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Confidence building

by contributor James D. Rosener, Pepper Hamilton | Published July 24, 2012 at 1:01 PM

A number of factors have driven businesses around the world to adopt arbitration as the exclusive means to resolve international commercial contractual disputes. Some of the reasons behind this trend include businesses' fear of foreign courts and laws, a desire for predictability of proceedings, expediency, lower costs and confidence in the enforceability of an impartial decision. Part and parcel with speed, lower cost and fairness is the ability to enforce a foreign award in the forum where assets or funds that can satisfy the award are located.

Consequently, a common standard of enforcement of foreign awards is central to an effective international arbitral system. The United Nations Commission on International Trade Laws, or Uncitral, Model Law on International Commercial Arbitration and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, provide the basis upon which contracting states can adopt national laws to implement an arbitration system that transcends national borders. India has adopted the Uncitral Model Law in large measure through the Indian Arbitration and Conciliation Act, 1996 and is a signatory to the New York Convention.

But unless Indian courts stop interfering in the enforcement of foreign arbitral awards, businesses will lack confidence in their ability to enforce foreign arbitral awards in the country, and thus may be deterred from doing business in India or with Indian parties.

Let's begin by briefly exploring the relevant statutory provisions that govern domestic and commercial arbitrations in India and then move on to analyze some of the key decisions of the Indian Supreme Court.

The Indian Arbitration and Conciliation Act consists of four parts -- this article will focus on Part I and Part II. Part I of the act governs domestic cases in which the place of arbitration is India. Part II of the act, governing the recognition and enforcement of foreign arbitral awards, mandates that in order to qualify as a foreign award, not only must the award be that of a contracting state, but it also must be from a state that has been notified as a convention country in the Indian Official Gazette. As a result, if the arbitral award is issued by a non-notified country, the party seeking enforcement must file a civil suit in India, which often devolves into a de novo trial on the merits.

Additionally, Sections 8 and 45 of the act govern the judicial review of foreign and domestic awards, respectively, whereas Section 34 dictates when a court may set aside a domestic award. Section 48 of the act provides the basis for a refusal to enforce a foreign arbitral award on grounds of "public policy."

In Oil & Natural Gas Corp. Ltd. v. SAW Pipes Ltd., the Indian Supreme Court overturned a domestic arbitration award. The court did so by expanding the scope of the term public policy from "more than a violation of law of India" to "an error of law." As a result, the enforcement of foreign as well as domestic awards can be refused on grounds of public policy where they would be contrary to (i) the fundamental policy of Indian law, (ii) the interest of India, (iii) justice or morality, or (iv) if the award is patently illegal. This has had the effect of making most arbitration awards susceptible to challenge.

In Shin-Etsu Chemical Co. v. Aksh Optifibre Ltd., the Indian Supreme Court, in a 2-1 decision, held that following a prima facie showing of validity and existence of the arbitration agreement it was for the arbitral tribunal and not the court to decide the case on its merits. While hailed as a more progressive, less interventionist, pro-arbitration stance, the court in Shin-Etsu nevertheless acknowledged the right to challenge the decision of the arbitral tribunal to retain jurisdiction post-award.

However, just three months after Shin-Etsu, in a 6-1 decision, the court held that the chief justice is entitled to decide the preliminary issues, such as existence of a valid arbitration agreement, rejecting the argument that the chief justice's role was merely limited to a prima facie review of the facts to appoint the arbitrator.

Seesawing back to a pro-arbitration stance just over a year later, in Agri Gold Exims Ltd. v. Sri Lakshmi Knits & Wovens & Ors., the Indian Supreme Court held that where an arbitration agreement exists, an Indian court is obligated under Section 8 of the Indian Arbitration and Conciliation Act to refer the parties to arbitration.

Subsequently, in Bhatia International v. Bulk Trading, a three-judge bench of the Supreme Court ruled that contrary to the express provisions of the legislation, the provisions of Part I of the act would apply in the case of international commercial arbitrations held outside India unless the parties expressly or impliedly excluded all or any of its provisions in their arbitration agreement, even though Part I expressly states that "[t]his Part [I] shall apply where the place of the arbitration is in India." The judgment has been criticized as it increased judicial interference from the Indian courts in arbitrations held outside India.

India cannot continue its quest for global credibility and be an attractive destination for foreign direct investment with its reputation as an unreliable venue for the enforcement of foreign arbitration awards. Experience and need will hopefully drive the Indian parliament to pass a law that implements the global standards for enforcement of arbitral awards, wherever they may be rendered and, more importantly, that requires its courts to respect it.

James D. Rosener is a partner in the law firm of Pepper Hamilton LLP where he is chairman of the international practice group and partner in charge of the New York office.

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