On 20 April 2021, the Indian Supreme Court in PASL Wind Solutions v. GE Power Conversion India,1 clarified that two Indian parties can choose a foreign arbitral seat and that parties to such foreign seated arbitrations will be able to obtain interim relief from the Indian courts. The Supreme Court’s decision (available here) settles an important question of law and upholds party autonomy. It also provides businesses that operate in India, including foreign companies with local subsidiaries, much needed clarity on these issues. Those entities can now choose foreign arbitral seats – like London, Dubai, Singapore and Hong Kong – in their arbitration agreements, even if the subject matter of their contracts and counterparties are entirely situated within India. In reaching its decision, the Supreme Court looked extensively at Indian and international case law and arbitral commentaries, including the third edition of Gary Born’s International Commercial Arbitration (2021). As the Supreme Court remarked, “[t]he decks have now been cleared to give effect to party autonomy in arbitration.”
This alert sets out the background to the PASL case, before summarizing the key issues addressed by the Supreme Court, and the implications of the judgement for Indian parties and Indian subsidiaries of foreign companies.
PASL Wind Solutions Pvt Ltd (“PASL”) and GE Power Conversion India Pvt Ltd (“GE India”) entered into a settlement agreement in relation to certain disputes arising out of a transaction for the supply of converters. Both companies are incorporated in India. GE India is a 99% subsidiary of General Electric Conversion International SAS (France), which in turn is a wholly-owned subsidiary of the General Electric Company (United States). The arbitration clause in the settlement agreement provided for arbitration in accordance with the ICC Rules and seated in Zurich. The settlement agreement was governed by Indian law.
In 2017, following disputes arising out of the settlement agreement, PASL initiated arbitration proceedings against GE India. In the course of the proceedings, the tribunal ruled that the seat of the arbitration was Zurich but that hearings would be conducted in Mumbai. In 2019, the tribunal issued a final award dismissing PASL’s claims and awarded GE India damages and costs.
GE India subsequently commenced enforcement proceedings before the Gujarat High Court under Sections 47 and 49 of the Indian Arbitration and Conciliation Act 1996 (the “Act”), contained in Part II of the Act, which applies to the enforcement of foreign awards. Part II of the Act gives effect to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). GE India also sought interim relief from the Court under Section 9 of the Act to prevent PASL from dissipating its assets to avoid complying with the award.
PASL argued that the award was not a foreign award capable of enforcement under Sections 47 and 49 of the Act. It contended that, under the closest connection test, which the Supreme Court had applied in prior cases to determine the arbitral seat,2 the arbitral seat was Mumbai, as it was, among other things, the place where the hearings took place. PASL thus sought to set aside the award under Section 34 of the Act, which applies to Indian-seated arbitrations and awards.
PASL’s case rested on the uncertainty that existed under Indian law as to whether two Indian parties could choose a foreign seat, an issue that had split the Indian courts. Some High Courts in India had taken a pro-arbitration approach on this issue and enforced the parties’ choice of a foreign arbitral seat, while others had not. For instance, in Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd,3 the Bombay High Court held that two Indian parties could not choose a foreign seat because “the intention of the legislature [is] clear that Indian nationals should not be permitted to derogate from Indian law.”4 The Bombay High Court relied on the Supreme Court’s decision in TDM Infrastructure v. UE Development India Private Limited,5 to support its findings.
In contrast, the Madhya Pradesh High Court in Sasan Power v. North American Coal Corporation,6 concluded that “two Indian Companies [are permitted] to arbitrate their dispute in a foreign country.” To support its conclusion, the Madhya Pradesh High Court relied on the Supreme court’s decision in Atlas Exports Industries v. Kotak & Company,7 where the Supreme Court held that “merely because the arbitrators [were] 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.”8 This approach was also taken by the Delhi High Court in GMR Energy Limited v. Doosan Power Systems India Private Limited.9
The uncertainty and divergent decisions arose, in part, from the structure of the Act. The Act is divided into two parts. Part I of the Act only applies to Indian-seated arbitrations, whether domestic or international commercial arbitrations. Section 2(1)(f) defines an “international commercial arbitration” as a commercial arbitration involving at least one party that is (i) an individual who is a national of, or habitually resident in a country other than India; (ii) a body corporate which is incorporated in any country other than India; (iii) an association or a body of individuals whose central management and control is exercised in any country other than India; or (iv) the Government of a foreign country. In other words, for purposes of Part I, an “international commercial arbitration” is an Indian-seated arbitration with a foreign nexus based on the profile of the party.
Part II of the Act only applies to arbitrations seated outside India. Section 44, contained in Part II of the Act, defines a “foreign award” as follows:
“In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—
(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies; and
(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.”
Unlike Part I of the Act, the application of Part II does not turn on whether the proceeding is an “international commercial arbitration,” as defined in Section 2(1)(f).
Except for a few provisions in Part I that have been legislatively amended to apply to foreign seated arbitrations (discussed in greater detail in our previous alert here), Part I and Part II of the Act are generally mutually exclusive. The provisions of Part I thus do not apply to foreign seated arbitrations and vice versa for Part II of the Act and Indian-seated arbitrations.
II. THE SUPREME COURT’S DECISION
At the first instance, in GE Power Conversion India Pvt Ltd v. PASL Wind Solutions Pvt Ltd.,10 the Gujarat High Court found that Zurich was the seat of the arbitration, and that Indian law did not prevent two Indian parties from choosing a foreign arbitral seat. As the proceedings were seated in Zurich, the award was a foreign award that was subject to the enforcement regime in Part II of the Act. The Gujarat High Court, however, rejected GE India’s request for interim relief on the basis that Section 9, contained in Part I of the Act, only applied to “international commercial arbitrations,” as defined in Section 2(1)(f) read with Section 2(2) of the Act. It therefore held that, Section 9 could not apply in this case as both parties were Indian.
PASL filed a Special Leave Petition before the Supreme Court seeking to set aside the Gujarat High Court’s judgement which, in key part, reiterated its argument before the High Court that two Indian parties could not choose a foreign seat. PASL raised three main arguments before the Supreme Court: (1) Mumbai (and not Zurich) was the seat of arbitration; (2) only an award issued in an “international commercial arbitration” as defined in Section 2(1)(f), can be considered a foreign award and be enforced under Part II of the Act; and (3) two Indian parties designating a foreign arbitral seat would be contrary to Section 23 and 28 of the Indian Contract Act, 1872 (“Contract Act”), read with Section 28(1)(a) and 34(2A) of the Act. GE India also filed a cross-objection, challenging the Gujarat High Court’s refusal to grant interim relief under Section 9 of the Act.
As discussed below, the Supreme Court rejected PASL’s appeal and each of its arguments on whether two Indian parties could choose a foreign seat. The Supreme Court also upheld GE India’s cross-objection and granted it interim relief to prevent the dissipation of PASL’s assets.
A. Arbitral Seat
PASL contended that the enforcement proceedings initiated under Sections 47 and 49 of the Act only applied to “foreign awards,” and that those provisions did not apply to this case because, applying the closest connection test, Mumbai (and not Zurich) was the seat of arbitration. It therefore argued that the award was not a “foreign award,” but was Indian-seated. The Supreme Court disagreed, explaining that the closest connection test only applies when the parties or the tribunal have not designated an arbitral seat. In this case, it was clear from the arbitration agreement that the seat was Zurich. The arbitral tribunal had also determined that the seat was Zurich.11 The Supreme Court thus held that there was no basis to apply the closest connection test to determine the arbitral seat.
B. The Meaning of “Foreign Awards” Under the Act
PASL argued that, even if the arbitral seat was Zurich, the award could not be enforced as a “foreign award” under Sections 47 and 49 in Part II of the Act because the proceedings were between two Indian parties and thus would not be an “international commercial arbitration,” as defined in Section 2(1)(f). According to PASL, the phrase “unless the context otherwise requires” in Section 44 (set out above) permits the definition of “international commercial arbitration” in Section 2(1)(f) to be imported into Section 44. As discussed above, that definition of “international commercial arbitration” requires that at least one of the parties have some foreign nexus before a proceeding can be considered an “international commercial arbitration.”
The Supreme Court rejected PASL’s arguments and, in particular, its attempts to read the definition of “international commercial arbitration” contained in Section 2(1)(f) in Part I of the Act into the definition of “foreign awards” contained in Section 44 in Part II of the Act. Following its decision in Bharat Aluminium Co v. Kaiser Aluminium Technical Services12, the Supreme Court noted that Part I of the Act is a comprehensive code that deals with arbitrations seated in India. Part II, on the other hand, is primarily concerned with the enforcement of foreign awards. The two parts thus do not overlap in application and, in the words of the Supreme Court, are “mutually exclusive.”13 Based on that understanding of the Act, the Supreme Court held that the definition of “international commercial arbitration” in Section 2(1)(f) in Part I of the Act could not be imported into Section 44 because that term is “party-centric,” while the same term when spoken about in the context of Part II of the Act is meant to have a “place-centric” focus. Put differently, for the purposes of Part II of the Act, the only relevant factor is whether the parties had chosen a foreign arbitral seat, regardless of whether the parties themselves have any foreign nexus.
The Supreme Court also clarified that there are four elements that must be satisfied for an award to be designated a “foreign award” under Section 44: (i) the dispute must be a commercial dispute as understood under Indian law; (ii) the award must be made pursuant to a written arbitration agreement; (iii) it must be a dispute that arises between “persons” (without regard to their nationality, residence, or domicile), and (iv) the arbitration must be conducted in a country that is a signatory to the New York Convention.14 The Court found that the arbitral award in this case satisfied all four elements and was therefore a “foreign award” under Part II of the Act.
C. The Indian Contract Act, Public Policy and Party Autonomy
PASL also contended that it would be contrary to the public policy of India if two Indian parties could designate a foreign arbitral seat, under Sections 23 and 28 of the Contract Act, read with Sections 28(1)(a) and 34(2A) of the Act. In broad terms, Section 23 of the Contract Act provides that the object of an agreement is unlawful if it is, among other things, opposed to the public policy of India. Section 28 of the Contract Act provides that a contract which restricts a party from enforcing its contractual rights before Indian courts is void. However, arbitration agreements are specifically exempted from the application of Section 28.
The two questions before the Supreme Court were (i) whether Section 28 of the Contract Act prohibits two Indian parties from choosing a foreign arbitral seat; and (ii) whether permitting them to do so would be a contravention of public policy under Section 23 of the Contract Act. The Court answered both questions in the negative.
Relying on the text of the provision, the Supreme Court clarified that Section 28 contains an express carve out for arbitration agreements. That provision thus does not impose any limitations on the terms of arbitration agreements, which includes the choice of the arbitral seat.
On Section 23 of the Contract Act, the Supreme Court held that there was nothing in the public policy of India that limited party autonomy in the selection of a foreign arbitral seat by Indian parties. The Supreme Court explained that the freedom of contract must be balanced against clear and undeniable harm to the public and that no such harm existed in allowing Indian parties to choose a foreign arbitral seat.
PASL also argued on the basis of Section 28(1)(a) of the Act that a domestic Indian arbitration (i.e., one that did not meet the test of an “international commercial arbitration” in Section 2(1)(f) of the Act) could only be decided in accordance with Indian law. It argued, in particular, that it would be contrary to Indian public policy and the intent of the Act for two Indian parties to contract out of the substantive laws of India, and thus the arbitration laws of India.
The Supreme Court disagreed and held that, as a matter of statutory interpretation of Section 28(1)(a) of the Act, Indian substantive law is only mandatorily applicable to domestic disputes seated in India. That does not preclude the choice of a foreign arbitral seat by two Indian parties. However, the Court also suggested that, if on the facts of a case, two Indian parties chose a foreign seat with the intention to circumvent Indian public policy, the enforcement of any foreign award rendered into those proceedings may be resisted on the basis of the public policy exception under Section 48(2)(b) of the Act.
D. Interim Relief
On GE India’s cross-objection, the Supreme Court concluded that GE India’s request for interim relief was valid, rejecting the Gujarat High Court’s conclusion that Section 9 of the Act could not apply in aid of a foreign seated arbitration between two Indian parties. Section 9 of the Act only applies to arbitrations under Part I of the Act and to foreign seated arbitrations that qualify as “international commercial arbitrations.” In this regard, the Court found that given its decision that the definition of “international commercial arbitration” under Section 2(1)(f) of the Act did not apply to foreign seated arbitrations, it did not matter that the parties lacked a foreign nexus, as required by Section 2(1)(f). Applying its separate finding that a proceeding could also qualify as an “international commercial arbitration” based on the place of the arbitration, the Supreme Court held that a foreign seated arbitration between two Indian parties acquired the character of being “international” simply by virtue of the choice of a foreign seat.
The Supreme Court’s decision provides much needed clarity on the use of foreign seats by Indian parties. The decision strongly reinforces the primacy of party autonomy, which it characterizes as the “brooding and guiding spirit of arbitration.” In doing so, it presents Indian parties and Indian subsidiaries of foreign companies with the ability to choose a foreign arbitral seat in contracts with other Indian parties, if they so desire. In such cases, the Indian courts will not have supervisory jurisdiction over the proceedings, and any award rendered will not be subject to set aside proceedings in India.
This is a significant development. While India is taking important strides towards becoming an arbitration friendly jurisdiction, the Act provides parties with numerous opportunities to approach Indian courts in connection with Indian-seated arbitrations, for instance, in relation to the appointment of arbitrators or a tribunal’s decision that it does not have jurisdiction or that it is exceeding its authority. Where the dispute is between two Indian parties, the degree of judicial intervention is heightened because the arbitration is likely to be characterized as a domestic arbitration (rather than an “international commercial arbitration” as defined in Section 2(1)(f) of the Act), allowing a party to argue that certain provisions of the Act that are not applicable to an international commercial arbitration should apply in that case. For instance, unlike an award issued in an Indian-seated international commercial arbitration, an award issued in a domestic arbitration can be set aside on the ground of patent illegality, which has historically meant that courts have scrutinized the merits of the case.15 Given the large volume of cases in the Indian court dockets, these arbitration-related court proceedings can often be expensive and time consuming, inevitably delaying a final resolution of the dispute. Choosing a foreign arbitral seat thus provides Indian parties with the opportunity to reduce the risk of such parallel-court proceedings that would otherwise arise in Indian-seated arbitrations.
In addition, in choosing a foreign seat, Indian parties (and their foreign parents) can also take comfort in knowing that the Indian courts remain available and willing to grant interim relief in aid of their arbitration. This is of huge significance as the parties, being Indian domiciled, are likely to have assets that are predominantly based in India.
Apart from the seat, the Supreme Court has also opened the door to Indian parties choosing a law other than Indian law to govern their substantive contract. The Court clarified that the restriction in Section 28(1)(a) of the Act -- which provides that arbitrations seated in India shall be decided in accordance with Indian law -- only applies in domestic arbitrations and not “international commercial arbitrations” (as defined in Section 2(1)(f) of the Act), even if they are seated in India. Thus, an arbitration seated in India involving, for instance, an Indian national habitually resident in another country or an entity whose central management and control is exercised in a country other than India, does not need to be mandatorily decided in accordance with Indian law.
While the Court did not rule on the issue, it seems to have left open the possibility for two Indian parties who have chosen a foreign seat to also choose a foreign substantive law to govern their foreign seated arbitration, notwithstanding that the proceedings may not otherwise qualify as an “international commercial arbitration.” Parties who choose a foreign law and a foreign seat should, however, keep in mind that any such choice should not be designed to circumvent the public policy of India. If so, the losing party may argue that an award rendered in such a proceeding can be set aside on public policy grounds. It remains to be seen how the Indian courts will treat such a public policy challenge. Given the Supreme Court’s emphasis in the PASL case on party autonomy, however, it appears that such a challenge should be difficult to make.
1 PASL Wind Solutions v. GE Power Conversion India, Civil Appeal No. 1647 of 2021.
2 Enercon (India) Ltd. v. Enercon GmbH (2014) 5 SCC 1.
3 Addhar Mercantile Private v Shree Jagdamba Agrico Exports (2015) SCC OnLine Bom 7752.
4 Addhar Mercantile Private v Shree Jagdamba Agrico Exports (2015) SCC OnLine Bom 7752 at para. 8.
5 TDM Infrastructure v. UE Development India Private Limited (2008) 14 SCC 271.
6 Sasan Power v North American Coal Corporation (2016)(2) ArbLR 179 (MP).
7 Atlas Exports Industries v. Kotak & Company (1999) 7 SCC 61
8 Atlas Exports Industries v. Kotak & Company (1999) 7 SCC 61, at para. 11.
9 GMR Energy Limited v. Doosan Power Systems India Private Limited (2017) SCC OnLine Del 11625. Relying on the Supreme Court’s decision in Atlas Exports, the Delhi High Court concluded, among other things, that two Indian parties choosing a foreign arbitral seat was not contrary to the public policy of India and therefore did not contravene Sections 23 and 28 of the Indian Contract Act, 1872.
10 GE Power Conversion India Pvt Ltd v. PASL Wind Solutions Pvt Ltd (2019) R/Petn. Under Arbitration Act Nos. 131 and 134 of 2019.
11 GE India challenged the validity of the arbitration agreement on the grounds that two Indian parties could not choose a foreign arbitral seat. The tribunal concluded that Zurich was the seat of the arbitration and that the choice of a foreign seat was permitted under Indian law. The arbitration agreement was thus valid.
12 Bharat Aluminium Co v. Kaiser Aluminium Technical Services (2012) 9 SCC 552.
13 PASL Wind Solutions v. GE Power Conversion India, Civil Appeal No. 1647 of 2021, at paras. 12 and 89.
14 PASL Wind Solutions v. GE Power Conversion India, Civil Appeal No. 1647 of 2021, at para. 21.
15 Section 34(2A) of the Act.