Herbert Smith Freehills has issued the latest edition of its India arbitration e-bulletin.
In this issue we consider various court decisions, which cover issues such as the constitutional validity of s87 of the Arbitration Act, setting aside an award on the grounds of bias, and the time limits surrounding enforcement of awards. In other news, we consider the latest developments regarding COVID-19, the UAE becoming a reciprocating territory for the enforcement of judgments, as well as India-related bilateral investment treaty news and other developments.
Indian Supreme Court considers the constitutional validity of s87 of the Arbitration Act
Late last year, the Supreme Court of India handed down its highly anticipated judgment in Hindustan Construction Company Limited & anr. v Union of India (Writ Petition (Civil) No. 1074 of 2019) settling the issue of automatic stays on the enforcement of arbitral awards. The court struck down s 87 of the Arbitration and Conciliation Act 1996 (the “Act”) as being “manifestly arbitrary”.
Disputes as to costs arose in a number of Hindustan Construction Company (“HCCL”) projects resulting in a number of arbitral proceedings. The resulting awards rendered in HCCL’s favour were challenged by the Union of India (“UOI“) under s34 of the Act. Following these challenges, the awards were automatically stayed under the un-amended s36 of the Act.
For context, in the 2015 amendments to the Act, s36(3) was introduced, which provided that an award would not be stayed automatically on the filing of a challenge. There was, however, some confusion as to the application of s36(3) to challenges existing at the time of the 2015 amendments. In BCCI v. Kochi Cricket Private Limited ((2018) 6 SCC 287), the Supreme Court clarified that the amended s36 would also apply to awards which had pending challenges under s34.
s87 was then introduced by the 2019 amendments. It effectively reversed the decision in BCCI, by providing that the 2015 amendments would only apply to arbitral proceedings and court proceedings commenced on or after the effective date of the 2015 amendments.
HCCL challenged s87 of the Act on the basis that it violated, inter alia, the right to equality under Article 14 by taking away the vested right of enforcement of an arbitral award without removing the basis of the BCCI judgment, making s87 unreasonable, excessive and arbitrary.
The Supreme Court struck down the insertion of s87 and the deletion of s26 of the 2015 amendments, noting that s36 of the Act was corrected by the 2015 amendments. It clarified that as per the BCCI case, the impact of the 2015 amendments meant that enforcement of an arbitral award would not automatically be stayed upon the filing of an application under s34 and that the amendments in 2015 would apply to all pending applications under s34 of the Act irrespective of whether or not the proceedings were commenced prior to or post the 2015 amendments.
S87 and the resulting re-introduction of the automatic stay “turn[ed] the clock backwards contrary to the object of [the Arbitration Act] and [the 2015 amendments]” and “result[ed] in manifest arbitrariness”.
This is a welcome decision appearing to resolve years of uncertainty surrounding stays and enforcement of awards and the applicability of amendments, for a country that is currently ranked by the World Bank as 163 in the world (out of 190 countries) for the enforcement of contracts.
The Indian Supreme Court sets aside a domestic award for arbitrator bias
In Vinod Bhaiyalal Jain v Wadhwani Parmeshwari Cold (Civil Appeal No. 6960 of 2011), the Supreme Court set aside a domestic award on the grounds of bias. The impugned arbitrator was acting as counsel for one of the parties and had refused to withdraw (even after objections were raised), giving rise to doubts about his impartiality.
The arbitration agreement contained in the receipt for purchase of cold storage services named a particular individual as the sole arbitrator in case of any dispute. It later emerged that this person was counsel for the respondent (Wadhwani) in a separate, unrelated dispute.
S12(1) of the Act provides that an arbitrator must disclose any circumstances likely to give rise to justifiable doubts as to his/her independence or impartiality. The court noted that, at the time of appointment, the arbitrator was already acting as counsel for Wadhwani in another case, and was put on legal notice by Vinod who filed objections against the appointment. The arbitrator rejected those objections as inconsequential and issued an award against Vinod. This led to the court agreeing with Vinod that the arbitrator was not impartial.
In setting out the relevant test, the court noted: “what is to be seen is that there has been a reasonable basis for the appellants to make a claim that in the present circumstance the learned Arbitrator would not be fair to them even if not biased”.
Although this case predates the 2015 Amendment Act (this includes substantial guidance on what constitutes arbitrator bias by effectively incorporating the IBA Guidelines on Conflicts of Interest in International Arbitration), the court’s approach is consistent with the guidelines and international best practice.
Delhi High Court’s enforcement of a SIAC administered foreign award reiterates its pro-arbitration approach.
In Glencore International AG v Indian Potash Limited (Ex. P. 99/2015 dated 9 August 2019), the Delhi High Court rejected a challenge to enforcement proceedings, upholding an unclear reference to an arbitral institution.
Under the arbitration agreement, disputes were to be referred to the non-existent “Singapore International Arbitration of the Chambers of Commerce in Singapore”. The tribunal considered the drafting history of the clause and found that the intention of the parties was to have a Singapore International Arbitration Centre (“SIAC”) administered arbitration. The court agreed with this construction, holding that SIAC had been right to administer the arbitration under its 2010 Rules (the “SIAC Rules”).
Indian Potash Limited (“IPL”), argued that since the law applicable to the arbitration agreement was Singapore law, the SIAC Registrar should have appointed an arbitrator under the Singapore International Arbitration Act (the “IAA“), as it was the applicable law when SIAC jurisdiction was ambiguous. The court disagreed and held that once the Registrar had rightly assumed jurisdiction under the SIAC Rules, it was correct in acting as the appointing authority under the SIAC Rules.
The court further observed that the threshold for refusing enforcement in such cases was whether the procedural defect was of such a nature that it would have altered the result and the award itself. It found that SIAC had acted properly within the ambit of its rules, and no prejudice was caused to IPL by the adoption of the SIAC Rules and administration of the arbitration by SIAC.
IPL further argued that the failure of the tribunal to decide on jurisdiction as a preliminary matter deprived it of its ability to challenge that decision before the Singapore High Court (under s10 of the IAA), and this provided grounds for setting aside the award through being contrary to a fundamental public policy of India. In rejecting this argument, the court noted that s10 of the IAA afforded the tribunal a discretion whether to decide jurisdiction as a preliminary matter, and that there was no fundamental public policy of India that an adjudicating authority had to decide jurisdiction as a preliminary issue.
The court also rejected IPL’s argument that the tribunal permitting Glencore to alter its pleadings on the date of the final hearing amounted to a breach of natural justice. Rule 17.5 of the SIAC Rules permitted the tribunal to allow a party to amend pleadings unless the tribunal considered it inappropriate having regard to the delay or prejudice to the other party or any other circumstances. The decision made was thus within the tribunal’s jurisdiction, and its exercise of discretion was to be respected. Moreover, IPL had not objected at the time despite being given the opportunity to do so.
Finally, IPL argued that as the foreign award was not stamped it was not enforceable in India. Following the decision in Shriram EPC Limited v Rioglass Solar SA (Civil Appeal No. 9515 of 2018 dated 13 September 2018), the court noted that foreign awards are not required to be stamped in India, otherwise parties would be required to pay stamp duty in all states and reduce the wining party’s freedom to choose the jurisdiction to enforce the award.
The Delhi High Court’s judgment is an interesting review of various arguments that may be used to challenge an award, and shows the court will respect decisions of tribunals and institutions over procedural matters in which they have discretion.
Arbitrator’s mandate terminates if they fail to issue an award within the time limit prescribed in the contract
In Jayesh Pandya v Subhtex (Civil Appeal No 6300 of 2009), the Supreme Court of India held that where there is a contractual term specifying a time period in which an award must be issued the arbitrator must do so within that time period or their mandate will terminate automatically. The court observed that it did not have any jurisdiction to extend the time afforded to the arbitrator. Despite being in the context of a domestic arbitration, the decision should also apply to an India-seat international arbitration.
The arbitration clause agreed by the parties provided that: “The arbitrator will make his award within a period of 4 months from the date of service of copy of agreement”.
Proceedings began with a first preliminary meeting held on 4 May 2007, however, owing to a delay in the compilation of documents and exchange of claims and counterclaims the first hearing was held on 27 August 2007.
At this hearing, Subhtex argued that the time limit for making an award would expire and that there was no purpose of the proceedings continuing. While the arbitration agreement allowed the parties to agree an extension of time, Subhtex did not agree to an extension.
The arbitrator continued with the proceedings regardless and Subhtex made an application to the Bombay High Court under s14 of the Act, seeking a declaration that the arbitrator had become unable to perform his functions and his mandate had terminated. The High Court dismissed the application, holding that Subhtex had waived its right to make the objection as it participated in the arbitration proceedings. Subhtex appealed the decision to the Supreme Court.
The Supreme Court struck down the arbitration award, holding that the parties had chosen to bind themselves to the time limit and that “arbitration proceedings are supposed to be governed and run by the terms as agreed by the parties”. As the extension of time could only take place with the agreement of the parties, without this neither the arbitrator or the court could not extend the time period.
The Supreme Court’s decision is a reminder that the courts will not be able to assist parties if they agree onerous time limits in their arbitration clause which they later struggle to comply with.
The Bombay High Court clarifies the limitation period for seeking enforcement of foreign arbitration awards
In Imax Corporation v E-City Entertainment (Commercial Arbitration Petition No 414 of 2018), the Bombay High Court clarified that the limitation period for enforcing a foreign award is twelve years from the date of the award, holding that the limitation period is the same for foreign awards as that for the execution of a foreign decree as enforcement and execution proceedings are synonymous for foreign awards.
The tribunal issued a liability award on 9 February 2006, a quantum and jurisdiction award on 24 August 2007 and a final award on 27 March 2008 (the “Awards”) in favour of Imax Corporation (“Imax“). In March 2017 the Supreme Court dismissed E-City Entertainment’s (“E-City”) challenge of the awards brought under s34 of the Act in July 2008. Following this, in April 2018, the petitioner filed a petition in the Bombay High Court to enforce the Awards.
E-City argued that the enforcement action in the Bombay High Court was time barred by the three year time limit provided under Article 137 of the Limitation Act, 1963 (the “Limitation Act”), which it sought to apply on the basis that the Act did not specify a time limit for enforcement
In response, Imax argued that the 12 year limitation period in Article 136 Limitation Act ought to apply as enforcement and execution proceedings for foreign awards were synonymous. Imax alternatively argued even if Article 137 did apply, the period July 2008 to March 2017 would be excluded from calculating the expiry of the limitation period as the challenge under s34 of the Act was pending.
The court noted that an action for enforcement and execution can form part of the same proceedings under the Act, and that it was established law that a foreign award is regarded as a decree of the court. This meant Article 136 – not Article 137- of the Limitation Act applied
The court also agreed with the Imax’s alternative argument: even if the limitation period was 3 years, the petition would still be in time as the period where the s34 challenge was pending would be excluded.
The case is helpful clarification on limitation periods for enforcing foreign arbitral awards in India.
Three Supreme Court decisions on the right of a party to unilaterally select arbitrators
In two recent decisions, the Supreme Court of India has considered the validity of an agreed procedure to appoint arbitrators where one party has the unilateral right to appoint the arbitrators or to select the pool of arbitrators from which the tribunal must be constituted. Such procedures are not unusual in contracts with Indian public sector undertakings (“PSUs”), often allowing for government and ex-government employees to be appointed. We have previously covered the issue of appointment of government and ex-government employees as arbitrators on our blog here. S12(5) of the Act (inserted by the 2015 amendments), makes employees of one of the parties (generally interpreted as employees of the particular PSU involved in the dispute) ineligible to be appointed as arbitrators.
In Perkins Eastman Architects v HSCC (India) (Arbitration Application No. 32 of 2019), the court held that a procedure where an employee (here, the chairman and managing director) of one party has the right to appoint a sole arbitrator was invalid. This was in contrast to a “completely different situation” in which both parties have the right to appoint arbitrators where the advantage derived from nominating an arbitrator of one party’s choice would get counterbalanced by the other party’s choice. In reaching its conclusion, the court relied on its 2017 decision in TRF Limited v Energo Engineering ((2017) 8 SCC 377) (previously discussed on the blog here) where it had held that a person who was himself disqualified from being appointed as an arbitrator (in that case, the Managing Director of one party) could not nominate any other person to act as the sole arbitrator.
Subsequently, in Central Organisation for Railway Electrification (“CORE”) v ECI-SPIC-SMO-MCML (“Contractor”) (Civil Appeal Nos. 9486-9487 of 2019), the court upheld an agreement that the tribunal was to comprise three serving and / or retired ‘Railway Officers’ (civil servants working as part of the Indian Railways), where one arbitrator would be chosen by Contractor from a panel of Railway Officers prepared by CORE’s general manager who also had the right to appoint the other two arbitrators, including the presiding arbitrator. The Contractor argued (among other things) that applying the decisions in TRF Limited and Perkins, CORE’s general manager could not select / appoint the arbitrators as he was himself ineligible to serve as an arbitrator (pursuant to S 12(5) of the Act). However, the Supreme Court distinguished these two decisions on the basis that the right / role of CORE’s general manager in appointing the tribunal was counterbalanced by the contractor’s right to select its nominee from the panel of retired Railway Officers prepared by CORE’s general manager.
Finally, in Proddatur Cable TV Digi Services v Siti Cable Network (OMP(T)(Comm) 109/2019 and IA 17896/2019), the Delhi High Court applied Perkins and found that a procedure where one party (here, Siti Cable) has the right to appoint a sole arbitrator was also invalid. For the court, it did not make a difference that the appointing authority was the party itself and not an employee of that party (e.g. the Chairman and Managing Director in Perkins): Siti Cable and/or the board of directors through which Siti Cable would act are parties interested in the outcome of the dispute in a manner that makes them ineligible to appoint the sole arbitrator.
The decisions in Perkins and Proddatur v Siti Cable provide some clarity regarding the validity of appointment procedures, and invalidates a procedure where one party or an employee of one party has the unilateral right to appoint the sole arbitrator. The Supreme Court’s decision in Perkins is the latest in a line of decisions which focus on the necessity and desirable of impartial and independent arbitrators (see our previous coverage here).
The decision in CORE, however, appears to be an outlier and is difficult to reconcile with the observations in Perkins and previous cases.
Investment Treaty Updates
India considers new foreign investment law
According to reports, India’s Ministry of Finance is considering a proposal for a new law to safeguard foreign investment by providing fast and effective dispute resolution processes in an aim to attract more overseas capital. The draft proposal includes a plan to set up an investment tribunal in state high courts that will fast-track disputes between investors and the government, and to appoint mediators for disputes with foreign investors.
India prevails in UNCITRAL BIT case brought by Russian/Cypriot investors
We understand that a tribunal constituted under the Russia-India BIT and the India-Cyprus BIT has dismissed claims filed against India by Tenoch Holdings Limited (Cyprus), Maxim Naumchenko and Andrey Poluektov in relation to India’s cancellation of letters of intent for the issuance of telecommunication licenses. India had reportedly cancelled the telecommunication licenses for on the grounds of preservation of its essential security interests. The tribunal upheld all of India’s contentions.
Jurisdiction award in Nissan BIT claim sets out India’s grounds for objecting jurisdiction
As previously reported here, the tribunal in the Nissan BIT claim under the Japan-India Comprehensive Economic Partnership Agreement (“CEPA“) had dismissed India’s objections to jurisdiction. The award) of the tribunal dismissing India’s objections to Nissan’s claim under the CEPA has now become public (and is accessible here).
India argued that the tribunal was not constituted properly as (i) the tribunal chair had to be appointed by agreement between the parties as per the CEPA; and (ii) India had failed to appoint its nominee by the 60-day period, and the CEPA did not provide for the subsequent actions of the PCA. The PCA granted India and extension to appoint its nominee, and simultaneously appointed a tribunal chair following a list procedure. The tribunal ruled that the CEPA applied to both the nominee and the tribunal chair. Therefore, once it was clear that the parties had failed to appoint the chair within 60 days’ from the date of the notice, it was logical for the PCA to commence with its list procedure.
India also relied on a fork-in-the-road provision in the CEPA arguing that Nissan was precluded from pursuing the claim before the tribunal as its corporate affiliate in India had commenced proceedings before the Madras High Court. The tribunal held that there is no duplicity of claims as the proceedings before the Madras High Court were not “investment disputes” and those disputes had only been brought before the tribunal.
India also tried to argue that the umbrella clause in the CEPA was undercut by the exclusive forum selection clause in the 2008 Memorandum of Understanding wherein the government had promised various incentives and tax concessions. The tribunal noted that the umbrella clause was drafted broadly requiring India to observe “any obligations”, which would include contractual obligations. In rejecting any limitation on the umbrella clause that was not expressly present, the tribunal noted that India must be aware of several MoUs that contain exclusive forum selection clauses and must have intended for them to be caught by the umbrella clause.
The tribunal also ruled against India’s objection that Nissan was precluded from bringing its claims by a three 3 year time limited in the CEPA as Nissan had knowledge of the losses incurred as early as February 2014. The tribunal held that Nissan was only claiming for the incentives that became payable after that date (February 2014) and therefore the date from which the limitation period would begin was February 23, 2014.
Finally, India argued that the CEPA excluded claims arising out of taxation measures. The tribunal rejected India’s proposed test; i.e. a measure “sufficiently clearly connected to a taxation law or regulation” as such a test could shield state actions that are incidentally connected to a tax law. Instead it preferred the more contextual approach of “who”, “what” and “why” (whether the conduct in issue was conduct of state entities empowered by domestic law to deal with taxation; whether the measures in issue were of the type customarily used in that state or states generally to deal with taxation; and whether the measures were ‘motivated principally by tax objectives) and deferred the question to the merits stage.
UAE notified as a reciprocating territory for foreign judgments
On 17 January 2020, the Ministry of Law and Justice (Department of Legal Affairs) of India issued a notification (the “Notification”) which declared the United Arab Emirates (the “UAE”) as a “reciprocating territory” under s44A of the Indian Code of Civil Procedure 1908 (see our previous blog post here).
Following the Notification, most civil judgments issued by the UAE courts are now directly enforceable in Indian courts (except judgments (i) relating to taxation, (ii) relating to charges of an administrative nature, and (iii) issued by UAE criminal courts). It is expected that the Notification will have retroactive effect, subject to clarification by the Ministry of Law and Justice.
The Notification only deals with UAE court judgments, and does not deal with the enforcement of arbitral awards passed by tribunals seated in the UAE. While the UAE is not a reciprocating territory under s44 of the Act, we understand that there is an agreement in place between India and UAE that allows for the reciprocal enforcement of arbitration awards.
Herbert Smith Freehills hosts its second Client Academy in Mumbai
At the end of January, our India practice hosted its second annual Client Academy at the Taj Lands End in Mumbai focused on leadership, innovation and international best practices. This included general counsels and senior legal advisors from a range of businesses such as Tata, Aditya Birla, JP Morgan, OYO and UPL, and presentations from Chris Parsons, Chairman of HSF’s India Practice, and Paula Hodges QC, Head of HSF’s Global Arbitration Practice and President of the London Court of International Arbitration.
COVID-19: our latest thinking
As COVID-19 continues to create significant challenges in our daily lives and the world economy, it can be overwhelming to keep track of latest global developments whilst dealing with immediate issues. To help you navigate these challenges, our latest thinking can be found on our global hub focusing on key themes such as people (protecting employee health and jobs), pressure points (managing pressure on businesses, liquidity and the supply chain) and governance (assuring decision making, reporting and disclosure).
For further information, please contact Nicholas Peacock, Head of the India Arbitration Practice, Kritika Venugopal, Senior Associate, Karan Talwar, Associate, Nihal Joseph, Associate, Divyanshu Agrawal, Associate, or your usual Herbert Smith Freehills contact.