Arbitration
Recent Legislative and Judicial Developments
Arbitration law in India is fast developing. Significant amendments were made to the Indian Arbitration and Conciliation Act, 1996 (the Arbitration Act) in 2015 and 2019, but some of these were rolled back in 2020. There have also been a number of recent Supreme Court decisions, all of whom show a consistent trend to promote arbitration as an effective alternative dispute resolution mechanism.
Legislative amendments and applicability
Prior to the amendments made to the Arbitration Act in 2015, any challenge to a domestic award in Indian courts would result in an automatic stay of the award. This position was altered in the 2015 amendments that required a separate application for stay of an award to be made and that any stay would only be granted on the basis of a reasoned decision. The Arbitration and Conciliation (Amendment) Ordinance, 2020 (the Ordinance) makes an exception for fraud or corruption and provides that where the court is prima facie satisfied that the arbitration agreement or contract which is the basis of the award, or the making of the award, was induced by fraud or corruption, the court shall stay enforcement of the award unconditionally.
The Ordinance also omits certain provisions that had been introduced by the Arbitration and Conciliation (Amendment) Act, 2019, which introduced certain qualifications, conditions of experience and norms for the accreditation of arbitrators, including conditions which were perceived as a bar to the appointment of foreign lawyers as arbitrators. The Ordinance states that these conditions will now be specified by regulations to be issued by the Arbitration Council of India (when established) in consultation with the Central Government. It is unclear at present whether these regulations envisaged by the Ordinance will permit the appointment of foreign lawyers as arbitrators.
Limited scope of judicial review of arbitral awards
Domestic awards
An application to an Indian court to set aside a domestic arbitral award is made under Section 34 of the Arbitration Act. Fortunately, in Ssangyong Engineering & Construction Co. Ltd. v. NHAI [(2019) 15 SCC 131], the Supreme Court emphasised the restricted scope of review of arbitral awards by Indian courts The Supreme Court held that the concept of ‘public policy of India’ as a ground to challenge an arbitral award is now restricted to ‘fundamental policy of Indian law’ or that the award is against the basic notions of justice or morality. These are in addition to where the making of the award was induced or affected by fraud or corruption. The former would apply restrictively and would no longer involve the court’s interference on the merits of an award. The latter ground would only apply in very exceptional circumstances when the conscience of the court is shocked by infraction of fundamental notions or principles of justice. It has been made clear that under no circumstance can a court interfere with an arbitral award on the ground that justice has not been done in the opinion of the court.
An additional ground of ‘patent illegality’ is available under Section 34 insofar as domestic awards with Indian parties is concerned. Here, the Supreme Court observed there must be patent illegality appearing on the face of the award, which refers to illegality that goes to the root of the matter and not mere erroneous application of the law. The ground of ‘patent illegality’ also does not entail reappreciation of evidence.
This decision was reaffirmed by the Supreme Court by a 3-Judge Bench in Patel Engineering Ltd. v. North Eastern Electric Power Corpn. Ltd. [(2020) 7 SCC 167].
Foreign awards
The enforcement of foreign awards can only be refused in limited circumstances set out in Section 48 of the Arbitration Act. The Supreme Court in Vijay Karia and Others v. Prysmian Cavi E Sistemi SRL and Others [(2020) 11 SCC 1], noted that no ordinary appeal lies against a judgment that recognises and enforces a foreign award, and observed that it should be very slow in interfering with such judgments, and should entertain an appeal only with a view to settle the law if some new or unique point is raised. The Supreme Court further noted that the object of Section 48 of the Arbitration Act is to enforce foreign awards subject to certain well-defined narrow exceptions – grounds which affect the jurisdiction of the arbitration proceedings, grounds which go to the public policy of India, and grounds which affect party interest alone. In the last of the three grounds, a court can still enforce a foreign award where the infraction is capable of waiver or abandonment, or where no prejudice has been caused to the party complaining of the infraction. It was further held that such grounds are watertight and no ground outside this provision can be looked at.
In terms of the specific grounds under Section 48, the Supreme Court held that a working test for determining whether a party has been unable to present its case is to see whether factors outside the party’s control have denied the party a fair hearing. The court further held that “fundamental policy” refers to the core values of India’s public policy, which may find expression not only in statutes, but also time-honoured principles followed by the courts and a rectifiable breach of the [Indian] Foreign Exchange Management Act, 1999 can never be held to be a violation of the “fundamental policy” of Indian law. The court observed that the important point to consider is that the foreign award must be read as a whole, fairly, and without nit-picking.
The pro-enforcement approach for foreign awards was reiterated by the Supreme Court in the subsequent decision of Government of India v. Vedanta Limited and Others [(2020) 10 SCC 1]. It was reiterated that the grounds for refusing enforcement of foreign awards contained in Section 48 are exhaustive and the merits of the arbitral award are not open to review by the enforcement court, as such review lies within the domain of the courts of the jurisdiction where the seat of the arbitration is located.
Refraining from exercising jurisdiction in foreign-seated arbitrations
The Supreme Court’s jurisprudence on “seat” of arbitration has a long and chequered history. In the recent 3-Judge Bench decision in Mankastu Impex Private Limited v. Airvisual Limited [(2020) 5 SCC 399], the Supreme Court refused to exercise its powers under Section 11 of the Arbitration Act to appoint an arbitrator since the arbitration clause provided that the arbitration would be “administered” in Hong Kong. It was held that this resulted in the seat of arbitration being Hong Kong which excluded the jurisdiction of Indian courts to appoint an arbitrator. This is consistent with the Supreme Court’s seminal decision in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. [(2012) 9 SCC 552], in which determination of the “seat” was the basis for deciding whether the arbitration was domestic or foreign. Where the seat of arbitration is outside India, the application of Part I of the Arbitration Act which deals with domestic awards is excluded, and consequently, challenges under Section 34 of the Arbitration Act cannot be made to foreign awards.
Expanding scope of disputes that are arbitrable
Fraud
The issue as to whether disputes involving allegations of fraud can be referred to arbitration came up again before the Supreme Court in Rashid Raza v. Sadaf Akhtar [(2019) 8 SCC 710]. Affirming its earlier decision in A. Ayyasamy v. A. Paramasivam [(2016) 10 SCC 386] wherein a distinction was made between serious allegations of forgery/fabrication as opposed to ‘simple allegations’, the Court culled out two working tests from this decision, namely: (i) whether the plea of fraud permeates the entire contract and above all, the agreement of arbitration, rendering it void; or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain. Where there is a ‘simple allegation’ of fraud which would not vitiate the arbitration clause or the agreement as a whole, disputes between the parties would be arbitrable.
The Supreme Court elaborated on this issue more recently in Avitel Post Studioz Limited and Others v. HSBC PI Holdings (Mauritius) Limited [2020 SCC OnLine SC 656]. The court held that ‘serious allegations of fraud’ arise only if one of the two tests laid down in its earlier decisions (the last being the decision in Rashid Raza) is satisfied, and not otherwise. The first test is satisfied when the arbitration clause or agreement itself cannot be said to exist – where the court finds that the party against whom a breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test is met in cases where allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, necessitating the hearing of the case by a writ court and the questions raised are not predominantly questions arising from the contract or its breach, but questions arising in the public law domain. The Supreme Court also observed that the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not preclude arbitration of a dispute which is otherwise arbitrable.
Tenancy disputes
In Vidya Drolia and Others v. Durga Trading Corporation [2020 SCC OnLine SC 1018], a 3-Judge Bench of the Supreme Court, in a reference, overruled its earlier decision in Himangni Enterprises v. Kamaljeet Singh Ahluwalia [(2017) 10 SCC 706] and held that disputes arising out of a landlord-tenant relationship governed by the Transfer of Property Act, 1882 are arbitrable. These are not actions in rem, but pertain to subordinate rights in personam that arise from rights in rem. However, landlord-tenant disputes covered by specific rent control legislation are not arbitrable. The court further held that the arbitral tribunal is the preferred first authority to determine all questions relating to arbitrability but a court may interfere at the stage of appointment of an arbitrator when the matter is demonstrably non-arbitrable.
Unstamped agreements
Most recently, a 3-Judge Bench of the Supreme Court in N.N. Global Mercantile Private Limited v. Indo Unique Flame Ltd. [2021 OnLine SC 13], overruled an earlier decision in SMS Tea Estates v. Chandmari Tea Co. [(2011) 14 SCC 66] which had held that an arbitration agreement in an unstamped commercial contract cannot be acted upon or is rendered unenforceable in law. The Supreme Court held that since an arbitration agreement is an independent agreement between the parties and is not chargeable to payment of stamp duty, the non-payment of stamp duty on the commercial contract would not invalidate the arbitration clause. Such non-payment is curable on payment of the requisite stamp duty. However, this is not the final word on this issue. Since a coordinate 3-Judge Bench in Vidya Drolia and Others v. Durga Trading Corporation had cited with approval the decision in Garware Wall Ropes Limited v. Coastal Marine Constructions and Engineering Limited (which had followed SMS Tea Estates), in N.N. Global Mercantile, the issue was referred to a Constitution Bench (of 5 Judges) to be authoritatively settled.
Reiteration of Group of Companies Doctrine
In Mahanagar Telephone Nigam Ltd. v. Canara Bank and Others [2019 SCC OnLine SC 995], the Supreme Court applied the doctrine of ‘Group of Companies’ to hold that a non-signatory group company is bound by an arbitration agreement where the conduct of the parties reflects a clear intention to this effect. Circumstances in which the ‘Group of Companies’ doctrine can be invoked include a direct relationship with the signatory to the arbitration agreement, direct commonality of the subject matter, composite nature of the transaction between the parties and cases where there is a tight group structure with strong organisational and financial links, so as to constitute a single economic unit, or a single economic reality. The effect of applying the doctrine is to enable a comprehensive resolution of disputes.
Mandatory pre-deposit requirement struck down
In ICOMM Tele Ltd. v. Punjab State Water Supply & Sewerage Board & Another [(2019) 4 SCC 401], the Supreme Court was hearing a challenge to the validity of an arbitration clause contained in a tender notice. The clause provided that before invoking arbitration, the claimant would be required to deposit 10% of the claim amount with the arbitrator and in the event of an award in favour of the claimant, the deposit would be refunded in proportion to the amount awarded. The court struck down the contractual provision as arbitrary and violative of Article 14 of the Constitution of India (equality before the law). In doing so, the Supreme Court held that any pre-deposit requirement would amount to a clog on the process of arbitration as an alternative dispute resolution mechanism and would discourage arbitration.
Limitation periods suspended in view of Covid-19
By order dated 6 May 2020 in Re: Cognizance for Extension of Limitation [Suo Moto Writ (Civil) No. 3/2020], the Supreme Court directed that all periods of limitation prescribed under the Arbitration Act would be extended with effect from 15 March 2020 in view of the Supreme Court’s earlier order of 23 March 2020 which had extended limitation periods as a consequence of the Covid-19 pandemic.
Conclusion
Recent decisions of the Supreme Court of India in arbitration law encourage a robust alternative dispute resolution mechanism by expanding the scope of disputes that are arbitrable, reiterating the reduced scope of judicial review in both domestic and foreign awards, refraining from exercising supervisory jurisdiction in respect of foreign-seated arbitrations and minimising impediments to arbitration. This trend, coupled with the amendments to the Arbitration Act in 2015 and 2019, should set the tone for India to be seen as an arbitration-friendly jurisdiction in the near future.
This material is for general information only and is not intended to provide legal advice.
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