Implications of opening the gate for foreign-seated arbitrations

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The principle of party autonomy is the backbone of arbitration. The freedom to choose the seat of arbitration is another key aspect of that principle.

This article examines only one facet of this: whether two or more domestic parties can choose a foreign seat of arbitration in India and a few other jurisdictions.

Pareekshit Bishnoi
Pareekshit Bishnoi

Position in India

India, until recently, has had a conflicting position of law, though with a late favorable inclination. However, the Supreme Court in PASL Wind Solutions Private Limited v GE Power Conversion India Pvt Ltd on 20 April 2021 expressly settled that “nothing stands in the way” of the two Indian parties choosing a foreign seat of arbitration (paragraphs 52 and 71).

Before this decision, such autonomy was principally understood to allow the Indian parties to circumvent Indian substantive law mandated by section 28(1)(a) of the Indian Arbitration Act and to contravene Indian public policy in terms of section 23 and section 28 of the Indian Contract Act, 1872.

The court held that section 28(1)(a) of the Indian Arbitration Act applies only when the seat of arbitration is in India (paragraphs 52 and 54) and, secondly, that there is nothing in contravention of public policy in two domestic parties choosing a foreign seat and substantive law (paragraphs 52 and 59).

Position in other countries

The UNCITRAL Model Law on International Commercial Arbitration, 1985, allows parties to choose any seat of arbitration and substantive law regardless of their nationality. Supplementing it, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1961, is territory-centric and not person- or nationality-centric.

Due to their adoption by different national jurisdictions, two domestic parties across nearly all jurisdictions can choose a foreign seat and foreign substantive law. For example, sections 20 and 28, and schedule II of the Singapore Arbitration Act, 1995, adopts the words of the model law and the convention. Similarly, section 3(a) and section 46 of the English Arbitration Act, 1996, expressly recognises the complete autonomy of the parties in choosing the seat of arbitration and substantive law.

Talking of limited exceptions, section 202 of the US Federal Arbitration Act, 1947, excludes an arbitration agreement or award from the scope of the convention where a dispute involves two domestic parties and no foreign element. Similarly, China mandates the presence of foreign-related elements, though lately, this has been liberally construed.

India, like England and Singapore, is a model and convention law country. With the PASL decision India has recognised the complete autonomy of parties in choice of arbitral seat, which is indicative of India’s pro-arbitration approach.

However, parties agreeing to arbitrate outside India should not lose sight of several factors. First, in the PASL case, GE Power was 99% owned by a French company. Thus, the dispute had a foreign element. Second, GE Power did a volte-face after successfully defending the application of PASL and challenging the choice of a foreign seat by the two domestic parties before the arbitral tribunal.

Third, the bargaining position of the opposite party will now play a critical role in determining the validity of arbitral clauses, particularly where a clause designating the seat is part of a standard form of contract. Fourth, complete autonomy clashes with India’s ambition to become an arbitration hub. Lastly, given that conflict of law rules are uncodified, this may be a new ground for intervention by Indian courts.

It will be interesting to see how arbitration-friendly jurisdictions like Singapore benefit from the PASL judgment. It has also to be seen whether India mandates foreign-related elements like the US and China or continues to recognise the choice of a foreign seat by two domestic parties in the present wholesome form.

Pareekshit Bishnoi
Advocate
New Delhi