Indian parties permitted to choose foreign seat for arbitration: An anomalous decision?
Associate Editor ,
Arbitration Corporate Law Review
A single-judge bench of the Gujarat High Court on November 3, 2020, held in GE Power Conversion Pvt. Ltd. v. PASL Wind Solutions Ltd., (“Power Conversion”) that companies incorporated in India can choose a foreign seat of arbitration. Further, it opined that the resulting award from the said arbitration can be enforced in India under Section 48 of the Arbitration and Conciliation Act, 1996 (“ACA”). The judgement is a crucial development in the Indian arbitration regime.
1. Background of the dispute
The petitioner, GE Power Conversion (“GE”), and the respondent, PASL Wind Solution (“PASL”), are both companies incorporated under the Companies Act, 1956. PASL had issued 3 purchase orders to the petitioners for the supply of 6 converters for wind turbines. A settlement agreement was reached between the parties due to a dispute regarding the quantitiy of goods to be supplied. The settlement agreement contained a dispute resolution clause, which provided for arbitration as a mechanism for resolution in case the negotiations failed. According to this clause, the dispute was to be referred and finally resolved by “Arbitration in Zurich” with the institutional rules being those of the International Chamber of Commerce (“ICC”). The Indian Contract Act, 1872 (“ICA”), governed the main contract.
Due to the aggravation of the dispute, PASL initiated arbitration claiming breach of the settlement agreement by GE. The venue of the arbitration was Mumbai, India. Here, GE challenged the jurisdiction of the ICC Tribunal on the premise that two Indian parties cannot choose a foreign seat for arbitration. However, the Tribunal rejected this claim. GE won the dispute. Pursuant to this award, GE filed before the Gujarat High Court to enforce the award under Section 48 of the ACA and for interim measures under Section 9 of the ACA to secure the due amount.
2. The challenge to the seat of arbitration
Before the High Court, PASL challenged the seat of the arbitration and contended the seat to be Mumbai instead of Zurich. The respondent relied on the decision in Union of India v. Hardy Exploration, (“Hardy”) and argued that applying the ‘closest connection test’, which can include factors such as nationality, assets of the parties and venue for arbitration. Based on this test, the court in Hardy held that the seat of arbitration should be Mumbai, India. Further, PASL also relied on Enercon (India) Ltd. v. Enercon Gmbh, where though the venue was London, the law governing the arbitration agreement, the conduct of the arbitration and law governing the substantive contract were Indian law. Thus, the court on applying the closest connection test had determined the seat to be in India. Therefore, PASL concluded that since the seat was Mumbai, the award can only be enforced under Part I of ACA, and Section 48 which falls under Part II will not come into the picture.
The High Court rejected this contention by PASL and affirmed the seat of the arbitration as Zurich. The court relied on the Supreme Court decision in BGS Soma v. NHPC, (“BGS Soma”) which was delivered after Hardy. In BGS Soma, the court had delineated a test for determining when a chosen venue could be treated as the seat of arbitration:
· The use of the phrase “arbitration proceedings” or “venue” to identify a place signifies that the entire arbitration proceedings are to be conducted at the said place. In this case, the venue is the seat of the arbitration. However, if the arbitration agreement only uses the phrase such as “tribunals are to meet or have witness, experts, or parties” at a particular place, it indicates that only the hearings shall be conducted at the said venue. Here, the venue cannot be treated as the seat.
· If the arbitration agreement states that the arbitration proceedings “shall be held” at a particular venue, the indication is that the arbitration is anchored at the said place and the choice of the venue is also the choice of the seat of arbitration.
· However, the above tests are subject to there being no other “significant contrary indicia” that suggests that the said place will merely act as a venue and not the seat of arbitration. There is no explicit delineation of what constitutes a significant contrary indication and the same can include wide factors such as communications between parties or arbitrators.
In the present case, while fixing the venue of the arbitration at Mumbai, the sole arbitrator emphasised that the seat of the arbitration remained Zurich. Further, during the hearing too, at once instance, the arbitrator stated that though they were in Mumbai, in fact, they were in Zurich and the Swiss Private International Law applied to the procedural law. Thus, the High Court concluded that from the conduct of the arbitrator during the arbitration proceedings, it was clear that the seat of arbitration was ‘intended’ as Zurich, and thus, there was a ‘significant contrary indicia’ to the seat being in India.
The court by following BGS Soma further settled it as the binding precedent. Ambiguities were created after the BGS Soma decision since both BGS Soma and Hardy were decided by a three-judge bench. Subsequently, scholars have argued that due to this technicality, that BGS Soma in practice never overruled Hardy.
3. The dispute on 'Foreign Award'
The Respondent, PASL, filed another challenge before the court prohibiting enforcement under Section 48 of ACA on the ground that the award could not categorized as a ‘foreign award’. PASL argued that since both parties were incorporated in India, the same is against public policy under both Section 28(a) of the ACA and Section 23 of the ICA. It further argued that Indian parties cannot gain an advantage by simply designating a foreign seat without having any foreign element. It stated that if parties are allowed to do so, the purpose of the ACA will be defeated. The mechanism under Part II is given to foreign parties for swift redressal as under it, they deliberately face less judicial scrutiny.
However, the court again rejected this contention by PASL. It held that Section 44 of the ACA which defines a ‘foreign award’ is the only provision through which one should determine whether an award being is a foreign award. Further, it opined that the determination of the same has to be based only on the sole consideration of the seat of the arbitration. It conclusively rejected the argument by PASL and held that the nationality of the parties is irrelevant in determining whether an award is a foreign award. The parties to a contract can agree to have their disputes resolved by foreign courts termed as ‘neutral court’ or ‘court of choice’ and thereby creating exclusive or non-exclusive jurisdiction. This, the court held, will not be in contravention to public policy.
The observation made by the court with respect to this issue has the potential to have significant consequences by clearing the uncertainties and enabling domestic parties to choose a suitable forum. The courts on various occasions have differed on the correct position of law. Though in Atlas Export Industries v. Kotak & Company, the Supreme Court had permitted a choice of foreign seat for two Indian parties, the decision was laid down in the context of the then Arbitration Act, 1940. Therefore, the ruling lost precedential value. The Supreme Court did permit Indian parties to choose London as the seat of arbitration in Reliance Industries Ltd. v. Union of India, however, it did not directly answer whether the same can be permitted in each case. Similarly, various High Courts have taken different approaches. The Delhi High Court permitting the Indian parties to choose a foreign seat in GMR Energy Ltd v. Doosan Powers, whereas, in Addhar Merchantile Ltd. v. Shree Jagdamba Agrico Exports, the Bombay High Court denied such flexibility
The decision in Power Conversion shall enable a stronger legal position for Indian parties choosing a foreign seat. Large multi-national companies that have incorporated their subsidiaries in India and deal with domestic distributors and vendors may now insist on foreign seats for arbitration. These subsidiaries may choose a jurisdiction where the parent company is more comfortable and where the dispute can be quickly decided and disposed of by the courts.
However, the observations of the court on the issue of interim measures create a new hurdle and problem for such foreign seated arbitration involving two nationally incorporated parties. This problem is discussed in the next section.
4. Observation of the Court on Section 9 of ACA
As stated before, GE had also filed for interim measures under Section 9 of ACA to secure the due amount from PASL. The court taking this issue into consideration stated that the remedy under Section 9 in cases of foreign seated arbitration is only available for ‘international commercial arbitration’ as defined under Section 2(f) of ACA. Under Section 2(f), at least one party to the dispute should be incorporated or based outside India. Thus, the court reasoned that since both parties in the present case are based in India, the arbitration cannot be termed as ‘international commercial arbitration’. Therefore, GE was not eligible to be granted interim measures by the Indian courts.
This finding by the court has resulted in an anomalous situation. This is because if the arbitration is foreign seated and only one of the parties is incorporated outside India, neither of the parties can approach Indian courts for interim measures since the arbitration will be categorized as ‘international commercial arbitration’ under Section 2(f). On the other hand, if both parties, which are incorporated in India, arbitrate outside India as permitted by this judgment, neither party shall be enabled to seek interim relief in India. Thus, a party anticipating an unfavourable award will have a free hand to dispose of or secret away their assets to defeat the consequences of enforcement. Therefore, the parties will be prohibited from attaining the important and crucial reliefs under Section 9. The Indian courts shall be left helpless in such situations and the enforcement proceedings will be inconsequential.
The two key takeaways from the decision in Power Conversion regarding foreign awards and interim measures shall prompt Indian incorporated companies to take a closer look at the jurisdiction for arbitration and promote forum shopping . Since enforcement is dependent on the location of the companies’ assets[i] the domestic companies may choose an offshore seat in case the opposing party has assets outside India. This will enable them to enforce the award outside India as well as claim interim measures. Although if the assets of the opposing party are in India, the company will need to access to them, whether the benefits of offshore arbitration outweigh the downsides of the absence of interim measures under Section 9 of ACA.
However, on a positive note, the judgement does promote party autonomy by permitted nationally incorporated parties to engage in foreign seated arbitration. Therefore, it can be viewed as a pro-arbitration ruling but in a limited sense.
i] Nigel Blackaby, Constantine Partasides, Alan Redfern and Martin Hunter, Redfern and Hunter on International Arbitration 608 (6th ed. 2015).
[[i]] Abhinav Gupta is a 2nd year law student at NUJS, Kolkata. He is Associate Editor of journals such as NUJS Law Review, NUJS Journal on Dispute Resolution, Arbitration and Corporate Law Review, and Journal on Indian law and Society. His interests are in the areas of arbitration law, competition law, and constitutional law. He can be contacted at email@example.com.
This article was reviewed by Arnav Maru and Shruti Prasad Dhonde.
Preferred Citation –Abhinav Gupta, “Indian parties permitted to choose foreign seat for arbitration: An anomalous decision?”, Arbitration & Corporate Law Review, Published on 28th December 2020.