Richard Smith, from Allen & Overy explains a case in which the Indian Supreme Court has reconsidered the state of arbitration law relating to offshore arbitrations.

On 10 January 2012, a five-judge constitutional bench of the Indian Supreme Court commenced hearings in Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc (Civil Appeal No 7019 of 2005) and other consolidated appeals.

The hearings have now concluded and we await the Court’s decision. The outcome of the appeal is likely to be of considerable significance to investors in India.

Background

The Indian Arbitration and Conciliation Act 1996 (the “Act”) has two distinct parts. Part I applies where the place of arbitration is in India (section 2(2)). This Part confers significant powers on the Indian courts to grant interim measures, to appoint and replace arbitrators and to review arbitral awards. Part II is concerned with the recognition and enforcement in India of foreign arbitral awards which fall within the scope of the 1958 New York Convention and the 1927 Geneva Convention. In line with those Conventions, Part II considerably restricts the scope for judicial intervention by the Indian courts.

In Bhatia International v Bulk Trading SA (“Bhatia”), the Indian Supreme Court considered a request for interim relief under Part I of the Act by a party to an ICC arbitration seated in Paris. A three-judge bench of the Court held that the provisions of Part I of the Act would also apply to international commercial arbitrations seated outside India, unless the parties had expressly or impliedly excluded its application. The reasoning underlying the Court’s judgment was that section 2(2) of the Act did not imply that Part I would “only” apply when the place of arbitration was in India.

The Bhatia ruling considerably expanded the scope for Indian courts to interfere in arbitrations seated outside India. For instance, in Venture Global Engineering v Satyam Computers Services (2008), a two-judge bench of the Supreme Court followed Bhatia and held that an LCIA award rendered in London could be challenged in India under the expanded “public policy” grounds for reviewing arbitral awards in Part I of the Act (section 34). Similarly, in Indtel Technical Services v Atkins (2008), the Supreme Court ruled that it had the power to appoint arbitrators in arbitrations seated outside India in the case of a deadlock between the parties concerning the appointment procedure. Later court decisions have also been inconsistent as to when Part I of the Act can be excluded by the parties to an arbitration with a seat outside India.

Bhatia and its progeny have therefore created significant uncertainty and delay in a number of arbitrations taking place outside India but involving Indian counter parties or laws. Those decisions have also been the subject of intense international attention and criticism for adopting a position inconsistent with the international arbitral practice by which the court of the seat of arbitration will generally have supervisory jurisdiction over an arbitration and exclusive jurisdiction to review and set aside any arbitral awards. As a result of Bhatia, it has become common for commercial parties to exclude expressly the application of Part I of the Act in arbitration agreements which have any connection with India, in order to prevent the Indian courts from assuming jurisdiction over arbitrations seated outside India.

Reference to the constitutional bench

In 2008, a two-judge bench of the Supreme Court expressed reservations about the principles laid down in Bhatia. Subsequently, in 2011, the matter was referred to the five-judge constitutional bench (including the Indian Chief Justice) to reconsider the current legal position and, hopefully, settle the controversy.

The observations made by the bench during the course of the hearings show that it is aware of the international implications of the appeal, particularly the detrimental impact on investments in India if the arbitration regime to which those investments are subject suffer from excessive judicial intervention. In the course of considering the application of Part I to foreign seated arbitrations, the Court is also likely to clarify Indian “conflict of laws” principles as they apply in an international arbitration with an Indian connection.

Conclusion

In April 2010, the Indian Law Ministry introduced a consultation paper proposing certain important amendments to the Act. One of the key amendments sought to nullify the impact of the Bhatia line of decisions. However, the proposed legislative reforms have yet to be considered by the Indian Parliament and it seems unlikely that statutory clarification will be forthcoming in the foreseeable future. In those circumstances, the Supreme Court’s decision to reconsider its own ruling in Bhatia is a welcome development. It is hoped that the constitutional bench will adopt a less interventionist approach than the previous decisions, thereby providing greater certainty for parties which chose to invest in India.

The hearing in this matter continues. Allen & Overy are acting for one of the interested parties to the appeal and will provide updates on any significant developments.