HIGH COURT OF GUJARAT FINDS THAT TWO INDIAN PARTIES CAN CHOOSE A FOREIGN SEAT OF ARBITRATION BUT CANNOT OBTAIN INTERIM RELIEF IN INDIAN COURTS

The Gujarat High Court (the “Court”) recently handed down a significant decision in GE Power Conversion India Private Limited v. PASL Wind Solutions Private Limited, Arbitration Petition No. 131 and 134 of 2019, confirming 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 who had chosen a non-Indian seat would not be entitled to interim relief from the Indian courts in support of the arbitration under s9 of the Arbitration and Conciliation Act 1996 (the “Act”).

Background

PASL Wind Solutions Private Limited (“PASL”) and GE Power Conversion India Private Limited (“GE”), both Indian companies, 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 (the “Award”).

GE applied to enforce the Award under s47 of the Act, and also for interim relief under s9 of the Act. GE requested the Court to issue interim orders requiring PASL to deposit the Award amount with the Court and restrain it from transferring its property.

Key issues

Seat of the arbitration

PASL argued that the seat of arbitration was India. Its counsel argued that of the three types of arbitration regimes governed by the Act (i.e. domestic arbitration seated in India, international commercial arbitration, and foreign awards made outside India), the present proceeding was a domestic arbitration. s2(1)(f) of the Act defines ‘international commercial arbitration’ based on the parties’ nationality. An arbitration qualifies as such when it relates to a dispute arising out of a legal commercial relationship, and at least one of the parties is non-Indian. Since both parties to the disputes were body corporates incorporated in India, this definition did not apply.

The Court held that the nationality of the parties and other domestic elements in the arbitration were “irrelevant” in determining whether an award was a foreign award. This would be determined solely by the seat of the arbitration. The Court held that the seat was indeed Zurich, based on a plain reading of the dispute resolution clause in the settlement agreement, and transcripts from the hearing which emphasised that the seat of the arbitration was Zurich and Swiss law would apply to the proceedings.

Indian parties’ choice of a foreign seat

PASL submitted that the intention of the Act was not to allow two Indian parties to contract out of the full extent of judicial scrutiny imposed on the enforcement of domestic awards (such as wider grounds to challenge the award) by designating a seat outside India in an arbitration that otherwise had no foreign element. PASL referred to s28 of the Indian Contract Act 1872 (“ICA”), which states that agreements restraining parties to a contract from enforcing their rights by legal proceedings are void. PASL argued that the object of a contract by which two Indian parties agree to seat the arbitration outside India would be unlawful under s23 of the ICA since it would defeat the provisions of the Act, and this would contravene Indian public policy.

In the alternative, PASL requested non-enforcement of the award on the ground that the Tribunal’s reasoning in the Award obliterated the basis of the settlement agreement, and was contrary to the fundamental policy of Indian law and basic notions of justice.

The Court was not prepared to delve into the merits of the Tribunal’s decision at the enforcement stage, following precedent established in other cases (discussed in our prior blog post).

Turning to PASL’s public policy argument under s48(2)(b) of the Act, the Court highlighted the exception to s28 of the ICA (under which contracts referring disputes to arbitration are not unlawful), and emphasised the high threshold required to establish contravention of Indian public policy. It pointed out that neither the ICA nor the Act prohibited two Indian parties from designating a foreign seat of arbitration, and rejected PASL’s argument that such a choice would violate public policy. The Court also stated that the case of TDM Infrastructure v. UE Development India (2008) 14 SCC 271, which prohibits Indian parties from contracting out of Indian law, was inapplicable to the facts of the case.

Interim relief under s9

s2(2) of the Act provides that s9 applies to “international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made...is enforceable and recognised under the provisions of Part II of this Act". As noted above, the definition of ‘international commercial arbitration’ under s2(1)(f) requires at least one party to be non-Indian.

GE argued that the Court should construe the term ‘international commercial arbitration’ in s2(2) as referring to all arbitrations seated outside India, so as not to leave foreign award holders seeking enforcement without a remedy.

PASL on the other hand argued that the proceeding between the parties was not an international commercial arbitration since both parties were Indian, and the fact that GE made an application under s9 showed that it considered the arbitration to be domestic.

The Court ruled that in accordance with s2(1)(f) and s2(2), interim measures under s9 are available for ‘international commercial arbitrations’ regardless of whether such arbitrations were seated in India or abroad. However, since both parties in this case were Indian, the arbitration was not an ‘international commercial arbitration’ under s2(1)(f), so they would not be entitled to seek such relief. Based on the principles of statutory interpretation, the Court refused to interpret the “plain and unambiguous” language of the proviso to s2(2) as referring to all arbitrations seated outside India.

Comment

This judgment is a welcome clarification of the position that two Indian parties are entitled to choose a foreign seat of arbitration. Various courts have ruled differently on this proposition – for example, the Delhi High Court ruled in favour in GMR Energy v. Doosan Power Systems, CS (Comm.) 447/2017 (see our coverage of this decision here), while the Bombay High Court took a contrary position in Addhar Mercantile v. Shree Jagdamba Agrico Exports, AA No. 197 of 2014 and 910 of 2013.

On the other hand, Indian parties providing for foreign seats where there may be no non-Indian party to the dispute should be mindful that interim relief from an Indian court under s9 of the Act (e.g. relating to restrictions on transfer of property etc.) may not be available.

A final determination on these issues by the Supreme Court would be welcome should this judgment be appealed.

For more information please contact Nicholas Peacock, Partner, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact.

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