New Strategic Choices: Indian Supreme Court Rules That Two Indian Parties Can Choose A Foreign Seat Of Arbitration
NEW STRATEGIC CHOICES: INDIAN SUPREME COURT RULES THAT TWO INDIAN PARTIES CAN CHOOSE A FOREIGN SEAT OF ARBITRATION
The SC found that nothing stands in the way of party autonomy in designating a seat of arbitration outside India, even if both parties are Indian nationals
In a landmark ruling, the Indian Supreme Court in PASL Wind Solutions Private Limited v GE Power Conversion India Private Limited (Civil Appeal No. 1647 of 2021) has held that two companies incorporated in India can validly designate a foreign seat for arbitration. Previously, there had been inconsistent judicial precedent on this issue and lingering concerns that an offshore arbitration award made pursuant to an arbitration agreement between exclusively Indian parties could be susceptible to challenge in the Indian courts.
The ruling also opens doors to strategic new choices when arbitration agreements are negotiated in transactions between Indian parties. What are the advantages of choosing a foreign seat of arbitration, and does it always make sense to do so? Are there any residual benefits of seating proceedings in India? These are questions relevant not only to domestic Indian parties, but also to foreign investors doing business in India via a local Indian subsidiary.
The dispute in question
The disputing parties were PASL Wind Solutions (PASL) and GE Power Conversion India (GE Power), both companies incorporated and with their registered offices in India. A dispute arose under certain purchase orders and the parties entered into a settlement agreement which provided for arbitration in Zurich under the ICC Arbitration Rules.
PASL commenced arbitration under the settlement agreement. The tribunal by way of a procedural order found the parties had freely agreed on Zurich as the seat of arbitration, and hearings in the arbitration were conducted in Mumbai. The tribunal dismissed PASL's claim and issued a costs award in favor of GE Power. PASL contested enforcement of the costs award in India on the basis that the parties could not have validly agreed on a foreign seat. The matter came before the Supreme Court on appeal.
The Supreme Court's analysis
Ruling that two domestic Indian parties are entitled to elect for foreign-seated arbitration, the Supreme Court's reasoning was essentially as follows:
• PASL had argued that the legislative framework under Part II of the Indian Arbitration and Conciliation Act 1996 only contemplated the enforcement of awards arising from an "international commercial arbitration" and would not extend to an award involving two Indian companies. The Court disagreed, finding that the costs award was a "foreign award" under section 44 which was enforceable under Part II of the Act.
• The Indian Contract Act does not preclude two Indian parties from referring their disputes to arbitration outside India.
• There is no clear and undeniable public harm in permitting two Indian nationals to choose a foreign seat of arbitration. In any case, the enforcement of a foreign award can still be resisted in India on grounds contained in section 48 of the Arbitration Act, which include the foreign award being contrary to the public policy of India.
In summary, the Supreme Court found that nothing stands in the way of party autonomy in designating a seat of arbitration outside India, even if both parties are Indian nationals.
The Supreme Court's ruling will have a tangible impact on the negotiation of arbitration agreements amongst Indian parties. While India's standing as a seat of arbitration has improved significantly in recent years (following the 2015 and 2019 amendments to the Arbitration Act), there are still various reasons why parties to Indian transactions may prefer an international seat (such as Singapore, Hong Kong, or London) over an Indian seat:
• If recourse to the courts is needed during arbitration proceedings, the court system in the international seats of arbitration is likely to be more efficient than the Indian courts, which are overburdened and well-known for delays;
• When arbitrating outside India, there is (generally speaking) a reduced risk that parties will be dragged into Indian court proceedings ancillary to the arbitration;
• Strictly speaking, the grounds for resisting enforcement of foreign awards should be subject to a narrower scope of review than an award between Indian companies made in India, which may be set aside "if the Court finds that the award is vitiated by patent illegality appearing on the face of the award" (under section 34(2A) of the Arbitration Act). There is no available ground to resist enforcement of foreign awards on the basis of "patent illegality" under section 48 of the Arbitration Act.
• As the Supreme Court confirmed in PASL Wind, parties to arbitrations seated outside India (even where all the parties to a dispute are Indian) are still entitled to apply for interim relief before the Indian courts under section 9 of the Arbitration Act.
There are even unlikely to be any practical downsides to choosing a foreign seat, given that parties can still agree to hold physical hearings in India as a matter of practical convenience.
On the other hand, many of the perceived drawbacks of India-seated arbitration can often be mitigated by adopting a set of institutional arbitration rules such as the SIAC or the ICC, so that the arbitration is administered by a reputable international arbitral institution instead of relying on ad hoc procedure under the Arbitration Act. Another potentially useful aspect of India-seated arbitration relates to the enforceability of urgent interim orders made by an emergency arbitrator.
In Amazon.com NV Investment Holdings LLC v. Future Retail Ltd. and Future Coupons Pvt. Ltd, the Delhi High Court recently held that an award of a SIAC emergency arbitrator rendered in an India-seated arbitration is in principle enforceable under section 17(2) of the Arbitration Act. For the time being, the enforceability of emergency awards made in foreign-seated arbitrations remains unclear.
It is well-known that Indian parties are already frequent users of arbitration seated outside India (for instance in 2020, Indian parties were again the top foreign user at the Singapore International Arbitration Centre). While, overall, the Supreme Court's decision in PASL Wind is likely to accelerate this trend, there are nonetheless a range of factors for Indian parties to consider when deciding whether or not to choose a foreign seat of arbitration for any particular transaction.
Content relating to India is based on our experience as international counsel representing clients in their business activities in India. We are not permitted to advise on the laws of India and should such advise be required, we would work alongside a domestic law firm.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.