Introduction

In yet another landmark decision1, the Supreme Court of India ("Supreme Court") reinforced party autonomy under arbitration law and allowed two (or more) Indian parties to have their disputes arbitrated outside India and clarified the meaning and import of foreign awards under the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

Facts

Disputes arose between two Indian parties under a contract for purchase of certain converters and the expiry of warranty thereunder. The parties entered into a settlement agreement dated 23 December 2014. Clause 6 of this settlement agreement inter alia, provided for resolution of disputes by arbitration in Zurich, Switzerland and in accordance with the rules of the International Chamber of Commerce ("ICC Rules").

Thereafter, PASL referred the matter to arbitration before a sole arbitrator appointed under the ICC Rules. GE challenged the sole arbitrator's jurisdiction on the ground that two Indian parties could not have chosen a foreign seat of arbitration. The sole arbitrator rejected GE's objection and was persuaded inter alia, by the Supreme Court's decision in Reliance Industries Ltd v. Union of India2 which was followed in subsequent decisions as well. As such, the sole arbitrator proceeded to adjudicate the disputes as per Swiss law because the seat of arbitration was Zurich. Meanwhile, as per the mutual agreement of both parties, the venue of arbitration was changed to Mumbai as the forum conveniens. The final award ("Award") was passed on 18 April 2019 inter alia, rejecting PASL's claim and also ordering it to pay GE's legal costs.

Upon PASL's failure to pay the sums awarded, GE initiated enforcement proceedings before the Gujarat High Court under sections 47 and 49 of the Arbitration Act, within whose jurisdiction PASL's assets were located. GE also filed an application under section 9 seeking interim reliefs against PASL.

PASL resisted enforcement and contended that the seat of the arbitration was Mumbai which was also the venue of the arbitration. PASL also filed an application under section 34 of the Arbitration Act, to which GE filed an application for rejection under Order 7 Rule 11 of the Civil Procedure Code, 1908.

Thereafter, the Gujarat High Court upheld the right of the parties to designate a foreign seat of arbitration but also rejected GE's application under section 9 on the ground since the same was not maintainable in foreign seated arbitrations conducted between Indian parties. The order of the Gujarat High Court was challenged before the Supreme Court and the enforcement and challenge proceedings remained in abeyance. .

PASL's arguments

PASL inter alia, argued that two Indian parties could not designate a foreign seat of arbitration as the same was contrary to section 23 of the Indian Contract Act, 1872 ("Contract Act") read with section 28 (1)(a) and section 34(2) of the Arbitration Act.

PASL further argued that the Award could not be enforced under Part- II of the Arbitration Act since foreign awards had to necessarily arise from 'international commercial arbitration', as defined under section 2(1)(f) of the Arbitration Act where one of the parties to the award must be residing outside India. PASL also argued that based on the expression "unless the context otherwise requires" contained in section 44 of the Arbitration Act, foreign awards must necessarily arise from an international commercial arbitration and Part-II of the Arbitration Act could not be applied without the involvement of a foreign element.

PASL relied on the decisions of the Supreme Court in TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.3 and the Bombay High Court in Seven Islands Shipping Ltd. v. Sah Petroleums Ltd.4 and Addhar Mercantile Pvt. Ltd. v. Shree Jagadamba Agrico Exports Pvt. Ltd.5. PASL also distinguished Atlas Export Industries v. Kotak & Co.6, inter alia, on the grounds that the specific argument under section 23 of the Contract Act.

PASL also argued that the seat of the arbitration could only be Mumbai going by the closest connection test in the absence of any foreign element and that Zurich could only be a salutary seat agreed by both parties in the settlement agreement dated 23 December 2014. As such, Part-II of the Arbitration Act would not apply to the Award.

GE's arguments

GE refuted PASL's arguments and submitted that Part-I and Part-II of the Arbitration Act were mutually exclusive, as was held by the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc7.

GE argued that the definition of 'foreign award' under section 44 of the Arbitration Act only requires persons, both of whom can be Indian, to arbitrate in a place outside India, which is a signatory to the New York convention.

GE argued that neither section 23 nor section 28 of the Contract Act curtails the parties' choice of a foreign seat in arbitration and that the exception to section 28 of the Contract Act expressly excludes arbitration from its application. GE also argued that section 28 of the Arbitration Act would only apply where the place of arbitration is in India, as held in BALCO. GE also refuted PASL's reliance on the closest connection test to designate Mumbai as the seat, since the settlement agreement dated 23 December 2014 and the procedural orders had designated Zurich as the seat and that Mumbai was merely the forum conveniens.

Lastly, GE argued that the phrase "international commercial arbitration" appearing in the proviso to section 2(2) and in section 10 of the Commercial Courts Act was not governed by the definition contained in section 2(1) (f) but only referred to arbitrations seated outside India.

Judgement

The Supreme Court upheld GE's arguments and dismissed PASL's appeal. In doing so, the Supreme Court made the following important observations and findings:

  1. Clause 6 of the settlement agreement dated 23 December 2014 inter alia designated the seat of the arbitration as Zurich, Switzerland and also referred to the agreement of both parties to have their disputes decided as per the ICC Rules.
  2. The closest connection test relied upon by PASL to contend that Mumbai would be the jurisdictional seat and not Zurich, would only apply if it was unclear that a seat had been designated either by the parties or by the tribunal, which was different from the venue of arbitration. In this case, Zurich had been designated as the seat of arbitration by the parties as well the tribunal.
  3. Parts I and II of the Arbitration Act are mutually exclusive. Part I deals with arbitrations where the seat is in India and has no application to a foreign-seated arbitrations. Part-I is a complete code in dealing with the appointment of arbitrators, commencement of arbitration, making of an award as well as challenge and execution of such awards. On the other hand, Part II only deals with the recognition and enforcement of foreign awards (as defined under section 44).
  4. PASL's argument that the proviso to section 2(2) of the Arbitration Act "acts as a bridge" between Part-I and Part-II of the Arbitration Act was rejected on the ground that section 2(2) of the Arbitration Act specifically states that Part I applies only to arbitrations which take place in India. It is settled law that a proviso could not travel beyond the main enacting provision8.
  5. An application seeking interim relief under Section 9 under Part-I of the Arbitration Act can only be applied when the assets of one of the parties are situated in India and interim orders are required qua such assets. The Gujarat High Court's contrary ruling that GE's section 9 application was not maintainable, was set aside.
  6. The four sub-clauses contained in section 2(1)(f) make it clear that the definition of the expression 'international commercial arbitration' contained therein is party-centric where at least one of the parties to the arbitration agreement should be residing outside India or is a foreign national. On the other hand, "international commercial arbitration" referred to in the context of taking place outside India, is only place-centric as is provided under section 44 of the Arbitration Act.
  7. The four ingredients of a foreign award under section 44 are: (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. Importantly, the meaning and import of foreign award under section 44 of the Arbitration Act is "party-neutral".
  8. The court's decision in TDM cannot be considered as a binding precedent since it was passed by a single judge appointing an arbitrator under section 11 of the Arbitration Act9. Furthermore, Seven Islands and Addhar Mercantile having relied upon TDM were overruled.
  9. Section 28(1)(a) of the Arbitration Act makes no reference to an arbitration conducted by two Indian parties outside India and as such, it was not a bar to two Indian parties from resolving their disputes at a neutral forum in a country other than India. Additionally, BALCO specifically indicated that section 28 (1) (a) of the Arbitration Act would not apply to a foreign seated arbitration.
  10. As regards PASL's contention that Indian parties designating a foreign seat of arbitration would do so with a view to circumvent the public policy of India, it would always for a ground to be made out under section 48 against enforcement of a foreign award arising out such arbitration.
  11. As held in BGS SGS SOMA JV v. NHPC10 and Kandla Exports Corporn. v. OCI Corporn11, the substantive law as to appeals and applications is laid down in the Arbitration Act while the procedure governing the same is laid down in the Commercial Courts Act. As such, there was no conflict between the acts especially since the Arbitration Act was a special enactment and a complete code in itself.
  12. The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favor of freedom of contract. There is no harm caused to the public in permitting two Indian nationals to avail of a challenge procedure of a foreign country and once again under section 48 of the Arbitration Act – "two bites at the apple".

Conclusion

The Supreme Court's ruling conclusively settles the conundrum surrounding foreign seated arbitrations initiated between Indian parties and provides much needed clarity on the recognition and enforcement of foreign awards. Party autonomy in arbitration is of paramount importance and the Supreme Court's endorsement will lead to the recognition and bolstering of India, as an arbitration friendly jurisdiction.

Footnotes

1. PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion India Pvt. Ltd. [Civil Appeal No. 1647 of 2021 decided on 20 April 2021]

2. (2014) 7 SCC 603

3. (2008) 14 SCC 271

4. (2012) 5 Mah LJ 822

5. Arbitration Application No. 197 of 2014 (decided on 12.06.2015 –)

6. [(1999) 7 SCC 61]

7. (2012) 9 SCC 552

8. Union of India v. Dileep Kumar Singh (2015) 4 SCC 421 (at paragraph 20); DMRC v. Tarun Pal Singh (2018) 14 SCC 161 (at paragraph 21); Kandla Export Corpn. v. OCI Corpn., (2018) 14 SCC 715 (at paragraph 13), and Mavilayi Service Co-operative Bank Ltd. v. Commissioner of Income Tax, Calicut 2021 SCC OnLine SC 16 (at paragraph 41).

9. State of West Bengal v. Associated Contractors, (2015) 1 SCC 32 (at paragraph 17)

10. (2020) 4 SCC 234 (at paragraphs 12 and 13)

11. (2018) 14 SCC 715

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