Herbert Smith Freehills has issued the latest edition of its India arbitration e-bulletin.
In this issue, we consider various court decisions which cover topics such as the limitation period for enforcement of foreign awards, the arbitrability of fraud, ‘patent illegality’ as a ground to set aside awards, and granting of interim directions against non-signatories to an arbitration agreement. We also consider India-related bilateral investment treaty news such as the tribunal’s decision in the Vodafone tax dispute and Nissan’s settlement of its claim against India. We also touch on other developments such as updates issued to the Indian Arbitration and Conciliation Act 1996 and the London Court of International Arbitration Rules.
Indian Supreme Court grants enforcement of foreign award and clarifies the limitation period for enforcing foreign awards
In Government of India v Vedanta Limited & others (dated 16 September 2020, in Civil Appeal No. 3185 of 2020), the Supreme Court rejected the Government of India’s (the “GOI”) challenge to the enforcement of a foreign arbitral award rendered in favour of Vedanta Limited, Ravva Oil (Singapore) Ltd and Videocon Industries Limited (the “Companies”).
The Companies had secured an award in 2011 from a Kuala Lumpur seated tribunal to recover development costs of around US$278 million from the GOI, arising out of a production sharing contract (“PSC”) for the development of the Ravva oil and gas fields situated offshore in the Bay of Bengal. The GOI unsuccessfully challenged the award in Malaysia, and in October 2014, the Companies obtained an order from the Delhi High Court directing the enforcement of the award.
The GOI challenged enforcement before the Supreme Court arguing that the enforcement action before the Delhi High Court was barred by limitation under the Limitation Act 1963 (the “Limitation Act”) and that enforcement of the award was contrary to India’s public policy under s48 of the Arbitration and Conciliation Act 1996 (the “Act”).
The Supreme Court noted that various High Courts had taken conflicting views on the limitation period for enforcing a foreign award (including a Bombay High court decision we have previously discussed here). Since the Act does not set out a limitation period for enforcement of a foreign award, the issue was whether the limitation period was: (i) twelve years under Article 136 of the Schedule to the Limitation Act which applied to the “execution of any decree…or order of any civil court”; or (ii) three years under Article 137 of the Schedule to the Limitation Act which applied to “any other application for which no period of limitation is provided elsewhere in this division”.
The court accepted the GOI’s submission that Article 136 applied only to domestic awards and not to foreign awards. It therefore found that Article 137 applied and so the limitation period was three years.
However, the court found that the Companies’ application was within the limitation period since their right to apply for enforcement only accrued in July 2014, when the GOI issued a notice to the Companies demanding US$77 million as its share of petroleum sold to third parties. In any event, the court held that there were sufficient grounds to condone the delay given the lack of clarity on the applicable limitation period.
On the public policy challenge, the court did not accept the GOI’s argument that the tribunal had adopted an erroneous interpretation of the PSC and that this was contrary to the public policy of India. The court affirmed that an enforcement court under s48 of the Act could not re-assess or re-appreciate evidence or review the merits of the underlying dispute. Errors of judgment were therefore insufficient ground for refusing enforcement of a foreign award. It observed that the “finality of awards in international commercial arbitrations” and the “limits of judicial intervention on grounds of public policy of the enforcement State” are “well settled in international arbitration”.
This is a welcome decision affirming a pro-enforcement approach to international arbitration and providing clarity on the applicable limitation period. However, the court’s approach on public policy in Vedanta contrasts with its own judgment from earlier this year in National Agriculture Co-operative Marketing Federation of India (NAFED) v Alimenta S.A. (dated 22 April 2020, in Civil Appeal No. 667 of 2012), where the court refused enforcement of a foreign award after undertaking a review of its merits. It remains to be seen which approach will ultimately win out.
Indian Supreme Court upholds the arbitrability of cases involving allegations of fraud
In a pronouncement clarifying whether disputes involving allegations of fraud can be the subject of arbitration proceedings in India, the Supreme Court in Avitel Post Studioz Limited v HSBC PI Holdings Mauritius Limited (dated 19 August 2020, in Civil Appeal Nos. 5145, 5158 and 9820 of 2016) held that only ‘serious allegations of fraud’ would need to be determined by civil courts, i.e. allegations which vitiate the validity of the arbitration agreement, or those which involve questions arising in the public law domain.
The underlying dispute arose from a Share Subscription Agreement (“SSA”) through which HSBC made a US$60 million investment in Avitel India in 2011. The investment was made based on representations made by Avitel’s promoters that, among other material contracts, they were at a very advanced stage of finalising a high-value contract with the British Broadcasting Corporation, and that the funds invested by HSBC would be used to purchase equipment to service this contract. HSBC later discovered that such a contract did not exist, and a majority of its investment had been siphoned off into other companies in which the promoters were interested. It initiated arbitration proceedings in 2012, and a final award was made in 2014. In the interim, a criminal complaint was also filed by HSBC in 2013. The arbitral tribunal found in HSBC’s favour holding that Avitel’s promoters had knowingly made false / misleading representations to induce HSBC to invest. The tribunal awarded US$60 million in damages, plus interest and costs. The present judgment on, among other things, whether HSBC had a strong prima facie case in the enforcement proceedings, was rendered by the Supreme Court in the context of s9 proceedings in which HSBC had sought maintenance of the entire claim amount in Avitel’s bank account pending enforcement of the award.
Before the Supreme Court, the parties disagreed on whether the dispute could be the subject of an arbitration proceeding on the basis of the allegations of fraud involved, including criminal allegations.
The court considered previous cases and made reference to s8 of the Act which makes it mandatory for courts to refer disputes which are the subject matter of an arbitration agreement to arbitration. The court laid down two tests to determine whether ‘serious allegations of fraud’ arise such as to warrant involvement of the civil courts:
- When the fraud percolates to the agreement to arbitrate and vitiates such agreement; or
- When allegations of arbitrary, fraudulent or malafide conduct are made against the State or its instrumentalities, involving hearing of questions arising in the public domain and not from the parties’ contractual relationship.
Turning to the facts of the case, the court held that there was no fraud that would vitiate the agreement to arbitrate contained in the SSA. The issues involving false representation, siphoning of funds and other issues were all between the parties, and did not have a “public flavour” so as to satisfy the above test and be tried in a court.
This decision is a helpful clarification on the position in relation to arbitration of disputes involving allegations of fraud, and may encourage civil courts to be more discerning in determining whether fraud is being alleged simply to frustrate arbitration proceedings.
Indian Supreme Court sets aside domestic award for patent illegality
In Patel Engineering Ltd v North Eastern Electric Power Corporation Ltd (dated 22 May 2020, in S.L.P. (C) Nos. 3584-85 of 2020 etc.), the Supreme Court set aside a domestic award on grounds of patent illegality under s34 of the Act.
Disputes arose between Patel Engineering Ltd (“PEL”) and North Eastern Electric Power Corporation Ltd (“NEEPCO”) in relation to works contracts concerning three different packages of a construction project. This resulted in three arbitral awards dated March 2016, all of which were rendered in favour of PEL (“Awards”). On a challenge by NEEPCO, these Awards were set aside by the Meghalaya High Court under s37 of the Act. PEL filed review petitions against this alleging that the judgment of the High Court suffered from “error apparent” as it had not taken into consideration the amendments made to the Act in 2015 (“2015 Amendments”).
For context, through the 2015 Amendments, s34(2A) was introduced, giving statutory force to patent illegality as a ground to set aside a domestic award. According to this provision, an award shall not be set aside merely on the ground of an “erroneous application of the law or by re-appreciation of evidence”, and was intended to be narrower in scope than the interpretation of patent illegality that had evolved previously through a series of judicial decisions.
The Supreme Court noted that as the Awards were challenged after the 2015 Amendments had entered into force, s34, as amended, would apply. The key question however, was regarding the scope of patent illegality under the new s34(2A) and whether the High Court had correctly applied this ground while setting aside the Awards.
In answering this question, the court noted that patent illegality is available as a ground to set aside a domestic award under s34(2A) of the Act in the following three circumstances: (i) if the decision of the arbitrator is found to be perverse, or so irrational that no reasonable person would have arrived at the same; or (ii) the construction of the contract adopted by the arbitrator is such that no fair or reasonable person would take; or (iii) that the view of the arbitrator is not even a possible view.
Applying these principles, the court ruled that the High Court had correctly concluded that an arbitral award can be set aside under s34 if it is patently illegal. In its decision, the High Court had considered the matter at length and concluded that no reasonable person could have arrived at the same conclusion as the arbitral tribunal while interpreting the relevant clauses of the contracts. The High Court’s determinations were therefore not in contravention, but consistent with the 2015 Amendments. There was no reason to re-open the matter and the court therefore upheld the setting aside of the Awards for patent illegality.
The decision in Patel Engineering seems to turn the clock back by indicating a willingness of courts to set aside domestic arbitral awards. Notably, the Supreme Court took a similar approach in South East Asia Marine Engineering & Constructions Ltd v Oil Limited (dated 11 May 2020, in Civil Appeal No. 673 of 2012), where it set aside another domestic award, on the grounds of an “impossible and perverse interpretation of contract”.
Delhi High Court considers grant of interim directions under s9 of the Act against a non-signatory to the arbitration agreement
In Blue Coast Infrastructure Development Pvt. Ltd. v Blue Coast Hotels Ltd. (dated 10 June 2020, in OMP (I) (Comm) No. 35/2020 and IA 3251/2020), the High Court of Delhi confirmed that interim directions can be passed by an Indian court against a non-party to the arbitration agreement, under s9 of the Act.
The dispute in this case arose out of a Joint Development Agreement (“JDA”) entered into by Blue Coast Infrastructure Development (“BCID”) and Silver Resorts (a special purpose vehicle floated by Blue Coast Hotels (“BCH”)). BCID had been authorised to collect money from investors for the development of the project, which BCH would compensate for should the project not be completed within the stipulated time. The project was never completed. BCH had also taken a loan from IFCI Ltd. for the project which it defaulted on, and IFCI auctioned the mortgaged property to recoup the monies and satisfy other creditors. Following this, INR 85 crores remained with IFCI. The petition was filed by BCID for a direction to IFCI either to deposit this amount (plus interest accrued) with the High Court Registry and not disburse it in favour of BCH, or not to release the amount to BCH without the court’s permission.
IFCI was neither a party nor a signatory to the JDA which contained the arbitration agreement, and it argued (inter alia) that interim directions cannot be granted by the court against it on this basis. The court considered the decision of the Bombay High Court in Girish Mehta v Mahesh Mehta (2010(1) BomCR 31) and the judgments of the Delhi High Court in Gatx India v Arshiya Rail (2015 VAD (Delhi) 190) and Value Advisory Services v ZTE Corporation (dated 15 July 2009, OMP no. 65/2008). The court reiterated that there is no general rule to the effect that directions cannot be issued to persons not parties to the arbitration agreement, and this can be done for preservation of the subject matter of the arbitration agreement. Further, unlike s17 which specifically allows for the measures granted by the arbitral tribunal to be directed only against parties to the arbitration, there is no such limitation in relation to interim relief granted by courts under s9. The court explained that while the arbitrator derives their powers from the parties’ agreement and therefore cannot issue directions to non-parties, this limitation is not applicable to courts of law.
Importantly, the Gatx judgment differentiated between orders granting interim relief against a party to the arbitration agreement which incidentally affect a third party, and orders granting relief directed against a third party, and held that the latter power should be used sparingly, i.e. in exceptional circumstances where denial of these measures might frustrate the petitioner’s rights in arbitration, defeat the object of the arbitration, render the proceedings infructuous, lead to gross injustice or leave the petitioner remediless, depending on the facts of each case. In this case, an attachment order in relation to money owed to a party to arbitration, but which was in the hands of a third party, was a relief against the party which incidentally affects the third party. It could be granted within the scope of s9. However, in Blue Coast, the court found that IFCI was not holding the sum of INR 85 crores as a custodian for BCH as other lenders had acquired a right to claim it, and hence, BCID was not entitled to interim measures in respect of this sum.
The Delhi High Court’s judgment is a reminder that interim measures can be granted by a court affecting non-signatories to an arbitration agreement in certain circumstances, and is a confirmation that an attachment order can be made against property held by a third party if it is held on behalf of a party to the arbitration agreement.
India amends Arbitration Law relating to enforcement of Awards tainted by fraud and arbitrator qualifications
In a little heralded development, the GOI passed the Arbitration and Conciliation (Amendment) Ordinance 2020 (the “Ordinance”) on 4 November 2020 to amend the Act with immediate effect. The Ordinance introduces provisions to stay the enforcement of arbitral awards tainted by fraud, and deletes certain provisions from the Act relating to qualification and accreditation of arbitrators. Further detail can be found in our post here.
PCA Tribunal finds India in breach of its treaty obligations in Vodafone tax dispute
As previously reported here, a PCA Tribunal has ruled that India violated the Netherlands-India Bilateral Investment Treaty (“BIT”) by retrospectively imposing tax liabilities worth US$2.2 billion on Vodafone in 2012. The retrospective tax liabilities had been introduced by statute in 2012 to reverse a ruling of the Supreme Court which had concluded that Vodafone was not liable for capital gains tax in respect of its acquisition of the Indian mobile phone business of Hutchinson Essar Limited in 2007.
The London seated tribunal unanimously found that the change in law with retroactive effect was in violation of the fair and equitable treatment guarantee under the BIT. As a consequence, India was directed to cease the unlawful conduct in question and ordered to pay the majority of Vodafone’s costs, understood to be in excess of £4 million. The tribunal also rejected India’s jurisdictional challenge that taxation was a matter of India’s sovereignty and therefore outside the scope of the BIT. The result of the tribunal’s decision is that any further steps by the Indian tax authorities to collect retrospective tax, interests or penalties from Vodafone (which as at the date of the award totalled close to US$10.8 billion) would be a breach of India’s international law obligations under the BIT.
The award in favour of Vodafone, precedes the decisions in two other keenly anticipated international arbitration claims brought by Cairn Energy and Vedanta Resources against the Indian government in respect of demands of tax, interest and penalties levied on them under the same retrospective amendment to Indian tax law. It will be interesting to see whether the outcome of those two decisions aligns or deviates from the result in the Vodafone dispute.
Nissan settles treaty claim against India
In the previous edition of this bulletin, we reported that the tribunal in the Nissan BIT claim under the Japan-India Comprehensive Economic Partnership Agreement (“CEPA“) had dismissed India’s objections to jurisdiction. As we have reported, the latest development in this arbitration is that a settlement has been reached between the government of Tamil Nadu and Nissan. Although the amount has not been confirmed, sources have placed it between US$185-238 million. The industries minister of the government of Tamil Nadu also confirmed that Nissan had begun the process to withdraw its arbitration claim.
Nissan’s claim related to the failure to make incentive payments allegedly promised by the state government of Tamil Nadu pursuant to a 2008 agreement, under which Nissan and its consortium partner Renault agreed to establish a manufacturing facility in Chennai, and invested INR 61 billion into the project. Nissan had alleged that the failure of the state government to pay certain incentives was arbitrary and without cause, and therefore a breach of the fair and equitable treatment clause of the CEPA, as well as its umbrella clause under which India had committed to observe any obligations entered into with regard to investment activities covered by the CEPA. The value of the claim was approximately US$660 million.
New LCIA Rules in force on 1 October 2020
Earlier this year, the London Court of International Arbitration (“LCIA”) announced changes to its rules, which have come into effect from 1 October 2020. While the revisions have been couched as an ‘update’ rather than a substantial rewrite, some notable changes have been introduced, such as allowing the parties to commence multiple arbitrations by filing a ‘composite request’. The rules also confirm the breadth of the tribunal’s discretion in important matters such as ordering early determination of claims which are manifestly unmeritorious. The circumstances under which disputes can be consolidated have also been widened.
For a comprehensive overview of the new rules, please see our report as well as our podcast. You can also listen to Paula Hodges QC (President of the LCIA Court and also Head of Global Arbitration Practice at Herbert Smith Freehills) discussing her insight into the new rules on the LCIA podcast.
Recognition for Herbert Smith Freehills’ India practice
Finally, we are pleased to share that Herbert Smith Freehills has been named as one of the top international law firms for India-related work for the 12th consecutive year by the Indian Business and Law Journal.
For further information, please contact Nicholas Peacock, Partner and Head of the India Disputes Practice, Nihal Joseph, Associate, or your usual Herbert Smith Freehills contact. The authors are grateful to Arushie Marwah and Vrinda Vinayak, Graduate Solicitors (India) for their substantial assistance.