India: arbitration round-up 2012

Practical Law UK Articles 8-523-9040 (Approx. 5 pages)

India: arbitration round-up 2012

by H. Jayesh (Co-Founder and Senior partner), Shruti Thampi (Associate) and Saksham Chaturvedi (Associate), Juris Corp

Top developments of 2012

2012 has been a positive year for arbitration in India, especially for international arbitration. Of particular importance is the Supreme Court judgment in Bharat Aluminium v Kaiser Aluminium Technical Services (Bharat Aluminium).

Bharat Aluminium v Kaiser Aluminium Technical Services, Inc (Civil Appeal No. 7019 of 2005)

In Bharat Aluminium, a bench of five judges (colloquially known as Constitution Bench), held that Part 1 of the Arbitration and Conciliation Act 1996 (1996 Act) does not apply to international arbitrations with a seat outside India (see Legal update, Uprooting Bhatia International: Part I of Indian Arbitration and Conciliation Act does not apply to arbitration outside India).

Part 1 of the 1996 Act deals with domestic arbitrations, while Part 2 deals with arbitrations with a seat outside India.

In Bhatia International v Bulk Trading Co. [(2004) 2 SCC 105] (Bhatia International) and Venture Global Engineering v Satyam Computer Services Ltd and another [(2008) 4 SCC 190] (Venture Global), the Indian Supreme Court had ruled that Part 1 of the 1996 Act applied to arbitrations with a seat outside India, unless the parties expressly excluded the applicability of Part 1. This meant that a foreign award could be challenged and set aside under the grounds contained in section 34 of the 1996 Act, which was intended to apply to domestic awards only. Part 2 only provided for the enforcement of foreign awards in India. This meant that the (foreign) award holder was still free to enforce the award outside India.

Although the Supreme Court overruled Bhatia International, it held that the Bharat Aluminium judgment would apply prospectively to arbitration agreements executed after 6 September 2012. This means that the ratio of Bhatia International and Venture Global will continue to apply to arbitration agreements entered into prior to 6 September 2012.

The negative impact of the prospective ruling has already manifested itself. In Aargus Global Logistics Pvt Ltd v NNR Global Logistics (Shanghai) Co Ltd (O.M.P. 201 of 2012), the claimant filed a petition under section 34 of the 1996 Act to set aside a foreign award. Had Bharat Aluminium applied in this case, the Delhi High Court would not have heard the petition. But due to the prospective implication of Bharat Aluminium, the application under section 34 of the 1996 Act was held to be maintainable. However, on the merits, the court held that it could not set aside the award.

It is worth noting, however, that courts may find ways to distinguish Bhatia International even for arbitration agreements pre-dating 6 September 2012. For example, in a decision that preceded the judgment in Bharat Aluminium, the Delhi High Court dismissed an application to set aside an arbitral award made in New York (Indiabulls Financial Services Limited (India) v Amaprop Limited (Cayman Islands) & Anr [O.M.P. 287 of 2011, decided by the Delhi High Court on 18th May 2012]). The Delhi High Court held that, when an agreement provided for settling a dispute in a particular jurisdiction beyond India, parties cannot invoke the jurisdiction of an Indian court under section 34 of the 1996 Act to challenge the impugned award. On arguments relating to "public policy", the court held that a petition to set aside a foreign award under Part 1 of the 1996 Act was not the correct stage to deal with the issue.

For guidance on drafting agreements for arbitration in India, see India: ad hoc arbitration clause.

India held liable under BIT for excessive judicial delay: White Industries v India

In an award published in early 2012, an UNCITRAL tribunal held that India breached its obligations under the India/Australia bilateral investment treaty (BIT) by failing to provide "effective means of asserting claims and enforcing rights" (an obligation under the India/Kuwait BIT, imported by virtue of the most favoured nation clause in the India/Australia BIT) through undue delay in the Indian court system (see Legal update, India liable under BIT for excessive judicial delays). The award highlighted the considerable delays that investors may face when attempting to enforce awards in India.

Independence and impartiality of arbitrators: Shakti Bhog Foods Ltd v Kola Shipping Ltd and another

In Shakti Bhog Foods Ltd. v Kola Shipping Ltd and another [O.M.P. 194 of 2009, decided by the Delhi High Court on 21st August 2012], the Delhi High Court set aside a foreign arbitral award, under Part I of the 1996 Act. This was on the ground that the arbitrator had failed to disclose the fact that he had been appointed as arbitrator by the first respondent in a previous arbitration on a related issue. The court held that this raised justifiable doubts as to his independence and impartiality. After a comprehensive analysis of the provisions of the 1996 Act and IBA Guidelines on Conflicts of Interest in International Arbitration, the Delhi High Court considered the award to be contrary to public policy and accordingly set it aside.

Extension of arbitration agreement to non-signatory: Chloro Controls India Pvt Ltd v Severn Trent Water Purification Inc and others

In Chloro Controls India Pvt. Ltd v Severn Trent Water Purification Inc and others [Civil Appeal no. 7134 of 2012, decided on 28th September 2012], the Indian Supreme Court ruled that non-signatories to arbitration agreements can be referred to arbitration. This case related to an arbitration with a seat outside India, which is governed by Part II of the 1996 Act.

Section 45 in Part II of the 1996 Act provides:

"Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed."

There is a similar provision under section 8 in Part I of the 1996 Act, in relation to Indian-seated arbitrations.

In this case, the Supreme Court held that the expression "any person" in section 45 clearly refers to the legislative intention of enlarging the scope of the words beyond the term "the parties" who are signatory to the arbitration agreement. The court held that the fact that not all the parties were signatories to all agreements was insignificant. It expressly stated that even in such situations, non-signatory parties could be referred to arbitration only if they fell within the ambit of "any person claiming through or under" (parties to the arbitration agreement) in section 45.

Interestingly, the Supreme Court's ruling diverges from its earlier decision in Sukanya Holdings (P) Ltd v Jayesh H Pandya [(2003) 5SCC 531]. The Supreme Court in Chloro Controls distinguished the case from Sukanya Holdings, on the basis that the latter was irrelevant as it was decided under section 8.

Masusmi Sa Investment Llc v Keystone Realtors Pvt Ltd and others

In Masusmi Sa Investment Llc v Keystone Realtors Pvt. Ltd and others [COAPPL-47-CAAL-53-COAPPL-25-COAPPL-4.12, the Bombay High Court decided that an order of a "judicial authority" referring parties to arbitration under section 8 of the 1996 Act, cannot be appealed using a right of appeal vested by another law. The Bombay High Court was dealing with an appeal from a Company Law Board decision. The court held that the 1996 Act is a self-contained code, which specifically lists those court orders that may be appealed (and those that cannot be appealed) to a higher forum. Section 8 orders are not included in the list of orders that can be appealed against.

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