The Gujarat High Court settled the position of law that two Indian parties can choose a foreign seat of arbitration and the award decreed therefrom could be enforced as a foreign arbitral award in India. A Single Judge Bench of Justice Biren Vaishnav pronounced judgment in a dispute between two power companies.
The two Indian companies, GE and PASL were engaged in a tussle over a contract pertaining to wind turbines. The parties had agreed that any disputes between them would be settled by an arbitration under to Swiss Law, with Zurich being the foreign seat of arbitration. The seat of arbitration determines the law applicable during the arbitration.
The arbitration, in this case, took place in Mumbai and the award was decided in GE’s favour. GE approached the Gujarat High Court seeking the enforcement of the arbitral award in terms of Part – 2 of the Arbitration and Conciliation Act, 1996, which deals with the enforcement of certain foreign awards.
Disputing the applicability of Part-2, PASL contended that the award was a domestic award, being one between two Indian parties in Indian territory. Therefore, Part-1 of the Act was the proper law, it was claimed.
The award was not a foreign award, nor was the arbitration an International Commercial Arbitration, PASL asserted before the Court.
Senior Counsel Tushar Hemani relied on the opening to Section 44 i.e. the phrase “unless the context otherwise requires“.
This implies the Section envisaged the parties being situated outside India, it was argued. Any interpretation to the contrary would defeat the purpose of the legislation and allow domestic parties to take advantage of relatively more lenient criteria for scrutiny before enforcing an award, he argued.
Since the Act defines an International Commercial Arbitration as one where at least one party is located outside India, the arbitration in question could not be characterised as an International Commercial Arbitration. Therefore, the arbitration was domestic and the award a domestic award, PASL asserted.
Senior Advocate Hemani disputed the seat of arbitration being outside India, stating that Mumbai, being most closely connected to the transaction, should be deemed the foreign seat of arbitration. He relied on Mankatsu v. Air Visual to make this argument.
By making the claim that the foreign seat of arbitration was outside India, the petitioner (i.e. GE) had restricted the legal recourse available to the parties, which voided the contract. This went against the public policy of India, he added, relying on Sections 28 and 23 of the Contract Act, read with Sections 34 and 48 of the Arbitration Act.
Hemani went on to dispute the terms of the arbitral award on facts for foreign seat of arbitration, as well.
Appearing for GE, Senior Advocate Mihir Thakore averred that the nationality of the parties nor the venue of the arbitration affected the nature of the award which was foreign. It was foreign since the parties had decided the foreign seat of arbitration outside India (in Zurich).
The consideration of whether the arbitration was a domestic or international commercial arbitration was irrelevant since the award was a foreign award covered by Part-2. There is nothing in law to prevent parties that is two Indian parties from having a foreign seated arbitration, he added.
The award could be enforced in India because the assets of the firms were in India, and neither of the parties had contested the correctness of the award before a Court in Zurich.
Court’s Analysis and Judgment
Court found that there was a distinct line between Parts I and II of the Act and its applicability.
The Court culled the following requirements from Section 45 to term the award a foreign award i.e:
- It must be an arbitral award,
- The award must arise from an adjudication of a commercial dispute between parties who had a legal relationship between the parties.
- The relationship could be contractual or non-contractual.
- The relationship should be grounded in a written agreement which the New York Convention applies.
- It must be made in a territory recognized by the Central Government as a territory to which the New York Convention applies.
Noting that the parties did not dispute the fact that the award was an arbitral award or that their relationship was commercial, the Court went on to examine whether the award was a foreign award.
The Court held that consideration of nationality was not determinative of whether the award was a foreign award on foreign seat of arbitration since Section 44 was exhaustive and the sole repository for the definition of a foreign award.
“…nationality of the parties has no relevance for considering the applicability of Part II, of the Act of 1996. Applicability of Part II is determined solely based on what is the seat of arbitration, whether it is in a country which is signatory to the New York Convention. If this requirement is fulfilled, Part II will apply…”
The Court further found the parties to have intended for Zurich to be the foreign seat of arbitration, which was also agreed to by the arbitrator.
Because the subject-matter of the agreement lay within the jurisdiction of the Gujarat High Court, the Court found it could enforce the award, as per Section 47 of the Arbitration Act.
The Court also junked the challenge on the ‘public policy’ front, explaining that a reference to arbitration could not be construed a restriction on legal recourse available in terms of Section 28 of the Contract Act.
“…this Court remains unimpressed since what escapes from the canvas of Mr. Hemani while raising such defense and which is crucial for determining incurrence of the disability under Section 28 is its Explanation 1 which clearly lays down that the disability provided for under Section 28 would exclude from its ambit a reference to arbitration…”, the Court opined.
Therefore, the Arbitration Act did not preclude two parties from designating a neutral, foreign court to oversee its arbitration, the Judge observed.
However, an application made under Section 9 of the Arbitration Act (within Part -1) for an injunction against sale of assets by the PASL was held to be non-maintainable.
Senior Advocate Thakore had averred that Section 9 applied to foreign awards as well, and that the proviso to Section 2(2) extending the operation of Part-1 only to International Commercial Arbitrations was a misnomer.
On these terms, the enforcement of the award was allowed.
Read the Judgment: