India: Arbitration In India: Overview 2008

Last Updated: 22 April 2009
Article by Sumeet Kachwaha

First published in International Bar Association's Arbitration Newsletter, March 2009

The Indian Arbitration & Conciliation Act, 1996 (Act) is faithfully based on the Model Law. The Indian Supreme Court's interpretation of the law however has been somewhat controversial and (some would say), at variance with the Model Law. This past year saw some significant, far reaching and controversial judgments being delivered by the Supreme Court. This note presents a snapshot:

(i) Venture Global Engineering v. Satyam Computer Services

The year started with a bang when on the 10th of January 2008 the Court pronounced the Venture Global Judgment. Before we get into the judgment it may be worthwhile to outline the provisions of the Act relating to enforcement of arbitral awards:

Scheme Of The Act: Broadly stated the Act has two parts. Part I provides for domestic arbitration. Any arbitration taking place in India (whether it is between Indian or foreign parties) would be governed by Part I. Part II only provides for enforcement of certain types of foreign awards i.e. New York Convention awards and Geneva Convention awards. Part I of the Act, vide Section 34 contains provisions for setting aside of domestic awards (based on Article 34 of the Model Law). There is no provision, corresponding to Article 35 of the Model Law, requiring a successful party to apply for enforcement of a domestic award. In other words once objections to an award are dismissed (or there are no objections) the award can be enforced straightaway without the need for any proceedings for enforcement of an award. The position for a foreign award is different in a significant aspect that there is only a provision (Section 48) to enforce the foreign award (on the New York Convention grounds). There is no provision to set aside a foreign award. This is since the New York Convention envisages (vide Article V (e) ) that an award can be challenged or suspended by the competent authority of the country in which it was made or under the laws of which it was made.

Hence, to sum up, the statutory scheme is that there is a provision to challenge a domestic award but there is none to challenge a foreign award - the only provision being to enforce (or refuse to enforce) a foreign award on the New York Convention grounds.

Facts And Issue: In Venture Global, the Supreme Court was concerned with a situation where an award had been rendered in London under the Rules of the LCIA and was sought to be enforced by the successful party (an Indian party) in the District Court of Michigan, USA, as the losing party was situated there. The dispute arose out of a shareholder's agreement. The award held that there was an "event of default" under the shareholder's agreement and as a result of which the successful party could exercise its option to purchase the shares of the appellant at book value. The JV company was situated in India but the successful Indian party (Respondent) took the unusual steps to try to enforce the award in the USA. The appellant contented that as transfer of shares in an Indian company were involved and Indian procedures and compliances would need to be gone through, Indian courts would have jurisdiction and challenged the award in India by way of a civil suit. The issue before the Supreme Court was whether a foreign award can be challenged in India and if so under what provision.

Decision Of The Court: The Supreme Court held that even though there may be no express provision for challenging an arbitration award rendered outside India, the same could be challenged applying the provisions available under the Act for challenging a domestic award (Section 34 of the Act appearing in Part I). Applying a previous decision in the case of Bhatia International v. Bulk Trading, the Court held that Part I of the Act would also apply to Part II arbitrations, unless the parties have expressly or impliedly opted out of the same.

Comment: What irked the court was that the properties were situated in India. Indian compliance and regulatory mechanism would be triggered. Indian interest would be affected. But the award would not be tested here. Instead the award would be enforced indirectly through the threat of contempt of court mechanism of a foreign court. This may be an unusual feature of the case but in the process the court ended up laying down bad law:

First and foremost, Venture Global has taken judicial law making to a new height. It has created a procedure for challenging an award where none exists (by borrowing the law which exists for domestic awards). Secondly the court has ignored the scheme of the Act which (in accord with the New York Convention) envisages that a foreign award can be challenged only in the country where it was rendered or under the laws of which it was rendered. Third, the decision has muddied the waters considerably. Section 34 of the Act (providing for challenge to domestic awards) permits a challenge on merits i.e. patent illegality on a wide interpretation of the public policy ground, (applying a previous 2003 Supreme Court decision in Saw Pipe's case) whereas this is not permissible for a foreign award (applying another 1994 Supreme Court decision in Renusagar's case). Under the new judge made regime of Venture Global, a foreign award can now be challenged on merits under Section 34, even though the New York Convention grounds do not contemplate such challenge. Furthermore, no application for enforcement can proceed till an application for setting aside (perhaps in a different form of the choice of losing party) has worked itself out. The enforcement mechanism for foreign awards has thus been rendered inefficient, clumsy and uncertain. Parties would therefore be well advised to incorporate a clause opting out of Part I of the Indian Arbitration Act, in the case of foreign arbitrations.

(ii) TDM Infrastructure Pvt. Ltd. v. U.E. Development India Pvt. Ltd.

Statutory Scheme: As stated above, the Act has two Parts. Part I applies to any arbitration seated in India irrespective of the identity of the parties (i.e. Indian or foreign). Part I thus provides for a common set of provisions for both domestic and international arbitrations. There are however two specific provisions for international commercial arbitrations. The first is that if there is a break down of the parties stipulated mechanism for constitution of the arbitral tribunal (or no mechanism is stipulated and the parties cannot agree), then in the case of international commercial arbitration, the appointment is to be made by the Chief Justice of the Supreme Court of India or his nominee, whereas in the case of a domestic arbitration the appointment is to be made by the Chief Justice of the High Court or his nominee having jurisdiction in relation to the dispute. The second difference is of substance and that is, in an international commercial arbitration parties are free to designate a governing law other than Indian law. An arbitration between domestic parties on the other hand shall be decided in accordance with the substantive law of India. In view of this difference between the provisions for domestic arbitration and international arbitration, it became necessary for the Act to define "International Commercial Arbitration". This is defined in Section 2 (1) (f) of the Act as follows:

(f) "international commercial arbitration" means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is –

  1. an individual who is a national of, or habitually resident in, any country other than India; or
  2. a body corporate which is incorporated in any country than India; or
  3. a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or
  4. the Government of a foreign country;

Facts And Issue In TDM Case: In TDM case the Supreme Court was called upon to interpret the meaning of "International Commercial Arbitration". The context was that a 100% subsidiary of a Malaysian company brought arbitration against another 100% subsidiary of a Malaysian company. The Petitioner contented that all its shareholders are Malaysians and all directors are Malaysians too. Further all meetings of the Board of Directors took place in Malaysia (except for one meeting, statutorily required to take place at the registered office in India).

Under these circumstances, the Petitioner contented that though both the companies are incorporated in India, the Petitioner is a company whose "central management and control is exercised in a country other than India and therefore the arbitration qualifies as an "international commercial arbitration" within the meaning of Section 2 (1) (f) (iii).

Decision Of The Court: The Supreme Court rejected this contention. It drastically read down Section 2 (1) (f) (iii). It held that the said Section would not apply to a company but would only apply to unincorporated associations or body of individuals. It held that if both companies are incorporated in India then the arbitration between them would necessarily be a domestic arbitration (irrespective of where the central control or management may be). The court rested its decision on the proposition that as a matter of "public policy", Indian companies i.e. companies incorporated in India can only opt for Indian law as the governing law of the contract. If an arbitration between them is held to be an "international commercial arbitration" they would be able to opt for a foreign law, which the Court held would be contrary to Indian public policy.

Comment: The Supreme Court of India has re-read Section 2(1)(f)(iii) and rendered significant portions of it otiose or meaningless. Firstly the court ignored the disjunctive "or" between Section 2 (1) (f) (ii) and Section 2 (1) (f) (iii). If incorporation outside India was to be the sole and conclusive test, there would be no need for the word "or" at the end of Section 2 (1) (f) (ii). The alternative test laid down in 2 (1) (f) (iii) was simply overlooked (because it did not fit in with what the court felt to be the public policy of India). Secondly the court ignored a plain reading of Section 2 (1) (f) (iii) in so far as it expressly applies to a company.

More significantly the court laid down far reaching law stating that once a company is incorporated in India it cannot opt for a foreign law (as a matter of public policy). This ignores the fact that there may be SPVs or 100% subsidiaries of foreign companies set up in India which may legitimately like to resolve their contractual difference through governing law other than Indian. It is not the public policy of India (and there is nothing in Section 28 of the Act to suggest) that a company which is owned, controlled and managed from outside India cannot opt for a foreign law merely because it is incorporated in India. The TDM Judgment not only ignores a plain reading of Section 2 (1) (f) of the Act, it lays down a far reaching proposition that as a matter of law, companies incorporated in India cannot opt for a governing law other than India in contractual matters. Indeed it casts a doubt that such companies can opt for foreign law even in relation to off-shore arbitrations.

(iii) Comed Chemicals Ltd. v. C.N. Ramchand:

Facts And Issue: The issue before the Supreme Court was whether a contract of employment or a contract where there is a master-servant relationship is arbitrable or not. The Respondent, a British national, was the Director (Technical) of the applicant company. The company terminated his services and raised disputes. There existed an arbitration agreement between the parties. At the stage of appointment of an arbitrator, two questions arose before the Court. The first was whether the dispute was one which could be considered to be "commercial" under Indian laws (a requirement of Section 2 (1) (f) of the Act in relation to international commercial arbitration - please see above). The other issue was whether the dispute between parties was arbitrable.

Decision Of The Court: The Supreme Court adapted the wide interpretation of the expression "commercial" in accordance with foot note to Article 1 (1) of the Model Law ("The term 'commercial' should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature ..........."). Accordingly it held that notwithstanding the employer - employee relationship the disputes between the parties would be considered to be commercial.

The next issue was whether the disputes would be arbitrable. The court held that if the contract between the parties was merely a contract of employment or a master-servant contract, the dispute would not be arbitrable but if the contract stipulates performance of functions which could be undertaken by a business man there would be an element of commerce and the dispute would be arbitrable. The court referred to various provisions under the Companies Act to conclude that a director of a company is not a mere employee or a servant of a company. A director is a controller of the affairs of the company. Hence the disputes between the parties would be arbitrable.

Comment: The significance of the case lies in that it holds that an ordinary contract of employment would not be arbitrable - though a dispute of a company with its director would be arbitrable. However the court did not lay down any lucid test as to the circumstances under which disputes between a company and its (non-director) senior executives would be arbitrable. In a given case it may become controversial and a disputed question of fact as to whether such disputes are arbitrable or not. There are no helpful guidelines laid down by the court to resolve this. The end result being that save in the case of directors there is a cloud of doubt as to whether disputes between a company and its employees are arbitrable or not and accordingly it may be better to eschew an arbitration clause in a contract of employment.

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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