A second look at international arbitration


The Supreme Court needs to adopt a ‘pro-arbitration’ stance to provide fast, efficient and predictable remedies to foreign investors.

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.)


Pendency of cases will be curtailed from 15 to 3 years

Under E-Courts projects timeline has been drawn for computerisation of courts
Arbitration and Conciliation Act 1966 will be amended to make India an international hub

The Ministry of of Law and Justice embarked on a Mission Mode Programme for Delivery of Justice and Legal Reforms. Addressing a Press conference here today Minister of Law and Justice, Dr. M. Veerappa Moily said, under this umbrella, various plans to curtail the pendency in the Courts from the present 15 years to 3 years have been drawn and are at various stage of implementation. One of the programmes which has been successfully implemented in this direction is the consideration of the cases of the under trials who were not only languishing in the jail without their cases being taken up but were also straining the capacity of the jails. He said, with a Mission Mode Programme which started on 26th January to 31st July last year, cases of over 2.5 lakh under trials, out of an estimated 3 lakh under trails were decided. Sh. Moily said, the programme has not ended on 31st July but is continuing.

On this occasion a booklet containing the innovations that have been brought in during the past one and half years and vision ahead was also released. The Minister stated under the E-Courts project, computerisation of courts has been approved. Timeline has been revised to March 2012 for computerizing 12000 courts and March 2014 for the remaining 2249 courts.

Sh. Moily further stated that his Ministry wants to bring comprehensive amendments to the Arbitration and Conciliation Act, 1966 in order to make arbitration more popular make India as a hub of international arbitration and overcome problems due to certain judgements of Supreme Court and High Courts. In addition, the Ministry has convened national consultations at various places wherein all the stakeholders like Judges of the Supreme Court and High Courts, legal experts, advocates and representatives of the arbitration institutions.

Free hand for arbitrators

MJ Antony / New Delhi January 06, 2010, 0:37 IST in The Business Standard

Courts cannot review the evidence and documents already examined by arbitrators.

Though arbitration is considered to be a speedy and economical route to justice, it has often been proved to be as tedious and costly as regular civil litigation. Appeals under the old Arbitration Act of 1940 are still pending in the Supreme Court despite the fact that a comparatively new law is in place since 1996. Last month, the court decided a dispute which started 16 years ago. The irony is that the award was passed in 1996, and since then it was pending in the Uttarakhand High Court and the Supreme Court.

The more paradoxical aspect of the case (M/s Ravindra Gupta & Co vs Union of India) is that the two courts took so long to determine a legal point which is now taken for granted. Should the courts interfere in the award of an arbitrator? In a long series of judgments, the Supreme Court has strictly limited the role of the courts in arbitration matters and given wide elbow room to the arbitrators. Nevertheless, cases are plenty in which the high courts or subordinate courts have re-examined the facts of the dispute and substituted their decision in place of the arbitrator’s. This was one such case.

The Supreme Court has stated in categorical terms that the arbitrator has the final word in a dispute referred to him. Neither party can challenge his award on the ground that he had come to a wrong conclusion. The logic is that if the parties have selected their own forum, it should be conceded the power of appraisement of evidence. Whether a particular amount should be paid is a decision within the competency of the arbitrator. In the State of Rajasthan vs Puri Construction Co (1994) case, the court had categorically stated that “the arbitrator is the sole judge of the quality as well as the quantity of evidence and it will not be for the court to take upon itself the task of being a judge on the evidence before the arbitrator”.

As early as in 1987, the court had explained in the Municipal Corporation of Delhi vs Jagan Nath case that “it may be possible that on the same evidence the court may arrive at a different conclusion than the one arrived at by the arbitrator, but that by itself is no ground for setting aside the award”. The court cannot investigate into the merits of the case or examine the documentary and oral evidence in the record for the purposes of finding out whether the arbitrator has committed an error of law.

The court cannot even examine whether the view taken by the arbitrator is “reasonable”, an amorphous term which has been discussed by judges for centuries. This is because, as the above judgment conceded, “reason varies in its conclusions according to the idiosyncrasies of the individual and the time and circumstances in which he thinks. An arbitrator acting as a judge has to exercise discretion informed by tradition, methodised by analogy, disciplined by system and subordinated to the primordial necessity or order in social life.”

Some awards explain the reasons for arriving at the decision. According to the Supreme Court, whether the award carries reasons or not, the court should not interfere. In the Arosan Enterprises Ltd vs Union of India (1999) case, the court granted some exceptions to the rule. If the award is “totally perverse” or if it is based on a wrong proposition of law, the court can intervene. “In the event of, however, if two views are possible on a question of law as well, the court would not be justified in interfering with the award,” the judgment pointed out.

In a recent case, ONGC vs SAW Pipes Ltd, the court again emphasised that if the arbitral tribunal had committed a mere error of fact or law, the court would still have no jurisdiction to interfere in the award. If the reference to the arbitrator is in general terms, and the award is based on an erroneous legal proposition, the court can interfere in it. If a specific question of law is submitted for arbitration, an erroneous decision in point of law does not make the award bad unless the court is satisfied that the arbitrator had proceeded illegally.

The new Arbitration and Conciliation Act was passed as civil litigation was found to be wasteful and time-consuming. However, cases under the refurbished law are also taking too long to settle as seen in the chronology of recent judgments. Arbitrators, like enquiry commissions, have a stake in prolonging the dispute. The legal profession ably assists them in the endeavour. Reviving old questions in new garbs is one such tricks of the trade. It only adds to the mass of case law.