In a recent case, the Supreme Court of India held that a foreign arbitral award could be set aside by the Indian courts. This departs from the widely recognised principle that international arbitral awards can only be set aside by a competent court of the country in which, or under the law of which, that award was made.

Background

Disputes arose under a joint venture contract, which were then referred to arbitration in London under the LCIA rules. An award was rendered, ordering the transfer of shares and the claimant was able to obtain an order from the US courts granting enforcement of the award.

The losing party objected to enforcement by filing a cross-petition in the US courts, as well as bringing proceedings before the Indian courts seeking a declaration to set aside the award, and a permanent injunction on the transfer of shares under the award on the grounds of public policy. The matter subsequently came before the Indian Supreme Court. The question before the court was whether the provisions of the Indian Arbitration and Conciliation Act 1996 (Indian Arbitration Act) dealing with setting aside of arbitral awards applied to international commercial arbitrations taking place outside India.

Judgment

In reaching its decision, the Supreme Court was heavily influenced by a provision in the shareholders’ agreement between the two parties that required the parties to act at all times ‘in accordance with the Companies Act and other Applicable Acts/Rules being [sic] in force, in India at any time’ even though the agreement was governed by US law. The Supreme Court decided there was an ‘intimate and close nexus to India’ since the joint venture company was in India, transfer of the shares should be made in India under Indian laws and all the necessary steps should be taken in India before ownership interests are transferred. As a result, it also held that enforcement should be in India and it criticised the claimant’s actions to enforce the award in the US as an attempt to bypass legal and regulatory scrutiny in India.

The Supreme Court ordered a stay of enforcement and allowed the appeal. It was held that unless the parties agreed otherwise, the provisions of Part I of the Indian Arbitration Act (which sets out rules for domestic arbitrations including the setting aside of awards) also apply to international commercial arbitrations that take place outside India. The Supreme Court also endorsed recent Indian decisions which have expanded the scope of judicial review by construing ‘public policy’ broadly. It held that ‘in conflict with the public policy of India’ includes ‘contrary to the substantive provisions of law’.

Commentary

This recent decision appears to empower Indian courts to set aside awards even where India is not the seat of arbitration. This potentially exposes any international arbitral award to review by the Indian courts, and is not consistent with accepted international arbitral practice, and the approach under the New York Convention. To address this unwelcome development, clients should consider including appropriate wording in their arbitration agreements to exclude Part I of the Indian Arbitration Act where there are Indian counterparties or an Indian nexus.