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SC's Boost To Domestic Arbitration!

Published on Sat, Jun 07,2014 | 12:54, Updated at Mon, Jun 09 at 16:29Source : Moneycontrol.com |   Watch Video :

In the past India’s Supreme Court has frowned upon judicial intervention in foreign seated arbitrations. While that gave a boost to arbitration centers outside India, domestic arbitration continued to be vulnerable to court intervention. Last week, while deciding the Swiss Timing matter, the apex court gave a much needed impetus to Indian arbitration in cases involving allegations of fraud. But this is a decision made by a single judge bench. Payaswini Upadhyay asks experts if this new decision will prevail as precedent or suffer from the overhang of previous conflicting rulings by larger benches.

In 2012, in the landmark Kaiser Aluminum judgment, the Supreme Court laid down that Indian courts have no jurisdiction to intervene in foreign seated arbitrations. But that judgment was prospective and applied only to agreements signed post September 2012.

For agreements signed prior to September 2012, the Supreme Court’s 2014 decision in the MSM Satellite’s case has come to the rescue. In February this year, the apex court ruled in favor of foreign arbitration dismissing the argument that allegations of fraud on the main contract will render the arbitration agreement inoperative.   
 
Promod Nair
Founding Partner, Arista Chambers
“As far as foreign investors are concerned, two decisions that have been welcomed are the Supreme Court decisions in the Balco vs Kaiser Aluminium case in 2012 and more recently, the MSM vs World Sport Group judgment. In the Balco case, the SC essentially adopted a hand-off approach to foreign seated arbitrations and the SC held that where the seat of arbitration is outside of India, Indian court will not intervene in the process at all. And that considerably reduced the scope of judicial intervention in foreign seated arbitrations. The second welcome judgment for foreign investors was the MSM case where the SC held that even where a dispute involves complicated allegations of fraud or corruption, the Indian courts will still enforce the agreement to arbitrate and this was parties where they have agreed to seat the arbitration outside India.”

But these two landmark rulings have only helped cases where the seat of arbitration was outside of India.

Domestic arbitration continued to be vulnerable to court intervention; thanks to the Maestro Engineers precedent. In 2009, a 2 judge bench of the Supreme Court laid down that if a complicated question of fact or law is involved or where allegation of fraud is made, courts can refuse to refer a matter to arbitration.

Dushyant Dave
Senior Advocate 
Yes; there was a lot of abuse of judicial process in India after this and the courts are unable to understand the scope of the true meaning and scope of the arbitration process.

Promod Nair
Founding Partner, Arista Chambers
“In practice what that really meant was every time there was party who was reluctant to arbitrate, all that it had to do was to introduce allegations of fraud or corruption and by introducing such allegations, the agreement to arbitrate could effectively be nullified.”

Last week, this upset was undone by a single judge of the apex court in the Swiss Timing case.

In 2010, Switzerland based Swiss Timing agreed to provide timing, score and result system services for the Commonwealth games. A year later, the Commonwealth Organizing Committee withheld payments to 9 foreign vendors, including Swiss Timing, arguing non-performance of contracts.

Last year, Swiss Timing invoked the arbitration agreement governed by the Indian Arbitration Act. The CWG Organizing Committee argued that the court cannot refer the dispute for arbitration as the contract was vitiated by fraud. The Committee argued that Swiss Timing manipulated the contract in its favor and that the rates charged by it were exorbitant. Further, any arbitration proceeding would overlap with the criminal proceedings pending against Suresh Kalmadi- the then Chairman of CWG. In arguing so, the CWG Committee relied on the Maestro Engineers precedent that in cases where fraud is alleged, courts can refuse to refer a matter to arbitration.

But these arguments failed to pass muster with the apex court that ruled that all these issues can be dealt with by the arbitral Tribunal.

Promod Nair
Founding Partner, Arista Chambers
“That was the rule that was also endorsed by the Supreme Court in the decisions in Hindustan Petroleum vs Pinkcity Petroleums and also the Supreme Court judgment in the Gajapathi Raju case. In both, the Supreme Court underlined that the rule laid down under Section 8 of the Arbitration Act was mandatory and the court had no discretion. The mandatory nature of the provision as well as the binding law that was laid down the SC in these two judgments was subsequently undermined by the SC own judgment in 2009 in the Maestro Engineers case.”
 
Both the Hindustan Petroleum & Gajapathi Raju decisions say a matter can be referred to arbitration even if the case involved fraud allegations. But these judgments were not considered when the Supreme Court decided the Maestro Engineers case to say cases involving fraud allegations cannot be arbitrated. This miss was noticed by the Supreme Court in the Swiss Timing case. This miss, Justice Nijjar concluded, renders the Maestro judgment per incuriam meaning a judgment given without considering the relevant precedent on that matter.  And so, it does not lay down the correct law and cannot be relied upon. But can Justice Nijjar’s decision prevail over the 2 judge bench decision in Maestro?

Dushyant Dave
Senior Advocate
“I personally feel that the judges are not extremely enamored by the 2009 decision. And I have seen many cases where the Supreme Court and High courts have referred the parties to arbitration in all kinds of disputes including the allegations of fraud. So there is no need to take a relook into the matter. I am sure when a matter comes up to the SC, the SC would perhaps distinguish and differ from the 2009 decision when it comes before a 3 judge bench. Either of the parties can take advantage of the earlier decisions which said that all dispute including fraud are arbitrable and distinguish their case from 2009 ruling.”
 
The more lasting solution would be an amendment to the Arbitration Act to address the upset created by the 2009 Maestro ruling which lawyers tell me could be a reality soon as the Law Commission is likely to come out with a report shortly on amendments required in the Arbitration Act.

In Mumbai, Payaswini Upadhyay

 
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