Arbitration act: No, not in India, let’s go abroad

In essence the Supreme Court has reaffirmed the juridical relevance of the seat of arbitration.

By Ketan Gaur and Kaustub Narendran

While no times more than the present call for suggestions for a majestic getaway, we are sorry to disappoint – this is not a travel blog.

Every once in a while, a seemingly simple and elegant question concerning the arbitration regime in India provokes deep inquiry into the structure and purpose of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), challenging our assumptions and forcing us to reimagine. One such question, viz. “can two Indian parties agree to arbitrate their disputes outside India”, recently came up before the Supreme Court in PASL Wind Solutions Pvt. Ltd. v. GE Power Conversion Pvt. Ltd.

Briefly, the Appellant and the Respondent, both Indian companies, had contractually agreed to settle their disputes relating to the purchase of certain converters by arbitration in Zurich, Switzerland. The Appellant (as the Claimant in the arbitration), having lost its case and ordered to pay costs by the sole arbitrator, challenged the arbitral award under Section 34 of the Arbitration Act and resisted the Respondents’ enforcement by contending that the arbitration agreement was invalid since two Indian parties were incapable of agreeing to a foreign seat of arbitration.

The applicability of the Arbitration Act is guided by the legal jurisdiction (or ‘seat’) of the place that an arbitral award is made in:

• Where the agreement between the parties stipulates that arbitral proceedings shall have their legal jurisdiction in India, then Indian Courts under Part I of the Arbitration Act would exercise supervisory jurisdiction as regard the commencement and conduct of the arbitration and also hear challenges to and enforce the arbitral award; (“Part I Arbitration”) and
• Where the arbitral proceedings are conducted outside the jurisdiction of India, the role of Indian Courts would be limited to aiding commencement and assisting in enforcement of the award, aside from required interim relief and the collection of evidence in aid of arbitration. (“Part II Arbitration”)

Insofar as Part I Arbitrations are concerned, the Arbitration Act created a category of arbitrations called “international commercial arbitration” (“ICA”), where at least one of the parties is a non-Indian person/ entity (See. Section 2(1)(f), Arbitration Act).

ICA as a category is relevant to Part I Arbitrations to the extent that:

• only in ICA does the arbitral tribunal have discretion to deviate from applying Indian Law to the substance of the dispute (See. Section 28(a) and (b), Arbitration Act); and
• the additional ground to challenge an arbitral award, i.e. of “patent illegality”, is unavailable in the case of an ICA. (See. Section 34(2A), Arbitration Act)

The above rules made be best understood in the context of the following example:

Indian companies A and B enter into a contract for the installation and maintenance of certain wind turbines in India and agree to arbitrate disputes in India under English Law (“Contract 1”). A and B also enter into tripartite agreement with a German company C for the procurement and supply of the said turbines and also agree to arbitrate disputes in India under English Law (“Contract 2”).

• Should a dispute arise under Contract 1, the arbitral tribunal will have no choice by to apply Indian law to the dispute since both A and B are Indian Companies. Either party can also subsequently allege that the tribunal’s application of Indian law was patently illegal.
• However, in disputes under Contract 2, the involvement of a German company would make the same an ICA, and the arbitral tribunal would be free to apply English Law despite the arbitration being seated in India. None of the parties would be able to challenge the award on the ground of patent illegality.

Keeping this example in mind, should it be permissible for A and B to continue to apply English Law to Contract 1 by deciding to arbitrate their disputes in London instead of doing so in India?

So far, various High Courts have come to conflicting conclusions, with Bombay High Court answering the question in negative and the Madhya Pradesh High Court and the Delhi High Court answering in the affirmative. In its wonderfully nuanced judgement the Supreme Court of India has sided with the Madhya Pradesh and the Delhi High Courts in approving such an arrangement. The decision proceeds on the premise that the term “foreign award” (See. Section 44, Arbitration Act) is seat-centric and party-neutral.

In essence the Supreme Court has reaffirmed the juridical relevance of the seat of arbitration, concluding that there is no limitation either under the Arbitration Act or under larger public policy to limit Indian parties from conducting arbitrations and challenging awards in foreign jurisdictions, with the role of Indian courts being circumscribed to only consider the recognition and enforcement of such awards (which can be interfered with only under extremely narrow grounds).

The Supreme Court has re-emphasised “party autonomy”, the so-called “brooding spirit” of the Arbitration Act, in locating arbitral proceedings and in the choice of procedural law (a.k.a. lex loci or Proper Law of Arbitration). Readers would appreciate that a constellation of considerations influence decisions regarding the jurisdiction of arbitration such as the place of performance of the contract, relationship to third parties, location of assets and familiarity or preference of parties with the various judicial systems. With the judgement in PASL Wind the Supreme Court has reassured Indian parties that they are free to locate arbitrations around the world which shall be recognized and enforced by Indian Courts.

The decision is also relevant insofar as Supreme Court appears to have appreciated the debates between the contracting parties in the travaux to the New York Convention, 1958 and the effort to ensure that nationality of the parties to a dispute is not determinative of the legal status of the arbitration (unlike the earlier Geneva Convention, 1927).

Further, our case journals are full of examples where concepts which are only relevant to domestic arbitrations regarding constitution of tribunals, challenges to awards and enforcement have been freely taken out of context and applied to foreign arbitrations. The said decision shall also be useful in remedying these issues and in re-affirming the conceptual boundary between domestic and foreign arbitrations and the differing role of Courts in these situations.

In the course of arguments, the Appellant contended that such arrangements were opposed to “public policy” insofar as Indian parties may now seek to evade Indian law but seating their arbitration proceedings outside India. While the Supreme Court has appreciated this concern of wilful evasion, it has drawn solace from the fact that the rules applicable to resolving conflict of laws would anyway make deviation from mandatory substantive law unlawful.

For instance, in the Example provided above, even if Contract I provided for arbitration seated in London and under English substantive law, mandatory laws of India (such as law regulating import/ export, product liability, taxation etc.) will have to be necessarily applied by the arbitral tribunal.

In other words, the freedom to decide the jurisdiction of the arbitration would not amount to freedom to deviate from the mandatory substantive law applicable to the transactions/ performance of the contract. With the judgement in PASL Wind, one may expect deeper engagement of Indian Courts at the enforcement stage with the conflict of law rules, a hitherto ignored aspect of common law in India.

In conclusion, the authors believe that the industry ought to welcome the decision of the Supreme Court in PASL Wind for its recognition of international commerce as a complex ecosystem, traversing various legal jurisdictions which demands greater flexibility to fashion dispute-resolution mechanisms, irrespective of the nationality of the contracting parties.

(Ketan Gaur is counsel, Trilegal and Kaustub Narendran is associate, Trilegal. The views expressed are personal and not necessarily that of Financial Express Online)