Principle of Territoriality in Foreign Seated Arbitration

The Author, Wafiya Faiz, 3rd year, BA.LLB, Jamia Millia Islamia. She is currently interning with LatestLaws.com and Indian Dispute Resolution Centre.

Introduction

The emerging field of Alternative Dispute Resolution has enhanced the effect of the ADR mechanism and alleviated the workload on the judiciary. It is considered one of the best ways to solve disputes and help to reduce the burden on the court. Arbitration is one such dispute mechanism. Both parties argue from each side, stating their claims, and an independent arbitrator passes a judgment which is enforceable like a decree of the court. In this procedure, parties have autonomy to decide the procedure of arbitration proceedings and have flexibility in deciding seat and place of arbitration. The seat of arbitration is considered the legal identity of the arbitration proceedings. It determines the laws or jurisdiction which is to be applied between parties. In international arbitration, the seat of arbitration is the legal jurisdiction which decides the governing laws and the supervisory court that can intervene in the process. Any challenge of award, interim measures or any such related matters are to be addressed by the court of the arbitration’s seat. This principle of the seat of arbitration is also known as the territoriality principle or the jurisdiction theory.

What is the Territoriality Principle?

The territorial principle states that the legal framework to be applied in the arbitration procedure must be in accordance with the seat of arbitration, which is the geographical location where the arbitration is deemed to take place. This principle is embedded in the UNCITRAL Model law. The court of the country where the arbitration procedure is to be seated has the primary authority to supervise the proceeding. Many member states have adopted the UNCITRAL Model Law in determining their state practices[1]. Based on this model, independent states have drafted their arbitration laws. While European states have adopted it entirely, the Asia-Pacific States have made certain modifications. Article 1(2)^[2] of the Model Law specifies that the country who adopted the UNCITRAL Model Law, that law will apply to arbitrations taking place within the country. Those in support of jurisdictional theory state that all arbitration procedures have to be regulated by the rules of laws chosen by the parties. It provides supervisory jurisdiction to national courts. This is in conformity with the New York Convention. The New York Convention, officially known as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, is a key convention focused on international arbitration. All the states got together and formed an international convention saying that if any award is passed in all the signatory nations, then that would be enforced and recognised in all such nations. There are about 170 countries, including India, that are signatories to the New York Convention. Therefore, foreign awards are enforceable by Indian courts provided all the necessary conditions are met. A perusal of a few sections of the convention signifies that law of the seat of arbitration is to be applied in absence of party agreement.

Indian Legal Practice on the Seat of Arbitration

Indian Arbitration and Conciliation Act 1996 is the state law governing arbitration. Section 2(1)(f)^[3] of the Act defines international commercial arbitration. It says that if one of the parties in a dispute is a foreign entity, it falls under international arbitration. The act neither defines domestic arbitration nor foreign-seated arbitration. There is often confusion arising out of international arbitration and foreign-seated arbitration. The latter focuses that the seat of arbitration needs to be outside India.^[4] Part I of the Arbitration Act addresses domestic arbitration, while Part II pertains to international commercial arbitration.^[5] There are certain exceptions in Part I of the Act regarding the seat of arbitration. Section 9, 27 and 37 apply in international arbitration as well. If the seat of arbitration is India, then Indian Arbitration and Conciliation Act, 1996, will be the governing law for the arbitration. There has been judicial decision governing foreign seated arbitration. The decision of the Supreme Court in Venture Global v. Satyam Computer[6]  is one such which has been subjected to criticism. The ruling comes out that a foreign award could be challenged under section 34 of the Arbitration and Conciliation Act, despite the arbitration taking place outside India. Later on, the judgment of the Supreme Court in Bharat Aluminium v. Kaiser Aluminium[7] has unequivocally overturned the previous judgment and has been much scrutinised[8]. The Court explicitly ruled that Part 1 of the Arbitration Act of 1996 does not apply to foreign-seated arbitration. This judicial history traces its origin to the decision in Bhatia International v. Bulk Trading. [9] In this case a three-judge bench of the Supreme Court held that Part I of the Act applies to International commercial arbitrations seated outside India, unless explicitly excluded by the parties. Following the judgment of Bhatia and Venture Global, Indian courts could assert jurisdiction with respect to foreign-seated arbitrations. However, this was later overruled by the BALCO judgement, which set the precedent. It reiterated that Part I of the Act which deals with domestic arbitration would not be applicable to foreign seated arbitration and reinforced the principle of territoriality.

Indian courts have supervisory jurisdiction to grant interim relief, allowing parties to seek necessary protection. Part II of the Arbitration and Conciliation Act, 1996 regulates the enforcement of foreign arbitral awards in India. With the amendment in 2015, Indian legislature added a proviso to section 2(2)^[10] which allowed interim relief under section 9 to be applicable even in foreign seated arbitration and award made in such place is enforceable and recognised under provision of part II of Arbitration and Conciliation Act.^[11] This amendment serves as a crucial step to remedy in situations where a party may dismantle the assets when the seat of arbitration is outside and the assets are in India. Section 9^[12] also serves as one of the exceptions in Part I of the act which applies in foreign seated arbitration.

While Section 9 has received autonomy to be applicable even in foreign-seated arbitration, Section 17[13] has a narrow purview and lags behind in comparison. Section 17 of the Arbitration and Conciliation Act, 1996 had limited applicability before the amendment of 2015^[14]. After this, section 17 has become identical to that of the Court under section 9 and the order of the arbitral tribunal also becomes enforceable like that of a court. However, this section is not extended to foreign-seated arbitration. In the absence of direct enforcement under the act, an application under section 9 of the Act can be filed to seek relief of interim order^[15]. Thus, in India, foreign awards are directly enforceable under part II of the Act. This part enforces the New York Convention in India. While interim orders passed by foreign tribunals to aid final awards are not enforceable.

Enforceability of foreign-seated arbitration between Indian Parties.

Indian arbitration and conciliation act clearly differentiate between part I and part II where part I deals with domestic arbitration and part II with foreign seated arbitration. With these differences, Indian parties having foreign seated arbitration were barred to enforce it in India. The decision of the court in TMD Infrastructure Private Limited Vs UE Development India Private Limited^[16] is a landmark decision which regulated the autonomy of parties like MNCs, having control outside India but incorporated here. The Supreme Court interpreted section 2(1)(f) of the Act and restricted the scope of international commercial arbitration. According to section 2(1)(f) clause (II), international commercial arbitrations are those where a corporation is incorporated in any country other than India, while section (III) states that parties whose central management is outside India. Section (III) only comes into picture when section (II) does not apply. Herein, the court found that both the companies were incorporated under the companies Act and registered in India. Therefore, it was held that the arbitration was not of International commercial arbitration and the award was enforceable in India unless contrary to the public policy. On a bare reading of section 53^[17] of the Arbitration and conciliation Act which is modeled on the Geneva Convention on the execution of Foreign Arbitral Awards, 1927, it can be inferred that for an award to be considered as foreign award, it is necessary that parties to the Arbitration should be of different nationalities. Part II, however, requires not only that the arbitration take place outside of India, but also that the country hosting the arbitration be a signatory to the New York Convention^[18].

Enforcement of foreign awards can take place either by New York convention outlined in chapter I of Part II  and the Geneva Convention in Chapter II of Part II of the act. Enforcement of foreign awards by New York convention outlines a condition under which foreign awards are enforced and recognized in accordance with the New York Convention. Sections 44 to 52 outline the conditions under which foreign awards are enforced, where section 48 states the situations under which the foreign awards in India can be refused, and section 49 allows foreign arbitral awards to be treated as the court’s decree. While chapter II of Part II based on Geneva Convention, where in the beginning itself, the interpretation clause considers foreign awards as Geneva Convention Awards. It specifies that the award must be between the parties where at least one is subjected to the jurisdiction of the country declared by the central government to be a party to the convention. Enforcement of foreign awards by Indian parties having seats outside India has been a much debated issue. In the case of Atlas Export Industries V. Kotak & Co.^[19] , in the said case, an Indian company, Atlas Export Industries entered with a contract to another Indian company, Kotak & Co. The seat of arbitration was in London. The London court of international arbitration explicitly determined this as well. After the award was passed, an appeal was filed by Atlas challenging the said award. This became a landmark case where the enforcement of foreign awards was challenged on the ground that two Indian parties cannot be permitted for foreign seated arbitration. The matter reached the Supreme Court where the court held that the foreign award is enforceable and the mere challenge of award for having a seat outside India cannot make it unenforceable. It stated:

 11. … Merely because the arbitrators are situated in a foreign country cannot by itself be enough to nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement... ^[20] It was concluded by the court that two Indian parties having foreign seated arbitration can enforce foreign awards in India. However, this principle was not followed in TMD Infrastructure Private Limited Vs UE Development India Private Limited ( Supra). Thus, two Indian parties cannot choose a foreign seat for arbitration.^[21] Adding to this, the apex court in the case of Reliance Industries Ltd v. Union of India^[22], dismissed the challenge of an arbitral award arising from a foreign-seated arbitration between two Indian parties. However there was no clarification by the court on acceptance of the autonomy of Indian parties to have a foreign seated arbitration and enforcement of award in India. Meanwhile, Delhi High court has addressed this issue on a few occasions. In one of the case, High court accepted the principle laid down in Atlas and allowed the Indian parties to have a seat outside India^[23]. After a prolonged discussion over the enforcement of foreign awards in case of Indian parties having foreign seated arbitration, the Supreme Court in the case of PASL Wind Solution Pvt Ltd V. GE Power Conversion India Pvt Ltd^[24] held that two Indian parties can have foreign seat and an arbitral award would be enforceable under Part II of the act. The said ruling established a precedent that India parties are allowed for foreign seated arbitration and their awards would be enforceable in India under part II of the Act.

Trend of state practices in foreign seated arbitration

The most popular seat for arbitration over the last decade is London. The United Kingdom (Which includes Great Britain and Northern Ireland) signifies and ratifies the New York Convention in 1975. The Arbitration Act of 1996 is the primary legislation governing England and Wales. England's practice of international arbitration firmly adhered to the principle of territoriality. In the case of Econet Wireless Ltd v Vee Network Ltd^[25], the English court ruled that for granting interim relief, the court of the country of the seat of arbitration will apply. Furthermore, the famous case of territoriality principle, U&M Mining Zambia Ltd v Konkona Copper Mines PLC^[26], ruled that the choice of the seat of arbitration decides the choice of courts.

New Zealand arbitration act under section 17L^[27] provides enforcement of interim awards passed by the arbitration tribunal irrespective of the seat of arbitration. This is based on the UNCITRAL Model Law. New Zealand is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).^[28]

French law recognises the principle of competence - competence in its domestic as well as international This principle grants power to the Arbitral Tribunal to decide its jurisdiction including issues related to validity of Arbitration agreements. This principle is enshrined in Article 1448^[29] of the French Civil Procedure Code^[30]. French courts have power to order interim relief before the arbitral tribunal is constituted. However, under Civil Procedure Code Article 1468^[31], even if the arbitral tribunal has been constituted, French courts retain exclusive jurisdiction to order two types of interim measures, namely conservatory attachments and judicial securities.

Indian court in the case of Amazon v. Future Retail^[32], ruled that Emergency Awards are enforceable in India. Thus, awards made by emergency arbitrators in India-seated arbitration are enforceable^[33]. In yet similar case of Singapore High Court, CVG V CVH^[34], it was held that foreign awards include foreign interim awards made by an emergency arbitrator^[35]. In Singapore, interim orders issued by a foreign-seated arbitral tribunal are enforceable as an arbitral award. In Singapore international Arbitration Act, section 27(1)^[36] defines an arbitral award which includes “order, or a direction made or given by an arbitral tribunal in the course of an arbitration in respect of any of the matters set out in section 12(1)(c) to (j)”.^[37] Further section 12(1)(h) includes “an interim injunction or any other measures” Moreover, interim award passed by a foreign seated tribunal can be enforced as an arbitral award in Singapore.

Conclusion

Territoriality principle is an important concept of arbitration. It plays a pivotal role in the legal framework of foreign seated arbitration.^[38] The choice of seat is becoming a prime factor to determine the procedural aspect of law. There have been judgments of the Supreme Court and other High courts reframing the rules of arbitration and allowing party autonomy on the choice of seat of arbitration. The Indian framework aligns with the UNCITRAL Model Law which recognises the enforceability of foreign awards under Part II of the Arbitration and Conciliation Act, 1996. Enforcement of certain foreign awards is laid down under part II of the act in accordance with New York convention and Geneva Convention. Landmark decisions  including BALCi and PASL Wind Solutions have laid down supreme principle, clarifying the scope and application of Indian law in foreign seated arbitration. State practice in the UK, Singapore, France, and New Zealand exhibits different approaches to enforcement of foreign awards. Taking into account, there is a need to enact a separate legislation on international commercial arbitration clarifying the efficiency of cross-border dispute resolution including governing law, jurisdiction and this will also reduce the scope of litigation.