Freedom of Seat: A Big Win for Party Autonomy

Introduction

In a landmark judgement in the case of PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited[1] (“PASL Case”), the Supreme Court on 20.04.2021, has finally settled a gnawing issue confronted by the legal fraternity time and again - that of ‘choice of seat of arbitration’ between Indian parties. This issue has been hotly debated for several years on account of the conflicting rulings issued by various High Courts and the Supreme Court. The decision of the Supreme Court in the PASL Case has therefore brought some much-needed clarity by emphasizing that two Indian parties are in no way barred from choosing a foreign seat of arbitration, thereby upholding the principle of party autonomy which is the backbone of all arbitration proceedings.  More importantly, the Supreme Court also clarified that the arbitral award passed in such cases would be treated as a ‘foreign award’ enforceable under the provisions of Part II of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). Accordingly, the party against whom such an award is passed will now have the option to challenge the award at the foreign seat and oppose enforcement of such foreign award in India. Further, regardless of nationality, parties to a foreign seated arbitration can approach Indian Courts for interim relief under Section 9 of the Arbitration Act.

Brief Facts

The facts stem from disputes that arose between PASL Wind Solutions Private Limited (“PASL”) and GE Power Conversion India Private Limited (“GE Power”) under a settlement agreement. The settlement agreement provided for disputes to be resolved by way of arbitration, in accordance with the International Chamber of Commerce (“ICC”) Arbitration Rules, with Zurich being specified as the seat of arbitration. Accordingly, PASL requested for arbitration before the ICC. GE Power objected to this on the ground that Indian parties could not elect a foreign seat of arbitration. Notably, PASL contested this on the ground that Indian law did not bar Indian parties from electing a foreign seat of arbitration. While the arbitral tribunal rejected GE Power’s objection, it accepted GE Power’s application for changing the venue of arbitration to Mumbai only in order to save costs. Ultimately, an arbitral award (“Award”) was passed in 2019 in favour of GE Power.

Thereafter, GE Power initiated enforcement proceedings before the Gujarat High Court to enforce the Award as a ‘foreign award’ (under Part II of the Arbitration Act) and filed an application seeking interim relief under Section 9 of the Arbitration Act. PASL challenged the enforcement proceedings on the ground that the Award was in fact a ‘domestic award’ since it resolved a dispute between two Indian parties and contradicting its previous position, argued that choice of foreign seat by two Indian parties is contrary to public policy of India. Ruling against PASL in November 2020, the Gujarat High Court upheld the right of Indian parties to designate a foreign seat of arbitration and ruled that the Award was a ‘foreign award’ enforceable under the Arbitration Act. However, the interim application filed by GE Power was dismissed on the ground that interim relief under Section 9 is available in ‘international commercial arbitrations’ only where at least one party is a foreign party. Since both parties were Indian entities, the Gujarat High Court held that the same was not maintainable in the present case.

It was against this order of the Gujarat High Court that PASL filed an appeal before the Supreme Court.

Key Findings of the Supreme Court

In arriving at its decision, the Supreme Court undertook a detailed analysis of previous conflicting precedents and distinguished such judgments from the present case. In doing so, the Supreme Court has ruled on various principles crucial to arbitration law in India.

Firstly, it has unequivocally held that party autonomy ‘is the brooding and guiding spirit of arbitration’ and that Indian parties can opt for a foreign seat of arbitration. In the context of the present case, the Supreme Court clarified that the arbitral tribunal had specifically decided that only the venue of hearing would be Mumbai owing to cost considerations, however Zurich would continue to be the seat of arbitration and that both parties had agreed to this. Connected with this, the Supreme Court also clarified that an award delivered by an arbitral tribunal seated outside India is a foreign award and will be enforceable under Part II of the Arbitration Act (dealing with enforcement of foreign awards) even if the parties to the arbitration are Indian.

Secondly, while considering whether choosing a foreign seat is against the public policy of India, the Supreme Court carefully analyzed the provisions of the Arbitration Act and the Indian Contract Act, 1872 and held 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 nationals to avail of a challenge procedure of a foreign country.” Particularly since after a foreign award passes muster under foreign procedure, its enforcement can be resisted in India on the grounds contained in Section 48 of the Arbitration Act, which includes foreign award being in contravention of public policy of India. Thus, by electing a foreign seat, Indian parties are in no way acting contrary to the public policy of India.

Thirdly, overruling the decision of the Gujarat High Court only on the issue of interim relief, the Supreme Court categorically observed that regardless of nationality, parties to a foreign seated arbitration can approach Indian Courts for interim relief under Section 9 of the Arbitration Act. The Supreme Court held that when two Indian parties elect a foreign seat of arbitration, it would be classified as an international commercial arbitration (i.e., an arbitration taking place outside India) under Section 2(2) of the Arbitration Act based on the ‘place-centric approach’. Accordingly, in such cases, interim relief under Section 9 of the Arbitration Act, would be available to international commercial arbitrations, even if there are no foreign parties. Consequently, the Supreme Court ruled that the interim application under Section 9 was in fact maintainable before the Gujarat High Court.

Conclusion

From the above, it is evident that this decision is significant in several ways in the field of arbitration. It reiterates that party autonomy is of paramount importance in arbitration proceedings. Indian parties can now not only choose a foreign seat of arbitration but also benefit from enforcing awards flowing from such arbitrations in India. This is certainly a step in the right direction and will go a long way in making India an arbitration friendly jurisdiction.

[1] Civil Appeal No. 1647 of 2021 (Arising out of SLP (Civil) No. 3936 of 2021)