United States shall be deemed not to fall under the NYC unless that relationship involves property located abroad, envisages performance or enforcement abroad, or has some other reasonable relation with one or more foreign states. The Court however, while rejecting the reliance placed on the provision of FAA noted that unlike the FAA, no such caveat was entered when India acceded to the NYC and that Section 44 is reflective of the same.
vii) Position of law prior the decision in PASL Wind Solutions qua party autonomy
The position of the law before the present judgment was also clearly in favour of party autonomy.25 One of the first cases before the Supreme Court challenging the right of parties to choose a foreign-seated arbitration arose in Atlas Export Industries v. Kotak & Co.26 In the said case, even though an Indian company had entered into a contract with a company incorporated in Hong Kong, the goods were to be supplied through an Indian company, namely, Kotak & Co. in Mumbai. As per the arbitration agreement contained in the contract, the arbitration was to take place in London in accordance with arbitration rules of Grain and Feed Trade Association (GAFTA). Dispute arose between the parties and a foreign award was delivered. The respondent moved an application under the provisions of the Foreign Awards (Recognition and Enforcement) Act, 196127 before the High Court seeking enforcement of the award. The award was made a rule of the court and subsequently a decree was passed in terms of the award, against which a letters patent appeal was filed by Atlas on the ground that the award is unenforceable on the ground of it being contrary to Sections 23 and 28 of the Contract Act. The principal contention of the appellant was that the parties between whom the dispute arose, being Indian parties could not have resorted to a foreign seated arbitration and thereby impliedly exclude the remedy available under ordinary Indian law. Reliance was placed on Sections 23 and 28 of the Contract Act, however the same was rejected. The Supreme Court held merely because the arbitrators are situated in a foreign country that by itself cannot be a reason to nullify the arbitration agreement, when the parties with their eyes open, willingly entered into an arbitration agreement.
It may however, be noted that although the contract was to be performed in India, there was a foreign element involved in the form of a company incorporated in Hong Kong.
However, the Supreme Court in dealing with proceedings relating to appointment of arbitrator in TDM Infrastructure (P) Ltd. v. UE Development (India)(P) Ltd.28 while referring to Section 28 of the Arbitration Act observed that the “intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian Law. This is part of the public policy of the country”. The aforesaid judgment was relied on by the Bombay High Court29 to hold that two Indian parties cannot choose a foreign seat for arbitration. In 2015, however, the Supreme Court in State of W.B. v. Associated Contractors,30 held that TDM Infrastructure31 being a judgment delivered by a Single Judge under Section 11 of the Arbitration Act, cannot be regarded as a binding precedent.33
Finally, the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.34, crystallised the position of law insofar as mutual exclusivity of Parts I and II of the Arbitration Act is concerned. The five-Judge Bench in its decision categorically held Section 28, contained in Part I of the Act will not apply where the seat of arbitration is outside India. Also, the purpose of Section 28 is only to identify the rules that would be applicable to substance of dispute. This section makes a distinction between purely domestic arbitrations and international commercial arbitrations, with a seat in India. Section 28(1)(a) makes it clear that in an arbitration under Part I to which Section 2(1)(f) does not apply i.e. not an international commercial arbitration, there is no choice but for the Tribunal to decide the dispute by applying the Indian substantive law applicable to the contract. This is clearly to ensure that two or more Indian parties do not circumvent the substantive Indian law, by resorting to arbitrations. However, when the seat is outside India, the conflict of law rule of the country in which the arbitration takes place would have to be applied. That the expression used in Section 28(1)(a) “where the place of arbitration is situated in India” does not indicate the intention of Parliament to give extraterritorial operation to Part I of the Arbitration Act of 1996.
In Centrotrade Minerals and Metal Inc. v. Hindustan Copper Ltd.35, while upholding the parties’ right to have a two-tier arbitration, the Court held that the principle of party autonomy is virtually the backbone of arbitrations. In Union of India v. U.P. State Bridge Corpn. Ltd.36 too, the Supreme Court recognised party autonomy in the choice of procedure as one of the foundational pillars of arbitration.
The Supreme Court gave approval to the statement of law laid down by the Madhya Pradesh High Court in Sasan Power Ltd. v. North American Coal Corpn. (India)(P) Ltd.37 (Sasan I). Sasan I discussed series of judgments pertaining to applicability of Parts I and II of the Arbitration Act and party autonomy. The High Court in unequivocal terms held that applicability of Part II is determined solely based on what is the seat of arbitration and that nationality of parties is irrelevant. The High Court qua party autonomy went on to hold that once parties by mutual agreement have decided to resolve their dispute and when they, on their own, chose to have the seat of arbitration in a foreign country, then in view of Section 2(2) of the Arbitration Act, Part I of the Act will have no application.
It would not be out of place to mention that the Supreme Court while adjudicating the appeal noted that the dispute was in fact between three parties, one of which was an American company and hence there existed a foreign element. The Court in its judgment concluded that the question whether two Indian companies could enter into an agreement to be governed by the laws of another country does not arise in this case.38
From the foregoing discussion it is clear that the question whether party autonomy being unfettered insofar as allowing two Indian companies to choose a foreign seat of arbitration came to be decided by the Supreme Court for the first time in PASL Wind Solutions39. Although judgments like Atlas Export40 and Sasan Power41 dealt with the said issue, there was foreign element involved in both the casesin the form of foreign parties.
viii) Freedom of contract
In PASL Wind Solutions42, the Supreme Court after citing numerous judgments on public policy and referring to Sections 23 and 28 of the Contract Act came to the conclusion that the balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian nationals from referring their dispute to arbitration at neutral forum outside India.
The argument of PASL that since two Indian parties cannot opt out of the substantive law of India and therefore, ought to be confined to arbitrations in India by placing reliance on Sections 28(1)(a) and 34(2-A) was rejected. The Court held that:
- … Section 28(1)(a) of the Arbitration Act makes no reference to an arbitration being conducted between two Indian parties in a country other than India, and cannot be held, by some tortuous process of reasoning, to interdict two Indian parties from resolving their disputes at a neutral forum in a country other than India.43
The Court accepted the argument of the respondent GE that the parties in present scenario, will have two bites at the cherry i.e. first, by challenging the award under Swiss Law in Zurich and second, by resisting the enforcement under the grounds mentioned in Section 48 of the Arbitration Act. The Supreme Court concluded that Section 48 of the Arbitration Act provides sufficient safeguard against enforcement of an award which is violative of public policy. If in a given case it is found that two Indian nationals have circumvented a law which pertains to fundamental policy of India or enforcement of a foreign award would be violative of public policy of India, enforcement of such foreign award may be refused by Indian courts.
The authors are of the opinion that the judgment of the Supreme Court is a welcome step towards making India an arbitration friendly country as it upholds the concept of party autonomy and freedom of contract, which forms the backbone of arbitration. In the past, as can be seen from the judgments discussed in the foregoing paragraphs, the Supreme Court has upheld party autonomy with respect to different aspects of arbitration, it is for the first time, the Supreme Court got the opportunity to adjudicate whether party autonomy under the Arbitration Act is unfettered so as to permit two Indian parties to choose a foreign seat for arbitration. This judgment will have a far-reaching impact as there are several matters pending before the Supreme Court and High Court, which involve similar issue.
Although in the first glance, the judgment appears to be detailed, touching upon various issues in support of its conclusion, however, on a deeper reading, it appears that certain fundamental issues were notarised by the parties and not dealt with by the Court. The Supreme Court ought to have examined whether two Indian entities in respect of a contract executed in India and wholly performed in India can adopt foreign law and confer jurisdiction on foreign courts/tribunals especially when the foreign court/tribunal otherwise would not have jurisdiction and whether such an agreement by Indian entities would be opposed to the sovereignty of Indian State.
It is a settled position of law that judicial functions and judicial powers are one of the essential attributes of a sovereign State. The tribunals, just like the courts in India discharge the State’s inherent judicial function44to adjudicate the disputes arising between its citizens or its entities in exercise of the judicial power of the State. Similarly, the arbitrator appointed by the parties also exercise the judicial power of the State.45
That conferment of jurisdiction is a legislative function, and it cannot be conferred with the consent of the parties.46 The Arbitration Act only provides a limited party autonomy which is to get the disputes arising between Indian citizens/entities resolved by an alternative dispute resolution method viz. arbitration. However, the party autonomy is not unfettered. Therefore, under the guise of party autonomy it is not open to Indian citizens/Indian entities who are otherwise subject to the Indian judicial system, to contract out of the same, with respect to purely domestic transactions/disputes sans foreign element. Any such attempt would impinge upon the sovereign judicial power of the State to adjudicate the disputes arising between its citizens with respect to domestic transactions.
In the opinion of the authors, had the Supreme Court dealt with the aforesaid aspects of the matter, the issue of two India parties choosing a foreign seat would have been settled once and for all.
*Advocate, Supreme Court of India, LLM, National University of Singapore.
**Advocate, Supreme Court of India.
22Pieter Sanders, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Netherlands International Law Review, Vol. 6, Issue 1, March 1959).
23Gary B. Born, International Commercial Arbitration (Wolters Kluwer, 3rd Edn., 2021.
24 Geneva Convention on the Execution of Foreign Arbitral Awards, 1927.
25E.g. Atlas Export Industries v. Kotak & Co., (1999) 7 SCC 61; Reliance Industries Ltd. v. Union of India, (2014) 7 SCC 603; Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.,(2016) 4 SCC 126; Centrotrade Minerals and Metal Inc. v. Hindustan Copper Ltd., (2017) 2 SCC 228.
33Followed by High Court of Madhya Pradesh in Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., 2015 SCC OnLine MP 7417 and the Delhi High Court in GMR Energy Ltd. v. Doosan Power Systems India (P) Ltd., 2017 SCC OnLine Del 11625.
45Sherbanubai Jafferbhoy v. Hooseinbhoy Abdoolabhoy, 1947 SCC OnLine Bom 59; Kihoto Hollohan v. Zachillhu,1992 Supp (2) SCC 651; Rohtas Industries Ltd. v. Rohtas Industries Staff Union,(1976) 2 SCC 82; Jaswant Sugar Mills Ltd. v. Lakshmi Chand, AIR 1963 SC 677; Union of India v. R. Gandhi, (2010) 11 SCC 1.