• Commercial Law Advisors

Are Two Indian Parties Entitled To Choose A Foreign Seat Of Arbitration? The Supreme Court Weighs In

The Supreme Court on 20.04.2021 delivered its much-awaited judgment in the case of PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited. The heavily contested point of law revolving around whether two Indian parties are entitled to choose a foreign seat of arbitration was finally put to rest.

Answering the question in the affirmative, the key takeaways from the Supreme Court’s three bench verdict can be summarized as follows:

  1. The court clarified that the words “shall be referred to and finally resolved” was clear evidence of the parties’ intention to designate Zurich as the juridical seat of arbitration. The court also pointed out that the closest connection test would be applicable only in situations where it is unclear that a seat has been agreed upon either by the parties or by the tribunal.

  2. The court emphasized the importance of party autonomy as the ‘guiding spirit of arbitration’ and held that two Indian parties can choose foreign law as the law governing the arbitration, despite both parties being Indian nationals. As section 28(1)(a) is contained in Part I of the Indian Arbitration Act (“Act”) governing domestic arbitrations, it would be inapplicable to the facts of the present case.

  3. While freedom of contract must be enshrined, the lawfulness of two Indian parties choosing a foreign seat may be tested for violations of public policy whilst enforcing the award in India. However, the court adopting a general stance held that there was no ‘undeniable public harm’ against two Indian parties choosing a foreign seat and therefore did not fall foul to section 23 of the Indian Contract Act.

  4. An award between two Indian parties pronounced in a foreign seated arbitration would be construed as a ‘foreign award’ in accordance with the Act. The court also held that Part I and Part II of the Act are mutually exclusive, wherein the argument that the proviso to section 2(2) of the Act, acts as a bridge which connects the two parts, was strongly dismissed.

  5. The ambit of ‘International Commercial Arbitration’ under Part I of the Act is based on the nationality of parties, is party-centric and pertains only to India seated arbitrations. Therefore, this definition under Part I of the Act cannot be transported into Section 44 in Part II of the Act. For the purposes of Part II of the Act, the New York Convention would have to be followed in that, the basis of ‘international commercial arbitration’ therein, would depend on the seat chosen by the parties.

  6. The court found that interim reliefs under section 9 of the Act can be invoked by the parties through recourse to Indian courts for arbitrations of this nature.

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