Briefing on the Law Commission of India's Report on Changes to the Arbitration Law

I recently wrote a post for Kluwer Arbitration Blog on the 246th Report of the Law Commission of India on the "Amendments to the Arbitration and Conciliation Act, 1996". The post covers the suggestions and amendments proposed by the commission and can be viewed on this link. 

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 27^th 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 6^th 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?

Supreme Court on Implied Exclusion of Part I of the Arbitration and Conciliation Act

On September 1, 2011, a two judge bench of the Supreme Court (Cyriac Joseph and Altamas Kabir) in Yograj Infrastructure Ltd v. Ssang Yong Engineering & Construction Co. Ltd., ruled that where the seat of arbitration was Singapore, rules governing the arbitration were of the Singapore International Arbitration Centre ("SIAC") and the substantive law of contract was Indian law, then Part I of the Arbitration and Conciliation Act, 1996 (the "1996 Act") was excluded by implication. 

Background

The Appellant was an Indian company while the Respondent was a company incorporated in Seoul, South Korea with its registered office at Seoul and its project office at New Delhi. In 2006, the National Highways Authority of India ("NHAI") awarded a contract to the Respondent, for a project in the State of Madhya Pradesh.  The Respondent entered into a Sub-Contract with the Appellant Company for carrying out the work in question.

Arbitration Clause

Clauses 27 and 28 of the Agreement provided for arbitration and the governing law agreed to was the the 1996 Act. 

The arbitration clause contained in the Agreement in Clause 27 read as follows:

"27.1 All disputes, differences arising out of or in connection with the Agreement shall be referred to arbitration. The arbitration proceedings shall be conducted in English in Singapore in accordance with the Singapore International Arbitration Centre (SIAC) Rules as in force at the time of signing of this Agreement. The arbitration shall be final and binding.

27.2 The arbitration shall take place in Singapore and be conducted in English language.

27.3 None of the Party shall be entitled to suspend the performance of the Agreement merely by reason of a dispute and/or a dispute referred to arbitration."

Clause 28 of the Agreement described the governing law and provided:

"This agreement shall be subject to the laws of India. During the period of arbitration, the performance of this agreement shall be carried on without interruption and in accordance with its terms and provisions."

Issues

The issues involved in the instant case were:

(i) whether Indian Courts would have jurisdiction to entertain an appeal under Section 37 of the Arbitration and Conciliation Act, 1996, against an interim order passed by the Arbitral Tribunal with its seat in Singapore; 

(ii) Whether the "law of arbitration" would be the International Arbitration Act, 2002, of Singapore; and 

(iii) whether the "Curial law" would be the laws of Singapore.

Dispute

In 2009, Respondent issued a notice of termination of the Agreement, inter alia, on the ground of delay in performing the work under the Agreement. Settlement talks having failed, the Respondent/claimant, invoked Clause 27 of the Agreement for reference of the disputes to arbitration in accordance with the SIAC Rules. Both the parties filed applications before the Sole Arbitrator seeking interim relief under Rule 24 of the SIAC Rules in June, 2010. The Arbitrator passed an interim order on 29th June, 2010 in favour of Respondent.

Before the lower courts

The appeal filed by the Appellant before the District Court, Narasinghpur, under Section 37(2)(b) of the 1996 Act, against the order of the Sole Arbitrator, was dismissed on the ground of maintainability and lack of jurisdiction, since the seat of the arbitration proceedings was in Singapore and the said proceedings were governed by the laws of Singapore. 

The Civil Revision filed against the said order was dismissed by the Madhya Pradesh High Court in August, 2010. The High Court observed that under Clause 27.1 of the Agreement, the parties had agreed to resolve their dispute under the provisions of SIAC Rules which expressly or, in any case, impliedly also adopted Rule 32 of the said Rules which categorically indicates that the law of arbitration under the said Rules would be the International Arbitration Act, 2002, of Singapore. Against this decision of the High Court, the Appellant filed this Special Leave Petition. 

Before the Supreme Court

Contentions of Appellant

Appellant contended that Indian law is the applicable law of arbitration, in terms of the agreement arrived at between the parties. This explicit agreement is evident from the wording of clause 28 of the Agreement, which provided that the Agreement would be subject to the laws of India and that during the period of arbitration, the performance of the Agreement would be carried out without interruption and in accordance with its terms and provisions. In other words, all interim measures sought to be enforced would necessarily have to be in accordance with Sections 9 and 37(2)(b) of the Act.

As per clause 27.1, SIAC Rules would apply only to the arbitration proceedings, but not to appeals from such proceedings. It was submitted that the right to appeal from an interim order under Section 37(2)(b) is a substantive right provided under the Act and was not governed by the SIAC Rules.

Reliance was also placed on Rule 1.1 of the SIAC Rules which provides:

"Where parties have agreed to refer their disputes to the SIAC for arbitration, the parties shall be deemed to have agreed that the arbitration shall be conducted and administered in accordance with these Rules. If any of these Rules is in conflict with a mandatory provision of the applicable law of the arbitration from which the parties cannot derogate, that provision shall prevail."

Rule 32 (of the 2007 Rules) provides: 

"Where the seat of arbitration is Singapore, the law of the arbitration under these Rules shall be the International Arbitration Act (Chapter 143A, 2002 Ed, Statutes of the Republic of Singapore ) or its modification or re-enactment thereof." 

However, Section 37(2)(b) of the 1996 Act being a substantive and non-derogable provision, providing a right of appeal to parties from a denial of an interim measure, such a provision protects the interest of parties during the continuance of arbitration and as a consequence, Rule 32 of the SIAC Rules which does not provide for an appeal, is in direct conflict with a mandatory non-derogable provision contained in Section 37(2)(b) of the 1996 Act.

It was then submitted that Part I of the 1996 Act was applicable in this case, since: 

(i) it had not been excluded by Clause 27 of the Agreement (the Bhatia International and Venture Global decisions were relied on, as well as Citation Infowares Ltd. v. Equinox Corporation, wherein it was clearly held that where the operation of Part I of the 1996 Act is not expressly excluded by the arbitration clause, the said Act would apply); (ii) Clause 28 of the Agreement expressly provided that the Agreement would be subject to the laws of India and that during the period of arbitration the parties to the Agreement would carry on in accordance with the terms and conditions contained therein. 

The International Arbitration Act of Singapore would have no application to this case, though the conduct of the proceedings of arbitration would be governed by the SIAC Rules.

It was thus argued that the High Court had made an error in its decision by not considering Clause 28 of the Agreement while arriving at such a conclusion. Moreover, the very fact that the Respondents had approached the District Court, Narsinghpur, in India and had filed an application under Section 9 of the 1996 Act,  and even mentioned that the contract was within the jurisdiction of the court, indicated that the Respondent also accepted the applicability of the 1996 Act. 

The Appellant further relied on section 42 in Part I of the 1996 Act, which states: 

"Notwithstanding anything contained elsewhere in this Part or in any other law for the time being in force, where with respect to an arbitration agreement any application under this Part has been made in a Court, that Court alone shall have jurisdiction over the arbitral proceedings and all subsequent applications arising out of that agreement and the arbitral proceedings shall be made in that Court and in no other Court."

The concepts of 'proper law' of an arbitration agreement and 'curial law' were explained and distinguished. The proper law is the law which would be applicable in deciding the disputes referred to arbitration, it governs most aspects of the main contract, and the curial law governs the procedural aspect of the conduct of the arbitration proceedings. 

Thus, the appellant argued, the proper law of the arbitration would be the 1996 Act, the curial law would be the SIAC Rules. This difference in the two concepts had been considered by the Apex Court in Sumitomo Heavy Industries Ltd. v. ONGC and NTPC v. Singer, in which the question for decision was what would be the law governing the arbitration when the proper law of the contract and the curial law were agreed upon between the parties. 

Appellant contended that absent any express choice, the proper law of the contract would be the proper law of the Arbitration Agreement. In the instant case, admittedly the proper law of contract was the law of India and since the parties had not expressly made any choice regarding the law governing the Arbitration Agreement, the proper law of contract, namely, the 1996 Act, would be the proper law of the Arbitration Agreement.

The right to appeal, a substantive right under the 1996 Act would be governed by the said Act and the present appeal, was therefore, liable to be allowed, and the order of the High Court, impugned in the appeal, was liable to be set aside.

Contentions of Respondent

Respondent submitted that the parties had agreed that the seat of arbitration would be Singapore and that the arbitration proceedings would be continued in accordance with SIAC Rules, as per Clause 27.1 of the Agreement. It was also agreed that the proper law of the contract would be Indian law and the proper law of the arbitration would be Singapore law.

Respondent contended that an application under Section 9 of the 1996 Act was filed before the District Court prior to the date of invocation of the arbitration proceedings and before the curial law, Singapore law, became operative.The District Judge  directed the applicant to submit its case before the Arbitrator in Singapore. The parties had expressly chosen the proper law of the contract to be Indian Law, the proper law of arbitration to be the Singapore International Arbitration Act, 2002 and the curial law to be Singapore law, since the seat of arbitration was in Singapore. Respondent relied on Sumitomo Heavy Industries Ltd. v. ONGC, where it was held that the curial law, besides determining the procedural powers and duties of the Arbitrators, would also determine what judicial remedies are available to the parties, who wished to apply for security for costs or for discovery or who wished to challenge the Award once it had been rendered and before it was enforced.

Next, it was submitted that choice of the seat of arbitration empowered the courts within the seat of arbitration to have supervisory jurisdiction over such arbitration.  

The decision in NTPC v. Singer related to the applicability of the Indian Arbitration Act, 1940, and the Foreign Awards (Recognition and Enforcement) Act, 1961, to a foreign award sought to be set aside in India under the provisions of the 1940 Act. The said decisions have no relevance to the question raised in the present case which raises the question as to whether the Indian Courts would have jurisdiction to entertain an appeal under Section 37 of the 1996 Act against an interim order of the Arbitral Tribunal, despite the parties having expressly agreed that the seat of arbitration would be in Singapore and the Curial law of the arbitration proceedings would be the laws of Singapore. In the NTPC judgment, the Court had observed that Courts would give effect to the choice of a procedural law other than the proper law of contract only where the parties had agreed that the matters of procedure should be governed by a different system of law. In the above-mentioned case, the Court was dealing with a challenge to a domestic award and not a foreign award. Section 9(b) of the Foreign Awards (Recognition and Enforcement) Act, 1961, provides that the said Act would not apply to an award, although, made outside India, but which is governed by the laws of India. Accordingly, all such awards were treated as domestic awards by the 1961 Act and any challenge to the said award, could, therefore, be brought only under the provisions of the 1940 Act. The law of arbitration in the NTPC case was Indian law as opposed to the present case, where the parties had agreed that the law of arbitration would be the International Arbitration Act, 2002, of Singapore.

By virtue of Clause 27 of the Agreement, and by accepting the SIAC Rules, the parties had agreed that Part I of the 1996 Act would not apply to the arbitration proceedings taking place in Singapore. This was reiterated in the Terms of Reference that the arbitration proceedings would be governed by the laws of Singapore. Even in Bhatia International, relied upon by Appellant, the Court had held that parties by agreement, express or implied, could exclude all or any of the provisions of Part I of the 1996 Act. Consequently, in Bhatia International the Court had held that exclusion of Part I of the 1996 Act could be by virtue of the Rules chosen by the parties to govern the arbitration proceedings.

With respect to Section 42 of the 1996 Act, the High Court had held that by express agreement parties had ousted the jurisdiction of the Indian Courts, while the arbitration proceedings were subsisting. Accordingly, it was only the laws of arbitration as governed by the SIAC Rules which would govern the arbitration proceedings along with the procedural law, which is the law of Singapore.

Decision

The decision turned on Clause 27.1 of the Agreement between the parties. As evident from Clause 27.1, the procedural law with regard to the arbitration proceedings, was unambiguously the SIAC Rules. Clause 27.2 made it clear that the seat of arbitration would be Singapore.

To decide on the law on the basis of which the arbitral proceedings were to be decided, the Court looked to Clause 28 of the Agreement. Clause 28 indicated that the governing law of the agreement would be the law of India, i.e., the 1996 Act. While the proper law governed the agreement itself, in the absence of any other stipulation in the arbitration clause as to which law would apply in respect of the arbitral proceedings, it is the law governing the contract which would also be the law applicable to the Arbitral Tribunal itself. Clause 27.1 made it clear, according to the Court that the curial law, regulating the procedure to be adopted in conducting the arbitration, would be the SIAC Rules. 

The question to be decided was whether in such a case the provisions of Section 2(2) of the 1996 Act, indicating that Part I of the Act would apply where the place of arbitration is in India, would be a bar to the invocation of the provisions of Sections 34 and 37 of the Act, as far as the instant arbitral proceedings, being conducted in Singapore, were concerned.

The Court distinguished Bhatia International, wherein while considering the applicability of Part I of the 1996 Act to arbitral proceedings where the seat of arbitration was in India, the Court was of the view that Part I of the Act did not automatically exclude all foreign arbitral proceedings or awards, unless the parties specifically agreed to exclude the same. In the present case, parties had categorically agreed that the arbitration proceedings, if any, would be governed by the SIAC Rules as the Curial law, which included Rule 32, requiring applicability of the Singapore International Arbitration Act, 2002.

Regarding Rule 1.1 of the SIAC Rules, the Court ruled that Section 2(2) of the 1996 Act indicates that Part I would apply only in cases where the seat of arbitration is in India. Although the Court in Bhatia International, while considering the said provision, held that in certain situations the provision of Part I of the aforesaid Act would apply even when the seat of arbitration was not in India, in the instant case, once the parties had specifically agreed that the arbitration proceedings would be conducted in accordance with the SIAC Rules, which includes Rule 32, the decision in Bhatia International and subsequent decisions relying on it, would no longer apply.

With regard to Section 42 of the 1996 Act, the Court held that the same was applicable at the pre-arbitral stage, when the Arbitrator had not also been appointed. Once the Arbitrator was appointed and the arbitral proceedings were commenced, the SIAC Rules became applicable excluding the applicability of Section 42 as well as Part I of the 1996 Act, including the right of appeal under Section 37 thereof.

Thus the appeal under Section 37 was not maintainable and the instant appeal was dismissed.

Choices in International Arbitration - Part I

A survey was recently conducted by White and Case LLP in association with The School of International Arbitration, Queen Mary, University of London on the factors that influence corporate choices about the main aspects of international arbitration. It purports to be one of the largest empirical studies of its kind.

The survey throws up several interesting results.

Law governing substance:

The law governing the substance of the dispute is the most important issue to be decided at the outset (51% of respondents). The maximum number of respondents preferred English law (40%), followed by New York law (17%). Other popular legal systems were Switzerland, France, Germany, Australia and California. Top factors which influence choice of law are neutrality and impartiality of the legal system, appropriateness for the type of contract, familiarity with and experience of the particular law.

Transnational principles and rules:

Not surprisingly, when asked about certain transnational rules and principles, most respondents had never applied general principles of law, commercial practices, fairness or equity. Not too many have applied international treaties or conventions such as the United Nations Convention on Contracts for the International Sale of Goods (CISG) (which is probably applied more often here and here). UNIDROIT Principles and International Commercial Terms (INCOTERMS) are among the popular international rules used by respondents.

Some proposed amendments to the Arbitration and Conciliation Act (Part II)

I had discussed in a previous post some of the proposed amendments to the Arbitration and Conciliation Act. Interesting posts on the same topic have appeared on the Law and Legal Developments Blog and the Practical Academic Blog. In this post, I discuss some more of the proposed amendments.

An important provision in the Arbitration Amendment Bill is the widened scope of “domestic arbitration”. The definition of “domestic arbitration” proposes to include, as section 2(1)(ea), “international arbitration” and “international commercial arbitration” where the place of arbitration is in India.

This departs from the present position which did not include within the scope of domestic arbitration, an arbitration taking place in India between two foreign parties, or two parties, both of which have place of business outside India. This present position is similar to the law in Switzerland. The amendment, however, marks a clear departure from the UNCITRAL Model Law which, in Article 1(3), defines international arbitration.

Thus electing to arbitrate in India would mean that all the provisions of Part I of the Arbitration and Conciliation Act, 1996 would apply to international arbitrations seated in India, as was envisaged by the Supreme Court in Bhatia International v. Bulk Trading S. A.

This amendment could have implications for the lex arbitri, or the law governing arbitration which applies to the arbitration proceedings and arbitral procedure. Often, parties may agree to a separate seat of arbitration (locus arbitri) and separate law governing the arbitration (lex arbitri). That is, the law governing arbitration (lex arbitri) need not be the law of the seat of arbitration (lex loci arbitri). If parties do not make a choice of lex arbitri, though there is a presumption in favour of lex loci arbitri, the same is not cast in stone. However, for an arbitration seated in India, it appears that it would be mandatory to follow Indian law of arbitration.

Though the autonomy of parties in respect of lex arbitri has been curtailed, this freedom appears to have been preserved in respect of substantive law under which the dispute is to be adjudicated. Usually in domestic arbitrations, the parties are bound by the substantive laws of the country. However, despite bringing international arbitrations held in India under the definition of “domestic arbitration”, Indian substantive law is not made mandatorily applicable to these disputes. Section 28(1A), as proposed, which discusses the substantive law of the dispute, gives paramountcy to the will of the parties as expressed in their contract. Failing agreement by the parties, the power lies with the arbitral tribunal to make a choice of law. Moreover, as mentioned in an earlier post, the public policy standards for setting aside awards from international arbitrations held in India remains different from that for setting aside other domestic awards.

Moreover, as the applicability of Part I (except Sections 8, 9and 27) to arbitrations held outside India stands excluded as discussed in a previous post, it appears that it is no more tenable to consider awards rendered outside India, even in non-convention countries as domestic awards. So, it may be argued that the “lacuna in law” that the judgment in Bhatia feared in this regard is set to come true. However, I have strong reservations to the “lacuna in law” argument of Bhatia. Judgments in Renusagar Power Co. v. General Electric Co. and ONGC v SAW Pipes make express references to principles of Common Law regarding enforcement of foreign judgments and awards. In the face of “lacuna” in Indian statutory law, these principles can provide useful guidance. Moreover, the intention of the Parliament to base recognition and enforcement of awards on a system of reciprocity is evident in the text of Section 45 itself.