India: Good News For Indian International Arbitration (But With A Sting In Its Tail)

Summary

The Indian Supreme Court has recently reversed a judgment it made in 2002, and has held that the power to set aside awards in Section 34 of Part I of the Indian Arbitration Act ("the Act") applies only to arbitrations seated in India.  The Supreme Court confirmed that "on a plain reading, Part I is limited in its application to arbitrations which take place in India".  Part II of the Act deals with the recognition and enforcement for foreign awards under the New York Convention and limits judicial intervention in line with the Convention.

Whilst this is good news for foreign parties, the Supreme Court also held (rather unfortunately) that its decision would only apply to arbitration agreements executed after the date of the judgment (6 September 2012).  The previous difficulties and challenges therefore remain for current arbitrations and future arbitrations arising from contracts made before 6 September this year.

In a similarly unfortunate vein, the Supreme Court also held on a strict construction of the Act, that the Indian courts do not have the power to grant interim relief in support of arbitration proceedings seated outside India, nor is there any inherent jurisdiction to do so outside the Act.  The Indian courts therefore will not in the future make, for example, injunctions freezing assets nor order the arrest of ships, where the principal dispute is subject to a foreign arbitration clause.

Background

Bhatia International -v- Bulk Trading S.A.1 decided by the Supreme Court in 2002, unleashed the excessive interventionist role of the judiciary in international commercial arbitrations, thereby negating the intent and purpose of the Arbitration Act, 1996.

While deciding a Section 9 petition (for interim measures) in an ICC arbitration, a three judge bench of the Supreme Court unanimously held that all provisions of Part I, including Section 9, are applicable to international commercial arbitrations held outside India.  The Court further held that while in the case of "domestic arbitrations", the provisions of Part I compulsorily apply, in "foreign arbitrations" Part I applies unless the parties have expressly or impliedly excluded its provisions.  The Supreme Court then decided in 2003 in ONGC -v- Saw Pipes2 that a foreign award that conflicted with Indian law would be contrary to public policy and unenforceable.

Venture Global Engineering Case -v- Satyam Computer Services Ltd.3 (which relied upon the Bhatia International case) added to the misery of international businesses and expounded the scope of Court's intervention in enforcement of foreign arbitral awards.  The Court effectively made explicit what was otherwise implicit by holding in relation to an LCIA award rendered in London that even though there was no provision in Part II of the Act providing for challenge to a foreign award, it could not be construed that the Legislature did not intend to provide the same since there was no need for the Legislature to repeat what was already included in the general provisions of Part I unless and until it wanted to include a contrary procedure.

By giving such an interpretation the Court effectively made the Act extraterritorial in its operation.  Part I was made applicable to international commercial arbitration held outside India unless expressly or impliedly excluded by the parties.

Fortunately (from the point of view of foreign companies who might have claims in arbitration against Indian companies) during the course of the last year or so prior to Bharat several judgments in Calcutta and the Supreme Court put in doubt the earlier judgments and eventually a five judge Constitutional Bench reconsidered Bhatia and Venture Global in the Bharat case, which was consolidated with other appeals raising similar issues and heard together with "amicus" briefs on behalf of international arbitral institutions with an interest in the outcome.  The course of the hearing was monitored globally by interested arbitration practitioners and companies involved in arbitration with Indian parties.

Judgment

In the judgment delivered on 6 September the principles laid down in Bhatia and Venture Global was over-ruled and the Court held:

  • Part I of the Act has no applicability to International Commercial Arbitration held outside India;
  • Part I of the Act shall apply to all arbitrations which take place within India;
  • There can be no overlapping or intermingling of the provisions contained in Part I with the provisions contained in Part II of the Act;
  • In a foreign seated international commercial arbitration, no application for interim relief is maintainable under Section 9 or any other provision, as applicability of Part I is restricted to all arbitrations which take place in India;
  • No suit for interim injunction is maintainable in India, when the seat of arbitration is outside India;
  • As Part I has no applicability to international commercial arbitration held outside India, arbitral awards in foreign seated arbitrations will be subject to the jurisdiction of Indian courts when they are sought to be enforced in accordance with Part II of the Act.

Comment

Although the judgment may have restored some faith in the international community in relation to arbitrating disputes with Indian parties, the Supreme Court does seem to have thrown the baby out with the bath water by making the judgment apply only to arbitration agreements entered into after 6 September 2012 and by ousting the jurisdiction of the Indian Courts to grant interim relief in support of any foreign arbitration whatsoever.

As a result, it seems that for quite some years practitioners and parties will have to bear in mind that there are two possible regimes which will apply (pre and post 6 September 2012 arbitration agreements).

As this is a judgment of the highest court in India, it is likely only to be possible to remedy the unfortunate aspects by legislation to make the operation of the Act more effective in the context of international arbitration.  Even if there is a political will to do this, it will likely not be a speedy process.

Footnotes

1 (2002) 4 SCC 105

2 (2003) 5 SCC 705

3 (2008) 4 SCC 190

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