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SC Takes The Litigation Out Of Arbitration?

Published on Sat, Sep 15,2012 | 11:07, Updated at Sat, Sep 15 at 11:16Source : CNBC-TV18 |   Watch Video :

The key purpose of arbitration is to avoid going to court. But in India these past few years arbitration had become synonymous with litigation; even if it was a foreign arbitration! Besides ambiguity in the law, at the heart of the problem was a Supreme Court judgment in the Bhatia case in 2002. So it was up to the Supreme Court to put matters back in order….which it has done in the Bharat Aluminium judgment delivered last week. So Bhatia’s been redone but as experts tell Payaswini Upadhyay that this good has come with several unintended consequences.

 “The way in which the proceedings under the Act are conducted and without an exception challenged in Courts, has made lawyers laugh and legal philosophers weep”, said the Supreme Court in 1981 for the Arbitration Act 1940. And so, to better the cause of arbitration, the Indian parliament passed the Arbitration & Conciliation Act, 1996. The legislative intent was to reduce judicial intervention by saying that no court shall interfere in an arbitration except where Part 1 of the Act is applicable. Part 1 of the Act includes provisions relating to interim relief, appointment of arbitrator, setting aside of arbitral awards etc.

But in 2002, this was interpreted by the Supreme Court differently in the Bhatia International case. A 3 judge bench of the apex court laid down that Part I of the Arbitration Act applied equally to arbitrations seated outside India unless the agreement provided otherwise.

Dipen Sabharwal
Partner, White & Case
“The Bhatia judgment certainly distorted the fundamental intent of the 1996 Act which was passed to reduce the supervisory jurisdiction of Indian courts and overall reduce the interference by the judiciary as a broad measure- the spirit of the 1996 Act was the UNCITRAL Model Law which encourages partly autonomy and minimizes judicial interference; Bhatia had the exact opposite effect.”

Dushyant Dave
Senior Advocate, Supreme Court
“It really gave tremendous fillip, unfortunately if I may say so, to unscrupulous litigants to bring international commercial arbitrations to India and challenge them. Those awards were challenged and for mere asking, they were stayed. So the very purpose of having commercial contract and expeditious adjudication was completely nullified.”

This upset was undone by the Supreme Court in a landmark ruling last week. A 5 judge constitution bench of the Supreme Court laid down that Part 1 of the Arbitration Act would apply only when the seat of arbitration is in India and would not apply to international commercial arbitration held outside of India. The apex court further said that the conduct of arbitration and challenge to an award would be regulated by a court of the country where the arbitration is conducted.

Vijaya Sampath
Senior Partner, Lakshmikumaran & Sridharan
“The Arbitration and Conciliation Act now has been brought in line with international arbitrations because almost all over the world, it is now understood that the concept of territoriality or the seat of arbitration really governs the operation of the Arbitration Act. And therefore that has been brought in line with what international arbitrations are all about.”

Dushyant Dave
Senior Advocate, Supreme Court
“It will certainly deter frivolous litigations by losing parties- both Indian and foreign. Many unscrupulous losing parties, many of them foreigners, brought those awards to India to challenge knowing fully well that India doesn’t have jurisdiction but it will buy them 5,10, 15 years. So I think that will stop; the commercial awards will become enforceable in respective foreign jurisdictions as quickly as possible and both the Indian and foreign parties who are successful in those commercial awards will get the benefits as quickly as possible.”

But with these benefits come several unintended consequences too. First, while curtailing the powers of Indian courts on arbitrations seated outside of India, the apex court also curtailed the applicability of this order. It laid down that its order will apply only to arbitration agreements entered into after 6 September 2012.

Dipen Sabharwal
Partner, White & Case
“We can have a situation where parties enter into a contract on the 5th of September 2012 providing for arbitration outside India and let’s say a dispute arises in 2028 and proceedings are commenced and arbitration takes place. So we can have a situation where 16 years from now, an arbitration award, which is rendered outside India can still be set aside in India relying on the Bhatia judgment. So that is an anomaly.”

Vijaya Sampath
Senior Partner, Lakshmikumaran & Sridharan
“It would definitely be advisable for companies to restate their arbitration clauses in the agreement and make it effective, say, after the 6th of September. And then there would be no ambiguity in its interpretation because all of them would come under this ruling and will be interpreted as such- whether it is practical and whether all parties would agree to it, I am really not sure. More importantly, I don’t know whether that is what the SC intended because if it is interpreted strictly, then it would be that all the parties who came on appeal and argues this case would not get the benefit of the judgment because it will only apply to all agreements after the 6th of September and obviously all the agreements for these parties were executed well before that date. They might issue a clarification and I am sure someone will seek and obtain a clarification.”

The second unintended consequence stems from the part where the Supreme Court has said that the Indian courts can grant interim relief only in cases of domestic arbitrations. The apex court said that Section 9- that deals with interim relief measures- is placed under Part 1 of the Arbitration Act. And since Part 1 will not apply to foreign arbitrations, interim relief provisions won’t apply too. The apex court turned down the argument that such an interpretation will leave parties remediless and said that it’s not for the court to rectify this gap in law; it’s up to the parliament to do so.

Incidentally, a 2010 Consultation paper published by the Ministry of Law under Veerappa Moily sought to address this lacuna. It had proposed that while Indian courts should not be allowed to intervene in international arbitrations, the power to grant interim relief should be vested in the courts. But since 2010, the consultation paper has remained just that.

In the absence of a legislative amendment on the interim relief front, this SC order may lead to concerns especially when the assets are located in India. Foreign parties have successfully used interim relief provisions to stop the Indian party from sale of assets located in India, to stop transfer of shares if a joint venture agreement was sought to be breached and many more. 

Dipen Sabharwal
Partner, White and Case
“I think there is going to be an unintended consequence. With the SC trying to minimize unnecessary judicial interference, there may be an element of throwing the baby out with the bathwater where even in legitimate circumstances where Indian courts are best placed to issue interim relief, they would not be able to do so as a result of the Kaiser judgment. And I think parties would just have to deal with that by seating their arbitration in a jurisdiction where interim measures will be readily available and then moving quickly in India.”

Vijaya Sampath
Senior Partner, Lakshmikumaran & Sridharan
“If you look at it dispassionately, the non availability of interim relief both to Indian companies as well as foreign companies is really not such a big deterrent for any well-intentioned party. This is for the simple reason that either the foreign company or the Indian company which is aggrieved can get an interim award either in the arbitral tribunal or if the proceedings are yet to start can get an interim injunction from the local court where the seat of arbitration is. And if the Indian party or the foreign party does not comply with the order, go and get a contempt proceeding for not complying with the order of the court.”

Promod Nair
Partner, JSA
“Such an interim order granted by the arbitral tribunal would not satisfy the definition of an award which can be enforced under the New York convention. So they are likely to face considerable difficulties on that score. The second option is to approach the courts of the seat of arbitration and ask for an interim order. And again courts are empowered by their arbitral legislations to provide such kind of supervisory assistance. Again, this is also likely to face considerable difficulty when it comes to stage of enforcing such an order in India because such an order would not constitute a decree that is enforceable either under the reciprocity scheme or under the provisions of Code of Civil procedure. So this is certainly an anomaly that requires to be addressed.”

But even after this landmark ruling, it may not be all clear for international commercial arbitrations. Under Section 48 of the Arbitration Act, the enforcement of a foreign award can be refused if it’s contrary to India’s public policy. In 2003, in ONGC vs Saw Pipes, the SC interpreted it to mean that an arbitral award that contravened Indian statute was contrary to public policy and can be set aside. That was laid down in the context of a domestic arbitration. In 2008, in Venture Global vs Satyam Computers, the Supreme Court expanded it to foreign arbitrations as well. 

Promod Nair
Partner, JSA
”The risk that the Indian courts will take a slightly more expansive approach to construing ‘public policy’ is still a risk that prevails and that aspect of the Venture Global decision has not been overruled.”

Dushyant Dave
Senior Advocate, Supreme Court
“The SC certainly could have gone into the question of reviewing or at least reconsidering Saw Pipes principles and they could’ve said whether Saw Pipe would be available in the context of International Commercial Arbitration even if it is governed by Indian law. To that extent, judges had an opportunity perhaps to revisit it.

The clarity on that may come in good time too. And while the order may have lead to several unintended consequences, for now, the arbitration community is hailing it for acknowledging that arbitration is supposed to work differently from litigation. And that territoriality in international commercial arbitration should be respected. As far as prospective applicability goes, several lawyers involved in the case indicated to me offline that they might consider filing a review petition to seek clarity on this aspect.

In Mumbai, Payaswini Upadhyay

 
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