Indian Parties Can Choose A Foreign Seat For Arbitration: Supreme Court

The Supreme Court held that parties to a contract who are Indian nationals or Companies incorporated in India can choose a forum for arbitration outside India.

"Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals", the bench headed by Justice Rohinton Fali Nariman observed.

The bench was considering the question whether two companies incorporated in India can choose a forum for arbitration outside India in the case  PASL Wind Solutions Private Limited Vs. GE Power Conversion India Private Limited.

In this case, a contract was entered between two companies, both incorporated in India under the Companies Act, 1956. Clause 6 (Arbitration Clause) provided that the disputes between them shall be referred to and finally resolved by Arbitration in Zurich in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. As the disputes eventually arose between the Companies, it was referred to arbitration before International Chamber of Commerce. One of the parties filed a preliminary application challenging the jurisdiction of the arbitrator on the ground that two Indian parties could not have chosen a foreign seat of arbitration. This objection was rejected by the Arbitrator who continued the proceedings and passed Final Award. The successful party filed enforcement proceedings under sections 47 and 49 of the Arbitration Act before the High Court of Gujarat. 

Before the Apex Court, the appellant company contended that :

(1) Two Indian parties cannot designate a seat of arbitration outside India as doing so would be contrary to section 23 of the Indian Contract Act,  read with section 28(1)(a) and section 34(2A) of the Arbitration Act.

(2) Foreign awards contemplated under Part II of the Arbitration Act arise only from international commercial arbitrations. "International commercial arbitration", as has been defined in section 2(1)(f) of the Arbitration Act, would make it clear that there has to be a foreign element when parties arbitrate outside India, the foreign element being that at least one of the parties is, inter alia, a national of a country other than India, or habitually resident in a country other than India, or a body corporate incorporated outside India. For this reason, the award passed in the present case cannot be designated as a foreign award under Part II of the Arbitration Act.

(3) When there is no foreign element involved in an award made in Zurich between two Indian companies, such award cannot be the subject matter of challenge or enforcement either under Part I or Part II of the Arbitration Act.

(4) There is a head-on conflict between section 10(3) of the Commercial Courts Act and section 47 of the Arbitration Act, as a result of which the former must prevail.

To address these contentions, the bench, also comprising Justices BR Gavai and Hrishikesh Roy, referred to various provisions of the Arbitration Act and various precedents and made the following observations:

Part I and Part II of the Arbitration Act are mutually exclusive 

The Arbitration Act is in four parts. Part I deals with arbitrations where the seat is in India and has no application to a foreign-seated arbitration. It is, therefore, a complete code in dealing with appointment of arbitrators, commencement of arbitration, making of an award and challenges to the aforesaid award as well as execution of such awards.

On the other hand, Part II is not concerned with the arbitral proceedings at all. It is concerned only with the enforcement of a foreign award, as defined, in India. Section 45 alone deals with referring the parties to arbitration in the circumstances mentioned therein. Barring this exception, in any case, Part II does not apply to arbitral proceedings once commenced in a country outside India

Re: Section 23 Contract Act

Freedom of contract needs to be balanced with clear and undeniable harm to the public, even if the facts of a particular case do not fall within the crystallised principles enumerated in well-established 'heads' of public policy. The question that then arises is whether there is anything in the public policy of India, as so understood, which interdicts the party autonomy of two Indian persons referring their disputes to arbitration at a neutral forum outside India.

Re Section 28, 34 Arbitration Act

Section 28(1)(a) of the Arbitration Act, when read with section 2(2), section 2(6) and section 4, provides that, where the place of arbitration is situated in India, in an arbitration other than an international commercial arbitration (i.e. an arbitration where none of the parties, inter alia, happens to be a national of a foreign country or habitually resident in a foreign country), the arbitral tribunal shall decide the dispute in accordance with the substantive law for the time being in force in India. The Appellant's contention was that since two Indian parties cannot opt out of the substantive law of India and therefore, ought to be confined to arbitrations in India, Indian public policy, as reflected in these two sections, ought to prevail

"52. It can be seen 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. 

Take the case of an Indian national who is habitually resident in a country outside India. Any dispute between such Indian national and an Indian national who is habitually resident in India would attract the provisions of section 2(1)(f)(i) and, consequently, section 28(1)(b) of the Arbitration Act, in which case two Indian nationals would be entitled to have their dispute decided in India in accordance with the rules of law designated by the parties as applicable to the substance of the dispute, which need not be Indian law. This, by itself, is a strong indicator that section 28 of the Arbitration Act cannot be read in the manner suggested by Mr. Himani.", the court said while rejecting this contention.

Re: Section 10 of the Commercial Courts Act.  

"We have already seen how "international commercial arbitration", when used in the proviso to section 2(2) of the Arbitration Act, does not refer to the definition contained in section 2(1)(f) but would have reference to arbitrations which take place outside India, awards made in such arbitrations being enforceable under Part II of the Arbitration Act. It will be noted that section 10(1) applies to international commercial arbitrations, and applications or appeals arising therefrom, under both Parts I and II of the Arbitration Act. When applications or appeals arise out of such arbitrations under Part I, where the place of arbitration is in India, undoubtedly, the definition of "international commercial arbitration" in section 2(1)(f) will govern.

However, when applied to Part II, "international commercial arbitration" has reference to a place of arbitration which is international in the sense of the arbitration taking place outside India. Thus construed, there is no clash at all between section 10 of the Commercial Courts Act and the explanation to section 47 of the Arbitration Act, as an arbitration resulting in a foreign award, as defined under section 44 of the Arbitration Act, will be enforceable only in a High Court under section 10(1) of the Commercial Courts Act, and not in a district court under section 10(2) or section 10(3)."

GE Power was led by senior counsel Nakul Dewan instructed by Cyril Amarchand Mangaldas Partner Shaneen Parikh, Principal Associate Shalaka Patil and Associate Surya Karan Sambyal. PASL was represented by Senior Advocate Tushar Hemani instructed by Anushree Kapadia and Sharvil Pathak.

Case: PASL Wind Solutions Private Limited Vs. GE Power Conversion India Private Limited [CA 1647 OF 2021]
Coram: Justices RF Nariman, BR Gavai and Hrishikesh Roy
Counsel: Sr. Adv Tushar Himani, Sr. Adv Nakul Dewan , M/s Cyril Amarchand Mangaldas
Citation :LL 2021 SC 226

Click here to Read/Download Judgment