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Nothing In Arbitration Act Prevents Two Indian Companies From Seeking Neutral Foreign Award: Delhi High Court

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The Court heard a civil matter related to arbitration outside India and foreign arbitrary awards related to it.

The fact of the case

The appellant in the present case is a company registered under the Companies Act, 1956 with its office existing at Ahmedabad, Gujarat whereas the Respondent is another company incorporated under the same Act with its registered office at Chennai, Tamil Nadu. The Respondent’s company is a 99% subsidiary of General Electric Conversion International SAS, France, also being a subsidiary of the General Electric Company, United States. In 2010, the appellant issued three purchase orders related to the supply of certain converters. However, the dispute arose between the parties regarding the warranty expiration of the mentioned converters that were supplied to the Petitioner.

As per the settlement agreement by parties dated 23.12.2014 clauses contained the procedure for dispute resolution.  The Clauses specified that the arbitration seat will be Zurich governing the Swiss law. In the arbitration dispute, the sole arbitrator rendered the award in favor of the Respondent but the proceeding was conducted in an arbitration seat in Mumbai.

Issue of the case

Can the parties belonging to companies incorporated under the Indian Companies Act, 1956 select an outside India forum for arbitration related to company issues?

Can the arbitrary award to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 applied to be considered as a “foreign award” under Part II of the Arbitration and Conciliation Act, 1996.

Arguments by parties

In the present suit, the dispute between the parties arose following the settlement agreement. The appellant claimed that Respondents were supposed to give warranties for converters and that was not provided. But the Respondent argued that only the delta modules were covered under the warranties and not the converters.

Thus, the appellant appealed for an arbitration suit to the International Chamber of Commerce and on 18 August 2017, the parties decided to dispute resolution by appointing a sole arbitrator by ICC. As it was reflected in the arbitration request that the substantive law applicable to the dispute would be Indian law, the Respondent filed an application challenging the arbitrator’s jurisdiction on the ground that two Indian companies are not allowed to choose a foreign seat of arbitration. However, the appellant opposed this application and submitted that no such bar in law is there to restrict them from doing so.

Moreover, after the final award, the Respondent called upon the appellant for paying the said amount as granted. The appellant failed to oblige and the Respondent hence initiated a suit proceeding challenging Section 47 and 49 of the Arbitration Act before Gujarat High Court being the jurisdiction of the appellant’s asset location.

Further Arguments by Appellant

Learned Advocate Tushar Himani argued that two Indian parties cannot choose a foreign seat as it would be contrary to the Indian Contract Act and also that the award passed in the present case cannot be considered as a foreign award under the Arbitration Act as under Section 2(1) (f) of the Arbitration Act, there should be a foreign element for arbitrating outside India and also one of the parties needs to be a habitual resident outside India. To support this reason he relied upon the case of TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd., (2008) 14 SCC 271.

Further Arguments by Respondent

Learned Advocate Mr Nakul Dewan argued that the appellant is saying the exact opposite of what it agreed to in the procedural order dated 20.02.2018 before the sole arbitrator. Furthermore, he mentioned that according to the Foreign Awards (Recognition and Enforcement) Act, 1961, two Indian parties can enter into a dispute resolution agreement with an arbitration seat outside India and the result will be in an award that will have to be enforced as a foreign award.

Court’s observations

The Court has considered that there is no need to refuse a foreign award only because it was made between two Indian companies. Also, the Court held that the appellant did not plead the same in any Court before, and hence for not raising the same appeal the appellant’s arguments were not entertained earlier. The Court referred to some important similar judgments and laws related to Indian Arbitration Act and Foreign Awards Act. Moreover, it was held that there is nothing in the provisions of the Arbitration Act which “interdicts two Indian parties from getting their disputes arbitrated at a neutral forum outside India”. It is clear that if the place of arbitration is located in India, in any arbitration held in a place where no party is a habitual resident in a foreign country the arbitral tribunal is to decide the dispute that is following the substantive law for the time being in force in India.

Court’s decision

The Court upheld the judgment passed by the Gujarat High Court. The appeal is, accordingly, disposed of.

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