Seat of arbitration outside India – Supreme Courts important judgment on Arbitration Act

Seat of arbitration outside India – Supreme Courts important judgment on application of New York Convention and foreign award under Part II of the Arbitration and Conciliation Act, 1996

ABCAUS Case Law Citation
ABCAUS 3489 (2021) (04) SC

Important case law relied referred:
Mankastu Impex (P) Ltd. v. Airvisual Ltd., (2020) 5 SCC 399
S.K. Gupta v. K.P. Jain, (1979) 3 SCC 54
Allied Motors (P) Ltd. v. CIT, (1997) 3 SCC 472
Bennett Coleman & Co. (P) Ltd. v. Punya Priya Das Gupta, (1969)2 SCC 1
Atlas Export Industries v. Kotak & Company (1999) 7 SCC 61
State of Gujarat v. Manoharsinhji Pradyumansinhji Jadeja (2013) 2 SCC 300
Shayara Bano v. Union of India, (2017) 9SCC 1
Fuerst Day Lawson Limited
Maxim Nordenfelt Guns and Ammunition Company v. Nordenfelt, [1893] 1 Ch. 630
Gherulal Parakh v. Mahadeodas Maiya 1959 Supp (2) SCR 406

Seat of arbitration outside India

The main controversy in this case was with respect to the seat of arbitration outside India.

The question of law raised in the instant case was as to whether two companies incorporated in India can choose a forum for arbitration outside India – and whether an award made at such forum outside India, to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention) applies, can be said to be a “foreign award” under Part II of the Arbitration and Conciliation Act, 1996 (Arbitration Act) and be enforceable as such?

In the instant case both the appellant and the respondent were companies incorporated under the Companies Act 1956 having their registered office in India.

Dispute arose with respect to supply in pursuance of a purchase order and the parties entered into a settlement agreement in which the dispute resolution clause provided for reference to Arbitration in foreign country.

Due to dispute pursuant to settlement agreement, appellant issued a request for arbitration to the International Chamber of Commerce (ICC). The parties agreed to resolution of disputes by the sole arbitrator appointed by the ICC.  It was agreed and also reflected in the request for arbitration and in the terms of reference to arbitration, that the substantive law applicable to the dispute would be Indian law.

However, the respondent vide preliminary objection, challenged the jurisdiction of the arbitrator on the ground that two Indian parties could not have chosen a foreign seat of arbitration. By a Procedural Order the sole arbitrator dismissed the respondent’ objection.

Accepting the respondent’s suggestion, the arbitrator, though the seat was in Zurich, held all sittings in Mumbai. This arrangement had been accepted by both parties

The award was finally passed rejecting the appellant’s claim.

When the respondent initiated enforcement proceedings against the appellant, under sections 47 and 49 of the Arbitration Act before the High Court of Gujarat, the appellant did a complete volte-face and asserted that the applying the test of closest connection, seat of arbitration was really Mumbai and the seat of arbitration could not have been outside India. Accordingly, the appellant filed proceedings challenging the said final award under section 34 of the Arbitration Act.

Closest connection test for seat of arbitration

The Hon’ble Supreme Court stated that the closest connection test strongly apply if it is unclear that a seat has been designated either by the parties or by the tribunal. Whereas, in the instant case, the seat had clearly been designated both by the parties and by the tribunal, and had been accepted by both the parties.

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

The Hon’ble Supreme Court observed that 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 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.

Like old Act, current Arbitration Act, Part I and Part II of which have been held to be mutually exclusive.

The Hon’ble Supreme Court rejected the argument that proviso to section 2(2) of the Arbitration Act is a bridge which connects the two parts. It is settled law that a proviso cannot travel beyond the main enacting provision.

Ingredients of a Foreign Award sought to be enforced under Part II

The Hon’ble Supreme Court pointed out that it is not the Geneva Convention but in pursuance of Article I of the New York Convention that section 44 of the Arbitration Act has been enacted.

The Court stated that following four ingredients which are necessary for an award to be designated as a foreign award under section 44 are fully satisfied in this case:

(i) the dispute must be considered to be a commercial dispute under the law in force in India.

(ii) it must be made in pursuance of an agreement in writing for arbitration

(iii) it must be disputes that arise between “persons” (without regard to their nationality, residence, or domicile), and

(iv) the arbitration must be conducted in a country which is a signatory to the New York Convention

The Hon’ble Supreme Court noted that in an earlier judgment it was held that It is clear that this Court categorically held that a foreign award cannot be refused to be enforced merely because it was made between two Indian parties, under pari materia provisions of the Foreign Awards Act. The Court had also held that since this plea had never been taken in any of the courts below, it was not available to the appellant to raise the said plea before Supreme Court for the first time.

The Hon’ble Supreme Court noted that the word “persons” mentioned in section 44 has no reference to   nationality, residence or domicile. Unlike the U.S. Code, section 44 of the Arbitration Act does not have any such caveat.

Sections 23 and 28 of the Contract Act

Section 23 of the contact Act deals with what considerations and objects are lawful, and what not. Section 28 provides that agreements in restraint of legal proceedings to be void.

The Hon’ble Supreme Court stated that 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. It is for this reason that in another judgment, referring to the said exception, the Court found 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.

The Hon’ble Supreme Court stated that 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 county when, after a foreign award passes muster 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.

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

The Gujarat High Court had given a finding that the section 9 application that was made by the respondent was not maintainable by reason of the expression “international commercial arbitration” appearing in the proviso to section 2(2) having the meaning to be ascribed by section 2(1)(f) of the Arbitration Act. The Hon’ble Supreme Court set aside that part of the judgment and held that the application made by the respondent under section 9 would be maintainable.

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