ENFORCEMENT OF A FOREIGN AWARD – SC BRINGS IN CLARITY
It is said that there are situations when an honest attempt is made to uncomplicate a relatively simple question of law distorted by time, it further complicates it. The humongous task recently undertaken by the three-judge bench of the Hon’ble Supreme Court proves the above saying wrong. The interpretations based on which the Court has decided the issue, has not only brought enormous clarity regarding the enforcement of Foreign Arbitral Awards but also established that the independence and liberty of parties cannot be questioned to escape from the rigors of such award.
Analysis of the ruling of the Apex Court regarding the Enforcement of Foreign Arbitral Award in Pasl Wind Solutions Private Limited Versus GE Power Conversion India Private Limited Civil Appeal No. 1647 of 2021
ISSUE BEFORE THE COURT
The Court was faced with the question of whether two Indian companies are at liberty to choose a forum of Arbitration in a foreign country and if so, the Award passed by the said forum outside India can be categorized as a “Foreign Award” under Part II (Enforcement of Certain Foreign Awards) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act”).
BRIEF FACTUAL BACKGROUND
The Appellant and the Respondent (collectively referred as the “Parties”) are Companies incorporated in India. The parties entered in a business arrangement by way of which the Respondent supplied 6 converters to the Appellant. During business, certain disputes arose regarding the expiry of warranty of converters and subsequently, a settlement agreement was executed by way of which additional services were agreed to be provided by the Respondent along with warranties to redress the grievances of the Appellant. The dispute resolution clause of the Settlement agreement stipulated that in the event of a dispute arising out of the agreement, the same shall be resolved by Arbitration in Zurich. The applicable rules for the Arbitration shall be the Rules of Conciliation and Arbitration of the International Chamber of Commerce.
When disputes arose between the parties the Appellant issued a request for Arbitration to the International Chamber of Commerce (“ICC”), the parties agreed to resolve the disputes by a Sole Arbitrator appointed by the ICC. It was further agreed by the Parties that the substantive law Applicable to the dispute would be Indian Law. During the course of arbitration proceedings, a preliminary objection on jurisdiction was raised by the Respondent stating that it was not within the powers of the parties to choose a foreign seat of arbitration.
The Learned Sole Arbitrator dismissed the Preliminary objections holding that two Indian parties are at liberty to Arbitrate outside India placing reliance on the judgment of the Hon’ble Supreme Court in Reliance Industries Ltd. v. Union of India [1] among other judgements to buttress his findings. The procedural award was not challenged by either of the parties, but it was amicably decided that though the seat of arbitration as per the dispute resolution clause is Zurich, all hearings will be held in Mumbai for the convenience of the Parties.
A final order came to be passed in April, 2019 by way of which the Arbitrator rejected the claim of the Appellant and directed them to pay compensation in terms of legal cost, expenses and interest to the Respondent. Upon failure of the Appellant to comply with the orders of the Hon’ble Arbitrator, the Respondent initiated enforcement proceedings under Section 47 (Evidence) and Section 49 (Enforcement of foreign awards) of the Act before the High Court of Gujarat. Interestingly, the Appellant countered the proceedings against them by asserting that as the Arbitration was conducted in Mumbai, the seat for Arbitration is Mumbai, based on which preferred an application under Section 34 of the Act. Multiple proceedings came to be filed by the parties in various lower courts which till the final decision in the Judgment where at a standstill.
QUESTIONS OF LAW CONTENDED BY THE PARTIES IN BRIEF
The contentions in brief are as follows:
1. Designation of seat outside India by two Indian Parties is contrary to section 23 (what consideration and objects are lawful, and what are not) of the Indian Contract Act, 1872 read with section 28 (1) (a) (disputes to be decided as per the substantive law) and section 32(2A) of the 1996 Act.
2. Does the Arbitration act directly or indirectly curb Party’s Autonomy to choose seat of Arbitration?
3. Whether Part I and Part II of the Arbitration Act are mutually exclusive or otherwise?
4. In the event of Conflict whether provisions of a Special Law will prevail over binding procedural law?
FINDINGS
The Court analyzed all the contentions with a fine-tooth comb and the resultant finding in authors opinion will play a pivotal role in eliminating the prevailing ambiguities in law. A brief analysis of the same is as follows:
Designation of seat outside India by two Indian Parties is contrary to section 23 (what consideration and objects are lawful, and what are not) of the Indian Contract Act, 1872 read with section 28 (1) (a) (disputes to be decided as per the substantive law) and section 32(2A) of the 1996 Act.
As per section 23 of the Indian Contract Act, 1872 considerations and objects of a contract is deemed to be unlawful if the same among other things is opposed to public policy. While co-relating the same with the present issue the court examined if the circumstances broadly fall within the debatably vague expression of “Public Policy”. This involved a careful dissection of the age-old judgment in the case of Maxim Nordenfelt Guns and Ammunition Company v. Nordenfelt [2], whereby the court of Appeal had given liberty for expansion or modification of rules which rest upon the foundation of public policy and dispensed with rigid approach towards interpretation.
The Hon’ble Apex Court has painstakingly considered the doctrine of public policy and relied on the judgment of Gherulal Parakh v. Mahadeodas Maiya [3] drawing an inference that public policy being a branch of common law, it is permissible for the courts to analyse the same on a case-to-case basis and apply the same differently.
In addition to the abovementioned judgments, a plethora of other judgments were analysed by the Hon’ble Apex court to come to an inevitable conclusion that Freedom of contract needs to be balanced when there is no harm being caused to the public. It is further not permissible for the courts to tamper with the autonomy of the parties.
Further, the landmark Judgment of Atlas Export Industries v. Kotak & Company [4] where the Court found that which is unlawful under section 23 of the Indian Contract Act 1872, because it breaches Indian public policy, would be void was given an extended interpretation stating that merely two Indian parties choosing a foreign seat of Arbitration cannot be construed as breach of public policy resultantly making the Contract Void. In relation to contemporaneous reading of Section 28(1) (a) of the Arbitration Act, the same would make it evidently clear that the said provision does not make any 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.
As per the above findings the judgment strikes a highly effective balance between Freedom of Contract and clear and undeniable harm to public by ticking the scales in favor of Freedom of Contract.
Does the Arbitration act directly or indirectly curb Party Autonomy to choose seat of Arbitration?
The above question has plagued the courts for many decades now and is by and large an off shoot of the previous issue. The principles of Party Autonomy have always been integral principle of Arbitration and the same was in cogent terms highlighted in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., [5] where it was held:
“that the brooding and guiding spirit in arbitration, the parties are free to agree on application of three different laws governing their entire contract — (1) proper law of contract, (2) proper law of arbitration agreement, and (3) proper law of the conduct of arbitration, which is popularly and in legal parlance known as “curial law”.
The above ruling establishes, that Party Autonomy is the backbone of any arbitration and an endeavour has to be made to curb judicial intervention as much as possible.
Having dealt with the above issues it brings us to the third issue being:
Whether Part I and Part II of the Arbitration Act are mutually exclusive or otherwise?
A holistic reading establishes that the Arbitration act is a complete code in itself with respect to appointment of arbitrators, commencement of arbitration, making of an award and challenges to the aforesaid award as well as execution of such awards.
Part II of the act deals with Enforcement of certain kinds of foreign Awards therefore the contentions of the Appellants that Part I and Part II are intertwined with each other is erroneous and misleading. It is also evidently true that provisions in the mode and manner of section 2(7) exist to distinguish domestic award from that of a foreign award. For that very purpose section 44 of the Act defines what is a Foreign award.
The Hon’ble Apex Court while dealing with the mutual exclusivity of Part I and Part II very peevishly lamented the damage done by the judgment of Bhatia International v. Bulk Trading S.A. [6] wherein it was held that the section would apply to Arbitrations held outside India. This was fortuitously rectified by the BALCO judgement. As evident the Part II of the Act is based on the New York Convention which in a nutshell recognises enforcement of Arbitral Awards made outside the state where it is sought to be imposed. The same has been brought to usher in respect for Foreign awards, which has been incorporated in Section 44 of the Act. The four main components prescribed in section 44 are:
- the dispute must be considered to be a commercial dispute under the law in force in India,
- it must be made in pursuance of an agreement in writing for arbitration,
- it must be disputes that arise between “persons” (without regard to their nationality, residence, or domicile),
- the arbitration must be conducted in a country which is a signatory to the New York Convention.
The Courts while dealing with the maintainability of the same is entrusted with the responsibility of ascertaining whether the dispute at hand qualifies the above-mentioned requirements. It further draws a clear line between foreign and international arbitration. Based on the findings the court came to the finding that Part I and Part II are mutually exclusive and therefore any unreasonable overlap for the purpose of individual convenience is impermissible under Law.
The Final substantive issue regarding the same is:
In the event of Conflict whether provisions of a Special Law will prevail over binding procedural law?
The above issue emanated out of the contentions of the Appellant stating that Section 10 (Jurisdiction in respect of arbitration matters) read with section 21 (Act to have overriding effect) of the Commercial Courts Act to show that by virtue of the abovementioned provisions, the impugned judgment of the High Court is infructuous as non- maintainable. The said argument was dealt with by assessing the applicability of substantive law and procedural law. It is an established position that the Arbitration Act is a special act whereas the Commercial Courts Act is general. Therefore, in all practical purposes the substantive law for appeals and applications will be the Arbitration Act on the other hand for the procedure governing the same will be as per Commercial courts Act [7]. Considering, the broader principles the interplay as sought to be established by the Appellants do not stand.
CONCLUSION
It is indeed an important stride by the Apex Court to analyse the judicial precedents and simplify the position of law with regards to enforcement of foreign arbitral award and cohesively define the legislative intent in this regard. What emerges out of the same is that party’s autonomy in regards to proceedings is unquestionable and the Parties are not at liberty to derogate from the Indian laws. The law laid down in Enercon (India) Ltd. v. Enercon GmbH [8], was differentiated in this regard by holding that foreign element is not necessarily required to have the seat of Arbitration in foreign country.
The aspect of public policy has also been amply defined. What emerges is that the defence of actions being contrary to public policy cannot be used loosely for the simple reason that the ambit regarding the same is quite clearly defined. In this regard the law laid down by Lord Mansfield held in Holman v Johnson [9] gives a clear picture where it is stated that:
“Public policy is the principle which declares that no man can lawfully do that which tends to be injurious to public welfare Ex dolo malo non oritur action”.
Further, it is also critical to give emphasis to the choice of parties. It is amply clear that the choice of parties are binding. As long as the Parties to contract do not oust the jurisdiction of all the courts which would otherwise have jurisdiction to decide the cause of action under the law, it cannot be said that the parties have by their contract ousted the jurisdiction of the court and where the parties to a contract agreed to submit the disputes arising from it to a particular jurisdiction which would otherwise also be a proper jurisdiction under the law, their agreement to the extent they agreed to not to submit to the other jurisdiction cannot be said to be void against the public policy [10].
– Ranit Basu | Partner
You can reach out to Ranit at ranit@bridgeheadlaw.com.
[1] (2014) 7 SCC 603
[2] [1893] 1 Ch. 630
[3] 1959 Supp (2) SCR 406
[4] (1999) 7 SCC 61
[5] (2016) 4 SCC 126
[6] (2002) 4 SCC 105
[7] BGS SGS SOMA JV v. NHPC, (2020) 4 SCC 234
[8] (2014) 5 SCC 1
[9] [1775-1802] ALL ER Rep 98
[10] ABC Laminart Pvt Ltd vs. AP Agencies, AIR 1989 SC(1239)
