Arbitrations in India have historically been lengthy and complex affairs. The arbitral process was also largely dependent on individual arbitrators due to a lack of formal rules and the fact that most arbitrations were conducted on an ad hoc basis rather than by arbitration institutions. Arbitrations were also plagued with uncertainty because of various judicial decisions which expanded the scope of challenges to awards and judicial interference in the arbitral process. This uncertainty led to lengthy court proceedings arising from arbitrations and further ambiguity regarding the means by which final awards could be executed. The position was similar when awards in foreign-seated arbitrations were either challenged before Indian courts or were sought to be executed in India. These drawbacks hindered arbitration as an effective means of dispute resolution.
In order to rectify these issues, Parliament passed the Arbitration and Conciliation (Amendment) Act on December 17 2015, which received the president's assent on December 31 2015. With this, substantial changes to the Arbitration and Conciliation Act 1996 came into force on October 23 2014.
The amendment seeks to:
- make arbitration in India a quicker and more streamlined process;
- reduce interference by the courts;
- make India a more attractive destination for foreign investors; and
- improve the ease of doing business in India.
While these intentions are noble and undoubtedly commendable, the amendment is not without its own set of issues. This update analyses the effect that the amendment may have on international commercial arbitration seated outside India, from the perspective of a foreign party.
International commercial arbitration
Before analysing the impact of the amendment, it would be prudent first to understand the definition of 'international commercial arbitration'. As per Section 2(1)(f) of the act, 'international commercial arbitration' is an arbitration which relates to disputes arising out of legal relationships, whether contractual or not, considered to be commercial under Indian law and where at least one of the parties is:
- an individual who is a national of, or habitually resident in, any country other than India;
- a body corporate which is incorporated in any country other than India;
- an association or body of individuals whose central management and control is exercised in any country other than India; or
- the government of a foreign country.
Notably, before the amendment, if a company which had its central management and exercised its control in a country other than India was party to an arbitration, that arbitration was treated as an international commercial arbitration. However, in order to align the act with the judgment in TDM Infrastructure Private Limited v UE Development India Private Limited,(1) wherein the Supreme Court held that the legislature intended to determine the residence of a company based on its place of incorporation and not its place of central management or control, the amendment has deleted the words "a company or" from the beginning of Section (2)(1)(f)(iii). That said, foreign companies incorporated outside India are still covered under Section (2)(1)(f)(ii) (ie, body corporates incorporated outside India).
Clarity on applicability of Part I and seeking of interim reliefs
The act, as promulgated in 1996, specified that Part I applied where the place of arbitration was India. However, in Bhatia International v Bulk Trading SA(2) the Supreme Court held that, in the context of a foreign party seeking interim relief against an Indian party under Section 9 of the act (which falls under Part 1 of the act), Part I applies to international commercial arbitrations held outside India, unless the parties have by express or implied agreement excluded all or any of the provisions of Part I of the act. The court accordingly proceeded to consider the application on merit.
This judgment's scope was expanded in several other subsequent cases – in particular, Venture Global Engineering v Satyam Computer Services Limited.(3) In this case, a party to an international commercial arbitration filed a petition under Section 34 of the act, challenging a foreign award. In view of its judgment in Bhatia International,(4) the Supreme Court held that since Part I of the act applied to foreign seated arbitrations – and thus foreign awards – a party could challenge a foreign award under Part I of the act – in particular, Section 34.
Ultimately, in 2012 in Bhatia in Bharat Aluminium Company v Kaiser Aluminium Technical Service, Inc(5) (the BALCO case), a constitutional bench of the Supreme Court overruled the judgment, holding that Part I would not apply to foreign-seated international commercial arbitrations. However, this judgment applied only to agreements executed after September 6 2012. Agreements executed before this date would continue under the Bhatia regime. This led to two parallel regimes: arbitration agreements executed during the Bhatia regime on the one hand and agreements signed after September 6 2012 (ie, the BALCO regime) on the other. These parallel regimes created a substantial gap in the act, as parties to foreign-seated arbitration under the BALCO regime had no means by which to obtain interim relief from the Indian courts under the act.
In order to resolve this issue, the amendment has introduced a provision to Section 2(2) which stipulates that in the case of international commercial arbitration – unless the parties have otherwise agreed – Sections 9, 27, 37(1)(a) and 37(3) (all of which fall under Part 1 of act) will apply to foreign-seated arbitrations. However, foreign arbitral awards will be enforced and recognised under Part II of the act. In a sense, the amendment has brought back the Bhatiajudgment insofar as it makes Section 9 applicable to foreign-seated arbitrations, while at the same time ensuring that a foreign award cannot be challenged under Section 34.
As a result of this proviso, unless the parties have agreed otherwise, a foreign party can seek interim relief against a party in India, and thus preserve its goods/assets located in India, during the pendency of the arbitration. This relief can be sought either before arbitration commences, during arbitration or after an award has been passed, until the execution of the award.
This recourse should come as a relief to parties, as they can now petition the high courts directly for interim protection measures to preserve their goods or assets located in India which are the subject matter of arbitration or to secure disputed amounts.
In accordance with the newly introduced Section 9(2), if interim relief is sought before commencement of arbitration, and if such relief is granted, the arbitral proceedings must commence within 90 days from the date of the order or from the date set out by the court. However, the consequence of failing to commence arbitration within the 90-day period has not yet been set out.
Assistance from courts and appeal provisions
As a result of the new proviso to Section 2(2), unless there is an agreement excluding the applicability of this section, a party to a foreign-seated international commercial arbitration can apply to a court under this section, seeking its assistance in taking evidence. This should be particularly useful for foreign parties that want to summon witnesses or have documents produced that are located in India. This section also sets out the consequence for not complying with an order made thereunder.
Further, unless there is an agreement excluding the applicability of Section 9 or Section 2(2), a party that is dissatisfied with an order passed under Section 9 can appeal under Section 37(1)(a). However, there appears to be a typographical error in the amendment in this respect. As per the unamended act, Section 37(1)(a) provided for the right to appeal orders passed under Section 9 of the act. However, under the amendment, this appeal provision has been renumbered as Section 37(1)(b), with the introduction of a new Section 37(1)(a) providing for appeals from orders passed under Section 8, which does not apply to foreign-seated international commercial arbitrations. The proviso to Section 2(2) should therefore have made Section 37(1)(b) applicable instead of Section 37(1)(a). Hopefully this error will be addressed by Parliament soon. Further, since Section 37(3) also applies to international commercial arbitrations, no second appeal can be sought under Section 37(1)(b). However, Section 37(1)(b)(3) specifically provides that no right to appeal to the Supreme Court will be affected or removed.
Restricted grounds for refusal to execute awards
Parties can seek to execute foreign awards passed in countries that are signatories to the New York Convention or the Geneva Convention under Sections 48 or 57 of the act. Section 48 applies where an award has been passed in a country which is a signatory to the New York Convention and has a reciprocal agreement with India. Section 57 applies to cases where an award has been passed in a country which is a signatory to the Geneva Convention. One of the grounds for refusal is that the foreign award was passed in contravention of the public policy of India, which was previously not defined. The amendment has introduced two identical explanations to Section 48(2) and Section 57(1) in an attempt to explain the meaning of 'public policy of India'. The explanations seek to narrow the scope of the definition of 'public policy' which, to date, has been interpreted so broadly by the judiciary that almost all awards are challenged based on a violation of the public policy of India. Explanation 1 clarifies that an award conflicts with the public policy of India only in the following circumstances:
"i. the making of the award was induced or affected by fraud or corruption or was in violation of Section 75 or Section 81; or
ii it is in contravention with the fundamental policy of Indian law; or
iii it is in conflict with the most basic notions of morality or justice."
Explanation 2 tries to clarify that when determining whether there has been a contravention of public policy, the courts will not review the case on the merits of the dispute.
While some attempt has been made to explain what public policy is, the explanations may not really help, as they are loosely worded and open to interpretation.
Prospective applicability of amendment
Section 26 has sought to resolve the issue of whether the amendment will apply retrospectively or prospectively. In accordance with Section 26, the amendment will apply prospectively to arbitral proceedings invoked after October 23 2015. However, the issue of whether the amendment applies to pending court proceedings filed after the passing of an award is a matter of debate and is currently being considered by various courts across the country. In fact, the high courts have already taken opposing views on this matter. However, this controversy will not affect new foreign-seated arbitration, but will affect matters relating to earlier domestic arbitrations and international arbitrations awards that have already been challenged under Section 34 of the act.
The amendment should come as a welcome relief to most international entities/individuals that are parties to foreign-seated international commercial arbitration. The confusion of whether Part I of the act applied to foreign-seated arbitrations has largely been laid to rest. In addition, foreign parties now have the advantage of approaching courts in India for interim relief against Indian parties, as regards their assets located in India. Further, the parties to international commercial arbitration can directly approach the high courts under Section 9 for interim protection, which will no doubt provide foreign parties with some relief.
For further information on this topic please contact Raj R Panchmatia, Peshwan Jehangir or Anindya Basarkod at Khaitan & Co by telephone (+91 22 6636 5000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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