SUPREME COURT HOLDS THAT TWO INDIAN PARTIES CAN DESIGNATE A SEAT OF ARBITRATION OUTSIDE INDIA
It is common knowledge that the #seat of #arbitration determines the applicable law governing the arbitration including the procedural aspects. When parties specify a particular country as the seat of arbitration in an arbitration agreement, then, the applicable law of such country would govern the arbitration proceedings.
In this regard, the Hon’ble #SupremeCourt of India in the case of PASL Wind Solutions Private Limited versus GE Power Conversion India Private Limited [CA 1647 OF 2021], vide its Judgment dated 20.04.2021 held that two Indian parties can choose foreign seat for arbitration.
The facts of this case involves PASL Wind Solutions Private Limited (“Appellant”), which is a company having its registered office at Ahmedabad, Gujarat and General Electric Power Conversion India Private Limited (“Respondent”), which is a company having its registered office at Chennai, Tamil Nadu, and is a 99% subsidiary of General Electric Conversion International SAS, France, which in turn is a subsidiary of the General Electric Company, United States.
In 2010, the Appellant issued three purchase orders to the Respondent for supply of certain converters. Disputes arose between the Parties, whereby the Appellant claimed that warranties that were supposed to be given for converters were not so given. In order to resolve the conflict, the Parties entered into a Settlement Agreement dated 23.12.2014. Clause 6 of the Settlement Agreement contained arbitration as the dispute resolution clause. Accordingly, on 03.07.2017, the Appellant issued a request for arbitration to the International Chamber of Commerce [“ICC”] for appointment of arbitrator. It was agreed between the Parties, that the substantive law applicable to the dispute would be the Indian law.
The Respondent filed a preliminary Application challenging the jurisdiction of the arbitrator on the ground that two Indian parties could not choose a foreign seat for arbitration. The Appellant opposed the said Application. However, the learned sole Arbitrator, vide Procedural Order dated 20.02.2018, dismissed the Respondent’s preliminary Application. In the Procedural Order, the seat of the arbitration was stated to be Zurich, Switzerland, which was objected by the Respondent. The Respondent suggested Mumbai, India as a convenient venue to hold arbitration proceedings. Thereafter, the learned Arbitrator decided that though the seat is in Zurich, all hearings will be held in Mumbai. Thereafter, a Final Award dated 18.04.2019 was passed in which the Appellant’s claim was rejected.
As a result, the Respondent demanded the payment of amounts from the Appellant under the Final Award dated 18.04.2019. The Appellant failed to oblige the same. The Respondent initiated enforcement proceedings under Sections 47 and 49 of the Arbitration and Conciliation Act, 1996 [“Arbitration Act”] before the High Court of Gujarat. The Appellant filed an Appeal before the Supreme Court and contented that 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, 1872 [“Contract Act”] read with Section 28(1)(a) and Section 34(2A) of the Arbitration Act.
The Supreme Court framed the following issues in this case:
- Whether two companies incorporated in India can choose a forum for arbitration outside India.
- Whether an award made at such forum outside India, to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 [“New York Convention”] applies, can be said to be a “foreign award” under Part II of the Arbitration Act and be enforceable as such.
While dealing with the aforementioned issues the Hon’ble Supreme Court of India observed and held that:
- Under Section 44 of the Arbitration Act, a foreign award is defined as an arbitral award on differences between persons arising out of legal relationships, considered as commercial under the law in force in India, in pursuance of an agreement in writing for arbitration to which the New York Convention applies, and in one of such territories as the Central Government, by notification, declares to be territories to which the said Convention applies.
- It is necessary for an award to meet the following four ingredients in order to be designated as a foreign award under Section 44:
- The dispute must be considered to be a commercial dispute under the law in force in India,
- It must be made in pursuance of an agreement in writing for arbitration,
- It must be disputes that arise between “persons” (without regard to their nationality, residence, or domicile), and
- The arbitration must be conducted in a country which is a signatory to the New York Convention;
And all the above ingredients from (i) to (iv) are satisfied in the present case. Ingredient (ii) is satisfied given Clause 6 of the Settlement Agreement. Ingredients (iii) and (iv) are also satisfied on the facts of this case as the disputes are between two persons, i.e. two Indian Companies, and the arbitration is conducted at the seat designated by the Parties, i.e. Zurich, Switzerland, which is a signatory to the New York Convention.
- The Court referred to one of its earlier Judgments whereby it was held that a foreign award cannot be refused to be enforced merely because it was made between two Indian parties. Further, the Supreme Court held that since this plea had never been taken up before the High Court and earlier proceedings, the Appellant is not allowed to raise the said plea before this Court for the first time.
- The Court discussed several Judgments on the Arbitration Law and commentaries on the International Arbitration Law to draw distinction between the different points of view. The Court stated that the exception to Section 28 of the Arbitration Act specifically saves the arbitration of disputes between two persons without reference to the nationality of persons who may resort to arbitration. The Court held that that there is nothing in either Section 23 or Section 28 of the Contract Act, which prohibits two Indian parties from getting their disputes arbitrated at a neutral forum outside India.
Therefore, in this view, the Supreme Court held that nothing stands in the way of a party’s autonomy in designating a seat of arbitration outside India, even when both parties happen to be Indian nationals.
Lakshmi Vishwakarma
Senior Legal Associate
The Indian Lawyer & Allied Services