India’s arbitration rollercoaster: two Indian parties may choose a seat outside India – a win for party autonomy

• The Supreme Court of India (SCI) held last month that two Indian parties may choose an arbitration seat outside India.
• For an award to be enforceable in India, the seat must be in a country that is party to the New York Convention.
• There is still ambiguity on whether two Indian parties may choose a foreign substantive law.
• Choosing a seat outside India does not preclude two Indian parties from seeking interim relief before Indian courts.   

Why is this ruling important for foreign investors?

The lack of clarity on this issue meant that, until now, India-incorporated subsidiaries and joint ventures of foreign investors usually refrained from choosing an arbitration seat outside India. An India seat meant that Indian courts had supervisory jurisdiction, and the award would be subject to challenge in India. Indian arbitration has had its ups and downs, and despite numerous arbitration-friendly rulings, there is still much uncertainty, and arbitration-related Indian court proceedings are still time consuming and could take many years. For example, in a recent case – Anglo American v MMTC (December 2020) – challenge proceedings were pending in the Delhi High Court for five years (though the SCI, which is usually quicker, decided the appeal within a few months of its being filed). A seat outside India would mean that challenge and other arbitration-related proceedings would be decided by the courts at the seat, such as Singapore or London.

The facts

The SCI’s judgment dated 20 April 2021 in PASL Wind Solutions Private Limited v GE Power Conversion India Private Limited involved a Zurich-seated arbitration under the ICC Rules. The parties were two Indian companies, with registered offices in India. The sole arbitrator ruled in favour of GE Power. GE Power brought enforcement proceedings in India. The Gujarat High Court enforced the Award, holding that the Indian Arbitration Act does not prevent two Indian parties from designating a neutral, foreign court to oversee the arbitration. PASL Wind appealed to the Supreme Court.

Public policy and party autonomy

PASL Wind argued that under the Indian Arbitration Act, when two Indian parties arbitrate in India, they are required to do so under Indian law. Choosing a foreign seat would result in parties derogating from Indian substantive law, which would violate Indian public policy. The SCI disagreed and held that the provision requiring two Indian parties to choose Indian law in an India-seated arbitration cannot prevent two Indian parties from choosing a seat outside India. The SCI went on to hold that “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 SCI emphasised that party autonomy, which it described as the “brooding and guiding spirit of arbitration”, must prevail.

But what about foreign substantive law? 

There is some ambiguity on whether two Indian parties can choose a foreign substantive law to govern their contract. In rejecting PASL Wind’s argument that choosing a foreign seat results in two Indian parties derogating from Indian substantive law, the SCI did not expressly state that two Indian parties may choose a foreign substantive law when they arbitrate outside India. In fact, a few paragraphs might be read to suggest otherwise. For example, in dealing with the public policy argument, the SCI held that choosing a seat outside India does not violate public policy because it is “more than likely” that the two Indian parties will “apply the substantive law of India to disputes between them” and even in the absence of such designation, “the substantive law of India will be applied by the arbitrator in accordance with the conflict of law rules”. This reasoning could suggest that two Indian parties must choose Indian substantive law as the law governing their contract—but the issue was not squarely before the SCI on the facts. Further clarity on this issue will be important.

Enforcement 

The Indian Arbitration Act is divided into four parts. Part I deals with arbitrations that take place in India. Part II deals with enforcement of foreign awards. Parts III and IV are not relevant for this discussion. The SCI has clarified that an award delivered by a tribunal seated outside India is a foreign award, and will be enforceable under Part II even if the two parties are Indian.  

Interim relief in India

The SCI has clarified that parties to a foreign-seated arbitration have access to Indian courts for interim relief, notwithstanding their nationality. This is important for protection of assets. Two Indian parties are likely to have assets in India, and Indian courts are now permitted to protect those assets pending arbitration.

This material is for general information purposes only and is not intended to constitute legal or other advice. Regulation prohibits foreign law firms from practising Indian law or from having their own offices in India. The contents of this publication do not constitute any opinion or determination of Indian law by us. Any comments in this publication are based on our experience as international counsel representing our clients in their deals and disputes which may have a connection with India. Where Indian law advice is needed, we work alongside leading Indian counsel.