Vivek Kapoor

The engines of economic growth in India are moving towards full throttle. In this resurrection of India as an economic giant, foreign investors are keenly looking at safeguards the Government of India is prepared to offer to ensure that the commercial bases of their investments are protected. The corner stones of investor confidence have always been transparency, predictability and clarity in policies and regulations. Capital preservation has always been as much of a consideration as investment return and capital growth.

The Government has recently released a draft Model Bilateral Investment Treaty (“Model BIT”) for comments. The finalized draft shall be used to negotiate any new BIT entered into by the Government, including the much anticipated US-India BIT. In addition, it would be used to renegotiate the 72 currently active BITs of India.

From the perspective of the foreign investor, the most significant role for this Model BIT should be to inculcate a deep sense of assurance that the Government in India is ready to walk the talk. Woefully, the draft Model BIT does not seem to be making that case.

To start with, the concept of investment that lies at the heart of any investment treaty is surprisingly ill-considered in the case of the Model BIT. The Model BIT has chosen the enterprise-based definition of investment over the widely used asset-based definition. The negative list, which includes intellectual property rights amongst others, added to the foreign direct investment-focused definition, further shrivels the form an investment can take.

From the perspective of a capital-importing country, the definition of investment identifies who the country’s clients are for purposes of investment policy – entrepreneurs, industries and groups that the country wants to attract in order to increase foreign investment. Investment of capital takes a multitude of forms in the world today and in recognizing this reality, the definitions of investment in contemporary treaties tend to be broad. A broad definition of investment reflects a desire to encourage foreign investment in all its forms, present and future.

With India looking to bring about a generational change in technology, expertise and enterprise, the present definition of investment needs to be discarded for a more progressive and dynamic one. Concerns of arbitral activism to expand the definition of investment to unexpected areas can be better addressed with the exclusion of specific types of assets (as has been done), or by using a closed-list definition with a wide asset-based list of examples which are exhaustive rather than illustrative, or by tempering the definition with characteristics of an investment established under the investment law jurisprudence.

Further, the crippling of many substantive protections is bound to dampen investor enthusiasm and confidence. The protection of “National Treatment” excludes from its purview laws and actions of regional (1 of the 29 states of India) and local governments, effectively leaving the substantive protection limited to the measures of the Union Government. Even though the Union Government holds the sway, the Constitution of India vests significant powers (various items listed on the State List of the Seventh Schedule of the Constitution of India) to the Indian states which they exercise independent of the Union Government. Local government is similarly empowered (Eleventh and Twelfth Schedules of the Constitution enumerate items on which the rural and urban local governments, respectively can exercise their powers), though on a much smaller scale. This means that there will be no recourse from any actions and policies of the regional and local governments, which may be contaminated with misplaced enthusiasm and wayward nationalism, or subject to the oscillating political cycles of India.

Next, the standard protection of ‘fair and equitable treatment’ has been replaced with leaner, imprecise protections. And the protection of ‘full protection and security’ has been completely left out. Though investments are to be protected from violations of due process and manifestly abusive treatment, but only if the violations of due process are “un-remedied and egregious” and the manifestly abusive treatment is “continuous, unjustified, and outrageous” coercion or harassment. The bar for a remedy, requiring egregious or outrageous state conduct, is high, and seems to suggest that lesser evils shall not be frowned upon. As the NAFTA tribunal in Mondev International Ltd v USA very aptly observed “what is unfair or inequitable need not equate with the outrageous or egregious”, and that “a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith”.
It is also difficult to understand what form of coercion or harassment could be justified (as opposed to unjustified) and why a single act of manifestly abusive treatment, that causes significant harm, should be excluded.

With a reputation of being mired in red tape, India is working hard to overcome its governance and ease-of-doing-business credibility crisis. The Model BIT, attempting to exclude “services supplied in the exercise of governmental authority”, reflects badly on the government’s resolve to give an efficient investment milieu to foreign investors. It is a clear reaction to the White Industries case (the slow, and sometimes inefficient, judicial system, cost India a few million dollars) and the Louis Dreyfus Armateurs claim (the Government allegedly failed to provide protection and security to the project, its employees and their families). The incongruity here is that every investor legitimately expects the host government to be warranting robust services, particularly those services which are supplied in the exercise of government authority and cannot be replicated by private service providers. At the top of that list are effective means of asserting claims and enforcing rights, i.e. efficient courts, and safe and secure business environment, i.e. law and order.

The echo of the Vodafone, Cairn Energy and Vedanta claims is glaring in the Model BIT’s exclusion of any taxation measures from its purview. Governments, no doubt, need to have a free hand in their taxation policy without suspecting a lurking investment claim. However, a carve-out for taxation should exclude from its purview retrospective taxation and unambiguous tax sops promised to draw investors. India’s past record in this regard is rather uninspiring.

The trepidations from the battery of recent investment claims filed against India are evident in the Model BIT. The drafters of the Model BIT, cockeyed in their focus, have endeavored to limit protections afforded to inbound investors in India in order to reduce exposure to future investment claims. However, they have ignored that the BIT lays down reciprocal investment guarantees, and by the same token protections to outbound Indian investors venturing into foreign markets will also be shaved off. This is increasingly significant as India is now not only importing capital, but also exporting it, even though not on a comparable basis. Moreover, with Indian industry’s increasing economic engagement on the South – South trackway, a BIT negotiated on this model would leave Indian investors to fend for themselves in case of an embittered investment in another developing country.

If India wants foreign investors not to be unsettled by the exclusion of the Most Favored Nation provision, the absence of market access commitments, the exclusion of an umbrella clause, and a requirement to first exhaust local remedies (though not endlessly), it needs to be seen as forthcoming in providing credible and robust assurances on the whole. In the present form of the Model BIT, essential facets like investment, national treatment, standard of treatment, expropriation, and dispute resolution are handled immaturely and reek of lack of a vision.

The Model BIT needs to adopt a perspective which is more progressive and aligns with the interests of India Inc even after decades. The drafters should be careful of not falling into the pattern of many previous policy reforms which fail to establish their relevance after few years, and in fact threaten the very objective for which they were brought in place. They must find the fine balance between investor rights, investor responsibilities and State’s regulatory powers. The Model BIT in its present form resembles a half-baked cookie, which has all the flavors to be a delicacy but leaves a lot to be desired.

Note: an abridged version of this piece was published in the August 2015 edition of Lex Witness.

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Vikas Mahendra

The recently promulgated Arbitration and Conciliation (Amendment) Ordinance 2015 (the “Ordinance”) marks a significant change in the arbitration landscape of India. Most significantly, the Ordinance (a statutory enactment in exercise of an extraordinary power granted to the President to act when the parliament is not in session) seeks to restrain judicial intervention in arbitration and tackle inordinate delay with arbitration-related court actions. The amendments, though well intentioned, are not without concern.

Key Amendments

Applicability

The Ordinance is stated to come into force with immediate effect. However, it is not specifically stated as to whether the provisions would apply to pending arbitrations and/or judicial proceedings dealing with the issues that are the subject of the amendments. Pending clarification, this is likely to give rise to some uncertainty. However, since the Ordinance has not been specifically made prospective, it is likely to be interpreted as applying to arbitrations initiated pursuant to existing arbitration agreements (although there is some basis to argue otherwise).

The amendments affirm the line of distinction between purely domestic arbitration involving Indian parties (“Domestic Arbitration”), arbitrations having an international element but seated in India (“International Arbitration”), and arbitrations seated outside of India (“Foreign Arbitration”). The provisions of the Arbitration and Conciliation Act 1996 (“Act”) (other than Part II of the Act dealing with enforcement) are normally not applicable to Foreign Arbitrations, except where specifically provided.

The Ordinance clarifies that an arbitration would be a Domestic Arbitration even if one of the parties to the arbitration has its central business and management outside India. This amendment affirms the ruling of the Supreme Court in TDM Infrastructure and affords primacy to the place of incorporation of a company.

Reference to Arbitration

The Ordinance now permits “any person claiming through or under” a party to the arbitration to seek reference of a dispute the subject of an arbitration agreement to arbitration. This clarifies a string of slightly inconsistent rulings of the Indian courts and provides that even non-signatories to an arbitration agreement may be able to seek reference to arbitration under appropriate circumstances.

The Ordinance also requires the courts to refer parties to arbitration if, prima facie, an arbitration agreement is found to exist. This amendment will prevent an extended inquiry by the courts on the validity of the arbitration agreement (as was frequently done), and leave these issues to be determined by the arbitral tribunal.

Appointment of Arbitrators

Previously, due to a string of Supreme Court decisions including the decision in Patel Engineering, appointment of an arbitrator by the Indian courts was considered a judicial function. This was interpreted to mean that courts enjoyed broad powers to inquire into the validity of arbitration agreements prior to appointing arbitrators. The Ordinance clarifies that the power to appoint arbitrators is not a judicial function.

The Ordinance also clarifies that the power to appoint arbitrators can be delegated by the Supreme Court or the High Court to any person or institution. This is an important statutory recognition of the role of institutions in arbitral proceedings.

The Ordinance requires the courts to aim to dispose of an application for appointment of arbitrators within 60 days from the date of service of notice to the other party.

The Ordinance also clarifies the grounds available to challenge appointment of arbitrators on grounds that the appointment raises justifiable doubts as to his/her impartiality or independence. The amended Act contains two schedules that list various grounds for challenge – which appear to be heavily influenced by the IBA Guidelines on Conflict of Interest in International Arbitration.

The amended Act also makes it impermissible for parties to agree in advance to appoint an arbitrator who has previously been an employee of either party. Provisions such as these, which were a standard feature of a number of State contracts will now no longer be valid.

Court Assistance to Arbitration

The Ordinance now clarifies that the courts’ power to grant interim relief in aid of arbitration is available prior to initiating arbitration, provided the parties actually initiate arbitration within 90 days from the date of obtaining interim relief from the court. This is in contrast to recent decisions in other countries where courts have recognised the courts’ power to grant interim relief even if arbitration is not in contemplation.

The Ordinance also clarifies that the courts’ power to order interim relief is only available if the arbitral tribunal is not in a position to grant efficacious interim protection.

Significantly, the Ordinance makes interim orders granted by arbitral tribunals enforceable in Indian courts. This amendment will give more teeth to arbitral tribunals’ orders and minimise the need to approach courts to obtain an enforceable order.

Court Assistance to Foreign Arbitration

Following the Supreme Court ruling in Bharat Aluminum, foreign parties were concerned that by choosing to arbitrate outside of India they were unable to seek interim protection from Indian courts. The Ordinance now specifically recognises that parties to a Foreign Arbitration can seek the assistance of Indian courts for interim protection and for obtaining evidence, unless they specifically exclude the jurisdiction of the Indian courts to provide such assistance.

The Ordinance however suggests that Indian Courts will only provide assistance if the seat of arbitration is in a country which India recognises in its official Gazette as being a reciprocating territory for the purposes of the Act.

Conduct of Arbitrations

A controversial provision in the Ordinance is the requirement for arbitrations to be completed within 12 months. Parties are free to agree to extend this period by up to 6 months. Any further extension can only be sought by making a court application. In such proceedings the court has the power to replace recalcitrant arbitrators, impose penalties by reducing arbitrators’ fees and impose exemplary costs on parties. The Ordinance requires the courts to endeavour to decide such applications within 60 days. Mandatory stipulations of this nature, which do not account for differences in the complexity of arbitrations are likely to attract criticism. Further, the requirement to approach the courts to seek an extension in each case is likely to increase court interference.

Significantly, a new provision allows parties to choose fast-track arbitration. In such proceedings the arbitrator is required to render an award within 6 months from his/her appointment. The default rule is for a decision to be rendered based on written pleadings with an oral hearing being permitted only if both parties so request or if the arbitrator finds it necessary.

Interest and Costs

The Ordinance makes certain amendments to the arbitrators’ power to order interest. It prescribes a default rule of awarding interest post-award at market rate (as periodically determined by the Reserve Bank of India) plus 2%.

The Ordinance also contains detailed provisions relating to ordering of costs. It stipulates that the court/arbitral tribunal can only order “reasonable” costs for legal fees, witness attendance, institution fees etc. The Ordinance also provides that the default rule is for an unsuccessful party to bear costs. The court/tribunal is free to deviate from this default rule for reasons to be recorded in writing and after considering the circumstances detailed in the Act.

Setting Aside and Enforcement

The scheme of the Ordinance confirms the principle laid down in Bharat Aluminum, which clarified that Indian courts do not have the power to set-aside awards rendered in Foreign Arbitrations.

The Ordinance also narrows the scope of the public policy ground for setting aside arbitral awards and challenging enforcement to circumstances where: the making of an award is vitiated by fraud or corruption; the award violates the fundamental policy of India and; the award is opposed to basic notions of justice or morality. The Ordinance further clarifies that the court cannot review an award on merits while considering whether the award is opposed to the fundamental policy of India.

The Ordinance specifically provides that ‘patent illegality’ as a ground for setting aside awards will only be available for Domestic Arbitrations. Even here, the Ordinance provides that an award may not be set aside merely on grounds that the tribunal erroneously applied the law or by re-appreciating evidence.

In a further bid to avoid frivolous challenges, the Ordinance provides that an application to set aside an award would not automatically stay enforcement. The Ordinance further provides that where payment of money is the subject of an award, stay on enforcement shall be granted only upon furnishing the sums in dispute as deposit or by furnishing sufficient security.

Conclusion

The intentions of the Ordinance are clear and laudable. It seeks to make India a more arbitration friendly jurisdiction – both for India seated and foreign seated arbitration. The content however needs further refinement and clarity; and the language, a further review.

The Ordinance  will expire (subject to re-promulgation) if the amendments are not accepted by the Indian parliament within six weeks from the start of the parliament’s Winter Session this November. Given that most political parties have expressed support, it is hoped that the parliament will accept the changes now long overdue and in the process smoothen the edges.

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Binsy Susan and Ankita Singh

The last decade has seen a concerted effort by the Indian legislature, the executive and the judiciary to promote alternative dispute resolution in India. The Arbitration and Conciliation (Amendment) Act, 2015 (‘Amending Act’) marks an important milestone in the development of arbitration law in India. Some of the important changes brought about by the Amending Act are as follows:

• Makes arbitration more effective and time bound by introducing a time limit for delivering award and a fast track procedure for arbitration.
• Limits court interference by providing for no automatic stay on operation of awards when an application is filed under Section 34 to set aside the award.
• Limits the interpretation of public policy (one of the grounds for setting aside the award or challenging the enforcement of award, as the case may be), a term broadly interpreted by the courts under the unamended provisions.
• Provision to file an application for interim relief in arbitrations seated outside India to safeguard assets in India, pending the outcome of arbitration.

The Amending Act was brought into force with effect from October 23, 2015, to plug the perceived inadequacies in the Arbitration and Conciliation Act, 1996.

Section 26

The applicability of the Amending Act is governed by Section 26, which reads as follows:

“Section 26: Act not to apply to pending arbitration proceedings: Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act”.

The first part of Section 26 provides that the Amending Act shall not apply to arbitral proceedings commenced before October 23, 2015 (the date of commencement of the Amending Act), whereas the second part provides that the Amending Act shall apply ‘in relation to arbitral proceedings’ commenced on or after October 23, 2015. Section 26 is in the nature of a savings clause i.e. a provision which sets out the extent to which the rights accrued and liabilities incurred under the repealed provisions are to be governed by the amending act or the repealed act, as the case may be. A plain reading of Section 26 suggests that while it ‘saves’ all arbitrations commenced before October 23, 2015, the applicability of the Amending Act to fresh applications/ pending court proceedings in relation to arbitrations commenced before October 23, 2015 is not clear.

The Conundrum

Prior to the amendment, the Law Commission of India in its 246^th Report had recommended introducing Section 85A, which provided that the proposed amendments were prospective and were to apply only to fresh arbitrations (commenced after the date of enforcement of amendment) and fresh applications (i.e. proceedings filed before a court or a tribunal after the date of enforcement of amendment). Pending arbitration proceedings and court proceedings filed prior to October 23, 2015 were to be governed by the unamended provisions. However, the legislature did not accept this recommendation and instead enacted Section 26, which in its present form does not provide any clarity on applicability of the Amending Act to court proceedings arising out of arbitration proceedings that commenced before October 23, 2015.

Court proceedings in respect of an arbitration can be for interim relief (Section 9), appointment of arbitrator (Section 11), setting aside of award (Section 34), stay of enforcement of awards (Section 36) etc. and can be initiated prior to commencement of arbitration, during arbitration or post the termination of arbitration. After the Amending Act came into force, uncertainty arose on the issue of applicability of the amended provisions to court proceedings both pending and fresh.

Judicial Dicta

After the Amending Act came into force, several applications were pending in various Indian High Courts (at various stages) in relation to arbitrations commenced before October 23, 2015 that were required to be adjudicated by Courts. High Courts in India have taken different views.

One view taken by Indian Courts in Electrosteel Castings Limited v. Reacon Engineers (Calcutta H.C., January 14, 2016) and Pragat Akshay Urja v. State of M.P and Ors. (Himachal H. C., June 6, 2016) is that where the arbitration has commenced before October 23, 2015, court proceedings in respect of such arbitrations will not see the applicability of the Amending Act. In Electrosteel, a Section 34 application was filed after October 23, 2015 to set aside an award passed before October 23, 2015. A single judge bench of the Calcutta High Court refused to apply the Amending Act because the application was filed in context of an arbitration commenced before October 23, 2015, which was saved by Section 26.

A second view taken in New Tirupur Area Development v Hindustan Construction Co. Limited (Madras H.C, January 27, 2016) and Rendezvous Sports World v. BCCI (Bombay High Court, June 30, 2016) is that the Amending Act will be applicable to all court proceedings pending on October 23, 2015 or filed after October 23, 2015 in relation to arbitration proceedings initiated prior to the enforcement date of the Amending Act. The Madras High Court and the Bombay High Court in New Tirupur and Rendezvous were deciding whether the amended Section 36 was applicable to pending applications under Section 34. It is relevant to state that prior to the amendment, the operation of award was stayed automatically on filing of an application under Section 34 to set aside the award. After the amendment, Section 36 was amended to provide for a stay only on filing of an application for stay on operation of award, greatly reducing the ability of parties to stall the enforcement of an award by simply filing meaningless challenges to the award under Section 34.

The Bombay High Court and the Madras High Court analysed the scope of Section 26 and the use of different phrases in Section 26, “…..shall apply to arbitral proceedings commenced …” in the first part and “…shall apply in relation to arbitral proceedings…” in the second part. In this regard, the Courts relied on the law laid down in Thyssen Stahlunion GMBH v. Steel Authority of India that states that the phrase ‘in relation to arbitral proceedings’ is wider than ‘to arbitral proceedings’ to hold that the first part of Section 26 is restrictive as it saves only arbitral proceedings commenced before October 23, 2015 and the second part of Section 26 is wide due to use of ‘in relation to arbitral proceedings’. If this view were to be accepted, the Amending Act would be applicable to all proceedings (arbitral proceedings and court proceedings), other than what is saved by the first part of Section 26. Similarly, a Division Bench of the Calcutta High Court in Tufan Chatterjee v. Rangan Dhar (March 2, 2016), has held that proceedings in court whether initiated prior to, during or after the arbitral proceedings will not be saved by Section 26.

Therefore, while Tufan Chatterjee represents the broadest view in that it allows application of amended provisions to fresh applications (relating to arbitrations commenced before or after October 23, 2015), pending court proceedings and fresh arbitrations; on the other hand, Electrosteel represents the narrowest view in making amended provisions applicable to only fresh arbitrations and applications relating to such arbitrations.

Way Forward

Section 26, in its present form coupled with disparate judicial opinion has watered down the positive effect aimed by the Amending Act. While the view taken in New Tirupur case and Rendezvous case would allow for fresh applications to be adjudicated on the basis of the amended provisions, the application of the amended provisions to the pending court proceedings that were initiated prior to the enforcement of the Amending Act and are at different stages of adjudication may result in a lot of uncertainty. In court proceedings where arguments are nearing completion, applicability of Amending Act might be prejudicial, as the parties will have to start afresh as per the amended provisions.

The ambiguity gets further compounded by the fact that in India, High Court judgements of one jurisdiction are not binding on the other. In the absence of any clarification from the Parliament or a pronouncement from the Supreme Court, the application of the Amending Act remains a matter of interpretation by Courts and may vary from case to case. The decision in Rendezvous case has been challenged before the Supreme Court and is likely to be taken up for hearing in September 2016. It remains to be seen which view would be endorsed by the Supreme Court.

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Pranav B R and Ganesh Gopalakrishnan

On 4th October, 2016, a Division Bench of the Indian Supreme Court, in A. Ayyaswamy v. A. Paramasivam (“Ayyaswamy”) [2016], sought to clear the muddied waters surrounding the arbitrability of issues relating to fraud, albeit offering little clarity in the end. The uncertainties regarding arbitrability of fraud claims had previously reached a legal impasse following the contradictory Supreme Court rulings in N. Radhakrishnan v. Maestro Engineers (“Radhakrishnan”) [2010], and the Single Judge decision in Swiss Timing v. Organizing Committee, Commonwealth Games 2010 (“Swiss Timing”) [2014], and there was onus on the Bench in Ayyaswamy to authoritatively rule on the subject.

The SC Division Bench in Radhakrishnan had previously held, inter alia, that matters of fraud involving complicated questions of law and fact were better suited to be decided by a civil court. However, the Supreme Court in Swiss Timing, in a matter under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”) (relating to appointment of arbitrators), disregarded the ratio of the Radhakrishnan case by holding that allegations of fraud may be considered by the arbitral tribunal, in accordance with the powers vested in it under Section 16 of the Act.

The single Judge in Swiss Timing also held that the Radhakrishnan ruling had not considered all the existing case laws at the time, and was, therefore, per incuriam. The direct conflict in the ratios of the Radhakrishnan case and the Swiss Timings case had led to confusion amongst the lower courts, with many High Courts passing decisions that followed either of the two contradictory cases without offering a reason.

Facts-in-brief and Contentions

In Ayyaswamy, the allegations of fraud pertained to the handling of accounts of a hotel by the Appellant. The Respondents, who had entered into a partnership deed for running the hotel with the Appellant, had filed for an injunction before a civil court preventing the latter from managing the affairs of the enterprise.

The Appellant contended that as a valid arbitration agreement existed between the parties, and as per Section 8 of the Act, the matter must be referred to an arbitral tribunal by the civil court. The Appellant also urged the civil court to follow the ratio laid down in the Swiss Timing case and thus hold that the matter was arbitrable. The Respondents argued that the Radhakrishnan case clearly mandated that matters of fraud were not arbitrable and that the civil court was the appropriate forum to adjudicate the matter.

Lower Court decisions and Appeal to Supreme Court

The Civil Court decided to follow the ratio of Radhakrishnan and dismissed the Appellant’s plea for referral of the matter to an arbitral tribunal. The Appellants preferred an appeal before the Madras High Court, which subsequently dismissed the appeal. In its dismissal, the Madras HC reasoned that as the decision in Swiss Timings was rendered by a single Judge of the Supreme Court while the decision in Radhakrishnan was given by a Division Bench of the Supreme Court, it was bound to follow the judicial precedent set in Radhakirshnan. The Appellant then chose to approach the Supreme Court of India for relief.

Decision

The Supreme Court discussed at length the underlying objectives of the Act, observing that the doctrine of separability and kompetenz-kompetenz (embodied in Section 16 of the Act) helped the arbitral tribunal retain powers to adjudicate upon matters without court intervention. The SC attempted to strike a balance in the considerations of arbitrability of fraud. It held that while matters that involved allegations of “serious fraud” would not be arbitrable, matters that had “mere allegations” of fraud were arbitrable.

Referring to Radhakrishnan, the SC drew contradistinctions between simple allegations and allegations which “demand extensive evidence” and were “complex in nature” – with the latter brought under the ambit of civil courts and non-arbitrable. According to the Court, Swiss Timing did not have precedential value as opposed to Radhakrishnan as they were on varying subject matters.

In the present case, the matter was referred to arbitration as the fraud claims were deemed to be “were not so serious which cannot be taken care of by the arbitrator”.

Comments and Analysis

The Supreme Court has previously, in Sukanya Holdings v. Jayesh Pandya [2003], stated that where both arbitrable and non-arbitrable claims were raised, bifurcation of the subject matter would not be possible. It would, therefore, seem a matter of concern for arbitration in India if claims relating to fraud are raised in order to vitiate arbitral proceedings, as on account of a claim of fraud being raised, all the other substantive issues may also be relegated for adjudication to the civil court.

The 246th Indian Law Commission Report that proposed amendments to the Arbitration & Conciliation Act, 1996 also addressed the issue of arbitrability of fraud. The Report of the Commission notes that it is ‘important to set this entire controversy to rest and make issues of fraud expressly arbitrable’ and proposed in the amendments to Section 16 to confer powers on the arbitral tribunal to deal with serious questions of law, including ‘complicated questions of fact or allegations of fraud, corruption, etc.’ It observed that such an amendment was necessary to counter the denudation of the powers of the arbitral tribunal by the Supreme Court. However, the changes proposed by the Law Commission to Section 16 were not effected in the 2015 amendments to the Arbitration Act.

Instead, the amended Section 8 sought to consolidate the kompetenz-kompetenz principle by stating that the civil court will refer the parties to arbitration ‘unless it finds that prima facie no valid arbitration agreement exists’. The attitude of courts to resort to subject-matter analysis to determine arbitrability is not contemplated, statutorily.

A cause for worry remains the preemptive analysis of merits by civil courts. The Supreme Court, in Ayyasamy, reasons that on account of the wording employed in Section 34(2)(b) of the Act (power on civil courts to set aside awards of arbitral tribunals), it is necessary to have laws that state what matters are non-arbitrable as the civil court has powers to set aside an award on the  ground that the ‘subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force’. As the Indian Arbitration and Conciliation Act, 1996, omits to define the contours of arbitrability, this mantle of responsibility has fallen to the decisions of various courts. Civil courts have taken this to mean that they are robed with powers to delve into merits on a case-by-case basis to establish arbitrability of the claims.

The problem is further aggravated by the decision of the Supreme Court in Ayyaswamy because it is, in effect, legitimizing the preemptive examination of cases involving allegations of fraud to determine the arbitrability by the lower courts before they refer the matter for arbitration. This would, in addition to disregarding the statutory time frame established by the 2015 Amendments, undoubtedly result in the erosion of the universally recognized principle of kompetenz-kompetenz that governs the scope of an arbitral tribunal’s powers. This also brings to fore certain problems that may arise: for example, if the court deems a certain fraud claim within the jurisdiction of the tribunal, the tribunal would in effect consider itself to be bound by such a finding.

Thus, the judicial trend to delve into matters of merits does not augur well, especially in light of the courts choosing to flout statutory safeguards attempting to prevent judicial interventionism.

Few comments in India have welcomed the Ayyaswamy judgment, stating that the consideration of material evidence and analysis of allegations of fraud for complexity and seriousness by the civil court will yield better results. However, such a view adopts one of two premises – first, that the tribunal may elect (wrongly) to adjudicate on matters concerning public policy leading to setting aside of the award by a civil court at a later stage, or, second, that the arbitral tribunal is incapable of adjudicating the matter by itself.

We maintain that both of those premises are problematic as they reinforce the protectionist and interventionist attitude that civil courts have been attempting to shed over the past two decades. The Act is clear that the onus to decide on competency to rule on a subject matter rests on the arbitral tribunal – and this must be treated as sacrosanct to avoid decisions along the lines of Ayyaswamy. Presently, the silver lining to the Ayyaswamy judgment is that it will bring consistency in practice – the courts and lower fora have been supplied a binding decision, but whether this makes up for the usurpation of the tribunal’s powers is another matter entirely.

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Kartikey Mahajan and Sagar Gupta

India took a big leap in reforming its arbitration law by amending the Arbitration & Conciliation Act, 1996 (“Act“) in December 2015 (“2015 Amendments“). The 2015 Amendments coupled with setting up of the Mumbai Centre for International Arbitration (“MCIA“) within a year of the amendments and the increased emphasis by the Government on arbitration bode well for promoting institutional arbitration in India.

One of the obvious advantages of institutional arbitration is the emergency arbitrator provisions – a procedure which has been resorted to quite frequently by the Indian parties under the SIAC rules. Enforceability issues, however, loom large over such emergency awards in a foreign seated arbitration in light of the recent decision of the Delhi High Court (“Court“) in Raffles Design International India Pvt. Ltd.& Anr. v. Educomp Professional Education Ltd.& Ors. (MANU/DE/2754/2016) (“Raffles Design”). The Court ruled that an emergency award in a foreign seated arbitration cannot be enforced in India under the Act. However, it appears that parties can seek indirect enforcement of emergency awards by applying for interim measures under section 9 of the Act before Indian courts. We analyse the judgment and its implications below.

Indian position pre-2015 Amendments

Due to the Bhatia-BALCO dichotomy in Indian arbitral jurisprudence, arbitration agreements executed prior to 6 September 2012 with a foreign seat may still be bound by the provisions of Part I of the Act (applicable to India seated arbitrations) unless expressly or impliedly excluded. (one of the authors has discussed this previously here).

There are two important provisions for the grant of interim relief under the Act. Section 17 provides for interim measures by the arbitral tribunal and section 9 provides for interim measures by courts. Since both these provisions are contained in Part I of the Act, the authors presume that these provisions are not applicable to foreign seated arbitrations per se without going into the exceptions that may arise due to the Bhatia-BALCO dichotomy.

2015 Amendments – Job half done

To ensure that parties involved in a foreign seated arbitration have recourse to interim relief from Indian courts, the 2015 Amendments made section 9 of the Act applicable to foreign seated arbitrations (subject to an agreement to the contrary).  Another significant amendment was insertion of section 17(2) under which any order issued by the arbitral tribunal is now deemed to be an order of the court and enforceable in the same manner. The addition of section 17(2) should aid the enforcement of emergency awards for domestic seated arbitration in India. However, there was no similar amendment made in Part II of the Act dealing with foreign seated arbitrations, leaving any interim orders passed by a foreign seated arbitral tribunal as non-enforceable in India.

In August 2014, the Law Commission of India in its 246^th Report, sought to offer statutory recognition to emergency awards by broadening the definition of “arbitral tribunal” under section 2(1)(d) of the Act (similar to the position in Singapore as described below) to incluase an emergency arbitrator. Nonetheless, such statutory recognition is not reflected in 2015 Amendments and this, along with the absence of a provision similar to section 17(2) in Part II of the Act, has caused uncertainty in India for both domestic and foreign seated emergency awards.

Raffles Design: The Judgment and Improper reliance

In Raffles Design, the dispute resolution clause provided for arbitration under SIAC Rules. In September 2015, the petitioners invoked emergency arbitration provisions and an emergency award was rendered on 6 October 2016. The petitioners were successful in enforcing emergency award against one of the respondents before the High Court of Singapore under section 12 of the Singapore International Arbitration Act in February 2016. The Court was concerned with the question, among others, of maintainability of an application for interim measures under section 9 of the Act after a foreign seated emergency award was already obtained by the petitioner, which it answered in the affirmative. The reasoning raises some interesting propositions worth analysing.

1. a) Enforcement of Emergency Awards in India

The Court reasoned that section 17(2) of the Act is not applicable to foreign seated arbitrations, as it is contained in Part I of the Act. The Court then went on to rely on Article 17H of the UNCITRAL Model Law (“Model Law”) which provides for recognition and enforcement of interim measures granted by the arbitral tribunal to be binding, except the grounds mentioned in Article 17I. In the absence of a similar provision for foreign seated arbitrations, the Court held that the emergency award cannot be enforced under the Act and the only method available for enforcing the same would be to file a suit. (¶ 98-99)

The Act is silent on the enforcement of foreign seated emergency awards/orders of the arbitral tribunal and the Court’s observations in this regard that emergency awards cannot be enforced under the Act appear to be consistent.

1. b) Non-reliance on HSBC

The Court reasoned that section 9 of the Act cannot be used to enforce emergency awards but the parties are free to approach the court for interim relief under section 9 (¶100). Raffles Design is not the first Indian case which provided an avenue to the parties to approach Indian courts under section 9 for interim measures after obtaining an emergency award in a foreign seated arbitration.

The judgment of HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd. & Ors. (MANU/MH/0050/2014) (“HSBC”) holds particular importance for the acknowledgement of the concept of emergency arbitration in India. It is unfortunate that HSBC has not received much attention in the Indian arbitration scene and was not even mentioned by the Court in Raffles Design.

1. c) Improper reliance on Article 17I(2) of the Model Law

In HSBC, the Bombay High Court granted interim measures in a similar vein as that of the emergency arbitrator. On the other hand, in Raffles Design it was held that it is open to a court to independently determine the grant of interim relief.

In arriving at this conclusion, the Court incorrectly sought to rely on Article 17I(2) of the Model Law to state that the “court enforcing an interim order passed by the Arbitral Tribunal in prescribed form undertakes a review of the substance of interim measure.” (¶101)  In fact, a bare reading of Article 17I(2) of the Model Law demonstrates that such a review on merits of the interim measure is not available – “…. The court where recognition or enforcement is sought shall not.. undertake a review of the substance of the interim measure.” (emphasis added)

Analysing international trends

The legislative and judicial trend worldwide is to bring municipal arbitration laws to recognize and enforce emergency awards. Some jurisdictions who have brought such legislative changes include Singapore (amendment to the definition of ‘arbitral tribunal’ to include emergency arbitrator in section 2(1)), and Hong Kong (amendment to include Part 3A, section 22B to make emergency relief granted, whether in or outside Hong Kong, by an emergency arbitrator under the relevant arbitration rules enforceable).

Recognition of the importance of emergency arbitration can be observed from the recent decision of Gerald Metal S.A. v. Timis & Ors. (2016 EWHC 2327 (Ch)) where it was held that the Court may not grant interim measures in the case of “urgency” if, emergency arbitration provisions are available under the procedural rules (in that case, LCIA). One of the factors considered by the court was that the test for ‘urgency’ was same under both the English Arbitration Act, 1996 and the LCIA Rules. Therefore, limitation on the powers of the court was placed to grant interim measures and it could only be exercised if there was a lack of “practical ability” of the emergency arbitrator to provide interim relief or when its powers are inadequate. As the emergency arbitrator awards are themselves surrounded by a cloud of uncertainty in terms of enforcement in India, it is difficult to foresee any Indian court exercising restraint in favour of an emergency arbitrator’s powers to grant interim relief.

The way forward

Raffles Design highlights the lacunae under Indian law in relation to enforcement of foreign seated emergency arbitrator awards. It is noted that the amendment to section 2(1)(d) of Act recommended by the Law Commission of India would have brought Indian law in line with the global trend to enforce emergency awards by way of legislative provision. However, such an attempt would only be applicable for domestic seated emergency awards which can still possibly be enforced resorting to section 17(2) of the Act. In order to expressly recognise the emergency awards in foreign seated arbitrations, a provision similar to section 17(2) of the Act needs to be inserted in Part II of the Act.

The timing of amendments of the Singapore and Hong Kong legislations to include favourable provisions relating to emergency awards coincided with the inclusion of emergency arbitration provisions in the SIAC Rules and HKIAC Rules. It is hoped that with the launch of the MCIA providing for emergency arbitration and the Government’s push towards institutional arbitration, such provisions will be incorporated in the Indian legislation in near future.

For the time being, in the absence of a conclusive judgment of the Supreme Court, the only remedy available for indirect enforcement of emergency awards appears to be for the parties to apply for interim measures under section 9 of the Act. As held in Raffles Design, the Court will review the merits independently of the interim relief already granted by the Tribunal. But the authors are hopeful that a court dealing with such a section 9 application may be more inclined to grant interim relief where it has already been ordered by the emergency arbitrator as was done in the case of HSBC.

Raffles Design decides only the maintainability of the section 9 application and the Court is yet to decide on the merits. It is only after analysing the judgment on merits and as well future decisions from other High Courts of the country, we can firmly establish that the Indian courts might be looking to award the same relief in an application under section 9 of the Act as that awarded by the emergency arbitrator.

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Tejas Shiroor

ArbitralWomen

Much Ado About India’s Protectionist Model BIT

The last week of November 2016 was an eventful and rather paradoxical week for India. While India and Brazil successfully concluded negotiations for a new Bilateral Investment Treaty (“BIT”), the India-Netherlands BIT expired.

India has spent the past year refurbishing its investment agreements. According to UNCTAD, India is one of the most frequent respondent states in investor-state disputes, with approximately 20 disputes filed against it since 2003, three of which were initiated in 2016. In an attempt to armour itself against fresh attacks by investors, the Indian government notified 57 countries with which its BITs have expired, or are soon to expire, that it intends to negotiate new treaties upon their expiry. These negotiations will be based on India’s Model BIT (the “Model BIT”), which India circulated in December 2015.

The Model BIT has raised more than just a few eyebrows, as it does away with significant protections that investors conventionally rely on. For example, it does not contain a most favoured nation (“MFN”) clause; it does away with the fair and equitable treatment (“FET”) standard; it insists on the exhaustion of local remedies (both judicial and administrative) during a period of at least five years (unless the investor can demonstrate that there are no available domestic legal remedies capable of providing any relief), and provides for a further cooling-off period of six months, before initiating arbitration proceedings.

Nevertheless, the Sun Rises on the India-Brazil BIT…

While sceptics have wondered just how much success India will have in negotiations based on this rather protectionist Model BIT, India seems to have found a friend in its main trading partner in Latin America, and BRICS counterpart – Brazil.

As reported by IAReporter, India and Brazil have recently successfully agreed on a BIT. While the text of the India-Brazil BIT will be published only later this year, according to IAReporter:

• Investors will not have the option of initiating arbitration proceedings against India or Brazil. The BIT replaces investor-state arbitration with other alternative dispute resolution mechanisms, such as an ombudsman, state-to-state arbitration and “dispute prevention procedures”.
• The BIT does not provide for the blanket protection of the FET standard. Instead, it contains specific protections derived from customary international law, such as protection against denial of justice.
• The MFN clause has been omitted entirely from the BIT.
• The BIT also contains investor obligations and a number of exceptions relating to taxation, labour, health, security, human, animal and plant life, and “national archaeological treasures”.

The unconventional nature of the India-Brazil BIT, and the exclusion of investor-state arbitration in particular, does not come as a surprise. Brazil, which is the fifth largest beneficiary of foreign direct investment (“FDI”) in the world, and the largest in Latin America, has called into question the belief that more BIT protection entails more FDI. Unlike other countries, Brazil has refused to entangle itself in a web of BITs, by signing but not ratifying 14 BITs in the 1990s. Since 2015, however, Brazil has signed new BITs with Angola, Chile, Colombia, Malawi, Mexico, and Mozambique. It is worth noting that none of these new BITs are presently in force, and that its BITs with Angola and Mozambique exclude investor-state arbitration as a means of dispute resolution.

Prospective investors and practitioners will naturally wonder whether the exclusion of investor-state arbitration could render the India-Brazil BIT toothless. That said, as discussed below, could it also toll the death knell for intra BRICS arbitration?

The finalisation of the India-Brazil BIT comes on the heels of the Conference on International Arbitration in BRICS organised by the Indian government on 27 August 2016, ahead of the 8th BRICS Summit hosted by India on 15-16 October 2016. The aim of the conference was to debate the need to develop an effective international arbitration system for the resolution of intra BRICS commercial and investment disputes. Mr Arun Jaitley, the Indian Finance Minister, recommended that a task force comprising representatives from the BRICS member states be set up to suggest institutional reforms in international arbitration and develop arbitration as an alternative dispute resolution mechanism for intra BRICS investment and commercial disputes.

Three months down the line, now that two major BRICS countries, India and Brazil, have chosen to opt out of investor-state arbitration, India’s enthusiasm for arbitration of intra BRICS investment disputes is dubious. Moreover, their fellow BRICS, South Africa’s dislike for international arbitration is no secret. South Africa was the first African country to terminate its BITs and replace them with domestic law, the Protection of Investment Act 22 of 2015, which denies investors direct access to investor-state arbitration. This law requires investors to resort to local remedies to resolve investment related disputes, and provides for state-to-state arbitration, subject to the consent of the government and the exhaustion of local remedies.

Against this background, although India can talk the talk about arbitration to resolve BRICS-centric investor-state disputes, it seems rather unlikely from the India-Brazil BIT that India (or its BRICS counter-parts) will be ready to walk the walk.

… But Sets on the India-Netherlands BIT

The Model BIT has had little success so far with the capital exporting states of the European Union (“EU”).

India and the EU have been negotiating an India-EU Broad-based Trade and Investment Agreement (“BTIA”), to replace the India-Netherlands BIT which expired on 30 November 2016, as well as India’s BITs with 23 other EU states which will expire by the end of 2017.

India and the EU are nowhere close to reaching an agreement with respect to the BTIA. This is largely due to India’s inward-looking Model BIT, notably its provision which requires investors to exhaust local remedies during a period of five years before initiating arbitration proceedings.

India and the EU’s inability to reach an agreement with respect to the BTIA has been particularly worrisome, as the expiry of the India-Netherlands BIT has created a gaping legal hole in the two countries’ bilateral investment environment. While the India-Netherlands BIT contains a “sunset clause” which will protect existing investments for a period of fifteen years following termination, it will not protect new investments made after its termination on 30 November 2016.

Jyrki Katainen, Vice-President of the European Commission, cautions that in the absence of protection, European investors might not be eager to bring fresh investment into India, and the cost of capital will rise significantly. India must not take Mr Katainen’s concerns lightly. When Dutch Prime Minister Mark Rutte visited Prime Minister Modi in June 2015, he affirmed that the Netherlands has a lot to offer India, particularly in the areas of water management, health care, mobility, agriculture and horticulture, and urban planning. As reported on the Indian Ministry of External Affairs website, the Netherlands is India’s fourth largest trading partner in the EU, and the value of mutual trade has risen to more than six billion Euros in recent years. The Netherlands is also one of India’s top five investors, with the presence of 115 Dutch companies in India. In addition to possibly scaring away Dutch investors, the absence of a BIT/BTIA could worry potential Indian investors as well, as most of the out-bound FDI from India is directed to the Netherlands. If India does not play its cards right, the Netherlands may no longer have a lot to offer India, contrary to its Prime Minister’s promises.

Will India Woo Investors Despite Sending Them Mixed Signals?

Prime Minister Modi has been very vocal about facilitating “a vibrant ecosystem for alternate dispute resolution, including arbitration” to “provide additional comfort to investors and businesses”. Yet the Model BIT betrays his reluctance for arbitration.

He has acknowledged that “if a dispute arises, corporates want to resolve them quickly through arbitration, without going to courts.” However, in addition to India’s Model BIT, which compels disputing parties to first go to Indian courts, Section 29A of India’s new Arbitration and Conciliation Amendment Act, 2015, also forces parties to go to court to extend the period for completion of the arbitration beyond 18 months from the constitution of the tribunal (see here for a detailed discussion).

He has recognised that “Businesses seek assurance of the prevalence of rule of law in the Indian market. They need to be assured that the rules of the game will not change overnight, in an arbitrary fashion.” Nevertheless, his sudden (and controversial) decision to “demonetize” Indian Rupee (“INR”) 500 and INR 1000 banknotes overnight has raised alarm bells for investors as regards the stability and predictability of India’s legal environment.

So while India has been actively reshaping its arbitration laws and investment climate, the jury is still out on whether these measures will actually help create a more secure legal environment for investors, or if these mixed signals from India will drive investors away.

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Kabir Singh, Kartikey Mahajan and Andrew Foo

Traditionally, arbitration agreements do not designate the law governing the arbitration agreement. In BCY v BCZ [2016] SGHC 249 (“BCY v. BCZ“), the Singapore High Court clarified the position in relation to the law applicable to the arbitration agreement where such choice is absent. In doing so, the High Court differentiated between the situations where the arbitration agreement sits within a main contract and where it is a freestanding agreement. The decision raises interesting implications which we analyse below.

Background to the dispute

The dispute concerned a sale and purchase agreement for shares in a company (“SPA”). The parties exchanged seven drafts of the SPA but ultimately a final version of the SPA was not signed. The SPA contained an arbitration clause providing for ICC arbitration seated in Singapore, governing law of the contract as New York law and no law was specified to govern the arbitration agreement.

When the plaintiff decided not to proceed with the proposed sale of shares, the defendant commenced ICC arbitration. The plaintiff challenged the arbitrator’s jurisdiction on the ground that no arbitration agreement had been concluded between the parties. The arbitral tribunal found that New York law applied to the arbitration agreement, under which a valid arbitration agreement had come into existence.

The plaintiff appealed the decision of the arbitrator to the High Court under section 10 of the International Arbitration Act (Cap 143A). The issue before the Court was whether an arbitration agreement had come into existence, in accordance with the law governing the arbitration agreement.

Decision of the High Court

 Relying on the English Court of Appeal judgment of Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 (“Sulamérica”), the High Court reiterated that the governing law of an arbitration agreement is to be determined via a three-step test: (a) the parties’ express choice; (b) the implied choice of the parties, as gleaned from their intentions at the time of contracting; or (c) the system of law with which the arbitration agreement has the closest and most real connection.

Since there was no express choice of law to govern the arbitration agreement, the High Court was concerned with part (b) of the above test, i.e., the implied choice of law.

The defendant asserted that New York law, being the law governing the SPA, should govern the arbitration agreement. The plaintiff contended, however, that Singapore law, being the law of the seat, should govern the arbitration agreement. In support, the plaintiff relied on FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12 (“FirstLink”) where an Assistant Registrar (an “AR“) held that absent indications to the contrary, the law of the seat will govern the arbitration agreement when the parties have not expressly specified so.

While the Court noted that the parties agreed there was no material difference between New York and Singapore law in respect of whether an arbitration agreement was in existence, the Court nevertheless proceeded to determine the governing law of the arbitration agreement given the divergence of authorities on this issue.

The Court ultimately concluded that there had been no reason for the AR in FirstLink to depart from Sulamérica in favour of a starting presumption for the law of the seat (¶54). The Court also held that the choice of law analysis for an arbitration agreement would differ depending on whether it sits within a main contract or is instead a freestanding arbitration agreement.

1) Arbitration agreement as part of the main contract

The Court held that for arbitration agreements forming part of the main contract the “governing law of the main contract is a strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary” (¶65). The choice of a seat different from the law of the governing contract could justify moving away from the starting point of applying the governing law of the main contract. (¶55). However, it could not in itself suffice to displace the starting position (¶65).

The Court also explained that the default position should only be displaced if the consequences of it “would be to negate the validity of the arbitration agreement, even though the parties themselves had evinced a clear intention to be bound to arbitrate their disputes”. In such circumstances, the law of the seat would govern the arbitration agreement

Further, the Court held that “anything which suggests the parties may not have intended to have their arbitration agreement governed by the same law as the main contract would still be a factor to consider.”

2) Freestanding arbitration agreement

With respect to ‘freestanding’ arbitration agreements, the Court concluded that if there is no express choice of law of the arbitration agreement, the law of the seat would most likely govern the arbitration agreement. The Court acknowledged that freestanding arbitration agreements are rare, and gave two examples (1) in highly complex transactions, where parties enter into a single arbitration agreement covering disputes arising out of several contracts or an overall project; and (2) an arbitration agreement concluded after a dispute has arisen.

Implications – Default laws under the institutional rules

When parties have not expressly agreed the law of an arbitration agreement:

• The Model SIAC clause and the SIAC Rules are silent on what the default law of the arbitration agreement should be;

• Whereas the HKIAC Model clause specifies Hong Kong law as the default law applicable to arbitration agreements;

• Similarly, the LCIA Rules provide that the default seat of the arbitration shall be London and that the default law applicable to the arbitration agreement shall be the law of the seat (English law if the default seat is London), subject to parties’ agreement otherwise.

Thus, taking into account BCY v. BCZ, the law applicable to the arbitration agreement can depend on which institution’s Model Clause and/or institutional rules are adopted:

Conclusion

It is common for international arbitration users to be embroiled in disputes concerning the law applicable to the arbitration agreement where no express choice had been made. This is especially true where parties treat arbitration clauses as “Midnight Clauses” and do not give appropriate attention to carefully drafting an arbitration clause.

In such situations, the BCY v. BCZ decision is certainly a welcome step. BCY v. BCZ attempts to align the Singapore position with the English position (the Sulamerica decision), such that the implied choice of law for the arbitration agreement is likely to be the same as the law of the substantive contract.

BCY v BCZ also represents development of the common law jurisprudence on the distinction it draws between freestanding arbitration agreements and arbitration agreements contained in a substantive contract. Barring any express choice by the parties, the law governing the arbitration agreement which is freestanding is the law of the seat and the law governing the arbitration agreement contained in a substantive contract is the law of the substantive contract.

It will be interesting to observe how courts and tribunals address this distinction in future cases.  This is because the distinction can be a difficult one to draw.  For example:

• In BCY v BCZ, the alleged arbitration agreement was held to be one that was part of a substantive contract, i.e., an SPA, notwithstanding the fact that the draft SPAs were never signed. The High Court accepted that the arbitration agreement, if it existed, had existed “prior to the conclusion of the [substantive] contract” and was “independent of the SPA“.

• In Viscous Global Investments Ltd v Palladium Navigation Corporation “Quest” [2014] EWHC 2654, cited by the Singapore High Court, there were four bills of lading which each contained / incorporated an arbitration clause. Additionally, there was a subsequent letter of undertaking containing an arbitration clause. The English High Court held that the arbitration clause in the letter of undertaking replaced the four prior arbitration clauses and, thus, regarded the subsequent arbitration clause as a freestanding arbitration agreement. One wonders if the court would have reached the same conclusion if it had regarded the subsequent arbitration clause as merely varying the prior arbitration clauses, as the losing party had contended.

To avoid potentially costly litigation on this issue, it remains advisable for parties to expressly state the law governing their arbitration agreement. As explained above, adopting institutional rules and / or a Model Clause does not always offer certainty.

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Agnish Aditya

A few months back, the Supreme Court of India attempted to set the issue of arbitrability of fraud at rest in the case of A. Ayyasamy v. A. Paramasivam [(2016) 10 SCC 386]. The court, while deciding an application under Section 8 held that although “mere allegations of fraud simplicitor” are arbitrable, “serious allegations of fraud” are not. In a previous blog post, the authors have already expressed their reluctance in celebrating the judgment and pointed out the protectionist and interventionist attitude of the judgment. The authors commented that a positive aspect to this judgment is that “it will bring consistency in practice”. I shall attempt to show that perhaps they are too optimistic by showing that a consistent application of the Ayyasamy dicta is perhaps impossible.

Problems with the Arbitrability Test in Ayyasamy

It is well settled in Indian law that the Court can examine the issue of arbitrability of a dispute under a Section 8 application. The Arbitration and Conciliation Act, 1996 [the Act] does not offer any guidance for determining arbitrability of a subject matter. Thus, in absence of any guidance, the Supreme Court devised a test for determining arbitrability (defined by the court as “capable of being adjudicated by a private forum”) in Booz-Allen & Hamilton Inc v. SBI Home Finance [(2011) 5 SCC 532]. According to the Court disputes relating to a right in personam are arbitrable and disputes relating to rights in rem are not. The Court, however, added a caveat to this rule writing “this is not however a rigid or inflexible rule”.

In Ayyasamy, the Court did not follow the Booz-Allen test for determining the arbitrability of fraud claims. It did not distinguish between “mere allegations of fraud simplicitor” and “serious allegations of fraud”, while holding the latter non-arbitrable, on the basis of the type of right it affects. Instead, the Court held that “serious allegations of fraud” are not capable of being dealt by the arbitrator since it involves complicated issues of fact which require reviewing of voluminous evidence. The Court also opined that ordinary civil courts are better equipped to handle such cases as “[G]enerations of judges have dealt with such allegations in the context of civil and commercial disputes.”

The Court, in Ayyasami, did not rely on the established precedent for determining arbitrability. While the Booz-Allen test has been criticized for being too generic and not practicable, it does find its basis in jurisprudence. The reasoning in Ayyasamy, however, is solely based on an apprehension towards arbitration.

Interpreting “Serious Allegations of Fraud”

The phrase “serious allegations of fraud” can be traced back to one of the earliest cases on arbitrability of fraud claims in India, Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak [AIR 1962 SC 406]. In Abdul Kadir, the Court held that when there are “serious allegations of fraud” levelled at a party, if the party so desires, the Court shall refuse to refer the matter to arbitration. In N. Radhakrishnan v. Maestro Engineers [(2010) 1 SCC 72], the Court found that since there were “serious allegations of fraud” the matter could not be referred to an arbitrator. High Courts have also used this term while determining arbitrability of a dispute. But none of these cases have attempted to chalk out a uniform method of determining what makes an allegation a “serious” one. The Ayyasamy judgment has necessitated such a test.

At first one might interpret “serious allegations of fraud”, as used in Ayyasamy, as allegations of fraud which involve copious amounts of sum or are serious enough to deserve a criminal trial. As a matter of policy, this could be a cogent interpretation since frauds of such magnitude affect a right in rem and should be tried in a public court for transparency and accountability. It could also be argued as being opposed to public policy, which is a ground for setting aside an award. However, a careful reading of the judgment would show that this interpretation is only partly correct.

The court found “serious allegations of fraud” non-arbitrable because it involves complicated issues of fact and requires adducing of elaborate evidence. Thus, when the court refers to “serious allegations of fraud” it is independent of the gravity of the alleged fraud but is dependent on the amount of evidence required to prove the allegation.

So if a case involves allegations of fraud consisting of a hefty sum of money, but does not require elaborate evidence to prove and does not involve complicated issues of fact; it can be referred to the arbitral tribunal. On the contrary an allegation of fraud with little money involved may be non-arbitrable due to complex issues of fact or elaborate evidence required to prove the allegations.

Problems with This Interpretation

The proposed interpretation of “serious allegations of fraud” gives rise to two problems. The first, and the graver one, being that the determination of the nature (whether “serious” or “mere”) of the allegations shall depend on the nature of the judge. A pro-arbitration judge might refer a case to arbitration by finding a matter capable of being adjudicated by an arbitrator. A sceptic judge, however, might find the same matter non-arbitrable. This shall lead to judicial interference which the Act seeks to minimise.

The Court can come to a better conclusion by examining the qualifications of the appointed (or prospective) arbitrator. This shall help the Court determine whether the arbitrator will be capable of adjudicating upon a fraud claim or not. But there are problems with this approach as well. The Act does not contemplate a Court sitting in judgment over an arbitrator’s qualification. This might not only be undesirable by the parties and the arbitrator but also practically impossible.

But if this approach is taken, it shall give rise to the second problem of further undesirable judicial intervention and delay. In Ayyasamy, the Court held that in order to determine whether an allegation is a “serious” one or not the Court shall conduct “a strict and meticulous inquiry into the allegations of fraud”. This statement does not tell us about the standard of proof that the Court requires, but one may assume that a prima facie case will not suffice. An examination of the qualifications of an arbitrator shall not add to this “strict and meticulous inquiry” requirement and lead to delays and increased judicial intervention which is contrary to the objectives of the Act.

Concluding Remarks

In Ayyasamy, the Court found that the allegations merely related to matters of accounts which could be looked into “even by the arbitrator.” This statement clearly has the undertone of a lack of confidence in the process of arbitration. Even though, post the White Industries award, the Supreme Court has been forced to adopt the pro-arbitration rhetoric; Ayyasamy exhibits that subliminally the Court is still apprehensive of arbitration.

Ayyasamy, like most post-BALCO cases [see this post], indulges in pro-arbitration rhetoric while relying on international authorities and established principles of Kompetenz-Kompetenz, minimal interference, etc. But unfortunately it culled out the “serious allegations” and “mere allegations” dichotomy based on its apprehensions of fraud and not on precedents or policy. As I argued above, the interpretation of these terms which logically flow from the judgment are not practically possible without breaching the policies which are instrumental for fostering arbitration.

One may argue that legislative intervention is the only cure to this conundrum, but the fact is that the legislature already missed an opportunity by rejecting the Law Commission’s recommendation in this regard. The Law Commission recommended, and rightly so, to amend Section 16 of the Act and make fraud expressly arbitrable. The legislature failed to do so for unexplained reasons. Thus, banking for a legislative intervention any time is perhaps not practicable.

But before we jump to criticize the Supreme Court’s thinly veiled scepticism towards the capability of arbitration and arbitrators, we must introspect. The lack of confidence on arbitrators is not completely unfounded. India is still far behind in adopting the best practices in arbitration. Although arbitration is often resorted to, finding experienced arbitrators is often difficult. The lack of well-established institutional arbitration in India also adds to the problem. India still has a long way to go in developing confidence in arbitration as a reliable method of dispute resolution.

The issue of arbitrability of fraud claims might be resolved sooner or later by the judiciary or the legislature. But the problem of crisis of confidence can only be tackled by the community of lawyers and arbitrators by addressing the naysayer’s concern in a legitimate manner. Recently the Government has constituted a High Level Committee to review the current arbitration regime in India and suggest measures for institutionalization [see this post] which definitely seems to be the best foot forward for bringing a change in the current domestic arbitration regime.

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Shivansh Jolly

Appellate arbitration clauses provide for an appellate mechanism against an award rendered between the concerned parties by subjecting the dispute through another arbitration to eliminate all potential errors and obtain correction of the same. Not all arbitration disputes are suitable for an appellate review. But in cases where parties place higher importance on the correctness of an award rather than on time and cost of arbitration, appellate arbitration clauses serve this purpose. The purpose served by such clauses can also be understood by appreciating how arbitral awards cannot be judicially reviewed on merits (Gary Born, International Arbitration: Law and Practice at 8, Kluwer Law Int’l 2012). Since the grounds on which an award may be challenged before a court remain limited, as can be seen from the UNCITRAL Model Law and the Indian Arbitration and Conciliation Act, 1996 (“1996 Act”), appellate arbitration clauses provide greater freedom of review of arbitral awards to parties resorting to them.

Recognizing the importance of such clauses, a three-judge bench of the Supreme Court of India (“Supreme Court”), delivered a judgment on December 15, 2016 upholding the legal validity of appellate arbitration clauses under the 1996 Act in the case of M/s Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., Civil Appeal No. 2562 of 2006 (“Centrotrade”). In Centrotrade, the arbitration agreement contained a two-tiered arbitration procedure providing for a first instance institutional arbitration in accordance with the Rules of Arbitration of the Indian Council of Arbitration (“ICA Rules”) to be held in India. In the event of disagreement between the parties in respect of the correctness of the first award, the arbitration agreement granted either party a right to appeal against the first award before an appellate tribunal to be constituted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (“ICC Rules”), to be held in London. The law of the main contract was Indian law.

Centrotrade initiated arbitration against Hindustan Copper Ltd. The tribunal of the first instance delivered a “nil” award, which prompted Centrotrade to appeal, as permitted by the arbitration agreement. The appellate tribunal delivered an award in favour of Centrotrade, who thereafter commenced Indian enforcement proceedings against Hindustan Copper Ltd. The determination of the Supreme Court on the enforcement proceedings is still pending. Hindustan Copper Ltd. thereafter moved to challenge the legal validity of the appellate tribunal award before a division bench of the Supreme Court. The judgment of the Supreme Court is important for two reasons: first, the 1996 Act is modelled on the UNCITRAL Model Law and, hence, the present judgment could add to the developing jurisprudence on how national courts should assess appellate arbitration clauses. Second, since Part I of the 1996 Act is also applicable to international commercial arbitrations seated in India, the judgment could increase India’s prospects as an arbitration friendly destination.

The Supreme Court affirmed that the intention of the parties to reserve a right to an appellate review of the first award is unambiguously clear from the wording of the two tiered arbitration agreement. Notably, the apex court also observed that the 1996 Act, neither explicitly nor implicitly, bars parties to resort to appellate arbitration clauses. Second, the Supreme Court drew the distinction between legal and statutory right to appeal. In Centrotrade, the election of an arbitration appellate mechanism qualified as a legal right premised on an agreement between the parties. Thereafter, the Supreme Court held that UNCITRAL Model Law—and hence the 1996 Act—allows parties to an arbitration agreement to reserve their right to appeal against an award.

Although the said case is a strong reflection of a pro-arbitration approach, the following questions of importance remain unaddressed. First, whether Indian courts would entertain annulment or enforcement proceedings in respect of the first arbitral award pending its review by an appellate arbitral tribunal. In the interest of judicial economy and efficiency, this should not be allowed. A bar on initiation of annulment or enforcement proceedings as regards the first award would also ensure certainty regarding the fate of the appellate arbitral award, and the recourse available to parties thereafter. The said proposition finds approval under the JAMS Optional Arbitration Appeal Procedure, 2003 (“JAMS Appeal Procedure”); the Arbitration Appeal Procedure of International Institute of Conflict Prevention and Resolution, 2007 (“CPR Appeal Procedure”); and the Optional Appellate Rules of American Arbitral Association, 2013 (“AAA Optional Rules”). Rule (c) of the JAMS Appeal Procedure, Rule 2.3 of the CPR Appeal Procedure and Rule A-2(a) of the AAA Optional Rules provide for the same.

Second, it is important to determine the stage at which the limitation period for seeking an annulment or enforcement of an award would commence, i.e., whether the limitation period would commence from the date of the first award or from the date of the appellate award. Since it would be proper to allow annulment or enforcement proceedings to commence only against the appellate award, it follows that the limitation period should also commence from the date of the appellate award. While Rule (c) of the JAMS Appeal Procedure and Rule 2.3 of the CPR Appeal Procedure imply that the limitation period for initiating annulment/enforcement proceedings shall commence from the date of the appellate award, Rule A-2(a) of the AAA Optional Rules makes the said case expressly clear while reading – “…and the time period for commencement of judicial enforcement proceedings shall be tolled during the pendency of the appeal.”

Third, the Indian judiciary may need to address whether the 1996 Act permits remanding the dispute to the prior tribunal, owing to the principle of party autonomy. Strictly speaking, a tribunal rendering its final award is functus officio. The said aspect requires consideration as the JAMS Appeal Procedure, the CPR Appeal Procedure and the AAA Optional Rules forbid the appellate tribunal to remand the matter back to the prior tribunal. The issue has two sides to it, assuming the arbitration agreement is silent on the availability of remand. The probable benefit of remanding may entail the familiarity of the said tribunal with the dispute, thereby avoiding a scenario wherein an appellate tribunal would be required to consider the issues de novo. However, a potential drawback to parties arising from a remand would be that of losing out on an opportunity to have the dispute re-examined by a set of arbitrators with specified qualifications. Rule A-5(d) of the AAA Optional Rules provides for the latter.

Fourth, in cases where a two-tiered arbitration agreement resorts to an ad hoc arbitration, it would be interesting to explore the manner in which an appellate tribunal would be appointed where no express procedure for the same is provided in an agreement. Since the arbitration agreement in the Centrotrade case did not provide for any appointment procedure, the default procedures under the ICA and ICC Rules applied respectively. Two eventualities may arise out of such a situation. Either the Indian courts may require the parties to resort to the same procedure of appointment as agreed upon for the constitution of the first arbitral tribunal or they may require the party invoking the appellate procedure to proceed under Section 11 of the 1996 Act to seek a court assisted appointment of the appellate arbitral tribunal. Although a situation as contemplated above (appellate arbitration clauses providing for ad hoc arbitration without a procedure for appointment) would be peculiar, as parties resorting to such clauses can reasonably be expected to seek appellate arbitrators possessing expertise over the concerned subject matter of the dispute, it can never be entirely ruled out.

With the abovementioned issues remaining unsettled in the Indian legal sphere of arbitration, it would be apt to say that although the Indian judiciary has put its best foot forward while upholding the legal validity of appellate arbitration clauses, a testing journey of a thousand miles remains yet to be covered and successfully completed.

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Mohit Mahla

Coincidentally, at the same time last year, the world witnessed two historical developments. First, Donald J. Trump was elected as the 45^th president of the United States. Second, in an attempt to curb black money (a move, the result of which is still to be evaluated), the Modi-led Government demonetised 500 and 1000 currency notes in India. Even before, interestingly, the Supreme Court of India through its judgment in Shri Vimal Kishor Shah & Ors. v. Mr. Jayesh Dinesh Shah & Ors. (“Vimal Kishor Shah”) [2016 (8) SCALE 116] in effect has demonetised arbitration of trust disputes in India.

From being typically charitable in nature to becoming an effective commercial vehicle for succession and estate planning, trusts in India have evolved with time. With the growing complexity of trust deeds and the constantly evolving nature of trusts, came the inevitable raven – “disputes”. Resolving trust disputes through arbitration – which comes with the usual advantages over litigation, such as confidentiality, party autonomy, limited curial review, costs and time benefits – seemed to be an attractive option. That being said, arbitration of trusts disputes raises issues that make trusts disputes non-arbitrable in many jurisdictions including India.

The question of arbitrability of disputes arising out of trust deeds was considered by the Supreme Court of India in Vimal Kishor Shah. The court was hearing an appeal against an order of the High Court of Bombay appointing an arbitrator to hear disputes arising out of a family trust deed. The arbitration agreement in that deed provided for arbitration of any disputes between trustees; trustees and beneficiaries; and beneficiaries, it held that disputes arising out of trust deeds are non-arbitrable under the Arbitration and Conciliation Act, 1996 (the “Arbitration Act”). The Supreme Court, however, ignored certain important facets of modern-day-arbitrations which are problematic. A few of those problems are the following.

A trust deed is not an Arbitration Agreement

The Supreme Court concluded that a trust deed cannot be construed as an agreement let alone an arbitration agreement within the meaning of Section 7 of the Arbitration Act (which is based on Article 7 of UNCITRAL Model Law on International Commercial Arbitration, 1985). The Supreme Court found that trust deeds are not signed by the beneficiaries and, thus, beneficiaries under a trust deed containing an arbitration clause cannot be regarded as a “party” to the arbitration agreement under the Arbitration Act. In reaching such a conclusion, the Supreme Court has ignored the following points:

First, the signature of the parties to an arbitration agreement cannot be regarded as a decisive factor in determining its validity and enforceability. In the past, however, courts and arbitral tribunals strictly interpreted the writing requirement of arbitration agreements. Now, however, the writing requirement is interpreted more liberally by various jurisdictions. The courts in U.S.A, Singapore and even in India have clarified that the mere absence of a signature will not affect the existence of a valid and binding arbitration agreement. [See Seawright v. Am. Gen. Fin., Inc., 2007 U.S. App. (6th Cir. 2007); Malini Ventura v. Knight Capital Pte. Ltd and others [2015] SGHC 225; Govind Rubber Ltd. v. Louids Dreyfus Commodities Asia Ltd. (2015) 13 SCC 477]. Further, both, Option I (on which Section 7 of the Arbitration Act is based upon) and Option II of the 2006 version of Article 7 of the UNCITRAL Model Law on International Commercial Arbitration do not have a writing requirement. This removes one of the difficulties faced in arbitration of trust disputes–especially in respect of disputes involving beneficiaries.

Second, in reaching the conclusion that a beneficiary of a trust cannot be regarded as a “party” to the arbitration agreement under the Act, the Supreme Court ignored the intention of the legislature behind the recent amendment to Section 8 of the Arbitration Act. As a result of the amendment, Section 8 now provides a reference to arbitration could be sought not only by a party to the arbitration agreement but also by “persons claiming through or under” a party to an arbitration agreement. Thus, the purpose was to bring parties who are not signatories to an arbitration agreement – but whose rights and liabilities are still affected by the underlying agreement – into the ambit of “party” to the arbitration agreement. Beneficiaries of a trust can plausibly be regarded as “persons claiming through or under” the settlor who is a party to an arbitration agreement and, thus, can be bound by an arbitration agreement contained in a trust deed.

Third, the Supreme Court has failed to appreciate the common law doctrine of “Direct Benefits Estoppel or Deemed Acquiescence” the foundation of which is that a party is estopped from avoiding or bound by arbitration if it knowingly seeks the benefits of the agreement containing the arbitration clause. [See McArthur v. McArthur, 224 Cal. App. 4th 651 (Cal. App. 1st Dist. Mar. 11, 2014)], where the court applied the doctrine of direct benefits estoppel and prevented a trust beneficiary who was getting benefits under a trust, from avoiding the arbitration provision of that trust]. Beneficiaries of a trust should not be allowed to cherry-pick from a trust deed, parts which are suitable and avoid the parts which are not suitable and should ideally be bound by the arbitration agreement contained in the trust document if they have derived any benefits from the trust.

Implied bar of exclusion of applicability of the Act under the Indian Trusts Act, 1882

The Indian Trusts Act, 1882 (the “Trusts Act”) is the legislation governing private trusts in India. The Trusts Act encompass provisions about various aspects of trusts, i.e., the creation of trust, duties, and liabilities of trustees, rights and powers of trustees, rights and liabilities of the beneficiary, and so on. The Trusts Act empowers the civil courts in respect of certain legal remedies, but it nowhere provides, however, the civil courts’ exclusive jurisdiction to adjudicate disputes arising between the settlor, trustees and beneficiaries. The Supreme Court, while accepting there is no express bar on arbitration of disputes under the Trusts Act, found that there was an implied bar of exclusion of applicability of the Act for deciding trust disputes. By doing so, the Supreme Court has added yet another category of disputes to the list of six well-recognized examples of disputes considered non-arbitrable as identified by the Supreme Court in the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. & Ors., (2011) 5 SCC 532 (“Booz Allen”). However, the Supreme Court failed to appreciate the general arbitrability test (though not being rigid or inflexible) in Booz Allen. According to that case, “generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration.” Trust disputes concern rights in personam and, therefore, based on the general arbitrability test laid down under Booz Allen should not have been regarded as non-arbitrable.

Further, a blanket ban on arbitration of disputes arising out of trust deeds would also mean that separate arbitration agreements entered into between the beneficiaries to resolve disputes between themselves are now non-arbitrable, a consequence – which was highly undesirable.

Conclusion

Arbitration could be an effective mean to resolve trust disputes, especially due to its private and confidential nature which is an important consideration in disputes arising in the context of family trusts in India. However, unless reconsidered, Vimal Kishor Shah has clearly made all trust disputes (even those between the beneficiaries) non-arbitrable in India. To cure the harm done by Vimal Kishor Shah, legislative amendments to the pre-independence era’s Trusts Act are desirable. As a suggestion, the Trusts Act could be amended to include a provision that where a written trust instrument provides for any dispute arising between any of the parties (including the beneficiaries) to the trust, would be submitted to arbitration. That provision should have effect as between those parties as if it were an arbitration agreement and as if the parties were parties to that arbitration agreement. Guidance in this regard could be taken from the legislative amendments made in the Florida Probate Code (Section 731.401 of Chapter 731) or Guernsey Trust Law (Section 63) to facilitate arbitration of trust disputes. However, until allowed legislatively, trust disputes remains non-arbitrable in India.

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Rishab Gupta and Aonkan Ghosh

YSIAC

The ability of a party to obtain urgent interim relief is central to the efficacy of any method of dispute resolution. In case of disputes that are subject to an arbitration agreement, until recently parties had only two options: either approach national courts for interim relief in support of the arbitration, or wait for the formation of the arbitral tribunal and then make an application for interim relief. The former would essentially require parties to initiate local proceedings before national courts (the avoidance of which may in fact have been the principal reason for choosing arbitration in the first place). The latter would expose a party to the risk of dissipation of assets while the arbitral tribunal is being constituted.

Emergency arbitration is often cited as one of the solutions to the parties’ conundrum. But is emergency arbitration genuinely a substitute to urgent interim relief from courts? In this article, we compare the pros and cons of obtaining urgent interim relief from national courts and emergency arbitrator. In doing so, we focus on India’s experience and provide statistics from the practice of Indian courts.

Relevant Parameters

By way of background, under Section 9 of India’s Arbitration and Conciliation Act, 1996 (the Act), Indian courts can grant interim relief in support of arbitration. Parties can approach courts for interim relief at any point before the constitution of the arbitral tribunal. However, after the tribunal has been constituted, parties are generally expected to seek interim relief from the tribunal directly. Further, interim relief from Indian courts is available even in cases where the seat of arbitration is outside India, unless the parties have agreed otherwise.

As for emergency arbitration, while the Act makes no reference to it, rules of Indian arbitration institutions – such as the Mumbai Center for International Arbitration and the Indian Council of Arbitration – allow parties to seek orders from emergency arbitrators. Moreover, Indian parties are often involved in emergency arbitration proceedings conducted by foreign institutions, particularly SIAC.

The table below contains a comparison of interim relief available under Section 9 of the Act with emergency arbitration.

How long it takes to obtain interim relief?

For the purposes of this study, we randomly selected 300 Section 9 applications filed before the Delhi High Court in the year 2016. Next, we excluded those applications that were either withdrawn or granted with the consent of the parties. For the applications that remained in our dataset, we analysed the time it takes to obtain the first ad-interim order. Ad-interim orders are orders of Indian courts that are operative either till the final disposal of an interim application or till the next hearing. For example, in urgent matters, a court might grant an ad-interim injunction restraining the respondent from calling upon a performance bank guarantee, pending the final adjudication of the Section 9 application. Accordingly, in evaluating the efficacy of Section 9 proceedings, the relevant time period is between filing of Section 9 application and grant of the first ad-interim order, as opposed to the date on which the Section 9 application is finally disposed of.

The study revealed that the median time it took the Delhi High Court to grant ad-interim relief from the date of filing is 3 days.

In the context of emergency arbitration, it is not possible to carry out a similar empirical study because arbitration institutions do not disclose data about individual cases. Also, time periods set out in the rules of the various institutions vary. For example, SIAC Rules provide that the emergency arbitrator must issue an award/order within 14 days of his appointment, while the ICC Rules provide 15 days. Experience shows that SIAC and ICC emergency arbitrators often issue their orders more quickly than that; nevertheless, it is likely to remain the case that parties can receive even quicker relief by filing a Section 9 application in Indian courts.

Success rate

Out of the 300 Section 9 applications filed before the Delhi High Court, 72 applications were either granted, withdrawn by consent or remain pending with no interim relief ordered to date. Of the remaining 228 applications, interim relief of some sort was granted in 167 cases. This represents a success rate of 73 per cent for the applicant. The most common forms of interim relief granted by the Delhi High Court were freezing injunction prohibiting dealing with or disposing of certain assets, orders for deposits of sums in court, creation of bank guarantee in favour of the applicant, and disclosure of assets.

In case of emergency arbitration, again very limited data is publicly available to evaluate the success rate in a methodical manner. In case of SIAC for example, between July 2010 and 31 March 2017, 57 emergency arbitration applications were filed, of which 29 applications were granted while 2 remain pending, 6 were withdrawn and 4 were granted by consent. That represents a success rate of 64.4 per cent. Other institutions have not however published similar statistics.

Orders against third parties

Emergency arbitrators cannot grant relief against third parties. That is an important limitation, which derives from the fact that the jurisdiction of emergency arbitrators and the (eventual) arbitral tribunal is limited to those parties who have consented to submit their dispute to arbitration. For example, article 29(5) of the ICC Rules expressly provides that the ICC’s Emergency Arbitrator Provisions apply only to signatories to the arbitration agreement or their successors.

On the other hand, Indian courts, like courts of other jurisdictions, can grant interim relief against third parties in certain circumstances (for example, where such orders are necessary to protect the subject matter of the arbitration). The classic situation is when a freezing order is granted against a bank that holds funds on behalf of one of the respondents. An emergency arbitrator would not be able to make the bank a party to the freezing order.

Ex-parte orders

The ability of a party to obtain ex parte interim orders can be crucial in circumstances where an element of surprise is necessary (for example, where prior notice to the respondent would lead him to remove his assets from the jurisdiction of the court). Like in other jurisdictions, Indian courts can grant ex parte orders in exceptional circumstances. Emergency arbitrators, on the other hand, cannot grant relief on an ex parte basis. That is because one of the central tenets of arbitration is that all parties be given equal opportunity to present their case.

Enforceability

Even if a party is successful in obtaining relief from an emergency arbitrator, it must still deal with the question of enforcement. With the exception of Singapore and Hong Kong, in no other country orders of emergency arbitrators have received statutory recognition. In India, the Law Commission considered this issue at the time of suggesting amendments to the Act; however, ultimately no such amendment was made. Therefore, orders of emergency arbitrators are not enforceable in India. The fact that certain rules permit emergency relief to be granted as “awards”, and not just “orders”, will make no difference to their enforcement in India (compare Schedule 1(6) of the SIAC Rules with Article 29(2) of the new ICC Rules).

Despite concerns regarding their enforceability in India, emergency relief can be crucial in Indian related arbitrations. To start with, orders of emergency arbitrators may be extremely helpful if the respondent has assets in jurisdictions where such orders are enforceable (e.g. Singapore and Hong Kong). Further, experience shows that parties often voluntarily comply with emergency orders. That may be because losing parties fear that arbitral tribunals would not look too kindly on their failure to comply with the orders of emergency arbitrators. Moreover, to further incentivize compliance, arbitration rules allow arbitral tribunals to reflect non-compliance with the orders of emergency arbitrators in their final award (see, e.g., Article 29(4) of the ICC Rules). Finally, and rather counter-intuitively, orders of emergency arbitrators may assist a party in obtaining relief from an Indian court under Section 9 of the Act (see, e.g., HSBC v. Avitel 2014 SCC OnLine Bom 102, where the Bombay High Court granted interim relief in the same terms as that of a SIAC appointed emergency arbitrator; but see Raffles Design (2016) 234 DLT 349, where the Delhi High Court in the context of a Section 9 application effectively ignored the orders of a SIAC appointed emergency arbitrator).

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Moazzam Khan and Shweta Sahu

YSIAC

India has long been regarded as an unappealing centre for arbitration – be it as the seat of arbitration or as the place of final enforcement of the arbitral award. Indian judiciary is often quoted to be over interfering in matters of arbitration and enforcement. If fact could replace fiction, in the last decade, Shylock would have a hard time enforcing his rights to his money with little hope of claiming a pound of Antonio’s flesh. The Indian courts wouldn’t shy from reopening and rehashing the proceedings already happened before the Duke of Venice, a twist in the tale that could make Shakespeare rewrite the famous climax and make Portia’s wit of little consequence indeed. While this reputation may have been well-deserved in the decade past, the ground reality since has seen a galactic shift. The legislature and judiciary have together taken upon themselves to ensure this course correction.

In this article we bust the myth that is an enforcement defiant India in context of foreign awards.

A. The ever-shrinking scope of resisting enforcement of foreign awards in India:

The legislature and judiciary have restricted resistance to enforcement of a foreign award only on established grounds under Section 48 of the Arbitration and Conciliation Act 1996 (“Act”) and, in keeping with the view of arbitrally-progressive jurisdictions, have held that executing courts cannot review the award on merits.

Some (the authors included) would even argue that under the present regime, it is easier to enforce a foreign award in India than a domestic one.

i. Foreign-Seated Awards – no longer open to challenge in India:

The myriad of challenges to enforcement of foreign awards in India had become a nightmare for parties seeking enforcement in India. The uncertainty associated with enforcement of foreign awards reached its zenith with Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105 which laid down that Indian courts would have jurisdiction in international commercial arbitrations, irrespective of the seat of the arbitration. The resulting jurisprudence saw Indian courts not only refusing enforcement but even setting aside foreign awards. The time was ripe for the proverbial hero to emerge and save foreign seated arbitrations from the un-welcome interventions by Indian Courts. In September 2012, a five judge bench of the Hon’ble Supreme Court of India delivered its much celebrated decision in BALCO v. Kaiser Aluminium (2012) 9 SCC 552 which ousted the jurisdiction of Indian courts in foreign-seated arbitration. Post BALCO, foreign awards cannot be challenged in India. (However, this judgment was applied prospectively, to arbitral agreements executed after 6 September 2012 i.e. the date of the judgment.)

ii. “Patent Illegality” no longer a ground of resisting enforcement of foreign awards:

The introduction of the test of “patent illegality” to the already infamous ground of “public policy”, as interpreted in ONGC v. Saw Pipes (2003) 5 SCC 705, meant that enforcement of a foreign award in India could be challenged on the basis that the foreign award was contrary to the substantive law of India or in contravention of contractual terms etc. – determinations which ought to be in the sole remit of the arbitrator.

After almost a decade, the scope of challenge was restricted in Shri Lal Mahal Ltd. v. Progetto Grano SPA (2014) 2 SCC 433 wherein “public policy” under Section 48(2)(b) of the Act was narrowly interpreted and the recourse to the ground of “patent illegality” for challenging enforcement of foreign awards was no longer available.

The pro-arbitration shift in the judicial mindset can also be gleaned from the fact that the in judgment Shri Lal Mahal Ltd., the Supreme Court (speaking through Hon’ble Mr. Justice R.M. Lodha) overruled its own ruling in Phulchand Exports Limited v. O.OO. Patriot (2011) 10 SCC 300 (an earlier judgment delivered by Justice Lodha himself – wherein the Supreme Court had ruled that a party could resist enforcement of a foreign award on grounds of “patent illegality”).

As the statute reads today, even domestic awards cannot be vitiated on grounds of being patently illegal in India-seated international commercial arbitrations. (Arbitration and Conciliation Act 1996, section 23(2A))

iii. A foreign award need not be stamped under the Indian Stamp Act:

A domestic award may be refused enforcement if it hasn’t been adequately stamped, in accordance with laws of India. However, resisting enforcement of a foreign award on the ground that it is not stamped as per the Indian law, has been shunned as a frivolous ground for delaying and obstructing enforcement of foreign awards. (See Naval Gent Maritime Ltd. v. Shivnath Rai Harnarain (I) Ltd. (2009) 163 DLT 391 (Del))

iv. Intention to arbitrate is paramount:

In a recent appeal, the Supreme Court upheld the finding of the Bombay High Court that in a foreign seated arbitration (and resultant award), an un-signed arbitration agreement would not defeat the award. (See Govind Rubber v Louids Dreyfus Commodities Asia P. Ltd. (2015) 13 SCC 477) The court preferred to give primacy to the intention and conduct of parties for construing arbitration agreements over the mandate of the parties’ signatures required in the agreement.

v. Burden of proof on the resisting party:

Similarly, in a recent ruling, the Bombay High Court placed a “higher burden on party resisting enforcement of giving necessary proof which stands on higher pedestal than evidence” than the burden on the party seeking enforcement of a foreign award, who is only expected to produce necessary evidence. (See Integrated Sales Services Ltd., Hong Kong v. Arun Dev s/o Govindvishnu Uppadhyaya & Ors. (2017) 1 AIR Bom R 715)

vi. No third party or the Government can object to enforcement of a foreign award:

With the Supreme Court taking the lead in a consistent pro-enforcement approach of foreign awards, the High Courts have also been keeping up with the pace, with the High Court of Delhi being the harbinger in this respect. In NTT Docomo Inc. v. TATA Sons Ltd (2017) SCC OnLine Del 8078, the Delhi High Court allowed enforcement of an LCIA award after rejecting the Reserve Bank of India’s objections that the underlying terms of settlement (wherein the Indian entity, Tata Sons, was required to pay $1.17 billion to NTT Docomo, a Japanese company) would be against the public policy of India. The Delhi High Court held that since RBI was not a party to the award, it could not maintain any challenge to its enforcement.

vii. Reciprocating countries for enforcement of foreign awards outnumber the ones for foreign judgments:

48 countries have been notified by the Central Government of India as “reciprocating countries” under the New York Convention, while only 12 nations have been recognized as reciprocating countries under Section 44A of the Code of Civil Procedure for execution of foreign judgments. In respect of judgments emanating from the remaining countries, the parties seeking execution would have to file a suit in India and place in evidence the underlying foreign judgment.

B. The legislative intent: Arbitration and Conciliation (Amendment) Act 2015

Consistent with the pro-enforcement approach adopted by Indian courts, the recent legislative changes to the Act vide the Arbitration and Conciliation (Amendment) Act 2015 clarify the extent to which a foreign award can be said to be in conflict with the public policy of India. Subsequent to these amendments, only the following cases amount to violation of “public policy” under Section 48 of the Act:

i. the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81 of the Act; or
ii. it is in contravention with the fundamental policy of Indian law; or
iii. it is in conflict with the most basic notions of morality or justice.

The tests for these grounds have been summed by the Supreme Court in Associate Builders v. Delhi Development Authority (2014) (4) ARBLR 307 (SC). It has been further clarified that “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.” Such amendments are to be seen as strong measures in response to the infamous perception of India being liberal to the challenges to enforcement of arbitral awards on grounds of “public policy”.

Furthermore, subsequent to these amendments, even after making of the arbitral Award, a successful party which is entitled to seek the enforcement of the award can apply to the court under section 9 of the Act, for protection by grant of interim measures, pending enforcement of the foreign award. (See, Arbitration and Conciliation Act 1996, section 2(2) proviso)

C. Protectors of the Realm: Commercial Courts in India

The Indian legal system continues to face criticism on account of the time taken in disposal of cases. Thus, with the objective to accelerate disposal of high value commercial disputes, Commercial Courts, Commercial Division and Commercial Appellate Division of High Court Act, 2015 (“Commercial Courts Act”) was enacted.

Under this regime, specialized commercial courts were set up for speedy and effective dispute resolution of all commercial disputes.

The Commercial Courts Act also provided that proceedings emanating from arbitrations (both foreign and domestic), where the subject matter is a commercial dispute, would also be heard and disposed of by the Commercial Courts (Commercial Courts Act, section 10). The statute amended the application of the extant Code of Civil Procedure 1908 to commercial disputes, provided for a mechanism for speedy resolution, and a much needed requirement of appointment of only those judges which have experience in dealing with commercial disputes. (Commercial Courts Act, sections 4, 5)

“Change is the end result of all true learning”

Liberalization of policies and clarified norms of doing business in India have made investments more lucrative and attractive. However, to truly sustain its growing global credibility, India needed to deal with the elephant in the room.

His Lordship Justice D. Desai in 1982, of the Supreme Court of India had, in relation to the then extant arbitral laws, observed that “the way in which the proceedings under the Act are conducted and without exception challenged in Courts, has made Lawyers laugh and legal philosophers weep” (Guru Nanak Foundation v Rattan Singh (1982) SCR (1) 842). India has since come a long way. In face of the legislative and judicial changes brought in and the evident shift in the judicial mindset, India’s current reputation of being enforcement unfriendly is largely undeserving and a remnant of the decade past – the Bhatia Raj. India is no longer emerging as a pro-arbitration and pro-enforcement jurisdiction. It has already arrived. Sit-up and take notice!

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Arbitrators as Lawmakers by Dolores Bentolila € 180

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Rohit Bhat

On 29^th December 2016, the Government of India constituted a High-Level Committee under the Chairmanship of Mr. Justice B N Srikrishna, Retired Judge, Supreme Court of India. The Committee was constituted pursuant to the Government’s commitment to speedy resolution of commercial disputes and to make India an international hub of arbitration. The terms of reference of the Committee required it to examine the effectiveness of existing arbitration mechanisms, studying the functioning and performance of arbitral institutions in India and identifying gaps regarding manpower, skills, infrastructure, and funding in such institutions.

On 3^rd August 2017, the Committee forwarded its 143-page report to the Law Minister and if implemented, it will bring about much-needed changes to India’s international arbitration regime. However, its recommendations concerning investor-state arbitration have far reaching consequences. The Committee has advocated a move away from investor state arbitration and has recommended various measures such as state to state arbitration, compulsory negotiation and mediation and also toyed with the idea of a multilateral investment court.

Since the decision in White Industries v. The Republic of India India has faced a barrage of investor state claims. 21 cases have been filed against it, 11 of which are still pending. These cases prompted India to re-draft its 2003 Model BIT, and in 2015, India adopted a new protectionist BIT (available here) which brought about significant changes to the BIT regime. As stated in this news report, India is looking to renegotiate all its existing BIT’s to bring it in tune with its 2015 Model BIT. India has, thus far, served termination notices to 57 countries, which includes capital exporting states of the EU. The use of the 2015 Model BIT has been subject to criticism and as pointed out by Prabhash Ranjan a BIT that protects investors may contribute to rising FDI inflows. The lack of investor state arbitration, on the other hand, may render foreign investment more vulnerable to regulatory abuse. The present recommendations, if adopted, will play an important role in India’s ongoing BIT re-negotiations.

Moving away from investor state arbitration:

The critical recommendation of the Committee is made at Page 108 of the report where the Committee advocates a move away from the present system of investor-state dispute resolution. In supporting its recommendation, the committee has made specific reference to the recently concluded India-Brazil BIT. This BIT does not provide for investor-state arbitration. Instead, it provides for an ombudsman and state-state arbitration. The Committee has, in approving such a mechanism, emphasised that ‘state-state arbitration gives states greater control over the arbitral proceedings as compared to investor-state arbitration and that the involvement of both the states directly can allow some room for reciprocity, prevent unnecessary arbitration claims and otherwise provide for greater involvement of states in the dispute resolution process.’

In the alternative – appellate mechanisms in the existing BIT’s

If India chooses not to do away with investor state mechanisms, the Committee has recommended making a further change to its BITs and incorporating an appellate mechanism. Such a mechanism, according to the Committee, will deal with the criticism that ‘arbitral tribunals often rule in favour of the investor, leaving states without recourse to appeal.’ Further problems of ‘inconsistency and unpredictability’ have also been referred to, and it is suggested that an appellate mechanism may resolve these problems. In making its recommendation, the Committee has referred to the appellate mechanisms included by the United States in its free trade agreements with Singapore, Chile, and Morocco.

Multilateral investment courts

The anti-investor-state arbitration theme of the Committee is apparent from its suggestion that the Government explores the option of multilateral investment courts, such as the one that the EU has been working on since 2015.

Compulsory Negotiation, Conciliation, Ombudspersons and Mediation

The Committee has made strong recommendations in favor of systems that ‘potentially could minimize investor-state dispute, or once they have arisen, channelise them to processes and platforms which focus and highlight communication and the shaping of consensual solutions.’ To achieve this objective, the Committee suggests the inclusion of provisions for mandatory negotiation, conciliation, ombudspersons, and mediation. The Committee has specifically emphasized mediation, which has the advantage of being cost effective, preserving confidentiality, ‘strengthening of the relationship between the parties’ and ‘preserving long term relationships.’ The Committee has recommended that Government attempt to incorporate a mandatory mediation clause in any new BIT signed pursuant to the ongoing renegotiation process.

Approval of the 2015 Model BIT

The Committee has given its approval to changes made to the dispute resolution clauses in the 2015 Model BIT. These changes include the multi-tiered dispute resolution procedure that provides for exhaustion of local remedies before investor state arbitration can be invoked. Under Article 15 of the 2015 Model BIT, an investor is required to exhaust all local remedies for a period of at least 5 years from the date on which he first acquired knowledge of the breach.  After that, a claim may be submitted, and parties are then obligated to use best-efforts to resolve the dispute amicably for a period of 6 months. It is only on the failure of such best efforts that an investor can submit a claim for arbitration. This procedure has been approved by the Committee. The Committee has refrained from making any observations on other areas such as the changes brought about by the expropriation clause and the absence of a fair and equitable treatment clause.

Mechanisms to deal with existing and future disputes

Apart from suggesting a policy shift, the Committee has also dealt with dispute management under the BITs and has outlined the five pillars of a proper mechanism for dispute management – procedures, authority, coordination, counsel, and funds. Recommendations under these heads include (a) designating a body that would be responsible for dispute management and claims of investors; (b) creation of a body that would be responsible for coordinating the state’s defence at all stages of the arbitration; (c) creation of an inter-ministerial group to coordinate with the dispute management agency in order to ensure that the state’s views are adequately represented before the tribunal; (d) close monitoring of disputes brought by Indian investors against other contracting states so as to ensure that treaty interpretations by Indian investors do not run contrary to the position adopted by the Indian Government; (e) Appointing qualified and reputed counsel without any conflict of interest; (f) ensuring that the team of counsel consists of solicitor and lead counsel and lastly; and (g) the creation of a fund for defence of investor state proceedings so as to ensure that unavailability of funds does not delay investor state arbitration proceedings.

Conclusion

The High-Level Committee report in the first instance recognizes that it was necessary for the Government to have (previously) initiated an extensive BIT program to attract foreign investment. Its recommendations, however, is perhaps an indicator of the fact that India no longer needs solely rely on investor state protection to attract such investment. The recently concluded India-Brazil BIT that contained no investor state arbitration shows India’s skepticism of this mechanism. India now seeks to renegotiate 57 BIT’s, including with capital exporting countries such as the Netherlands (India’s third largest source of foreign direct investment), which unlike Brazil, would most likely favor strong investor protection provisions. Implementing the recommendations of the High-Level Committee will result in a policy shift in India’s approach to investor state arbitration, which may have an important impact on India’s upcoming treaty negotiations.

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Lukasz Gorywoda

There are around 3,000 bilateral investment treaties (BIT) in force worldwide. Most of them are concise with broadly formulated investor rights and host state obligations. In practice, it is up to arbitral tribunals to give them the actual meaning.

Many of those BITs are now being revisited. This recast movement comes from the policy concern that the balance between investor protection and host states’ sovereign rights has not been struck right. Increasingly, the way that some standards and clauses common to many BITs have been applied by arbitral tribunals has come under criticism as shifting the balance in favour of investor protection and unduly restricting host states’ sovereign rights.

The argument on which this criticism builds is that through broad treaty language, states delegate to arbitral tribunals the task of specifying states’ obligations in a relatively unconstrained manner, often leading to divergent and unpredictable results. Undoubtedly, the amount of discretion which arbitral tribunals enjoy at the interpretation stage is a function of particular treaty language. It is true that open-ended standards provide tribunals with more flexibility than rules specifying in detail required or prohibited conduct or action. However, such legislative technique often allows attainment of tailored and equitable results, which is not always possible in a system of rigid rules that have been set ex ante and in isolation from the actual dispute. In case of standards, tribunals fill them ex post, adjusting their meaning to facts of the case. However, some applications of, for example, the “fair and equitable treatment” (FET) standard or the “most favoured nation” (MFN) clause have particularly disturbed states, so they have been voicing concerns that arbitral awards are unpredictable and can expand their treaty obligations.

Not addressing the merits of those concerns, this two-part note looks into the ways that states can control the exercise of tribunals’ discretion and their implications. Of course, states can prevent unintended results from happening by simply adding more specific language to their new BITs. But what can they do with the existing treaties?

“Rebalancing” tools

Seeking to protect their “regulatory sovereignty” and to “reassert control” over their BIT frameworks, states resort to various strategies. Some states are not interested in just “rebalancing” their approach to investment protection and choose to terminate the most “problematic” or simply all of their BITs. Others prefer to renegotiate and amend their treaties. However, renegotiation of a treaty is costly and time consuming. Those states which are sensitive to cost and time concerns may resort to the third strategy available for constraining arbitral tribunals’ discretion: joint authoritative interpretation of provisions that raise their concerns.

In theory, it is straightforward and simple. State parties to a treaty can get together and issue a joint statement on a specific issue, such as, for example, the definition of the FET standard. They can do so on an ad hoc basis or through a formal mechanism, if such has been provided in a treaty. In practice, though, both states must agree on the interpretation, so it needs to be in their joint interest. Looking at the existing treaty practice, one can see that states have been resorting to joint interpretations rather rarely. A possible explanation for this rare use can be the asymmetry of interests of particular treaty parties, when one of them prevalently is a capital exporting and the other a capital importing state. “Joint Interpretative Notes” (JIN) recently agreed by India and Bangladesh with respect to their BIT are therefore a good excuse for taking a brief look at this relatively low-cost tool for controlling “unintended” interpretations by arbitral tribunals.

India and Bangladesh joint interpretative statement

On 12 July 2017, India’s Government announced that it approved the JIN on the 2011 India-Bangladesh BIT. As provided in press release, “[t]he JIN includes interpretative notes to be jointly adopted for many clauses, including, the definition of investor, definition of investment, exclusion of taxation measures, Fair and Equitable Treatment (FET), National Treatment (NT) and Most Favoured Nation (MFN) treatment, expropriation, essential security interests and Settlement of Disputes between an Investor-and a Contracting Party”. Such interpretative notes, according to India’s Government, “would impart clarity to the interpretation of the existing Agreement between India and Bangladesh for the Promotion and Protection of Investments (BIPA)”. India’s Government also notes that “issuance of such statements is likely to have strong persuasive value before tribunals”.

Approval of the JIN is a step in the India’s program to recast its entire investment treaty framework. In 2016, India sent notices to 58 countries announcing its intention to terminate (or not renew) respective BITs. As to the remaining 25 BITs that cannot yet be terminated because the initial period for which the treaty was signed has not expired, India has circulated to the counterparties a proposed Joint Interpretative Statement (JIS). JIS contains clarifications similar in their approach to the text of India’s 2015 Model BIT, i.e., seriously reducing investors’ rights. Whereas the text of JIS has been made public, India’s Government has not published the JIN with Bangladesh. Thus, one can only speculate to what extent it reflects India’s approach to investment protection set out in its “model” JIS.

Interpretation or amendment?

The strategy of adopting joint interpretative statements, as employed by India, looks like an efficient and easy way for states to reassert control over their foreign investment regimes. Assuming that arbitral tribunals will defer to clarifications contained in the JIN, India has in fact “amended” its original BIT with Bangladesh without going through a lengthy and costly process of formal treaty renegotiation and amendment. If so, the question is what status such a “backdoor” treaty amendment has under international law and what signal such a practice sends to potential foreign investors.

The question whether the JIN is a true interpretation or “disguised” amendment of India-Bangladesh BIT is not easy to answer. As observed by Gabrielle Kaufmann-Kohler, it is often difficult to draw the line between a true interpretation and an amendment. (G. Kaufmann-Kohler, ‘Interpretive Powers of the Free Trade Commission and the Rule of Law’ in E. Gaillard and F. Bachand (eds.), Fifteen Years of NAFTA Chapter 11 Arbitration (Juris 2011), p. 191.) A true interpretation should clarify what the norm has always been. The JIN provide clarifications but mainly by adding limitations to the meanings of original provisions, thus re-examining the original text quite thoroughly. Further, pursuant to Article 39 and Article 11 of the Vienna Convention on the Law of Treaties (VCLT), states can amend treaties by “any means if agreed”. This means that JIN can in fact be treated as an amendment of the India-Bangladesh BIT.

Some NAFTA tribunals have addressed the interpretation/amendment distinction with respect to the NAFTA Free Trade Commission (FTC) “Notes of Interpretation of Certain Chapter 11 Provisions” (FTC Notes) of 2001 on the FET standard. NAFTA, unlike India-Bangladesh BIT, explicitly provides for an institutional mechanism for interpretation by its state parties and specifies that interpretative notes issued by the FTC are binding on Chapter 11 arbitral tribunals.

The tribunal in Pope & Talbot v. Canada viewed the FTC Notes as an amendment of the NAFTA. It held, however, that this classification had no impact on the case before it (already in the merits phase), because the conclusion it had reached in the partial award rendered before the issuance of FTC Notes would hold under the new regime as well. The tribunal in ADF v. United States did not address the distinction between an “interpretation” and an “amendment” of Article 1105(1) NAFTA but observed that the FTC statements are to be treated as the most authentic and authoritative “source of instruction on what the Parties intended to convey in a particular provision of NAFTA”. In view of the tribunal in Merrill & Ring v. Canada the FTC Notes looked “closer to an amendment of the treaty, than a strict interpretation”. The tribunal did not draw any consequences from this classification but stressed the evolutionary nature of the FET standard.

Although joint interpretative statements prima facie look like an easy tool to control “unintended” tribunal interpretations, they have been rarely used by states in their treaty practice. Asymmetry of interests of particular treaty parties, when one of them prevalently is a capital exporting and the other a capital importing state, can possibly explain this rare use of joint interpretative statements. The JIN recently signed by India and Bangladesh substantially affects their BIT which puts to the fore the question how to distinguish treaty interpretation from treaty amendment. Part II explains why the interpretation/amendment distinction is important for the international investment community.

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Lukasz Gorywoda

These two-parts blog posts look into the ways that states can control the exercise of tribunals’ discretion and their implications. Of course, states can prevent unintended results from happening by simply adding more specific language to their new BITs. But what can they do with the existing treaties?

Due process concerns

Joint interpretative statements, as explained in the first part of this post, can be used by states to protect their “regulatory sovereignty” and to “reassert control” over their BIT frameworks. “Joint Interpretative Notes” (JIN) recently agreed by India and Bangladesh have substantially affected their BIT and this regulatory technique puts to the fore the question how to distinguish treaty interpretation from treaty amendment.

Why is the interpretation/amendment distinction important? As observed by Gabrielle Kaufmann-Kohler, whereas to treaty amendment principle of non-retroactivity applies as the amendment creates a new norm, it does not apply to treaty interpretation because a true interpretation merely clarifies the content of an existing norm. (Id., at p. 189) Thus, if the JIN were in fact a disguised amendment of India-Bangladesh BIT, the guarantees of due process would require their inapplicability to pending disputes. Not to mention that if the JIN were to be applicable to pending disputes, the respondent state would have unduly benefitted from new meanings of India-Bangladesh BIT provisions which it directly formulated in the course of the proceedings. While it does not seem that there are any pending disputes under India-Bangladesh BIT at the moment, these due process concerns may gain more practical relevance when India concludes further interpretative notes with respect to its other 24 BITs.

Binding or persuasive?

Such joint interpretative statements like the JIN or the FTC Notes constitute a special form of “subsequent agreements” within the meaning of Article 31(3)(a) VCLT that “shall be taken into account” by an arbitral tribunal interpreting a particular treaty at issue. It is clear that tribunals are “bound” to take into account joint interpretative statements. It is not clear, though, whether their content is binding on tribunals. Literal interpretation would suggest that joint interpretative statements as a type of subsequent agreements are not binding but have the same rank as the other elements of the general rule of interpretation under Article 31 VCLT. However, a 2013 report of the International Law Commission on “Subsequent agreements and subsequent practice in relation to interpretation of treaties” (A68/10) recognizes that treaty parties can give their subsequent agreements binding force, stating that “subsequent agreements and subsequent practice establishing the agreement of the parties regarding the interpretation of a treaty must be conclusive regarding such interpretation when ‘the parties consider the interpretations to be binding upon them’”. (Commentary to Conclusion 2, p. 22)

As mentioned above, NAFTA parties indicated in Article 1131(2) that interpretative notes issued by the FTC are binding on Chapter 11 arbitral tribunals. To recall, India-Bangladesh BIT does not provide for a mechanism of state parties interpretation and the JIN has not been made public. In the “model” Joint Interpretative Statement (JIS) circulated by India, though, we can find a reference to “the requirement under customary international law and Article 31 (3) (a) & (b) of Vienna Convention of [sic] Law of Treaties, that any interpretation of the Agreement take into account the Contracting Parties’ subsequent statements and practice reflecting their shared understanding of the meaning of that Agreement”. Furthermore, the JIS “shall be read together with the Agreement and shall form an integral part of the Agreement”. This could be read as manifesting India’s intent to make the JIS binding.

In the end, states are “masters of treaties”. Even if they have delegated a lot of power to arbitral tribunals, they can always regain it. As observed by James Crawford, “[i]n the context of investment treaty arbitration there is a certain tendency to believe that investors own bilateral investment treaties, not the States parties to them […] That is not what international law says. International law says that the parties to a treaty own the treaty and can interpret it.” (J. Crawford, ‘A Consensualist Interpretation of Article 31(3) of the Vienna Convention on the Law of Treaties’ in G. Nolte (ed.), Treaties and Subsequent Practice (OUP 2013), p. 31)

Conclusion

Joint interpretative statements can be very useful for states and investors as their clarifications can contribute to a better understanding of a particular treaty provision and hence increase predictability. However, they can go beyond their clarifying function and be used to correct the arbitral practice by imposing certain understandings. This technique is part of the trend of rebalancing the international investment regime towards greater rights for states. In fact, some joint interpretative statements, if given a binding nature by state parties, can lead to effective treaty amendment without a need to satisfy formal procedural requirements. Although it seems not to pose serious difficulties under international law, it may be problematic at the domestic level if a particular constitutional order prohibits a government concluding a treaty without following certain procedure. The India-Bangladesh JIN, if it reflects the content of the JIS, is definitely designed to move the international investment protection standards into fresh directions. However, the question is whether joint interpretative statements are the right instrument for such a profound re-examination of investment protection framework.

Some useful links:

JIN: http://pib.nic.in/newsite/PrintRelease.aspx?relid=167345
JIS: http://indiainbusiness.nic.in/newdesign/upload/Consolidated_Interpretive-Statement.pdf

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Siddharth S. Aatreya

The primary purpose of an arbitration clause is to represent the parties’ common agreement to resolve disputes arising out of their contractual relationship by arbitration. One-way arbitration clauses, however, serve this primary purpose while giving only one party the right to commence arbitration proceedings. Consequently, the other party only has the option of approaching a domestic court to pursue a claim.

In countries like India, banks and other financial institutions that engage in lending and trading activities on an international scale take on a high litigation risk. To dilute this risk and maintain profitability, they deny the benefits of opting for arbitration to their borrowers in an attempt to ensure that only legitimate claims against them are made before domestic courts. At the same time, they reduce the cost and risk involved in pursuing claims in different jurisdictions for themselves by compelling both parties to arbitrate only if they choose to initiate it. The clause’s ability to dilute the bank/financial institution’s litigation risk has been responsible for its growing popularity.

Despite this growing popularity, the enforceability of such clauses has been a matter of great controversy around the world, with courts in different countries taking divergent positions. In India, however, no clear stance can be culled out of conflicting judgments rendered by different High Courts.

The Development of the English Position

The first reported judgment in England on the enforceability of one-way arbitration clauses is Baron v. Suderland Corporation 1966 (1) All ER 555, rendered in 1966.  Here, the Court held that “mutuality” was necessary for a valid arbitration agreement, and defined it to mean that all parties to an agreement should have “equal procedural rights.” Since one-way clauses gave only one party the right to commence proceedings, the court held that the clause gave the parties unequal procedural rights and was, therefore, void. In 1985, this position was reiterated in Tote Bookmakers v. Development and Property Holding [1985] 2 WLR 603.

A year after Tote, however, the position was changed in Pittalis v. Sherefettin  [1986] 1 QB 868. Here, the court held that a one-way arbitration clause is a consequence of the nature of the commercial relationship between the parties, and would satisfy the mutuality requirement laid down in Baron as long as both parties were aware of and had freely consented to it. Consequently, such clauses continue to be enforceable in England today.

Enforceability in India

The Calcutta High Court has consistently upheld one-way arbitration clauses. In Kedarnath Atmaram v. Kesoram Cotton Mill, 1949 SCC OnLine 382 it first used the “prior knowledge and consent of both parties” requirement to find that one-way clauses would be valid as long as this condition was met. In 2002, the Court’s decision in S&D Securities v. Union of India, 2005 124 CompCas 340 traced the development of English law in this regard and finally relied on the reasoning in Pittalis to uphold their validity. The Calcutta High Court’s position is, therefore, consistent with the current position in most common law countries, as observed in the Singapore High Court’s recent decision in Dyna-Jet Pte Ltd v. Wilson Taylor Asia Pacific Pte Ltd. [2016] SGHC 23.

Unenforceability in India

The only other Indian High Court that has decided upon the enforceability of such clauses is the Delhi High Court, which has adopted the opposite view. In Bhartia Cutler Hammer Ltd. v. AVN Tubes, 1995 (23) DRJ 672, the court first decided upon this matter, holding that the apparent inequality in rights given to parties under the clause would render it void.

Most recently, in Lucent Technologies v. ICICI Bank, MANU/DE/2717/2009 the Delhi High Court succinctly clarified its position. The court found, first, that such a clause would amount to an agreement in restraint of legal proceedings since it restricted the rights of only one party to seek an alternative form of dispute resolution (arbitration). On this basis, the Court held that the clause was void under the Indian Contract Act. The court then overlooked Pittalis and relied instead on Tote in holding that a one-way clause would, in any case, violate the “mutuality” requirement of a valid arbitration clause.

The argument for uniform enforceability in India

Notwithstanding the Delhi High Court’s finding to the contrary, I would argue that the uniform Indian position should be that such clauses are enforceable since they fulfill the two broad conditions of a valid clause – fair terms and free consent from all parties to it.

First, one-way arbitration clauses are a consequence of the high litigation risk that financial institutions face. However, while the right to commence an arbitration reflects this risk, the terms of the arbitration itself are in no way tilted in favour of the financial institutions. This means that the fairness of a potential verdict is not affected at all.

Furthermore, the Delhi High Court’s decision that such a clause amounts to an agreement in restraint of legal proceedings in Lucent is unfounded. The right to commence an arbitration is merely a contractual right, which can be distributed in an unbalanced manner between the parties as long as the parties to the contract consent to it. In any case, the unbalanced distribution of this right does not leave any party without a remedy in case of a breach, since the right to pursue a claim before a domestic court remains untouched.

Second, on procedural fairness. Here, the requirement of “prior knowledge and consent” laid down by the Calcutta High Court and contemporary English courts is of importance. This means that no blanket assumption of procedural unfairness can be made in such cases – the court must instead analyse this on a case-to-case basis. Thus, a one-way arbitration clause would be struck down on procedural grounds only if it can be established that there was a gross inequity of bargaining power that vitiated consent to the clause in that particular case.  See Central Inland Water Transport Corporation v. Brojo Nath Ganguly, 1986 SCR (2) 278 for a discussion on procedural unconscionability of contracts in Indian law. As long as both parties to the clause validly consent to it, however, it should be enforced.

Conclusion

As noted above, no consensus has been arrived at on the enforceability of one-way arbitration clauses around the world. India has seen two High Courts consistently adopt opposite viewpoints on this issue. In the absence of a conclusive judgment from India’s Supreme Court or any legislative direction specific to one-way arbitration clauses, this confusion will persist. Thus, while it is possible to argue that such clauses should be uniformly enforceable across India, it is prudent for financial institutions to avoid the use of such clauses in India for now.

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Ayushi Singhal

As on May 1, 2017, 60751 cases were pending in the Indian Supreme Court. Likewise, as per the data available, a total of 41,53,957 cases are pending in the twenty-four High Courts in India. The rate at which these cases are disposed, for various reasons like the vacancies for the position of judges, inefficient procedures, etc., nowhere matches with the pendency. Unlike many countries in the world, in addition to the judicial function of decision-making, the Chief Justice of India (Supreme Court), and the Chief Justices of the various High Courts (collectively ‘Chief Justices’) are also vested with the performance of administrative functions. These functions include maintenance of roster, allocation of matters to other judges, etc.

Along with these functions, so far as arbitration is concerned, before the 2015 Amendment to the Indian Arbitration and Conciliation Act, 1996, the Chief Justices, where the parties failed to do so, were also required to appoint arbitrators in pursuance of an arbitration agreement for arbitrations seated in India.

Also, this power of appointment of arbitrators on the failure of parties to do so, was characterized as a judicial power, instead of an administrative power, which meant that the scope and nature of this judicial intervention in an arbitration, was broader than it would otherwise be. In other words, the Chief Justices while appointing arbitrators could hold a detailed trial and hear detailed arguments concerning whether the arbitration agreement exists or not (as opposed to making a prima facie determination, and leaving the final determination for the arbitrator). [See, SBP v Patel Engineering, (2005) 8 SCC 618; National Insurance Co. Ltd. v Boghara Polyfab Pvt. Ltd., (2009) 1 SCC 267]

This naturally led to delays in the appointment of arbitrators, sometimes the Section 11 [the concerned provision in the Arbitration Act for the appointment of arbitrators] applications being pending for years, consequently resulting in delay in the making of arbitral awards as well. Even when speedy disposal of the disputes indeed might have been one of the reasons why parties might have opted for arbitration over litigation at the first place.

In this background, the Law Commission of India in its 246^th Report recommended that the appointment of arbitrators be made instead by the High Court or the Supreme Court, such power being administrative in nature, and thus delegable to an arbitral institution. The possibility of such a delegation was made explicit in the amended Section 11. Section 11 provides, inter alia, “the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court” can appoint the arbitrator(s) when a party(s) fails to do so, with the stated purpose of the amendment being to “provide greater incentive for the High Court and/or Supreme Court to delegate the power of appointment (being a non-judicial act) to specialized, external persons or institutions”. The amendment also prescribed a time limit of sixty days from the date of service of notice on the opposite party, within which the court should endeavor to dispose of the application requesting appointment of arbitrators.

The UNCITRAL Model Law also does not disallow for such a possibility, as is evident from a combined reading of Articles 6 and 11, which suggests that any suitable authority as prescribed by the legislature, not necessarily courts, can appoint arbitrators.

Yet, neither the Supreme Court nor any of the High Courts have yet designated an institution/expert to make appointments. Until now, this power was not even exercised on an ad hoc basis. However recently in Arbitration Case no. 33 of 2014, the Supreme Court of India, has by order dated May 3, 2017, directed the Mumbai Centre for International Arbitration (MCIA) to appoint an arbitrator, in an international commercial dispute between Sun Pharmaceutical Industries Ltd., Mumbai and M/s Falma Organics Limited Nigeria. This is the first instance where the Supreme Court has made use of the power under Section 11, and this is indeed a pro-arbitration development in India. It is hoped that this process is systemized whereby the parties can approach designated arbitral institutions directly for such purpose, instead of the court acting as an intermediary for every such appointment.

Indeed this function can be systemized by assigning it to a central arbitral institution like the ICADR (International Centre for Alternative Dispute Resolution), after creating the necessary infrastructure, which would in turn also help in popularizing the Institution, which presently hardly deals with any cases in comparison with its competitors. Regional institutions like the MCIA in Mumbai or the Nani Palkhivala Arbitration Centre (NPAC) in Chennai, etc. can also be designated, depending upon the seat of arbitration, which would also promote institutionalized arbitration in India.

This is also along the lines of how the appointment of arbitrators takes place in Singapore [thanks to Jeet Shroff for making me notice this]. Not only will such delegation leave space for the judiciary to adjudicate other matters, but will also speed up the process of appointment of arbitrators, by reducing one time-taking step from this process.

One issue which however remains to be clarified in this regard is the appealability of the decision of the Court or such arbitral institution, where it decides that the arbitrator should not be appointed. Section 37 of the Arbitration Act, which lists appealable orders does not mention this order, despite recommendation to this effect by Law Commission’s 246^th Report (which led to the introduction of the progressive 2015 Amendment to the Act). As against this, where the party resisting arbitration has initiated court proceedings, and the opposite party requests the court to refer the matter to arbitration and the court denies reference, the same can be appealed under Section 37 (orders passed under Section 8 are appealable). This results in an anomaly, whereby a party might be better off waiting for the matter to be referred to arbitration, than in initiating appointment of arbitration, so far as appealability is concerned, though there appears no reason for such difference. This, however, forms the subject of a separate discussion.

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Ayushi Singhal

The decision of the Indian Supreme Court in A. Ayyasamy v. A. Paramasivam (‘Ayyasamy’) [(2016) 10 SCC 386] has been previously discussed on this blog here, and here. This post seeks to analyse the distinction between arbitrability of fraud concerning India-seated arbitrations and foreign-seated arbitrations created as a result of this judgment.

The court in World Sport Group Ltd. v. MSM Satellite (‘World Sport’) [(2014) 11 SCC 639] had concluded that disputes involving fraud are arbitrable (without making a differentiation between mere allegations of fraud and serious allegations of fraud as made in Ayyasamy), so far as foreign-seated arbitrations are concerned. However Ayyasamy declares that serious allegations of fraud are inarbitrable in India-seated arbitrations, thus creating an artificial difference concerning arbitrability of fraud between foreign-seated and India-seated arbitrations. While all disputes involving fraud are arbitrable for foreign-seated arbitrations, serious allegations of fraud are inarbitrable for domestic arbitrations.  There appears to be no legal basis for this differentiation.

Indian case law, as well as jurisprudence in other countries have indeed differentiated between domestic and international public policy, the latter often construed more narrowly than the former for considerations of international trade and commerce. However courts haven’t used public policy as the reason for having different standards for arbitrability of fraud for domestic and international arbitrations, which but would have also required making differentiation between international commercial arbitrations seated in India, and pure domestic arbitrations seated in India.

The reasoning of courts rather, is rooted in the competence of the arbitral tribunal; though there exists no evidence to the effect that tribunals appointed in foreign-seated arbitrations are more competent than those appointed for arbitrations seated in India, nor do these form two separate groups – the same arbitrator can be appointed for both foreign and India seated arbitrations. The argument that it is more legitimate to interfere in domestic awards than in foreign awards might be plausible, but has not been fleshed out by the court either.

• §8 and 45 provide for the powers of the Indian courts to refer disputes to arbitration, when there exists an arbitration agreement concerning the dispute prescribing for India-seated and foreign-seated arbitrations respectively. The difference in the language of §§8 and 45 of the Indian Arbitration and Conciliation Act, 1996, where the latter allows for more interference than the former, can be argued as a source of this differentiation similar to the rationale in the case of Swiss Timing Ltd. v. Organising Committee [(2014) 6 SCC 677, ¶28]. However there is a difference between the issues of court interference in the determination of arbitrability and determination of whether a particular dispute is arbitrable. The former is a procedural enquiry, while the latter is substantive. The difference in the language of the aforementioned sections can at best be a source of the procedural enquiry, i.e. for the argument that courts can decide arbitrability of the dispute before making a reference under §45, as against under §8; but not for the substantive enquiry. Though the difference in the substantive enquiry resulting from the difference in the languages of §§ 8 and 45 has been undertaken in previous cases as well. [See, Shin-Etsu Chemicals Co. v. Aksh Optifibre Ltd., (2005) 7 SCC 234; Kalpana Kothari v. Sudha Yadav, (2002) 1 SCC 203; Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641; India Household & Healthcare Ltd. v. LG Household & Healthcare Ltd., (2010) 1 SCC 72; Sundaram Brake Linings v. Kotak Mahindra Ltd., (2010) 4 Comp. L.J. 345 (Mad).]

If anything, the difference in language demanded explanation from the bench in World Sport, when it expanded the ambit of arbitrability under §45 in comparison with §8. This is because even assuming that the difference in language can be a source of the substantive enquiry as well, language of §45 is more permissible than that of §8 (allowing for greater interference in foreign-seated arbitrations), leading to a reverse conclusion from the present position of law.

Chandrachud J. in his concurring opinion in Ayyasamy indeed misses the opportunity to notice this flaw. In the course of his opinion, he draws attention to the difference in the language of §8 of the Act, and the corresponding provision in the UNCITRAL Model Law, the latter also allowing the courts to decline reference to arbitration when the AA is “null and void, inoperative and incapable of being performed”. This leads the court to conclude that §8, as against the provision in UNCITRAL Model Law, is mandatory in nature (though the conclusion reached by the court in Ayyasamy does not seem to be in accordance with this peremptory language). §45 mirrors the language of UNCITRAL Model Law, yet ironically, the court concludes that the ambit of arbitrability while making a reference under §8 is narrower than §45 (while the court does not state so explicitly, though the legal position after the pronouncement of Ayyasamy is exactly this).

At another level, it is suspect if Indian law should at all govern the question of arbitrability in all foreign arbitrations, unless Indian courts also have exclusive natural jurisdiction over the dispute. If such jurisdiction does not exist, the issue should be decided in accordance with the law of the seat or the law of the place of enforcement. Hence, application of Indian law to the question of arbitrability in foreign-seated arbitrations is in itself problematic. Indian courts, as against elsewhere in the world, have applied the substantive law of contract to the question of arbitrability (Reliance Industries Ltd. v. Union of India, 2014 SCC Online SC 411, ¶76: Note that this judgment was passed after World Sport). Yet, in the context of arbitrability of fraud, without making the analysis of the applicable law, courts have used Indian law for making the determination. For instance in World Sport, the substantive law of contract was that of England and Wales, where fraud, irrespective of its seriousness, is arbitrable (Fili Shipping v. Premium Nafta Products, [2007] UKHL 40), yet this did not find traction in the judgment of the court.

Lastly, the position as it stands right now goes against the precedent in National Insurance Co. Ltd. v Boghara Polyfab Pvt. Ltd. [(2009) 1 SCC 267], which had explicitly denied the court the power to rule upon the question of arbitrability at the stage of reference, ruling this to be the mandate of the arbitral tribunal under §16 of the Act. [See also, Meguin GmBH v. Nandan Petrochem Ltd. (2007) 5 RAJ 239 (SC) (appointed arbitrator in accordance with §11, despite involvement of issues of fraud in the dispute); SBP & Co. v. Patel Engineering Ltd., (2005) 8 SCC 618; Arasmeta Captive Power Co. (P) Ltd. v. Lafarge India (P) Ltd., (2013) 15 SCC 414].

Incidentally, §7 as well was sought to be amended by the 246^th Report, making it clear that the subject matter of the arbitration had to be capable of settlement by arbitration for it to be a valid AA, however this suggestion was not introduced in the final amendment act.

As suggested previously, the language of neither §45, nor §§8 and 11, warrant the court to answer the question of arbitrability. Indeed both Swiss Timing and World Sport are decisions based on this reasoning, rather than arbitrability of fraud. Ayyasamy on the other hand, licenses the court to determine the question of arbitrability and analyse the merits of the dispute to the extent required in determining whether allegations of serious fraud are involved. The tribunal might in fact feel obligated by such determination by the court, even when it might think otherwise.

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Ashutosh Kumar and Anjali Anchayil

The long-standing tax dispute between India and the Vodafone, also previously discussed in here,  recently entered new territory when India secured an ex-parte ad-interim injunction restraining the continuation of one of two bilateral investment treaty (“BIT”) arbitration proceedings initiated against it by the Vodafone group.

A judge of the Delhi High Court granted this injunction on 22 August 2017 (I.A.9460/2017 in CS(OS) 383/2017) at the very first hearing of a civil suit filed by India against Vodafone Group PLC and Vodafone Consolidated Holdings Ltd. (the “Vodafone Entities”).

Background

In April 2014, Vodafone International Holdings B.V. (the “Dutch BV”) initiated arbitration proceedings (the “First Arbitration”) under the India-Netherlands Bilateral Investment Promotion and Protection Agreement (the “India-Netherlands BIPA”). The dispute arose as a result of India’s efforts to impose tax liability on the Dutch BV for its alleged failure to deduct tax in relation to the indirect acquisition of an Indian company by the Dutch BV. Subsequently, in January 2017, the Vodafone Entities, as parent companies of the Dutch BV, initiated separate arbitration proceedings (the “Second Arbitration”) in relation to (broadly) the same dispute under the India-United Kingdom Bilateral Investment Promotion and Protection Agreement (“India-UK BIPA”).

In response, India filed a civil suit against the Vodafone Entities seeking declaratory and injunctive reliefs in relation to the Second Arbitration. India asserted that: (i) both arbitrations were based on the same cause of action and sought identical reliefs; (ii) the Second Arbitration constituted an abuse of law relying on the recent award in Orascom TMTI v. Algeria (ICSID Case No. ARB/12/35, 31 May 2017), where an ICSID arbitral tribunal had applied the doctrine of abuse of rights to decline jurisdiction over one of multiple parallel BIT arbitration proceedings; (iii) disputes in relation to tax demands were beyond the scope of BIT arbitration proceedings as taxation was a sovereign function and tax disputes could only be raised before domestic courts; and (iv) laws passed by the Indian Parliament could not be the subject of adjudication in BIT arbitration proceedings.

The injunction

The court granted an ex-parte ad-interim injunction restraining the Vodafone Entities from pursuing the Second Arbitration. It relied on the following conclusions: (i) the principles of Indian law applicable to anti-suit injunctions (see Modi Entertainment Network v. WSG Cricket Pte. Ltd., (2003) 4 SCC 341) were also applicable to anti-arbitration injunctions, and accordingly, an arbitration could be restrained by an injunction if such arbitration was “oppressive or vexatious”; (ii) prima facie there was a duplication of parties and reliefs in the two BIT arbitration proceedings; (iii) prima facie India was the “natural forum” to resolve the disputes raised by the Vodafone Entities; (iv) prima facie the Vodafone Entities and the Dutch BV constituted one economic entity/corporate group with common management and shareholders; (v) prima facie the filing of two BIT arbitration proceedings in such circumstances was an abuse of the process of law and created a risk of parallel proceedings and conflicting decisions; and (vi) prima facie it would be inequitable, unfair and unjust to permit the Vodafone Entities to prosecute the Second Arbitration.

Comment

The court noted the overlap between the two BIT arbitration proceedings and recognised the abuse of the process of law which would result as a direct consequence. The grant of an interim injunction in such circumstances was clearly justified. However, the decision suffered from certain procedural and analytical lacunae, which provide cause for concern. These lacunae are briefly noted below.

• Lack of urgency justifying an ex-parte order

The ex-parte ad-interim injunction was granted under Order XXXIX of the Code of Civil Procedure, 1908 (the “CPC”). While Order XXXIX of the CPC permits a court hearing a civil suit to grant an ex-parte injunction, recourse to an ex-parte injunction is permissible only “where it appears that the object of granting the injunction would be defeated by delay”. In addition, a court granting an ex-parte injunction must “record the reasons for its opinion that the object of granting the injunction would be defeated by delay”. However, from a reading of the decision, it appears that no circumstances were cited by India to satisfy the above condition and the court did not record any reasons for its opinion to such effect. In fact, as the Second Arbitration appears to have not progressed beyond the appointment of arbitrators, there was no apparent urgency justifying an ex-parte order. This procedural lacuna may be relevant in any appeal against the ex-parte ad-interim injunction.

• Tribunal being the more appropriate forum for relief

Although the court considered the award in Orascom TMTI v. Algeria, it did not acknowledge the implicit point that the more appropriate forum for relief in relation to parallel BIT arbitration proceedings would be the arbitral tribunal in the Second Arbitration. The arbitral tribunal would likely be better placed to assess the scope of the two BIT arbitration proceedings and the likelihood of parallel proceedings and conflicting decisions. In addition, by permitting the arbitral tribunal to decide this issue, the court would give due regard to the kompetenz-kompetenz principle. Accordingly, before granting an ex-parte ad-interim injunction, the court should have considered whether India should be directed to move an application before the arbitral tribunal in the Second Arbitration to seek an appropriate order declining jurisdiction. However, from a reading of the decision, it appears that this issue was not considered by the court. This analytical lacuna is another cause for concern. While the jurisdiction of the court to grant an injunction is not in doubt, the court appeared to disregard the more appropriate forum for relief and the kompetenz-kompetenz principle.

• Lack of clarity as to the scope of BIT arbitration proceedings

India argued that disputes in relation to tax demands were beyond the scope of BIT arbitration proceedings as taxation was a sovereign function, and also that laws passed by the Indian Parliament could not be adjudicated in BIT arbitration proceedings. These arguments challenged the jurisdiction of the arbitral tribunals in the two BIT arbitration proceedings, and did not have any relevance to whether these BIT arbitration proceedings were “vexatious or oppressive”.

While the court did not specifically address these arguments, it seemed to see some merit in them as it prima facie held that India was “the natural forum for the litigation of the [Vodafone Entities’] claim against [India]”. This conclusion (although prima facie in nature) indicated a lack of clarity as to the scope of BIT arbitration proceedings. While Indian courts have certainly had limited experience in deciding issues relating to BIT arbitration proceedings, to not recognise that state action (including legislation) can potentially be challenged in BIT arbitration proceedings with reference to independent standards of protection guaranteed under BITs is a serious analytical lacuna. However, it is quite likely that the court will ultimately recognise this aspect as it deals with the civil suit further.

• Application of principles applicable to anti-suit injunctions

The court granted an ex-parte ad-interim injunction by applying principles of Indian law applicable to anti-suit injunctions – specifically the principles laid down by the Supreme Court in Modi Entertainment Network v. WSG Cricket Pte. Ltd., (2003) 4 SCC 341. However, the application of these principles in the context of anti-arbitration injunctions was specifically rejected by a Division Bench of the Delhi High Court in McDonald’s India Private Limited v. Vikram Bakshi, (2016) SCC OnLine Del 3949, which is binding precedent for the court. Thus, the court appears to have applied incorrect principles to decide on the grant of the ex-parte ad-interim injunction. However, because BIT arbitration proceedings are substantially different from commercial arbitration proceedings (which were also the subject of the decision of the Delhi High Court in McDonald’s), it is arguable that principles applicable to anti-arbitration injunctions should not apply to BIT arbitration proceedings.

Conclusion

The ex-parte ad-interim injunction is likely to provide some respite to India. However, the procedural and analytical lacunae in the decision of the court leave it vulnerable to challenge. Therefore, this victory may only be short-lived. In any event, this civil suit is likely to test and redefine the contours of the law governing anti-arbitration injunctions in India – particularly in respect of BIT arbitration proceedings.

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Arthad Kurlekar

YIAG

Professor Pieter Sanders in 1999 famously asked “Quo Vadis Arbitration”? (Where do you go Arbitration?). In the Indian context this question is particularly relevant in light of the ever-fluctuating framework applicable to arbitrations seated in India. In this post, I will deal with one aspect of this inconsistency, namely the question of arbitrability. The Indian courts have struggled with the question of arbitrability, especially in crystallising an appropriate test to decide it. In 2011 the Indian Supreme Court made its first landmark attempt in Booz Allen Hamilton v SBI Home Finance (2011) 5 SCC 532.

Recently, the Bombay High Court has diverted from the test in Booz Allen. The particular struggle has been seen in two of its Judgments applying a uniform test, distinct from Booz Allen: Rakesh Kumar Malhotra v Rajinder Kumar Malhotra on 20 August 2014 (holding claims of oppression and mismanagement against a company as not arbitrable) and more recently on 12 April 2016 in Eros International Media v Telemax Links (where the court has held that IP disputes may be arbitrable subject to the relief sought).

The Booz Allen Hamilton Dictum

The case was a landmark in that it was the first and arguably the only decision expounding the concept of arbitrability. In this decision, the Indian Supreme Court gives a generic test and states:

“Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration.”

The Court clarifies that a right in personam is a right against a person, as opposed to a right in rem i.e. a right which attaches to a particular “thing” rather than a person, or creates a legal status such as citizenship, and which is therefore exercised against the world at large. Thus the test which it has sought to lay down is in the form of classification of rights as rights in rem, as those not arbitrable, and rights in personam as those which are arbitrable. It further states that a lis in personam associated with a lis in rem may also be arbitrable. Thus e.g. a breach of contract would be arbitrable, despite the existence of fraud present. Prima facie, this test seems to be clear in its ambit. The Court elaborates its idea by providing a non-exhaustive list of subject-matters incapable of settlement by arbitration such as constitutional disputes, divorce proceedings which would be declaratory of a status of a person, rights and liabilities relating to criminal offences, guardianship etc.

It should be noted, however, that immediately succeeding this observation the court notes that “[t]his is not […] a rigid or inflexible rule. Disputes relating to sub-ordinate rights in personam arising from rights in rem have always been considered to be arbitrable. (emphasis added)”. Thus although insolvency claims may not be arbitrable, the consequent breach in a contract by virtue of insolvency is arbitrable. To summarise, the test focuses on whether the action brought is in the nature of an action in rem or an action in personam. It focuses upon the question of whether a dispute is ‘inherently’ arbitrable due to the rights relied on in a dispute. Importantly (see below) it does not look into whether the individual relief sought in the action is in rem or in personam.

Emerging Trends

However, the Bombay High Court has differed in its interpretation. In 2014 in the Rakesh Kumar Malhotra case, it came up with a decision on the arbitrability of oppression and mismanagement (shareholders’ claims against the company) under the Companies Act of India (1956). Such a dispute revolves around specific actions taken by the company defeating the shareholders’ interest and, thus, applying the Booz-Allen test, this dispute would be arbitrable. In this case, however, the Bombay High Court held that the arbitrator could not grant the relief sought and hence the dispute was not arbitrable. The Court stated “[p]arts of the reliefs may be in rem and … therefore, the nature of the reliefs sought and powers invoked necessarily exclude arbitrability.” As an illustration in that very case, the Court held that the relief sought was under Section 402 of the Companies Act 1956 which allowed the company law board (a specialised tribunal) exclusive power to regulate the affairs of a company. Such a power was not within the ordinary remedies available to a Civil Court and hence the dispute was incapable of settlement by arbitration. Unlike the Supreme Court in Booz Allen Hamilton, the Bombay High Court has sought to determine arbitrability based on the relief sought by the parties, and not by the nature of the legal rights being asserted.

Similarly, on 12 April 2016 the Bombay High Court gave a decision through which it found contractual rights relating to copyright to be arbitrable. In doing so, the High Court relied on the relief sought by the party namely, a remedy for breach of contract. Strictly applying the Booz Allen test, it would seem that the dispute was non-arbitrable, as the basis for the claim was a copyright (i.e. a right in rem).

To summarise, the focus of the High Court is primarily on the relief sought. As per both these decisions, if the relief sought by a party (as opposed to the right relied on by the party) is capable of settlement by arbitration the Court will refer the matter to arbitration.

Prima facie, the test based on the relief sought looks attractive, in that owing to the nature of relief, matters revolving around a contestation of rights in rem would be arbitrable. Arguably thus, a greater number of disputes would be arbitrable in comparison to the Booz Allen test. Even admitting the relative success of the relief test over the Booz Allen test, there are certain pragmatic problems with it.

Problems with the Arbitrability Tests

A major disadvantage of such an approach is that a party may be able to circumvent arbitration by praying for a relief technically outside the purview of the arbitrator. Such an apprehension has been anticipated in the Rakesh Kumar Malhtora case where the court states that the petition for relief must not be “mala fide, oppressive, vexatious and an attempt at ‘dressing up’ to evade an arbitration clause”. Thus any relief which ordinarily a civil court would not be empowered to grant but a specialised body (such as a Tribunal under the Companies Act 1956 of India) could, could frustrate the arbitration.

The burden of proving that the relief sought is vexatious becomes very high. At the outset, making the determination of whether such a relief could be granted in the present dispute, at the stage of enforcement of the arbitration clause (i.e. prior to pleading the merits) is a difficult prospect. In such a case in order to arbitrate a party would have to demonstrate that all the reliefs of the other party were prima facie arbitrable. This runs contrary to the view that if the parties have agreed to arbitrate, then maximum effect should be given to the agreement – a view upheld by the Indian Supreme Court in Enercon v Enercon GmBH. Thus for specific reliefs sought by a party, the burden of proof would vest with the person to show a dispute is arbitrable. Such a burden is untenable.

The Booz Allen test approach, which uses the right relied upon by the parties in the dispute, to classify it as arbitrable or not arbitrable, is untenable for two reasons: First, situations may occur such as in the case of Eros International where the relief is in essence arbitrable rendering the test of ‘right relied on’ inadequate. Second, the Booz-Allen test is too generic in its conception as it does not address issues such as whether lien over cargo, or rights in rem over moveable goods are arbitrable. As such the Supreme Court in the Booz Allen decision qualifies its test by saying that it cannot be a hard and fast rule.

Both tests, namely the one based on the remedy and the one based on the nature of the relief sought, remain ambiguous. Neither test clearly demarcates the boundaries of arbitrability. It leaves the determination open on a case by to case basis rendering arbitration in India more uncertain.

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