Arbitration: Indian parties and foreign seats

A foreign seat of arbitration is often preferred by the international companies in contracts involving their Indian subsidiary. However, Indian law remained ambiguous on whether two Indian parties can choose a non-Indian seat of arbitration and if the interim orders that are indispensable to secure assets apply to such arbitrations. These ambiguities are now resolved by the Supreme Court judgment in PASL Wind Solutions Pvt Ltd Vs GE Power Conversion India Pvt Ltd. It has held that two Indian persons have the necessary authority to designate a neutral forum outside India for dispute resolution.

In PASL, the dispute resolution clause read, “In case no settlement can be reached through negotiations, all disputes, controversies or differences shall be referred to and finally resolved by the Arbitration in Zurich in the English language, in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce, which Rules are deemed to be incorporated by reference into this clause.”

Award, petition

An award was passed and GE filed a petition before the Gujarat High Court under Section 48 of the (Indian) Arbitration and Conciliation Act, 1996 for enforcement of the award and also an application under Section 9 for interim protection. The High Court, while disposing off the Section 9 application, ruled that two Indian parties can choose a foreign seat of arbitration; however, if they choose a foreign seat, they cannot seek interim protection from an Indian court under Section 9. This was appealed.

The Supreme Court held that the provisions for recognition and enforcement of foreign awards are concerned with seats rather than the location of the parties. Thus, the award rendered by such neutral forum shall be a “foreign award” and enforceable without regard of the nationality of the involved parties.

It was argued that the provisions pertaining to interim measures, taking assistance of the court and appeals apply only to “international commercial arbitration”. As at least one party must be foreign, two Indian parties arbitrating at a non-Indian seat is not included within the meaning of the international commercial arbitration, thus making foreign arbitration ineligible for interim measures. Rejecting this contention, the Supreme Court held that the Section 2(2) includes all arbitrations seated outside India including foreign arbitrations. Thus, the judgment is quite pro-arbitration.

However, Indian persons choosing a foreign seat should be mindful of three considerations.

First, the interim measures are available if there is no agreement to the contrary, and an arbitral award made or to be made is enforceable and recognised under Part II. It remains somewhat uncertain if this “agreement to the contrary” must be an express or implied one. It has been argued that the choice of a foreign seat per se implies the exclusion of recourse to the Indian courts except for recognition and enforcement purposes. However, the High Courts of Bombay and Delhi have taken a view that merely by choosing a foreign seat, the parties cannot be said to have impliedly excluded the applicable Part I provisions.

Second, it is advisable that the Indian parties designate a foreign seat that is notified as a reciprocating territory by the government as Section 9 interim reliefs may be sought from the Indian Courts only if Part II applies to the award. Otherwise, a party may obtain an arbitral award in its favour only to realise that the entity against which it has to enforce the award has been stripped of its assets and has been converted into a mere shell. If the award is not enforceable and recognisable, there would be no cause to grant interim protection. There is, however, no prohibition on granting interim reliefs pending enforcement of foreign award.

Third, the Supreme Court observed that if the dispute pertains to transactions concluded in India and breach thereof, the substantive law of India will be applied by the arbitrator in accordance with the conflict of law rules of the country in which the arbitration takes place. Even otherwise, a ground may be made out that the enforcement of a foreign award would be contrary to the public policy of India. If, on the facts of a given case, it is found that the two Indian nationals have circumvented a law that pertains to the fundamental policy of India (such as exporting something to Pakistan), such foreign award may then not be enforced.

Thus, instead of one bite at the cherry under Section 34 where arbitration between the two Indian nationals is conducted in India, the judgment now allows two bites—one, recourse to the foreign courts for setting aside the arbitral award on grounds available in that country and two, resist enforcement of it in India under Section 48.

(The authors are Managing Partner and Associate, respectively, with Advaya Legal, a law firm)

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