Foreign Seat : A ticket for Indian Parties to bypass Indian Law

(This is authored by Sagar Agrawal (III year) Aditi Mishra (III year) of ILS Law College, Pune.)

Introduction 

Arbitration is preferred over litigation for two primary reasons - party autonomy and speedy settlements without involving recurring trips to the already burdened Indian courts. However, the concept of party autonomy has provided a cause for parties to litigate in courts, thereby leading to the very outcome sought to be avoided through arbitration.

Choice of foreign seat of arbitration to Indian parties and the applicable substantive law has been a contentious issue before various Indian courts. The issue touches upon the aspects of nationality, public policy, party autonomy, and provisions of the relevant governing statutes. The law pertaining to foreign seated arbitration and the choice of substantive and curial law has been settled by a 3-Judge Bench of Supreme Court of India in the case of PASL Wind Solutions Pvt. Ltd. v GE Power Conversion India Pvt. Ltd. (“PASL”).

Seat vs Venue

Section 20 of the Arbitration and Conciliation Act 1996 (“A&C Act”) defines 'Place of Arbitration' but the terms 'Seat' and 'Venue’ have not been defined. It is vital to understand the difference between these two terms to settle the question of curial law. The same has been propounded through a string of judgments, summarized below.

In Bharat Aluminium Company v Kaiser Aluminium Technical Service Inc. (“BALCO”), the Supreme Court (“SC”) stated that the ‘Seat’ of arbitration is the “centre of gravity of the arbitration” i.e., the place where the arbitration is supposed to be anchored. On the other hand, ‘Venue’ is merely the geographical location where such arbitration meetings are conducted for convenience. It is the ‘seat’ of the arbitration that determines the ‘lex arbitri’ or the procedural law. The judgement also granted concurrent jurisdiction to two different courts to exercise power under the A&C Act i.e., the court where the cause of action is located would have jurisdiction along with the court where the arbitration takes place.

However, the SC in Indus Mobile Distribution Private Limited v Datawind Innovations Private Limited deviated from the concurrent jurisdiction rule. Ultimately the law was settled in BGS SGS SOMA JV v. NHPC Ltd. where the SC stated that in case of unqualified nomination of a seat, courts at the seat will have exclusive jurisdiction over the entire arbitral process. In addition, the court emphasized that “wherever there is an express designation of a “venue”, and no designation of any alternative place as the “seat”, combined with a supranational body of rules governing the arbitration, and no other significant contrary indicia, the inexorable conclusion is that the stated venue is actually the juridical seat of the arbitral proceeding.”

The A&C Act affirms that an Indian and a foreign party can opt for a foreign seat thereby, following the foreign procedural law, but the act is silent on whether two Indian parties can pick a foreign seat or not, which remained a recurring question in arbitration law.

Earlier Jurisprudence 

Part I of the A&C Act is a complete code in itself w.r.t. Indian seated arbitrations and part II is solely concerned with the enforcement of foreign awards. Section 2(1)(f) of A&C Act states that in international commercial arbitration, at least one party to the arbitration has to be a non-resident of India. This should be read with Section 2(2) which restricts Part I's applicability only to arbitrations seated in India.

One of the first major judgements answering this question although during the erstwhile Arbitration Act of 1940 was Atlas Exports Industries v. Kotak & Company, (‘Atlas’) where the SC affirmed that Indian parties can choose a foreign seat for their arbitration proceedings, however, the judgement was solely based on the provisions of Contract Law. (Detailed in the next section).

The SC, later, in TDM Infrastructure Private Limited v UE Development India Private Limited (“TDM infrastructure”) relied on Section 28 of the A&C Act in concluding that Indian parties are not entitled to derogate from Indian substantive law and merely dealt with the appointment of an arbitrator in case of International Commercial Arbitration (“ICA”) under Sections 11(5) and 11(9). The SC delved into the question of nationality and domicile and held that the case was not that of ICA as both the parties were companies incorporated in India and therefore it would fall outside the ambit of Section 2(1)(f) of A&C Act. The Court would therefore not have the jurisdiction to nominate an arbitrator. From the reading of TDM Infrastructure judgment, it appears that the SC, as a corollary, has held that Indian parties cannot choose a foreign seat for arbitration.

Later BALCO clarified that the applicability of Section 28 of the A&C Act is restricted to the substantive law of the contract and has nothing to do with choosing a foreign seat (curial law) or foreign law governing the arbitration agreement.

In a contrary Judgment, in Sasan Power Ltd. v North American Coal Corporation India Private Limited (“Sasan”) Madhya Pradesh HC held that Indian parties can choose a foreign seat and if they do so, Part I of the A&C Act would not apply to the dispute. It declared observations of TDM Infrastructure non-binding as they only determined the jurisdiction under Section 11 of the A&C Act (as discussed above). Moreover, the Judgment in Sasan relied on Atlas, delivered by a Bench larger than TDM Infrastructure.

Similarly, in GMR Energy Limited v Doosan Power Systems India Private Limited and Ors. (“GMR”), the single-judge of the Delhi High Court (“DHC”) relying on Sasan stated that Indian parties can arbitrate in a foreign seat, and an award provided in this dispute would be considered a foreign award under Part II of the A&C Act. It also considered the Sasan appeal before the SC, which affirmed that if Indian party chooses a foreign seat, it will not be in derogation of India’s dispute resolution laws.

After series of SC and HC rulings, the ambiguous position was finally settled in PASL where the SC affirmed that Indian parties can indeed enter into a foreign seated arbitration agreement.

Interplay between Indian Contracts Act and Arbitration Act with respect to foreign seated arbitration.

In PASL, a dispute arose between two Indian parties under a contract of purchase of converters wherein under the settlement agreement Zurich was chosen as the seat of arbitration. Respondents in this case asserted that two Indian parties cannot choose an arbitration seat outside of India since it would contravene Section 23 of the Indian Contract Act, 1872 (an agreement opposed to public policy is unlawful) read with Section 28(1)(a) of the above mentioned act(Agreements in restrain of legal proceedings). The respondents stated that by opting to arbitrate at a foreign seat, Indian parties can constructively, under Section 28 of the A&C Act withdraw from the Indian substantive law which in turn would be contradictory to public policy.

Atlas dealt with the above-mentioned question of law as to whether foreign seated arbitration contravenes Sections 23 and 28 of the Contracts Act. It held that nothing in either Section 23 or in Section 28 of the Contracts Act prevents any arbitration agreement from having a seat in a neutral venue outside of India as the two independent Indian parties entered into the agreement on their own accord and in no way, it violates public policy. Exception 1 to Section 28 of Contracts Act specifically exempts an arbitration agreement from the limitation of the judicial procedures. The judgement in Atlas was considered by the MP HC in Sasan Case and the same was affirmed by SC in PASL after a detailed examination of what is meant by “public policy”.

Narrowing down the restrictions under Section 28 (A&C ACT) and promotion of party autonomy.

Generally, when a dispute needs to be resolved through arbitration, emphasis is placed on - 1) the law governing the substantive contract, 2) the law governing the arbitration agreement, and 3) the curial law governing the arbitration proceedings.

The SC in PASL has reinforced the cardinal principle of party autonomy in arbitration law by setting a precedent that two Indian parties are at liberty to enter into an arbitration agreement seated at a neutral foreign jurisdiction.

The SC again relied on Atlas for clarity on the issue of party autonomy, despite the Bench in Atlas having only analyzed the subject from the point of view of Section 28 of the Contracts Act. PASL additionally resolved the meaning of Section 28(1)(a) (A&C Act), which states that for the purpose of its arbitration, two Indian parties cannot adopt a foreign substantive law. The Court decided that this clause belongs within Part I which applies solely to arbitrations sitting in India and not foreign seated arbitrations thereby validating the applicability of Section 2(2) and providing Indian parties an escape from Part I vis a vis Section 28 of the A&C Act.

According to Section 28 of the A&C Act, Indian law must apply to arbitrations which are not ICA or domestic arbitration seated in India. As per PASL this implies that in a domestic arbitration the two Indian parties are not at discretion to choose the substantive law governing their contractual relation but on the other hand the same two parties with a foreign seat are free to choose any substantive law subject to curial law. This effectively places foreign seated arbitrations between two Indian parties and a domestic arbitration [governed by Section 28(2) of A&C Act] at the same footing and the only stilted restriction to choose any legal system is in the case of two Indian parties arbitrating domestically.

Furthermore, the territoriality of the arbitration is the key to foreign award eligibility under Sections 44 and 53 of the A&C Act. The court also reiterated that parts I and II are mutually exclusive and Section 2(1)(f) cannot be imported into Section 44 of the A&C Act. Therefore, an award arising out of foreign seated arbitration can be considered a foreign award under Section 44 if it passes the four-pronged test of determining foreign award as laid down by the SC.

Conclusion 

“ The decks have now been cleared to give effect to party autonomy in arbitration. Party autonomy has been held to be the brooding and guiding spirit of arbitration.”

The SC judgement in PASL is welcomed as it will have a noteworthy impact on negotiations during an arbitration agreement, especially in case of foreign companies having subsidiaries in India.

It may be strategically beneficial for the losing party as it has the option of challenging the award in the foreign court and resist the enforcement of such award in the Indian courts. Additionally, interim reliefs under Section 9 of the A&C Act would still be available to the parties entering into foreign seated arbitration.

On the positive, the judgement has strengthened to the core party autonomy in arbitration law. By virtue thereof, Indian nationals are now allowed to bypass Indian law which has the potential to turn into a considerable argument against public policy. The practical aspects of implementation of doctrine of party autonomy and what the future holds for parties opting for foreign seated arbitrations, remain to be seen.