Friday, August 22, 2014

The Panna-Mukta Arbitrations: The Indian Supreme Court Adopts a Pro-Arbitration Stance. Another Step In The Right Direction?

Below is guest post from Nimoy Kher who is a third year student at NLSIU, Bangalore. 

In what may be seen as yet another step towards a more arbitration-friendly atmosphere in India, the Supreme Court of India on 27th May, in the case of Reliance Industries and Anr. v. Union of India denied Indian courts’ jurisdiction over an ongoing foreign arbitration proceeding.

By way of context, the factual matrix surrounding the case is as follows. There were two Production Sharing Contracts (PSCs) between the parties to the dispute. These PSCs dealt with the exploration and production of petroleum from the Tapti and Panna-Mukta Fields located just off the western coast of Mumbai. In 2010, certain disputes arose between the parties with regard to these PSCs, and Reliance Industries referred the disputes to arbitration, in accordance with the contracts. The government argued that the claims before the tribunal were non-arbitrable on several grounds. The arbitral tribunal, however, passed a final partial award declaring that it had jurisdiction over the parties’ disputes.

Subsequently, the government sought to set-aside this partial award under S.34 of the Indian arbitration statute. Reliance Industries opposed the maintainability of the setting aside petition. Reliance Industries based their challenge to the setting-aside petition on the argument that S. 34 falls under Part I of Indian Statute, and would therefore apply only to domestic or Indian seated arbitrations. Further, Reliance Industries argued that the arbitration agreements in the PSCs expressly named England as the seat of the arbitration and as such, all challenges to the award would lie in England. The government, on the other hand, argued that S.34 would apply to the award since it was clear from parties’ agreement that they did not intend to oust the applicability of the Indian statute, and also since the disputes between the parties involved substantial questions affecting Indian public interest.

The High Court placed heavy reliance on judgments such as Bhatia International v. Bulk Trading S.A and Venture Global Engineering v. Satyam Computer Services to assert jurisdiction over the award under S.34. The court opined that S.34 would apply since there was neither an explicit nor implicit rejection of the domestic provisions of the Indian statute, as per the requirements of Bhatia International. To the contrary, the court gleaned a manifest desire to subject the arbitration agreement to Indian law, from parties’ choice of Indian law as proper law of the contract. The court reasoned that the fact parties had chosen the law of India to govern the substantive contract clearly indicated that parties did not intend to oust the applicability of Indian law. By choosing England as the seat, parties had merely desired that the English law would be the curial law, and would apply only to questions of the conduct of arbitral proceedings. For all other matters, including challenge of an award, Indian law would apply.

Further, the court reasoned that S.34 would apply since the parties in the instant case did not wish to exclude the applicability of Indian public policy. The court relied on Art.15 (1) of the PSCs which stated that “the companies and the operations under this Contract shall be subject to all fiscal legislation of India” to support this conclusion. In any case, irrespective of the parties’ intention, the High Court declared that it would retain jurisdiction over the award, since the question of the arbitrability of certain kinds of disputes must not be decided just against the touchstone of the lex arbitri. It stated that:

“Since the question of arbitrability of the claim is a larger question effecting public policy of State it should be determined by applying laws of India.”

It must be bourne in mind, that in Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical Service Inc., a 2012 Supreme Court judgment, the court has overruled the judgments in Bhatia International and Venture Global. The Supreme Court has clearly stated that Part I of the Indian arbitration statute would not apply to foreign-seated arbitrations. However, as the High Court correctly recognized, the holding in the Bharat Aluminium Case applies prospectively, to arbitration agreements executed after 6th September 2012. Since the arbitration agreements in the present case were entered into before that date the High Court relied upon the ratio in Bhatia International and Venture Global to come to the aforementioned conclusions.

Fortunately, in appeal the Supreme Court comprehensively overruled the High Court on both issues. In light of the High Court judgment, the first issue that had to be determined was whether the choice of seat in the instant case, amounted to an implicit exclusion of the provisions of the arbitration act, and excluded the award from the ambit of S.34, as per the requirements laid down in Bhatia International. The Supreme Court found that in the instant case the choice of seat did, in fact, amount to an implicit exclusion of the Indian statute. The court concluded that a ‘meaningful reading’ of the terms of the contract clearly indicated that parties understood the distinction between the proper law of the contract and proper law of the arbitration agreement, and parties intended both to be different. The court opined:

“In our opinion, it is too late in the day to contend that the seat of arbitration is not analogous to an exclusive jurisdiction clause”

The court relied on a number of previous judgments such as Videocon Industries Ltd. v. Union of India and Anr. and Dozco v. Doosan Infracore Co.Ltd  to find that the choice of seat clearly amounted to an ouster of the jurisdiction of Indian courts. Further, in clear contrast to the High Court ruling, the court held that the mere fact that Indian law applied to the PSC would not indicate that parties intended Indian law to be the proper law of the arbitration agreement.

With regard to the second issue – whether the Indian statute would apply by virtue of the fact that substantial questions of Indian interest involved - the court found that the applicability of the provisions of the statute would not depend on the nature of the challenge of the award. For the standard of public policy laid down in the Indian statute to apply, it would first have to be proved that the statute applied to begin with. Since, in the instant case the arbitration agreement fell outside the scope of the statute by virtue of the seat of the arbitration being England, an award passed thereunder would not be subject to setting aside proceedings under S.34. The mere fact that question of Indian public interest were involved was not sufficient to attract the applicability of the statute.

This judgment is commendable, since despite being forced to rely on the ruling in Bhatia International, the court still carved out a niche, which excluded the applicability of Part I of the Indian statute to the arbitration proceedings. This judgment clearly indicates the change in the attitude of Indian courts towards international arbitration. It indicates that the Indian judiciary is increasingly hesitant to exercise control over international arbitrations. Further, the Supreme Court has correctly identified the inconveniences that are likely to be caused to parties by allowing the applicability of the Indian statute to international arbitration. Finally, this judgment is significant because it explicitly recognizes the need to follow international trends embodied in other UNCITRAL Model Law and New York Convention. Post the holding in Bharat Aluminium Co Ltd. v. Kaiser Aluminium Technical Services Inc., this judgment will no doubt help bolster the confidence of the international arbitration community in India.  The question remains, though: are these cases just flashes in the pan, or are they representative of a true change in the Indian arbitration landscape?

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