Australia: Time to re-draft your arbitration agreements (again)?


Two significant decisions in India and England are cause to reconsider what needs to go into an arbitration agreement and what can be discarded: Bharat Aluminium Co v Kaiser Aluminium Technical Service Inc (Bharat) and Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638 (Sulamerica).

As a result of both decisions:

  • Arbitration agreements with an Indian connection no longer need to exclude Part I of the Arbitration and Conciliation Act 1996 (India) (Indian Act).
  • Parties should consider including provisions dealing with interim measures for arbitrations outside India but which involve a party from India.
  • Parties should now include not only a governing law clause for the main contract, but a governing law clause for the arbitration agreement as well.

The pre-Bharat position in India

Bharat is a significant decision that repeals important arbitral case law in India and provides further security for parties arbitrating where the subject matter of the arbitration has a connection with India.

The Court in Bharat overruled the previous decision of the Supreme Court of India in Bhatia International v Bulk Trading [2002] INSC 132 (Bhatia). Bhatia found that Part I of the Indian Act (which, among other things, subjects awards to increased levels of review) applied to arbitrations seated outside India unless the parties agreed otherwise. For details on how such a decision undermined the finality of awards being enforced in India, see here.

As a result of Bhatia and the decisions that followed, parties to contracts that had some connection to India were advised to exclude Part I of the Indian Act in their arbitration agreements.

The position in India now

Part I of the Indian Act no longer applies to foreign arbitration

The judgment in Bharat has overruled Bhatia and will encourage clarity and certainty for foreign investors looking to do business in or in connection with India. The practical effect of the decision is that there is no longer a need to draft an arbitration agreement that excludes Part I of the Indian Act.

The Supreme Court found that Part I of the Indian Act applies only to arbitrations which take place in India. An award made outside India and to which the New York Convention applies will instead be subject to Part II of the Indian Act, which is consistent with the New York Convention.

The decision will act prospectively (and therefore will not apply to undermine the outcome in earlier decisions).

No more interim measures from Indian courts for foreign arbitration

It can often be useful to obtain urgent interlocutory relief from a court of the country in which one of the parties has assets or is domiciled. For example, it may be necessary to freeze assets of one party to stop them transferring those assets to avoid payment of any arbitration award.

The decision in Bharat, however, means that the power for Indian courts to order interim measures of protection for arbitrations (which appears in section 9, found in Part I) only applies to arbitrations held in India. There is no express power in the Indian Act for courts to order interim measures of protection for arbitrations seated outside India.

Proper law of the arbitration agreement in England

In Sulamerica, the English Court of Appeal considered what law governed the arbitration agreement (and its validity). The choice was between the law of Brazil (which was the proper law of the insurance policy) and England (the seat of arbitration). If governed by Brazilian law, the arbitration agreement would not have been enforceable.

The proper law of the arbitration agreement is important for determining the clause's validity. An invalid agreement may also render any arbitration award unenforceable. It had generally been considered that the proper law of the contract will be the proper law of the arbitration agreement. Recent decisions in England and Australia, however, have questioned this (see here).

In Sulamerica, the Court found that the proper law of the arbitration agreement is to be determined (absent an express choice) either through an implied choice (applying similar principles to implying contractual terms) or by determining which jurisdiction the arbitration agreement has the closest and most real connection with. This may result in the proper law of the main contract being the proper law of the agreement. In some circumstances, however, the law of the seat would be the proper law.

Re-drafting your arbitration agreements

Whilst the Bharat decision now removes the need to exclude Part I of the Indian Act in your arbitration agreements, it also removes the possibility to obtain interim measures from Indian courts for arbitrations held outside India. It may be possible to remedy this defect, to a degree, by inserting certain clauses in arbitration agreements dealing with interim measures and a tribunal's power to award the same. Advice should be sought on what clauses to include.

The Sulamerica decision, on the other hand, emphasises that every arbitration agreement should now include an express clause providing which law governs the arbitration agreement. This is in addition to any governing law clause of the contract in which the arbitration agreement is contained. Failure to do so may lead to unnecessary litigation in the Courts to determine the question, or worse, leave you with an unenforceable award.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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