Party Autonomy: Myth or a Reality

May 2021

1. Introduction

Over the years, the dissatisfaction with litigation has bolstered arbitration as a preferred means of dispute resolution, and would be true even for two domestic contracting parties or in a cross-border transaction. The basis of any arbitration proceeding is the arbitration agreement. Under the Arbitration & Conciliation Act, 1996 (“Act”) this term is defined as a written[1] agreement through which contracting parties agree to submit certain or all disputes to arbitration; it could be by means of a separate contract or a clause within a contract. The principle of party autonomy is enshrined in the ability of contracting parties to execute such an agreement, and provides a right to choose applicable substantive law to govern their contractual relationship as they are in the best position to determine that law. It is worth reflecting whether parties actually have absolute freedom to determine the arbitration process. While negotiating a dispute resolution provision, each party endeavors to push a forum which favors their interests during adjudication and enforcement stages. In the former, the primary aim is the ability to obtain favorable treatment in its own courts while, during enforcement, the key driver is choosing aspects that impact how easy it will be to administer a judgment or award. While there is a lot of jurisprudence in India on the issue, but in a recent case titled PASL Wind Solutions Pvt Ltd. vs. GE Power Conversion India Pvt Ltd. (“the PASL Case”) the Supreme Court (“SC”) of India ruled in favor of party autonomy, held that two Indian parties are entitled to elect a neutral forum and choose a foreign seat of arbitration.

This newsletter examines this judgment and the surrounding issues.

2. Setting the Context

The primary concern is and will always be if the ability of a party to choose the substantive law and a venue of choice lead to an efficacious resolution of disputes. The dynamics may be hugely different depending who the parties are i.e., Indian only or mix of Indian and foreign. It is essential to understand the context and challenges around the legal framework. The Act is divided into four parts; titled Arbitration, Part I contains 10 chapters and pursuant to section 2(7), deals with domestic awards; Part II is titled Enforcement of Certain Foreign Awards and contains two chapters; Part III covers Conciliation in a single, detailed chapter while Part IV contains selective Supplementary Provisions. It is imperative to understand why Part I is so important in the Indian context and examine some key provisions. Firstly, section 9 gives an option to the parties to approach the court for interim relief in order to secure the amount or property in dispute. Secondly, section 11 permits the parties to approach a court for appointment of arbitrator in case one fails to act in terms of the agreement pertaining to the appointment. Thirdly, section 27 gives power to the parties to apply to the court for taking its assistance during evidence. And, lastly, but by no means the least, section 34 which has been the catalyst for innumerable judgments and prescribes conditions on the basis of which an award can be set aside.[2]

In an important case, Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc.[3] the SC held that Part I of the Act does not apply to international commercial arbitrations held outside India. In order to minimize challenges under section 34, foreign parties negotiated to have the seat of arbitration outside India. The flip side was when Part I was specially excluded, parties were unable to secure any kind of interim relief from Indian courts. This position was revised through a 2015 amendment when a new proviso was added to section 2 of the Act and a narrow option was provided to a foreign party for seeking interim relief against an Indian party. This amendment ensures that contracting parties can carve-out an exception to the blanket exclusion of Part I where the venue is outside India and clarifies when someone wishes to apply to the Indian courts if assets of one party are situated in India and interim orders are required qua such assets, including their preservation, the courts in India may pass such orders. It is important to highlight that despite an agreement to arbitrate, Part I enables parties to approach courts for interim remedies and well-reasoned awards have been subjected to challenge under section 34, thereby mocking the entire arbitral process. In contrast, a party can challenge a foreign award in Indian courts under sections 48 and 57 contained in Part II on two grounds (a) foreign award is contrary to public policy and/or (b) subject-matter of the dispute was not capable of settlement through arbitration.

3. The PASL GE Case and what it means  

Historically, Indian parties have always subjected an agreement to arbitral proceedings conducted in India. But the law was never settled conclusively and remained unclear whether Indian parties can choose a non-Indian seat of arbitration and, in that case, whether the interim orders under Part I apply to such arbitrations. The PASL case has now settled these opacities.

3.1       Facts: Briefly, two Indian companies, PASL and GE Power Conversion India Private Limited executed a contract. Certain disputes arose pertaining to purchase of converters by GE which were settled by means of a settlement agreement in December 2014. The dispute resolution clause provided for arbitration in accordance with the International Chamber of Commerce (“ICC”) Arbitration Rules with Zurich as the venue. Disputes arose under the Settlement Agreement and PASL invoked ICC arbitration. GE challenged the jurisdiction of the tribunal on the ground that two Indian parties cannot elect a foreign seat of arbitration. This challenge was dismissed, but to cut down costs the venue was changed to Mumbai where, eventually, an award was passed against PASL who were directed to pay INR 30 million or about USD 400,000. PASL contested the award in the High Court of Gujarat and took the position that an agreement between two Indian parties with a foreign seat of arbitral proceedings is against public policy of India since it aims to prevent judicial scrutiny in India. The high court, upheld the award and dismissed the argument pointing to provisions under contract law which permit parties to arbitrate disputes. It also held that if they choose a foreign seat, they cannot seek interim protection from an Indian court under section 9. PASL approached the SC where GE too objected to the finding regarding section 9.

3.2      Selective Arguments: GE’s position was the award was a foreign award and sought enforcement under Part II of the Act. However, PASL submitted that section 44 (which defines a foreign award in the context of NY Convention) had to be read in conjunction with section 2(1)(f) of the Act, which defines “international commercial arbitration” as an arbitration relating to disputes where, amongst others, one party is non-Indian. Reading the two provisions together, they argued the effect was elements of section 2(1)(f) from Part I could be imported into section 44 of Part II.  

But the SC held that the two Parts are mutually exclusive. Part I is a complete code in itself that covers arbitrations seated in India and did not apply to those held overseas. They stated the context of the expression (international commercial arbitration) is, therefore, different from the context of the definition contained in Section 2(1)(f), which is in the context of such arbitration taking place in India, which only applies “unless the context otherwise requires.” The four sub-clauses of section 2(1)(f) make it clear that the definition is party-centric where at least one party should be non-Indian. In contrast, when international commercial arbitration is spoken in the context of taking place outside India, it is place-centric as provided in section 44 of the Act. “This expression, therefore, only means that it is an arbitration which takes place between two parties in a territory outside India, the New York Convention applying to such territory, thus making it an “international” commercial arbitration” (emphasis supplied) and awards would be foreign awards under Part II. The SC also ruled that when two Indian parties elect a foreign venue it would fall within the ambit of a place-centric approach and section 9 applications should be heard in terms of section 2(e)(ii) of the Act. In the instant case, such application was maintainable before the Gujarat High Court. By permitting parties recourse to section 9 for urgent relief provided there is no agreement to exclude Indian courts, the SC has expressly recognized a key point. When arbitrations take place outside India, assets of parties may be situated in India and, to that end, interim orders may be necessary to preserve them.

Another important contention was on section 28(1)(a) of the Act[4] which focuses on rules applicable to the substance of the dispute. This section provides that the law applicable to arbitration in India, which is not an international commercial arbitration, has to be Indian law. PASL argued that when two Indian parties select a foreign venue, it conflicts with the aforesaid section. The SC disagreed and held that on a collective reading of the aforesaid section with sections 2(2), 2(6) and 4 of the Act it was clear that Indian substantive law had to be applied when venue was in India.

PASL also contended that when two Indian parties elect a foreign seat of arbitration it is contrary to sections 23 and 28 of the Contract Act.[5] But, the SC took the view that section 28 contained an exception for arbitration and there is no bar on the basis of nationality in terms of who can arbitrate a dispute. On the application of section 23, they examined if Indian public policy prohibits two Indian parties from referring their disputes to arbitration seated outside India. It then stated it was necessary to establish harm to the public in order to determine if it was opposed to public policy within the contours of section 23. The SC concluded that there was no public harm when two Indian parties mutually agreed to refer their disputes to arbitration at a neutral forum outside India.

3.3      SC Ruling: In its judgment of over 100 pages, the SC noted the appeal raised an interesting question whether two Indian companies can volitionally elect a foreign arbitration venue and, once an award is made at such location to which the New York Convention applies, can it be considered a “foreign award” under Part II of the Act. It took the view that Indian parties can validly execute an arbitration agreement, opt for a foreign seat of arbitration and affirmed they can even exclude the jurisdiction of Indian courts during an arbitration. It observed The decks have now been cleared to give effect to party autonomy in arbitration. Party autonomy has been held to be the brooding and guiding spirit of arbitration………Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals.”

As noted, the arbitral award would be considered as a “foreign award” and enforceable under Part II of the Act. In this case, while the venue was shifted to Mumbai to save costs, the seat was Zurich as expressly stated in the Procedural Order of the tribunal and which was unchallenged by the parties.  

4. Conclusion  

One of the biggest advantages of arbitration is the expected speedy resolution of disputes. Needless to say, it is necessary that finality is given to the award with minimal court interference.  Indian courts have earned a reputation of being anti-arbitration since reasoned awards were often challenged. In recent years, the SC is trying its best to change that reputation and, through this significant ruling, has recognized and upheld freedom of the contracting parties to choose a non-Indian location for dispute resolution and even apply foreign substantive law as governing law, if they so wish. The judgment also ensures a party has recourse to foreign courts for setting aside the arbitral award on grounds available in that country and resist enforcement in India under section 48 of the Act.

It is important to remember that arbitration agreements are the cornerstone of proceedings. While drafting dispute resolution clauses, it is necessary not to relegate them as boiler plate but be cognizant of the constant evolving jurisprudence and craft the clauses depending on the parties involved. Drafting can impact the process and outcome of any proceedings. Since all international arbitration laws, rules, and conventions recognize party autonomy, so an arbitration agreement today must include clauses with an unambiguous choice of law, while recognizing that is what arbitrators will apply in sync with the foregoing principle. A dynamic business environment demands that the efficiency of its functions is not disrupted by protracted legal disputes. The SC has recognized this and is developing jurisprudence to support and encourage arbitration so that party autonomy does not remain a myth but, slowly and surely, becomes a reality.


Priti Suri

[1] Under section 7 of the Act, by writing means if it is contained in any document signed by the parties. It can be through letters or other means of communication including electronic or an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other

[2] These conditions include incapacity of party to execute an arbitration agreement, absence of proper notice of arbitrator’s appointment or of proceedings, award is contrary to public policy. This last ground can be used only if the award was induced or affected by fraud or corruption or it is in contravention with the fundamental policy of Indian law or is in conflict with the most basic notions of morality or justice

[3] (2012) 9 SCC 552

[4] This section provides that in a domestic Indian arbitration seated in India, the tribunal shall decide the dispute in accordance with Indian substantive law

[5] Section 23 deals with lawful consideration and object of a contract, while section 28 provides that agreements in restraint of legal proceedings are void