Canada: Indian Courts Change Approach Towards International Arbitration

When drafting arbitration provisions in international agreements, it is important to be aware of legal developments in both the jurisdiction selected as the arbitral seat, and any jurisdiction where an award may be enforced. Parties to international arbitration agreements often assume that signatories to the New York Convention and those countries adopting the UNCITRAL Model Law will respect the principles set out therein; however, some countries have applied those principles in ways that can be surprising for the unsuspecting.

Until recently, contrary to the interpretation given in many UNCITRAL Model Law signatory countries, Indian courts asserted jurisdiction over arbitration proceedings seated outside of India, provided Indian law was the substantive law of the contract. As there are many trade and investment opportunities for Canadian businesses in the Indian market, it is important to understand how Indian courts approach foreign arbitration proceedings.

Changes in Bharat Aluminium Co.

On September 6, 2012, in the case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc., a five-member constitutional bench of the Supreme Court of India (Supreme Court) overruled an earlier decision of the court in Bhatia International v. Bulk Trading S.A. & Anr.

Applying the rationale in Bhatia International, Indian arbitral jurisprudence had developed so as to grant Indian courts supervision over foreign arbitration proceedings where parties chose Indian law to govern their agreements. For example, there was precedent giving Indian courts the power to appoint arbitrators to conduct arbitration proceedings seated in foreign jurisdictions.

Bharat Aluminium Co. rejected this approach and applied the territoriality principle endorsed under the UNCITRAL Model Law, which provides that the law relating to the conduct of arbitration proceedings should be governed by the law of the forum. Using this principle, the Supreme Court found that English law would govern the arbitration procedure for the London seated arbitration in question, but the substantive laws of India would be used to construe the agreement that had been formed between the parties. In effect, the decision restricts interference from the Indian judiciary when proceedings applying the substantive laws of India are conducted outside of India.

Part 1 of India's Arbitration and Conciliation Act, 1996

Part 1 of the Arbitration and Conciliation Act, 1996 (the Act) regulates the commencement and conduct of arbitration proceedings as well as the challenge, recognition and enforcement of awards. Section 2(2) of the Act states that Part 1 applies when the "place of arbitration is in India."

In the earlier case of Bhatia International, the Supreme Court decided that because the Act did not specify whether Part 1 applied only to proceedings in India, the application of Part 1 could extend to arbitrations heard outside of India. The application of Part 1 was held to be compulsory for arbitrations heard in India, but also possible for those proceedings heard in other countries, unless the parties had expressly or implicitly rejected this reading. As a result, Indian courts began to take an interventionist approach to arbitration proceedings pursuant to Part 1, with the intention of making proceedings in foreign jurisdictions subject to the law governing proceedings in India.

The Supreme Court in Bharat Aluminium Co. refused to interpret Part 1 in accordance with the principles set out in Bhatia International. The court found that the scheme of the Act signalled Parliament's intention to conform to the territorial principles of the UNCITRAL Model Law and the standards set out in the New York Convention. According to Bharat Aluminium Co., the "place of arbitration" referenced in Part 1 means the place of the arbitral seat. In other words, Part 1 applies only when the seat of arbitration is in India.

Prospective Application

It is important to note that the law as set out in Bharat Aluminium Co. only applies to arbitration agreements executed on or after September 7, 2012; therefore, Indian courts will still have the ability to interfere in arbitrations seated outside India for agreements made before September 7, 2012. Accordingly, the impact of the decision in Bhatia International may still be a consideration for a dispute that arises under older contracts.

Conclusion

The decision in Bharat Aluminium Co. is a welcome change that brings Indian arbitration law in line with the UNCITRAL Model Law as well as jurisprudence in other major commercial centres.

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