Will India Be The Seat For Future International Arbitrations?

While it’s a long and rather arduous road ahead for India to truly become an arbitration-friendly jurisdiction, the Balco judgement inspires hope that a new and promising era has begun for arbitration in the country with growing liberalisation in India and extraordinary business growth in the last decade, there has been a notable increase in the interaction/ interplay between Indian and International business Organisations.

Over the past several years, India has managed to establish itself as a global hub for international business. While this has successfully changed the dynamics as far as redefining global frontiers for organisations across industries is concerned, the flip side is that such growth and resulted in investment has also increased the possibility and scope of differences and disputes. As a consequence, Arbitration as a method of alternative dispute resolution has gained increasing prominence and recognition across countries as the most effective and efficient method of dispute resolution, especially in the arena of international commercial disputes, which is attributable to the primacy that the arbitration process accords to party autonomy in determining the procedure, mode, manner, jurisdiction and timelines for the arbitration.

In the wake of the popularity that arbitration processes have gained, each country seems to be competing with each other to ensure that the national laws are conducive and favourable to the arbitration process. In this changing face of the Indian economy, the need to have an effective dispute resolution mechanism was advanced through the enactment of the Arbitration and Conciliation Act, 1996 (“1996 Act”), as a comprehensive code, covering both domestic and international commercial arbitrations incorporating the UNCITRAL the Model Law, the New York Convention and the Geneva Convention.

Despite having a strong pro-arbitral legislative base in the 1996 Act, India has till date been struggling to establish itself and gain recognition as an arbitration-friendly jurisdiction. India-seated arbitration proceedings have been seen as distinctive and sometimes restrictive processes filled with traps for the unwary. While the 1996 Act embodies several key features characteristic of an arbitration-friendly jurisdiction, such as the principles of party autonomy, strong judicial support with minimal judicial intervention, and recognition and enforcement of convention awards, the ambiguity regarding interim relief in aid of arbitration seated in India and interpretation of certain provisions in the 1996 Act has led to a considerable increase in intervention by the courts.

However, in recent years, there has been a shift towards minimal court supervision with regards to foreign arbitral awards and foreign arbitration. The Supreme Court of India has taken the lead in trying to resolve the controversy surrounding the extent of court intervention in foreign arbitrations and the Constitution Bench of the Supreme Court has, in the case of Bharat Aluminum Co. vs. Kaiser Aluminium Technical Service Inc.1 ("Balco judgment"), definitively decided the scope and limits of judicial intervention in respect of international commercial arbitration and recognition and enforcement of foreign awards.

Until the passing of the Balco judgement, there was strong judicial divergence between various courts in India on the issue whether provisions under Part I of the 1996 Act were available to international arbitration seated outside India. The Supreme Court in Bhatia International v. Bulk Trading S.A.2 ("Bhatia International") and Venture Global Engineering vs. Satyam Computers Services Ltd. and Anr.3 ("Venture Global"), examined the Scheme of the 1996 Act and laid down that provisions under Part I of the 1996 Act can be applied to international arbitrations seated outside India, unless expressly or impliedly excluded by the parties.

These judgements blurred the distinction between domestic and foreign seated arbtrations due to the overlapping provisions and afforded far-reaching powers beyond what was contemplated in the 1996 Act to the Indian Courts, enabling them to intervene in foreign seated arbitrations, thereby making international arbitral proceedings extremely litigious and time-consuming.

To bring India in line with international standards of arbitration-friendly jurisdictions, the Indian Courts started departing from their overreaching and intrusive regime and started wriggling out of the 'Bhatia trap' and applying provisions contained under Part I of the 1996 Act to international commercial arbitrations by stating that parties have impliedly excluded the application of the same since they had determined the law of the seat, procedural law, law of contract etc. to be other than the Indian law.

The Balco judgement sought to remedy this imbalance and confusion triggered from the earlier decisions, by reversing the trend and holding that the application of Part I of the 1996 Act is not available to foreign seated arbitrations and overruled, albeit prospectively, the earlier decisions in Bhatia International and Venture Global, setting right the anomaly resulting from the aforesaid decisions. Balco judgement highlights the distinct treatment to be given to domestic and foreign arbitrations and fortifying the intention of the legislature to limit judicial intervention in foreign seated arbitrations.

It further reinforced the principles of territoriality, party autonomy, and minimal judicial intervention, which are the touchstones on which the 1996 Act was formulated. Pursuant to this decision, Indian Courts no longer have the power to intervene in international arbitrations seated abroad, either for providing interim relief under Section 9 of the 1996 Act or by way of entertaining a challenge under Section 34 of the 1996 Act to foreign arbitral awards in India. However, as clarified by the Supreme Court, the Balco judgement is not applicable in cases where the arbitration agreement had been executed before 6 September 2012 and those agreements will still be subject to the interpretation arrived at in Bhatia International and Venture Global. Therefore, Balco judgement may not provide an immediate relief for all.

New banks will have an authorized share capital of '30 billion, comprising 3 billion fully paid-up shares of '10 each, twice the previous limit of '15 billion. Banks desirous of varying the number and denomination of its shares are required to obtain the permission of the RBI. The Government, in consultation with the RBI, also has the power to increase or decrease the authorized capital limit.

Banks will now have the freedom to issue preference shares (which was not permitted earlier) subject to compliance with guidelines to be framed by the RBI. While preference shares under the Companies Act, 1956 enjoy limited voting rights, the Banking Amendment Act stipulates that preference shares issued by banks, will not be allowed to carry any such right.

Besides private placement and public issue, alterations to paid-up capital may now also be carried out by nationalized banks through issuance of bonus shares or a rights issuance. These methods may enable banks to raise capital without material deviation from subsisting shareholding patterns.

Of practical importance, the Balco judgement has also emphasised that the seat of arbitration is its centre of gravity; therefore, the law of the seat/ curial law will necessarily be the law governing the arbitration proceedings. The necessary implication of the same is that, irrespective of whether the parties opt to subject the arbitration to Part I of the 1996 Act, it shall not be applicable to international arbitrations seated outside India. The corollary to this is that in the event two foreign parties have opted for India as the seat of arbitration, the arbitration shall be governed by the 1996 Act and the award rendered shall be considered as a domestic award. This is an important signal to all parties drafting their arbitration agreements and should encourage foreign parties contracting with Indian parties to now opt for India as a seat of arbitration in-order to avail of the benefits of Part I of the 1996 Act including Section 9 for seeking interim relief(s) and Section 34 for setting aside the award.

It might be too early or even premature to gauge the impact of the above decisions on the Indian arbitration regime, however, the Balco judgement is certainly a significant step in the right direction and is being followed with fervour by various Courts.

However, even today, the pie is only half baked and requires issues to be addressed at both ends: the judiciary and the legislature to stabilise and consolidate the position. The judiciary may have commendably interpreted the law as it stands while carefully not venturing into the domain of law-making; a Court’s jurisdiction is limited and ultimately apposite amendments will have to be passed by the legislature in this regard to cover loose ends.

The legislature ought to take notice of the limitations upon the judiciary and provide support to the arbitral process through amendments in the 1996 Act, some of which were suggested in the Consultation Paper released by the Ministry of Law & Justice, Government of India and by enacting significant legislations like the pending Commercial Division of High Court Bill, 2009 and National Litigation Policy in order to guide the Courts to have a consistent approach in administering and adjudicating upon issues arising from disputes subject to arbitration. Apposite amendments also need to be passed in view of the fact that parties who sign agreements containing arbitration clauses after the ruling of Balco judgement, would be precluded from seeking the Indian Courts’ assistance in appointment of arbitrators or challenge the awards passed in such arbitrations or seek enforcement of non-convention awards.

Although several countries exclude applicability of their domestic arbitration laws to foreign arbitrations, they still permit the parties to obtain interim relief from local courts irrespective of the seat of arbitration. For instance, the English Arbitration Act, 1996 empowers English Courts to grant interim reliefs in foreign-seated arbitrations. The arbitration laws of Hong Kong, Netherlands and Singapore follow a similar approach. The positive announcement of the Balco judgement was to some extent overshadowed by the controversy of interim protection being withdrawn from foreign seated arbitrations as the parties will now no longer be permitted to approach the Indian Courts for interim reliefs for protection of assets before the arbitral process has begun. This sets India apart from most arbitration-friendly jurisdictions, where some relief in support of foreign arbitrations is generally available.

Another aspect of the intervention by Indian courts is in the wide supervisory powers and discretion to deny enforcement of awards rendered outside India, if found contrary to Indian 'public policy'. On the pretext of 'public policy', famously dubbed as the 'unruly horse', courts often enter the dangerous territory of a full merit based re-hearing and analysis on finding of facts. Therefore, while making requisite amendments, the legislature should redefine and set out the circumstances and occasions that trigger a challenge to the award on account of violation of India's public policy.

The Legislature also ought to consider other areas, which are much touted advantages of international arbitration, however are problematic and pedantic as they have not yet been adequately addressed in the 1996 Act, such as the issue of costs, timeline adherence, stamping issues on foreign awards, intra court appeals and confidentiality of the proceedings.

These amendments and enactments would also send out a strong signal to the international community, that the rights of the investor would be protected through rule of law, and respected and enforced in a manner that would provide an effective means to safeguard property and other entitlements in case of a default by the counter parties. The Indian arbitral regime when concretised by way of suitable amendments, would go a long way in ensuring that India becomes an arbitration-friendly jurisdiction and may even offer itself as a credible seat for arbitration in future for international commercial arbitrations.

Whilst there will be, no doubt, a long and arduous path ahead, fraught with difficult legal and policy challenges, before India can truly be considered an arbitration-friendly jurisdiction, the Balco judgement inspires hope that a new and promising era has begun for arbitration in India. This is perhaps the first time in decades, there is an air of expectancy in arbitration circles in India and abroad as the proposed reforms are catalysed and backed by favourable judicial fervour and solid political will to overcome the various contradictions and challenges. Given the arbitration-friendly climate in India, if parties exercise substantial precautions and foresight in drafting the arbitration clause, there is a high optimistic assessment of the future of India as the new hub of arbitration.

Footnote:
1 (2012) 9 SCC 552

2 (2002) 4 SCC 105

3 (2008) 4 SCC 190

Disclaimer-The views expressed in this article are the personal views of the authors and are purely informative in nature.