Party Autonomy: Is it still a relevant principle for Indian Parties Arbitrating Abroad
Updated: Apr 14
One of the most important pillars of any arbitral regime is the consent of parties. A party's choice is non-derogable and to adhere to it is Sine Qua Non for any commercial contract.
One of the most important pillars of any arbitral regime is the consent of parties. A party's choice is non-derogable and to adhere to it is Sine Qua Non for any commercial contract. In spirit, a contract can neither be interpreted liberally or non-liberally, but has to be construed reasonably. Party autonomy is virtually the backbone which permits parties to adopt the foreign law as the proper law of arbitration. Merely on the basis that the seat is in a foreign court won’t nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement. (2017) 2 SCC 228 Centrotrade Minerals and Metal Inc. v. Hindustan Copper Ltd.
The supreme court recently in the case of PASL Wind Solutions Private Limited v. GE Power Conversion taking a step towards a pro arbitral regime, rightly rejected the public policy argument by the appellants and observed that Indian parties have complete autonomy and freedom to choose a foreign seat to arbitrate their disputes. In the landmark ruling, the Supreme court put to rest the conflicting rules by various high courts, wherein Indian parties were precluded from choosing a foreign seat of arbitration, and public policy was used to render awards liable to be set aside by the Indian courts routinely. This line of cases were overruled by the court. Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd 2015 SCC OnLine Bom 7752 and TDM Infrastructure Pvt Ltd v. UE Development India Ltd., (2008) 14 SCC 271
Dispute arose between the Indian parties in relation to warranties that were not provided during the purchase of convertors. The arbitration was governed by the ICC Arbitration Rules and arbitration according to the clause was designated to be in Zurich. When the tribunal was constituted, a preliminary objection was raised by the respondent on the ground that it was impermissible under law fot two Indian parties to elect a foreign seat. The same was dismissed by the tribunal, but for convenience sake and to reduce costs, Mumbai was decided as the venue of arbitration. In the words of the tribunal, while rejecting the preliminary objection it was observed that,
“the arbitration clause in the Settlement Agreement is valid and will proceed to apply the Swiss Act because the seat of the arbitration is Zurich, Switzerland”
Enforcement Proceedings before the High Court:
The award was passed in favour of the respondent and for enforcement a petition was filed under part II of the Arbitration Act before the HC, which was resisted on the ground that the seat of arbitration was at Mumbai and a section 34 petition was also filed. While the HC upheld the enforcement petition, it denied the petition for interim relief. Hence the present appeal to the SC. In conclusion Supreme court held that, “the award was made in Zurich as the seat of arbitration, between two Indian parties, was a foreign award enforceable under the act.”
● Two Indian parties are entitled and there is no restriction under the arbitration act to designate a seat of arbitration outside India;
● While discussing the famous case of BALCO v Kaiser Aluminium Inc., (2012) 9 SCC 552. The court reiterated that the findings that part I and Part II of the arbitration act are distinct and mutually exclusive. Hence there is a necessary implication that the meaning of “International Commercial Arbitration” in Part I and Part II have different connotation. While part I is party centric, part II, it is place centric.
● Even in international arbitration, Indian parties can avail interim reliefs under section 9.
To conclude the supreme court observed that,
“the mere fact that the parties were Indians doesn’t make a foreign seated arbitration as domestic. In the present case, the award was made in Zurich as the seat of arbitration, between two Indian parties and hence was enforceable under part II of the act.”
The SC heavily placed reliance on Atlas Exports Industries v. Kotak & Company (1997) 7 SCC 61.
This case was decided under the Arbitration and Conciliation Act, 1940. An objection under section 28 of the contract act was raised in the context of an international arbitration. But the SC opined that, merely because of the fact that arbitration had been held internationally, could not be a reason to nullify express terms between the parties which were incorporated on their own volition.
The Nature of Arbitration Clause: The principle of Severability
At the outset it is pertinent to mention that, an arbitration clause is separate and severable from the main contract. It is a trite law that it is a distinct contract in itself. From that, there is a necessary implication that party autonomy should be given primal importance, being a contract. While incorporating an arbitral clause the parties are vigilant to decide and lay down conditions material in deciding the seat and the law, which are important preconditions in cases of disputes and their adjudication. It is a trite law that when the conditions of the contract are straightforward and the intention of the parties is clear, the clause should only be construed in light of surrounding circumstances and the object of the contract.
The duty of the court in not to give a liberal or a narrow approach in construing the contractual terms, the duty is not to devolve deep into the intricacies of human mind to explore undisclosed intentions, but only to take the natural and ordinary meaning of the words used as a reasonable man. (Smt. Kamala Devi vs. Seth Takhatmal & Anr., 1964 (2) SCR 152). Case: Bangalore Electricity Supply Company Limited (BESCOM) vs. E.S. Solar Power Pvt. Ltd. [CA 9273 of 2019], Citation: LL 2021 SC 242.
But the courts in India on many occasions have abridged on the rights of businesses and their freedom of contract and by judicial overreach decided against a foreign seat of arbitration. This leads to the frustration of the complete arbitral process and specially, the parties who has the award in his favour to get the award enforced, not getting the fruits of the arbitration. In conflicting rulings various High Court have held that Indian parties cannot possibly have a seat outside India. But the present ruling of the supreme court is declaratory and overruled this line of cases.
Kompetenz-Kompetenz principle under article 16
The principle that the tribunal should rule on its own jurisdiction, including the issue of arbitrability and other jurisdictional issues. This doctrine is to minimize judicial intervention so that the arbitral process is not thwarted at the outset. The Arbitration Act of 1940 did not have such a provision which led to the courts having unbridled power and as a consequence, the compromise of the principles of freedom of contract and party autonomy.
The correct interpretation and foreign award and international arbitration
International arbitration under the context of part II, which is based on the NY convention, is inherently is party neutral and what mattered was only the fact that, the seat of arbitration was abroad. The court rejected the argument by the appellant as part I and II of the arbitration and conciliation act 1996 are distinct and mutually exclusive. In that context the definition of international commercial arbitration under section 2(2) cannot be possibly applied to part II of the act.
Also, the court observed that section 44 was only concerned with territoriality and there is no role of nationality, domicile or residence. But under section 2 (2) the court opined that it meant both the nationality and territoriality. Hence Indian parties could file for an interim relief based on their nationality and in the present case the finding of the High court dismissal against interim application were set aside. (Para 14)
Public Policy relation with Party autonomy
Public policy argument against the enforcement of award was rejected and in the absence of any public harm/public good the principle of freedom of contract was upheld by the supreme court. The international businesses set up in India now have an option to opt for a neutral territory for arbitration and mandate for a foreign seat of arbitration, for an effective adjudication. The court observed, the party autonomy to be the brooding and guiding spirit if arbitration. The Court held that:
“The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract.” Para 59
In can be argued that the legislative intent behind various amendments and the public policy has been in favour of incorporating better practices for arbitration and making India the next hub for arbitration. It could be argued that it is valid public policy and the balanced must be weighed between the private rights where the bargain does not cause harm to the public order against the public policy in general. The courts too must allow the private bargains to flourish. In the words of the apex court:
“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.” Para 61
The closest connection test would only be applied when there is a lack of clarity as to the seat of arbitration and venue, but when the parties have in express terms designated the seat and accepted the jurisdiction, in that case the test won’t be material and ignored by the court in favour of the party autonomy and express terms of the arbitration agreement. Enercon (India) Ltd. V. Enercon GmbH, (2014) 5 SCC 1.
Reasons to Opt for a Foreign Seat of Arbitration
Better infrastructure and the quality of award
Due to stringent and unviable procedure, nowadays even Indian companies have their seat of arbitration booked outside India, they being suspicious of the reasonableness of our legal justice system. It is not only a loss in revenue and opportunity, but a big blot on the efficacy of the judicial branch.
Indian parties are amongst the most who opt for a seat in arbitration abroad. More that 50% awards in the Singapore arbitration centre are regarding Indian parties. The reasons could be manifold, but the crux of the argument being the private parties’ choices should matter. Alternatively, foreign companies investing in India prefer to adjudicate disputes outside India for reasons such as a neutral forum, and effective supervision of arbitration proceedings, and a speedier and efficient disposal of disputes.
Only a limited appeal
When parties opted for an arbitration under part II they have specifically on their own volition opted for a quicker procedure and only a limited appeal of an award in that regard. While under part I of the arbitration act a section 34 petition can be filed as a limited appeal, in the context of part II there is a more restricted scope of appeal. The supreme court was of the opinion that the losing party should not have ‘two bites at the cherry’ for challenging the award at various stages, pre and post enforcement.
The Supreme Court has rightly upheld the choice of individual Indian parties who opt for a seat of arbitration outside India. This was an important step to make India arbitration friendly for which both flexibility and efficiency in the context of arbitration dispute are required. It is an important that parties should be allowed to choose the seat and laws of the arbitration. In giving them leeway to choose they could possibly be at a better position not only according to their desires under the contract, but in cases of international parties to have a neutral tribunal that won’t impede the process of an independent tribunal.
On the grounds of Public policy, the courts have had a one step forward and one step back approach towards the arbitral regime. Public policy is a unruly horse which the courts have possibly misinterpreted at various instances. But, public policy now is inclined towards making India arbitration friendly and hence the principle of freedom of contract should get primal importance. It could be argued that it would be sound public policy given the recent amendments by the parliaments to make arbitration the primal mode of dispute resolution given the pendency in the present judicial regime. This judgement is a way forward and a welcome one in that regard.
National Law Review, Party Autonomy Trumps! SC Allows Two Indian Parties to Choose Foreign Seat of Arbitration, Nishith Desai Associates, Volume XI, Number 124, May 4, 2021. Url: https://www.natlawreview.com/article/india-party-autonomy-trumps-sc-allows-two-indian-parties-to-choose-foreign-seat
PASL Wind Solutions Private Limited v. GE Power, SLP (Civil) 1647 of 2021 (arising out of GHC judgement dated November 2020), Supreme Court of India Judgement dated April 20, 2021.
Gurdeep Singh is a student at Rajiv Gandhi National University of Law, Punjab.