Short Summary

The article attempts to analyse the nature of foreign seated arbitration by two Indian parties. The significance of this determination is to further determine the applicability of Section 9 of the A & C Act, 1996 in such arbitrations.

INTRODUCTION

The position taken by the different Courts in India over the issue of two Indian parties choosing foreign seat of arbitration has been inconsistent even after more than 20 years of enactment of Indian Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act”). The Bombay High Court in Aadhar Mercantile (2015)[1] held that two Indian parties cannot choose foreign seat of arbitration while interpreting the ruling of Supreme Court (hereinafter referred to as “SC”) in TDM Infrastructure (2008)[2]. It was held by the SC that two Indian parties cannot derogate from Indian substantive law although the issue whether two Indian parties can choose foreign seat was not specifically dealt in this case. The recent judgments by various High Courts of Gujarat, Delhi and Madhya Pradesh took a different stance respectively in GE Power Conversion (2020)[3], GMR Energy Limited (2017)[4] and Sasan Power Limited (2016)[5] allowing the two Indian Parties to choose a foreign seat of arbitration. The High Courts in these cases also observed that arbitration seated outside India is not against public policy and upheld parties’ autonomy to choose a foreign seat. The authority relied in this regard was the decision by Supreme Court in Atlas Exports Indutries (1999)[6] case, which was passed in accordance with the earlier Arbitration and Conciliation Act of 1940. Nevertheless, the Supreme Court’s decision is awaited to settle the position conclusively under the present Act. In the absence of Supreme Court’s ruling in this reference until a precedent is set, this article aims to assess the nature of such arbitration agreement where the parties are domestic but involves a foreign element as seat of arbitration. Determination of the character of such arbitration is significant for determining the jurisdiction of the Indian Courts for applicability of Section 9 of the Act in foreign seated arbitrations involving domestic parties. The authors have tried to analyze the applicability of Part I of the Act in cases of foreign seated arbitrations, the nature of which is uncertain under the existing law of arbitration in India.

NATURE OF SUCH ARBITRATION

On a conjoint reading of Sections 2 (2) & (7), the Act provides that ‘Domestic Arbitration’ is an arbitration in which arbitral proceedings are held in India, governed by the Indian substantive and procedural law and where the parties subject the disputes to the jurisdiction of India. This implies that two Indian parties choosing foreign seat of arbitration will not fall under the definition of ‘domestic arbitration’. The Act provides a direct definition of ‘International Commercial Arbitration’ under Section 2(1)(f) which states that it is an arbitration where at least one of the parties is a foreign national or a body incorporated outside India or an association whose central management and control is exercised by foreign country or it is a government of foreign country. On a bare reading of the definition of ICA provided under the Act it can be said that at least one of the parties is required to be of foreign origin. This leads to a corollary assumption that arbitration involving two Indian parties cannot be termed as International Commercial Arbitration according to the Act. In the recent judgment of Barminco Indian Underground Mining Services LLP v. Hindustan Zinc Limited[7], a similar interpretation was given by the Rajasthan High Court. The court observed that the expression ‘international commercial arbitration’ under Section 2(1)(f) of the Act is a nationality centric definition which clearly suggests that for an arbitration to be termed or treated as an international commercial arbitration, the agreement has to have at least one foreign party or a company whose nationality is other than that of India. As both the parties were of Indian origin (and conversely, none of the parties were a foreign party), the Court noted that, such an arbitration would not qualify as an international commercial arbitration, although the award may be a foreign award.

This interpretation adds to the already existing dilemma for Indian parties to choose foreign seat of arbitration. Having said that, the authors argue that a wider interpretation shall be given to the ‘international commercial arbitration’ under the Indian law. In this respect, aid can be taken from the expansive definition provided by the UNCITRAL Model Law. The sub clause (b) of clause 3, Article 1 of the Model Law defines international arbitration as:

Article 1(3)

An arbitration is international if:

(b) One of the following places is situated outside the State in which the parties have their places of business:

i. the place of arbitration if determined in, or pursuant to, the arbitration agreement;

ii. any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or

The sub clause (i) of Article 1(3)(b) of the Model Law clearly mentions that an arbitration is considered to be ICA, when the parties situate the place of arbitration outside the State where they have their places of business. The situation of two Indian parties choosing a foreign seat would thus fall under the definition of international arbitration provided by the Model Law. It can be observed that the implication of Section 2(1)(f) of the Indian Act causes prejudice to the parties choosing foreign seat thereby rendering them remediless under Part 1 of the Act. And since the Indian Act is drawn on the lines of UNCITRAL Model Law, such arbitration agreements shall be considered under International Commercial Arbitration. The essence of the model law should be incorporated in a manner such that no prejudice shall be caused to the parties.

APPLICABILITY OF PART I OF THE ACT

Two Indian parties choosing India as the seat of arbitration are easily entitled to the perks of interim relief under Section 9 of the Act while the same parties designating a foreign seat for arbitration have been denied the same relief in the recent judgment of Gujarat High Court in GE Power v PASL[8]. Thus, it is imperative to discuss the applicability of Section 9 of the Act in cases of foreign seated arbitration involving two Indian parties till the Supreme Court decision is awaited on the issue. Since the foreign seated arbitration involving two domestic parties is more likely to fall within the nature of International Commercial Arbitration as has been argued earlier, the applicability of Section 9 of the Act may be determined in reference to the settled law on foreign seated ICA.

A. Foreign Seated International Commercial Arbitration under the Act

The law on extent of applicability of Part I to International Commercial Arbitration has been settled post 2015 Amendment to the Act. The Proviso to Section 2(2) of the Act makes Part I partially applicable to International Commercial Arbitrations. It states that even when the place of arbitration is outside India, the provisions of Section 9, 27, 37(1)(a) and 37(3) of the Act shall be applicable in case of International Commercial Arbitration. However, by adding the phrase ‘subject to an agreement to the contrary’ the legislature has intended to give effect to party autonomy where the parties agree not to be governed by these provisions at all. This disagreement could be either implied or express. There arises no confusion where there is an express clause of exclusion in the Arbitration agreement. However, the presence of ‘implied exclusion’ needs to be assessed by analyzing the facts and circumstances pertaining to the agreement. Although no direct test has been laid down by the Supreme Court in this regard, the position has been clarified by various High Courts. In cases such as Raffles Design v Educomp (2016)[9], Heligo Charters v Aircon Feibars (2018)[10] & Actis v Tigaksha Metallics (2020)[11] the Hon’ble High Courts allowed the applicability of Section 9 to foreign seated International Commercial Arbitrations. The Courts have decided on the same line that the choice of a foreign seat and a foreign curial law would not amount to ‘implied exclusion’ by the parties under Section 2(2) of the Act. Again, a categorical clarity on its applicability is required to be examined by the Apex Court.

B. Two Indian parties choosing a foreign seat

The legislative intent of providing interim relief under the Act is to protect the award holder against the ill practices of the other party in selling off the assets before the enforcement of the award. Such an act frustrates the arbitration proceedings and thus Section 9 of the Act provides an opportunity to the parties to enforce their arbitral award securely. This protection is also available to foreign seated International Commercial Arbitration. However, The Gujarat High Court in the case of foreign seated arbitration involving two Indian parties in GE Power v PASL (2020)[12] made a literal interpretation of Section 2(2) of the Act and denied interim relief under Section 9 of the Act to the parties as the case did not satisfy the ingredients of the definition of International Commercial Arbitration provided under the Act. The authors note that the lacunae in the definition clause has rendered the parties remediless and consequently led to the failure of carrying out the legislative intent behind providing interim relief to the parties.

CONCLUSION

The Act does not expressly prohibit two Indian parties to choose foreign seat of arbitration. However, it is pertinent to note that vide the 2015 amendment to the Act, provision of interim relief under Section 9 of the Act has now been made applicable to foreign seated ICA (unless agreed contrary). Therefore, in light of the 2015 Amendment and the existing definition of ICA the position whether Two Indian Parties who choose foreign seat can seek interim relief in India, continues to remain untested. It is well settled that the decision of one high court is not binding precedent upon another High Court and at best can only have a persuasive value. Therefore, the ruling of Supreme Court with regards to full party autonomy to choose foreign seat by Two Indian Parties and applicability of Section 9 of the Act in such arbitrations shall settle the position conclusively and is much awaited.

Furthermore, the present Act does not expressly include the foreign seated arbitrations between two domestic parties in the definition of International Commercial Arbitration rendering the nature of foreign seated arbitration between two Indian parties ambiguous. The authors note that India has adopted a restrictive approach in defining International Commercial Arbitration which derives its international character solely from the nationality of the parties and ignores the choices made with respect to seat and curial law. However, the position is positively settled in other countries like England and Singapore which follow the definition of International Arbitration provided under the UNCITRAL Model Law. The Model Law includes the arbitration agreements by the domestic parties seated outside the nation State under the term International arbitration. The Model Law has addressed the factors such as place of business and place of arbitration in determining the ‘international’ nature of the arbitration and has not placed any emphasis on nationality of the parties. While marching on the path of making India a pro-arbitration country, the lacunae persisting in the law should be removed. It will not only clarify the nature of foreign seated arbitration involving two Indian parties but also the applicability of Part I on such arbitrations.

Author Details

1. Anchal Jain, 4th Year, B.A. LLB (Hons.), Institute of Law, Nirma University.

2. Kulsoom Farhat Khan, 4th year, B.Com. LLB (Hons.), Institute of Law, Nirma University.