May 1st, 2021

Introduction

The seat of arbitration is considered to be one of the most major concerns of the parties entering the arbitration agreement. Any mistake while deciding the jurisdiction of the arbitration might deprive the parties of all the benefits arising out of the proper systematic arbitration system.

The parties generally prefer an arbitration-friendly jurisdiction to conduct their arbitration proceedings so that the award of the arbitration can attain finality in the most efficient possible manner. It is pertinent to note that several factors need to be taken into consideration while the parties decide on the seat of the arbitration. Where the local courts have a lot of power to decide on the advantages of a matter or have an intervening tendency while they consider an award that has been passed by the arbitral tribunal, the parties might not be inclined to submit to such jurisdictions.

It needs to be taken into consideration that where one of the parties to the contract is a subsidiary of a foreign company, they generally prefer to appear before a forum with which it is comfortable. For example, when a Taiwanese company enters into a contract with an Indian company through its Indian subsidiary, the Taiwanese company might be inclined to choose Singapore as this forum might be convenient for it. In this article, the author aims to conduct an in-depth analysis of the validity of the Indian parties choosing a foreign seat of arbitration.

The Arbitration and Conciliation Act, 1996

The Arbitration and Conciliation mechanism is comprised under the umbrella statute in India under the Arbitration and Conciliation Act, 1996. This is a statute enacted in India for the enforcement of the alternative dispute resolution mechanism. This Act is further divided into two parts – Part Ⅰ of the act deals with the definition of arbitration, the constitution of the arbitral tribunals, and the procedure for challenging the arbitral awards in India. Part Ⅱ of the Act focuses on the enforcement of the foreign awards in India, which is mentioned under the Convention on the Recognition and Enforcement of the Foreign Arbitral Awards ( New York Convention) and the Geneva Convention of the on the Execution of the Foreign Arbitral Awards in 1927 ( Geneva Convention).

It is pertinent to note that the Act does not explicitly define domestic arbitration, however, “International Commercial Arbitration” is defined as an arbitration that arises out of a legal relationship of a commercial nature as per the laws of the country and where at least one of the parties is a foreign party. Further, it says that, in the case of arbitration, which is conducted in India, Part I of the Arbitration Act shall apply to them. It is very much necessary to have clarity on the concept of seat in arbitration law, to understand the controversy at hand. On March 5, 2020, the Supreme Court of India clarified in the matter of Mankastu Impex Pvt. Ltd. v. Airvisual Ltd. that the “seat” of arbitration determines the applicable law for deciding the arbitration procedure as well as the judicial review over the arbitral award. On the other side, the venue is just a physical location for the conduct of the arbitration. This article deals with cases of arbitration where the seat of arbitration between two Indian parties is outside India.

Choice of a Foreign Seat of Arbitration by two Domestic Parties

There has always been a debate regarding the choice of seat of arbitration by two domestic parties while decoding the concept of party autonomy, being one of the most important ingredients of arbitration. On 20^th April, 2021, the Supreme Court of India, in a three judge Bench judgment, in the matter of PASL Wind Solutions Private Limited v. GE Power Conversion, held that two Indian parties are entitled to choose a foreign seat of arbitration and that the ensuing award is enforceable in India. This issue was also dealt by the Delhi High Court, wherein it held that there was no bar on two Indian parties choosing a foreign seat for Arbitration.^[1] This would fall under Part Ⅱ of the Indian Arbitration and Conciliation Act, 1996.^[2] This is premised on the New York Convention on the Recognition and Enforcement of the Foreign Arbitral Awards, 1959 (“New York Convention”). The Geneva Convention on the Execution of Foreign Awards of 1927 (“Geneva Convention”) expressly imposes a limit to the agreements to conduct arbitration between the parties that were nationals of different contracting states. All the awards which are a result of arbitration under the New York Convention shall be treated as foreign awards and shall be entitled to the protection of the treaty.^[3] Thus, under the Geneva Convention, if two parties choose a foreign seat, the award shall not be considered as a foreign award, contrary to the treatment under the New York Convention.

The Supreme Court in 1999, while recognizing party autonomy had declared that two Indian parties choosing a foreign seat of arbitration shall not nullify the arbitration agreement as it had been willingly entered into by the two domestic parties.^[4] The Madhya Pradesh High Court has also held that two Indian parties can choose a foreign seat for arbitration and hence can arbitrate outside India.^[5] When two parties have consciously chosen a foreign seat, then the arbitration agreement shall be governed by the laws of the foreign country. It shall be noted that Part Ⅰ of the Arbitration and Conciliation Act, 1996, shall not be applicable.^[6]

Errors in the Indian Arbitration Regime: Judicial Intervention and Allied Issues

The Arbitration Act of 1899 was the first arbitration statute in India. By Section 89, Schedule II of the Code of Civil Procedure 1908, the Act was extended to other parts of British India and it was based on the English Arbitration Act of 1899. Thereafter, the Arbitration Act, 1940 (“1940 Act”), the Foreign Awards (Recognition & Enforcement) Act, 1961, and the Arbitration (Protocol and Convention) Act, 1937 were enacted in India. The Arbitration Act of 1940, was the governing general law in India, on arbitration, until the year 1996. Also, India was one of the signatories to the Geneva Convention of 1927 on the Execution of Foreign Arbitral Awards and the New York Convention.^[7]

Unfortunately, the Arbitration Act of 1940 gave numerous opportunities to the litigants seeking intervention from courts as the Act was premised on distrust towards self-sufficient arbitral process and party autonomy. The Act gave further powers to the courts to make changes in the award, send it back to the arbitrators for consideration, and also set it aside if required. This gave birth to a culture that didn’t let the arbitration become an alternative dispute resolution mechanism because the court was looking after every aspect of the process. Arbitration didn’t get the status it deserved. There were instances where the parties indulged in dilatory tactics and used to appeal to the court at any stage of the arbitral proceedings to take an edge accruing from the backlog of cases. The Indian legislature, as one of the first crucial reforms, post the liberalization era, passed the Arbitration and Conciliation Act of 1996, which was based on the model law adopted by the United Nations Commission on International Trade Law, integrating as well as enhancing the former laws. However, the act was not fully effective and a lot was desired in order to achieve the required effectiveness.

Ad-hoc arbitrations became the norm. These arbitrations were presided over by the retired judges of the Supreme Court of India and various High Courts of India.^[8] Lacking the established procedures or institutional sanctity, these were burdened with many problems as delayed proceedings, poor quality of awards, unprofessional arbitrators, etc., which resulted in unrestricted court intervention at all the stages of the arbitration proceedings. It was a similar case as it was with the Arbitration Act of 1940. Also, the Act did not provide any clarity on the timelines. The Act did not provide any incentive to the arbitrators or the parties to maintain efficiency in the proceedings and finishing the proceedings in a timely manner. Arbitration proceedings became just like usual litigation proceedings and took many years to conclude, depriving them of the tag of ‘out-of-court fast and convenient settlement’. Not only this, after the arbitration proceedings would conclude, the party which had lost the arbitration proceeding used to challenge the decision in the court, and that settlement used to take years to conclude. The Act provided an easy escape route to the award debtor in being able to get an automatic stay on the execution of the award by simply using Section 34 of the Act to file an application, notwithstanding the soundness of the challenge of the decision.^[9]

Even the Supreme Court of India in 2004 observed that, “this automatic suspension of the execution of the award, the moment an application challenging the said award is filed under Section 34 of the Act leaving no discretion in the court to put the parties on terms, in our opinion, defeats the very objective of the alternate dispute resolution system to which arbitration belongs”.^[10] India remained an unattractive place to conduct arbitration because of factors such as long-drawn ad-hoc arbitration proceedings, unrestricted judicial intervention, and the unhampered capacity of the award debtors to delay the enforcement of the award.

The above position was changed in the 2015 Amendment which specified that there shall be no automatic stay and the Courts had the discretionary power to impose a conditional stay on the award upon hearing the grievances of the party challenging the award. However, the Act failed to clarify whether the Amendment would apply to awards challenged post the date of enactment, i.e., 23^rd October, 2015, of the said Act or it would apply to even the ones challenged before the date of enactment of the Act.

The Supreme Court in BCCI v. Kochi (2018)^[11] interpreted Section 26 of the 2015 Amendment Act. Section 26 left a grey area regarding the scope of applicability of the 2015 Amendment Act. Various High Courts have interpreted it in divergent ways. The dilemma was whether the Act would apply prospectively or retrospectively to arbitral proceedings that were initiated before the commencement of the Act and subsequently to court proceedings related to those arbitral processes. As a consequence, confusion arose whether the amended Section 36 of the Principal Act is applicable on enforcement proceedings when the award has been challenged under Section 34 of the Principal Act. The court came to a conclusion that it should apply after the Amendment came into force. However, concerning enforcement of awards, it was decided to be applied retrospectively. The Court gave the reasoning that the right to automatic stay was not vested under Section 36 and a separate application must be filed for the same for the court to consider. This decision was made after duly deliberating on the recommendations of the Law Commission’s 246^th Report which said that the automatic stay on the execution of the arbitral award defeated the very purpose of the arbitration.

Very recently, on 4^th November 2020, the Government of India brought another amendment known as the Arbitration and Conciliation (Amendment) Ordinance, 2020 through an ordinance promulgated by the President. This ordinance brings the debate of automatic stay once again into the picture. Adding another proviso to Section 36 (3), the ordinance aims to form a mechanism for putting an automatic stay on the arbitral awards while they are challenged under Section 34 in case the arbitration agreement or the arbitration clause added to the contractual agreement giving rise to the arbitration process is itself induced by fraud or corruption. Moreover, the proviso also allows such stay on the award if the award rendered to the dispute is influenced by fraud or corruption.