Paradigm shift of International Arbitration in India

In the wake of Liberalisation, Privatisation and Globalisation,(L.P.G) developing countries should have regulatory system which motivates confidence of foreign investors, traders and suppliers and recently developed Indian legal system shall provide an expeditious, cost effective and flexible dispute resolution system indeed.Thus arbitration in India is an elastic output available to the judicial system in which time-schedule can be planned for which great efforts have been put forth by the Arbitration Institutions, Trade/Industry associations apart from the Governmental support and supervision of the Judiciary. Hopefully India shall prove to be an important Arbitration Hub recognised by the world over.

While the process of arbitration taken roots in ancient India from village Councils/chambers/Mahajans, post independence times recognised resolution of disputes thru Panchayat which process became law as Panchayat Act 1994 apart from the clear constitutional recognition by way of Article 243 of our world-acclaimed Constitution.,

There have been amendments in the Arbitration and Conciliation Act. Till 1996, there were three statutes on arbitration 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 arose a need for reforming the Arbitration Act, 1940 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 matters connected therewith or incidental thereto and thus the Arbitration and Conciliation Act of 1996(the Act) came into place. The Arbitration and Conciliation Act, 1996 is a long leap in the direction of alternate dispute resolution systems. It is based on UNCITRAL (United Nations Commission on International Trade Law Model ).

The Act was divided into two parts. While former part deals with arbitration conducted in India and its enforcement, the latter one deals with arbitration conducted in foreign country and their enforcements

An earnest attempt is made in this note to analyse and examine the issues to be addressed following the Honorable Supreme Court historical decision viz., Bharat Aluminium Company Limited vs Kaiser Aluminium Technical Services (2012) 9 SCC 552 pronounced on September 6, 2012 (hereinafter BALCO)

Earlier historical judgement of Bhatia International Vs Bulk Trading (2002 AIR SC432) (hereinafter Bhatia) was viewed as an encouraging step for India-related arbitration which is now overruled the principle that the provisions of Part I of the Act would apply to international arbitrations held outside India unless excluded explicitly and or impliedly by the parties to those arbitrations.The Bhatia principle that Part I could in certain circumstances be exercised in offshore arbitration gave the Indian courts effective supervisory jurisdiction over certain arbitration awards seated outside India .

Part I of the Act which is drafted , where the place of arbitration is in India, provides Indian courts with substantial procedural and determinative powers in resepct of arbitration proceedings including the powers to grant interim measures, making arbitral appointments in the absence of agreements and the power to set aside arbitral awards under certain circumstances.The Bhatia principle that Part I could in certain circumstances be exercised in offshore arbitration, gave the Indian courts effective supervisory jurisdiction over certain arbitrations seated outside India. An opinion has been concluded that this practice considered to have had an adverse impact on the efficiency, certainly, and finality of the India related arbitrations.On the basis of the Bhatia decision, the Indian courts set aside a foreign arbitration award viz., Venture Global Engg vs satyam comptuer services Limited (2008 4 SCC 190) and appointed arbitration in proceedings seated outside India in the case of Indtel Technical services private Limited Vs WS Atkins Plc (AIR 2009 sc 1132).

Some of the important principles laid down by Hon. Apex Court in Balco case are summarised hereunder:

1.The Arbitration Act 1996 has accepted the territoriality principles of the UNCITRAL Model Law due to which sec 2(2) makes declaration that Part I of the Arbitration Act 1996 shall apply to all arbitrations which take place within India.

2. In an international commercial arbitration with a seat outside India, no application for interim relief would be maintainable in India.

3. 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 would not provide a cause of action for a suit where the main prayer is for injunction.

4. Part I of the Act would have no application to International commercial arbitration held outside India.Such awards would only be subject to the Indian Courts when the same are sought to be enforced in India in accordance with the provisions of Part II of the Arbitration Act. Part I only applies when the seat of arbitration in India irrespective of the kind of arbitration.

5. It was abundantly made clear and clarified that Sec 2(7) of the Act is to distinguish the domestic award (Part I of the act) from the foreign award (Part II of the Act),,The term "domestic award" means an award made in India rendered domestically or international award rendered in India which are liable to be challenged under Section 34 and are enforceable under section 36 of the Act.Thus Indian courts are having supervisory exercise control and regulation of arbitration proceedings which will produce a domestically rendered international commercial award.

6. Globally Acceptable Legal Precedent (Balco case) Earlier “under the law” has generated a great deal of controversies.(u/s 48(a) of Indian Arbitration Act 1996. To support and stress the importance of territorialisation in the arbitration act, Hon. Apex court referred to the following foreign judgements and recognised them in letter and spirit.Thus Hon. Apex Court made out an all-out search to arrive at a Globally acceptable legal precedent after studying the contemporary legal provisions in conjunction with the International Conventions. Few cases of foreign precedents are given below.

In the case of Bergesen Vs. Joseph Muller Corporation (Ref.710 F.2nd 928) , the Court held an award made in the State of New York between two foreign parties is to be considered as a non-domestic award within the meaning of the New York Convention and its implementing.

The Court thereafter culls out the following principle “Where the parties have failed to choose the law governing the arbitration proceedings, those proceedings must be considered, at any rate prima facie, as being governed by the law of the country in which the arbitration is held, on the ground that it is the country most closely connected with the proceedings”. The aforesaid classic statement of the Conflict of Law Rules as quoted in Dicey & Morris on the Conflict of Laws (11th Edition) Volume 1, was approved by the House of Lords in James Miller & Partners Vs. Whitworth Street Estates (Manchester ) Ltd . 37 .(Ref.1970 1 Lloyds Rep 269, 1970 AC 583).

Mr. Justice Mustill in the case of Black Clawson Internationa l Ltd . Vs. PapierIrke Waldhof-Aschaf fenburg A.G . , a little later characterized the same proposition as “the law of the place where the reference is conducted, the lex fori”. The Court also recognized the proposition that “there is equally no reason in theory which precludes parties to agree that an arbitration shall be held at a place or in country X but subject to the procedural laws of Y”. But it points out that in reality parties would hardly make such a decision as it would create enormous unnecessary complexities. Finally it is pointed out that it is necessary not to confuse the legal “seat” of an arbitration with the geographically convenient place or places for holding hearing.

7, Seat or place of arbitration vs Governing law. It would be a matter of construction of the individual agreement to decide w. The Hon. Apex Court held that ONLY if the agreement of the parties is construed to provide for the seat or place of arbitration being in India, Part I of the Act would be applicable and if the agreement is held to provide for a seat or place outside India, part I would be inapplicable to the extent inconsistent with the arbitration law of the seat, even if the agreement purports to provide that the Act shall govern the arbitration proceedings. )

8..NEW YORK CONVENTION :Chapter n I of Part II of the Act and section 44 deals with New York awards.. A reading of the Article V(1)(e) of NY Convention and Section 48(1)(e) makes it clear that only the courts in the country “in which the award was made” and the courts “under the law of which the award was made” (hereinafter referred to as the “first alternative” and the “second alternative” respectively) would be competent to suspend/annul the New York Convention awards. It is clarified that Section 48(1)(e) is only one of the defences on the basis of which recognition and enforcement of the award may be refused. It has no relevance to the determination of the issue as to whether the national law of a country confers upon its courts, the jurisdiction to annul the awards made outside the country.

Therefore the word “suspended /set aside in section 48(1)(e) cannot be interpreted to mean that, by necessary implication, the foreign awards sought to be enforced in India can also be challenged on merits in Indian Courts. The provision only means that Indian Courts would recognize as a valid defence in the enforcement proceedings relating to a foreign award, if the Court is satisfied that the award has been set aside in one of the two countries, i.e., the “first alternative” or the “second alternative”.

9. Public policy U/S 34 is recognised and retained

The Honourable Supreme Court remarkably held in ONGC vs Saw Pipes case (2003 5 SCC 705 that an award that conflicted with the Indian Law would be contrary to public Policy and therefore unenforceable. This view on public policy ground had since been applied as a standard for challenging enforcement of foreign-seated awards in India as in the case of Phulchand Exports Ltd Vs ))) Patriot (2011 10 SCC 300. Public Policy of India used in section 34 of the Act is given a wider meaning as held in Shri Lal Mahal Ltd Vs Progetto Grano Spa (2013) (3) ARBLR1(SC)

10,. Few Important passing remarks announced by the Hon.Supreme Court in Balco case:

The following principles have been enunciated by the Hon. Apex Court in the Balco case

"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 arbitration will apply to the proceedings"

"only if the agreement of the parties is constructed for the seat/place of arbitration being in India would Part I of the Act be applicable

"Due to the territoriality principles adopted by the Act, Part I and Part II of the Act are mutually exclusive."

“we are unable to agree with the conclusions recorded by this Court in Venture Global Engineering case (supra)that the foreign award could be annulled on the exclusive ground that Indian law governed the sustenance of the dispute. Such an opinion is not borne out of the huge body of Judicial precedents in different jurisdictions of the World.”

Although Balco judgement restricted the scope for the Indian courts to interfere in the offshore arbitration proceedings and awards, setting aside award as to the public policy grounds are open to the Indian courts subject to certain laid down principles and precedents by the Apex Court.

9. Hon. Supreme Court ordered that the law now declared (Balco) shall apply prospectively to all arbitration agreements executed hereinafter. (judgement delivered on September 6, 2012

Thus drafting of Arbitration clause in the case of the offshore contracts now gains renewed importance and implications. Place of Arbitration, Law applicable to Award are required to be penned with precision and unequivocal terms. If need be the the arbitration clause may be amended to suit the present arbitration process in the context of the present historical precedent of Supreme Court.

To conclude, it is to be noted that all the aspects of Balco principles and Public Policy principles supported by Expert committee and Hon. Law Commission recommendations are finding place and further clarity in the proposed Amendment Bill which is expected to be enacted by Parliament in the proposed Winter Session.

NB: This write-up is given for broad understanding of the progressiveness foreign arbitration in India in the context of Balco case and in case of any specific advice, expert advice need to be taken. Views expressed in this article are only the personal views of the author.

Dr.Vedula Gopinath,
Advocate/Arbitrator India vgnath@gmail.com