PASL WIND SOLUTIONS PRIVATE LIMITED Vs GE POWER CONVERSION INDIA PRIVATE LIMITED

CITATION: CIVIL APPEAL NO. 1647 OF 2021

CORAM: JUSTICES RF NARIMAN, BR GAVAI AND HRISHIKESH ROY PRONOUNCED BY: RF NARIMAN, J.

PRONOUNCED ON: 20.4.2021

LAW POINT: Parties to a contract who are Indian nationals or Companies incorporated in India can choose a forum for arbitration outside India.

FACTS: In this case, a contract was entered between two companies, both incorporated in India under the Companies Act, 1956. Clause 6  of  the  said contract (Arbitration Clause) provided that the disputes between them shall be referred to and finally resolved by Arbitration in Zurich in accordance with the Rules of Conciliation and Arbitration of  the International Chamber of Commerce. As the disputes eventually arose between the Companies, it was referred to arbitration before the International Chamber of Commerce. One of the parties filed a preliminary application challenging the jurisdiction of the arbitrator on the ground that two Indian parties could not have chosen a foreign seat of arbitration. This objection was rejected by the Arbitrator who continued the proceedings and passed the Final Award. The successful party filed enforcement proceedings under sections 47 and 49 of the Arbitration Act before the High Court of Gujarat. Appellant filed proceedings challenging the said final award under section 34 of the Arbitration Act, before the Small Causes Court, Ahmedabad which was then transferred to the Commercial Court, Ahmedabad. An application  filed  under Order 7 Rule 11 of the Code of Civil Procedure, 1908 by the respondent was rejected by the Commercial Court, Ahmedabad. Later, the proceedings under section 34 of the Arbitration Act and the respondent’s application under Order 21 of the CPC for execution of the final award were filed in appeal before the Apex Court.

CONTENTIONS OF APPELLANT COMPANY:

  • Two Indian parties cannot designate a seat of arbitration outside  India  as doing so would be contrary to section 23  of  the  Indian  Contract  Act,  read with section 28(1)(a) and section 34(2A) of the Arbitration Act.
  • Foreign awards contemplated under Part II of the Arbitration Act arise only from international commercial arbitrations. “International commercial arbitration”, as has been defined in section 2(1)(f) of  the  Arbitration  Act, would make it clear that there has to be a foreign element when parties arbitrate outside India, the foreign element being that at least one of the parties is  a  national  of  a  country  other than  India,  or habitually  resident  in a country other than India, or a  body corporate  incorporated outside  India. For this reason, the award passed in the present case cannot be designated as a foreign award under Part II of the Arbitration Act.
  • When there is no foreign element involved in an award made  in  Zurich between two Indian companies, such award cannot be the subject matter of challenge or enforcement either under Part I or Part II of the Arbitration Act.
  • There is a head-on conflict between section 10(3) of the Commercial Courts Act and section 47 of the Arbitration Act, as a result of which the former must prevail.

CONTENTIONS OF RESPONDENT COMPANY:

  • It was argued that Part I and Part II of the Arbitration Act have been held to be mutually exclusive
  • Further, unlike the definition of “international commercial arbitration” contained in section 2(1)(f) in Part I, nationality, domicile or residence of parties is irrelevant for the purpose of applicability of section 44 of the Arbitration Act
  • It was contended that neither section 23 nor section 28 of the Contract Act prescribe the choice of a foreign seat in arbitration. As a matter of fact, the exception to section 28 of the Contract Act expressly except arbitration from the clutches of section 28, which is an express approval to party autonomy which is the very basis of the  Arbitration Act. He  also  argued that section 23 of the Contract Act, when it speaks of “public policy”, must be confined to clear and incontestable cases of harm to the public
  • In both, the proviso to section 2(2) and section 10 of the  Commercial Courts Act, the phrase  “international  commercial  arbitration”  is  not  governed  by the definition contained in section 2(1)(f) but would only refer to  arbitrations in which the seat is outside India.

OBSERVATIONS BY THE APEX COURT:

Part I and Part II of the Arbitration Act are mutually exclusive

The Arbitration Act is in four parts. Part I deals with arbitrations where the seat is in India and has no application to a foreign-seated arbitration. It is, therefore, a complete code in dealing with appointment of arbitrators, commencement of arbitration, making of an award and challenges to the aforesaid award as well as execution of such awards.

On the other hand, Part II is not concerned with the arbitral proceedings at all. It is concerned only with the enforcement of a foreign award, as defined, in India. Section 45 alone deals with referring the parties to arbitration in the circumstances mentioned therein. Barring this exception, in any case, Part II does not apply to arbitral proceedings once commenced in a country outside India

As a matter of fact, section 2(2) specifically states that Part I  applies only where the place of arbitration is in India.

Definition of Section 2(1)(f) imported in Section 44 of the Arbitration  Act

The definition of “international commercial arbitration” contained in Section 2(1)(f), in the context of arbitration taking place in India, only applies “unless the context otherwise requires”. The four sub-clauses contained in section 2(1)(f) would make it clear that the definition of the expression “international commercial arbitration” contained therein is party-centric in the sense that at least one of the parties to the arbitration agreement should, inter alia, be a person who is a national of or habitually resident in any country other than India. On the other hand, when “international commercial arbitration” is spoken of in the context of taking place outside India, it is place-centric as is provided by section 44 of the Arbitration Act. The context of section 44 is party-neutral, having reference to the place at which the award is made. For this reason, the very basis of section 44 should not be altered when two Indian nationals have their disputes resolved in a country outside India.

Thereby bodily importing the expression “international commercial arbitration” contained in section 2(1)(f) of the Arbitration Act which, being restricted to Part I, into section 44 cannot be done because of the opening words of section 44, “In this Chapter” which is Chapter I of Part II. No canon of interpretation would permit it.

Application of Section 23 Contract Act

The elusive expression “public policy” appearing in section 23 of the Contract Act is a relative concept capable of modification in tune with the  strides  made  by mankind in science and law.

In Halsbury’s Laws of England, the doctrine is stated:

“Any agreement which tends to be injurious  to  the  public  or  against  the  public good is void as being contrary to public policy, however that this branch of the law will not be extended.  The  determination of what is contrary  to  the  so-called  policy of the law necessarily varies from time to time. Many transactions are upheld now which in a former generation  would  have  been  avoided  as  contrary  to  the supposed policy of the law. The rule remains, but its application varies with the principles which for the time being guide public opinion.”

The judgment in Central Inland Water Transport Corpn. v.  Brojo Nath Ganguly, (1986) held that The Indian Contract Act does not define the expression “public policy” or “opposed to public policy”. From the very nature of things, the expressions “public policy”, “opposed to public policy”, or “contrary to public policy” are incapable of precise definition. Public policy, however, is not the policy of a particular government. It connotes some matter which concerns the public good and the public interest.

This doctrine, as pointed out by Supreme Court in Gherulal Parakh vs. Mahadeodas Maiya 1959 SC, can be applied only in a case where clear and undeniable harm to the public is made out Freedom of contract needs to be balanced with clear and undeniable harm to the public, even if the facts of particular case do not fall within the crystallised principles enumerated in well- established ‘heads’ of public policy.

The exception 1 to section 28 of the Contract Act specifically saves the arbitration of disputes between two persons without reference to the nationality of persons who may resort to arbitration. Therefore, it can be safely concluded that there is nothing in either section 23 or section 28 which interdicts two Indian parties from getting their disputes arbitrated at a neutral forum outside India. Also, Party autonomy has been held to be the brooding  and guiding spirit of arbitration as held in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2016)

Section 28 of Arbitration Act

Section 28(1)(a) of the Arbitration Act, when read with section 2(2), section 2(6) and section 4, provides that, where the place of arbitration is situated in India, in an arbitration other than an international commercial arbitration (i.e. an arbitration where none of the parties, inter alia, happens to be a national of a foreign country or habitually resident in a foreign country), the arbitral tribunal shall decide the dispute in accordance with the substantive law for the time being in force in India. The Appellant’s contention was that since two Indian parties cannot opt out of the substantive law of India and therefore, ought to be confined to arbitrations in India, Indian public policy, as reflected in these two sections, ought to prevail.

It can be seen that section 28(1)(a) of the Arbitration Act makes no reference to an arbitration being conducted between two Indian parties in a country other than India, and cannot be held, by some tortuous process of reasoning, to interdict two Indian parties from   resolving their disputes at a neutral forum  in a country other than India.

Section 34(2a) of Arbitration Act

It is clear that in an international commercial arbitration, even when the arbitration takes place in India resulting in an award being made in India, the ground available under section 34(2A) would not be available, as it would not apply to an international commercial arbitration held in India.

In agreeing to a neutral forum outside India, parties agree that instead of resorting to section 34 of the Arbitration Act, the recourse to a court or tribunal in a country outside India for setting aside  the  arbitral  award  passed  in  that  country  on grounds available in that country, which may be wider than the grounds available under section 34 of the Arbitration Act, and then resisting enforcement under the grounds mentioned in section 48 of the Arbitration Act.

A ground may be made out under section 48 against enforcement of a foreign award where enforcement of such award would be contrary to the public policy of India. If it is found that two Indian nationals have circumvented a law which pertains to the fundamental policy of India, such foreign award may then not be enforced under section 48(2)(b) of the Arbitration Act.

The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract as there is no clear and undeniable harm caused to the public in permitting two Indian nationals to avail of a challenge procedure of a foreign country when, after a foreign award passed under that procedure,

Its enforcement can be resisted in India on  the  grounds  contained in  section  48 of the Arbitration Act, which includes the foreign award being contrary to the public policy of India.

Collision with Section 10 of Commercial Courts Act

The Phrase “international commercial arbitration”, when used in the proviso to section 2(2) of the Arbitration Act, does not refer to the  definition  contained  in section 2(1)(f) but would have reference to arbitrations which take place  outside India, awards made in such arbitrations being enforceable under Part II of the Arbitration Act.

It will be  noted that section 10(1) applies to international commercial arbitrations, and applications or appeals arising therefrom, under both Parts I and II of the Arbitration Act. When applications or appeals arise out of such  arbitrations  under Part I, where the place of arbitration is in India, the definition of “international commercial arbitration” in section 2(1)(f) will govern.

However, when applied to Part II, “international commercial arbitration”  has reference to a place of arbitration which is international in the  sense  of  the arbitration taking place outside India. Thus construed, there is  no  clash  at  all between section 10 of  the  Commercial  Courts  Act  and  the  explanation  to  section 47 of the Arbitration Act, as an arbitration resulting in a foreign award, as defined under section 44 of the Arbitration Act, will be enforceable only  in  a  High  Court under section 10(1) of  the  Commercial  Courts  Act,  and  not  in  a  district  court under section 10(2) or section 10(3).

The substantive law as to appeals and applications is laid down in the Arbitration Act whereas the procedure governing the same is laid down in the Commercial Courts Act. In this context, the Arbitration Act is a special Act vis-à-vis the Commercial Courts Act which is general, and which applies to the procedure governing appeals and applications in cases other than arbitrations as well.

Whether an application under section 9 of the Arbitration Act would lie

The application made by the respondent under section 9 would be maintainable contrary to the finding of Gujarat High Court as proviso to section 2(2), makes it clear that in an arbitration which takes place outside India, assets of one of the parties are situated in India and interim orders are required qua such assets, including preservation thereof, the courts in India may pass orders under section

This portion of the High Court judgment was therefore set aside.

DECISION: The judgment of the Gujarat High Court, except for the finding on the section 9, was upheld and appeal disposed accordingly.

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