INDIAN SUPREME COURT ALLOWS INDIAN PARTIES TO CHOOSE A FOREIGN SEAT OF ARBITRATION

Settling a much-litigated issue, the Supreme Court of India (“Court”) recently decided that two Indian parties can choose a foreign (non-Indian) seat of arbitration. Some courts had previously held that at least one party had to be a non-Indian person or company for such a clause to be effective. The Court clarified the position and held that an award issued by an arbitral tribunal in such circumstances would be enforceable in India and that the parties could also seek interim relief in India. The decision brings welcome certainty particularly for Indian subsidiaries of international companies that have negotiated contracts providing for offshore arbitration in jurisdictions like Singapore, London, Hong Kong and others.

Background

The judgment, in PASL Wind Solutions Private Limited v. GE Power Conversion India Private Limited, followed from an appeal from a decision of the Gujarat High Court (which we covered here). It involved two Indian companies, one a subsidiary of a French company, that had entered into an agreement for the sale of converters. The agreement provided for arbitration in Zurich under the ICC Rules and was governed by Indian substantive law. The Tribunal issued an award and GE Power applied to enforce it in Gujarat. The Gujarat High Court held that the award was enforceable notwithstanding that the two Indian parties had chosen a foreign seat, but also held that parties to such an arbitration would not be entitled to interim relief in the Indian courts. PASL Wind Solutions appealed to the Court.

The Judgment

Meaning of ‘Foreign’ Award

Part II of the Indian Arbitration and Conciliation Act 1996 (the “Arbitration Act”) applies to the enforcement of foreign awards in India. One question before the Court was how the term ‘foreign award’ should be interpreted.

The appellant argued that the definition turns on the nationality of the parties, and that an award could not be considered ‘foreign’ because it involved two Indian parties. The Court rejected this argument and held that there were four criteria for an award to be considered a foreign award: (i) the dispute must be considered to be a commercial dispute under the law in force in India, (ii) it must be made pursuant to a written arbitration agreement, (iii) the dispute must arise between “persons” (without regard to their nationality, residence, or domicile), and (iv) the arbitration must be conducted in a New York Convention country.

The Court held that these criteria were met by the award in question. Section 44 of the Arbitration Act (which defines foreign awards) was “party-neutral” and the key factor is the place of arbitration.

The appellant also argued that the term ‘foreign award’ in Part II must be understood by reference to terms used in Part I (which deals with domestic or India-seated arbitrations). The Court rejected this argument and held that it was not possible to interpret the provisions of one part of the Arbitration Act using provisions of another part, following its earlier decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services.

Public policy

Another issue before the Court was whether an agreement between two Indian parties to arbitrate in a foreign seat was against the provisions of the Indian Contract Act 1872. In particular it was argued that this was against Section 23, which makes agreements against public policy void, and Section 28, which provides that agreements in restraint of legal proceedings are void.

On public policy, the Court found that on balance there was no harm to the public in allowing two Indian parties to resolve their disputes offshore: “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…”. Where issues of fundamental Indian public policy where involved, the Court found that there were adequate safeguards in the Arbitration Act and under conflict of laws rules.

The Court also echoed its previous judgments which held that party autonomy was “the brooding and guiding spirit of arbitration” and that there were no grounds on which to restrict this autonomy by preventing Indian parties from arbitrating abroad.

Interim Relief

Finally, the Court overruled the Gujarat High Court’s finding that interim relief would not be available for arbitrations between Indian parties seated abroad. The Court found that this was based on an erroneous reading of the provisions of Parts I and II of the Arbitration Act.

Comment

The Court’s judgment will be a welcome clarification on an issue that has divided many High Courts in India including those in Delhi, Bombay and Gujarat. For contracts entered into before this question was widely litigated, parties will welcome the clarity. Looking ahead, for parties now negotiating contracts, the Court’s decision offers a wider menu of available forums in which to resolve their disputes, which is consistent with the global reach of Indian businesses.

For more information please contact Paula Hodges QC, Head of Global Arbitration Practice, Andrew Cannon, Partner, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact.

Paula Hodges QC
Paula Hodges QC
Head of Global Arbitration Practice
+44 20 7466 2027

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852
Nihal Joseph
Nihal Joseph
Associate
+44 20 7466 2212

SINGAPORE COURT OF APPEAL CONFIRMS THAT THE PARTIES’ INTENTION TO ARBITRATE SHOULD NOT BE GIVEN EFFECT “AT ALL COSTS”

  1. Introduction

In BNA v BNB and Anor [2019] SGCA 84, the Singapore Court of Appeal (the “COA“) confirmed that the phrase “arbitration in Shanghai” meant that Shanghai was the seat of arbitration, reversing the position taken by the arbitral tribunal and the High Court. The COA made this finding notwithstanding the fact that the arbitration agreement would, according to BNA, be invalid under PRC law.  This decision highlights that while the Singapore courts maintain a pro-arbitration approach in principle, the Singapore courts will not give effect to parties’ intention to arbitrate at all costs.

  1. Background

In 2012, BNA entered into an agreement with BNB (the “Contract“). Subsequently in 2013, the rights and obligations of BNB under the agreement were fully transferred to BNC by an addendum to the Contract.

The Contract contained the following arbitration agreement:

14.1 This Agreement shall be governed by the laws of the People’s Republic of China.

14.2 With respect to any and all disputes arising out of or relating to this Agreement, the parties shall initially attempt in good faith to resolve all disputes amicably between themselves. If such negotiations fail, it is agreed by both parties that such disputes shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai, which will be conducted in accordance with its Arbitration Rules. The arbitration award shall be final and binding on both parties. (emphasis added)(the “Arbitration Agreement“)

In 2016, BNB and BNC filed a notice of arbitration.  BNA challenged the jurisdiction of the Tribunal.  BNA’s success in the jurisdictional phase hinged on whether the proper law of the Arbitration Agreement was Singapore law or PRC law.  If PRC law was the proper law, it would invalidate the arbitration agreement as PRC law does not permit a foreign arbitral institution such as the SIAC to administer a PRC-seated arbitration or a purely domestic PRC related dispute.

The majority of the Tribunal found that Singapore was the seat and that it thus did have jurisdiction (the “Jurisdictional Decision“).  BNA then applied to the Singapore High Court, under s 10(3) of the International Arbitration Act (the “IAA“), to challenge the Tribunal’s decision.  The High Court of Singapore (the “HC“) reached the same conclusion as the majority of the Tribunal, although it did not agree with the majority of the Tribunal’s reasoning.

  1. COA reverses High Court’s decision

In a decision dated 27 December 2019, the COA reversed the decision of the High Court. In so doing, the COA found that the seat of the arbitration was Shanghai, and that the arbitration agreement was governed by PRC law. The COA confirmed that the approach set out in BCY v BCZ [2017] 2 SLR 357 (“BCY“) (which is consistent with the English position per Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102) must be applied.  BCY provides the appropriate choice-of-law framework under Singapore law.

The COA applied the three-step test from BCY as follows:

First limb: Did the parties expressly choose the proper law of the Arbitration Agreement?

If the Arbitration Agreement expressly stated which law should be applied to determine its validity, the enquiry would end there.  In this case the Contract did not stipulate expressly which law governs the Arbitration Agreement. The COA considered that the wording of clause 14.1 (see above) was not sufficiently specific.

Second limb: Did the parties make an implied choice of the proper law governing the Arbitration Agreement?

Given the finding on the first limb, the starting point for the COA was that there is a presumption that the law otherwise governing the Contract should also apply to the Arbitration Agreement.  In this case, PRC law was the governing law of the Contract.  The COA emphasised that this starting point can be displaced.  The HC had held that it was displaced.  In doing so, the HC emphasised that Rule 18.1 of the Arbitration Rules of the Singapore International Arbitration Centre 2013 (the “SIAC Rules“), which provided:

The parties may agree on the seat of arbitration.  Failing such agreement, the seat of the arbitration shall be Singapore, unless the Tribunal determines, having regard to all of the circumstances of the case, that another seat is appropriate. 

However, the COA found that Rule 18.1 could only apply if the parties had not agreed on the seat.   In the instant case, the Arbitration Agreement provided for “arbitration in Shanghai“.  The COA cited a number of authorities which support the proposition that this wording means that the parties chose Shanghai to be the seat and not, as the HC and the Tribunal found, merely as the venue of the arbitration.

The COA acknowledged that the natural reading of “arbitration in Shanghai” (i.e. meaning Shanghai as the seat) could be displaced by “contrary indicia“.   The Respondent argued that it should be displaced because the “background contextual material, including the earlier drafts of the [Contract], and the email correspondence between the parties, would show that the parties intended for their arbitration to be seated in a neutral forum which, in this case, could not be the PRC, and must instead be Singapore.

However, the COA refused to admit this evidence as doing so would contravene the parol evidence rule which applies according to s94 of the Evidence Act. The Respondent attempted to argue that the parol evidence rule and its exceptions (under ss 94 – 97 of the Evidence Act) should be displaced because the Evidence Act does not apply to arbitration proceedings.  This argument failed.  The COA emphasised that s2(1) of the Evidence Act provides that the applicable parts of the legislation do not apply to “proceedings before an arbitrator.”  The Respondent sought to introduce the evidence in the HC proceeding, which clearly was not a proceeding “before an arbitrator.

Since there were no contrary indicia to displace the natural meaning of “arbitration in Shanghai“, the COA therefore concluded that the parties had chosen Shanghai as the seat. The COA therefore held that there was no basis to rebut the starting position that PRC law applied to the Arbitration Agreement.

Third limb: What is the system of law with the closest and most real connection with the arbitration agreement?

This third limb only applies if there is no express or implied choice of the law which governs the Arbitration Agreement. Given the COA’s finding that PRC law was the implied choice of law, the third limb was therefore not considered in this case.

  1. Outcome of the COA’s decision

The COA found that the arbitration was seated in Shanghai and that PRC law governed the arbitration agreement.  In these circumstances, the COA did not consider it was able to then go on to determine whether the Tribunal had jurisdiction, as the Singapore courts did not properly have supervisory jurisdiction given that the seat was in the PRC.  The COA did not, therefore, make any finding as to whether or not the Arbitration Agreement would be invalid under PRC law.  As the COA stated: “it is for the parties to decide what further actions they wish to take“.

  1. Key points

The COA’s decision provides a welcome confirmation that the Singapore courts will not uphold the validity of an arbitration clause at all costs.  The case also highlights some important takeaways:

  • First, when it comes to drafting arbitration agreements it is critical to be as clear as possible as to the choice of legal seat and the law that governs the arbitration agreement (in addition to the law governing the balance of a contract). It is particularly important to include drafting on the choice of governing law where the law of the seat and the law governing the contract are different, as is common in many cross border transactions.
  • Second, parties should take extra care to seek advice on the negotiation and drafting of arbitration clauses for China related contracts. Further guidance can be found in our guide here.
  • Third, if a party wishes to rely on extrinsic evidence to support arguments in relation to the validity of an arbitration clause where the seat of arbitration is in Singapore, it should attempt to do so during the arbitration and not belatedly during any jurisdictional review or set aside proceedings before the Singapore courts. Proceedings before the HC or the COA are not proceedings “before an arbitrator” and, therefore, the parol evidence rule in the Evidence Act may prevent the admissibility of such evidence.

Herbert Smith Freehills is pleased to have advised the Appellant in this dispute, as counsel in the arbitration and as instructing solicitors to Singapore counsel TSMP Law Corporation in the Singapore court proceedings.  The Herbert Smith Freehills team has been led by Brenda Horrigan (Partner, Sydney) and Dan Waldek (of Counsel, Singapore) and supported by Weina Ye (Senior Associate, Shanghai) and Mitch Dearness (Associate, Singapore).

For more information, please contact Brenda Horrigan, Partner, Daniel Waldek, Of Counsel, Weina Ye, Senior Associate, Mitchell Dearness, Associate, or your usual Herbert Smith Freehills contact.

Brenda Horrigan
Brenda Horrigan
Partner
+61 2 9225 5536
Daniel Waldek
Daniel Waldek
Of Counsel
+65 686 88068
Weina Ye
Weina Ye
Senior Associate
+86 21 23222132
Mitchell Dearness
Mitchell Dearness
Associate
+65 68688061

English Commercial Court orders stay of Lebanon-seated arbitration in ‘exceptional’ case

In the most recent decision in the Sabbagh family feud, Sabbagh v Khoury & Ors [2018] EWHC 1330 (Comm), the English Commercial Court ordered the stay of parallel Lebanon-seated arbitration proceedings. This was despite the tribunal in that case having found that it had jurisdiction to hear it. In granting the interim injunction to restrain the pursuit of the arbitration proceedings, Mr Justice Knowles was quick to acknowledge the significance of a court that is not the supervisory court granting an injunction to prevent parties prosecuting a foreign arbitration.

 

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