A second look at international arbitration

NEW DELHI, 18/07/2011: View of the Supreme Court Building, in New Delhi on July 18, 2011. Photo: V. Sudershan

NEW DELHI, 18/07/2011: View of the Supreme Court Building, in New Delhi on July 18, 2011. Photo: V. Sudershan   | Photo Credit: V_Sudershan

Global convergence and harmonisation in international commercial arbitration are particularly evident in the area of judicial control of a foreign arbitral award. In most countries, the possibility to bring before a court an action for annulment of an arbitral award rendered abroad is excluded. On the other hand, the Supreme Court of India has over the years adopted a very aggressive nationalistic posture in deciding international arbitration disputes, and is an outlier in this arena. In cases involving foreign arbitral disputes, the Supreme Court has consistently revealed an alarming propensity to exercise authority in a manner contrary to the expectations of the business community.

Observed in this light, the Chief Justice of India's recent decision to constitute a constitutional bench to hear challenges to the Court's earlier parochial rulings opens the most important chapter in the legal battle to convert the Indian judicial system into a pro-arbitration regime. The constitutional bench reference was made in the case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. A two-judge bench of the Supreme Court had earlier in this case expressed reservation on the correctness of the operating precedent laid down in Bhatia International v. Bulk Trading S.A. (Bhatia International), and subsequently followed in Venture Global Engineering v. Satyam Computer Services (Venture Global) and other cases. Thereafter, in accordance with judicial discipline and propriety, the two-judge bench referred the matter to a three-judge bench setting out the reasons why it could not agree with the three-judge bench operating judgment in Bhatia International. Later, the three-judge bench, which also included the Chief Justice, also came to the conclusion that the ruling in Bhatia International needs to be reconsidered by a five-judge bench. The matter will now be placed before the five-judge constitutional bench on January 10, 2012.

Underlying principle

It must be noted that the underlying principle behind the Indian Arbitration and Conciliation Act, 1996 (“1996 Act”) was to “minimise the supervisory role of the courts in the arbitral process.” However, Bhatia International, decided by the Supreme Court in 2002, laid the foundation for an excessively interventionist role of the judiciary in international arbitrations, thereby negating the intent of the 1996 Act. Part I of the 1996 Act lays down the law governing domestic arbitrations, whereas Part II, entitled ‘Enforcement of Foreign Awards,' relates to enforcement of foreign awards in international commercial arbitrations under the New York Convention and the Geneva Convention. To make a distinction between the two, Section 2(2) of the 1996 Act provides that Part I “shall apply where the place of arbitration is in India.” However, in Bhatia International, the Supreme Court held that Indian courts had good jurisdiction even in the case of international arbitrations held outside of India. In reaching this decision, the Supreme Court construed the language in Section 2(2) and emphasised that the formulation omits the word “ only” (as in “ shall only apply”), so that the 1996 Act does not prohibit the application of Part I to an award made outside India. This decision is contrary to established notions of international arbitration law, which posit that municipal arbitration legislation should be restricted to arbitrations seated within the territory of such state.

The unfortunate potential consequence of Bhatia International, delivered in the context of the power of Indian courts to grant injunctions and other interim measures in foreign arbitrations, can hardly be exaggerated. In what came to be one of the most criticised decisions of the Supreme Court in recent times, the decision in Venture Global, paved the way for much increased judicial interference by Indian courts. In Venture Global, the Supreme Court relied on its reasoning in Bhatia International to hold that the “public policy” provision in Part I of the 1996 Act, applies also to foreign awards. In other words, the Supreme Court held that Indian courts would have jurisdiction to set aside an award rendered outside India, for violating Indian statutory provisions and being contrary to Indian public policy. These decisions have strangled the growth of arbitration into a successful alternative dispute resolution mechanism, and have been disastrous for foreign investors, and their Indian counterparts.

‘Risk premium'

Foreign direct investment flows towards locations with a strong governance infrastructure, which includes how well the legal system enforces contracts and protects property rights. A legal system's protection of property rights and the enforcement of contracts lower transaction costs of trade and allow resources to be transferred to those who can use them in the most productive manner. Internationally, arbitration has evolved as the major means to minimise transaction costs of trade. However, the decisions of the Supreme Court of India have the exact opposite effect. Post Bhatia International and Venture Global, parties are more hesitant in dealing with India, and insist on terms in agreements that compensate for the legal risk. The ‘risk premium' makes a plethora of transactions commercially unviable. Consequently, the Supreme Court decisions are disincentives to any long-term investment transaction and to entrepreneurial cooperation.

In April 2010, the Ministry of Law and Justice, with the intention of reinforcing the ‘minimum judicial intervention' standard, had proposed an amendment to correct the error made and followed since the decision in Bhatia International. The proposed amendment to Section 2(2) of the 1996 Act seeks to insert the word “ only” with a view to explicitly limit the operation of Part I of the Act to domestic arbitration, albeit, with a solitary exception in the context of interim measures and assistance in collection of evidence. Unfortunately, no progress has since been made towards introducing the arbitration amendments in Parliament.

Therefore, the only light at the end of the tunnel is the constitutional bench reference, which will come up for hearing on January 10, 2012. It is to be hoped that the Supreme Court will reverse these deleterious holdings and assure the business community of its commitment in protecting and promoting international commercial arbitration in India.

( Karan Singh Tyagi, a graduate of Harvard Law School, is an associate attorney with an international law firm in Paris.)

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