Two Indian Parties Can Opt For Seat Of Arbitration Outside India

It has been a highly debated question among the legal fraternity whether two Indian parties can choose to have an arbitration outside India. High Courts have expressed different opinions on this question. In the case of Sasan Power Limited vs. North American Coal Corporation India Pvt. Ltd[[1]], the Madhya Pradesh High Court had allowed two Indian parties to choose a seat outside of India. Similarly, in the case of GMR Energy Limited vs. Doosan Power Systems India [[2]], the Delhi High Court had also permitted two Indian parties to choose a foreign seat.

On the other hand, the Bombay High Court in the case of Addhar Mercantile Private Limited vs. Shree Jagdamba Agrico Exports Ltd[[3]], declared the clause according to which two Indian parties opting for a foreign seat is invalid. However, all ambiguity was put to rest when the Hon’ble Supreme Court ruled that two Indian parties can freely choose a foreign seat of arbitration.

Facts – Arbitration Outside India

In the present case, both the applicant and the respondent are companies registered in India.  In response to the three purchase orders issued by the appellant, the respondent supplied six convertors. Dispute regarding the warranty of the convertor arose between the parties. To resolve the dispute, the parties entered into a settlement agreement dated 23.12.2014. As per the dispute resolution clause of the settlement agreement, the dispute shall be resolved by arbitration to be conducted in Zurich and the arbitration shall be governed by the rules of the International Chamber of Commerce. It was agreed between the parties that the Indian Law will be the substantive law for arbitration.

Later, the respondent raised a preliminary objection challenging the jurisdiction of the arbitrator arguing that two Indian parties cannot choose a foreign seat of arbitration. Citing Indian judgments, the arbitrator dismissed the objection raised and held that the Swiss Act will apply to the arbitration agreement as the seat of the arbitration was Zurich, Switzerland. Later, the respondent suggested Mumbai as the venue of arbitration and in order to save costs, the arbitrator agreed to the change of location.  Subsequently, an arbitral award was passed against the appellant.

The respondent approached the Gujarat High Court for the enforcement of the award under Section 47 and 49 of the Arbitration Act as the assets of the appellant lies within the jurisdiction of the Gujarat High Court. The case was ruled in favour of the respondent and the appellant challenged the judgment before the Supreme Court.

Grounds and the Judgment

• Closest Connection Test

The appellant challenged the maintainability of the enforcement proceedings. During the arbitration proceedings, the appellant had argued that two Indian companies can agree to have a seat of arbitration outside India. However, during the enforcement proceedings, the appellant flipped from its earlier stand and argued that two Indian parties cannot choose a seat of arbitration outside India as it would be contrary to Section 23 of the Indian Contract Act, 1872 (Hereinafter referred to as “Contract Act”) read with Section 28(1)(a) and Section 34(2A) of the Arbitration Act, 1996 (Hereinafter referred to as “Arbitration Act”).

To support its argument, the appellant relied upon the closest connection test. However, the Hon’ble Supreme Court refused to accept this argument as the seat had clearly been designated both by the parties and by the tribunal, and had been accepted by both the parties. The aforesaid test is applicable only when the seat of the arbitration is not clear from the arbitration clause. While upholding the Gujarat High Court judgment, the Supreme Court held that two Indian parties can freely choose a foreign seat of arbitration outside india. The Supreme Court upheld the party autonomy and permitted the designation of a seat of arbitration outside India even when both parties are Indian.

• Whether the award is a Foreign Award

Appellant argued that the present award passed in the impugned order is not a foreign award and therefore cannot be enforced under Part II of the Arbitration Act. Appellant argued that foreign award arises out of international commercial arbitrations only and as per Section 2(1)(f) of the Arbitration Act which states that either of the party has to be a foreign party.

Since both the parties are Indian in the present case, the present award cannot be designated as a foreign award under Part II of the Arbitration Act. By rejecting the Appellant’s argument, the Hon’ble SC held that Section 44 is venue-centric in nature and thus the nationality of the parties will not be relevant in deciding the nature of the award.

• Whether an application under Section 9 of the Arbitration Act would be maintainable

As part of the enforcement proceedings, the respondent had also filed a Section 9 Application to secure the award. The Gujarat High Court, in the impugned judgment, held that if both the parties choose a foreign seat, then they cannot make an application for interim reliefs under Section 9 of the Arbitration Act.

The reason given by the Gujarat High Court was that recourse under Section 9 is applicable to international commercial arbitration only and the definition of international commercial arbitration in Section 2(1)(f) of the Arbitration Act required at least one foreign party, which did not exist in the present case. By overruling the part of the impugned order of the Gujarat High Court, the Supreme Court held that Section 9 of the Arbitration Act remains available where two Indian parties adopt a foreign seat.

Conclusion

Indian judiciary has taken many steps towards establishing a pro-arbitration regime in India and with this judgment, the Supreme Court has taken a gigantic leap in that direction. International companies/investors will find much needed relief in this ruling. It addresses a big concern that almost all foreign entities with Indian subsidiaries facei.e.to have the ability to resolve domestic disputes with other Indian parties in a neutral/foreign jurisdiction with the ability to approach Indian courts for interim reliefs under Section 9 of the Arbitration Act.

In this landmark judgment, the Indian judiciary has upheld party autonomy. This judgment has affirmed the ruling of Bharat Aluminium Co. Vs. Kaiser Aluminium Technical Services Inc.[4] wherein the Supreme Court held that party autonomy is the brooding and guiding spirit of the arbitration. The Supreme Court also pointed out that if the arbitration takes place outside India and if the assets of one of the parties are in India, then the Indian Courts can pass interim orders as required, to preserve such assets.   

• [1]CIVIL APPEAL NO. 8299 OF 2016
• [2] 2017 SCC Online Del 11625
• [3] Arbitration Petition No 910 of 2013
• [4] CIVIL APPEAL NO.7019 OF 2005
• [5] Two Indian Parties Can Opt For Seat Of Arbitration Outside India

Contributed By – Gaurav Purohit, Associate

King Stubb & Kasiva,
Advocates & Attorneys

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DISCLAIMER: The article is intended for general guidance purpose only and is not intended to constitute, and should not be taken as legal advice. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.