commercial arbitration in india - an update

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Commercial arbitration in India - an update

Arbitration is a medium which provides an effective and expeditious dispute resolutionframework unlike the Court proceedings which takes number of years in resolving disputesbetween the parties. Parties submit themselves to Arbitration, as it enables a faster resolutionand disposal of the disputes between the parties and leaves very little scope for prolongation of disputes. For this reason it inspires the confidence of Foreign Investors to invest in India andreassure international investors in the reliability of the Indian legal system to provide an

expeditious, cheaper and flexible dispute resolution me chanism.

The re have been ame ndments in the Arbitration and C onciliation Act. Till 1996, t here werethre e statutes on arbi tration in India i.e., the Arbitration (Protocol and Convention) Act, 1937,the Indian Arbitration Act, 1940 and the Foreign Awards (Recognition and Enforcement) Act,1961. The Arbitration Act, 1940 dealt only with arbitration that took place in India. There arosea need for reforming the Arbitration Act, 1940 and amend the law relating to domesticarbitration, international commercial arbitration and enforcement of foreign arbitral awards asalso t o define the law relating to conciliation and for matters connecte d therewi th or incidentalthereto1 and thus the Arbitration and Conciliation Act of 1996 came i nto place. The Arbitration

and Conciliation Act, 1996 is a long leap in the direction of alternate dispute resolutionsyste ms. It is base d on UNCITRAL (United Nations Commission on International Trade Law)Mod el. 2

The Arbitration and Conc iliation Act of 1996 ha s divided itself into two parts. The First partdeal s with Arbitration that is conducted in India and its enforcement. The Second part providesfor arbitration conducted in a Foreign Country and enforcement of such foreign awards.

The resolution of disputes through Arbitration is the most expeditious, cheap and flexiblemeans of dispute resolution. Parties prefer this Statute for the resolution of their disputes for

the reason that they can decide as to whether to refer their dispute to a specific arbitrator or apanel of arbitrators with a developed expertise in the subject matter in dispute; control on thetimetable as opposed to leaving this to the court administrators; confidentiality; etc.

To this extent arbitration is the only expandable resource available to the traditional court

Singh & AssociatesBijoylashmi Das and Harsimran Singh

IndiaDecember 31 2013
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system. It can and does have a streamlining effect on the flow of litigation generally. Duringlast few months, the Indian judiciary has made considerable and much required action inestablishing India as an (international) arbitration-friendly judicial system.

This article scrutinizes the issues left unaddressed following the Honble Supreme Courtsdecision in Bharat Aluminium Co Vs Kaiser Aluminium Technical Services Inc3 (herein after BALCO) and suggests precautions that may be taken in relation thereto. Few of the importantprinciples laid down by the Supreme Court of India in BALCO judgment are as follows:

a. The Arbitration Act, 1996 has accepted the territoriality principle of the UNCITRAL ModelLaw due to which Section 2(2) makes a declaration that Part I of the Arbitration Act, 1996(the Act) shall apply to all arbitrations which take place within India. In a internationalcommercial arbitration with a seat outside India, no application for interim relief would bemaintainable in India;

b. The Indian Courts do not have the power to grant interim measures when the seat of arbitration is outside India. Pendency of the arbitration proceedings outside India wouldnot provide a cause of action for a suit where the main prayer is for injunction;

c. Part I of the Act would have no application to International Commercial Arbitration heldoutside India. Therefore, such awards would only be subject to the jurisdiction of theIndian courts when the same are sought to be enforced in India in accordance with theprovisions contained in Part II of the Act. Part I only applies when the seat of arbitration isin India, irrespective of the kind of arbitration;

d. It was observed that the object of section 2(7) of the Act is to distinguish the domesticaward (Part I of the Act) from the foreign award (Part II of the Act); and not to distinguishthe domestic award from an international award rendered in India. The term domesticaward means an award made in India whether in a purely domestic context, (i.e.,domestically rendered award in a domestic arbitration or in the international arbitration

which awards are liable to be challenged u/s 34 and are enforceable u/s 36 of the Act).Therefore, Indian courts being the supervisory courts, will exercise control andregulate the arbitration proceedings,which will produce a "domestically renderedinternational commercial award". Meaning thereby, it would be a "foreign award" for thepurposes of enforcement in a country other than India;

e. Seat/place of the arbitration vs. the governing law:- It would be a matter of construction of the individual agreement to decide whether: (i) The designated foreign "seat" would beread as in fact only providing for a "venue" / "place" where the hearings would be held, inview of the choice of the Act as being the curial law OR (ii) Whether the specificdesignation of a foreign seat, necessarily carrying with it the choice of that country's

arbitration / curial law, would prevail over and include the conflicting selection choice bythe parties of the Act. The Honble Apex Court held that ONLY if the agreement of theparties is construed to provide for the "seat" / "place" of Arbitration being in India Part I of the Act be applicable and if the agreement is held to provide for a "seat"/ "place" outsideIndia, Part I would be inapplicable to the extent inconsistent with the arbitration law of theseat,even if the agreement purports to provide that the Act shall govern the arbitrationproceedings;

Briefly noting the much discussed judgment which has been broadly viewed as an encouragingstep for India-related arbitration, overruled the principle that the provisions of Part I of the

Indian Arbitration and Conciliation Act 1996 (the Act) would apply to international arbitrationsheld outside of India, unless excluded explicitly and/or impliedly by the parties to thosearbitrations. This principle was first laid out in an earlier Supreme Court of India decision inBhatia International Vs Bulk Trading SA 4.


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Part I of the Act, which is drafted to apply where the place of arbitration is in India, providesthe Indian courts with substantial procedural and determinative powers in respect of arbitrationproceedings, including the power to grant interim measures (section 9), the authority to makearbitral appointments in the absence of agreement by the parties (section 11) and the power toset aside arbitral awards (section 34).

The Honble Supreme Court remarkably held in ONGC Vs Saw Pipes5 that an award thatconflicted with Indian law would be contrary to public policy and therefore unenforceable. Thisview on public policy ground had since been applied as a standard for challenging enforcementof foreign-seated awards in India, like in Phulchand Exports Ltd Vs OOO Patriot6.

The Bhatia principle, that Part I could in certain circumstances be exercised in offshorearbitration, gave the Indian courts effective supervisory jurisdiction over certain arbitrationsseated outside India a practice considered to have had an adverse impact on the efficiency,certainty and finality of India related arbitrations.

On the basis of the Bhatia decision, the Indian courts went on to set aside a foreign arbitrationaward (Venture Global Engineering Vs Satyam Computer Services Limited7) and appointed anarbitrator in proceedings seated outside of India (Indtel Technical Services Pvt Ltd Vs WS Atkins Plc8).

Under BALCO decision following words of the Honble Supreme Court are worth mentioning:

the choice of another country as the seat of arbitration inevitably imports anacceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings.

Therefore:

Only if the agreement of the parties is construed to provide for the seat/place of Arbitration being in India would Part I of the Arbitration Act, 1996 be applicable.

The court further clarified that, due to the territoriality principle adopted by the Act, Part I andPart II of the Act are mutually exclusive.

Albeit BALCO judgment restricted the scope for the Indian courts to interfere in the conduct of arbitrations which are seated outside of India, it still however detoured from other contentiousdecisions of the Apex Court as to the public policy grounds for challenge to an award including

the scope of such challenge.

The obvious concern for parties was that the Saw Pipes and Phulchand Exports cases openedthe door at the enforcement stage to the substantive review of the merits of any awardrendered outside of India. Parties to offshore arbitration proceedings, having evaded theinterference of the Indian courts at the procedural stage, may have nonetheless had toencounter it at enforcement.

However, in Shri Lal Mahal Ltd Vs Progetto Grano Spa9, the Honble Supreme Courtaddressed this concern.The Supreme Court held that the expression the phrase "public policy

of India" used in Section 34 in context is required to be given a wider meaning. It can be stated that the concept of public policy connotes some matter which concerns public good and the public interest. What is for public good or in public interest or what would be injurious or harmful to the public good or public interest has varied from time to time. However, the award which is, on the face of it, patently in violation of statutory provisions cannot be said to be in


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public interest. Such award/ judgment/decision is likely to adversely affect the administration of ustice. Hence, in our view in addition to narrower meaning given to the term "public policy" inRenusagar case [Renusagar Power Plant Co Ltd v General Electric Co10 ] it is required to beheld that the award could be set aside if it is patently illegal. The result would be - award could be set aside if it is contrary to: (a) fundamental policy of Indian law; or (b) the interests of India;or (c) justice or morality, or (d) in addition, if it is patently illegal. Illegality must go to the root of the matter and if the illegality is of trivial nature it cannot be held that award is against the

public policy. Award could also be set aside if it is so unfair and unreasonable that it shocks theconscience of the court. Such award is opposed to public policy and is required to be adjudged void. Therefore, the scope for challenging a foreign award with respect to a domestic awardhas been restricted.

In Lal Mahal the Honble Supreme Court analyzed the earlier law and held that theenforcement of a foreign award would be refused on the ground that it is contrary to publicpolicy of India only if it is covered by one of the three categories enumerated in Renusagar. Although the expression 'public policy of India' is used in the context of challenging both adomestic award [Section 34(2)(b) (ii)] and a foreign award [Section 48(2)(b)], and the concept

of the term is the same in nature in both sections, its application would differ in degree. Theterm's application for the purposes of Section 48(2)(b) is more limited than its application inrespect of Section 34(2)(b)(ii). The Honble Apex Court further affirmed that Section 48 of theact does not give the court an opportunity to have a second look at a foreign award at theenforcement stage; neither does the scope of inquiry under Section 48 permit review of foreignaward on its merits. Procedural defects like taking into consideration inadmissible evidence, or ignoring or rejecting evidence that may be of binding nature in the course of foreign arbitrationwould not necessarily lead the court to refuse enforcement of an arbitral award on the groundof public policy.

Therefore, the Supreme Court affirmed that while considering the enforceability of foreignawards, the court did not exercise appellate jurisdiction over the foreign arbitral award; nor could it enquire as to whether, while rendering the foreign award, an error was committed.

Going forward, there remain at least two aspects of the post-BALCO arbitral regime which mayhave a negative impact on the certainty of the arbitral process.

i. Parties to older arbitration agreements still subject to the pre-BALCO regime;

a. Since BALCO judgment applies prospectively, therefore all arbitration agreementsexecuted before September 6, 2012, therefore, remain subject to the Bhatia regime. TheIndian courts have indicated a clear will to apply and develop the restrictiveapproach to judicial intervention in offshore arbitrations.

b. In fact, the Supreme Court led the way in Vale Australia Pty Ltd Vs Steel Authority of India Limited11, by refusing to reassess the merits of the dispute when dealing with apetition to set aside a foreign seated arbitral award.

c. Further, the Honble Delhi High Court, in NNR Global Logistics Vs Aargus GlobalLogistics12, rejected an application for a foreign award to be set aside on public policygrounds under Part I of the Act, although the agreement pre-dated the BALCO decision.The court reasoned that the applicable curial law was the law of the seat by holding that

24. Likewise in Bharat Aluminium Co. it has been held that "the legal position that emerges from a conspectus of all the decisions, seems to be that the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the

proceedings. The use of the word "may" in Section 48(2)(b) of the Act is reflective of


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the legislative intent that the power to refuse enforcement is discretionary and should beexercised only where the enforcement is contrary to the public policy of India. 29.There is nothing in the present case to suggest that the enforcement of the impugned

Award, which is essentially a money decree, would compel Aargus to do something which is prohibited or contrary to law as prevailing in India. In other words, theenforcement of the impugned Award which is in the form of a money decree cannot beheld to be opposed to the public policy of India.

d. The Honble Bombay High Court in Konkola Copper Mines (PLC) Vs Stewarts and Lloydsof India Ltd13 while discussing the prospective application of the rationale in BALCOobserved that the Supreme Court had made observations on various aspects of arbitration law in India. Accordingly, it would not be proper to hold that the reasonscontained in the Supreme Court judgment would only operate prospectively. The Bombay High Court further observed that the Supreme Court judgment was declaratory withregard to various established propositions of law. Even if there were judgments beforeBALCO that had held that the place of arbitration would not be relevant for determining the jurisdiction of a court, the same did not lay down the correct position of law and hence could not be relied on. The Bombay High Court judgment is significant, since it

makes it clear that the reasoning adopted by the Supreme Court in BALCO would not apply only prospectively, but would also apply to disputes arising from arbitrationagreements entered into before September 6 2012.

ii. Interim measures which now are not available in support of foreign arbitral proceedings:

a. The Honble Supreme Court held that there is complete segregation between Part I andPart II of the Act, meaning that any of the provisions contained in Part I cannot bemade applicable to Foreign Awards; regrettably, Part I contains not only provisionswhich can be used to upset foreign arbitration proceedings but also those which canassist the same, for e.g. section 9 of Part I of the Act to seek interim measures.

b. Although the Honble Supreme Court recognized that the segregation doctrine wouldprohibit Indian courts to grant interim reliefs in support of foreign arbitrations, it was alsodeliberated that this issue could not be resolved by the Supreme Court but instead wasa matter to be redressed by the legislature.

c. Hence,untilsuchreformsareimplemented, parties to arbitration proceedings seatedoutside of India will be unable to apply to the Indian courts to preserve assets or evidence, compel attendance of a witness or obtain an order for security for costs inIndia. In other words, even though parties may attempt to agree in their arbitrationclauses that the Indian courts be empowered to issue such interim measures, such a

provision is unlikely to be effective given the pronouncements of the Honble SupremeCourt.

Recently, overruling its earlier judgment by a single judge, a two judges bench in KonkolaCopper Mines (PLC) Vs Stewarts and Lloyds of India Ltd.14 relying on Somaiya Organics(India) Ltd. vs. State of U.P. (2001) 5 SCC 519 [ that the doctrine of prospective overruling is arecognition of the principle that the Court moulds the reliefs claimed to meet the justice of thecase and this power has been expressly conferred by Article 142 of the Constitution on theSupreme Court.Prospective overruling is a method evolved by the Court to adjust competing rights of parties so as to save transactions, statutory or otherwise, that were effected by theearlier law ] held as under:

16. In our view, it would not be appropriate, while applying the ratio of the judgment inBALCO to hold that the reasons which are contained in the judgment would operate with

prospective effect. What the Supreme Court has essentially ordered, while moulding the


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reliefs is that the declaration of law to the effect that Part-I shall apply only to thosearbitrations where the place of arbitration in India shall take prospective effect after thedate of the judgment. But equally, it would be impermissible to hold that the interpretationwhich has been placed by the Supreme Court on the provisions of Section 2(1)(e) would apply only prospectively. The judgment of the Supreme Court is declaratory of the

position of law that the Court having jurisdiction over the place of arbitration can entertaina proceeding in the exercise of its supervisory jurisdiction as indeed the Court where the

cause of action arises. The Supreme Court has also noted that the regulation of arbitration consists of four steps: (i) the commencement of arbitration; (ii) the conduct of arbitration; (iii) the challenge to the award; and (iv) the recognition or enforcement of theaward. In the judgment of the Supreme Court, Section 9 has been held to be an ancillary

provision that supports the arbitral process or one that is structurally ancillary. Once the provisions of Section 9 are regarded to be ancillary in nature, or in other words, afacilitative statutory instrument to support the arbitral process,it would be apparent that those provisions would apply where Part-I of the Act of 1996 is attracted. Consequently,where as in the present case, the place of an international commercial arbitration is inIndia, Part-I would apply and of which Section 9 is a necessary, if ancillary ingredient.

Counsel appearing on behalf of the Respondent submitted that prior to the judgment of the Supreme Court, several High Courts had taken the view that the place of arbitration isirrelevant to the exercise of the jurisdiction under Section 2(1)(e). This, in our view,cannot make any difference to the outcome because once the Supreme Court hasconcluded what should be the correct interpretation of Section 2(1)(e), the binding

principles laid down therein must necessarily apply.

17. that once the place or seat of arbitration was agreed upon between the parties tobe in India, Part-I would necessarily stand attracted.The judgment in Bhatia International was overruled in BALCO on the issue as to whether Part-I would be attracted to foreign

seated commercial arbitrations. In the present case, on the facts as they are admitted, it is evident that the commercial arbitration was not a foreign seated arbitration. That the

place of arbitration was to be in India is evident and to it Part-I, therefore, was attracted....

There is no doubt that the judgments discussed here have been well received in internationalcommercial arbitration domain. This has made to revisit the long standing notion of gettingforeign awards enforced in India as a time-consuming process with possibilities of judicialinterference at various stages.

The latest decisions by the Indian courts wherein the grounds to challenge a foreign awardhave been restricted will result in faster resolution of disputes through arbitral processes. Ahope ensues that with the present judicial scenario on the subject the confidence of theinternational community in commercial arbitration strengthens as being a plausible ADRmechanism in India.

On the basis of Judicial Pronouncements as on 12.12.2013

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commercial arbitration in india - an update

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