The Supreme Court of India upholds party autonomy on choice of foreign seat

Five months after our previous report on the Gujarat High Court’s judgment in GE Power Conversion Pvt. Ltd. v. PASL Wind Solution Pvt. Ltd.,¹ the Supreme Court has ruled that two Indian parties may choose a foreign seat of arbitration and any award resulting from the arbitration  would be enforceable in courts across India. In its groundbreaking judgment, the Supreme Court also found that interim relief under the Arbitration and Conciliation Act, 1996 (Arbitration Act) would be available for foreign seated arbitrations between two Indian parties, notably setting aside a contrary view held by the Gujarat High Court. Indian parties and foreign investors with Indian registered companies now have the freedom to choose a suitable seat outside of India to resolve their commercial disputes through arbitration.

PASL Wind Solutions Private Limited v GE Power Conversion India Private Limited²

Parties’ contentions

 PASL Wind Solutions Private Limited (PASL) argued that the Arbitration Act precludes two Indian parties from designating a foreign seat of arbitration since ‘foreign award’ under Part II of the Arbitration Act would necessarily arise from an ‘international commercial arbitration’ as defined under section 2(1)(f) of the Arbitration Act (Part I). Part I of the Arbitration Act requires that at least one of the parties be a non-Indian national or resident or incorporated outside India. Accordingly, the present award involving two Indian companies would not qualify as a foreign award under section 44 of the Arbitration Act.

On the other hand, GE Power Conversion India Private Limited (GE) contended that the nationality, domicile or residence of parties is irrelevant for the purposes of section 44 of the Arbitration Act (definition of ‘foreign award’). This was premised on the New York Convention, which permits parties from the same State to agree to have their disputes resolved in a third State and for the resulting award to be enforceable as a foreign award under the Convention.

Foreign seat

The issue focussed on whether the Arbitration Act permits two domestic Indian parties to opt for a foreign seated arbitration. The Supreme Court found that the parties had unequivocally elected Zurich as the seat of arbitration.

The Court reiterated that Part I and II of the Arbitration Act are mutually exclusive, where Part I is a “complete code” for India-seated arbitrations and Part II solely concerned  the enforcement of foreign awards. Consequently, the Court did not find merit in imposing a nationality requirement in section 44 of the Arbitration Act. The Court noted that there are four elements that distinguish an award as a ‘foreign award’: (i) the dispute must be considered a commercial dispute under Indian law, (ii) the award must be made pursuant to an agreement in writing for arbitration; (iii) the dispute must arise between “persons” (without regard to nationality, residence or domicile); and (iv) the arbitration must be concluded in a country which is signatory to the New York Convention. The Court accordingly held that all four criteria were fulfilled in this case.

Further, the Court observed that contrary to other jurisdictions, which may require a foreign connection for an award to fall within the scope of the New York Convention, no such caveat is contained in the Arbitration Act.

With respect to PASL’s argument that Indian parties could utilise the choice of foreign seat to circumvent substantive rules of Indian law, the Court considered that this issue would not arise in most cases by virtue of the tribunal applying the substantive law in accordance with the conflict of law rules at the seat of arbitration. In any event, an aggrieved party would still have recourse under section 48(2)(b) of the Arbitration Act (conditions for enforcement of foreign awards) if the foreign award is contrary to the fundamental policy of Indian law.

While appreciating the balance between freedom of contract and party autonomy on the one hand and clear and undeniable harm to the public on the other, the Court found that no clear and undeniable harm can be caused to the public in permitting two Indian nationals to choose a foreign seat of arbitration in circumstances where enforcement of foreign award can still be resisted in India on the grounds contained in section 48 of the Arbitration Act. The Court accordingly upheld party autonomy in designating a foreign seat even if both parties were Indian nationals.

Availability of Interim Relief

Previously, the Gujarat High Court had ruled that interim relief under section 9 of the Arbitration Act (interim relief by courts) would not be available to Indian parties with a foreign seat of arbitration. To the contrary and much to the relief of global stakeholders that do business in India, the Supreme Court held that Indian parties in foreign seated arbitrations were entitled to seek interim relief from Indian courts under section 9 of the Arbitration Act and accordingly set aside the corresponding part of the Gujarat High Court judgment. 

Concluding remarks

The Supreme Court’s decision is a welcome development that has settled the much debated question on whether two Indian parties may choose a foreign seat of arbitration.  The decision will likely accelerate the trend of Indian parties seating their arbitrations abroad and have a significant impact on negotiation of arbitration agreements in India-related transactions. Despite the considerable improvement in the dispute resolution landscape in India, with credit to the many pro-arbitration judgments of the Indian judiciary, parties to Indian transactions are likely to favour international seats over an Indian seat. This maybe for a number of reasons, a primary one being to avoid the delays that plague the Indian court system.   

DISCLAIMER: DLA Piper is not licensed to advise on Indian law. The above publication has been prepared for the purposes of sharing information and should not be treated as legal advice.

¹R/Petn. under Arbitration Act No. 131 of 2019 with R/Petn. under Arbitration Act No. 134 of 2019 decided on 3 November 2019

²(Civil Appeal No. 1647 of 2021) decided on 20 April 2021