Party Autonomy or the Choice of Seat: The Essence of Arbitration

Introduction

With the rapid increase in globalisation and liberalisation, international commercial arbitration has gained massive recognition across the world. The establishment of the Arbitration and Conciliation Act, 1996¹ (hereinafter referred to as “the Act”) aimed to incorporate the virtues of international as well as domestic arbitrations. The Act has been adopted on similar lines as that of the UNCITRAL Model Law² and makes provisions for both domestic as well as international commercial arbitration.³ Despite significant amendments to the Act, there are still a lot of provisions that require clarity and need to be discussed.

Part I of the Act includes arbitrations that are seated in India i.e. domestic arbitration (between Indian parties) as well as international commercial arbitrations (between an Indian party and a foreign party). Part II of the Act includes arbitrations that are seated outside India.⁴ Further, the Act includes provisions under which an Indian party and a foreign party can have a foreign seat of arbitration.⁵ However, there is still no clarity about whether Indian parties can choose a foreign seat of arbitration.

Primarily, an arbitration agreement that includes elements of international commercial arbitration has three types of laws: lex loci contractus or the law governing the substantive contract, lex arbitri or the law governing such agreement, and lex fori or the curial law governing the conduct of the arbitration proceedings.⁶ As arbitration is a result of an agreement between two or more parties, party autonomy is centric to every arbitration agreement. The principle of party autonomy is when the parties consensually execute the arbitration agreement. The parties are said to be truly “autonomous” when they have the freedom to choose the substantive laws that will govern such an agreement, the composition the Arbitral Tribunal, the place/seat of arbitration, etc.⁷

This paper will focus on the applicability of the Act vis-à-vis the determination of the seat of arbitration. Further, this paper will discuss the extent to which the parties have autonomy under the Indian arbitration law, despite the prevailing precedents on the applicability of the two Parts of the Act and the supervisory control of the courts over the arbitral proceedings. Lastly, this paper will discuss whether Indian parties have the autonomy to choose a foreign seat of arbitration.

Applicability of the Act vis-à-vis the seat of arbitration

To get a deeper understanding of the applicability of the Act with vis-à-vis the seat of arbitration, it is necessary to look at the following decisions of the Supreme Court. In 2002, a 3-Judge Bench of the Supreme Court in Bhatia International v. Bulk Trading SA⁸, held that Part I of the Act will apply to international commercial arbitrations, both in and outside India, unless the parties to the agreement, expressly or impliedly, exclude the applicability of any or all provisions of Part I of the Act.⁹ The rationale behind this decision of the Supreme Court was that Section 2(2) of the Act, although adopted from the UNCITRAL Model Law, omits the word “only”.¹⁰ This, according to the Supreme Court, indicated the intention of the legislature to give scope to the international commercial arbitrations, both in and outside India, to be included.¹¹ Following this, the Supreme Court upheld Bhatia principle¹² i.e. the principle of express or implied exclusion, in numerous cases like Venture Global Engg. v. Satyam Computer Services Ltd.¹³, Videocon Industries Ltd. v. Union of India¹⁴, Yograj Infrastructure Ltd. v. Ssang Yong Engg. and Construction Co.¹⁵, etc.

However, in 2012, in the landmark judgment of BALCO v. Kaiser Aluminium Technical Services Inc.¹⁶, a 5-Judge Constitutional Bench of the Supreme Court overruled the Bhatia principle¹⁷ as it was deemed extremely erroneous and was derogating from the Indian law.¹⁸ The Supreme Court held that the absence of the word “only” in Section 2(2) of the Act, as opposed to Article 1(2) of the Model Law, does not nullify the “territoriality principle” i.e. only the courts of the country where the seat of arbitration is located will have the jurisdiction over such arbitral proceedings.¹⁹ Thus, it was held that Parts I and II of the Act are mutually exclusive of each other and only when the seat of arbitration is in India, Part I of the Act will apply to those international commercial arbitrations.²⁰ Although the BALCO²¹ regime has set the precedent in its favour; it is imperative to note that the decision of BALCO²² only applies to arbitral agreements post 6-9-2012, before which the Bhatia principle²³ is applicable. Thus, this has led to the existence of two parallel regimes, thereby, causing chaos in the status of the Indian law on arbitration.

The seat, although not defined in the Act, is the “centre of gravity” or the “central point” of arbitration.²⁴ The seat is also determinative of the applicability of the Act as well as of the “territoriality principle”. Thus, it is imperative to understand the difference between basic terms, such as “seat”, “venue” and “place”. These terms can have a lot of different meanings when used in different contexts. However, in the context of the 1996 Act, while “seat” and “place” have the same meaning, “seat” and “venue” do not.²⁵ In other words, under international commercial arbitration, while the “seat” may be in India, the “venue” can be anywhere in India or outside India without any implication on the applicability of either of the parts.²⁶ Thus, while the “seat” of arbitration is determinative of the applicability of the Act, the “venue” is irrelevant in that regard.

Lastly, it is also imperative to note that Sections 20(2) and (3) gives the parties freedom to choose the seat of arbitration. However, the Supreme Court in BALCO case²⁷ held that the provisions regarding “courts” under Section 2(1)(e) of the Act have to be read along with Section 20 of the Act because the “courts” have supervisory control over the arbitral proceedings.²⁸ This not only creates chaos but also leads to ambiguity on the extent to which a party has the autonomy to choose the seat of arbitration.

Can Indian parties choose a foreign seat?

The correct choice of the seat of arbitration ensures a systematic and efficient proceeding. Most parties prefer to be free with such choices to get an “arbitration-friendly” jurisdiction. By now, it is clear that Part I of the Act includes arbitrations that are seated in India and Part II of the Act includes arbitrations that are seated outside India. It is also clear that the Act includes provisions under which an Indian party and a foreign party can have a foreign seat of arbitration.²⁹ However, there is still no clarity about whether Indian parties can choose a foreign seat of arbitration.

To resolve the ambiguity around the existence of “party autonomy”, it is necessary to look at the ages-long debate over whether Indian parties to a proceeding have the autonomy/freedom to choose a foreign seat, despite the prevailing precedents on the applicability of Parts I and II of the Act. This is because an arbitration agreement is also an autonomous agreement that can be governed by any proper law distinct from lex loci contractus and lex arbitri. Thus, various High Courts in India have attempted to highlight and address the issue.

In Atlas Export Industries v. Kotak & Co.³⁰, although there were not only two Indian parties but also a third foreign party, the Court held that a mere choice of a foreign seat of arbitration cannot by itself nullify an agreement between the parties.³¹ Following this, in Sasan Power Ltd. v. North American Coal Corpn. (India) (P) Ltd.³², where both parties were companies that were incorporated in India, the Madhya Pradesh High Court had to address whether these Indian parties could choose a foreign seat of arbitration. Here, it was held that two Indian parties have the autonomy/freedom to choose a foreign seat of arbitration.³³

Further, various recent judgments support the stance of Atlas Export Industries case³⁴ and Sasan Power case³⁵. In GMR Energy Ltd. v. Doosan Power Systems India (P) Ltd.³⁶, the parties had agreed upon the Singapore International Arbitration Centre (SIAC) as the seat of arbitration. GMR Energy Limited sought a decree of permanent injunction, restraining Doosan from holding the arbitration in Singapore. However, the Delhi High Court rejected this claim and held that Indian parties were free to choose a foreign seat of arbitration.³⁷

Further, in GE Power Conversion India (P) Ltd. v. PASL Wind Solutions (P) Ltd.³⁸, the parties had agreed upon Zurich as the seat of arbitration and the governing laws to be the Swiss law under the arbitration clause in the agreement between them. It was observed that the intention of the parties to choose Zurich as the seat of arbitration was reflected by the said clause. The Gujarat High Court, giving primacy to the party autonomy, held that the Act had no provisions that could restrain Indian parties from freely choosing a foreign seat of arbitration.³⁹

Further, in Dholi Spintex (P) Ltd. v. Louis Dreyfus Co. India (P) Ltd.⁴⁰, the Delhi High Court held that Indian parties are free to choose a foreign seat of arbitration as long as doing so is not against the principles of justice and morality. Further, it was held that for the autonomy to be granted to the Indian parties, they must ensure that the substantive contract must have a foreign component.⁴¹

However, the Bombay High Court in Addhar Mercantile (P) Ltd. v. Shree Jagdamba Agrico Exports (P) Ltd.⁴² took a contradictory stance. Here, the arbitration clause in the agreement laid that the seat of arbitration will be either India or Singapore, and the laws governing the proceeding will be English laws. It was held that the arbitration can be validly conducted in India because it was provided in the arbitration clause of the agreement.⁴³ Having said that, it is imperative to note that the Court did not hold that the arbitration could not be conducted in Singapore. It was, in fact, held that had the arbitration been conducted in Singapore, the English law would have applied. Thus, whether Indian parties to a proceeding have the autonomy/freedom can choose a foreign seat or not, was not even addressed in this case.⁴⁴

The decision of the Bombay High Court was based on the decision in TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.⁴⁵ In TDM case⁴⁶, it was held that it was impermissible for Indian parties to derogate from the Indian law as it was “part of the public policy of India.” Further, it was held that the seat of arbitration was located in India and the proceedings were to be dealt with as per Section 28 of the Act.⁴⁷ Here, the key issues that the Court had to deal with were whether the petitioner was Indian by nationality and whether the arbitration in question was international commercial arbitration. Section 28 of the Act has nothing to do with the seat of the arbitration, it only addresses the substantive law to be used to resolve a dispute. There were no observations made about whether Indian parties to a proceeding have the autonomy/freedom to choose a foreign seat.⁴⁸ Thus, it can be seen that the decision of the Bombay High Court in cases like Addhar Mercantile case⁴⁹ and Sah Petroleums Ltd. v. Seven Islands Shipping Ltd.⁵⁰ was based on a misinterpretation of the decision in TDM case⁵¹.

Section 28 of the Act highlights the intention of the legislature to ensure that Indian parties to an arbitral proceeding do not derogate from the Indian law. However, it is imperative to note that as per Section 2(2) of the Act, being a provision under Part I of the Act, Section 28 of the Act only applies to the arbitrations seated in India. Thus, the decision in TDM case⁵² has nothing to do with whether the Indian parties can/cannot choose a foreign seat of arbitration, thereby clearing that the Indian parties choosing a foreign seat of arbitration is not against public policy.

Moreover, as shown above, in Addhar Mercantile case⁵³, it was held that had the arbitration been conducted in Singapore, the English law would have applied. It was not held that the arbitration could not have been conducted in Singapore.⁵⁴ Thus, the Bombay High Court did not hold that Indian parties were not autonomous/free to choose a foreign seat of arbitration, and this question was left unaddressed.

Conclusion

Despite various conflicting decisions, what is imperative is to note that the Act does not explicitly allow/disallow the Indian parties from choosing a foreign seat of arbitration. Further, though the BALCO⁵⁵ regime has reduced the ambiguity regarding the applicability of Part I of the Act, it has negatively impacted party autonomy by emphasising “supervisory control” of the courts over an arbitral proceeding. Nonetheless, it can be inferred that Indian parties are entitled to choose a foreign seat of arbitration, regardless of whether Part I of the Act will apply to such proceedings or not. However, it has been held that the Indian parties choosing a foreign seat of arbitration will not be entitled to interim reliefs under Section 9⁵⁶ of the Act.⁵⁷

Even in Union of India v. Reliance Industries Ltd.⁵⁸, all the parties involved in the dispute were Indian, while the seat of arbitration was London. Neither did the Supreme Court, nor did the parties raise any objections towards the Indian parties choosing a foreign seat of arbitration. Had it been impermissible to do so, the Supreme Court would have objected to it. Although various High Courts have upheld the party autonomy to choose a foreign seat of arbitration, the Supreme Court or the lawmakers must make amendments to the current provisions/precedents to reduce the ambiguity and uplift party autonomy, which is the cornerstone of any arbitral proceeding.⁵⁹

“Party autonomy”, as a fundamental principle of international commercial arbitration, is not only centric to every arbitration agreement in general terms but is also supported and uplifted by the UNCITRAL Model Law⁶⁰, the Nigeria Arbitration and Conciliation Act, 2004⁶¹, the New York Convention, 1958⁶², the International Chamber of Commerce Arbitration Rules, 2012⁶³ (popularly known as “the ICC Rules”), etc.⁶⁴ Thus, it is necessary that the courts give primacy to the agreement between the parties and must only intervene if such an agreement between the parties is inexecutable or fraudulent.

Moreover, the Supreme Court in Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd.⁶⁵, giving primacy to party autonomy, has held that if the courts decide that the dispute can be resolved through arbitration under Section 89⁶⁶ of the Civil Procedure Code, 1908, it is mandatory for the parties to consent to such arbitration and cannot be forced to do so.⁶⁷ Thus, the parties are also autonomous/free to choose whether they want to go through the arbitration at all.⁶⁸ Thus, it can be concluded that party autonomy is at the core of international commercial arbitration and cannot be overlooked so that the “pro-arbitration” climate can be maintained in India. Nonetheless, the provisions on party autonomy must neither disregard the public policy of the country, nor the principles of justice and morality.