Foreign investors in India face a new challenge, following the Satyam Computer judgment. Only careful drafting of arbitration clauses will steer them free from intervention by local courts.

India has never been an easy jurisdiction for arbitration. At the start of 2008 its highest court decided a case which cast grave doubt on India’s commitment to international arbitration.

The Satyam Computer case illustrates a long-held judicial mistrust of arbitration, viewing it as an attempt to oust the jurisdiction of the court. In India, judges are always best placed to decide any dispute, no matter what the subject matter.

Judgment

In Satyam Computer, the Indian Supreme Court declared that Part I of the Arbitration and Conciliation Act of 1996 applied to foreign arbitrations as much as it did to Indian arbitrations.

The Arbitration and Conciliation Act

Part I of the Act makes provision for recourse against an arbitral award. It enables Indian courts to remove arbitrators and set aside awards which are deemed “in conflict with the public policy of India”.

The Arbitration and Conciliation Act was originally designed to bring Indian arbitration law into line with international practice. It is based on the UNCITRAL model law and was meant to reassure the commercial world of India’s commitment to investor protection.

Part I had been generally accepted to apply only to arbitrations held inside India.

Parts II and III applied to arbitrations held outside of India (foreign arbitrations). These parts deal with the courts’ obligation to stay proceedings brought in breach of an agreement to arbitrate; and with enforcement of international arbitral awards.

They do not confer powers on the court to interfere with the arbitration or with the award.

Power of the courts

The Supreme Court also confirmed that a broad definition of public policy would apply. This extends the powers of the Indian courts and increases the uncertainty facing any party to arbitration connected to India. The court declared in effect that Indian courts had the same powers to police foreign arbitrations as they had to police Indian arbitrations.

Caveat

The Supreme Court did concede that parties to an international arbitration may exclude the application of Part I by stating this in the arbitration clause.

Recommendation

Given the judicial attitude in India to arbitration, most practitioners will be wise to opt for clear words to this effect in any arbitration clause involving India. It will be safer to exclude the whole of Part I, as an exclusion just of particular provisions may not be effective.

Many parties are also already amending the arbitration clauses of existing contracts to take into account the Supreme Court’s decision.

The coming years promise a game of cat and mouse as lawyers drafting arbitration agreements do their best to avoid the reach of the Indian courts.

Venture Global Engineering v. Satyam Computer Services Ltd. & Anr

Civil Appeal No. 309 of 2008 (Supreme Court of India, 10 January 2008)