Recently, the Gujarat High Court had ruled that Indian companies could choose to be governed by foreign law for arbitration. The court also stated that these companies will not be able to approach Indian courts for interim relief in disputes as they will lose jurisdiction here in India. The judgment came shortly after an arbitral tribunal in Zurich awarded a settlement in favour of GE Power Conversion India Pvt. against PASL Wind Solutions Pvt — both India based companies. While commenting on the judgment eminent corporate lawyer Gautam Khaitan stated that it can have a negative impact on the enforcement of tribunal awards in India.
Indian companies, foreign settlement
The arbitral tribunal in Zurich has directed PASL to pay INR 3 crore to GE Power. Shortly, GE power approached the Gujarat High Court to enforce the directions of the German tribunal in India. PASL contested in the court that the seat of arbitration should be Mumbai instead of Zurich. Based on the language of the contract, the court held that the seat of arbitration was Zurich and hence, the Indian laws will not be applicable in the settlement. Thereafter, PASL argued that both the parties belong to Indian origin and there was no essential foreign element. Hence, the dispute cannot be governed under foreign law. The company also contested that designating the case to a foreign seat is in violation of Indian public policy.
The Gujarat High Court found the argument of PASL unimpressive and stated that “Parties to a contract may agree to have their disputes resolved by a foreign court termed as a ‘neutral court’ or a ‘court of choice’ creating exclusive or non-exclusive jurisdiction in it.”
Maintainability of an application under Section 9 before this Court ?
The Hon’ble Gujarat High Court after examining the arguments of both sides on this issue held that:
…the plain language of proviso to Section 2 (2) reads to imply that the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognized under the provisions of Part II of this Act. Interpreting the above provision ejusdem generis it would arise that Section 9 interalia shall apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognized under the provisions of Part II of this Act. The words “…even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognized under the provisions of Part II of this Act” qualifies international commercial arbitration and particularly when such international commercial arbitration bears an arbitral award made or to be made in such place is enforceable and recognized under the provisions of Part II of this Act…
Differing from the Bombay High court judgment in Trammo DMCC v. Nagarjuna Fertilizers and chemicals limited 2017 SCC OnLine Bom 8676 (Trammo) wherein Bombay High court had interalia held that “… Thus necessarily a recourse would be required to be taken to the definition of “Court” as contained in “Explanation” to Section 47 falling in Part II of the Act, so as to hold that it is this provision which becomes relevant to confer jurisdiction on this court to entertain the Section 9 petition, pending the enforceability of the foreign award in question……A party in enforcing a foreign award and seeking recourse to Section 9 of the Act, cannot be left without an effective remedy, in a situation akin to the facts in the present case. This interpretation in my opinion suffices and fulfills the legislative intent in making Section 9 interalia available in enforcement of foreign awards”, the Gujarat high court held that the ratio laid down in Trammo was unique to the facts under consideration in Trammo and the ratios of judgments are to examined in the context of the facts of each case and thereby holding that application under Section 9 is not maintainable before the said Court.
Major Upshots :
- Indian subsidiaries who select a foreign jurisdiction as the seat of arbitration for the resolution of disputes do not breach the public policy of the country.
- For the purpose of enforcement, an arbitral award passed by such a third party jurisdiction shall be considered as a foreign award.
- Nationality of the parties is not an essential condition for the enforcement of an Foreign award.
- However, the parties are not entitled to seek interim relief pursuant to Section 9 of the Arbitration and Conciliation Act, 1996.
The ruling opens door for the Indian subsidiaries to choose a seat for arbitration outside India and the Hon’ble High Court of Gujarat clears all the misconceptions laid prior to this judgment and upholds the legal position and validity of an foreign award. However, just like every coin has two sides this judgment also restrict/bars the parties to seek for an interim relief under Section 9 of the Act.
If the seat of arbitration is outside India, but one of the parties to the arbitration agreement is non-Indian, either of the parties can approach the Indian courts for interim relief under Section 9 of the Act. However, on the contrary, if two Indian parties arbitrate outside India (which is lawful as per this decision), then neither party would be able to seek interim relief in India. In view of said legal position it is important that parties while deciding on the seat of arbitration carefully take the said decision.
Mr. Gautam Khaitan further feels that the matter is likely to knock the doors of the Hon’ble Supreme Court for final considerations particularly in view of Bombay High court judgment in Trammo; though Trammo involved adjudication in the form of an International Commercial Arbitration, whereas the main crux of this case is participation of Indian subsidiary companies who have chosen an offshore seat to arbitrate which arbitration however is not an International Commercial Arbitration, and the said distinction separates the two judgments; however, if challenged then Supreme Court verdict will bring clarity on the issue.