Link Legal :: Arbitration Newsletter, Nov 2020

Role of Judiciary in Making India an Arbitration Friendly Jurisdiction

Alternative dispute resolution processes have seen a sharp rise in recent times, primarily due to their manifold advantages over the conventional method i.e. litigation. The Ministry of Law and Justice, in its report submitted to the Parliament in September 2014 revealed that India is facing a shortage of over 6,000 judges. It is worthwhile to state that between 2006 to 2018, India has seen an 8.6% rise in the pendency of cases across all courts¹ consequently increasing the time required by a court to decide a case. These factors make litigation in India avoidable, especially in contractual disputes which can be settled through alternate mechanisms like arbitration which is governed by the Arbitration & Conciliation Act, 1996 (“Arbitration Act”).

The judiciary has played a pivotal role in promoting and making India an arbitration friendly state, and time is not far when India will pose a serious challenge in hosting arbitrations qua foreign jurisdictions. The Supreme Court of India and various High Courts have adopted a hands-off approach to disputes resolved by means of arbitration when such decisions have been challenged by a party. The courts in India have consistently adopted arbitration friendly approach in the recent past. There are many instances when the courts have upheld the arbitration agreements even when they have suffered from some minor errors thereby respecting the parties’ choice to have their disputes settled by arbitration. The Supreme Court while taking a pro-arbitration approach has upheld an arbitration agreement in spite of the error it suffered and concluded that since the intention of the parties to arbitrate was clear, the Court can make the arbitration agreement workable even if it has some errors in it.²

The courts have ordinarily refused to interfere with the awards passed under the Arbitration Act where parties have tried to bypass the provisions of the Arbitration Act. The Supreme Court while taking a pro-arbitration view did not interfere with an order on the ground that the party had appealed against an order passed under the Arbitration Act under Section 13 (1) of the Commercial Courts, Commercial Division and Commercial Appellate Division of High Court Act, 2015 (“Commercial Courts Act, 2015”) and observed that the appeals with respect of arbitration are only governed by the Arbitration Act.³ A party cannot use the appeal provisions of the Commercial Courts Act, 2015 to bypass the provisions of the Arbitration Act if no appeal is provided under the provisions of the Arbitration Act.

Further, the courts have been cautious in granting anti-arbitration injunctions. The Bombay High Court has held that when a party has remedies available under the Arbitration Act, it cannot obtain an anti-arbitration injunction from Court by ignoring the provisions of the Arbitration Act.⁴ In this case, a party alleged that one of the arbitrator was appointed after collusion with the other party and without following the procedure agreed upon and hence sought an order from the Court restraining the arbitral tribunal from proceeding with the arbitration. The Bombay High Court held that the party making such allegations has a remedy available under Section 12 of the Arbitration Act to challenge appointment of an Arbitrator and hence it cannot be allowed to bypass the provisions of the Arbitration Act.

In another recent judgment⁵, the Supreme Court while dealing with the question of arbitrability of fraud held that ‘serious allegations of fraud’, leading to non-arbitrability would arise only if either of following two tests were satisfied, and not otherwise:

Where the Court finds that the arbitration agreement itself cannot be said to exist being vitiated by fraud; or
Where allegations are made against the State or its instrumentalities, relating to arbitrary, fraudulent, or mala fide conduct, giving rise to question of public law as opposed to questions limited to the contractual relationship between the parties.

Therefore, while limiting the grounds on which a party can avoid arbitration citing fraud, the court held that all cases involving allegations of fraud would be arbitrable except the ones that pass the above test.

The judiciary has also proactively responded to amendments introduced by the Legislature which have been against the core intent of the Arbitration Act. The Arbitration & Conciliation (Amendment) Act, 2019 introduced Section 87 which provided that the 2015 Amendment Act was applicable prospectively. This meant that the amended Section 36 as introduced by the 2015 amendment would not apply to petitions filed under Section 34 against the arbitral awards which were passed in the arbitration proceedings commenced before commencement of the 2015 Amendment Act, i.e., 23^rd October 2015, thereby bringing back the regime of automatic stay of execution of Arbitral Awards passed in the proceedings initiated before the 23^rd October 2015. Section 87 was directly in conflict with the judgment of BCCI V. Kochi Cricket Private Limited & Ors⁶. The Supreme Court in Hindustan Construction Company Limited & Anr. V. Union of India & Ors.⁷ struck down Section 87 as introduced by the 2019 Amendment, hence restoring the position laid in the BCCI V. Kochi Cricket Private Limited & Ors (supra) case. The Supreme Court read Section 35 (which deals with finality of an award) along with Section 34 and 36 to state that it was never intended that a petition seeking setting aside of an arbitral award would automatically stay enforcement of the said award. It further observed that filing a petition seeking setting aside of an arbitral award therefore would not provide an automatic stay against the enforcement of any arbitral award, irrespective of when the arbitration was commenced.

Even though the courts have tried to remove hurdles during and after the arbitration process by ordinarily refraining from interfering with the decisions of the arbitral tribunals or passing other arbitration friendly judgments, however, this by itself may not be sufficient to attract overseas entities to opt for arbitration process in India. In our view, the following may go a long way in providing the necessary comfort to parties that the arbitration process shall no longer be permitted to be unnecessarily prolonged in India:

Efforts should be made to move from ad-hoc arbitration to institutionalised arbitration.
Since the government is the biggest litigator, necessary directives may be issued to all ministries, bodies and public sector undertakings etc. to accept and abide by the arbitration award, except for cogent reasons to be signed off by an officer not below the rank of Joint Secretary.
Heavy costs should be imposed by courts on frivolous petitions filed to challenge arbitral awards.
Arbitrators should be appointed depending upon the nature of the dispute(s).
Number of judges and courts dealing exclusively with arbitration cases should be increased in every jurisdiction.

https://www.prsindia.org/policy/vital-stats/pendency-cases-judiciary#:~:text=As%20of%20April%202018%2C%20there,before%20the%2024%20High%20Courts.
Enercon India Limited & Ors. V. Enercon GmBH & Anr (2014) 5 SCC 1
Kandla Export Corporation & Anr. V. OCI Corporation & Anr. (2018) 14 SCC 715
Ravi Arya & Ors V. Palmview Overseas Limited & Ors. (2018) SCC OnLine Bom 19886
Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited 2020 SCC OnLine SC 656
(2018) 6 SCC 287
(2019) SCC OnLine SC 1520

Authors

Suadat Ahmad Kirmani
Principal Associate

Nishank Tyagi
Associate

Case Notes

Government of India vs. Vedanta Limited and Ors., Civil Appeal No. 3185 of 2020, Decided on 16.09.2020

The Supreme Court of India recently settled an important issue related to the application of the Limitation Act, 1963 on the enforceability of the foreign award. The issue before the Court was to determine whether for the purpose of the execution of a foreign award, the limitation period shall be governed by Article 136 or Article 137 of the Limitation Act, 1963.

There is no specific provision under Part II of the Arbitration and Conciliation Act, 1996 relating to the period of limitation for filing an application for the enforcement of foreign award. Before this judgement, the law on the limitation period for enforcing a foreign award was unsettled and several High Courts had conflicting opinions. The Madras High Court in M/S Bharat Salt Refineries Ltd. vs. M/S Compania Naviera (OSA No. 52/2008) and the Delhi High Court in Cairn India Limited vs. Union of India (OMP (EFA) (Comm.) 15/2016) have taken a stand that the limitation period of 12 years as provided under Article 136 of the Limitation Act shall be applicable. On the contrary, the Bombay High Court in Noy Vallesina Engineering SPA vs. Jindal Drugs Limited (2006 SCC OnLine 545) held that the limitation period for enforcement of foreign award shall be for a period of 3 years as provided under Article 137 of the Limitation Act.

The Government of India and the Claimants entered a contract for the purpose of extraction of petroleum. The PSC provided for a development plan as per which the Claimant shall incur the costs of the petroleum operations and were entitled to recover the cost incurred from the petroleum produced. The Government and the Claimant were to receive their respective share in the ratio as fixed under the PSC. The dispute arose between the parties over the demand of the Claimant to increase the ‘cap’ amount to be received by the Claimant due to the enormous production for which the Claimant had to undergo extra development costs. The panel of arbitrators ruled that the Claimants were entitled to recover US$ 278,871,668 from the Government of India.

The award was challenged before the Malaysian High Court on the ground that the award contains decisions on matters which was beyond the scope of arbitration and that the award was contrary to the public policy of Malaysia and was initially set aside. The order was challenged before the Court of Appeals which held the award to be valid. The Claimant accordingly sent a demand notice to the Government of India demanding US$ 77 Million towards the Government’s share of Profit Petroleum under the PSC.

The Government of India then approached the Malaysian Federal Court filing an application for a leave to appeal. While the application was pending before the Malaysian Federal Court, the Claimant moved an application under Sections 47 read with 49 of the Arbitration and Conciliation Act, 1996 for the enforcement of the award. The Government of India resisted the application on grounds of the application being hit by the limitation period under the residuary provision of Article 137 of the Limitation Act, the enforcement of award being contrary to the public policy of India and that the award contained decisions on matters which was beyond the scope of PSC. The Delhi High Court rejected the claims made by the Government of India and passed the direction for the enforcement of the award. The High Court held that the period of limitation shall be governed by Article 136 of the Limitation Act, 1963 and that would be for a period of 12 years.

The Government of India then approached the Supreme Court of India filing a Special Leave Petition appealing against the order of the Delhi High Court. It was argued before the Supreme Court that the application filed before the Delhi High Court was hit by limitation which would be governed by Article 137 of the Limitation Act and therefore the Delhi High Court acted ultra-vires in condoning the delay. It was argued that in absence of any provision relating to the limitation in the enforcement of foreign award, the limitation shall be governed by Article 137 of the Limitation Act and therefore the time limit for filing the application would be three years. It was further argued that since the application of execution is to be treated as an application for enforcement under Order XXI of the Code of Civil Procedure, therefore the High Court had no powers to condone the delay. It was further argued that the award was against the public policy of India, and therefore liable to be set aside.

The Supreme Court ruled on the point of limitation that for the purpose of filing an application for execution of foreign award, the limitation period shall be governed by Article 137 of the Limitation Act, 1963 which prescribes for a period of three years from when the right to apply accrues. The Court relying upon its earlier decision in Bank of Baroda vs. Kotak Mahindra Bank clarified that Article 136 of the Limitation Act is appliable only to decrees passed in India. The Supreme Court further ruled that the bar contained under Section 5 of the Limitation Act, 1963 shall not apply on an application being filed for the execution of foreign award.

Upholding the validity of the award of the Tribunal, it was also held that the award passed by the Tribunal wasn’t contrary to the public policy of India and held that the public policy defence shall be applicable in cases only where the enforcement of the award would vitiate the basic notions of morality and justice of the state.

Balasore Alloys Limited vs. Medima LLC, Arbitration Petition (Civil) No. 15/2020 and SLP (Civil) No. 10264 of 2020.

The Supreme Court recently decided upon an issue relating to multiple arbitration agreements and sought to harmonise as to which of the two arbitration clauses would apply in the present proceedings.

In the matter at hand, the Applicant and the Respondent had entered into transactions for the supply of High Carbon Chrome to the Respondent for sale in the territory of USA and Canada. Disputes arose between parties for the settlement of which the arbitration clause was invoked by the Claimant.

An application was filed before the Supreme Court under Section 11(6) read with Section 11(12)(a) of the Arbitration and Conciliation Act, 1996 for the appointment of the sole arbitrator. The claims as put forward by the Petitioner were objected by the Respondent on the ground that the application for appointment shall not lie before the Court as per the agreement between the parties dated 31.03.2018 which provided that in an instance of a dispute, the matter shall be referred to arbitration under Clause 7 of the agreement, comprising of three members having its seat at Kolkata and be governed by the laws of India. Subsequently, another agreement relating to the same transaction on 31.03.2018 provided that in an instance of any dispute the same shall be referred to the International Chamber of Commerce under Clause 23 of the ‘Umbrella Agreement’ and be governed by the laws of England.

On the other hand, it was also brought to the notice of the Court that the arbitration clause was initially invoked by the Respondent wherein relying upon the contract which mandated that in an instance of any dispute, the matter shall be referred to arbitration before the ICC, the application by the Respondent was already made to the ICC and the ICC had already appointed the panel of arbitrator to adjudicate upon the issue.

The Supreme Court approaching on the principle of harmonisation upheld the validity of both the arbitration clauses in the different agreements. The Court ruled that in view of the matter, when admittedly the parties had entered into the agreement dated 31.03.2018 and there was consensus ad idem to the terms and conditions contained therein which is comprehensive and encompassing all terms of the transaction and such agreement also contains an arbitration Clause which is different from the arbitration Clause provided in the purchase order which is for the limited purpose of supply of the produce with more specific details which arises out of Agreement dated 31.03.2018; the arbitration Clause contained in Clause-23 in the main agreement dated 31.03.2018 would govern the parties insofar as the present nature of dispute that has been raised by them with regard to the price and the terms of payment including recovery etc. In that view, it was held by the Supreme Court that it will not be appropriate for the applicant to invoke Clause-7 of the purchase orders more particularly when the arbitration Clause contained in the Agreement dated 31.03.2018 has been invoked and the Arbitral Tribunal comprising of Mr. Jonathan Jacob Gass, Mr. Gourab Banerji and Ms. Lucy Greenwood have already been appointed on 22.06.2020. The application was therefore dismissed.

GE Power Conversion Pvt. Ltd. vs. PASL Wind Solutions Pvt. Ltd.¹

The issue relating to the enforcement of an arbitral award passed in India, originally having a foreign seat as settled in the terms of the contract by the parties was recently settled by the Gujarat High Court in GE Power Conversion Pvt. Ltd. vs. PASL Wind Solutions Pvt. Ltd.

An application for execution was brought before the Gujarat High Court under Section 47 (Part II) of the Arbitration and Conciliation Act, 1996. The award pertained to a dispute involving two Indian companies who entered a contract for supply of six ‘converters’ by the Award Holder (Petitioner) to the Respondent. The dispute arose with respect to the warranty period of the ‘converters’ issued by the Petitioner. The Dispute Resolution Clause provided that in a situation of any dispute, parties shall resolve to solve it amicably between themselves and if no settlement could be agreed, the dispute shall be referred for adjudication by means of arbitration having its seat in Zurich in accordance with the rules of conciliation and arbitration of the International Chamber of Commerce.

When dispute arose between the parties, the matter was referred for arbitration at the International Chamber of Commerce (hereinafter ‘ICC’). The ICC appointed the sole arbitrator to adjudicate the issue between the parties, the arbitration in this case took place in Mumbai and was decided in the favour of the Petitioner. The major contention raised objecting the enforcement was that the arbitration proceedings shall not be considered as an ‘International Commercial Arbitration’ and therefore the award not being a foreign award under Section 44 of the Arbitration and Conciliation Act, 1996, the enforcement shall not be governed by the Part II of the Arbitration and Conciliation Act, 1996. It was argued that since both the parties were Indian, and most of the transactions between the parties took place in Mumbai, the arbitration therefore could not be considered as an International Commercial Arbitration. It was further argued that claiming that the seat of arbitration was outside India, put a restriction on the Respondent in the legal recourse which voided the contract as being opposed to the public policy of India under Section 28, Section 23 of the Arbitration and Conciliation Act, 1996 read with Section 34 and 48 of the Arbitration and Conciliation Act, 1996. The major issue to be addressed by the Court was therefore related to the definition of the “foreign award” as provided under Section 44 of the Arbitration and Conciliation Act, 1996.

Upon appreciation of the above definition as provided in Section 45, the following ingredients of a foreign award were culled out by the High Court:

It must be an arbitral award.
The award must be deduced upon an adjudication of a dispute between parties.
Such dispute must be owing to and/or arise from a legal relationship between the parties.
Such legal relationship, may or may not be contractual, however must borne out to be commercial in nature.

The High Court ruled that nationality of the parties has no relevance for considering the applicability of Part II of the Act of 1996. Applicability of Part II is determined solely based on what is the seat of arbitration, whether it is in a country which is a signatory to the New York Convention. If this requirement is fulfilled, Part II of the 1996 Act shall apply. Since the subject matter of the dispute was within the territorial jurisdiction of the Gujarat High Court, the award therefore could be enforced by the High Court.

On the scope of public policy, the High Court ruled that the award is not contrary to the public policy, as it is a well settled principle that by agreement the parties cannot confer jurisdiction where none exists on a Court to which CPC applies, but this principle does not apply when parties agree to submit to exclusive jurisdiction of a foreign court. Thus, it is clear that parties to a contract may agree to have their disputes resolved by a foreign court termed as a ‘neutral court’ or a ‘court of choice’ creating exclusive or non-exclusive jurisdiction in it.

R/Petn. Under arbitration act no. 131 of 2019 with R/Petn. Under Arbitration Act no. 134 of 2019.

Arbitration and Conciliation (Amendment) Ordinance, 2020

The President of India recently promogulated an Ordinance to the Arbitration and Conciliation Act, 1996. Through the Ordinance, changes have been made to Section 36 of the Arbitration and Conciliation Act, 1996.

The aims and objectives provide that the Ordinance has been brought “to ensure that all stakeholders parties get an opportunity to seek unconditional stay of the enforcement of arbitral awards where the underlying arbitration agreement or contract or making of the arbitral award are induced by fraud or corruption.”

The Ordinance provides for an unconditional automatic stay on arbitral awards where prima facie it is found that that the award is induced by fraud or corruption, pending the disposal of a challenge against the award under Section 34 of the Arbitration and Conciliation Act, 1996. A similar amendment was introduced to the Arbitration and Conciliation Act, 1996 by the 2019 Amendment. The 2019 Amendment inserted Section 87 to the 1996 Act to give a retrospective application to automatic stay of the arbitral awards once they are challenged. The provision was struck down by the Supreme Court in Hindustan Construction Company Ltd. vs. Union of India as being manifestly arbitrary and therefore in violation of Article 14.

An amendment has also been introduced to Section 43J of the Arbitration and Conciliation Act, 1996 which provides that the “qualifications, experience and norms for accreditation of arbitrators shall be such as may be specified by the regulations.” Further, the Eighth Schedule to the 1996 Act which dealt with the “Qualifications and Experience of Arbitrators” has been omitted.

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