SUPREME COURT ON FOREIGN SEAT OF ARBITRATION: AN ANALYSIS

[Pranjul Dalela is a student at NUSRL, Ranchi and Khushboo Sharma is a student at NLIU, Bhopal]


Introduction


Recently, in PASL Wind Solutions Pvt Ltd v GE Power Conversion India Pvt Ltd (PASL), the Supreme Court has ruled that Indian parties have autonomy to opt for their choice of arbitration outside India. This case has thus, provided a clear vision with respect to the controversial issue of foreign seat in Arbitration. First, it provides a clear definition of the sections under Arbitration and Conciliation Act (the Act) which provide for opting foreign seat. Second, it provides a vision to the clash between party autonomy and public policy. Also, the judgment provides a vision to the aspect of interim relief which was decided by the Gujarat High Court. Hence the article analytically discusses all such aspects with respect to the stance of the Supreme Court taken in the aforesaid decision.


(A) Mutual Exclusivity of Part I and Part II of the Act:


The SC in the present matter provides two definitions of expression with respect to “international commercial arbitration” as defined under Section 2(1)(f) of the Act and Section 44 of the Act. The former provides that in case of commercial disputes wherein one of the party is a resident of any other country than India, such disputes shall be recognized as ICA. And with respect to the latter, it provides four essential which includes (a) The dispute must be a commercial dispute under Indian law (b) it must be the result of a written agreement for arbitration (c) it must be a dispute between persons regardless of their nationality or residency (d) arbitration must take place in a country that is a signatory to the New York Convention. The interpretation of these two definitions brings out that Section 2(1)(f) is party-centric and on the other hand, Section 44 is place-centric.


The Court relied on Bharat Aluminum Company v. Kaiser Aluminum Technical Services Inc (BALCO), and stipulated that, Section 2(1)(f) and Section 44 of the Act are mutually exclusive as they are placed under Part I and Part II of the Act.


The interpretation of these two sections by the SC stipulates that under Section 44 of the Act, it is not a requirement for the parties to be a national or resident of a country other than India and thus, Indian parties to a commercial dispute are at liberty to opt for a foreign seat of arbitration and such arbitration shall be considered as an ICA under the Act. Further, the award provided by such international seat would be considered as a foreign award. In fact, Part I of the Act, is only applicable to Indian seated arbitrators, thus parties opting for a foreign seat of arbitration would not be governed by Part I of the Act. Nevertheless, such parties would qualify to obtain their foreign award implemented under Section 49 of the Act.


The Court’s judgment for the first time has made a clear distinction with respect to two different sections pertaining to ICA under the Act and provided a clarification on the law which was disputable among various High Court such as Delhi, Bombay and Gujarat.


(B) Aspects regarding The Indian Contract Act, Public Policy and Party Autonomy


It was also under contention that the two parties would violate the public policy principle if the parties opt out of substantive law of India and designate a foreign arbitral seat under Section 23 and 28 of Contracts Act, read with Section 28(1)(a) and 34(2)(a) of the Act.


The court relying on the text of the provisions stipulated that Section 28 of the Contract Act expressly excludes arbitration agreement thus, there lies no limitation on the terms of the agreement which would also include the choice of seat for arbitration. Further, while dealing with Section 23 of the Contracts Act, the Court stipulated that public policy of India does not limit an Indian party to opt for foreign arbitral seat. In fact, the court provided that a balance must be drawn between freedoms of contract against clear harm to the public. In the present case the potential of such harm was not present. Further SC relied on Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287, and concluded that in circumstances where the seat is outside India, the conflict of law provisions of the nation in which the arbitration takes place must be applied. In addition, unless there is an express decision of which rules will apply to the content of the dispute, the law of the nation in which the contract is to be performed will be used.


Moreover, as section 28(1)(a) of the Act is found in Part I of the Act, it was noted that it does not apply to foreign seated arbitrations. As a result, when Indian parties choose a foreign seat of arbitration, the substantive law of India will be applied in conformity with conflict of law provisions and international comity. However, if it is determined that the Indian parties or the award have circumvented Indian substantive law, such a foreign award will not be enforced on the basis of a violation of India's basic policy as per Section 48(2)(b) of the Act. This strategy guarantees that a balance between freedom of contract and public policy is maintained, allowing Indian parties to enjoy autonomy. Also, under Article 137 of the Limitation Act of 1963, the timeframe for limitation of execution of a foreign award is three years (Limitation Act). However, the period of limitation for all awards other than an award of obligatory injunction, as defined by section 136 of the Limitation Act, is 12 years in the event of a domestic award that is regarded a presumed decree under the Civil Procedure Code of 1908. Thus, the decision to choose a seat of arbitration should also have an impact on the limitation period with respect to arbitration award but the same was not dealt by the Court.


(C) Interim Relief:


The Supreme Court set aside the Gujarat HC’s judgment on the application of Section 9 and held that the remedy of interim relief could be granted as per Section 2(2) of the Act, in cases wherein Indian parties have opted for foreign seat of arbitration and arbitral award would be recognized under provisions of Part II of the Act. It was a matter of worry with the courts that the party which receives an unfavorable award might dispose of their assets and render the award delusional as the Indian Courts does not possess the power to pass an interim order. With the judgment of this case, the issue is settled now.


Conclusion


When it comes to permitting Indian parties to pick a foreign seat of arbitration, different High Courts have reached various conclusions. The Indian parties' choice of a foreign seat was respected by the Delhi High Court, but not by the Bombay High Court. The PASL decision will go a long way in this respect, since it clarifies the legal position regarding Indian parties choosing a foreign seat of arbitration and promotes the notion of party autonomy in India. Furthermore, if parties believe that the scope of arbitration in India is potentially harmful to them, they can use their right under Party Autonomy and choose a seat elsewhere than India. The parties have no right of appeal against an order made under Section 11 of the Act. If the parties are concerned about this, they are free to select any seat for arbitration that best suits their needs.


86 views0 comments