This column first appeared in The Deal on July 24, 2012. It is reprinted here with permission.
A number of factors have driven businesses across the world to adopt arbitration as the exclusive means to resolve international commercial contractual disputes. Some of the reasons behind this trend include businesses’ fear of foreign courts and laws, a desire for predictability of proceedings, expediency, lower costs and confidence in the enforceability of an impartial decision. Part and parcel with speed, lower cost and fairness is the ability to enforce a foreign award in the forum where assets or funds that can satisfy the award are located.
Consequently, a common standard of enforcement of foreign awards is central to an effective international arbitral system. The United Nations Commission on International Trade Laws (UNCITRAL) Model Law on International Commercial Arbitration and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) provide the basis upon which contracting states can adopt national laws to implement an arbitration system that transcends national borders. India has adopted the UNCITRAL Model Law in large measure through the Indian Arbitration and Conciliation Act, 1996 (the Act) and is a signatory to the New York Convention.1
This article argues that unless Indian courts stop interfering in the enforcement of foreign arbitral awards, businesses will lack confidence in their ability to enforce foreign arbitral awards in India, and thus may be deterred from doing business in India or with Indian parties. We begin by briefly exploring the relevant statutory provisions that govern domestic and commercial arbitrations in India and then move on to analyze some of the key decisions of the Indian Supreme Court.
The Indian Arbitration and Conciliation Act of 1996
The Indian Arbitration Act consists of four parts—this article will focus on Part I and Part II Part I of the Act governs domestic cases in which the place of arbitration is India. Part II of the Indian Arbitration Act, governing the recognition and enforcement of foreign arbitral awards, mandates that in order to qualify as a foreign award, not only must the award be that of a contracting state, but it also must be from a state that has been notified as a Convention Country in the Indian Official Gazette.2 As a result, if the arbitral award is issued by a non-notified country, the party seeking enforcement must file a civil suit in India, which often devolves into a de novo trial on the merits.3
Additionally, Section(s) 8 and 45 of the Act govern the judicial review of foreign and domestic awards, respectively, whereas Section 34 dictates when a court may set aside a domestic award. Section 48 of the Act provides the basis for a refusal to enforce a foreign arbitral award on grounds of "public policy."
Discussion of Indian Supreme Court Decisions Interpreting the Act
In SAW Pipes,4 the Indian Supreme Court overturned a domestic arbitration award. The court did so by expanding the scope of the term public policy from "more than a violation of law of India"5 to "an error of law." As a result, the enforcement of foreign as well as domestic awards can be refused on grounds of public policy where they would be contrary to (i) the fundamental policy of Indian law, (ii) the interest of India, (iii) justice or morality, or (iv) if the award is patently illegal. This has had the effect of making most arbitration awards susceptible to challenge.
In Shin-Etsu Chemicals Co. v. Aksh Optifibre Ltd.,6 the Indian Supreme Court, in a 2-1 decision, held that following a prima facie showing of validity and existence of the arbitration agreement, it was for the arbitral tribunal and not the court to decide the case on its merits. While hailed as a more progressive, less interventionist, pro-arbitration stance, the court in Shin-Etsu nevertheless acknowledged the right to challenge the decision of the arbitral tribunal to retain jurisdiction post-award.
However, just three months after Shin-Etsu, in a 6-1 decision, the court held that the chief justice is entitled to decide the preliminary issues, such as existence of a valid arbitration agreement, rejecting the argument that the chief justice’s role was merely limited to a prima facie review of the facts to appoint the arbitrator.7
See-sawing back to a pro-arbitration stance just over a year later, in Agri Gold the Indian Supreme Court held that where an arbitration agreement exists, an Indian court is obligated under Section 8 of the Indian Arbitration Act to refer the parties to arbitration.8
Subsequently, in Bhatia International,9 a three-judge bench of the Supreme Court ruled that contrary to the express provisions of the legislation, the provisions of Part I of the 1996 Act would apply in the case of international commercial arbitrations held outside India unless the parties expressly or impliedly excluded all or any of its provisions in their arbitration agreement, despite the fact that Part I expressly states that "[t]his Part [I] shall apply where the place of the arbitration is in India."10 The judgment has been criticized as it increased judicial interference from the Indian courts in arbitrations held outside India.11
Conclusion: The Future of Arbitration in India
India cannot continue its quest for global credibility and be an attractive destination for foreign direct investment with its reputation as an unreliable venue for the enforcement of foreign arbitration awards. Experience and need will hopefully drive the Indian parliament to pass a law that implements the global standards for enforcement of arbitral awards, wherever they may be rendered and, more importantly, requires its courts to respect it.
1 Act No. 26 of 1996 (16 August 1996).
2 This was also a requirement in The Foreign Awards (Recognition and Enforcement) Act, 1961.
3 Consultation Paper titled "Proposed Amendments to the Arbitration and Conciliation Act, 1996" published by the Ministry of Law and Justice, Government of India. See http://lawmin.nic.in/la/consultationpaper.pdf.
4 Oil & Natural Gas Corp. Ltd. v. SAW Pipes Ltd., (2003) 5 SCC 705.
5 Renusagar Power Co. Ltd. v General Electric Company, (1984) 4 SCC 679. Here, the court considered the interpretation of Section 3 of the Foreign Awards Act, 1961, which was a precedent to the current law, the Arbitration and Conciliation Act, 1996. Thus, Saw Pipes is distinguishable on the basis that it considered a similar, although not identical, provision under the new law.
6 Shin-Etsu Chemicals Co. v. Aksh Optifibre Ltd., (2005) 7 SCC 234.
7 SBP & Co. v Patel Engineering, (2005) 8 SCC 618.
8 Agri Gold Exims Ltd. v. Sri Kakshmi Knits & Wovens & Ors., (2007) 3 SCC 686. However, this case did not involve the validity of the arbitration agreement and thus the court did not address that issue.
9 Bhatia International v. Bulk Trading, (2002)4 SCC 105. Also see Venture Global Engineering v. Satyam Computers, (2008) 4 SCC 190
10 The Indian Supreme Court noted that while attractive, the argument would leave a lacuna in the Act as neither Part I nor Part II would apply to arbitrations held in a country that is not a signatory to the New York Convention or the Geneva Convention, and so no law would govern such arbitrations, and a party would be remediless as there would be no basis for interim relief in India even though the properties and assets are in India.
11 However, the same issue is up for consideration before a five judge bench of the Supreme Court. Arguments commenced on January 10, 2012
James D. Rosener
Pepper Hamilton LLP is not admitted to practice law in India. You should contact your Indian law advisor to address any specific Indian law questions you may have. The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.