Two Indian parties can choose a foreign seat of arbitration, court rules

In its judgment (106 page / 520KB PDF) in a case challenging the jurisdiction of an arbitration, the three-judge bench said: “Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when parties happen to be Indian nationals.”

Indian law expert Vinayak Kapur of Pinsent Masons, the law firm behind Out-Law, said: “The judgment should bring significant comfort for foreign businesses operating or planning to operate in India, but sceptical of encountering the Indian court system where a dispute is referred to arbitration. With this judgment, we expect contracting Indian corporates, in particular where such with foreign parents are involved, to opt for arbitration seats like Singapore, London, Paris or Zurich.”

The case was brought by PASL Wind Solutions after a dispute arose with GE Power Conversion India after a dispute arose over a contract for the supply of converters by GE Power to PASL Wind. Both companies were incorporated in India.

The contract included an arbitration clause, stating that any disputes between the parties would be referred to and resolved by arbitration in Zurich in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC).

However, when the dispute did arise and was referred to arbitration, PASL Wind challenged the jurisdiction of the arbitrator on the ground that two Indian parties could not have validly chosen a foreign seat.

The objection was rejected by the arbitrator, who went on to deliver the final award in favour of GE Power. GE Power filed for enforcement proceedings, and the High Court of Gujarat agreed to enforce the award. PASL Wind then appealed to the Supreme Court.

PASL Wind argued that if two Indian parties were allowed to arbitrate outside India, this would violate the terms of the Indian Arbitration Act, which stipulates that when two Indian parties arbitrate in India, they are required to do so under Indian law.

The Supreme Court said the provision requiring two Indian parties to arbitrate under Indian substantive law did not prevent them from choosing a seat outside India.

It added: “The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian nationals to avail of a challenge procedure of a foreign country”.

The Supreme Court judgment resolves uncertainty caused by conflicting opinions delivered by high courts in different Indian states.

The Supreme Court clarified that an award rendered in a foreign-seated arbitration, even when the arbitration was between two Indian parties, will be considered a 'foreign award' and its enforcement in India would be governed by the New York Convention.

It also said that Section 9 of the Arbitration Act – which allows Indian courts to provide interim relief – is available even in foreign seated arbitrations and to parties regardless of their nationality. Two Indian parties are likely to have assets in India, and Indian courts are permitted to protect those assets pending arbitration.

Construction disputes expert Christian Lütkehaus of Pinsent Masons, said: “The Supreme Court’s award, and in particular its reasoning, can be seen as continuation of a trend that has been evident for a good number of years and has brought about substantial improvements for foreign-headquartered businesses seeking reasonably streamlined proceedings for the resolution of disputes arising under contracts concluded in India".

Mohan Pillay of Pinsent Masons MPillay, the Singapore joint law venture between MPillay and Pinsent Masons, the law firm behind Out-Law, said: “The Supreme Court’s decision is to be welcomed. Allowing two Indian parties to agree a foreign arbitral seat not only settles a long running debate, it underlines, if somewhat belatedly, the rightful importance of party autonomy. This development will hold particular significance for foreign companies with Indian subsidiaries.”