Supreme Court clarifies the enforceability of foreign arbitral awards between two Indian parties: PASL Wind Solutions vs. GE Power Conversion (20 April 2021)

Case Background

The case involves PASL Wind Solutions Private Limited (the appellant), a company incorporated in Ahmedabad, Gujarat, and GE Power Conversion India Private Limited (the respondent), a company based in Chennai, Tamil Nadu. In 2010, the appellant placed three purchase orders with the respondent for the supply of converters. After the supply, disputes arose concerning the warranty period of these converters. To resolve these issues, both parties entered into a settlement agreement on December 23, 2014.

Clause 6 of this settlement agreement included a dispute resolution clause, which stated that any disputes would first be resolved amicably for a minimum of 60 days. If amicable settlement failed, the disputes would be referred to arbitration in Zurich, Switzerland, under the rules of the International Chamber of Commerce (ICC). The agreement also specified that the arbitration award would be final and binding.

A dispute arose when the appellant claimed that the warranties for the converters were not provided as agreed, while the respondent contended that the warranties only covered the delta modules, not the converters themselves. Consequently, on July 3, 2017, the appellant initiated arbitration with the ICC. Both parties agreed to have a sole arbitrator appointed by the ICC. It was also agreed that Indian law would be the substantive law applicable to the dispute.

Timeline

Course of Proceedings

The respondent initially challenged the arbitrator’s jurisdiction, arguing that two Indian parties could not choose a foreign seat for arbitration. However, the arbitrator rejected this challenge, citing previous Supreme Court decisions and affirming Zurich as the seat of arbitration. The arbitrator also decided that while the seat of arbitration was Zurich, all hearings would be held in Mumbai, India, for convenience.

After the final award was issued against the appellant, the respondent initiated enforcement proceedings in the Gujarat High Court. The appellant then reversed its earlier stance, claiming that Mumbai was the actual seat of arbitration and filed a challenge to the award under Section 34 of the Arbitration Act before the Small Causes Court, Ahmedabad, which was later transferred to the Commercial Court, Ahmedabad. The Commercial Court rejected the respondent’s application to dismiss the challenge. Both the enforcement and challenge proceedings were halted due to the present appeal before the Supreme Court.

Legal Framework

The Supreme Court examined several key provisions of the Arbitration and Conciliation Act, 1996, and the Indian Contract Act, 1872. These include:

• Section 2(1)(f) of the Arbitration Act: Defines “international commercial arbitration” as an arbitration where at least one party is a foreign national, a body corporate incorporated outside India, or an association managed outside India.
• Section 2(2) of the Arbitration Act: States that Part I of the Act applies where the place of arbitration is in India. A proviso was added in 2015 to allow certain provisions of Part I to apply to international commercial arbitrations even if the seat is outside India.
• Section 4 of the Arbitration Act: Deals with waiver of the right to object, stating that a party who knows of non-compliance with the arbitration agreement but proceeds without objection waives their right to object.
• Section 28 of the Arbitration Act: Specifies the rules applicable to the substance of the dispute. Section 28(1)(a) states that in arbitrations other than international commercial arbitrations, the arbitral tribunal shall decide the dispute in accordance with the substantive law of India.
• Section 34(2A) of the Arbitration Act: Allows a court to set aside an arbitral award arising out of arbitrations other than international commercial arbitrations if the award is vitiated by patent illegality.
• Section 44 of the Arbitration Act: Defines “foreign award” as an arbitral award on differences between persons arising out of legal relationships, considered commercial under Indian law, made in pursuance of an agreement to which the New York Convention applies, and in a territory notified by the Central Government.
• Section 47 of the Arbitration Act: Specifies the evidence required for the enforcement of a foreign award, and defines “court” as the High Court.
• Section 49 of the Arbitration Act: States that a foreign award deemed enforceable shall be treated as a decree of the court.
• Section 23 of the Indian Contract Act, 1872: States that the consideration or object of an agreement is unlawful if it is forbidden by law, defeats the provisions of any law, is fraudulent, involves injury to person or property, or is immoral or opposed to public policy.
• Section 28 of the Indian Contract Act, 1872: States that agreements that restrict a party from enforcing their rights in ordinary tribunals are void. Exception 1 to this section states that this does not apply to agreements to refer disputes to arbitration.

Arguments

Appellant’s Arguments:

• The appellant argued that two Indian parties cannot choose a foreign seat of arbitration, as this would violate Section 23 of the Contract Act and Section 28(1)(a) and 34(2A) of the Arbitration Act.
• They contended that by choosing a foreign seat, parties could bypass Indian substantive law, which is against public policy.
• The appellant submitted that foreign awards under Part II of the Arbitration Act must arise from international commercial arbitrations, which, according to Section 2(1)(f) of the Act, requires a foreign element.
• They argued that the award in this case could not be considered a foreign award under Part II, as both parties were Indian.
• The appellant distinguished the Supreme Court’s judgment in Atlas Export Industries v. Kotak & Co. [(1999) 7 SCC 61], arguing that the specific argument under Section 23 of the Contract Act was not addressed.
• They also argued that the judgment of the Madhya Pradesh High Court in Sasan Power Limited v. North American Coal Corporation (India) Pvt. Ltd. [2015 SCC OnLine MP 7417] was based on an incorrect appreciation of facts.
• The appellant stressed that the expression “unless the context otherwise requires” in Section 44 of the Arbitration Act should import the definition of “international commercial arbitration” from Part I, which requires a foreign element.
• The appellant argued that the Arbitration Act is a self-contained code, and an award between two Indian companies without a foreign element cannot be challenged or enforced under either Part I or Part II.
• They relied on Section 10 of the Commercial Courts Act, 2015, to argue that the present case is not an international commercial arbitration and thus the High Court lacked jurisdiction.
• The appellant argued that the seat of arbitration should be Mumbai, based on the closest connection test, as all factors connected the arbitration to India.

Respondent’s Arguments:

• The respondent argued that the appellant was contradicting its earlier position before the arbitrator, where it had asserted that two Indian companies could agree to a foreign seat of arbitration.
• They argued that Part I and Part II of the Arbitration Act are mutually exclusive, and the definition of “international commercial arbitration” from Part I cannot be imported into Section 44 of Part II.
• The respondent submitted that nationality or domicile is irrelevant for the application of Section 44 of the Arbitration Act.
• They relied on the judgment in Atlas Export Industries v. Kotak & Co. [(1999) 7 SCC 61] to argue that two Indian parties can agree to a foreign seat of arbitration.
• The respondent argued that neither Section 23 nor Section 28 of the Contract Act prohibits choosing a foreign seat for arbitration.
• They contended that the expression “unless the context otherwise requires” in Section 44 cannot defeat the basis of the section, which only requires the seat of arbitration to be outside India.
• The respondent argued that the closest connection test only applies when the seat is not determined, and in this case, Zurich was the designated seat.
• They also argued that the phrase “international commercial arbitration” in the proviso to Section 2(2) and Section 10 of the Commercial Courts Act is not governed by the definition in Section 2(1)(f) but refers to arbitrations with a seat outside India.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Can two companies incorporated in India choose a forum for arbitration outside India?
2. Can an award made at such a forum outside India, to which the New York Convention applies, be considered a “foreign award” under Part II of the Arbitration Act and be enforceable as such?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Ratio Decidendi

The Supreme Court held that:

• Two Indian parties can choose a foreign seat of arbitration. The Arbitration Act does not prohibit such an agreement.
• The definition of “foreign award” under Section 44 of the Arbitration Act does not require a foreign element in the parties. It only requires that the award be made in a territory notified by the Central Government as a signatory to the New York Convention.
• Part I and Part II of the Arbitration Act are mutually exclusive, and the definition of “international commercial arbitration” in Part I cannot be imported into Part II.
• The expression “unless the context otherwise requires” in Section 44 cannot defeat the basis of the section, which is seat-oriented and not party-oriented.
• Party autonomy is a cardinal principle in arbitration law. The parties are free to choose the seat of arbitration, and the courts should respect this choice.
• The closest connection test is only applicable when the seat is not determined. If the parties have agreed on a seat, that seat is the center of gravity of the arbitration.

Conclusion

The Supreme Court dismissed the appeal, upholding the enforceability of the arbitral award as a “foreign award.” The Court clarified that two Indian parties can indeed choose a foreign seat for arbitration, and such awards can be enforced in India under Part II of the Arbitration Act, provided the seat is in a country that is a signatory to the New York Convention. This judgment reaffirms the principle of party autonomy in arbitration and provides much-needed clarity on the enforceability of foreign-seated arbitral awards between Indian parties.