Key Points: Foreign awards might not be enforceable in India, but good drafting can increase the likelihood of enforcement.
Over the past decade, India has become an emerging economic power house because of favourable policy changes and a stronger economy. This has resulted in India becoming an increasingly popular market for foreign investment.
When investors are considering whether to do business with an Indian company, an important legal consideration to take into account is whether, in case a dispute arises, an arbitral award will be readily enforceable in India.
Although one would assume that the enforcement of awards in India which a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) is no reason for concern, the reality is very different. This is partly so because the Indian Arbitration and Conciliation Act 1996 sets more stringent requirements as to what constitutes a "foreign award" for the purpose of enforcement under the Act. Furthermore, the Indian Supreme Court's interpretation of the Act has resulted in foreign arbitral awards being at risk of being set aside in India.
The aim of this article is to provide a brief summary of:
- what constitutes a "foreign award" under the Act;
- the Indian Supreme Court's interpretation of the Act in relation to setting aside a foreign arbitral award; and
- some practical tips on how to draft an arbitration agreement to avoid or reduce potential problems associated with the enforcement in India.
India's position on the New York Convention
International arbitration has been the preferred dispute resolution procedure over litigation for resolving disputes between commercial parties from different countries. One of the key reasons is that under the New York Convention an award issued in one New York Convention country can be enforced in any other New York Convention country. Because litigation in Indian courts is often perceived to be lengthy and burdensome –because of a substantial backlog of cases – arbitration is seen as the only real option for foreign companies to enforce their rights in India. However, before choosing arbitration for resolving disputes with Indian businesses one needs to be aware of some limitations which may impact on the enforceability of a foreign arbitral award in India.
Firstly, the Indian Government has signed the New York Convention with two reservations:
"...the Government of India declare that they will apply the Convention to the recognition and enforcement of awards made only in the territory of a State, party to this Convention. They further declare that they will apply the Convention only to the differences arising out of the legal relationships, whether contractual or not, which are considered as commercial under the law of India."
The so called "commercial reservation" limits the enforcement of foreign arbitral awards to those which are considered to be commercial in nature, whereas the so called "reciprocity reservation" limits the enforcement of arbitral awards to those made in other New York Convention countries. Both reservations have found their way into Part II of the Act dealing with the enforcement of foreign arbitral awards, through the definition of what constitutes a "foreign award". Section 44 of the Act defines a "foreign award" to be one:
- that arises out of legal relationships, whether contractual or not, considered as commercial under the law in force in India; and
- that is made in one of such territories as the Central Government of India, being satisfied that reciprocal provisions have been made, declares by notification in the Official Gazette to be a territory to which the New York Convention applies.
Although the term "commercial" has not been defined by the Act, the Indian Supreme Court has favoured a wide interpretation of this term and guidance can also be taken from the UNCITRAL Model Law which considers "commercial representation or agency" and "consulting" to be relationships of a commercial nature.
However, the reciprocity requirement as it is expressed in the Act is more onerous and considerably more restrictive than what is contemplated by the New York Convention. Section 44 not only requires that the award is made in a Convention Country, but the country also has to be notified in India's Official Gazette as being a country to which the New York Convention applies.
There would be no reason for concern had the notification in the official Gazette occurred for all Convention Countries, but of the 142 countries which have signed the New York Convention to date only about 47 countries have been notified in the Official Gazette of India as countries in which the New York Convention applies.
Australia has recently been added to the list of officially notified Convention Countries, but more than 95 Convention Countries, some of which are regular seat jurisdictions for international arbitrations such as China, Canada, the United Arab Emirates or New Zealand (to name just a few) have not been officially gazetted. As a result, arbitral awards made in those countries are likely to be refused enforcement in India.
Challenging a foreign arbitral award
Further, even if the award was made in a country which is officially recognised by India as a Convention Country the enforcement of the award is far from guaranteed.
In Venture Global Engineering v Satyam Computer Services Ltd (2008) 4 SCC 190, for example, the Indian Supreme Court adopted the view that a foreign arbitral award which is inconsistent with Indian domestic law could be set aside for contravention of "public policy". In doing so the court applied the provisions for the setting aside of awards made in India under Part I of the Act (section 2(2) of the Act provides that "this Part [ie. Part I] shall apply where the place of arbitration is in India").
In addition the Indian courts' interpretation of what constitutes a contravention of public policy is very broad. In Oil & National Gas Corporation Ltd v Saw Pipes (2003) 5 SCC 705 the Indian Supreme Court specified that the public policy of India is affected where the award is against the fundamental policy of India or the interests of India, or where the award is unjust, immoral or patently illegal – the broadness of this definition only being limited by the imagination of the person interpreting it!
This leaves the question how those risks and uncertainties in enforcing arbitral awards in India can be avoided or at least reduced. For the reasons already mentioned, litigating in Indian courts, or litigating in your home court and then enforcing the foreign judgment through the Indian courts, is no real alternative.
The best way to reduce the risk is to make appropriate drafting adjustments for this in the arbitration agreement. Firstly, the parties should agree on a seat (or place) of the arbitration in a country which is officially gazetted by India as a New York Convention country, making it less likely that an Indian court will refuse the enforcement of the award on the basis that it is not a "foreign award" pursuant to Part II of the Act.
Further, the arbitration agreement should expressly exclude the application of Part I of the Act, which could prevent the award from being set aside on Indian public policy grounds.