The supreme court in this case held that parties to a contract who are Indian nationals or companies (incorporated in India) can choose arbitration outside of India.
CIVIL APPEAL NO. 1647 OF 2021
DATE OF JUDGEMENT:
20 April 2021.
Justices RF Nariman, BR Gavai, and Hrishikesh Roy
- PASL WIND SOLUTIONS PRIVATE LIMITED (APPELLANT)
- GE POWER CONVERSION INDIA PRIVATE LIMITED (RESPONDENT)
Sr. Adv Tushar Himani, Nakul Dewan, M/s Cyril Amarchand Mangaldas
The question before the court was that whether two parties of a contract choose a foreign seat for arbitration in a country other than India.
The Supreme court states that Indian parties can choose a foreign seat for arbitration.
- Section 47 and 49 of the Arbitration Act.
- Section 28 (1)(A) and 34 (2A) of the Arbitration Act.
- Section 2 (1)(f), 2(2), 2(6), and 4 of the Arbitration Act.
- Section 23 of the Indian Contract Act.
- Section 10 (3) of the Commercial Courts Act.
- The supreme court in this case held that parties to a contract who are Indian nationals or companies (incorporated in India) can choose arbitration outside of India. The question before the bench was that whether two companies that are incorporated in India can choose a forum for arbitration outside of India.
- In the present case, two companies entered into a contract (both the companies were incorporated in India under companies Act, 1956). Clause 6 of the contract stated that in the case of dispute between the companies the matter shall be referred to and resolved by arbitration in Zurich according to the rules of Conciliation and Arbitration of International Chamber of Commerce.
- One of the companies disagreeing with this clause filed a preliminary application challenging the jurisdiction of arbitrator stating that the two Indian parties could not choose a foreign seat for arbitration. The objection was subsequently rejected by the arbitrator and the proceedings were continued and the final award was passed.
- The party later filed an application for enforcement proceedings under section 47 and 49 of the arbitration act before the High Court of Gujarat.
ARGUMENTS BY THE PARTIES
The appellant company argued that -
- The company argued that two Indian parties which form the contract cannot choose a seat of arbitration outside of India and doing so would be violative of Section 23 of the Indian Contract Act along with section 28 (1)(A) and 34 (2A) of the Arbitration Act.
- The petitioners also contended that the part 2 of the arbitration act arises only from international commercial arbitration. As the term is defined in section 2 (1)(f) of the Arbitration Act. The section clearly mentions that there needs to be a presence of "foreign element" which means that at least one of the parties is, inter alia, a national of a country other than India or a habitual resident in any other country than India or a body incorporated outside of India and for these reasons the award passed in the present case cannot be held.
- And in this case, there was no foreign element present in an award made in Zurich between the two Indian parties, such award cannot be the subject of challenge for enforcement under either Part 1 or Part 2 of the Arbitration Act.
- There is a conflict between section 10 (3) of the Commercial Courts Act and section 47 of the Arbitration Act and the former shall prevail.
ANALYSIS OF THE JUDGEMENT
- While delivering the judgement, the bench referred to various laws and provisions of the Arbitration Act, The Contract Act, and The Commercial Courts Act. The bench also referred to various previous judgements.
- Talking about Part 1 and Part 2 of the court observed that both these parts are mutually exclusive. Part 1 deals with arbitration where the seat is in India and has no application to a foreign arbitration. It only deals with appointment, commencement of the arbitration etc.
- Whereas the Part 2 is in no capacity concerned with the arbitral proceedings. This part only deals with enforcement of a foreign award, as per Indian laws. Section 45 of the act alone deals with referring the parties to arbitration in certain circumstances. However, this part does not deal with proceedings outside India.
- In regards of section 23 of the Indian Contract act, the court observed that the freedom of contract has to be balanced with clear and undeniable harm to the public, even if the particular cases do not fall within the crystallised principles mentioned in the well-established 'heads' of public policy. The question that whether there is anything regarding the public policy of India, which interdicts the party autonomy of the two Indian persons referring their disputes to arbitration at a neutral place outside of India.
- Section 28(1)(A) when read with section 2(2), 2(6), and 4 of the Arbitration act provides that where the place of Arbitration is located outside of India other than International commercial arbitration, the tribunal shall decide the matter of dispute in accordance with law in India. It shall be noted that this section does not provide for arbitration being held between two parties in a country other than India.
- Regarding the section 10 of Commercial Courts act, the court observed that, it has already been said that international commercial arbitration, when used as per section 2(2) of the arbitration act, does not refer to the definition mentioned in section 2(1)(f) but does have references to arbitration which takes place outside of India.
- It shall be noted that section 10(1) applies to international commercial arbitrations, under both part 1 and part 2 of the Arbitration act. When applications or appeals arise out of such arbitrations under Part I, where the place of arbitration is in India, without any doubt, the definition of "international commercial arbitration" in section 2(1)(f) will govern.
- However, when part 2 is concerned, international commercial arbitration has reference to a place of arbitration in which international means taking place outside of India. Thus, it can be concluded that there is no clash at all between section 10 of the Commercial Courts Act and the explanation to section 47 of the Arbitration Act.
This case was brought before the supreme court of India when two parties entered into a contract in which an arbitration clause was present which stated that, the seat for arbitration is in Zurich. One of the parties aggrieved approached the court against the order of arbitration claiming that such an arbitration cannot take place as both the parties are Indian companies incorporated in India under the Companies Act. The court while talking about the various provisions of the arbitration act, contract act, and the commercial courts act held that parties to a contract in India can choose a foreign arbitration.
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