The Law Point
The present case was appealed before the Supreme Court by the Appellant as they were aggrieved by the decisions of the High Court of Gujarat. The bench hearing the petition comprised of Hon’ble Judges- Justice Rohinton Fali Nariman, Justice B.R. Gavai and Justice Hrishikesh Roy. The settlement agreement between the parties was governed by Indian law under which the dispute arose and both the companies were Indian Companies. However, the seat of arbitration was Zurich. The excerpt of which is mentioned below.
In case no settlement can be reached through negotiations, all disputes, controversies or differences shall be referred to and finally resolved by 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. The Arbitration Award shall be final and binding on both the parties.
The question before the Apex Court was-
A. Whether two companies incorporated in India can choose a forum for arbitration outside India?
B. Whether an award made at such forum outside India, to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 applies, can be said to be a foreign award under Part II of the Arbitration and Conciliation Act, 1996 and be enforceable as such.
The decision of the Tribunal: In the course of the proceedings, the tribunal ruled that the seat of the arbitration was Zurich but that hearings would be conducted in Mumbai. In 2019, the tribunal issued a final award dismissing PASL’s claims and awarded GE India damages and costs. GE India subsequently commenced enforcement proceedings before the Gujarat High Court under Sections 47 and 49 of the Indian Arbitration and Conciliation Act 1996, contained in Part II of the Act, which applies to the enforcement of foreign awards. Part II of the Act gives effect to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. GE India also sought interim relief from the Court under Section 9 of the Act to prevent PASL from dissipating its assets to avoid complying with the award.
There are many judgments on this issue. Some High Courts in India had taken a pro-arbitration approach on this issue and enforced the parties’ choice of a foreign arbitral seat, while others had not. The Madhya Pradesh High Court in Sasan Power v. North American Coal Corporation (2015 SCC OnLine MP 7417), concluded that “two Indian Companies are permitted to arbitrate their dispute in a foreign country.” To support its conclusion, the Madhya Pradesh High Court relied on the Supreme court’s decision in Atlas Exports Industries v. Kotak & Company (1999) 7 SCC 61, where the Supreme Court held that “merely because the arbitrators were situated in a foreign country cannot by itself be enough to nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement.” This approach was also taken by the Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited [CS (Comm) 447/2017].
The decision of the Gujarat High Court: In GE Power Conversion India Pvt Ltd v. PASL Wind Solutions Pvt Ltd. [(2019) R/Petn. Under Arbitration Act Nos. 131 and 134 of 2019], the Gujarat High Court found that Zurich was the seat of the arbitration and that Indian law did not prevent two Indian parties from choosing a foreign arbitral seat. As the proceedings were seated in Zurich, the award was a foreign award that was subject to the enforcement regime in Part II of the Act. The Gujarat High Court, however, rejected GE India’s request for interim relief on the basis that Section 9, contained in Part I of the Act, only applied to “international commercial arbitrations,” as defined in Section 2(1)(f) read with Section 2(2) of the Act. It, therefore, held that Section 9 could not apply in this case as both parties were Indian.
PASL contended that it would be contrary to the public policy of India if two Indian parties could designate a foreign arbitral seat, under Sections 23 and 28 of the Contract Act, read with Sections 28(1)(a) and 34(2A) of the Act. In broad terms, Section 23 of the Contract Act provides that the object of an agreement is unlawful if it is, among other things, opposed to the public policy of India. Section 28 of the Contract Act provides that a contract that restricts a party from enforcing its contractual rights before Indian courts is void. However, arbitration agreements are specifically exempted from the application of Section 28 of the Contract Act.
The Supreme Court’s decision settles an important question of law and upholds party autonomy. It also provides businesses that operate in India, including foreign companies with local subsidiaries, much-needed clarity on these issues. Those entities can now choose foreign arbitral seats in their arbitration agreements, even if the subject matter of their contracts and counterparties are entirely situated within India.
Judgment
Whether there is any direct collision between the Himani by stating that since the explanation to section 47 is in direct collision with section 10(3) of the Commercial Courts Act, vide section 21 of, the Commercial Courts Act, section 10(3) would prevail over the explanation to section 47. One is first to appreciate the purport of the expression “international commercial arbitration” contained in section 10(1) of the Commercial Courts Act. We have already seen how section 2(1)(f) of the Arbitration Act which defines the expression “international commercial arbitration” is only for a limited purpose, namely, for the purpose of Part I of the Arbitration Act. Under section 2(2) of the Commercial Courts Act, words and expressions used and not defined in the Commercial Courts Act but defined in the CPC and the Indian Evidence Act, 1872 shall have the same meanings respectively assigned to them in that Code and the Act. Conspicuous by its absence is the definition contained in the Arbitration Act.
In this context, it has also been held that the Arbitration Act is a special Act vis-à-vis the Commercial Courts Act which is general, and which applies to the procedure governing appeals and applications in cases other than arbitrations as well. In Kandla Export Corpn. v. OCI Corpn., (2018) 14 SCC 715, this Court held:
“20. Given the judgment of this Court in Fuerst Day Lawson [Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., (2011) 8 SCC 333 : (2011) 4 SCC (Civ) 178] , which Parliament is presumed to know when it enacted the Arbitration Amendment Act, 2015, and given the fact that no change was made in Section 50 of the Arbitration Act when the Commercial Courts Act was brought into force, it is clear that Section 50 is a provision contained in a self-contained code on matters pertaining to arbitration, and which is exhaustive in nature. We have already seen how section 2(1)(f) of the Arbitration Act which defines the expression “international commercial arbitration” is only for a limited purpose, namely, for the purpose of Part I of the Arbitration Act.
Under section 2(2) of the Commercial Courts Act, words and expressions used and not defined in the Commercial Courts Act but defined in the CPC and the Indian Evidence Act, 1872 shall have the same meanings respectively assigned to them in that Code and the Act. Conspicuous by its absence are definitions contained in 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 that 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).
It is interesting to note that the Arbitration and Conciliation (Amendment) Act, 2015 and the Commercial Courts Act, 2015, both came into effect from 23.10.2015. In R.S. Raghunath v. the State of Karnataka, (1992) 1 SCC 335, this Court held that even a later general law which contains a non-obstante clause does not override a special law as both must be held to operate.
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.
After due deliberations and concerted analysis of the arguments presented by both parties, the court delivered its judgment. While delivering the judgment, the bench referred to various laws and provisions of the Arbitration Act, The Contract Act and The Commercial Courts Act. The bench also referred to various previous Judgments. The bench delved deep into the understandings of the various concepts that are pertinent to the case. Highlights of the same are mentioned hereunder:
- PASL contended that the enforcement proceedings initiated under Sections 47 and 49 of the Act only applied to “foreign awards,” and that those provisions did not apply to this case because applying the closest connection test, Mumbai (and not Zurich) was the seat of arbitration. It, therefore, argued that the award was not a “foreign award,” but was Indian-seated. The Supreme Court disagreed with the contentions of PASL. The Court explained that the closest connection test only applies when the parties or the tribunal have not designated an arbitral seat. In this case, it was clear from the arbitration agreement that the seat was in Zurich. The arbitral tribunal had also determined that the seat was Zurich. The Supreme Court thus held that there was no basis to apply the closest connection test to determine the arbitral seat.
- The Supreme Court rejected PASL’s arguments and, in particular, its attempts to read the definition of “international commercial arbitration” contained in Section 2(1)(f) in Part I of the Act into the definition of “foreign awards” contained in Section 44 in Part II of the Act. Following its decision in Bharat Aluminium Co v. Kaiser Aluminium Technical Services (2012) 9 SCC 552, the Supreme Court noted that Part I of the Act is a comprehensive code that deals with arbitrations seated in India. Part II, on the other hand, is primarily concerned with the enforcement of foreign awards. The two parts thus do not overlap in the application and, in the words of the Supreme Court, are mutually exclusive. Based on that understanding of the Act, the Supreme Court held that the definition of “international commercial arbitration” in Section 2(1)(f) in Part I of the Act could not be imported into Section 44 because that term is “party-centric,” while the same term when spoken about in the context of Part II of the Act is meant to have a “place-centric” focus. Put differently, for the purposes of Part II of the Act, the only relevant factor is whether the parties had chosen a foreign arbitral seat, regardless of whether the parties themselves have any foreign nexus.
- The Supreme Court also clarified that there are four elements that must be satisfied for an award to be designated a “foreign award” under Section 44: (i) the dispute must be a commercial dispute as understood under Indian law; (ii) the award must be made pursuant to a written arbitration agreement; (iii) it must be a dispute that arises between “persons” (without regard to their nationality, residence, or domicile), and (iv) the arbitration must be conducted in a country that is a signatory to the New York Convention. The Court found that the arbitral award, in this case, satisfied all four elements and was, therefore, a “foreign award” under Part II of the Act.
- The Supreme Court clarified that Section 28 of the Indian Contract Act contains an express carve-out for arbitration agreements. That provision thus does not impose any limitations on the terms of arbitration agreements, which includes the choice of the arbitral seat.
- For Section 23 of the Contract Act, the Supreme Court held that there was nothing in the public policy of India that limited party autonomy in the selection of a foreign arbitral seat by Indian parties. The Supreme Court explained that the freedom of contract must be balanced against clear and undeniable harm to the public and that no such harm existed in allowing Indian parties to choose a foreign arbitral seat.
- The Supreme Court held that as a matter of statutory interpretation of Section 28(1)(a) of the Act, Indian substantive law is only mandatorily applicable to domestic disputes seated in India. That does not preclude the choice of a foreign arbitral seat by two Indian parties. However, the Court also suggested that, if on the facts of a case, two Indian parties chose a foreign seat with the intention to circumvent Indian public policy, the enforcement of any foreign award rendered into those proceedings may be resisted on the basis of the public policy exception under Section 48(2)(b) of the Act.
- For the cross-objection of GE India, the Supreme Court concluded that GE India’s request for interim relief was valid, rejecting the Gujarat High Court’s conclusion that Section 9 of the Act could not apply in aid of a foreign seated arbitration between two Indian parties. Section 9 of the Act only applies to arbitrations under Part I of the Act and to foreign seated arbitrations that qualify as “international commercial arbitrations.” In this regard, the Court found that given its decision that the definition of “international commercial arbitration” under Section 2(1)(f) of the Act did not apply to foreign seated arbitrations, it did not matter that the parties lacked a foreign nexus, as required by Section 2(1)(f). Applying its separate finding that a proceeding could also qualify as an “international commercial arbitration” based on the place of the arbitration, the Supreme Court held that a foreign seated arbitration between two Indian parties acquired the character of being “international” simply by virtue of the choice of a foreign seat.
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