Party autonomy now rules in arbitration law

Recent decisions of the Supreme Court have added to what is recognised as a pro-arbitration regime. One was PASL Wind Solutions Private Limited v GE Power Conversion India Private Limited, where the court ruled that two Indian parties were permitted to choose a foreign seat of arbitration, and that an award from such an arbitration was an enforceable foreign award under the Arbitration and Conciliation Act, 1996 (act). This decision will have a far-reaching impact as it now allows Indian parties the freedom to arbitrate at their seat of choice without the threat of challenges to enforceability.

The arbitration arose out of a dispute between two Indian parties under an agreement that provided for arbitration in Zurich. GE Power, which succeeded in the arbitration, applied to an Indian court to enforce the award against PASL. PASL challenged the award in India to set it aside, rather than challenging it before courts of the seat. Prior to PASL, there were conflicting decisions on whether two Indian parties could choose a foreign seat of arbitration. One view was that this amounted to contracting out of Indian law and therefore against public policy (Sasan Power Limited v North American Coal Corporation India Private Limited), while the other view was that it was permitted (GMR Energy Limited v Doosan Power Systems Private Limited).

In PASL, the Supreme Court held that there was nothing in the act to fetter the parties’ choice of seat, and that the choice of a foreign seat in an agreement between Indian parties would not amount to a violation of public policy. Indeed, the court upheld the fundamental principle of party autonomy. The court recognised party autonomy as the “brooding and guiding spirit” and “backbone” of arbitration. It further observed, “Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals”, even though there was no connection to the foreign seat chosen by them in the arbitration agreement.

In considering whether an award in an arbitration would be treated as a foreign award, the court held that it was the territoriality principle that was relevant, that is the seat of the arbitration, under part II of the act and the New York Convention. The nationality of the parties was irrelevant and the fact that both were Indian entities did not affect the award being a foreign award and enforceable under the act.

The court dismissed the argument that permitting Indian parties to arbitrate in a foreign seat would effectively allow them to circumvent Indian laws that would otherwise apply. It observed that adequate protection existed since, if the parties had circumvented a law pertaining to the fundamental policy of India, the award would not be enforced.

The Supreme Court ruled that the parties were also permitted to apply to Indian courts for interim relief under section 9 of the act, notwithstanding that they were both Indian parties. In so doing, it differentiated between the term international commercial arbitration in section 2(1)(f) of part I of the act, which was concerned with the status of the parties and their nationality, and the term used in the context of foreign awards in part II. It was concerned with territoriality, that is the arbitral seat, nationality being irrelevant.

The judgment was followed subsequently by the Calcutta High Court in Medima LLC v Balasore Alloys Limited. The judgment in PASL has also been followed in Subway Systems India Private Ltd v S Sasikala, where the Madras High Court, relying on PASL, upheld a foreign award between two Indian parties.

The ruling will not necessarily incentivise a rush of foreign arbitrations. While this is a welcome decision for companies incorporated in India that are wholly owned or controlled by an overseas parent, such as GE Power, it may not necessarily be the best option for purely domestic transactions between Indian parties.

With one more pro-arbitration ruling, India’s Supreme Court has upheld party autonomy and the freedom of the parties to contract. The continued inflow of foreign investment gives investors further confidence that Indian courts will uphold and support the arbitral process, an approach that is important for any arbitral seat.

Shaneen Parikh and Shalaka Patil are partners at Cyril Amarchand Mangaldas. Rahul Mantri, an associate, also contributed to the article