International Commercial Arbitration - Vital Issues in Indian Scenario

INTRODUCTION: Enterprises, the word over, now conduct business on a dramatically more on international scale. The growth of the world economies is directly connected with the millions of commercial contracts, which are becoming more international in character owing to global integration. Centuries ago international traders learned that business disputes were inevitable. Disputes arose over failure to ship or deliver goods, over the quality of merchandise, over interpretations of terms of agreement which set forth the risks of seller and buyer etc., The scientific and technical revolution of modern times has not only increased radically the exchange of goods between different regions of the world but also enhanced the quality and character of these disputes. The importance of arbitration as a means of resolution of business disputes has been increasing with the advent of globalization and liberalization of trade-in-goods, services and ideas during the last decade. The General Assembly of the United Nations has recommended that all countries give due consideration to the model law on International Commercial Arbitration and Conciliation Rules adopted by the United Nations Commission on International Trade Law(UNCITRAL). The said Model Law and Rules make significant contribution to the establishment of a united arbitral legal frame work and procedure for the fair and efficient settlement of disputes arising in international commercial relations. The Government of India has also enacted the Arbitration and Conciliation Act, 1996 to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matter connected therewith or incidental thereto. WHAT IS INTERNATIONAL COMMERCIAL ARBITRATION? Sec.2(1)(f) of the Arbitration and Conciliation Act, 1996 defines ‘International Commercial Arbitration’ to mean an “arbitration relating to dispute arising out of legal relationships, whether contractual or not, considered as commercial under the law in India where at least one of the parties is: i. An individual who is a national of, or habitually resident in, any country other than India; or ii. A body corporate which is incorporated in any country other than India, or; iii. A company or an association or a body of individuals whose central management and control is exercised in any country other than India; or iv. The Government of a foreign country.” The definition has two elements – conceptual and physical. The conceptual element is that the legal relationship between the parties should be commercial in nature. The physical element is that one party should be a foreigner – a foreign national or resident, or a foreign body corporation, or a company whose central management or control is in foreign hands. Simply stated, in international commercial arbitration disputes arise out of legal relationship, whether contractual or not, which are considered commercial under the law in force in India. The term ‘commercial’ is given a wide interpretation so as to cover matters arising out of all relationships, which are of commercial nature. For example, sale or purchase of goods is a classic case of commercial transaction. Secondly, at least one of the parties involved in the dispute is resident or domiciled outside India or is managed and controlled from abroad. CONCEPT OF COMMERCIALITY In 1958, forty five countries, including India and the United States, participated in the U.N conference that culminated in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958(the New York Convention). The Convention encourages the recognition and enforcement of international arbitration agreements and awards. Article 1(3) of the Convention provides that a State may declare that it will apply the Convention ‘only’ to differences arising out of legal relationships, whether contractual or not, which are considered as ‘commercial under the national law’ of the State. The rationale behind this ‘declaration’ i.e., states can restrict applicability of convention, probably derives from the recognition of the legal regimes in civil law countries, where a distinction exists between “commercial” and “non-commercial” contracts. A commercial contract can broadly be understood to be a contract made by merchants and traders in the ordinary course of their business. These commercial contracts are governed by a special code of commercial law. In many civil law countries, only dispute arising out of commercial contracts can be submitted to arbitration. The first aspect should be noted in this context is that of the 137 states that are signatories to the Convention, only 46 adopted the ‘commercial reservation’ with respect to the Convention. Interestingly, many common law countries like India, the U.S.A., Canada etc., have also adopted this reservation, despite the fact that there is no general distinction between “commercial” and “non-commercial” contracts as understood in civil law countries. One possible reason why these countries kept the “commercial reservation” could be because they were concerned about issues relating to sovereign immunity. Thus, the effect of the reservation was that each country could restrict the application of the Convention to only those matters which were considered to be commercial under the law of that particular country. Since different countries defined and interpreted the word “commercial” differently, it gave rise to many problems. Hence, during the drafting of the UNCITRAL Model Law, when there was a renewed exercise to bring about unification and harmonization of ICA law across the world, there was an attempt to provide a definition of the word “commercial”. However, this did not prove to be an easy task. Countries like Mexico specifically wanted foreign direct investments and financial transactions entered by the government to be excluded as they are considered to be part of the public debt. On the other hand, countries like Germany and the United States specifically wanted a clause to expressly state that the nature of the transaction i.e., whether it was commercial or not would not depend on the nature and character of the parties to the transaction. Thus, for example the fact that a person who is not a merchant had entered into an otherwise commercial transaction would have no effect on the commerciality of the transaction. These differing view points among various countries were almost irreconcilable and hence as a compromise, it was decided to annexe a footnote to Article-1 of the Model Law to aid in the interpretation of the term. As a result, Footnote-2 to Article1(1) of the Model Law reads: “the term ‘commercial’ should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods or services; distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting; engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture and other forms of industrial or business co-operation; carriage of goods or passengers by air, sea, rail or road.” However, uncertainty remains about the legal effect of such a footnote. Many countries do not adopt this kind of legislative technique. While Footnote 1 of the Model Law states that Article Headings are to be used for reference purposes only and are not to be used for purposes of interpretation, there is no mention of the use of the Footnotes themselves. A problem also might arise where a national legislation although based on the Model Law specifically makes a requirement of the transaction being “commercial” under the law of that nation. In such a situation it is unclear what effect the footnote might have. This is because the Footnote might include certain transaction to be commercial which are not considered as commercial under the nation’s legal system. An example of such a national legislation is the Indian Act. It makes a specific reference to the Model Law and is almost an identical replica of the Model Law. It however contains a requirement that the dispute need to be commercial under the law in force in India. The relevant portion of the Indian law is as follows: “Sec.2(1)(f): “International Commercial Arbitration” means an arbitration relating to disputes arising out of legal relationship, whether contractual or not, considered as commercial under the law in force in India and ….” Some other aspects of the Footnote in the Model Law are: v The list is illustrative and not exhaustive. v The legislative intent behind the footnote is to construe the term ‘commercial’ in a broad manner. v Although the Footnote has not referred to it, transactions for supply of electrical energy, transport of liquefied gas via pipeline and non-transactions such as claims of damages arising out of a commercial context are meant to be covered. v Labour or employment disputes and ordinary consumer claims are not meant to be covered. It can reasonably inferred that the Model Law progresses from the Convention, as the Convention had no guidance on this issue whatsoever and left it completely at each nation’s discretion. However, it should be noted that the interpretation of the word “commercial” still remains important. This is because India and some other countries have retained the commercial reservation even after enacting a new law on the lines of the Model Law. The convention might still govern a number of cases despite the fact that the countries have enacted the Model Law. Moreover as compared to the Convention, only 48 states have enacted legislations based on the Model Law. COMMERCIALITY- BY INDIAN COURTS The Indian Judiciary has mostly interpreted the term ‘commercial’ quite broadly. In Josef Meisaner GMBR & Co., Vs. Kanoria Chemicals & Industries Ltd., AIR 1985 Calcutta 45 and Kamani Engg.Corp.Ltd., Vs. Societe De Traction Et D’ Electricity Sociate Anonyme in A.I.R. 1965 Bom114 the High Court of Calcutta and High Court of Bombay held that the transactions involving in supply of technical know-how were non commercial. So also, in Indian Organic Chemicals Ltd., Vs. Chemtex Fibres Inc., A.I.R. 1978 Bom 106 the Bombay High Court held that technology transfer agreement was considered to be non-commercial. It was further observed that, it would be necessary to prove that it was commercial by virtue of a provision of law or operative legal principle in force in India. In Renusagar Power Co.Ltd., Vs. General Electric Co., (1984) 4 SCC 679, the Supreme Court held that the Foreign Awards (Recognition and Enforcement) Act, 1961 (which contain a similar provision with respect to commerciality) was meant to facilitate international trade and hence the expression should receive a liberal construction. In the case of RM Investments & Tradiing Co.Pvt.Ltd., Vs. Boing Co., AIR 1994 SC 1136 the Supreme Court held that the term commercial should be considered broadly and the Model Law can be referred to. In this case, the court held that consulting was a commercial activity and commercial need not always imply trade. Many courts dealing with the arbitration law have cited the famous case of Atiabari Tea Co.Ltd., Vs. State of Assam A.I.R. 1961 SC 232 in which the Hon’ble Supreme Court held that, “Trade and Commerce do not mean merely traffic in goods, i.e., exchange of commodities for money or other commodities. In the complexities of modern conditions, in their wide sweep are included carriage of persons and goods by road, rail, air and waterways, building contracts banking, insurance, transactions in the stock exchanges and forward markets, communication of information, supply of energy, postal and telegraphic services and many more activities – too numerous to be exhaustively enumerated – which may be called commercial intercourse”. With respect to commerciality, given the aims of international commercial arbitration law and the current era of globalization, a broad construction should be adopted. While it is impossible to exhaustively list each and every commercial relationship, an express amendment to the Indian Act in the main body of the statute, similar to Footnote 2 of the Model Law, would help in bringing about the clarity and certainty. It would be advantageous for the global business if courts globally give liberal construction to the word ‘commercial’. Only then, the international commercial arbitration would be able to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of dispute arising in such trade through arbitration. Otherwise, the world business community would be busy interpreting the word ‘commercial’ and in the process defeating the very purpose of the commercial arbitration. INTERNATIONAL COMMERCIAL ARBITRATION - INTERIM MEASURES. Sec.9 of the Arbitration and Conciliation Act which corresponds to Article-9 of the UNCITRAL model Law, inter alia provides that a party may, before or during arbitral proceedings, or at any time after the making of the arbitral award, apply to a court for interim relief. Sec.9 of the Act reads as under:- “Interim measures, etc., by court.- A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section-36, apply to a Court:- i. For the appointment of a guardian for a minor or a person of unsound mind for the purpose of arbitral proceedings; or ii. For an interim measure of protection in respect of any of the following matters, namely a. The preservation, interim custody or sale of any goods which are the subject matter of arbitration agreement; b. Securing the amount in dispute in the arbitration c. The detention, preservation or inspection of any property or thing which is the subject matter of the dispute in arbitration, or as to which any question may arise therein and authorizing for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorizing any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence. d. Interim injunction or the appointment of a receiver. e. Such other interim measure of protection as may appear to the Court to be just and convenient. And the Court shall have the same power for making orders as it has for the purpose of, an in relation to, any proceedings before it. In Marriat Iinternational Inc Vs. Anasal Hotels Ltd., 2000(3) Arb.L.R., 369 it was held that the Courts in India have no power to issue interim orders under S.9 of the Arbitration and Conciliation Act, 1996 in the matter when the arbitration is held at a place outside India. In Bhatia International Vs. Bulk Trading S.A. & another (2002) 4 SCC 105, the parties agreed that as per the rules of International Chambers of Commerce the arbitration would be held in Paris. One of the parties, however, filed an application in the Court at Indore in India seeking an injunction restraining the Indian party not to alienate its property or assets. An objection was taken that the international commercial arbitration was taking place out of India and as the provisions of Part-I of the Arbitration and Conciliation Act, 1996 are not applicable and Section-9 of the Act, which authorizes a court to give interim relief is applicable where the arbitration is in India and not outside. This type of argument had been accepted by the High Court of Orissa, Bombay, Madras, Delhi and Culcutta which held that Part-I of the Act, in which Section 9 provided for interim relief, is not applicable where the arbitration took place outside India. The Supreme Court over ruled the Judgments of the High Courts and has held as under:- v The very object of the Act was to establish a uniform legal framework for the fair and efficient settlement of disputes arising in international commercial arbitration. v The Act is a consolidated and integrated Act. General provisions applicable to all types of arbitration such as those contained in Sections 9 & 17 are, therefore, not repeated in every Chapter and Part of the Act. Such general provisions apply to all Chapters and Parts unless it is expressly stated that they are not to apply or where separate provisions have been made in a particular Chapter or Part. v The words ‘this Act” used in Section 1(1) mean the entire Act. This shows that the entire Act, including Part-I applies to the whole of India. The Act applies compulsorily to all arbitrations held in India and all proceedings relating thereto. Parties, can however, deviate only to the extent permissible by the derogable provisions of Part-I. v Provisions of Part-I are equally applicable to international commercial arbitrations held outside India, unless any or all such provisions have been excluded by agreement between the parties, expressly or by implication. Therefore, unless Section-9 has been excluded, the parties may seek interim relief from a court as defined in Section 2(1)(e). v The definition of ‘International Commercial Arbitration” under Section 2(1)(f) makes no distinction between international commercial arbitration held in India or outside India. An international commercial arbitration may be held in a country, which is a signatory to either the New York Convention or the Geneva Convention, hereinafter referred to as ‘convention countries’. An international commercial arbitration may be held in a non-convention country. The Act nowhere provides that its provisions are not to apply to international commercial arbitration, which takes place in a non-convention country. Admittedly, Part-II only applies to arbitrations which take place in a convention country. v Article-23 of the I.C.C. Rules permits parties to apply to a competent judicial authority for interim or conservatory measures. Therefore, where arbitration is to be carried out as per rules of the ICC, the parties can seek relief under Section-9 of the Act. v The definition of ‘court’ under section 2(1)(e) of the Act does not provide that the courts in India will not have jurisdiction if an international commercial arbitration takes place outside India. Thus, courts in India would have jurisdiction even in respect of an international commercial arbitration. v An award made in an international commercial arbitration held in a non-convention country would also be considered as a ‘domestic award’. v Court must identify the interpretation, which represents the true intention of the legislature, always bearing in mind, that a court should not try to legislate. While deciding what is the true meaning and intention of the legislature, court must consider the consequences that would result from the various alternative constructions. Court must reject constructions, which lead to hardship, serious inconvenience, injustice, absurdity, anomaly or uncertainty and friction in the very system that the statute concerned is supposed to regulate and preference should be given to that construction which avoids such results. v Judicial art of interpretation and appraisal is imbued with creativity as well as realism because interpretation implies a degree of discretion and choice, regardless of the conventional principle that judges are to expound, not legislate. The Apex Court concluded that, “Indian Court could grant interim relief in respect of international commercial arbitration which was held out of India. The Judgment has settled the law that Indian Courts can grant interim relief, even if arbitration is held outside India, for the reason that the property is situated in India and there is need to safeguard the interest of the parties. The Bill amends Section-9 to restructure and regulate the powers of the court for interim measures. It also provides that a party who obtains an interim order does not take undue advantage. The court can pass restitution order, depending on the circumstances. It also provides that where the place of arbitration under Part-I of the existing Act is in India, whether in regard to arbitration between Indian Parties or an international arbitration in India, the Indian Law will apply. There was an occasion for the Andhra Pradesh High Court to deal with the consideration of application for grant of interim measures by Indian Courts in the case of International Commercial Arbitration held outside India. The facts of the case in National Aluminium Company Ltd., Vs. Gerald Metls SA, Switzerland 2004(3) ALT 749. The facts in the case are that, NALCO is a producer of Aluminum.NALCO entered into an agreement with the Transworld(Aluminum) Ltd., on 30-11-1998 for sale of 79,000 MT of sandy metallurgical grade collimated alumina for a period of five years from 1999 to 2003. The port at Visakhapatnam was identified as a loading port for loading the cargo for transshipment. In between, Gerald Motors entered into the shoe of Transworld(Aluminum) Ltd. Thereafter a Deed of Novation was entered into between NALCO and Gerald Motors on 5-12-2002. There was a dispute between the parties. There was an arbitration clause in the agreement and the venue of Arbitration shall be London, England and the provisions of English Law to apply to the proceedings. In this background, Gerald Metals moved an application u/s 9 of the Arbitration and Conciliation Act, 1996 before the District Judge, Visakhapatnam, who passed the interim order in I.A.No. 187/2004 in O.P.No.21/2004. Aggrieved by the said interim order, NALCO carried the matter in appeal in C.M.A. 258/2004 challenging that the District Judge had no jurisdiction to entertain an application u/s 9 of the Arbitration and Conciliation Act, 1996. Taking into consideration the ratio laid down in the Bhatia International Case, High Court of Andhra Pradesh held that the Section-9 of the Arbitration and Conciliation Act applicable to the proceedings in International Commercial Arbitration where the venue of the Arbitration is even outside India. CHOICE OF LAW/APPLICABLE LAW (PROPER LAW OF CONTRACT) An international commercial arbitration involves a foreign element which gives rise to questions as to the choice of law and the jurisdiction of the courts. Unlike in the case of persons belonging to the same legal system, contractual relationships between persons belonging to different legal systems may give rise to various private international law questions such as the identity of the applicable law and the competent forum. The term ‘proper law of contract’ means the system of law by which the parties intended the contract to be governed. International commercial Arbitration “applicable law” assumes significance. Section 28(1)(b) of the Arbitration and Conciliation Act, states as under: “28. Rules applicable to substance of dispute:- (1) Where the place of arbitration is situate in India, - (a) in an Arbitration other than an international commercial arbitration, the arbitral tribunal shall decide the dispute submitted to arbitration in accordance with the substantive law for the time being in force in India;- (b) In international commercial arbitration:- (i) The arbitral tribunal shall decide the dispute in accordance with the rules of law designated by the parties as applicable to the substance of the dispute. (ii) any designation by the parties of the law or legal system of a given country shall be construed, unless otherwise expressed, as directly referring to the substantive law of that country and not to its conflict of law rules; (iii) failing any designation of the law under clause(a) by the parties, the arbitral tribunal shall apply the rules of law it considers to be appropriate given all the circumstances surrounding the dispute. Simply stated, it means, that the parties may decide the law applicable to the substance of the dispute. Second, the designated law or legal system by the parties of a given country is to be construed to be the substantive law of that country. Third, if the parties fail to designate any law, the arbitral tribunal shall apply the rules of law it considers appropriate. In that event, the Courts endeavour to impute an intention by identifying the legal system with which the transaction has its closest and most real connection. When the intention of the parties to a contract with regard to law governing the contract is not expressed in words, their intention is to be inferred from the terms and nature of the contract, and from the general circumstances of the case, and such inferred intention determines the proper law of the contract. The true intention of the parties, in the absence of an express selection, has to be discovered by applying sound ideas of business, convenience and sense to the language of the contract itself. According to Diecy, the proper law of contract will be the law of the country where it is made. However, where the contract is made in one country and it is to be performed in another country, the proper law may be presumed to be the law of the country where it is to be performed. The following are the general principles being adopted in international commercial arbitration. LEXI ARBITRI. The Lex Loci Arbitri is the Latin term for “law of the place where arbitration is to take place” in the conflict of laws. The Lex Loci Arbitri is an element in the choice of law rules applied to cases testing the validity of the contract. In the absence of selection of a proper law by the parties, the courts will usually take the nomination of a forum as a ‘connecting factor’ i.e., a fact that links a case to a specific geographical location. For these purposes, one of the forums that may be selected is arbitration. Hence, the fact that the parties have chosen a state as the place of arbitration is an indication that the parties may have intended the local law to apply. This indication will be weighed alongside other connecting factors. The state that has the largest number of connecting factors will be the lex causae applied to resolve the dispute between the parties. If there is a tie, the connecting factors which relate to performance will be given a greater weighting. LEX SITUS: Lex Situs, the Latin term, refers to the law of the place in which the property is situated for the purpose of the conflict of laws. For example, the property may subject to tax pursuant to the law of the place of the property or by virtue of the domicile of its owner. This choice of law rule applied to identify the lex cause for cases involving title to, or the possession and use of the property. In law, there are two types of property. v REAL PROPERTY: Real property is land or any permanent feature or structure above or below the surface. Ownership of the land is an aspect of the system of real property or realty in common law systems. v PERSONAL PROPERTY: All other property other than the real property is considered as personal property in common law systems and movables in civil law systems and the conflict of laws, and this property is either tangible or intangible i.e., it is either physical property that can be touched like a computer, or it is an enforceable right like a patent or other form of intellectual property. Land has traditionally represented one of the most important and cultural and economic forms of wealth in society. Because of this historical significance, it is vital that any judgment affecting title to or the use of the land should be enforceable with the minimum difficulty. Hence, compliance with the lex situs should produce a judgment in rem. LEXI LOCI CONTRACTUS: Lex Loci Contractus, the Latin term, means, “law of the land where the contract is made” in the conflict of laws. Lex Loci Contractus is one of the possible choice of law rules applied to cases testing the validity of the contract. LEXI LOCI SOLUTIONIS Lex Loci Solutionis, the Latin term, means “law of the place where relevant performance occurs’ in the conflict of laws. Lex Loci Solutionis is one of the possible choice of law rules applied to cases testing the validity of the contract and in tort cases. LEX PATRIAE: Lex Patriae the Latin term, means “the law of the nationality” in the conflict of laws which is the system of public law applied to any suit where there is a choice to be made between several possibly relevant laws and a different result will be achieved depending on which law is selected. The lex patriae is a civil law choice of law rule to test the status and capacity of the parties to the case. For example, suppose that a person with a nationality in Denmark decides to take a ‘round the world’ trip. It would be inconvenient if this person’s legal status and capacities changed every time he or she entered a new state, e.g., that he or she might be considered an infant or an adult, married or free to marry, bankrupt or creditworthy, etc., depending upon the nature of the laws of the place where he or she happened to be. Assuming that there are no public policy issues raised under the relevant lex fori, the lex patriae should apply to define all major issues and so produce an in rem outcome no matter where the case might be litigated. LEXI LOCI DELICTI COMMISSI This Latin term means, “law of the place where the tort was committed” in the conflict of laws. Lex Loci Delicti Commissi is one of the possible choice of law rules applied to cases arising from an alleged tort. LEX DOMICILII: This Latin term means, “law of the domicile” in the conflict of laws. The lex domicilii is a common law choice of law rule applied to cases testing the status and capacity of the parties to the case. In Brij Raj Marwari Vs. Anant Prasad A.I.R. 1942 Cal 309, it was held that, whether the proper law is the law lex loci contractus or lex loci solutionis is a matter of presumption. There are, however accepted rules for determining which of them is applicable, where the parties have expressed themselves, the intention so expressed overrides the presumption. But when there is no express intention that the rule to apply is to infer from the intention of the terms of the contract and the circumstances of the case. In Armour Shipping Co.Ltd., Vs. Caisse Algerienic (1982) 1 ALL ER 498, it has been held by the Court of Appeal in England that the proper law to be applicable in respect of the contract is that which applied at the time when it was made. In such a case the choice of the parties to the forum of the suit in London haws no relevance when the proper law of bond did not have any connection with England courts and for enforcement of such bond no English court could entertain jurisdiction. In the matter of discharge of contracts the proper law of contract does not depend upon the debtor’s place or residence even though a contractual debt will be normally regarded as suit at the debtor’s place of residence. But the discharge of the debt whether by performance or through other means does not depend upon lex suits of the debt, but to the proper law of conflict from which it arises. In United Railways of the Havana and Regal Warehouse Ltd., (1962) 2 ALL ER 214, it was held that, in the matter of novation of contract the proper law of contract does not depend on lex situs, but depends probably on the law of the country with which the substitution of the new debtor by novation is most closely connected. In In Hamlic & Co., Vs. Tallisker Distillery (1894) AC 202, it has been made clear that the fact that one aspect of the contract is to be governed by the law of one country does not necessarily mean that the law is to be proper law of contract as a whole. Hence, the proper law of contract can vary in different aspects of the contract, namely discharge of contract, novation of contract, performance of contract etc., In international trade the contract some times specifies a foreign country in which the disputes will be adjudicated. Cheshire on Private International Law has observed as follows: “As distinct from the expressed or implied choice of proper law the express choice of a foreign tribunal is not absolutely binding in accordance with the excellent principles that contractual undertaking should be honoured, there is indeed a prima facie rule that as action brought in England in difference of an agreement to submit to arbitration abroad will be stayed, but nevertheless the court has discretion in the matter and where parties are amenable to the jurisdiction, as for example, the defendant is person of England, it will allow the English action to continue if it considers that the ends of justice will be better served by a trial in this country” The Bombay High Court has also agreed with the above principle in the case of Hazi Abdulla Vs. G.R.Stamp A.I.R. 1924 Bom 381, where the contract provided for adjudication by arbitration in England the court stayed the action in India so that the parties are compelled to go for arbitration in England. Contrary to the above, the Division Bengh of Calcutta High Court in the case of Lyods Triestinco Societa Vs. Laxmi Narain Ram Nivas A.I.R. 1959 Cal 669, held that where on a consideration of the circumstances the court came to the conclusion that it would be unjust or unfair to stay the suit, it would refuse to grant a stay. It was also observed that there is no doubt that the proper law of the contract in this case was the Italian Law, but the parties could not oust the jurisdiction of the Indian court by agreement whether executed in India or outside. A Division Bench of our Hon’ble High Court of Andhra Pradesh in the case of Black Sea Steamship Vs. Union of India, A.I.R. 1976 A.P. 103, observed as follows: “It is open to the court to consider the balance of convenience, the interest of justice and the circumstances when it decided the question of jurisdiction of the court in the light of the clause in the agreement between the parties chosen one of the several courts or forums which were available to them. Indeed such a consideration is essential in the interest of international trade and commerce for the better relationship between the countries and the people of the world”. The Supreme Court has also reiterated the above principles in the case of United Commercial Bank Vs. Bank of India, A.I.R. 1981 SC 1428. In National Thermal Power Company Vs. Siniger Company, AIR 1993 SC 908, the parties have agreed that that in the event of any dispute between the parties, the arbitration would be in accordance with ICC rules. In this case, regarding the applicable, Supreme Court of India observed, “An international commercial arbitration necessarily involves a foreign element giving rise to questions as to the choice of law and the jurisdiction of courts. Unlike in the case of persons belonging to the same legal system, contractual relationships between persons belonging to different legal system may give rise to various private international law questions such as the identity of the applicable law and the competent forum. An award rendered in the territory of a foreign State may be regarded as a domestic award in India where it is sought to be enforced by reason of Indian law being the proper law governing the arbitration agreement in terms of which the award was made. The Foreign Awards Act, 1961, incorporating the New York Convention, leaves no room for bout on the point” Judgments referred above, makes it clear that the aspect of jurisdiction in any contract is not what is agreed by the parties alone but circumstances of each case, novation of contract, performance etc., However once the parties are amenable to the jurisdiction of a particular court, it is open to the court in that particular country though the parties agree to have their action adjudicated in a different country to entertain the cause and adjudicate upon it considering that the ends of justice will be better served. FORUM SHOPPING: Forum shopping is the informal name given to the practice adopted by some plaintiffs to get their legal case heard in the court thought most likely to provide a favourable judgment, or by some defendants who seek to have the case moved to a different court. This is an increasingly serious problem because it balances the concept of party autonomy against broader concerns of justice and fairness. Some states have become notorious as plaintiff-friendly jurisdictions and so have become litigation magnets even though there is little or no connection between the legal issues and the jurisdiction in which they are to be litigated. For example, through its expansive acceptance of personal jurisdiction, the United States has attracted foreign litigants wishing to take advantage of the more generous awards of damages and alimony, the extensive discovery rules and, most importantly, the contingent fee system. The standard preliminary issue in every case, whether purely domestic or including a foreign element, is the test to determine whether the court of first instance has jurisdiction and, if it has, whether it is most appropriate forum. The principle expressed as forum non conveniens is the Latin for “inconvenient forum”, and a judge may decline to hear, or to transfer, a case if the court selected is not the most convenient for the case. Every state drafts rules to determine where a lawsuit must be filed and some times, a centralized but distant location may be inconvenient for the parties or witnesses. So long as the case is domestic, there can be no cause for complaint. The state has no brief to make often specialized resources available in the parties home towns. But, if the courts in two states would accept civil jurisdiction, the plaintiff must be able to show that justice requires the trial to take place in the plaintiff’s proposed forum. This is a significant issue because the plaintiff might have selected one forum because: v It is believed that the defendant or key witnesses will not be able to travel to the state selected. There may be problems of cost, physical health or visa/entry permit eligibility. This strategy would enable the plaintiff to win the case by default. v The court or judge or body of law or rules of evidence are most likely to favour the plaintiff’s case. Hence, there are two different forms of action that may arise: v The defendant may appear in the forum court to argue that it should reject the jurisdiction; tactical considerations will determine whether there should also be an application to transfer the case to an allegedly more convenient forum; or v If a case has been filed in another jurisdiction, the defendant may seek injunctive relief against the plaintiff in a second state, requiring that the plaintiff discontinue the action in the first forum and instead submit the case for hearing in this allegedly more convenient forum. In both cases, the first step is to determine whether the first instance forum is the natural forum, i.e., the forum that has the closest connection with the action and the parties. This requires the court to determine whether there is another forum that is clearly more appropriate. The basis of the test is the Doctrine of Comity, i.e., the immediate forum court must respect the right of a foreign court to assume jurisdiction. The Canadian case of Braintech Inc., Vs. Kostiuk (1999) B.C.J. No.622 considered the effect of the internet in relation to defamation and recognized that if every jurisdiction in the world which has access to the internet took jurisdiction, it would have a crippling effect on the freedom of expression. Domestic courts therefore test the results arising from the choice of the venue against criteria such as “oppressive” or “vexatious”. Because the court is balancing practical issues of justice, there may be injustice to the defendant if the plaintiff is allowed to pursue the immediate proceedings, but also of injustice to the plaintiff if he or she is not allowed to do so. So, as a general rule, the court will not grant an application to transfer or an injunction if, by doing so, it will unjustly deprive the plaintiff of advantages in the first instance forum. Nevertheless, there should be a real and substantial connection between the venue and the cause(s) of action to provide some protection against defendants from being pursued in jurisdictions having little or no connection with the transaction or the parties. But, if the alternative venue court concludes that the first instance court has assumed jurisdiction either without considering whether there was an alternative forum or reached an obviously unreasonable conclusion on the merits, an injunction would be a reasonable response. Equally, if the foreign court has reasonably concluded that there was no more convenient forum, Comity requires the second venue court to respect that decision and the application for an injunction and transfer should be dismissed. In cases where there is a sound argument to be made in favour of both courts, the court in the second venue should not arbitrarily claim a better right to decide for both jurisdictions. In most cases, it will be obvious whether the foreign court has acted on principles similar to those applied in the second venue court, and if so, the second venue court should refuse the relief. In Brace Transport Corporation of Monoria Bermuda Vs. Orient Middle East Lines Ltd., A.I.R. 1994 SC 1715, Supreme Court of India held that, “a party seeking to enforce an award in an international commercial arbitration may have a choice of country in which to do so. In other words the party may be able to go for forum shopping, however, it depends upon the location of the losing party. Since the purpose of enforcement proceedings is to ensure compliance with an award by the legal attachment or seizure of the defaulting party’s assets. These legal proceedings must be taken in the State or States in which the property or other assets of the losing party are located”. RECOURSE AGAINST ARBITRAL AWARD – PUBLIC POLICY An arbitral award can be challenged in a court by way of an application. According to Sub Section (2) of Section-2, ‘Court” means the principal Civil Court of original jurisdiction in a district and includes the High Court in exercise of its ordinary original civil jurisdiction on the subject matter of the arbitration. As far as grounds of challenging an arbitration award are concerned, Sub-Section (2) of Sec.34 specifies the grounds on which an arbitral award may be set aside by the court. An arbitration award can be challenged, inter alia, if it is in conflict with the public policy of India. The concept of “public policy” in international commercial arbitration, therefore, assumes importance. PUBLIC POLICY An arbitration award is invalid f it is in conflict with the public policy of India. If a contract is made contrary to public policy, its performance cannot be enforced either at law or in equity. However, neither the Arbitration and Conciliation Act, 1996 or the Indian Contract Act defines the expression “public policy” or “opposed to public policy” or “contrary to public policy”. Obviously, from the very nature of things, the expressions are incapable of precise definition. Public policy is not the policy of a particular Government. It connotes some matter, which concerns the public good or public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest varies from time to time. Courts have laid down principles as to what is opposed to public policy. Lord Davey in Janson Vs. Driefontein Consolidated Mines Ltd., (1902) AC 484 has said, “Public policy is always an unsafe and treacherous ground for legal decision”. Justice Burrough in Richardson Vs. Mellish (1824) 2 Bing 229, described public policy as, “a very unruly horse, and when once you get astride it you never know where it will carry you.” Lord Dennning MR in Enderby Town Footbal Club Ltd., Vs. Football Association Ltd., (1971) Ch.591, said, “With a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles.” In 42 Harvard Law Rev.76, Winfield defined Public Policy as, “a principle of judicial legislation or interpretation founded on the current needs of the community”. In Central Inland Water Transport Corporation Vs. Brojo Nath Ganguly, A.I.R. 1986 SC 1571, Supreme Court of India defined public policy as, “Public Policy connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injuries or harmful to the public good or the public interest has varied from time to time STATUTORY FRAME WORK:- v Article-2(2)(e) of the Geneva Convention provides:- to obtain such recognition or enforcement, it shall further be necessary that the recognition or enforcement of the award is not contrary to the public policy or to the principles of the law of the country in which it is sought to be relief upon. v In Section-7(1) of the Act, 1937, it is provided that, in order that enforcement of the foreign award must not be contrary to the public policy or the law of India. v According to Sec.57(1)(e) of the Act, 1996, in order that a foreign award may be enforceable, it shall be necessary that the enforcement of the award is not contrary to public policy or the law of India. v Article-V(2)(b) of the New York Convention provides that, recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that the recognition and enforcement would be contrary to the public policy of that country. v Sec-7(1)(b)(ii) of the Act 1961, provides that:- a foreign award may not be enforced under this Act if the Court dealing with the case is satisfied that the enforcement of the award will be contrary to public policy. v Sec.48(2)(b) of the Act, 1996 provides that:- Enforcement of an arbitral award may also be refused if the Court finds that the enforcement of the Award would be contrary to the public policy of India. The question before the Supreme Court of India in Renusagar Power Co., Vs. General Electric Co., in AIR 1994 SC 860 was whether award of interest on interest or compound interest was contrary to public policy of India. Supreme Court observed that the award of interest on damages or interest on interest, that is, compound interest is not regarded as being against public policy in England, Australia and Canada. However, in India, there is no absolute bar on the award of interest by way of damages and it would be permissible to do so if there is a usage or contract, express or implied, or any provision of law to justify the award of such interest. Payment of compound interest on loans advanced by banks and financial institutions are provided in contracts for such loans and law enforces those contracts. It was held that award of interest on interest cannot be said to be against the public policy. The Supreme Court laid down the following principles while interpreting Sec.7(1)(b)(ii) of the Foreign Awards(Recognition and Enforcement) Act, 1961. v The use of the words “public policy” instead of “public policy of India” in Sec.7(1)(b)(ii) of he Foreign Awards (Recognition and Enforcement) Act, 1961, did not mean that the court was free to examine the validity of the award from the point of view whether it violated the Public Policy of the country in which it was rendered or the country whose law governed the contract; v In order to attract the bar of Public Policy, the enforcement of award must involve something more than mere violation of the law of India; v The phrase Public Policy must be construed in the sense in which doctrine of public policy is applied in the field of private international law; v The enforcement of a foreign award would be contrary to Public Policy, if would be contrary to, (i) fundamental policy of the Indian law; and (ii) the interest of India; and (iii) justice and morality Where enforcement of a foreign arbitration award is sought, the court, if satisfied that the enforcement thereof would be contrary to the public policy of India, may decline to enforce the award. It is quite clear from the language in the section that the expression ‘public policy’ refers to ‘public policy of India’ and, therefore, the recourse against domestic arbitral award and enforcement of a foreign arbitral award in India cannot be questioned on the ground that it is contrary to the public policy of any other country. In the above Judgment, the Supreme Court of India, further observed that, “it is the fundamental principle of law that orders of the Courts must be complied with for any action which involves disregard for such orders would adversely affect the administration of Justice and would be destructive of the rule of law and would be contrary to public policy” In Smitha Conductors Vs. Euro Alloy Ltd., 2001(3) Arb.L.R., 175, the Supreme Court of India held that the expression, “public policy” means Public Policy of India and the recognition and enforcement of foreign award cannot be questioned on the ground that it is contrary to the foreign country public policy. The Supreme Court of India, in the case of ONGC Ltd., Vs. SAW Pipes Ltd., 2003(5) SCC 705 has deliberated whether the Court would have jurisdiction under S.34 of the Act to set aside an award passed by the arbitral tribunal which is patently illegal or in contravention of the provisions of the Act or any other substantive law governing the parties or is against the terms of the contract. While expanding the scope of the word “Public Policy” to include “patent illegality”, the Supreme Court observed that, the phrase ‘public policy of India’ is not defined under the Act and the term is required to be given meaning in the context and also considering the purpose of the section and the scheme of the Act. The concept of public policy is considered to be vague, susceptible to narrow or wider meaning depending upon the context in which it is used. Lacking the precedent, the court has to give its meaning in the light and principles underlying the Arbitration Act, Contract and the constitutional provisions. The Supreme Court observed that, “it is thus, clear that the principles governing public policy must be and are capable, on proper occasion, of expansion or modification. Practices, which were considered perfectly normal at one time, have to-day become obnoxious and oppressive to public conscience. If there is no head of public policy, which covers a case, then the court must in consonance with public conscience and in keeping with public good and public interest declare such practice to be opposed to public policy. Above all, in deciding any case, which may not be covered by authority, our courts have before them the beacon light of the preamble to the Constitution. Lacking precedent, the court can always be guided by the light and the principles underlying the fundamental rights and the directive principles enshrined in our constitution” The Apex Court after analysis of the ambit and scope of court’s jurisdiction under S.34 of the Act as aforesaid, has held as under: v The jurisdiction or the power of the arbitral tribunal is prescribed under the Act and if the award is de hors the said provisions, it would be, on the face of it, illegal. The decision of the Tribunal must be within the bounds of its jurisdiction conferred under the Act or the contract. In exercising jurisdiction, the arbitral tribunal cannot act in breach of some provision of substantive law or the provisions of the Arbitration and Conciliation Act, 1996. v Reading Section 34 conjointly with other provisions of the Arbitration and Conciliation Act, 1996, it appears that the legislative intent could not be that if the award is in contravention of the provisions of the Arbitration and Conciliation Act, 1996, still, it could not be set aside by the Court. If it were held that such award could not be interfered, it would be contrary to basic concept of justice. If the arbitral tribunal has not followed the mandatory procedure prescribed under the Act, it would mean that it has acted beyond its jurisdiction and thereby the award would be patently illegal which could be set-aside u/s 34 of the Act. v Procedural law cannot fail to provide relief when substantive law gives the right since there cannot be any wrong without a remedy. v If the award was contrary to the substantive provisions of law or the provisions of the Act, or against the terms of the contract, it would be patently illegal, which could be interfered under S.34. However, such failure should be patent affecting rights of the parties. v For achieving the object of speedier disposal of the dispute, justice in accordance with law cannot be sacrificed. Giving limited jurisdiction to the Court for having finality to the award and resolving the dispute by speedier method would be much more frustrated by permitting patently illegal award to operate. Patently illegal award is required to be set at naught, otherwise, it would promote injustice. v The phrase, ‘Public Policy of India” used in S.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 public good or in public interest or what would be injuries 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 public interest. Such award/Judgment/decision is likely to adversely affect the administration of justice. Hence, in addition to narrower meaning given to the term ‘public policy’ in Renusagar’s case, the Apex Court held that, the award could be set aside if it is contrary to: i. Fundamental policy of Indian law; or ii. The interest of India; or iii. Justice or morality; or iv. In addition, if it is patently illegal. v Illegality must go to the root of the matter and if the illegality is trivial in 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 the conscience of the Court. Such award is opposed to public policy and it required to be adjudged void. SOVEREIGN IMMUNITY Generally speaking it is the doctrine that the sovereign or Government cannot commit a legal wrong and is immune from civil suit or criminal prosecution. The doctrine of sovereign immunity is based on international law. It is one of the rules of international law that a sovereign state should not be impleaded in the courts of another sovereign state against its will. Like all the rules of international law, this rule is said to arise out of the consensus of the civilized nations of the world. All nations agree upon it. So, it is part of the law of nations. The problem of a State invoking its immunity as a ground to thwart arbitration on a commercial dispute could hardly be ignored. True, most of the States which embark on trade activities are reluctant to raise this protective shield for fear of losing credit. Some in fact have made a distinction between their acta jure imperii and their acta jure gestiones allowing jurisdiction to courts in the latter category. But, this distinction is not universal. There are two theories with regard to sovereign immunity. The Doctrine of Absolute Immunity: A century ago no sovereign state engaged in commercial activities. It kept to the traditional functions of a sovereign – to maintain law and order; to conduct foreign affairs; and to see to the defence of the country. It was in those days that England with most other countries adopted the rule of absolute immunity. It was adopted because it was considered to be the rule of international law at that time. The doctrine of restrictive immunity: In the last 50 years, there has been a complete transformation in the functions of a sovereign state. Nearly every country now engages in commercial activities. It has its departments of state or creates its own legal entities which may go into the market places of the world. They charter ships, buy commodities, issues letters of credit etc., This transformation has changed the rules of international law relating to sovereign immunity. Many countries have now departed from the rule of absolute immunity and many of the countries have departed from it that it can no longer be considered a rule of international law. It has been replaced by the doctrine of restrictive immunity. This doctrine gives immunity to acts of a governmental nature, described in Latin as jure imperii, but no immunity to acts of a commercial nature, jure gestionis. In 1951, Sir Hersch Lauterpacht showed that, even at that date, many European countries had abandoned the doctrine of absolute immunity and adopted that of restrictive immunity. The Supreme Court of the United States of America in Alfred Dunhill of London Inc., Vs. Republic of Cuba, vide its Judgment Dated: 24th day of May, 1976, observed that, “…The United States abandoned the absolute theory of sovereign immunity and embraced the restrictive view under which immunity in our courts should be granted only with respect to causes of action arising out of a foreign state’s public or governmental actions and not with respect to those arising out of its commercial or proprietary actions. In Rahimtoola Vs. Nizam of Hyderabad (1958) 1 A.C. 379, Lord Denning observed that, “if the dispute brings into question, for instance, the legislative or international transactions of a foreign government, or the policy of its executive, the could should grant immunity if asked to do so because it does offend the dignity of a foreign sovereign to have the merits of such a dispute convassed in the domestic courts of another country; but, if the dispute concerns, for instance, the commercial transactions of a foreign government(whether carried on by its own departments or agencies or by setting up separate legal entities), and it arises properly within the territorial jurisdiction of our courts, there is no ground for granting immunity”. In Thai-Europe Tapioca Service Ltd., Vs. Government of Pakistanm Directorate of Agricultural Supplied (1975) 1 W.L.R. 1485, it was observed by Lord Denning that, “….a foreign sovereign has no immunity when it enters into a commercial transaction with a trader here and a dispute arises which is properly within the territorial jurisdiction of our courts. If a foreign government incorporates a legal entity which buys commodities on the London Market; or if it has a state department which charters ships on the Baltic Exchange; it thereby enters into the market places of the world; and international comity requires that it should abide by the rules of the market.”. Another leading case on the point of sovereign immunity is Trendtex Corporation Vs. Central Bank of Nizeria, in which the majority Judges observed that, “The facts in that case are that, (i) The Central Bank of Nigeria is a Central Bank Modelled on the Bank of England, (ii) It has governmental functions in that it issues legal tender; it safeguards the international value of the currency; and it acts as banker and financial adviser to the government; (iii) its affairs are under a great deal of government control in that the Federal Executive Council may over rule the board on monetary and banking policy; (iv) it acts as banker for other banks in Nigeria and abroad and maintains accounts with other banks. It acts as a banker for the states within the federation; but has few, if any, private customers. In these circumstances, I have found it difficult to decide whether or not the Central Bank of Nigeria should be considered in international law a department of the Federation of Nigeria, even though it is a separate legal entity. But, on the while, I do not think it should be. This conclusion would be enough to decide the case, but I find it so difficult that I prefer to rest my decision on the ground that there is no immunity in respect of commercial transactions, even for a government department.” Thus, when a sovereign state enters into the field of commercial transactions world through its entities are not entitled to claim immunity of being sued and only when the sovereign state enters into any transactions of public/sovereign functions, it is entitled to claim immunity.

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