Arbitration Law: A New Worry For Foreign Awards In India
Zurich Skyline (Photographer: Gianluca Colla/Bloomberg)

Arbitration Law: A New Worry For Foreign Awards In India

A recent ruling by the Gujarat High Court will force Indian companies to reconsider their choice of jurisdiction to settle disputes. While domestic companies can choose to be governed by a foreign law for arbitration purposes, they can’t approach Indian courts for interim relief, the high court has said.

After GE Power Conversion India Pvt. won an award from an arbitral tribunal in Zurich, it approached the high court to enforce the directions against PASL Wind Solutions Pvt. The dispute related to purchase of converters by GE Power from PASL and warranty conditions. The arbitral tribunal ruled in favour of GE Power and directed PASL to pay over Rs 3 crore.

Domestic Companies, Foreign Seat

PASL first contested the award on grounds that the seat of arbitration should be Mumbai and not Zurich. But the high court pointed to the language of the agreement and concluded that the seat of arbitration was in fact Zurich. The seat of arbitration determines which country’s law will be applicable.

PASL then argued that two domestic companies cannot choose to be governed by a foreign law. Two Indian parties cannot be allowed to gain advantage simply by designating a seat abroad in an arbitration that otherwise has no other foreign element, it argued. If the parties are allowed to do so, it said, the purpose of the Arbitration Act will be completely defeated.

The crux of PASL’s argument was that an agreement with an object to contract out of the full extent of Indian judicial scrutiny by designating a foreign seat is in violation of the country’s public policy. And that courts can refuse enforcement if an award is contrary to India’s public policy.

But the Gujarat High Court was “unimpressed” with this argument. The court pointed to the contract law provisions which permit parties to arbitrate disputes.

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.

Gujarat High Court

There’s been limited guidance on whether two Indian parties can choose a foreign seat and whether it’ll be against public policy, Vyapak Desai, head of dispute resolution practice at Nishith Desai Associates, said. This judgment clearly holds that there’s no problem in choosing an offshore seat and this will have significant consequences, he said.

MNCs who have Indian incorporated subsidiaries which deal with domestic vendors, distributors, etc may now insist on a foreign seat. So far, since the law was unclear, they were necessarily required to seat arbitration in India.
Vyapak Desai, Head- Dispute Resolution, Nishith Desai Associates

Now, Indian subsidiaries of foreign companies may pick jurisdictions where the parent is more comfortable and where there’s faster disposal of disputes by courts, Desai added.

So, What’s The Problem?

In short, no interim relief.

While seeking to enforce the award, GE Power had also asked for certain interim reliefs. PASL had contested it saying that the award by the Zurich tribunal is not an “international commercial arbitration” since neither party is incorporated outside India. And so, the provisions of the arbitration law that allow parties to seek interim relief won’t be applicable. The court agreed with this reasoning.

This conclusion leads to rather anomalous consequences, Promod Nair, founder of Arista Chambers, pointed out.

If the seat of arbitration is outside India, but one of the parties to the arbitration agreement is non-Indian, either of the parties will be able to approach the Indian courts for interim measures of protection, he explained. On the other hand, Nair said, 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.

It would also mean that despite it being lawful for two (or more) Indian parties to arbitrate offshore, a party which anticipates or receives an unfavourable award would have a free hand to secret away or dispose off assets to defeat enforcement of the award- and the Indian courts would be helpless in such a situation.
Promod Nair, Founder, Arista Chambers

The two key outcomes of this ruling, experts said, will prompt companies to take a closer look at the choice of jurisdiction for arbitration.

They explained that domestic companies, specially subsidiaries of MNCs, may choose an offshore seat if the counterparty has assets outside of India as well. In such a scenario, the award can be enforced against those assets as well. But if the assets are all in India, then it needs be assessed whether the perceived benefits of arbitrating offshore outweigh the absence of interim relief.

Nair said that domestic parties should now carefully consider the consequences of choosing an offshore seat- especially if this deprives them of access to interim relief in India and has negative consequences for the efficient enforcement of arbitral awards.

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