India: Year In Review: Key Decisions And Developments In Indian Arbitration Law In 2014

Last Updated: 21 January 2015
Article by Economic Laws Practice

Introduction

The judicial developments in arbitration in India in 2014 have been both encouraging and curious at the same time. We briefly review some of the key decisions rendered by Indian courts this year and their impact on the arbitration jurisprudence.

Challenging foreign awards in pre-Balco arbitration agreements under Section 34 becomes increasingly difficult

Having overruled Bhatia International1prospectively, BALCO2created much curiosity in respect of the treatment that challenges to foreign awards from pre-BALCO arbitration agreements under Section 34 of the Indian Arbitration and Conciliation Act, 1996 ("1996 Act") would receive in Indian Courts. A rather encouraging decision this year (in the post-BALCO era) dealing with a pre-BALCO arbitration agreement is Reliance Industries Limited v. Union of India.3

The Apex Court followed Videocon4(a pre-BALCO decision) and held that choice of foreign seat coupled with a choice of foreign law governing the arbitration agreement indicates an intention by the parties to exclude the application of Part I of the 1996 Act, even if the contract was governed by Indian law.

The Court however went a step further and made the following noteworthy observations - "it is too late in the day to contend that the seat of arbitration is not analogous to an exclusive jurisdiction clause...."

Incidentally, another decision of the Supreme Court this year on a separate issue also confirmed this position. In Enercon,5 while granting an anti-suit injunction against proceedings brought in England, the Supreme Court held that, once the seat of arbitration was established, (which in this case was India) it was clear under Indian law, that the courts of the seat of arbitration would have exclusive jurisdiction to exercise supervisory powers over the arbitration.

Arbitral Tribunals can now determine issues concerning fraud

A decision that has long been controversial in India under the 1996 Act is that of Radhakrishnan,6which held that serious allegations of fraud can only be inquired into by a court and not an arbitrator. This decision had resulted in significant speculation as to the arbitrability of issues of fraud under Indian law.

Two decisions of the Supreme Court in 2014 have significantly weakened the impact of Radhakrishnan. First, the decision in World Sports7distinguished between domestic and foreign arbitrations, to hold that Radhakrishnan does not apply while determining an application under Section 45 of the 1996 Act, i.e. courts must refer parties to arbitration where the seat of arbitration is outside India, even if allegations of fraud are in issue. Second, the decision in Swiss Timing,8while dealing with a domestic arbitration, held that Radhakrishnan is per incurium.

In World Sport, the Court observed that, while considering an application under Section 45, "a court must refer disputes to arbitration unless the arbitration agreement is null and void, inoperative or incapable of being performed". The Court elaborated on the expressions "null and void", "inoperative" and "incapable of being performed". With reference to the expression "null and void", the Court recognized that the arbitration agreement must be treated as a "distinct agreement" and can be void or voidable only on grounds which relate directly to the arbitration agreement. It was held that allegations of fraud and false misrepresentations might make the contract voidable, but that by itself did not affect the arbitration agreement which is independent and severable from the contract. With reference to the expression 'inoperative', the Court held that it 'covers those cases where the arbitration agreement has ceased to have effect, such as revocation by the parties'; and that the expression 'incapable of being performed' applies 'to those cases where the arbitration cannot be effectively set into motion', for example where the arbitration clause is too vaguely worded. The Court observed that, 'where allegations of fraud have to be inquired into' does not fall within either of the aforesaid expressions of Section 45 and is not therefore a bar on the Court to refer disputes to arbitration.

While World Sport was a welcome breather in this controversy, the Apex Court drew a somewhat artificial distinction on this point between arbitrations seated in India and outside India – restricting the application of its ratio to foreign seated arbitrations. However, Swiss Timing came to the rescue a few months later when the Supreme Court categorically held that the decision in Radhakrishnan was per incurium on the grounds that it did not follow or distinguish the decision in Hindustan Petroleum Corpn. Ltd.;9 that it did not even consider the decision in P. Anand Gajapathi Raju & Ors;10and that it did not consider the provision contained in Section 16 of the 1996 Act. The Court has held that allegations that a contract is vitiated by fraud do not shut out arbitration.

The Supreme Court's decision in Swiss Timing has been questioned, since it is a single-judge decision departing from a two-judge bench decision. This problem magnifies from the perspective of lower courts as to which Supreme Court decision ought to be followed. When there are two divergent views expressed by the Supreme Court, then precedent suggests that lower courts should follow the larger bench decision (in this case, Radhkrishnan).11 The situation in Swiss Timing is tricky because it is not just a divergent view of the Supreme Court but it considers Radhakrishnan and declares it per incurium.

The treatment received by Swiss Timing in the Bombay High Court is revealing. The Bombay High Court rejected the argument that Swiss Timing ought not be followed being a single-judge decision whereas Radhakrishnan was decided by a two-judge bench.12 The Bombay High Court finally followed Swiss Timing to refer the disputes to arbitration. It may however, be too soon to conclude that Radhakrishnan is passé. The question whether lower courts will follow Swiss Timing or Radhkrishnan will continue to loom in the days to come until a larger bench considers the validity of Radhakrishnan.

Arbitral Tribunals have power to award Interest on Pre-Award Interest

Until recently, the decision of the Supreme Court in S.L. Arora13 held the field on the arbitrator's powers to award post-award interest on the sum awarded as interest for the pre-award period. This decision has been subject to some criticism given that, while such interest could be claimed if the dispute was brought to court, it could not if it was before an arbitration tribunal.

In 2013, S.L Arora was referred to a three-judge bench in Hyder Consulting14, for being per incurium certain previous Supreme Court decisions of equivalent benches.

The majority in Hyder Consulting has now held that an arbitrator indeed has the power under Section 31(7) of the 1996 Act to award post-award interest on both the principal sum and interest until the date of award, as such interest is to be considered as subsumed in the principal sum.

Scope of Public Policy expanded

The effect of the much celebrated case of Shri Lal Mahal15 which reinstated the Renusagar16position with respect to enforcement of foreign awards has been diluted with two decisions of the Supreme Court this year.

The decision in Associate Builders17 and Western Geco,18have once again unsettled the position with respect to the meaning and scope of the term 'public policy' under Section 34 of the 1996 Act affecting both domestic and foreign awards.

In Western Geco the Apex Court held that three 'distinct and fundamental juristic principles' form a part and parcel of "fundamental policy of Indian law": first, the court or adjudicating authority must adopt a 'judicial approach' when determining the rights of a citizen. This implies that it cannot act in an 'arbitrary, capricious or whimsical manner'; second, the court or quasi-judicial authority must determine rights and obligations of parties in accordance with principles of natural justice which encompasses that the authority deciding the matter must apply its mind to the attendant facts; and third, a decision which is perverse or so irrational that a reasonable person could not have reached such a conclusion may not be sustained in a court of law. Associate Builders has confirmed this position.

Consequently, parties will undoubtedly have a wider scope for challenging domestic awards. In particular, the Court's ability to interfere with awards on merits has been significantly broadened. In addition, since the Renusagar test includes inter alia the parameter of 'fundamental policy of India', these decisions we fear, will most likely give an impetus to recalcitrant parties to also delay enforcement of foreign awards.

Footnotes

1 Bhatia International vs Bulk Trading S. A. & Anr (2002) 4 SCC 105.

2 Bharat Aluminium Co v. Kaiser Aluminium Technical Services (2012) 9 SCC 649.

3 Reliance Industries Limited and Anr. v. Union of India (UOI) (2014) 7 SCC 603.

4 Videocon Industries Ltd v. Union Of India (2011) 6 SCC 161

5 Enercon (India) Ltd. & Ors v. Enercon GMBH & Anr (2014) 5 SCC 1.

6 N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC 72.

7 World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd (2014) 11 SCC 639.

8 Swiss Timing v. Organizing Committee, Commonwealth Games (2014) 6 SCC 677.

9 Hindustan Petroleum Corpn. Ltd vs M/S. Pinkcity Midway Petroleums (2003) 6 SCC 503.

10 P. Anand Gajapathi Raju & Ors v. PVG Raju (2000) 4 SCC 539.

11 State of UP v. Ram Chandra Trivedi (1976) 4 SCC 52

12 Avitel Post Studioz Limited v HSBC PI Holdings (Mauritius) Limited (2014) SCC Online Bom 929.

13 State of Haryana v. S L Arora and Co. (2010) 3 SCC 690.

14 Hyder Consulting (UK) Ltd. v. Governor, State of Orissa(2014) SCC OnLine SC 940.

15 Shri Lal mahal Ltd. v. Progetto Grano Spa (2014) 2 SCC 433.

16 Renusagar Power Co. Ltd. v. General Electric Co. (1994) Supp. (1) SCC 644.

17 Associate Builders v. Delhi Development Authority (2014) SCC OnLine SC 937

18 Oil and Natural Gas Corporation Ltd. v. Western Geco International Ltd (2014) 9 SCC 263

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