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Factors when drafting arbitration clauses in commercial contracts

In the recent case of PASL Wind Solutions Pvt Ltd v GE Power Conversion India Pvt Ltd, the Supreme Court allowed two Indian parties to elect a foreign seat of arbitration and clarified that the arbitral award was to be treated as a foreign award, enforceable under part II of the Arbitration and Conciliation Act, 1996 (act).

The court decided the following issues: two Indian parties are entitled to agree to a foreign seat of arbitration; and while the term international commercial arbitration in part I of the act is party-centric, when used in part II it has a place-centric meaning. Consequently, such foreign-seated arbitration was an international commercial arbitration and the award would be enforced as a foreign award under the act.

The Supreme Court has now decided that part I of the act is a complete code with respect to arbitrations seated in India. That includes the appointment of arbitrators, the commencement of arbitrations, and challenges to and execution of an award. Part II of the act, therefore, does not apply to foreign-seated arbitrations. Part II provides only for the enforcement of foreign awards, except section 45, which deals with the referral of parties to arbitration. The court therefore held that parts I and II of the act are mutually exclusive.

The Supreme Court also considered the use of the term international commercial arbitration in parts I and II. It held that in part I, the term is party-centric, which means that at least one party to an arbitration agreement is a national of, or habitually resident in any country other than India. However, in part II, the term international commercial arbitration is place-centric. An arbitration seated in a territory outside India would be subject to the New York Convention, and any arbitral award would constitute a foreign award recognised and enforceable under part II.

The Supreme Court has now held that there is nothing standing in the way of party autonomy in agreeing a seat of arbitration outside India even when both parties are Indian nationals. However, in such arbitrations parties are entitled to seek interim relief before the courts in India. The court further observed that an interim application under section 9 of the act should be heard in accordance with section 2(e)(ii), and such application for interim relief is maintainable before Indian courts.

Though not expressly laid down in the judgment, the two Indian parties in such arbitration agreements may also agree that a foreign law should be the substantive law governing the contract, firstly because the seat of arbitration is outside India, and secondly because the restriction under the act to adjudicate the dispute in accordance with the substantive law of India applies only to cases where the arbitration is seated in India.

Foreign companies operating through subsidiaries, or joint ventures will now be able to choose a foreign seat of arbitration in their transactional contracts. The choice of seat will be governed by neutrality, transparency, speed and efficiency. Jurisdictions offering party autonomy have been important for such foreign companies, who have had to choose a seat of arbitration outside India in arbitration agreements involving their subsidiaries, joint ventures, partners and vendors within the country. The judgment emphasises the importance of the principle of party autonomy where there is no bar under Indian law, as in the present case, and settles the law on an issue which has seen courts in India adopting many contradictory views.

The judgment removes the roadblocks in agreements involving two Indian parties to elect a foreign seat of arbitration, and to choose a foreign substantive law to govern their agreement provided that the arbitration is seated outside India. However, the party against whom the award is given would not only be able to challenge the award before the appropriate courts of the foreign seat of arbitration, but would also have the opportunity to oppose execution of the award before the courts in India. In addition that party can apply for the relief measures provided under section 9 of the act.

As the Supreme Court said, the decks have now been cleared to give effect to party autonomy in arbitration. Party autonomy is now the all-pervasive and guiding spirit of arbitration under Indian law.

This article was originally published by Indian Business Law Journal:

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