Party autonomy for arbitrations triumphs in Indian Supreme Court

The Supreme Court of India’s ruling in PASL Wind Solutions Private Ltd. v GE Power Conversion India Private Ltd. is significant for two principal reasons. First, it ruled that two Indian parties can choose a foreign seat of arbitration. Secondly, it ruled that arbitral awards handed down in cases of this nature are enforceable in India.

The background

Disputes relating to the purchase of convertors arose between two Indian companies: PASL Wind Solutions Private Ltd. (the appellant) and GE Power Conversion India Private Limited (the respondent).

The parties entered into a settlement agreement in which the dispute resolution clause directed the parties to arbitrate under ICC rules with Zurich as the seat of arbitration.

When disputes arose in relation to the settlement agreement, the appellant sought to arbitrate in Zurich, however, the respondent opposed this on grounds that foreign seats of arbitration could not be chosen by Indian parties.

Though the respondent’s opposition was dismissed, its application to save costs and move the arbitration to Mumbai was granted. The arbitral award was made in favour of the respondent.

The respondent sought to enforce the award before the Gujarat High Court as a foreign arbitral award. The appellant challenged such enforcement on the grounds that the arbitration took place in Mumbai and that it is, in any event, against Indian public policy for two Indian parties to choose a foreign seat of arbitration. Therefore, the appellant was seeking to avoid enforcement on the basis that the award was not a foreign arbitral award but instead should be treated as a domestic award and subject to different grounds for challenge.

The Gujarat High Court upheld the enforcement of the award but did not grant interim relief to the respondent.

The appellant appealed to the Supreme Court, and the respondent filed cross-objections.

A foreign seat of arbitration

The appellant argued that by using the ‘closest connection test’ the seat of arbitration should be Mumbai. The Supreme Court held, however, that the seat of arbitration was indeed Zurich – not Mumbai – because Zurich was the seat chosen in the settlement agreement, and because the only reason the seat was moved to Mumbai was to save costs. The Supreme Court made clear that the ‘closest connection test’ is only relevant in circumstances where the chosen seat of arbitration is in doubt for some reason: there was no doubt in this case because the settlement agreement was clear.

In addition, the appellant argued that two Indian parties are not permitted to choose a foreign seat of arbitration. The Supreme Court did not agree, holding that a clear and undeniable harm to the public would need to be demonstrated in order to restrict parties’ freedom to contract: selecting a foreign seat of arbitration would by no means constitute a clear and undeniable harm to the public by default.

Further, the appellant argued that the Arbitration Act did not permit Indian parties in a dispute to select a foreign seat of arbitration. The Supreme Court ruled otherwise, holding that the law only restricted the resolution of disputes to Indian law when arbitrations were already seated in India, and that the law was silent on arbitrations between Indian parties outside of India. As such, there is no law that prevents two Indian parties arbitrating outside of India.

Enforceability in India

The appellant argued against the respondent’s position that the arbitral award was a ‘foreign award’ and that it was enforceable under Part II of the Arbitration Act. The Supreme Court ruled that Part I and Part II of the Arbitration Act are mutually exclusive: Part I dealt with arbitrations in India, whereas Part II dealt with the enforcement of foreign awards. In addition, the Supreme Court ruled that a foreign seated arbitration to which the New York Convention applies would be recognised as an “international commercial arbitration”, and so it would be enforceable under Part II of the Arbitration Act.

Comment

This decision provides necessary clarification on an issue which has previously been unclear: previous judgments had ruled in some cases that Indian parties could choose foreign seats of arbitration, and in other cases that they could not. Now that this judgment has clarified that Indian parties can indeed choose a seat of arbitration outside of India and that awards flowing from those judgments are enforceable in India, India should be recognised as a more enforcement-friendly jurisdiction, respectful of party autonomy. To the extent that India as a nation wants to be considered as a leading hub for arbitration, this judgment is a bold step in the right direction.

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