The conflicting interpretation/position have now been put to rest by the 3 Judges bench of the Hon’ble Supreme Court, in the celebrated judgment, ‘PASL Wind Solutions Pvt. Ltd. vs GE Power Conversion India Pvt. Ltd.’, (2021) 7 SCC 1, which while appreciating the complexities of the conflicting interpretation, held that two Indian parties, can now arbitrate and choose the foreign law including the law governing the substance of the dispute i.e the contract, as well as the law and procedure for governing and conducting the arbitration proceedings respectively.

The issue whether two ‘Indian Parties’ can choose a foreign governing law has been subject of much discussion in regards to the two separate views interpretations evolving, firstly, from the judgment of the Hon’ble Supreme Court, in ‘TDM Infrastructure Private Limited v. UE Development India Private Limited’ (2008) 14 SCC 271, which in brief held, that that two Indian nationals should, as a matter of Indian law, not be permitted to derogate from Indian substantive law, as it against the public policy of the country. This judgment was later on relied in the two other judgments of the Bombay High. This position/interpretation of law was again concluded in the judgment of Sasan Power Ltd. v. North American Coal Corporation (India) Pvt. Ltd., (2016) 10 SCC 813, expanding the jurisprudence on the abovementioned interpretation.

The second interpretation/position taken by the Hon’ble SC is namely in ‘Atlas Export Industries v. Kotak & Company’ (1999) 7 SCC 61. It held that foreign award cannot be refused merely because it is made into two Indian parties. The Court held when the parties have with their eyes open willingly entered into the agreement, the party autonomy has to prevail apart from other considerations. This judgment hence gave a preference to the party autonomy, and freedom of parties to choose, so far as, it is not contrary to public policy of India. The above interpretation is further relied in GMR Energy Ltd. v. Doosan Power Systems India Pvt. Ltd. by the Hon’ble Delhi High Court leading to a conflicting line of approach from the judgments mentioned in first paragraph.

However, the complexity of the issue is not limited to the public policy, (which though in itself is sometimes blamed to be abstract and contextual conclusion) vs the freedom of party to choose. The deeper issue is as to the explicit definition of ‘International Commercial Arbitration’ (‘ICA’) under section 2(1)(f) of the Arbitration and Conciliation Act, 1996 (‘A&C Act’), which mandates that there has to be a foreign element when parties arbitrate outside India, the foreign element being that at least one of the parties is, inter alia, a national of a country other than India, or habitually resident in a country other than India, or a body corporate incorporated outside India.

The problem become further complex when the implication accounted in terms of the applicable (1) proper law of contract, (2) proper law of arbitration agreement, and (3) proper law of the conduct of arbitration. The issue that can be derived from the above is whether the parties can although opt out of substantive law of dispute i.e Indian Contract Act, 1872, despite both parties being Indian, apart from choosing the law for arbitration agreement.

The problem has to be also seen in terms as to whether the provision like Section 9, Section 34, Section 37 etc. providing safeguards under Part I of the Act, can be extended to the award made in the present case, or it has to be kept limited to Part II and the recognized remedies, applied in case of an award from the ICA, as per Part II, of the Arbitration and Conciliation Act, 1996.

The brief facts of the above case are that both the companies were registered in Indian, under the Indian Companies Act, the appellants applied for supply of certain converters, pursuant to which the respondent supplied. Disputes arose between the parties in relation to the expiry of the warranty. In order to resolve these disputes, the parties entered into a settlement agreement. The settlement agreement under Clause 6, contained the dispute resolution clause. That this clause provided that all disputes, shall be referred to and finally resolved by ‘Arbitration’ in Zurich in the English language, in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce. The appellant issued request for initiation arbitration. On a preliminary application, the learned sole arbitrator, dismissed the respondent’s preliminary application, declaring two Indian parties can arbitrate outside India. A final award was passed in which the appellant’s claim was rejected. As the appellant failed to oblige, the respondent-initiated enforcement proceedings under sections 47 and 49 of the Arbitration Act before the High Court of Gujarat. The Appellant taking the contrary stand appellant challenged the said final award under section 34 of the Arbitration Act. Therefore, the Hon’ble Supreme Court had to decide various issue which is relevant to the abovementioned questions.

The issues framed/adopted by the Hon’ble SC, are Firstly, as to whether two companies incorporated in India can choose a forum for arbitration outside India - and whether an award made at such forum, to which the New York Convention applies, can be said to be a “foreign award” under Part II of the A&C Act.

The Court held that Part I and Part II of the A&C Act, are mutually exclusive. Part I deals with arbitrations where the seat is in India and has no application to a foreign-seated arbitration. On the other hand, Part II is not concerned with the arbitral proceedings at all and is concerned only with the enforcement of a foreign award. Further the Court observed that Section 2(7) provides that award in Part I, shall be domestic award. However, it doesn’t merely apply to domestic arbitration, but also to ICA, as stated under 2(1)f of the A&C Act. The Court on analyzing various provision comes to a conclusion, the Part I, talks about the ‘domestic award’ as award made in India, i.e domestically rendered, whether in domestic arbitration or international arbitration.

The Hon’ble Apex Court further observed that section 44 of the A&C Act, in Part II, provides the definition of ‘Foreign Award’, thus accepting the principle of territoriality, whereby the separation is maintained. The only exception is proviso to Section 2(2) of the A&C Act, which provides for the applicability of Section 9 to the foreign award.

The court held that there appears some confusion as Section 2(1)f of the A&C Act, defines the ICA. The Court therefore differentiates that ICA is referred in two sense in A&C Act, firstly, in party centric way (i.e Section 2(1)f, Part I), Secondly, on the basis of territory (i.e, Part II, of the A&C, Act,) both of which are mutually exclusive. The Court on the basis of the requirement under Section 44, held that ‘person’ as used in the Section 44, doesn’t excludes Indian parties from its preview and is only based on territory i.e place where the award is made, hence the award if made in any recognized territory under New York Convention, the same can be enforced as per Section 49 of the A&C Act.

However, the Court further proceeded to analyses that merely because the ingredients of Section 44, is fulfilled can the Indian parties be allowed to choose a foreign seat, and will it not violate the Public Policy under Section 23 r/w Section 28 (restraint of right to legal recourse) of the Indian Contract Act, 1872. The Court held that basing itself on certain observation in a common law judgment, that its paramount public policy to consider, that judges are not to lightly interfere with the freedom of contract and his job is to reconcile freedom of contract with other public interests. The Apex Court held that the Courts should not create a new head for the Public Policy as it is an unruly horse, but it has to merely expound the law. There are two way to interpret a provision, the ‘narrow way’ of interpreting and the ‘broad view’. Further, the narrow view would not invalidate a contract unless on the ground of strong governing precedents.

The Hon’ble Apex Court, concluded the relevant question therefore is to find if there is anything in the public policy of India, which interdicts the party autonomy of two Indian persons referring their disputes to arbitration at a neutral forum outside India. The Court declares that the case at hand is clearly covered by Exception 1 to Section 28. The parties are only required to have their dispute/s adjudicated by arbitration. Basing on the Atlas judgment “merely because the arbitrators are situated in a foreign country cannot by itself be enough to nullify the arbitration agreement” thus the Contention is overruled by the court and held that there is no interdiction.

Lastly, the Contention of the Substantive law also the Court declared, if on the facts it is found that two Indian nationals have circumvented a law which pertains to the fundamental policy of India, such foreign award may then not be enforced under section 48(2)(b) of the Arbitration Act. The Court further held that in the present case the Parties are subject to the setting aside provision available in the country chosen by parties and also further subject to challenges under Section 48 of the A&C Act. Thus, there is no clear and undeniable harm caused to the public.

In the present context, where the arbitration is the most preferred way of resolving the commercial disputes, the freedom to choose would promote party autonomy as prescribed by the statute. There may be situations where urgent business demands require a faster resolution, which the current arbitration process in India may not be able to cater to, as effectively as some other jurisdictions. Thus, it would be beneficial for parties to have the option to resolve disputes through arbitration outside India, especially for international businesses with Indian subsidiaries. However, it is important to consider the potential delay and enforcement issues that may arise from having dual remedies.

By - Devesh Bhatia