Transforming Commercial Dispute Resolution in India

THE ROADBLOCKS TO INDIA RELATED INTERNATIONAL

ARBITRATION (WITH A SPECIFIC REFERENCE TO THE PROPOSED REFORMS)

BY

ANIRUDH KRISHNAN

PARTNER, AK LAW CHAMBERS,

CHIEF - EDITOR, JUSTICE R.S. BACHAWAT’S LAW OF ARBITRATION AND CONCILIATIONCONSULTANT, 246TH AND 253RD REPORTS

OF THE LAW COMMISSION OF INDIA

THE ROADBLOCKS TO INDIA RELATED INTERNATIONAL

ARBITRATION

I. Judicial interventions in foreign seated arbitrations

II. Anti-arbitration injunctions and the Section 45 test

III. Enforcement of foreign awards

IV. Incentives to frivolous litigation

JUDICIAL INTERVENTION IN FOREIGN SEATED ARBITRATIONS

▪Application of Sections 9 and 34 to foreign seated arbitrations

•Sections 9 and 34 are in Part I of the Act.

•Section 2(2) of the Act-"This Part shall apply where the

place of arbitration is in India“

•Contrast with Article 1(2) of the UNCITRAL Model Law-“The

provisions of this Law, except articles 8, 9, 35 and 36,

apply only if the place of arbitration is in the territory of

this State.”

▪ Supreme Court in Bhatia (Bhatia International v. Bulk Trading

S.A. (2002) 4 SCC 105 ) on Section 2(2):

• Part 1 mandatorily applies if the arbitration is held in India.

• Part 1 applies if the arbitration is held abroad unless it is

expressly or impliedly excluded.

• Merely specifying the seat of arbitration to be foreign does

not amount to implied exclusion.

• Entire jurisprudence has since developed on how to

construe an implied exclusion.



Foreign seat alone = no implied exclusion

(Bhatia International v. Bulk Trading S.A. and Anr., (2002) 4 SCC 105)

Foreign law governing contract, nothing else specified= no implied exclusion

(Venture Global Engineering v. Satyam Computer Services Ltd. and Anr., (2008) 4 SCC 190)

Foreign seat+ foreign law governing the contract= implied exclusion can be presumed

(Dozco India P. Ltd. v. Doosan Infracore Co. Ltd., (2011) 6 SCC 179)


Foreign law governing the arbitration+ Indian law governing contract= express exclusion.

(Videocon Industries Limited v. Union of India (UOI) and Anr., (2011) 6 SCC 161)

Simple point- implied exclusion not based on conflict of laws principles.

▪ Bhatia overruled by the Supreme Court in Bharat Aluminium

Company and Ors. v. Kaiser Aluminium Technical Service,

Inc. and Ors. (2012) 9 SCC 552 (“BALCO”)

• Only if the seat is determined to be India, would Part I be

applicable;

• If seat is outside India, even express inclusion of Part I

cannot confer jurisdiction on an Indian Court.

• The decision in BALCO would have prospective effect and

apply only to arbitration agreements executed after the

date of judgement.

JUDICIAL INTERVENTION IN FOREIGN SEATED ARBITRATION

▪ Consequence of BALCO

• If the seat of the arbitration is located abroad, a party

cannot resort to Sections 9, 27 of the Act;

• Courts to continue to apply Bhatia even though it is

recognized to be bad law.

JUDICIAL INTERVENTION IN FOREIGN SEATED ARBITRATION

PROPOSED REFORMS

▪Law Commission changes

•Prospectivity of BALCO overturned;

•Section 9, 27, 37(1)(a) and 37(3) applicable to

foreign seated arbitrations unless expressly excluded.

PROPOSED REFORMS

(2) Scope.—This Part shall apply only where the seat of arbitration is in India.

Provided that, subject to an express agreement to the contrary, the provisions of Sections 9, 27, 37 (1)(a) and 37 (3) shall also apply to international commercial arbitration even if the seat of arbitration is outside India, if an award made, or that which might be made, in such place would be enforceable and recognized under Part II of this Act.

(2A) Notwithstanding any judgment/ decree to the contrary, the amendment to this sub-section (2) shall not apply to applications which are pending before any judicial authority on the date of such amendment, and which have arisen in relation to arbitrations where the date of the arbitration agreement is prior to 06.09.2012.

THE ANTI-ARBITRATION INJUNCTION

▪ Source of power – Section 151 of the Civil Procedure Code,

1908

• Modi Entertainment Network and Anr. v. W.S.G. Cricket PTE.

Ltd., (2003) 4 SCC 341

• PPN Power Generating Company Ltd. v. PPN (Mauritius)

Company and Ors., 2005 (3) Arb. LR 354 (Madras)

▪ Test for grant of anti-arbitration injunction (Modi

Entertainment test)

▪ in personam jurisdiction against Defendant;

▪ if the injunction is declined the ends of justice will be

defeated and injustice will be perpetuated;

▪ the principle of comity.

▪ the principle of forum non-conveniens.

THE ANTI-ARBITRATION INJUNCTION

THE USUAL RECOURSE – AN APPLICATION UNDER SECTION 45

OF THE ACT

Section 45 :-

“Power of judicial authority to refer parties to arbitration.-

Notwithstanding anything contained in Part I or in the Code

of Civil Procedure, 1908 (5 of 1908), a judicial authority,

when seized of an action in a matter in respect of which

the parties have made an agreement referred to in section

44, shall, at the request of one of the parties or any person

claiming through or under him, refer the parties to

arbitration, unless it finds that the said agreement is null

and void, inoperative or incapable of being performed.”

THE LEVEL OF SCRUTINY

▪ What is the level of scrutiny to decide if the arbitration

agreement is “null and void, inoperative or incapable of being

performed”?

• Minority judgement in Shin-Etsu Chemical Co. Ltd. v. Aksh

Optifibre Ltd. and Anr., (2005) 7 SCC 234 (delivered by

Justice Y.K. Sabharwal):

– Test under Section 45 to be a “prima facie” test

– In-depth analysis only if prima facie finding against

arbitration

• Majority judgement :

– Took the same view as Justice Y.K. Sabharwal on facts

– Did not reiterate finding on “prima facie” test

▪ The test in Chloro Controls (I) Pvt. Ltd. v. Severn Trent

Water Purification Inc. and Ors., (2012) 4 Arb LR 1 (SC)

• Incorporates test in National Insurance Co. Ltd. v.

Boghara Polyfab (P) Ltd., (2009) 1 SCC 267

• The Part I test held to be applicable to Section 45

THE LEVEL OF SCRUTINY

PROPOSED REFORMS

• The test under Section 45 to be “prima facie”.

Prima facie is there a valid arbitration

clause?

If yes, final determination to be

made by the tribunal; no appeal except to the Supreme Court.

If no, court to make an in-depth final finding

and an appeal is provided.

Proposed Amendment

Test under Part I modified-

“Explanation 1: If the judicial authority is prima

facie satisfied about the existence of an arbitration

agreement, it shall refer the parties to arbitration

and leave the final determination of the existence

of the arbitration agreement to the arbitral tribunal

in accordance with section 16, which shall decide

the same as a preliminary issue; “

PUBLIC POLICY – THE UNRULY HORSE

Renusagar Power Co. Ltd. v. General Electric Co.,

AIR 1994 SC 860

▪ Public policy includes:

• Fundamental policy of Indian law

• The interests of India

• Justice or Morality


Oil & Natural Gas Corporation Ltd. v. SAW Pipes

Ltd., (2003) 5 SCC 705. (Domestic Award)

(“ONGC I”)

▪ Additional grounds:

• Patent illegality

• So unfair and unreasonable that it shocks

the conscience of the Court

Phulchand Exports Ltd. v. OOO Patriot, (2011) 10 SCC 300

(“Phulchand”)

▪ ONGC 1 applied

Shri Lal Mahal Ltd. v. Progetto Grano Spa, (2014) 2 SCC

433 (“Shri Lal Mahal”)

▪ Phulchand overruled

▪ Back to Renusagar


MAKING THE HORSE MORE

UNRULY – ONGC II

Oil & Natural Gas Corporation Ltd. v. Western Geco

International Ltd., (2014) 9 SCC 263 (“ONGC II”)

▪ Fundamental policy of Indian law construed very widely

• Includes Wednesbury reasonableness principle.

LAW COMMISSION

RECOMMENDATIONS

▪ Shri Lal Mahal reiterated;

▪ Timeframe set for filing objections (90 days) and

disposing off the same (1 year);

▪ Supplementary Report – ONGC II nullified.

PROPOSED AMENDMENT

S. 48. Conditions for enforcement of foreign awards.—…

2) Enforcement of an arbitral award may also be refused if the Court finds that—

(a) the subject-matter of the difference is not capable of settlement by

arbitration under the law of India; or

(b) the enforcement of the award would be contrary to the public policy of India.

PROPOSED AMENDMENT

Explanation.— For Without prejudice to the generality of clause (b), it is hereby

declared, for the avoidance of any doubt, it is clarified that an award is in

conflict with the public policy of India only if:

(a) the making of the award was induced or affected by fraud or corruption;

corruption.

(b) it is in contravention with the fundamental policy of Indian law;

(c) it is in conflict with India’s most basic notions of morality or justice.

(3) An objection under the above sub-sections shall not be made after three

months have elapsed from the date on which the party making such objections

has received notice of the application under Section 47 of the Act:

Provided that if the Court is satisfied that the party raising the objection was

prevented by sufficient cause from making the application within the said period

of three months it may entertain the application within a further period of thirty

days, but not thereafter.

PROPOSED AMENDMENT

(4) An objection under this Section shall be disposed off expeditiously and in any

event within a period of one year from the date on which the notice issued pursuant

to an application under Section 47 is served.

(5)(3) If an application for the setting aside or suspension of the award has been

made to a competent authority referred to in clause (e) of sub-section (l) the Court

may, if it considers it proper, adjourn the decision on the enforcement of the award

and may also, on the application of the party claiming enforcement of the award,

order the other party to give suitable security.

(6) The costs regime set out in Section 6A of the Act shall apply to a proceeding in

relation to Sections 47 and 48 of the Act.

PROPOSED AMENDMENT

Section 34(2)(b)(ii)

“For the avoidance of doubt the test as to whether

there is a contravention with the fundamental policy

of Indian law shall not entail a review on the merits of

the dispute.”

(Supplementary Report)

THE PRESENT REGIME- INCENTIVIZES

LITIGATION

▪ Costs rarely imposed

▪ “Costs follow the event” – applicable in theory (Salem

Advocate Bar Association, Tamil Nadu v. Union of India,

(2005) 6 SCC 344)

▪ No timeframes for judicial decisions

▪ Vagueness on what constitutes International Commercial

Arbitration – potential source of litigation

• Gap filled by Supreme Court in TDM Infrastructure

Pvt. Ltd. v. UE Development India Pvt. Ltd., (2008) 14

SCC 271.

LAW COMMISSION AMENDMENT

▪ “Costs follow the event” – made mandatory;

▪ Timeframes fixed;

▪ TDM Infrastructure ruling incorporated into law as a

policy decision.

Proposed Amendment

Section 2 (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—

(i) an individual who is a national of, or habitually resident in, any

country other than India; or

(ii) a body corporate which is incorporated in any country other than

India; or

(iii) a company or an association or a body of individuals whose

central management and control is exercised in any country other

than India; or

(iv) the Government of a foreign country;

Proposed AmendmentS. 6A- Regime for costs- (1) In relation to any arbitration proceeding or any

proceeding under any of the provisions of this Act pertaining to such an arbitration,

the court or arbitral tribunal, notwithstanding anything contained in the Code of Civil

Procedure,1908, has the discretion as to determine:

(a) whether costs are payable by one party to another;

(b) the amount of those costs; and

(c) when they are to be paid.

Explanation.—For the purpose of clause (a), “costs” means reasonable costs relating

to—

(i) the fees and expenses of the arbitrators, courts and witnesses,;

(ii) legal fees and expenses,;

(iii) any administration fees of the institution supervising the arbitration,; and

(iv) any other expenses incurred in connection with the arbitral or court proceedings

and the arbitral award.

Proposed Amendment(2) If the court or arbitral tribunal decides to make an order about in payment of

costs –

(a) the general rule is that the unsuccessful party will be ordered to pay the costs of

the successful party; but

(b) the court or arbitral tribunal may make a different order for reasons to be

recorded in writing.

(3) In deciding what order, (if any), to make about costs, the court or arbitral tribunal

will have regard to all the circumstances, including –

(a) the conduct of all the parties;

(b) whether a party has succeeded on part of its case, even if that party has not

been wholly successful; and

(c) whether the party had made a frivolous counter claim leading to delay in the

disposal of the arbitral proceedings; and

(cd) whether any reasonable offer to settle is made by a party and unreasonably

refused by the other party.

Proposed Amendment

(4) The orders which the court or arbitral tribunal may make under this provision

include an order that a party must pay:

(a) a proportion of another party’s costs;

(b) a stated amount in respect of another party’s costs;

(c) costs from or until a certain date only;

(d) costs incurred before proceedings have begun;

(e) costs relating to particular steps taken in the proceedings;

(f) costs relating only to a distinct part of the proceedings; and

(g) interest on costs from or until a certain date.

(5) An agreement which has the effect that a party is to pay the whole or part of the

costs of the arbitration in any event is only valid if made after the dispute in

question has arisen.

CONCLUSION

▪ Allied amendments in the form of “Commercial Division and

Commercial Appellate Division of High Courts and

Commercial Courts Bill, 2015” (253rd Report of Law

Commission)

• Creation of fast track dispute resolution processes

▪ Need for change in culture

▪ If not, risk of more awards such as White Industries v.

Government of India.

THANK YOU

Contact: [email protected]

+91-7299088824

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