In a decision that comes as an exception to the recent pro-arbitration jurisprudence emanating from the Indian judiciary, the Delhi High Court in the case of Union of India v Reliance Industries1 set aside a foreign arbitral award from the pre-BALCO era and in doing so recognized a wider scope for Indian courts to set aside such awards.

While the ability of the Indian courts to interfere with foreign seated arbitrations from arbitration agreements pre-dating 6 September 2012 was specifically preserved by the Supreme Court in the BALCO case2 and is therefore not unexpected, the willingness of the court in Reliance Industries to read down existing jurisprudence on the implied exclusion of Part I of the Arbitration and Conciliation Act 1996 (the “Indian Arbitration Act”), and exercise its jurisdiction in respect of a foreign seated arbitration, makes this decision significant.

Facts of the Case

The Reliance Industries case concerned two production sharing contracts executed between the Government of India, Reliance Industries and others for the exploration and production of petroleum. Reliance Industries initiated arbitration against the Union of India in respect of a dispute relating to the payment of royalties, cess and service tax pursuant to the terms of the production sharing contracts. The Union of India objected to the arbitration and maintained that the disputes submitted for determination were non-arbitrable.

In a partial award the arbitral tribunal rejected the contentions of the Union of India and upheld their jurisdiction to hear the dispute. The Union of India brought proceedings before the Delhi High Court, pursuant to the provisions of Section 34 contained in Part I of the Indian Arbitration Act, seeking to set aside the partial arbitral award.

Reliance Industries objected to the maintainability of the application before the Delhi High Court. It made reference to the fact that:

  • the arbitration agreement in the production sharing contract was specifically governed by English law;
  • the arbitration was governed by the UNCITRAL Rules; and
  • London was chosen as a seat of arbitration.

Accordingly, applying the Supreme Court's decision in Videocon Industries v Union of India3, Reliance argued that the above factors amounted to an implied exclusion of Part I of the Indian Arbitration Act, and therefore the jurisdiction of the Delhi High Court was excluded.

The Union of India made reference to the fact that the governing law of the contract was Indian law and that the performance of the contract was in India – to argue that no implied exclusion of Part I of the Indian Arbitration Act could be inferred. It also strongly contended that the subject matter of the dispute, which related to the levy of taxes, was an inherent part of the public policy of India and for that reason the jurisdiction of the Indian courts could not be said to be impliedly excluded.

The Union of India also relied on the case of Venture Global Engineering v Satyam Computer Systems4, as authority for the proposition that the existence of a non-obstante clause (stating that the parties would not act contrary to Indian law) pointed to Part I of the Act not being excluded.

Decision of the Court

The key question before the court was whether Part I of the Indian Arbitration Act was impliedly excluded as a result of the parties choosing a foreign seat for the conduct of the arbitration and specifically choosing foreign law to govern the arbitration agreement. The court would have jurisdiction in respect of the application only if there was no implied exclusion of Part I.

The court upheld its jurisdiction to hear the application and ruled that there was no implied exclusion of Part I of the Indian Arbitration Act in the present case. The court substantiated its decision essentially on the following grounds:

  1. The contract between the parties contained a non-obstante clause which provided that the parties would not act in a manner that would contravene the laws of India. The court read this clause to mean that the parties could not be taken to have impliedly excluded any part of Indian law – including Part I of the Indian Arbitration Act.
  2. The court drew a distinction between an application made to the courts during the pendency of the arbitration and one made challenging an arbitral award after an award is rendered. The court held that in setting aside proceedings, the relevant law is the proper law of the contract and not the law governing the arbitration agreement.

The court took the view that because of the way it was worded, the choice of English law clause only applied to the pendency of the arbitration proceedings, and thus was irrelevant when considering the jurisdiction of the court in a setting aside proceeding. In such a situation, in circumstances where parties expressly chose to comply with Indian law, Part I of the Indian Arbitration Act could not, in the court's view, be said to have been excluded.

The court considered the case of Videocon (where the Supreme Court had recognised an implied exclusion of Part I of the Indian Arbitration Act on the basis that the arbitration agreement was governed by foreign law). The court however distinguished Videocon on the grounds that it related to an application for interim relief under Section 9 of the Indian Arbitration Act and was an application made during the pendency of the arbitration, as opposed to the present case where an award was sought to be set aside.

The court held that issues such as public policy had a lesser role to play in an interim relief application as opposed to a setting aside proceeding. Where the setting aside application was made on public policy grounds, the court considered that it should be presumed to have jurisdiction.

Analysis

The decision of the court raises various concerns, some of which are highlighted below:

Firstly, while considering whether Part I of the Indian Arbitration Act was impliedly or expressly excluded by the parties, courts in India have hitherto looked at Part I of the Act as a whole. In Reliance Industries the court fundamentally deviated from this position.

The court fragmented Part I of the Act into provisions that are relevant during the pendency of the arbitration and those that relate to challenge and enforcement proceedings. The result is that – while the courts of the country where the arbitration has its seat are more likely to play a supervisory role during the pendency of the arbitration, the courts in India (where Indian law is chosen as the governing law) take over this supervisory role once an award is rendered.

The legal basis of this distinction is unclear. It is of course possible that different laws may be applicable to different parts of a dispute, but the court appears to have assumed even where Part I of the Act has been impliedly excluded for interim measures purposes, that exclusion may cease to apply once an award has been issued and a party seeks to invoke section 34 to have it set aside. The concept of different courts having supervisory jurisdiction depending on the stage that the arbitration has reached is not one that is recognised in international arbitration practice, nor by the leading Indian case law relating to international arbitration.

Secondly, the decision in Reliance Industries suggests that any application to set aside an arbitral award made under Section 34 of the Indian Arbitration Act will raise issues of public policy. The court also appears to suggest that where Indian law is involved and issues of public policy are raised, Indian courts should necessarily be presumed to have jurisdiction.

On this analysis, the result is that in any contract involving Indian law, Indian courts will have jurisdiction to hear a setting aside application under Section 34 of the Indian Arbitration Act. It is not clear if there is anything the parties can do to impliedly exclude Part I of the Indian Arbitration Act, and therefore Section 34, once they have chosen Indian law.

Finally, the court, in giving its decision, placed significant reliance on the non-obstante clause contained in the contract between the parties – which provided that neither party would violate the laws of India. This clause (which commonly occurs in contracts of this nature) was ostensibly only intended to ensure compliance by the parties with the mandatory obligations contained in the laws of India (and it cannot be said that submitting to the supervisory jurisdiction of a foreign court is contrary to Indian law). However, the court expanded the scope of this clause by also including within its ambit the Indian Arbitration Act and appears to have held that the non-obstante clause prevents parties from contracting out of even non-mandatory provisions of the Indian Arbitration Act.

The impact of this aspect of the ruling on contracts containing similar non-obstante clauses, and entered into pre-BALCO, is significant. However, this aspect of the ruling is unlikely to affect post-BALCO agreements with arbitrations seated outside India, as the ruling in BALCO would take precedence in excluding the applicability of Part I of the Act in such cases.

We understand that a Special Leave Petition to appeal against this decision has been filed before the Supreme Court.