The liberty of Party Autonomy in Arbitration Act 1996
In the Supreme Court of India
Civil appeal no. 1647 of 2021 [arising out of SLP (Civil) no.3936 of 2021]
PASL WIND SOLUTIONS PRIVATE LIMITED … Appellant
GE POWER CONVERSION INDIA PRIVATE LIMITED … Respondent
In April 2020, a three Judge bench comprising Justice Rohinton Fali Nariman, Justice B.R. Gavai, and Justice Hrishikesh Roy ruled that it is not violative of the public policy of India for two Indian national parties to designate a seat of arbitration outside India. A look at this verdict which has significant bearing on Arbitration.
- The appellant company PASL Wind Solutions Private Limited (“PASL”) is a company incorporated in Ahmedabad under the Companies Act. The respondent company GE Power Conversion India Private Limited (“GE”) is a company incorporated in Chennai under the Companies Act.
- In 2010, PASL issued purchase orders for supply of convertors for wind turbines. Disputes arose between parties in relation expiry of warranty of the said convertors.
- In order to resolve these disputes, both parties entered into a settlement agreement in December 2014. The settlement agreement expressly contained an Arbitration clause to the effect that disputes, if any would be amicably solved. If no settlement was arrived at, then they shall be referred to and finally resolved by Arbitration in Zurich in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The Arbitration Award shall be final and binding on both the parties.
- Disputes arose between parties pursuant to the settlement agreement and in 2017 PASL issued a request for the arbitration to the International Chamber of Commerce (“ICC”). The parties agreed to resolution of disputes by the sole arbitrator appointed by the ICC. As per the agreement, the seat of Arbitration was suggested to be Zurich, Switzerland.
- GE suggested Mumbai, India as a convenient venue in which to hold arbitration proceedings as costs would be reduced thereby. It was agreed by the arbitrator that though the seat is in Zurich, all hearings would be in Mumbai for convenience of both parties.
- In April 2019, the arbitrator passed an order stating rejecting the claim of PASL and ordered PASL to compensate legal costs and expenses to the tune of USD 40,000.
- PASL failed to oblige its obligations and hence GE initiated enforcement proceedings u/s 47 & 49of the Arbitration Act before the High Court of Gujarat within whose jurisdiction the assets of PASL were located.
- PASL then argued that the seat of arbitration was Mumbai where all hearings took place. Hence it filed a case challenging the final award u/s 34 of the Arbitration Act.
- Whether two companies incorporated in India could choose a forum for arbitration outside India?
- Whether an award made at a forum outside India, to which the New York Convention applies, can be said to be a “foreign award” under Part II of the Arbitration and Conciliation Act, 1996 and be enforceable as such?
- Two Indian parties cannot designate a seat of arbitration outside India as it is contrary to section 23 of the Indian Contract Act 1872 read with sections 28 (1)(a) and 34 (2A) of the Arbitration Act.
- The final arbitration award could not fall under Part II of the Arbitration Act since it was concerning two Indian parties. Hence it could not be considered as International commercial arbitration, nor could the final award be considered a foreign award as none of the conditions of section 2(1)(f) of the Arbitration Act were satisfied.Parties cannot be allowed to take advantage by designating a foreign seat in arbitration for a dealing which has no foreign element. This would obviously mean lesser or no applicability of Indian arbitration law. The whole purpose of Arbitration Act would be defeated.
- Relying on the Enercon (India) Ltd. v. Enercon GmbH, (2014) 5 SCC 1, if the “closet connection test” is applied, Zurich would only be a “salutary seat”. Mumbai should be deemed as the seat of arbitration for its “closest connection” to the parties / agreement between the parties.
- In the Sasan Power Limited v. North American Coal Corporation India Private Limited (2016) 10 SCC 813 (RL-6), it was held that that two Indian companies can arbitrate outside of India. In the Atlas Export Industries v. Kotak & Company (1999) 7 SCC 61, it was held that a contract will be unlawful and void u/s 23 of the Indian Contract Act 1872 if it breaches public policy. However, “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.” This is applicable to this case as both parties agreed on Zurich as the seat of arbitration. Merely because the order is against PASL, it cannot question this basic fact. This judgement also reiterated the party autonomy – freedom to parties to choose the people, place and manner of arbitration as the core of arbitration.
- In the judgment passed in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552, it was held that Part I and Part II of the Arbitration Act are mutually exclusive. Part I of the Arbitration Act deals with general provisions relating to arbitration, arbitration agreements, proceedings, and enforcement of awards in India. Section 44 of the Arbitration Act. Section 44 of the Act deals with enforcement of “foreign award” passed in accordance with the New York convention to which countries are part to.
Section 2(1)(f) (Part I) of the Arbitration Act defines international commercial arbitration to include any commercial transactions between two parties where at least one party is an Indian national or resident and the other, a national / resident outside India. Section 44 of the Arbitration Act is primarily concerned with the enforcement of foreign award as per provisions of the foreign award. The nationality / residential status of parties is not of importance. The Country should have signed the New York convention. The definition of “international commercial arbitration” u/s 2(1)(f) of Part I of the Arbitration Act (for which nationality is important) cannot be imported into section 44 of the Arbitration Act (for which the place where the award was made is of importance).
- The “close connection” test shall be applied only in the absence of mention of seat of arbitration. In this case, the arbitration agreement expressly state that the seat of arbitration is Zurich, Switzerland. Mumbai is only the venue of arbitration agreed for the sake of convenience.
Apex Court Judgement
Based on the above arguments and decided case laws presented by parties, the Apex court held 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. This was also held not to be violative of the public policy of India.
- The Award in the present case fulfils the requirements under Section 44 to be designated a foreign award. It further held that there is no clash between Section 10 of the Commercial Courts Act and the Explanation to Section 47 of the Arbitration Act, as an arbitration resulting in a foreign award, as defined under Section 44 of the Arbitration Act, will be enforceable only in a High Court under Section 10(1) of the Commercial Courts Act, and not in a district court under Section 10(2) or Section 10(3).
Full text of the Judgment: