A recent Indian Supreme Court decision provides welcome support for a non-interventionist approach to international arbitration

Introduction

The historic tendency of the Indian judiciary to intervene in international arbitration proceedings has been a source of concern for foreign companies participating in construction and energy projects and other business transactions in India. In an encouraging move the recent decision of India’s Supreme Court in Bharat Aluminium Co. v Kaiser Aluminium Technical Services, Inc. (“Bharat Aluminium”)1 has reversed earlier authority which endorsed this interventionist approach.

Background

International commercial arbitration in India is regulated by the Arbitration and Conciliation Act 1996 (the “Arbitration Act”). The Arbitration Act is divided into two parts: Part I provides a framework of rules for domestic arbitrations, that is, any arbitration seated in India, including an arbitration involving a foreign party; and Part II provides rules for the recognition and enforcement of foreign arbitral awards, that is, those resulting from arbitrations seated outside India whether or not an Indian party is involved.

The Arbitration Act closely follows the UNCITRAL Model Law on International Commercial Arbitration2 which provides a suggested legal framework for international arbitration which respects party autonomy and places limits on the extent to which local courts may interfere in the arbitral process, particularly in relation to arbitrations held in other jurisdictions.

However, in a series of decisions the Indian courts severely eroded this principle of non-intervention. In particular, the Supreme Court’s own 2002 decision in Bhatia International v Bulk Trading S.A. (“Bhatia International”)3 found that Part I of the Arbitration Act applied equally to arbitrations held outside India, thereby justifying higher levels of court intervention. In another decision, the Court held that any foreign arbitral award that contravened Indian law was illegal and liable to be set aside on the grounds of public policy.4

The net effect of these decisions was that the Indian courts had the power to reopen and review any foreign arbitral award, whether seated within India or not and whether or not a party was seeking to enforce that foreign award in India. As a result of this approach, parties who had agreed to resolve their disputes by arbitration in, for example, Singapore could nonetheless be dragged into legal proceedings before the Indian courts even before any attempt at local enforcement was made. This approach was the source of considerable concern amongst foreign parties engaged in commercial transactions in India and had attracted substantial criticism from lawyers and academics in India and elsewhere.

The decision in Bharat Aluminium

In Bharat Aluminium the Supreme Court found that by adopting the UNCITRAL Model Law the Indian legislature had accepted the territorial principles contained within the Model Law. According to those principles, the “place” or “seat” of the arbitration agreed by the parties to an arbitration agreement provides the law governing that arbitration. The Court accepted that the Arbitration Act distinguished between domestic awards, as those rendered by arbitral tribunals seated within India, and foreign awards, as those rendered by tribunals seated in other jurisdictions. The Court confirmed that Part I of the Arbitration Act, and the intrusive powers it gives to the courts, only applies to arbitrations seated in India.

The Bharat Aluminium decision carries additional weight for two reasons: first it was a consolidation of several cases appealing against first instance decisions concerning the correct interpretation of the Arbitration Act. The Supreme Court therefore had the opportunity to review application of the Act in a range of circumstances; and secondly, the Supreme Court sat as a special five-member “Constitutional Bench”5 and delivered a unanimous verdict. The present case therefore represents a clear and firm statement of judicial intent in India in relation to international arbitration.

Conclusions

The Supreme Court’s decision in Bharat Aluminium means that Indian courts will no longer be able to set aside awards (or grant interim measures) in respect of arbitrations that are seated outside India. The decision is to be welcomed and provides firm judicial basis for the non-intervention of the Indian courts in foreign arbitral awards.

It is important to note that when a party seeks to enforce a foreign arbitral award in India the Indian courts will still have the power, under Part I of the Arbitration Act, to refuse enforcement on certain limited grounds, including where enforcement would be contrary to the public policy of India. This reservation of judicial authority is consistent with the UNCITRAL Model Law and is mirrored in most countries’ equivalent legislation.6

In recognition of the precedent set by its previous decisions, including Bhatia International, the Supreme Court stated that its present interpretation of the law will only apply to arbitration agreements entered into after the date of its decision, that is, 6 September 2012. This is somewhat unusual given that the decision corrects interpretation of legislation passed in 1996. Therefore, whilst the decision in Bharat Aluminium represents an important step forward, its prospective application will leave considerable uncertainty in relation to arbitration proceedings commenced pursuant to arbitration agreements contained in contracts already in place. It is to be hoped that the Indian courts will be persuaded in such cases to be mindful of the Bharat Aluminium decision and resist relying on Part I of the Arbitration Act to intervene in foreign arbitral proceedings.