[Abhijit and Tanmay are students at NALSAR, Hyderabad.]
In PASL Wind Solutions Private Limited v. GE Power Conversion India, the Supreme Court of India (Court) clarified the uncertainty regarding Indian parties choosing a foreign seat for arbitration. Briefly, the dispute resolution clause provided for arbitration, with Zurich as the seat. This case revolves around an award rendered in Zurich in the respondent’s favor. Significant for our analysis is that both parties were incorporated in India. The two primary questions posed by this situation were whether Indian parties could choose a foreign seat, and whether that would classify a subsequent award as foreign.
Analysis of the Judgment
The first question was whether the choice of a foreign seat was available to Indian parties at all. The appellant contended that granting Indian parties this option would be contrary to public policy as it would allow them to contract out of Indian laws where they would otherwise be applicable. With respect to this contention, the Court cited multiple cases such as Gherulal Parakh v. Mahadeodas Maiya and Vodafone International Holdings BV v. Union of India to emphasize the need to balance freedom of contract with clear and undeniable harm to the public. It further relied on the reasoning in Atlas Export v. Kotak, and pronounced that since nothing in either Section 23 or 28 of the Indian Contract Act 1872 prohibits Indian parties from participating in foreign-seated arbitration, there exists no discernible threat to the public that could constitute a public policy contravention. On the issue of avoidance of mandatory Indian laws by Indian parties, the Court found that if any such circumvention contravenes the fundamental policy of India, the award would be rendered unenforceable under Section 48 of The Arbitration and Conciliation Act 1996 (Act).
The second question was whether an award produced as a result of foreign-seated arbitration between two Indian parties could qualify as a ‘foreign award’ within the meaning of Section 44. The appellant claimed that the expression 'unless the context otherwise requires' in Section 44 creates scope for importing the definition of ‘international commercial arbitration’ from Section 2(1)(f) in Part I of the Act into the ambit of Section 44. This would imply that a foreign award necessitates an arbitration involving individuals who are nationals of, or reside in, a foreign country, or entities that are incorporated or centralized in foreign nations, or foreign governments. However, the Court upheld the findings of in BALCO, and rejected this submission, as Parts I and II of the Act are mutually exclusive.
This reasoning of the Court lies in the difference in the content of the two parts. Part I is a complete code in itself. It governs the procedural facets of India-seated arbitrations by specifying the procedure for appointing arbitrators, forms and contents of awards, and so on. Part II, however, intends to regulate the enforcement of foreign awards in India. It was included solely to ensure India’s compliance with its obligations as a signatory to the Convention on Recognition and Enforcement of Foreign Awards (NYC). Prior to the Act, these obligations did not exist, and the enforcement of foreign awards was regulated by the Foreign Awards Act 1961.
In addition to this, the Court intended to highlight a pertinent distinction between international commercial arbitrations and foreign-seated arbitrations. The former is clearly party-centric, as it requires the parties to belong to different nations. However, a foreign award does not attain a foreign character due to the participation of individuals or entities from different countries. Inspired by the NYC, Section 44 does not look to the nationality, domicile or residence of the parties to determine whether an arbitral award constitutes a foreign award. The only relevant consideration in making this determination is the seat of arbitration. This is because Section 44 only requires that the dispute be decided in a country other than India, which is also a signatory to the NYC. This interpretation is also supported by the travaux preparatoires of the NYC. Multiple countries insisted on the inclusion of the nationality of parties as a defining factor of a ‘foreign award’. In spite of this, it was finally concluded that the nature of the award under the NYC would be based only on the location of the seat. Accordingly, Section 44 can be termed as location-centric and party-agnostic. Therefore, the requirements of an international commercial arbitration under Section 2(1)(f) cannot be applied to Section 44.
Possible Implications
The substantive law of India is mandatorily applied in domestic arbitrations involving two Indian parties as per Section 28 of the Act. Before this judgment, there was uncertainty as to whether Indian parties could choose a foreign seat. Due to this uncertainty, Indian parties had to generally resort to an Indian seat for arbitration. Consequently, two Indian parties engaging in arbitration were deprived of their choice of substantive law, thereby diminishing their autonomy to select the applicable law.
However, in this judgement, the Court established that two Indian parties are permitted to arbitrate in a foreign seat, and the provisions under Part I would not be applicable. Now, Indian parties are free to subject their arbitration to the substantive law of their choice by choosing a foreign seat. This is because Section 28 comes under Part I, and would be inapplicable to foreign-seated arbitrations. This marks a significant stride in furthering the principle of party autonomy in Indian arbitration.
In addition to this, two Indian parties may also evade the possibility of having an award reviewed on the ground of patent illegality under Section 34(2A) in Part I of the Act. The origin of this provision can be traced to the 246th Report of the Law Commission of India. It suggested that domestic and foreign awards cannot be subjected to the same level of scrutiny on the basis of public policy, and the scope for interference of the courts should be greater in domestic awards. In order to accommodate this wider scope for scrutiny in domestic awards, patent illegality was introduced as an additional ground for setting aside arbitral awards under Section 34, and not Section 48, which is a similar provision relating to foreign awards.
A clear distinction between the public policy grounds and patent illegality was formulated by the Court in Ssangyong v. NHAI. It held that public policy grounds are limited to grossly aberrant instances such as an award being in violation of a law safeguarding national interests or so immoral and unjust that it upsets the conscience of the court. On the other hand, the phrase 'patent illegality' enjoys a more far-reaching purview comprising any illegality that can be traced to the core of the issue. To avoid the threat of an award being placed under the microscope of patent illegality and consequently being subjected to stricter inspection, two Indian parties may choose a foreign seat. In such a scenario, Section 48 would be the applicable provision, which provides a much higher standard for an award to be set aside. Again, this may incentivize Indian parties to opt for foreign-seated arbitration, thus hindering the development of the arbitration regime in India. However, in the event of a foreign seated arbitration, the award will still be subject to the setting aside procedures of the seat. These are a few notable repercussions of this verdict that may present a conundrum for Indian parties choosing a seat for arbitration.
Conclusion
While courts in India have gained a reputation for being interventionist in their attitude towards arbitration, this case has significantly furthered the principle of party autonomy. Henceforth, not only will Indian parties be free to choose a foreign seat of arbitration, but by doing so they may also exercise a choice of substantive law without losing the protection of interim relief measures. This will ensure that foreign awards are not rendered useless due to an award-debtor liquidating its assets in India before the award-creditor has a chance to enforce it. The clarity on the availability of foreign seats to Indian parties will also allow those who were forced to arbitrate domestically to choose a foreign seat if they wish to do so, without concerns relating to enforcement. This furthers the intended international nature and autonomy-driven approach of arbitration. However, whether this judgement will help develop a pro-arbitration regime in India is yet to be seen.