Between the Lines | Supreme Court: The parties to a contract who are Indian nationals or companies incorporated in India can choose a forum for arbitration outside India May 20, 2021
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The Hon’ble Supreme Court (“SC”) has in its judgment dated April 20, 2021 (“Judgement”), in the matter of PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited [CIVIL APPEAL NO. 1647 OF 2021], held that the parties to a contract who are Indian nationals or companies incorporated in India can choose a forum for arbitration outside India.
PASL Wind Solutions Private Limited (“Appellant”) and GE Power Conversion India Private Limited (“Respondent”) were companies incorporated under the Companies Act, 1956. In 2010, the Appellant had issued 3 purchase orders to the Respondent for supply of certain converters. Subsequently, disputes arose between the parties in relation to the expiry of the warranty of the said converters. Therefore, the parties entered into a settlement agreement dated December 23, 2014 (“Agreement”). Under the Agreement, it was provided that Zurich will be the seat for the arbitration and the arbitration proceedings shall be conducted by a sole arbitrator. Further, the Respondent agreed to provide certain delta modules along with warranties on these modules for the working of the converter panel. However, disputes arose again between the parties, whereby the Appellant claimed that, warranties for converters were not given. The Respondent argued that the warranties covered only the delta modules. Thus, on July 03, 2017, the Appellant issued a request for arbitration to the International Chamber of Commerce.
On August 18, 2017, the parties agreed to resolve disputes by way of arbitration and for that, the substantive law applicable would be the Indian law. The Respondent filed a preliminary application challenging the jurisdiction of the arbitrator on the ground that two Indian parties could not have chosen a foreign seat of arbitration. The Appellant contended that there was no bar in law. By Procedural Order No. 3 dated February 20, 2018 (“Order”), the arbitrator dismissed the Respondent’s preliminary application. The Order stated that the seat of arbitration was Zurich. The Respondent suggested Mumbai as a convenient venue to hold arbitration proceedings . At the Management Conference dated June 28, 2018, the arbitrator decided that even though the seat was Zurich, all hearings would be held in Mumbai.
An award dated April 18, 2019 (“Award”) was passed, rejecting the Appellant’s claim. As the Appellant failed to pay the amounts granted by the Award, the Respondent initiated enforcement proceedings under Sections 47 (Evidence) and 49 (Enforcement of foreign awards) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) and an interim application under Section 9 of the 1996 Act before the Gujarat High Court (“GHC”), within whose jurisdiction the assets of the Appellant were located. The GHC in the impugned judgment allowed the enforcement proceedings. Further, it was held that the Section 9 (Interim measures, etc., by Court) application was not maintainable since it is available for international commercial arbitrations (“ICA”) as specified in the proviso to Section 2(2) of the Act, and ICA as defined under Section 2(1)(f) of the 1996 Act requires at least one foreign party. This judgement of the GHC was challenged before the SC.
Whether two Indian companies can choose a neutral forum for arbitration outside India. In doing so, does the public policy of India interdict the party autonomy of such persons.
Contentions raised by the Appellant:
- A seat of arbitration cannot be designated outside India by 2 Indian parties as it would be contrary to Section 23 (Considerations and objects that are lawful) of the Indian Contract Act, 1872 (“Contract Act”), read with Sections 28 (Rules applicable to substance of dispute) and 34 (Application for setting aside arbitral award) of the Act. Further, by designating a seat outside India, it will also be open to the Indian parties to opt out of the substantive law of India, which would be contrary to the public policy of India.
- The foreign awards contemplated under Part II of the 1996 Act arise only from ICA. “ICA”, is defined in Section 2(1)(f) of the1996 Act and requires a foreign element when parties arbitrate outside India, that is, at least one of the parties is, inter alia, a national of a country other than India, or habitually resident in a country other than India, or a body corporate incorporated outside India. In the instant case, due to lack of a foreign element, the Award cannot be designated as a foreign award.
- The proviso to Section 2(2) of the 1996 Act was referred to state that, it furnished a bridge that joined Part II to Part I, as a result of which it became clear that Section 44 (Part II, Chapter I, Definition) of the 1996 Act refers only to ICA, as is stated in the said proviso. The 1996 Act is a self-contained code. In the absence of a foreign element, the Award cannot be the subject matter of challenge or enforcement either under Part I or Part II of the Act.
- It was argued that, there is a conflict between Section 10(3) of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 (“CCA”) and Section 47 of the Act. Further, by relying upon the non-obstante clause in Section 21 of the CCA, it was mentioned that the CCA must prevail. It was finally submitted that, the impugned judgment made by the GHC was made without jurisdiction because the present was not a case of an ICA but instead fell under the second category of “other than ICA”, as a result of which only a ‘district court’ would have jurisdiction.
Contentions raised by the Respondent:
- The Respondent first pointed out that the Appellant argued the exact opposite of what it itself sought under the Order, thus, it would now not be open to the Appellant to argue the exact opposite before the SC.
- Part I and Part II of the 1996 Act have been held to be mutually exclusive.
- Section 44 of the 1996 Act is modelled on the New York Convention which only requires “persons”, both of whom can be Indian, having disputes arising out of commercial legal relationships, which are to be decided in the territory of a State outside India, which State is a signatory to the New York Convention. Any attempt to breach the wall created between Part I and Part II, as held to be mutually exclusive in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [(2012) 9 SCC 552] (“BALCO”), cannot be approved by the SC.
- Both in the proviso to Section 2(2) of the 1996 Act and Section 10 of the CCA, the phrase “ICA” is not governed by the definition contained in Section 2(1)(f) of the Act, but would only refer to arbitrations in which the seat is outside India.
- Unlike the definition of “ICA” in Part I, under Section 44 (Part II) of the Act, nationality, domicile or residence of parties are irrelevant. Further, this is no longer res integra as it has been expressly decided under the pari materia provisions of the Foreign Awards (Recognition and Enforcement) Act, 1961 (“FAA”), in Atlas Export Industries v. Kotak & Co. [(1999) 7 SCC 61], that 2 Indian parties can enter into an arbitration agreement with a seat outside India, and resultant award would then be enforced as a foreign award.
- Further, relying upon a commentary on ICA published by the United Nations Conference on Trade and Development in 2005, it was argued that parties from the same State can agree to have their disputes resolved in a State other than the State to which they belong, as a result of which the New York Convention will then apply to enforce the aforesaid foreign award.
- Neither Section 23 nor Section 28 of the Contract Act condemns the choice of a foreign seat in arbitration. As a matter of fact, the Section 28 of the Contract Act expressly provides an exception for arbitration from the clutches of Section 28 of the Contract Act, that is, an express approval to party autonomy.
- Further, in Section 23 of the Contract Act, mention of “public policy” must be confined to clear and incontestable cases of harm to the public. Reliance was placed on paragraph 118 of BALCO (supra) to argue that Section 28(1) of the 1996 Act would apply only when the arbitration takes place in India and not when the seat is outside India.
Observations of the Supreme Court
Parts of the 1996 Act are mutually exclusive, Scope of Section 9 application and Scope of ICA:
The SC noted the relevant provisions of the1996 Act and also relied on the case of BALCO (supra) to conclude that, Part I and Part II of the 1996 Act are mutually exclusive. The SC analysed that, Part I deals with arbitrations where seat is in India and has no application to a foreign-seated arbitration. Further that, Part I is a complete code governing various aspects of arbitration proceedings and that a recourse to a court against an arbitral award may be made by an application for setting aside such an award, inter alia, under Section 34(2A) of the Act. On the other hand, Part II is not concerned with the arbitral proceedings but with enforcement of foreign awards in India. Therein, Chapter I deals with the enforcements of awards to which the New York Convention applies. Only exception being Section 45 of the Act, that deals with referring the parties to arbitration in the circumstances mentioned therein. Therefore, the SC also concluded that, Part II does not apply to arbitral proceedings once commenced in a country outside India.
Further, Section 2(2) of the1996 Act specifically states that Part I applies only where the place of arbitration is in India. It is a settled law that a proviso cannot travel beyond the main enacting provision as held in a number of cases. Therefore, the argument of the Appellant that the proviso to Section 2(2) of the 1996 Act was a bridge which connected the two parts of the Act, was rejected.
The SC noted that, the Respondent, by way of cross objection, had challenged the finding of the GHC that, an application under Section 9 of the 1996 Act would not be maintainable. The SC further observed that, the judgment in Bhatia International v. Bulk Trading S.A. [(2002) 4 SCC 105] (“Bhatia”) had incorrectly held that Section 9 of the 1996 Act would apply to arbitrations which take place outside India without any express provision to that effect. It was noted that the judgment of Bhatia (supra) had been expressly overruled in BALCO (supra) and pursuant thereto, a proviso to Section 2(2) of the 1996 Act was inserted to clarify that, in an arbitration which takes place outside India, assets of one of the parties are situated in India and interim orders are required qua such assets, the courts in India may pass such orders. Consequently, this part of the impugned judgment of the GHC was set aside.
The SC noted that, the four sub-clauses contained in the definition of “ICA” in Section 2(1)(f) of the 1996 Act clarify that the expression “ICA” contained therein is party-centric in the sense that at least one of the parties should, inter alia, be a person who is a national/habitual resident in any country other than India. However, on the other hand, the expression “ICA” is specifically spoken of in the context of a place of arbitration being between two parties in a territory outside India, as provided by Section 44 of the Act. The New York Convention applying to such territory, thus makes it an ICA. The SC noted that, under Section 44 of the Act, for an award to be designated as a foreign award, the following criteria are required to be fulfilled:
- the dispute must be considered to be a commercial dispute under the law in force in India;
- it must be made in pursuance of an agreement in writing for arbitration;
- it must be a dispute that arises between “persons” (without regard to their nationality, residence, or domicile); and
- the arbitration must be conducted in a country which is a signatory to the New York Convention.
The SC observed that, all conditions mentioned above were satisfied in the facts of this case. Further, the context of Section 44 of the 1996 Act was party-neutral, having reference to the place at which the award was made. Therefore, the argument that the very basis of Section 44 of the 1996 Act should be altered when two Indians have their disputes resolved in a country outside India was rejected. The SC also noted that, the argument of the Appellant would involve bodily importing the expression “ICA” into Section 44 of the Act, which cannot be done because of the opening words of the said section, “In this Chapter”, that is, Chapter I of Part II, and then applying the definition contained in Section 2(1)(f) (Part I) of the 1996 Act, must now be applied to Part II. The SC observed that, no canon of interpretation would permit acceptance of such an argument.
Public Policy and Party Autonomy:
The SC referred to the judgment of Atlas (supra) wherein it was held that, “Merely because the arbitrators are 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”. Therefore, the SC categorically held that a foreign award cannot be refused to be enforced merely because it was made between two Indian parties, under pari materia provisions of the FAA. The SC therefore, was unable to accede to the contention that Atlas (supra) cannot be regarded as an authority for the proposition that Sections 23 and 28 of the Contract Act are out of harm’s way when it comes to enforcing a foreign award under the FAA, where both parties are Indian companies.
The SC noted that the expression “public policy” appearing in Section 23 of the Contract Act is a relative concept capable of modification. The freedom of contract needs to be balanced with clear and undeniable harm to the public, even if the facts of a particular case do not fall within the crystallised principles enumerated in well-established ‘heads’ of public policy. The SC noted that, exception 1 to Section 28 of the Contract Act specifically saves the arbitration of disputes between two persons without reference to the nationality of persons who may resort to arbitration. It was noted that, the SC in Atlas (supra), referred to the said exception to Section 28 of the Contract Act and found that there is nothing in Sections 23 and 28 of the Contract Act which interdicts two Indian parties from getting their disputes arbitrated at a neutral forum outside India. The SC observed that, the principle of party autonomy has been held to be the guiding spirit of arbitration and that nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals.
The SC in TDM Infrastructure Private Limited v. UE Development India Private Limited [(2008) 14 SCC 271] had held contrary to the ratio of Atlas (supra) that arbitrations between Indian parties was not ICA and, therefore, could not be allowed to choose a foreign seat in derogation of Indian laws. The SC by this Judgement overruled TDM (supra) having not appreciated the law in its correct perspective. The judgements that relied on TDM (supra) to arrive at a similar conclusion were also over-ruled by this Judgement. The SC rejected the argument of the Appellant, with specific reference to Sections 28(1)(a) and 34(2A) of the 1996 Act, that, since two Indian parties cannot opt out of the substantive law of India and, therefore, ought to be confined to arbitrations in India, Indian public policy, as reflected in these two sections, ought to prevail. The SC noted that, Section 28(1)(a) of the 1996 Act, read with Sections 2(2), 2(6) and 4 of the 1996 Act, clarifies that where the place of arbitration is situated in India, in an arbitration other than an ICA (that is, an arbitration where none of the parties, inter alia, happen to be a foreign national or habitually resident in a foreign country), the arbitral tribunal shall decide the dispute in accordance with the substantive law for the time being in force in India. The SC observed that, Section 28(1)(a) of the 1996 Act makes no reference to an arbitration being conducted between two Indian parties in a country other than India, and cannot be held, by any process of reasoning, to interdict two Indian parties from resolving their disputes at a neutral forum in a country other than India. The SC noted that, even otherwise, BALCO (supra) specifically indicated that Section 28(1)(a) of the 1996 Act will not apply where the seat is outside India, as, in that event, the conflict of law rules of the country in which the arbitration takes place would have to be applied.
Conflict between CCA and the Act:
The Appellant had relied upon Section 10 read with Section 21 of the CCA to argue that in all cases between Indian nationals which result in awards delivered in a country outside India, Section 10(3) of the CCA would apply, as a result of which the impugned judgment having been made by the GHC, is made without jurisdiction. However, the SC observed that, when the Award was sought to be enforced, the explanation to Section 47 of the 1996 Act, clarified that it is the jurisdiction of the GHC alone.
This was rebutted by the Appellant by stating that since the explanation to Section 47 of the 1996 Act is in direct collision with provisions of the CCA, therefore, by virtue of Section 21, Section 10(3) of the CCA would prevail over the explanation to Section 47 of the 1996 Act. Therefore, the SC analysed further and noted that, Section 10(1) of the CCA applies to ICA, and applications or appeals arising therefrom, under both Parts I and II of the 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 “ICA” in Section 2(1)(f) 1996 Act will govern. However, when applied to Part II, “ICA” has reference to a place of arbitration taking place outside India. The SC thus construed that there is no clash at all between Section 10 of the CCA and the explanation to Section 47 of the 1996 Act, as an arbitration resulting in a foreign award, as defined under Section 44 of the Act, will be enforceable only in a ‘High Court’ under Section 10(1) of the CCA, and not in a district court under Section 10(2) or Section 10(3) of the CCA. The SC further noted that, the 1996 Act is a special act vis-à-vis the CCA which is general and that it applies to the procedure governing appeals and applications in cases other than arbitrations as well. The SC observed that, in R.S. Raghunath v. State of Karnataka, [(1992) 1 SCC 335], it was held that even a general law enacted late which contains a non-obstante clause does not override a special law. Therefore, the SC rejected the argument of the Appellant.
Decision of the Supreme Court
In conclusion, while answering the multiple issues in the observation, the SC held that there is no clear and undeniable harm caused to the public in permitting Indian parties/entities from designating a foreign seat of arbitration. Thus, parties to a contract who are Indian nationals or companies incorporated in India can choose a forum for arbitration outside India. The SC also upheld the impugned judgment of the GHC, except for the finding on the Section 9 application. The SC held that the application under Section 9 of the 1996 Act would be maintainable in the present case and disposed of the appeal accordingly.
The SC in this Judgement noted that, terms of the contract have to be understood in the way the parties intended them to be, particularly in agreements of arbitration, where party autonomy is the grundnorm. The SC in this Judgement rightly observed that, the balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian companies/nationals, to avail of a challenge procedure of a foreign country when, after a foreign award passes muster under that procedure, its enforcement can be resisted in India on the grounds contained in Section 48 of the 1996 Act, which includes the ground of the foreign award being held contrary to the public policy of India.
The SC observed that, in agreeing to a neutral forum outside India, parties agree that instead of one opportunity under Section 34 of the 1996 Act [with the grounds for setting aside the award being available under Section 34(2A)], the parties also have a recourse to challenge the award in a court/tribunal of foreign seat for setting aside the arbitral award. Further, the parties also have an opportunity to resist enforcement in India under the grounds mentioned in Section 48 of the 1996 Act. However, the SC cautioned that, if it was found that two Indian companies/nationals have circumvented a law which pertains to the fundamental policy of India, such foreign award may then not be enforced under Section 48(2)(b) of the 1996 Act.
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