Supreme Court of India Clarifies the Scope of Public Policy grounds for Challenging a Domestic Arbitration Award under Section 34 of the Arbitration and Conciliation Act

In a decision handed down recently, the Supreme Court of India found that the Delhi High Court had overstepped its powers and wrongly set aside a domestic arbitration award. In the process, the Supreme Court has clarified the scope of the “public policy ground” to set aside awards under Section 34(b)(ii) of the Arbitration and Conciliation Act (Act).

The Supreme Court was critical of the Delhi High Court re-opening an arbitrator’s award on merits by reviewing evidence considered by the arbitrator and even considering evidence above and beyond that which the arbitrator had the opportunity to consider. The Supreme Court advocated giving due weight and recognition to a determination by an arbitration – especially on issues of fact. The court recognized that an award could only be set aside on grounds of public policy in very limited circumstances, such as where an award was arbitrary, capricious or such that it would shock the conscience of the court.

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Shri Lal Mahal Ltd v Progetto Grano Spa: Supreme Court of India overrules Phulchand and reduces court interference in enforcement of foreign awards

In a previous e-bulletin, we had reported about the case of Phulchand Export Ltd v OOO Patriot¹ where the Supreme Court of India had set a worrying precedent by allowing parties to challenge enforcement of a foreign arbitral award on grounds of patent illegality. In Phulchand the court applied the controversial previous decision in ONGC v Saw Pipes² and held that a patently illegal award violates the public policy of India and therefore entitled the Indian courts to, in appropriate cases, re-look at the merits of the case even in enforcement proceedings.

The Supreme Court, in its recent decision in Shri Lal Mahal Ltd v Progetto Grano Spa³ expressly overruled Phulchand and declined to consider the merits of a foreign arbitral award in an enforcement proceeding. The decision in Shri Lal Mahal represents another significant pro-arbitration step taken by the Indian Supreme Court in recent times.

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High Court applies Sulamérica test in Arsanovia and gives rise to unexpected results

In December last year, the High Court upheld a challenge under section 67 of the Arbitration Act 1996 (the Act) in Arsanovia Ltd and others v Cruz City 1 Mauritius Holdings [2012] EWHC 3702 (Comm) and overturned an arbitration award on the ground that the Tribunal did not have substantive jurisdiction. The court was required to determine, by reference to the English common law conflict of law rules, the law applicable to the arbitration agreement in the absence of an express governing law. This was required in order resolve the issue of which law determined whether one of the claimants was party to the arbitration agreement.

In resolving whether to follow the law of the underlying contract (India) or the law of the seat (England) the court considered the Court of Appeal’s reasoning in the well-known cases of C v D and Sulamérica. Of particular note, the court factored in the exclusion by the parties of Part I of the Indian Arbitration and Conciliation Act 1996 (Indian Arbitration Act), and consequently held somewhat surprisingly that the parties had impliedly chosen the governing law to be Indian.

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Supreme Court of India delivers landmark arbitration decision in Bharat Aluminium, overruling Bhatia International

As reported in our blog posting on 6 September 2012, the controversial decision of the Indian Supreme Court in Bhatia International v Bulk Trading SA [1] has been overruled by the Indian Supreme Court in the case of Bharat Aluminium v Kaiser Aluminium, paving the way for an end to intervention by the Indian courts in arbitrations seated outside India. However, for contracts containing arbitration clauses entered into prior to the decision, the previous difficulties will remain, at least for now.

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Supreme Court of India delivers landmark arbitration decision in Bharat Aluminium, overruling Bhatia International

Supreme Court of India delivers landmark arbitration decision in Bharat Aluminium, overruling Bhatia International

The controversial decision of the Indian Supreme Court in Bhatia International v Bulk Trading SA has been overruled by the Indian Supreme Court, paving the way for reduced court intervention in arbitration seated outside of India.

In Bhatia International, the court had interpreted Section 2 of the Indian Arbitration and Conciliation Act 1996 (the Act) in a manner that allowed Part I of the Act (which provided for remedies such as awarding interim relief and setting aside of arbitral awards) to be applied even in the context of arbitration seated outside of India. Several authors and commentators had raised concerns about the impact and desirability of such a wide interpretation.

In light of conflicting opinions on the correctness of the decision in Bhatia International it was referred to a panel of five judges of the Supreme Court for reconsideration in the case of Bharat Aluminium v Kaiser Aluminium.  A key issue the court had to consider was whether Part I of the Act applied to arbitrations conducted outside of India.

The much awaited decision in Bharat Aluminium was delivered by the Supreme Court of India earlier today. Click here for a copy of the judgment. A detailed analysis of the decision (which runs into 190 pages) will follow shortly, but in summary the court held that: 

  • The decision in the case of Bhatia International has been overruled;
  • Part I of the Act (which vests courts with the powers of awarding interim relief in support of arbitration, and setting aside arbitral awards) only applies to arbitrations seated within India;
  • Awards rendered in foreign seated arbitrations are only subject to the jurisdiction of Indian courts when they are sought to be enforced in India under Part II of the Act;
  • Indian courts cannot order interim relief in support of foreign seated arbitrations;
  • The decision of the court in Bharat Aluminium only applies to arbitration agreements entered into after 6 September 2012.

The decision of the Supreme Court appears promising and leads the way for reducing the intervention of Indian courts in arbitrations seated outside India. However, given that the application of the decision is restricted to arbitration agreements entered into after 6 September 2012, the legacy of the decision in Bhatia International will be relevant for some time to come.

The above note is based on a preliminary review of the decision of the court in Bharat Aluminium. Watch this space for a more thorough analysis of the decision.

Recent Developments in India-related International Arbitration

In this post we consider the implications for India-related international arbitration of the Indian Supreme Court re-examining the controversial Bhatia decision. We also look at the successful investment treaty claim against India in White Industries, along with the expansion of the concept of public policy in the context of enforcing a foreign award in Phulchand v OOO Patriot. Finally, we comment on the impact of fraud allegations on arbitrations in India as discussed in Bharat Rasiklal v. Gautam Rasiklal.

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India liable under BIT for extensive judicial delays

An UNCITRAL tribunal in Singapore has held that the Republic of India breached its obligation under the India-Kuwait bilateral investment treaty (BIT) to provide investors with an “effective means of asserting claims and enforcing rights” through undue delay in the Indian court system.  White Industries Australia Limited (White) had spent nine years attempting to enforce an ICC Award in India, but was subjected to prolonged delays.  It therefore brought a claim under the Australian–Indian BIT but successfully relied on the BIT’s “most-favoured nation” clause to take advantage of the more favourable investor protections in the India-Kuwait BIT.

The UNCITRAL award adds to the developing jurisprudence suggesting that an arbitral award may be treated as a continuation of an investment and, as such, may be subject to such protections afforded to investments by a BIT.  The jurisdictional aspect of this case is also particularly topical given the consolidated appeal in Bhatia International v. Bulk Trading that began in the Supreme Court of India on 10 January 2012, which is considered likely to limit the ability of Indian courts to intervene in arbitrations seated outside India.

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Delhi High Court supports parties’ agreement to arbitrate in Singapore

Appellate courts in India have sometimes been subject to criticism from international arbitration practitioners due to their interventionist approach (often under the guise of supervision) towards arbitration proceedings.

Therefore, it is worth noting the recent decision in Max India Limited v. General Binding Corporation (Max) in which the Delhi High Court rejected the appellant’s invitation to intervene and ruled that it should not grant interim relief to the applicant prior to the commencement of arbitral proceedings, as there was an alternate forum available to the parties in the Singapore courts. The decision was upheld on appeal by a division bench of the Delhi High Court.

The ruling contrasts with some other Indian court decisions, particularly in the context of the applicability of Part I of the Indian Arbitration and Conciliation Act, 1996 (Act) to international arbitrations seated outside India.

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