Indian Supreme Court’s Landmark Seat Decision

This article examines the unconventional but pro-business approach taken by the Indian Supreme Court.

Background:

In April 2021, the Supreme Court of India decided a civil appeal arising out of an arbitration award, filed by PASL Wind Solutions Pvt. Ltd. (“the Appellant”). The award was passed pursuant to an arbitration agreement under a settlement agreement between the Appellant and GE Power Conversion India Pvt. Ltd. (“the Respondent”).

The seat of arbitration was Zurich, Switzerland, under the International Chamber of Commerce rules, and the parties agreed that the substantive law applicable to the dispute would be Indian law. The place of the arbitration was however Mumbai, India.

Both the parties were Indian entities, and an award was passed in favour of the Respondent. The Respondent attempted to enforce the award as a foreign award, in a state High Court in India, and the Appellant sought to set aside the award, under a provision relating to domestic awards, and also challenged its enforceability.

Findings of the Court:

The Supreme Court held, inter alia, that:

• two Indian parties were free to choose a foreign venue as the seat of arbitration;
• the decision of two Indian parties to choose a foreign seat was not against Indian public policy;
• such an award was enforceable as a foreign award in India; and
• such an arbitration could be considered an “international commercial arbitration”, notwithstanding that it did not satisfy the definition of this term under Section 2 (1) (f) of the (Indian) Arbitration and Conciliation Act, 1996 (“the Arbitration Act”), which says that an international commercial arbitration requires at least one of the parties to be a national of/habitually resident in or, in case of a body corporate, to be incorporated in, a country other than India.

The fact that this decision encourages contracting parties’ freedom of choice as regards the arbitration venue, has been discussed and examined in various analyses and reports.

There is another aspect however; and that is that the Supreme Court has shown willingness to be flexible and commercial-minded in its interpretation of Indian laws, not just to encourage the principle of freedom of arbitrating parties, but also the principle of freedom in commercial contracts in general.

It has gone so far as to adopt unconventional rules of interpretation, disregarding conventional principles and rules of statutory interpretation. In our opinion, this is a welcome step.

I. Public Policy: The principle of whether public policy in India may be affected or not, has often affected the enforcement of awards. Part I of the Arbitration Act deals with domestic-seated arbitrations, and also contains Section 34 which sets out various grounds for setting aside a domestic award.

A foreign award, on the other hand, may be sought to be enforced under Part II of the Arbitration Act, dealing with foreign-seated awards. Section 48 sets out grounds on which a party may resist enforcement of a foreign award.

The Appellant in this case effectively claimed that if two Indian entities were allowed to choose a foreign seat, and the award was considered a foreign award, it would amount to them derogating from the substantive law of India.

They also claimed that an arbitration proceeding between two Indian parties would have to be considered a domestic arbitration, as the definition of “international commercial arbitration” (requiring at least one party to be a foreign entity) was not satisfied, that the award was a domestic award, and that they were entitled to rely on the provisions of Section 34 (which is not applicable to foreign awards) to attempt to set aside the award.

II. International Commercial Arbitration: As stated above, the definition of “international commercial arbitration” in the Arbitration Act is dependent on the status of the parties, and requires that at least one party to the arbitration be a foreign (non-Indian) party.

However, the Supreme Court in this case stated that an “international commercial arbitration” can also include arbitrations where there is a foreign element, such as the seat of arbitration. The logic cannot be faulted, as in this case, the seat was admittedly in Zurich, and it would be illogical to refer to such an arbitration as a domestic arbitration or the award passed as a domestic award.

The Supreme Court also referred to Section 44 of the Arbitration Act, falling under Part II. This provision states that an award under an arbitration agreement to which the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards applies, and passed in a territory declared by the Government as one to which the above convention applies, is a foreign award. The court noted that the award in the present case falls under this definition.

However, if it is not considered to be an international commercial arbitration, it would be an award to which Part 1 of the Arbitration Act applies, and Section 2 (7) of the Arbitration Act states that an award passed under Part I would be a domestic award.

The court held that Section 2 (7) of the Arbitration Act was merely to clarify that (i) an award passed in India between two Indian parties, and (ii) an award passed in India between an Indian and a foreign party, would both be considered domestic awards. However, an award passed in a foreign seat between two Indian parties is to be considered as having a foreign element and is to be considered a foreign award.

This interpretation of the Supreme Court does not follow the rule of literal construction – the rule that a statute has to be constructed and interpreted as per its literal, plain and simple meaning. The Supreme Court has created a definition of “international commercial arbitration” which is not specifically contained in the Act, but which makes sense in view of the principle that parties should have freedom in deciding aspects of their commercial and arbitration agreements.

III. Contract Act: Section 28 of the Indian Contract Act, 1872 states that agreements that restrict a party from enforcing its contractual rights by “the usual legal proceedings in the ordinary tribunals” (i.e., the conventional court system), is void. There is however an exception made for agreements by which the parties agree to refer disputes to arbitration.

The Appellant contended that this exception for arbitration referred only to domestic arbitrations, stating that otherwise two Indian parties could opt out of the jurisdiction of Indian substantial law by choosing a foreign seat.

At the time of inclusion of the above exception, arbitration, especially foreign-seated or international arbitration involving Indian parties was still in its infancy, and the exception was merely to ensure that an arbitration agreement did not result in the parties falling foul of Section 28 as arbitration was not a “usual legal proceeding” in an “ordinary tribunal”.

The Supreme Court’s decision that this exception should also include foreign-seated arbitration is therefore an attempt to provide a flexible interpretation in view of the circumstances that obtain in the modern world. It is not an interpretation meant to be in accordance with the circumstances that obtained at the time of the legislative provision being enacted (which is more usual and which is an established principle of statutory interpretation).

Conclusion: While some aspects of the Supreme Court’s reasoning may appear unusual or even unconventional, we believe that the reasoning followed was commercially sound and, ultimately, has a strong logical basis.

The Supreme Court noted that grounds to challenge a domestic award in India would normally be available under Section 34 of the Arbitration Act, to two Indian parties arbitrating in India.

Even if they were made unavailable as a result of those parties choosing a foreign seat, the parties would nevertheless benefit by getting two chances to challenge the award (referred to by the court as “two bites at the cherry”):

• the first by a challenge under the law of the seat of arbitration (in this case Swiss law) and
• second, by challenging enforcement on the basis of the grounds set out in Section 48 of the Arbitration Act, which sets out the various aspects on which a party can resist enforcement of a foreign award in India.

The Supreme Court decided that allowing two Indian parties to “derogate” from Indian law by choosing a foreign seat does not cause disadvantage to them, and cannot be considered as causing harm to public interest either. The court held that in such a case, freedom to contract should be given priority.

In conclusion, we are of the opinion that this decision of the Supreme Court is a step in the right direction, and encourages commercial flexibility and incentivises freedom of business.