The curious case of Indian arbitration

September 2011

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Introduction

By Dylan McKimmie and Jesse Kennedy

A recent decision of the Supreme Court of India emphasises the importance of proper drafting of arbitration agreements when contracting with a party from India or when the contract is governed by Indian law.  If care is not taken, you may find your arbitral award (including interim orders) being reviewed and set aside by an Indian court, even when the arbitration is held outside India.

After providing an overview of the Supreme Court decision and the background to Indian courts reviewing foreign arbitral awards, this update offers tips on effective drafting of arbitration agreements to limit the ability of Indian courts to review foreign arbitral awards.

Review of arbitral awards by Indian courts

Part I of the Indian Arbitration and Conciliation Act 1996 (Indian Act) governs arbitration in India and confers jurisdiction on Indian courts to review and set aside awards on certain grounds.

Although the Indian Act was largely based on the UNCITRAL Model Law on International Commercial Arbitration, decisions of the Indian courts have extended the grounds for setting aside arbitral awards to include (somewhat notoriously) an error of law “on the face of the award”, finding such errors to be contrary to “public policy” (see Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd [2003] INSC 236).

This means that arbitral awards to which Part I of the Indian Act apply may not enjoy the same level of finality as in other jurisdictions.

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The application of Part I of the Indian Act to arbitrations outside India

In Bhatia International v Bulk Trading SA [2002] INSC 132, the Supreme Court of India held that Part I of the Indian Act applied to arbitrations which took place outside India, including to foreign awards, unless the parties expressly or impliedly excluded all or any of its provisions (see also Venture Global Engineering v Satyam Computer Services Ltd [2008] INSC 40).

These decisions have meant that Indian courts could have jurisdiction to review and set aside foreign awards (ie, awards made outside India) under Part I of the Indian Act. The decisions have also led many astute companies to include express exclusions of Part I of the Indian Act in any arbitration agreements providing for arbitration outside India yet contained in a contract with a connection to India.

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The recent Supreme Court decision

Yograj Infras Ltd v Ssang Yong Engineering & Construction Co Ltd [2011] INSC 769 concerned interim orders made in a Singapore arbitration arising out of the termination of a road construction contract governed by Indian law. The contract provided for all disputes to be referred to arbitration in accordance with the Arbitration Rules of the Singapore International Arbitration Centre (SIAC Rules), with the seat of arbitration being Singapore.

The appellant sought to appeal from the interim order to the Indian courts under s 37(2)(b) of the Indian Act. Whilst acknowledging the effect of decisions such as Bhatia International, the Court found:

  • ordinarily, the proper law of the contract (here India) was the law of the arbitration (note that in other jurisdictions, the law of the arbitration is usually considered to be that of the seat of arbitration unless the parties otherwise agree, not the proper law of the contract);
  • but, by choosing the SIAC Rules to govern the arbitration, the parties had impliedly excluded the operation of Part I of the Indian Act.

Importantly, the Court’s finding that the parties excluded the operation of the Indian Act was based on an older version of the SIAC Rules and may not necessarily apply to the new Rules. Rule 32 of the SIAC Rules then in force expressly provided that where the seat of arbitration was Singapore, the law of the arbitration was the International Arbitration Act of Singapore. Therefore, the parties agreed that a law other than the Indian Act was to govern the arbitration.

But the equivalent to the old rule 32 no longer exists following the 2010 amendments to the SIAC Rules. Nor is such a rule found in other key arbitral rules used in the Asia-Pacific region (eg, the ACICA Rules, HKIAC Rules, ICC Rules). Accordingly, it is unclear whether the adoption of institutional rules from an institution outside India, combined with a seat of arbitration outside India, would be sufficient to imply an agreement by the parties to exclude the operation of Part I of the Indian Act.

The decision does, however, suggest that the inclusion of an express choice of a non-Indian law to govern the arbitration (also referred to as the ‘curial law’) may be sufficient to exclude the operation of Part I of the Indian Act. Such clauses are not normally contained in arbitration agreements as usually the law of the chosen seat of arbitration is accepted as being the law governing the arbitration.

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Drafting arbitration agreements with a connection to India

If finality of arbitration awards is important and you do not wish to find yourself before an Indian court opposing an application to set aside an arbitral award, then care may need to be taken when drafting an arbitration agreement which concerns a contract with:

  • one party from India;
  • a governing law clause specifying the law of India to be the proper law; or
  • subject-matter connected with India;

To avoid the Indian courts having jurisdiction to review and set aside awards where the parties have chosen a seat of arbitration outside India, the following should be included in the arbitration agreement:

  1. Ideally, an express exclusion of the operation of Part I of the Indian Act. You may, however, wish to exclude all of Part I except for s 9, which allows a party to seek interim measures of protection from a court.
  2. If an express exclusion is not possible, expressly provide for the law of the arbitration to be that of a jurisdiction other than India (and preferably the same as the seat of arbitration).
  3. For abundant caution, also provide for:

(a) the law governing the contract to be a law other than that of India (if possible);

(b) the law governing the arbitration agreement to be a law other than that of India;

(c) the seat of arbitration to be a place outside India; and

(d) (only if convenient) the exclusive jurisdiction of courts of a country other than India with respect to all matters arising out of the arbitration.

Arbitration agreements that may be subject to the Indian Act should be carefully constructed, and an up to date understanding of how Indian courts are interpreting the Indian Act is important. The commercial risk in failing to do so is not inconsequential.

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