Party Autonomy & Public Policy Vis-À-Vis Indian Parties Choosing a Foreign Seat of Arbitration

Mr. Tariq Khan and Nakashvir Singh Aulakh*

Party autonomy is the single most important aspect of arbitration. It is the fact that the parties can choose the mode, medium, and governing law which makes arbitration the most preferred form of dispute resolution mechanism in recent years. The Supreme Court of India, time and again, has upheld party autonomy in arbitration and has even called it to be the backbone of arbitration.

However, there have been various conflicting precedents of Indian courts regarding autonomy of domestic parties in choosing a foreign seat of arbitration. The Bombay High Court in Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Private Limited, (“Addhar Mercantile”) relying upon a Supreme Court judgement of TDM Infrastructure Pvt Ltd v. UE Development India Ltd., held that two Indian parties cannot choose a seat outside India. Additionally, there have been judgements which have not directly dealt with the issue but land very close. One such judgement is KLA Construction Pvt. Ltd. v Kajima India Pvt. Ltd, where the Uttarakhand High court followed that a ‘foreign element’ is an important element for Indian parties to have a foreign seated arbitration. Another similar judgement of Reliance Industries Limited v. Union of India, where the Supreme Court made a decision on challenge to the award involving two Indian Parties and a foreign seat of arbitration on the basis that the award was valid in India. However, in Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd., the Madhya Pradesh High Court held that the domestic parties are free to choose a foreign seat of arbitration. The High Court stressed upon the Supreme Court decision in Atlas Exports Industries v. Kotak & Company, where the court refused to nullify the arbitration agreement merely because the seat of arbitration was in a foreign country. Subsequently, the Delhi High Court delivered a judgement on similar lines in GMR Energy Limited v. Doosan Power Systems India Private Limited.

Different jurisdictions have different approaches in allowing domestic parties to choose a foreign seat. On one side of the stretch, there are countries such as England (Section 1(B) of the English Arbitration Act, 1996) and Singapore[1] which allow domestic parties to choose a seat outside. On the other side, jurisdictions such as China[2] and the United States[3] do not allow domestic parties to choose a foreign seat without having a foreign element to the dispute.

Primarily, countries preventing domestic parties to have a foreign seat of arbitration have three major arguments. First, the countries like the US and China choose a direct supervision of every domestic dispute. Second, jurisdictions argue that it protects weaker parties. Lastly, in order to prevent domestic parties to bypass the local law, as was argued in Addhar Mercantile.

PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited

The Supreme Court, in a recent judgement of PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, (“PASL Wind”) delivered a significant verdict with regards to party autonomy and foreign arbitral awards. Two Indian companies, PASL Wind Solutions Private Limited (“PASL”) and GE Power Conversion India Private Limited (“GE”), entered into an agreement for the sale of converters. A dispute arose as to breach of warranties relating to the converters and the parties entered into a settlement agreement. The agreement included a dispute resolution clause providing for arbitration in Zurich under ICC Rules, but subject to Indian substantive law. A dispute arose under the settlement agreement and the Tribunal issued an award in GE’s favour.


GE went to Gujarat High Court to enforce the award under Section 47 of the Arbitration and Conciliation Act, 1996 (the “Act”) and, and also for interim relief under Section 9. PASL argued, inter alia, that the award was against public policy of India since it contravened the provisions of Indian Contract Act, 1872. The Gujarat High Court held that two Indian parties are permitted to choose a foreign seat of arbitration, and that the award from such an arbitration may then be enforced in India as a foreign award. However, the Court held that Indian parties settled abroad would not be entitled to interim relief from the Indian courts in support of the arbitration under Section 9 of the Act. The Supreme Court of India upheld the judgement except the High Court’s finding that interim relief would not be available to Indian parties who had chosen a non-Indian seat.

Public Policy and Arbitral Award

Section 34(2)(b)(ii) of the Act states that an arbitral award may be set aside by the Court if the arbitral award is in conflict with the public policy of India. Section 48(2)(b) talks about refusal of enforcement of a foreign arbitral award if it’s in is in conflict with the public policy of India. However, “public policy” is not defined in the act. It is difficult to offer an exact definition of public policy. In one English judgement, a judge commented on the public policy saying, “It is never argued at all but where other points fail.”[4] Across time, it has been described as “untrustworthy guide”, “variable quality”, “uncertain one”, “unruly horse”, etc. Primarily, duty of a Court of Law is to enforce a promise which the parties have made.

Setting Aside Foreign Awards

Part II of the Act deals with enforcement of foreign awards. Chapter I and II deals with enforcement of the New York Convention and the Geneva Convention awards. Section 48 (Chapter I of Part II) provides for setting aside of foreign arbitral awards. The Supreme Court of India, in Vijay Karia v. Prysmian Cavi E. Sistemi Srl and Ors., provided for two pronged clarifications with respect to judicial interference in enforcement of foreign awards. Whereby, firstly, Justice R.F. Nariman, citing the minimal intervention policy of courts in arbitration matters stated, “The Policy of the legislature is that there ought to be only one bite at the cherry in a case where objections are made to the foreign award in the extremely narrow grounds of Section 48.” Secondly, it put forward three grounds where court may refuse to enforce a foreign award. These were conditions affecting jurisdiction, party interest and public policy.

Conclusion

The Supreme Court of India, in Renusagar Power Co. Ltd. v. General Electric Co, formulated a threefold test in order for a foreign award to get enforced in India. It said that the enforcement would be denied if the award is against the following – i) the fundamental policy of Indian law, ii) the interests of India, and iii) justice or morality. Another ground of patent illegality for enforcement of a foreign award was added in Oil and Natural Gas Co. v. Saw Pipes by the Supreme Court. However, it was soon refuted in McDermott International Inc v. Burn Standard Co. Ltd, as the court observed that the courts must not delve into facts of the case. It was in line with general spirit of arbitration and other Supreme Court decisions (such as Vidya Drolia v. Durga Trading Corporation, Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. or Vimal Kishor Shah v. Jayesh Dinesh Shah) on role of courts in an arbitration appeal.

The recent PASL wind judgement clears the uncertainty around the party autonomy in choosing a foreign seat of arbitration. The judgment has paved a way for domestic parties to choose a foreign seat of arbitration. The legislature must take note of this and incorporate the same into the Act. It has also affirmed India’s position as an arbitration friendly jurisdiction by not letting the much misused public policy argument in the way of enforcement of a foreign award. Additionally, it will allow a two-tiered appeal to the losing party after the award. The losing party can challenge at the courts in India at the time of enforcement and also before the judicial bodies at the foreign seat. Besides Indian parties looking for a neutral venue, it will also help foreign corporations with Indian entities to settle their dispute close to their principal place of business. Consequently, parties no longer need engineer contracts to incorporate a foreign entity in order for the arbitration to be of international nature against the risk that a foreign award in a domestic arbitration might be pronounced void. The arguments of some jurisdictions for not allowing party autonomy are not in line with the general principles of arbitration. First,  it is absolutely unmerited on part of the courts to force another level of supervision when the parties chose to resolve the dispute privately. Secondly, to assume all domestic dispute involves parties with unequal bargaining powers is unwarranted. Lastly, judgements like Addhar Mercantile undermine the concept of seat. By simply choosing a foreign seat, a party is neither making a choice of the applicable substantive law nor it is trying to bypass domestic laws.


*The article has been authored by Mr. Tariq Khan, Principal Associate at Advani and Co. and Mr. Nakashvir Singh Aulakh, a third-year student at Rajiv Gandhi National University of Law.

[1] Robert Merkin & Johanna Hjalmarsson, Singapore Arbitration Legislation Annotated 2 (2009); Law Reform Committee, Sub-Committee on Review of Arbitration Laws, Report ¶ 16, (1993).

[2] Wei Sun & Melanie Willems, Arbitration in China: A Practitioner’s Guide 101-103 (2015);

[3] Gary B. Born, International Commercial Arbitration 162-163 (2d. ed. 2014); Ensco Offshore Company v. Titan Marine, 370 F. Supp. 2d 594 (S.D. Tex. 2005).

[4] Richardson v. Mellish, [1824] 2 Bing 119, 152 per Burrough J. as cited in A Redfern, M Hunter, N Blackaby & C Partaside, Redfern and Hunter on International Commercial Arbitration 10.85 (2009).

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