UK: The Modernisation Of International Arbitration In India

Last Updated: 16 July 1997
(First published in In House Lawyer, April 1997)

Stewart R Shackleton of Norton Rose looks at the modernisation of international arbitration in India.

It has been predicted that by the end of the first quarter of the next century, four out of five of the world's largest economies will be in Asia. One of them will be India. Already, important changes have occurred. Since 1991 India has undertaken significant economic reforms aimed at liberalising its economy. Industrial licensing has been eliminated in most sectors of the economy. Majority foreign owned investment is now permitted in most industries. With an increasing number of bureaucratic obstacles removed, a potentially enormous English speaking domestic market, the proposed reduction of tax rates to 30 per cent, and the government's recent decision to make infrastructure development a top priority, India is quickly becoming popular with foreign investors.

More business activity inevitably leads to more commercial disputes. To increase levels of foreign investment it is essential to have in place adequate legal machinery to resolve such disputes. Indian courts will be unable to cope efficiently with an increase in international litigation. They are notoriously slow and presently suffer an oppressive backlog of cases. As part of the reforms making the Indian economy more attractive to the international business community, India very recently modernised its arbitration laws. Last August, the Indian Arbitration and Conciliation Act 1996, came into force. As with the new arbitration law in England, the purpose of this Act is to provide commercial parties with a means of settling their disputes quickly and efficiently by simply avoiding local courts as much as possible.

In the Statement of Objects of Reasons for the new Act, the Indian legislator has expressly recognised that economic reforms in India risk failure if laws regulating the resolution of commercial disputes are not in tune with the objectives of those reforms.

Arbitration in India has been viewed abroad with distrust. Arbitration and the enforcement of arbitral awards in India had been problematic and uncertain. Indian courts have been highly interventionist. This willingness to intervene encouraged parties wishing to delay an arbitral award constantly to bring matters before the courts during the arbitral proceedings themselves. In addition, once an arbitral award was rendered, Indian arbitration law offered little guarantee of any finality to the dispute because of the numerous avenues of appeal open to parties dissatisfied with the award.

India has been a signatory of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards since 1958. However, recent controversial decisions by the Supreme Court of India provided interpretations of the Convention that were at variance with internationally accepted views on its application and India's obligations under the treaty. The Supreme Court refused to apply rules on enforcement of foreign awards where the contracts underlying the disputes were governed by Indian law. The decisions attracted widespread criticism abroad, gave rise to accusations of legal nationalism and called into question the enforceability of arbitral awards in India.

In order to restore confidence at home and abroad, India's laws on arbitration have been profoundly modified and brought into line with international standards and practices. Like the new English law on arbitration, the Indian Arbitration and Conciliation Act 1996 is modelled on the Model Arbitration Law developed by the United Nations (UNCITRAL). However, Indian legislators have followed the Model Law far more closely than the new English Arbitration Act. The few departures from the Model Law contained in the new Indian Act are actually designed to reinforce the Model Law's principles of party autonomy and minimal court supervision. Unlike the English Act, the Indian law contains no provision for appeals to the courts on preliminary questions of law or appeals against awards on questions of law.

The new Act repeals and replaces the law previously governing arbitration in India, the 1940 Arbitration Act brought into force by British colonial authorities, the 1937 Arbitration (Protocol and Convention) Act and the Foreign Awards (Recognition and Enforcement Act) 1961.

Scope of application

Unlike the Model Law, the Indian Act 1996 is not limited in scope only to international arbitrations. It applies to both international and domestic arbitrations. However, the new law does provide special rules for international arbitrations thereby underscoring the importance the Indian legislator intends to accord to them. The preamble of the new Act expressly recognises the specificity of international arbitration. If an arbitration in India is international, the Act allows the parties to choose a foreign governing law (article 28(1)(b)). Under the new Act, parties may now also confer upon the arbitrators the powers of amiables compositeurs or ask them to decide ex aequo et bono (article 28(2)). In the case of difficulties in the appointment of a sole or third arbitrator in an international commercial arbitration, rather than seek assistance from the courts as in England, foreign parties arbitrating in India will be able to turn to the Chief Justice of India, or person or institution designated by him, who will make the default appointment (article 11(8)). In domestic arbitration, the Chief Justice of the High Court is empowered to make default appointments. In both cases, this should result in the speedy appointment of an arbitral tribunal.

International arbitration is defined broadly at article 2(1)(f) as proceedings which involve at least one foreign party. This is a departure from the Model Law which places emphasis on the place of business of the parties or performance. Thus in India, an arbitration will be 'international' even when both parties are present in India and India is the place of performance if one of the parties is foreign.

Unlike the Model Law, the Indian law offers a definition of arbitration. It includes 'any arbitration whether or not administered by a permanent arbitral institution' (article 2(1)(a))

Arbitral procedure

As with the new English arbitration law, by adopting the provisions of the Model Law, India has reinforced the freedom of parties to choose their own procedures, accorded to the arbitrators increased powers and reduced the supervision and intervention by the courts - one of the stated objectives of the new law. Court interference during the course of an arbitration has now been almost eliminated. The Indian Act has added features to the Model Law in order to strengthen and safeguard the arbitral procedure. The new Act adopts the Model Law governing principles of equal treatment and the right of each party to be heard.

The new procedures are flexible. Failing agreement by the parties, the arbitral tribunal will have full authority to conduct proceedings in the manner it considers appropriate. The new Act specifically states that the arbitral tribunal is not bound by the 1908 Indian Code of Civil Procedure or the 1872 Indian Evidence Act. The courts will be available to the parties for assistance in obtaining evidence by ordering the production of documents or compelling attendance of witnesses.

Like the new English arbitration Act, the Indian law opts for the principle of a sole arbitrator in the event that the parties have not fixed the number of arbitrators. This is a break with the Model Law which prescribes three arbitrators in such circumstances. Unlike the new English Act, Indian law will not permit the parties to appoint an even number of arbitrators. In making any default appointments, the Chief Justices are to follow the Model Law criteria and have regard to the qualifications required of the arbitrator, any agreement by the parties and any other considerations likely to secure the appointment of an independent and impartial arbitrator.

The arbitral tribunal is empowered to rule on challenges to arbitrators and on its own jurisdiction. The autonomy of the arbitration clause is recognised. These measures ensure that the arbitral proceedings will not be held up by such challenges before the courts and the agreement of the parties to arbitrate their differences will be protected even if the underlying agreement is null and void.

With a view to improving enforcement, the new Indian law has added precautionary provisions regarding the procedure for the replacement of arbitrators. Any hearings held prior to the appointment of a replacement of an arbitrator may be repeated at the discretion of the tribunal (article 15(3)). Unless otherwise agreed by the parties, an order or ruling by the tribunal prior to the replacement of an arbitrator shall not be invalid solely because of the change in composition of the tribunal (article 15(4)).

An arbitral tribunal in India now has the power to make orders for interim and conservatory measures. An arbitral award will contain reasons for the decisions unless the parties decide otherwise.

Although currently a matter of some controversy, as a general rule, India permits foreign lawyers to represent parties in international arbitrations conducted in India. This allows commercial parties to use their own lawyers who may already be familiar with the dispute. Likewise a person of any nationality may be named arbitrator (article 11(1))

Enforcement of arbitral awards

The changes that will be of greatest interest to foreign investors will be those which are designed to assist the enforcement of foreign arbitral awards in India. Enforcement is supposed to be one of the principle advantages of international arbitration over litigation. This is because there are relatively few treaties between States for the mutual recognition and enforcement of judgements rendered by their respective national courts. However, over one hundred States including India and almost all major trading nations are members of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. India is also a member of the 1923 Geneva Protocol on Arbitration Clauses and the 1927 Geneva Conventions on the Execution of Foreign Arbitral Awards.

Under the New York Convention, courts in member states are not permitted to review the merits of a foreign arbitral award. In addition, the grounds on which a court might refuse enforcement are very limited. In order to resist enforcement, a party dissatisfied with an arbitral award rendered abroad would have to establish that:

- the arbitration agreement was not valid either because the parties were under some incapacity or by virtue of the substantive governing law or the law of the place where the award was made;
- the party was denied a fair hearing because it did not receive proper notice of the appointment of the tribunal or of proceedings or was otherwise unable to present its case;
- the award deals with disputes that fall outside the scope of the parties' arbitration agreement;
- there were procedural irregularities because the appointment of the arbitral tribunal or the arbitral procedure followed was not in accordance with the parties' arbitration agreement or the law of the place where the award was made;
- the award has not yet become binding or has been set aside by the courts of the place where the award was made;
- the subject matter of the dispute is not capable of arbitration in the country of enforcement; or
- enforcement of the award is contrary to the public policy of the country where enforcement is sought.

An award is normally considered 'foreign' under the New York Convention if it was rendered in a member state other than the State of enforcement or if it is not considered to be a domestic award in that State.

The Indian Foreign Awards Act 1961 enacted following India's ratification of the New York Convention, contained the Convention in an appended schedule. However, it also contained a provision, section 9(b), which stipulated that the rules for the enforcement of foreign awards in India would not apply to any arbitral award resulting from an arbitration agreement governed by Indian law. This concerned a potentially large number of contracts since, as a matter of policy, commercial contracts entered into by local or national governments in India with foreign parties are governed by Indian law.

In a now infamous decision rendered in 1992, the Indian Supreme Court decided that Indian Courts were competent in respect of all matters arising out of an arbitration agreement governed by Indian law even if the arbitral award is rendered in another country and pursuant to the rules of an international arbitration institution. The Supreme Court's decision resulted from an application to set aside an ICC interim award in a dispute between the Indian National Thermal Power Corporation and an American company, Singer Co. The award had been rendered in London.

In another earlier and equally well known case, the Indian Supreme Court had already purported to restrain an American party, Western Co of North America, before the courts of the United States, of an Award it obtained in London against the Indian government owned Oil and Natural Gas Commission.

These controversial decisions defeated the purpose of the New York Convention in India. Criticism was voiced both in India and abroad. Commentators pointed to the unfairness. Indian parties to international contracts could enforce awards in other countries under the Convention. Foreign parties, however, seeking the enforcement of a foreign award against Indian parties in India were exposed to all of the challenges that could be brought against any domestic Indian arbitral award.

The new Act puts a definite end to such practices, although the judiciary had already made some progress. In 1994, the Indian Supreme Court heard a challenge to an award against an Indian party on the grounds of public policy. The award was made in New York. The Supreme Court decided that a foreign arbitral award could be contrary to Indian public policy only if it was contrary to fundamental policy of India, the interests of India, or justice and morality. It thus restricted the scope of challenges on the grounds of public policy. It held, in particular, that an award of interest and punitive interest was not contrary to Indian public policy. A simple contravention of Indian law would not amount to a violation of Indian public policy. In the course of rendering its decision, the Supreme court also affirmed it could not review the merits of a foreign arbitral award and that the only grounds for the challenge of such an award were those set out in the New York Convention (Renusagar Power Co. v General Electric Co. AIR 1994 SC 860).

The new Indian arbitration law marks a break with the past. Part I of the Act only applies 'where the place of arbitration is India'(article 2(2)). The review powers of Indian courts are greatly reduced even with respect to arbitral awards rendered in India, since the grounds for the challenge of domestic awards are limited to those set out in the Model Law. These grounds are restricted to the propriety of the appointment of the arbitral tribunal, the protection of the parties' rights to be heard and public policy. Awards contrary to public policy in India are defined in the Act as those involving fraud or corruption. Any challenge to an award must be brought within three months. Awards are now defined in the Act as final and binding and are enforceable without necessarily being made into orders of the court.

Part II of the Act concerns the enforcement of foreign awards. Again, the Indian legislation has strictly adhered to the Model Law and the New York Convention with respect to challenges of foreign awards. The Model Law provisions which reflect the principles of the New York Convention are reproduced at article 48 of the Indian Act. In addition, the New York Convention, the Geneva Protocol and the Geneva Convention are joined as schedules to the new Act.

In terms of the number and the nature of changes, not to mention the time that has elapsed since the enactment of the arbitration statutes the new Act replaces, India's adoption of the new Model Law represents a far more radical and revolutionary development than similar reforms that have occurred in England. India has succeeded in removing the undesirable features of its arbitration law. However, it remains to be seen whether changes to the spirit and letter of the new arbitration law will be followed in practice by the Indian judiciary and the Indian legal profession.

Beyond reassuring foreign investors that their arbitral awards will be enforceable in India, the new Indian Act, provided it is applied in accordance with the express intent of the legislators, puts India in a strong position to compete favourably as a venue for arbitration in Asia. India is often compared to its neighbours in the region, especially China. It enjoys a number of comparative advantages which include well established legal and business institutions. The new law allows India to take full advantage of its geographical and cultural proximity to both Asia and Europe, its common law heritage, its rich legal pluralism, its large pools of highly educated and skilled anglophone professionals and the relatively lower costs associated with the conduct of arbitral proceedings in India, eventually to become a very convenient venue for international arbitration in Asia.

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

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