Gracious Timothy Dunna and Juhi Gupta

What is the meaning of “existence”? While theologians and philosophers continue to debate this endlessly, this metaphysical question has also concerned Indian arbitration law, specifically Section 11(6A) of the Arbitration & Conciliation Act, 1996 (“Act”). It was thought that the scope of a court’s intervention when appointing an arbitrator was solidified via the 2015 Amendment to the Act; however, Indian courts have actively engaged with the question of “existence” in their recent encounters with Section 11(6A), which provides:

“[The court] … shall, notwithstanding any judgment… confine to the examination of the existence of an arbitration agreement.” (emphasis added)

This provision and its judicial interpretation necessarily intertwine with fundamental arbitration tenets of minimal judicial intervention and kompetenz kompetenz, enshrined in Sections 5 and 16, as well as the doctrine of severability.

Prior to the 2015 Amendment, the position of law was that courts had a wide scope of authority while deciding a petition under Section 11 to appoint an arbitrator, which included considering issues of existence, duration, and validity of a live claim (see SBP and Boghara). Since the court’s decision assumed finality on matters referred to it under Section 11(7), these issues had to be decided either on the basis of affidavits and documents produced by parties or the court had to take such evidence on record. Therefore, it was possible that parties could find themselves in a full-blown trial at the very threshold of the arbitral process.

It was the 246^th Law Commission Report that recommended the introduction of Section 11(6A) on account of the complications created by SBP and Boghara. Notably, the Law Commission recommended the insertion of an explanation to the provision, which provided that the court must refer parties to arbitration once it is prima facie satisfied that an arbitration agreement exists, leaving final determination of validity of the arbitration agreement to the arbitrator. If the court concluded that the arbitration agreement does not exist and that it is null and void, the conclusion will be final and not prima facie, including the determination as to whether the agreement is null and void. Although the explanation arguably holds the key to understanding the import of “existence” in Section 11(6A), inexplicably, it did not find its way into the provision as enacted.

In 2017, the Supreme Court (“SC”), in Duro Felguera (“Duro”), acknowledged that the 2015 Amendment changed the position from the wide scope under Section 11 and that “after the amendment, all that the Courts need to see is whether an arbitration agreement exists – nothing more, nothing less.” Here, an original tender was consciously split into separate contracts, each containing a separate arbitration clause. The SC noted that parties could not go back to the original tender since now there were separate letters of award, separate subject matters, and separate works; thus, there couldn’t be a single tribunal. The SC not only determined the factum of existence but also the scope of the arbitration clause in the original tender vis-à-vis the separate contracts. It held that for a finding on existence, “it needs to be seen if the contract contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.” The existence of the arbitration agreement was held in the negative.

Thereafter, in United India Insurance (“United India”) the SC declined to appoint an arbitrator since a pre-condition to invoking the arbitration clause had not been satisfied, which was an admission of liability by insurer. The question was whether the denial of liability fell in the excepted category on account of a communication from the insurer to the insured. The SC held that it did, “thereby making the arbitration clause ineffective and incapable of being enforced, if not non-existent.” There could have been no arbitration if the insurer did not admit liability, which was the precondition to arbitration.

United India is viewed by many, at least academically, as having overruled Duro. However, in our opinion, it can be distinguished from Duro on facts. In United India, the SC labelled the exposition in Duro as a “general observation,” which was not binding in the specific context of United India. Rather, United India actually seems to have followed the dictum in Duro that “it needs to be seen if the contract contains a clause which provides for arbitration pertaining to the disputes which have arisen…” This dictum was certainly the basis of the Delhi High Court’s decision in Brightstar Telecommunications, where the issue was again the scope of the arbitration agreement: “[W]hether the arbitration mechanism agreed to by the parties is relatable to the disputes arising out of the transactions, which are the subject matter of the parent contract. In other words, the Court has to relate the existence of arbitration agreement to the disputes, which the parties had anticipated that would arise in connection with and/or in relation to the transactions that they had undertaken.” Here, the Court held that the product in question was excluded from the purview of the contract and, therefore, the arbitration agreement. It observed that if the court were to accept the absence of that product as a typographical error, as argued by the Applicant, it would require taking a leap of faith without any document placed on record. Thus, there was no doubt about the product falling outside the scope of the arbitration agreement.

Interestingly, in NCC Ltd., the Delhi High Court expressly added additional layers to the “existence” test under Section 11(6A) stating that the “space for correlating the dispute at hand with the arbitration agreement is very narrow” and “except for an open and shut case… the matter would have to be resolved by an Arbitral Tribunal.” Thus, where parties contested the scope of the arbitration agreement, the matter would have to be left for resolution by the tribunal, which was the scenario in NCC Ltd.

The most recent decision in the saga came from the SC in Garware, where it amplified Duro and United India. The SC heavily relied on its 2011 decision in SMS Tea (“SMS”) to hold that an arbitration clause contained within an unstamped and unregistered agreement was automatically rendered inadmissible and unenforceable (except unregistered agreements, which are admissible and enforceable for limited purposes). As per the Court, SMS could not be construed as having been specifically excluded by the import of “notwithstanding any judgment” in Section 11(6A) because SMS only gave effect to provisions of a mandatory enactment and neither the 246^th Law Commission Report nor the Statement of Object and Reasons of the 2015 Amendment indicated its exclusion. However, the SC concluded that the phrase specifically excluded SBP and Boghara.

Another angle in Garware was that if an unstamped and unregistered agreement was rendered unenforceable by mandatory legislation, it could not be considered a “contract” due to its unenforceability as per Section 2(h) of the Indian Contract Act, 1872, and since Section 7(2) of the Act speaks of an arbitration clause “in a contract,” an arbitration clause in an agreement would not exist if the said agreement was unenforceable. Note here that Garware’s interpretation of “existence” includes the question of whether the arbitration agreement is null and void, a threshold standard that was initially recommended by the Law Commission but did not feature in the 2015 Amendment.

While it is beyond the ambit of this post, an interesting question about Garware is whether the SC correctly applied the doctrine of severability of an arbitration agreement (see Enercon)? In this context, readers are encouraged to read the Bombay High Court’s decision in Gautam Landscapes, which involved the same factual scenario as Garware. The Bombay High Court applied the doctrine in the traditional fashion to hold that the arbitration clause is separate from the main agreement within which it was contained and, therefore, unconcerned with the non-stamping of the main agreement. Garware overruled this decision.

Finally, it important to discuss the decision of the SC in Vidya Drolia (“Vidya”), which was decided prior to Garware. It clarified what existence did not mean: the “validity of an arbitration agreement is… apart from its existence.” As for the court’s jurisdiction to determine subject-matter arbitrability under Section 11(6A), the SC opined that this had to be decided by a larger bench. However, going by the rationale in Garware about the need to have an enforceable agreement, it will not be surprising if the larger bench brings subject-matter arbitrability within the purview of the “existence” enquiry as a threshold standard.

Considering the above decisions, the issue boils down to whether the “existence” inquiry under Section 11(6A) should only encompass a mechanical finding of the factum of an arbitration agreement, or should it even extend to issues of scope, applying a narrow standard, and threshold issues of enforceability? We delve into this in Part II.

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Lakshya Gupta

The Indian Supreme Court recently in M/s Icomm Tele Ltd. vs. Punjab State Water Supply & Sewerage Board,  (“Icomm”), struck down a clause in an arbitration agreement as unconstitutional. The clause mandated a pre-deposit of 10% of the amount claimed in the arbitration proceeding. The Court found this clause to be arbitrary and resulting in a discouragement to arbitrate. While giving the judgment, the Court relied on the importance of alternative dispute mechanisms and the need to de-clog the court machinery. However, the judgment seems to raise more issues than it answers by extending the power of judicial review of courts to private agreements. It also brings to light the dichotomy of the Court to put a higher standard whenever the State is impleaded as a party. While, this may be necessary for social justice, it is interesting when similar principles are not extended to private parties.

The judgment in Icomm

The decision in Icomm was the result of an appeal to a writ petition filed in the Punjab and Haryana (P&H) High Court. The petitioner company had been awarded a tender for various civil/electrical works in the country by the respondent. Clause 25 of the notice inviting tender contained an arbitration clause which required a 10% of the amount claimed as pre-deposit to avoid “frivolous” claims. The clause also stated that in the event of a favourable award, the deposit will be refunded to him in an amount proportionate to the amount awarded, and the balance, if any, will be forfeited and paid to the other party. The petitioner claimed that this was arbitrary and opposed to public policy. However, the High Court refused to go into the merits of this contention and dismissed the writ. It stated that this was in nature of a private contract which was an open agreement and freely consented to by both the parties.

The Supreme Court on appeal overruled this judgement and accepted the contention of the petitioner. It stated that contracts of tender are justiciable since there is an element of public policy involved. What is interesting to note is that the precedents cited by the Court to support this power of judicial review all tested the procedure of awarding. The scope of judicial review is limited to the check of any bias inherent in the performance of administrative functions as understood in Tata Cellular vs. UOI , (“Tata”), which is cited by both the courts. The Supreme Court relied on this case but unlike the High Court, did not divulge into the application of the principles of Tata in later cases.

The High Court discussed this case in detail and distinguished the application of the principle given from the facts of the case at hand. For instance, in Raunaq International vs. IVR Construction Ltd., (“Raunaq”), the presence of any direct or indirect harm to the public (in the form of say undue delay in the construction of public utilities) was recognized as the core concern. The Wednesbury principle of unreasonableness was also considered to test arbitrariness wherever such harm was present. Jagdish Mandal vs. State of Orissa, applied and further explained the principles given in Raunaq. The Court here stated that the scope of judicial review in commercial transactions is very limited and the principles of equity and natural justice stay at arm’s length. But even these cases only questioned the fairness of procedure of grant of tenders and not any arbitration clause in their agreement.

The Supreme Court did accept that the review of private contracts is limited when it denied the petitioner’s contention that the notice was a contract of adhesion. In saying this, it held that imbalance of power cannot be claimed in commercial transactions. But, the specific nature of this clause, especially the part which allowed forfeiture of deposit by the party against whom an award had been passed, compelled the Court to hold clause 25 to be violative of Article 14 of the constitution. The Supreme Court distinguished the present case from S.K. Jain vs. State of Haryana (P&H HC), (“SK Jain”), in which a similar pre-deposit clause was challenged but was  held to be valid.

The clause in SK Jain was valid and distinguishable on two grounds – the amount deposit in terms of percentage chargeable increased with the increase in the quantum involved and there was no forfeiture. The pre-deposit was thus considered logical in light of being the balancing factor to prevent frivolous and inflated claims. In the present case the Court did not find any such nexus with frivolousness. This was because the clause required a 10% pre-deposit of the amount claimed in every instance of arbitration, no matter if the claim was genuine. The Court also opined that the courts, and by implication the arbitrator, can always dismiss frivolous claims with exemplary costs. There was no need for a party to have such pre-deposit clauses in their contract.

According to the Court, “Deterring a party to an arbitration from invoking this alternative dispute resolution process by a pre-deposit of 10% would discourage arbitration, contrary to the object of de-clogging the Court system and would render the arbitral process ineffective and expensive”.

The doctrine of freedom of contract vis-à-vis government contracts

This is not the first time that the Court has made special concessions to impose a higher degree of public interest in arbitration proceedings where the State is involved. In Datar Switchgears Ltd. vs. Tata Finance Ltd. (2000), (“Datar”), the Supreme Court held a clause which allowed one party to single-handedly choose the arbitrator is the event of a dispute to be valid. This was because of the doctrine of freedom of contract which gave complete discretion to the parties to choose their own terms. This has been upheld in several other cases involving two private parties.

The situation is slightly different when the State is involved. In Voestalpine Schienen GmbH vs. DMRC Ltd., the Court questioned a clause which allowed DMRC to choose a pool of arbitrators from which the other party could proceed to appoint one. It opined on the necessity of independent and impartial arbitrators in an arbitration process and discussed the importance of neutrality of arbitrators as set out in Section 12(3) of the Arbitration and Conciliation Act, 1996 (A&C Act). It also discussed the application of the provision in relation to contracts with State entities and how the balance between procedural fairness and the binding nature of contracts has been titled in favour of the former.

But the court did not invalidate the clause, nor did it extend the interpretation of section 12. It merely stated that there was a need to have a healthier and fairer environment for arbitration and send positive signals to the international business community. It categorically stated that the duty to do so is higher when one of the parties is the government. The case also stated that the theory of forfeiture in Datar is still binding precedent but failed to discuss the implications of freedom of contract where an instrumentality of the State is involved.

Conclusion

It is difficult to state that the judgment lays down a clear ratio with respect to the justiciability of arbitration agreements. It is simply restricted to the special facts of the case. Since SK Jain was distinguished and not overruled, thus, pre-deposit clauses are by themselves not banned. What the judgement reflects is the anxiety of the Judiciary to encourage ADR mechanisms in the country and try to keep up in pace with the international pressure to make the country more arbitration-friendly. However, it is not uncommon to see such arbitrary clauses as seen in Icomm, in private contracts. Unlike what the Court might want to believe, there is often a power imbalance which is exploited by the party making the contract. What will be interesting to see is how such an approach could help pierce the domain of arbitrary clauses between two private entities. Perhaps, the Court could test such an agreement via section 23 of the Indian Contract Act which declares contracts against public policy as void. But even this section is attracted when the object of the agreement is against public policy. If it can be used when only one clause in the agreement is questioned only time will tell.

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Vishvesh Vikram and Shubham Jain

The question whether two Indian parties can choose a foreign seat of arbitration has become far too obfuscated with some recent judicial pronouncements. This article seeks to argue that the scheme of Indian Arbitration and Conciliation Act (“Act”) itself does not permit it.

In India, enforcement of arbitral awards is covered in two parts under the Act. Part I of the Act covers arbitrations with their seat in India, including international commercial arbitrations. Part II of the Act covers arbitrations which are seated outside India. Even though the Act mentions the word “place” instead of “seat”, the Supreme Court has clarified in Bharat Aluminium Company v. Kaiser Aluminium Technical Services [(2012) 9 SCC 552] that it refers to seat only, except for Section 20(3), where the word “place” refers to the venue.

International commercial arbitration is defined in terms of involvement of a party who is either a national, a resident, a body corporate, or government, of another country.

The uncertainty caused by various High Court and Supreme Court judgments on this issue has previously been discussed in detail elsewhere. The argument for allowing Indian parties to choose a foreign seat stems from two judgments – Sasan Power Limited v North American Coal Corpn India Pvt Ltd [(2016) 10 SCC 813, “Sasan Power”] and Reliance Industries Limited v Union of India[(2014) 7 SCC 603, “Reliance Industries”]. In Sasan Power, the Madhya Pradesh High Court had allowed two Indian parties to choose a foreign seat. However, the Supreme Court, on appeal, clarified that the question did not expressly arise because of a foreign element in the case (NACCIPL was the subsidiary of an American company). Even in Reliance Industries, the Supreme Court did not venture into the discussion whether two Indian parties could choose a foreign seat – the judgment merely enforced an award where two Indian parties were seated outside India. On the basis of the ruling in Sasan Power, the Delhi High Court also allowed two Indian parties to choose a foreign seat in GMR Energy Limited v. Doosan Power Systems India [2017 SCC OnLine Del 11625].

For arbitrations seated in India, Section 28 requires that Indian law would be applicable as substantive law except for international commercial arbitrations. Further, Section 34 sub-clause (2A) provides that except for international commercial arbitrations, an award under Part I can be set aside if there is a patent illegality. Patent illegality has previously been defined by the Supreme Court in Associate Builders v Delhi Development Authority [(2015) 3 SCC 49] to mean a prima facie violation of Indian law, or a conclusion that no fair-minded person could reach through reasonable application of a legal provision. The proviso to sub-clause (2A) itself makes it clear that patent illegality cannot be claimed merely for erroneous application of a law or by reappreciation of evidence.

However, enforcement of foreign-seated arbitral awards under Section 48 in Part II does not require any such review. Thus, if two Indian parties are permitted to choose a foreign seat for arbitration, it would imply that they will be permitted to escape scrutiny from an allegation of patent illegality as Part II of the Act will be applicable. Compliance with the substantive law in force is not a precondition for enforcement of an award under Section 48, unless the law completely incapacitates a party or renders the arbitration agreement invalid.

Hence, the argument that two Indian parties choosing a foreign seat would still be subject to Indian law as applicable substantive law, and hence not evade it, cannot be accepted, since violation of substantive applicable law is not a ground for setting aside the award. Given that even parties with a foreign seat can opt for a venue for arbitration in India, permitting Indian parties to opt for a foreign seat may mean that two parties, without even venturing outside India’s borders, would be able to opt out of compliance with Indian law.

Such a view would result in Part I becoming a penalty for those Indian parties who fail to opt for a foreign seat, since only arbitral awards where both parties were Indian can be subjected to review of patent illegality under the present scheme of the Act.

In this case, if two Indian parties were to be permitted to opt for Part II, there would be no incentive for them to choose Part I as both the parties will be free from their obligation to comply with Indian law by simply choosing a foreign seat and thus opting for Part II. Such a view of the scheme would make Part I redundant. Furthermore, the distinction in enforceability between Part I and Part II, insofar as patent illegality is concerned, only exists to ensure that two Indian parties cannot derogate from Indian law. Hence, the scheme of the Act is clear in prohibiting Indian parties from choosing a foreign seat.

The Arbitration and Conciliation Act provides for parties undergoing international commercial arbitration to bypass domestic regulatory mechanisms. If such a scheme was to be envisioned as applicable to two Indian parties as well, then it would result in Part I becoming a penalty for Indian parties for choosing to comply with Indian law. Allowing national parties to opt out of the Indian legal system may have many adverse effects. The authors do not wish to argue for an approach which diminishes the scope for arbitration in India in general. The authors believe sufficient protection is provided to an arbitral award even under Section 34 where it cannot be set aside merely for erroneous application of law or a need for reappreciation of evidence. The authors believe that the Arbitration and Conciliation Act is pro-arbitration even though two Indian parties may not opt for a foreign seat under its scheme.

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Shivansh Jolly and Sarthak Malhotra

The decision of the Supreme Court of India (“SC”) in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) (“Ssansyong”), has led to three notable developments: (1) it clarifies the scope of the “public policy” ground for setting aside an award as amended by the Arbitration and Conciliation (Amendment) Act 2015 (“2015 Act”), (2) affirms the  prospective applicability of the 2015 Act and (3) adopts a peculiar approach towards recognition of minority decisions.

Facts

The dispute arose out of a contract between the parties for construction of a four-lane bypass on a National Highway in the State of Madhya Pradesh. The appellant, Ssangyong Engineering, was to be compensated under the contract for inflation in prices of components to be used in construction of the highway. The agreed method of compensation for inflated prices was the Wholesale Price Index (“WPI”) following 1993 – 1994 as the base year. However, National Highways Authority of India (“NHAI”) subsequently issued a circular revising the WPI to follow 2004 – 2005 as the base year for calculating the inflated cost, which was disputed by Ssangyong. The parties referred this dispute to a three member arbitral tribunal. The majority award upheld the revision of WPI as being within the terms of the contract. The minority decision opined otherwise, and held that the revision was de hors the contract. Aggrieved by the majority finding, Ssangyong unsuccessfully challenged the award as being against public policy before Delhi High Court, and consequently sought remedy from the SC in appeal.

Scope of “Public Policy” under Section 34

The public policy ground under Section 34 (2)(b)(ii) (challenge to domestic awards) and Section 48(2)(b) (conditions for enforcement of foreign awards) of the 1996 Act became a cause for concern due to a broad interpretation given to the phrase “fundamental policy of Indian law” by the SC in ONGC Ltd. v. Western Geco International Ltd. (“Western Geco”) – one of the three explanations given to public policy under the aforesaid provisions. This has already been discussed here. The impact of Western Geco, and later Associate Builders v. DDA (“Associate Builders”) following Western Geco, was such that “fundamental policy of Indian law” was left to be exploited for refusing enforcement to foreign awards, and allowing domestic awards to be reviewed on merits. This was changed by the 2015 amendments. The SC in the Ssangyong case held that the broad interpretation given to “fundamental policy” in Western Geco does not find place under Section 34, as amended by the 2015 Act. It relied on the 246^th Report of the Law Commission of India which stated that public policy ground cannot have the same scope under Section 34 and Section 48 [para 18]. The Report further stated that even though grounds of court intervention in a domestic award ought to be wider, the same was recognized by introducing “patent illegality” in Section 34(2A) by the 2015 Act without making the same amendment to Section 48. The SC also relied on the Supplementary to the 246^th Report which was released in February 2015 as a consequence of the SC’s judgments in Western Geco and Associate Builders [para 20]. The Report stated that the amendments to Section 34 ‘were suggested on the assumption that other terms such as “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” would not be widely construed.’

Therefore, the SC held that the wide import given to “fundamental policy of Indian law” in Western Geco and Associate Builders is improper, and not in accordance with the intent and purpose of the amended Sections 34 and 48 of the 1996 Act [para 23]. The SC also clarified that the following interpretation be given to the respective species of public policy under Section 34(2)(b)(ii), and to “patent illegality” under Section 34(2A):

• “fundamental policy of Indian law” – contravention of a law protecting national interest; disregarding orders of superior courts in India; principles of natural justice such as audi alteram partem (in line with Renusagar Power Co. Ltd. v. General Electric Co.) [paras 23 – 25];
• “most basic notions of morality or justice” – the SC adopted the ratio of Associate Builders wherein it was observed that an award would be against justice and morality when it shocks the conscience of the court; morality, however, would be determined on the basis of “prevailing mores of the day” [para 24];
• “patent illegality” – illegality which goes to the root of the matter, but excluding erroneous application of law by an arbitral tribunal or re-appreciation of evidence by an appellate court. However, this ground may be invoked if (a) no reasons are given for an award, (b) the view taken by an arbitrator is an impossible view while construing a contract, (c) an arbitrator decides questions beyond a contract or his terms of reference, and (d) if a perverse finding is arrived at based on no evidence, or overlooking vital evidence, or based on documents taken as evidence without notice of the parties [paras 26 – 30].

The SC also affirmed its findings in BCCI v. Kochi Cricket where it held that the 2015 Act amending Section 34 is entirely prospective in nature and shall apply to applications filed on or after 23.10.2015 (date of commencement of the 2015 Act), even if arbitration proceedings were commenced prior to the said date [paras 10 – 12]. This would allow parties to such arbitrations to also benefit from the findings of the SC in Ssangyong, eliminating exploitative use of “public policy” and “patent illegality” to unduly interfere with domestic and foreign awards.

Minority Decisions

The SC in Ssangyong set aside the judgments of the Single Judge and Division Bench of the Delhi High Court. It also exercised its plenary power under Article 142 of the Constitution of India to declare the minority decision as the award between the parties. Article 142 gives the SC power to make such orders which may be necessary for doing “complete justice” in a case. This power has been deliberately left undefined and elastic enough to grant suitable reliefs in a given situation [Delhi Development Authority v. Skipper Construction Company]. However, the prevailing view is that the SC cannot by-pass statutory considerations while exercising its power under Article 142 [Supreme Court Bar Association v. Union of India].

The SC’s approach in Ssangyong raises questions about the overall efficacy of the remedy available to the parties under Section 34 of the 1996 Act.

It is the prevailing position that the Act does not allow Indian courts to modify an award while dealing with a Section 34 application [Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express].¹⁾An appeal against the judgment is currently pending in the Supreme Court. The SC appeared to have endorsed this scheme of the Act when it observed that if the majority award was set aside, the parties would have to re-agitate their claims afresh before a new arbitral tribunal [para 49]. The Court further stated that the delay in resolution of disputes between the parties caused due to the foregoing would be contrary to the objective of 1996 Act, i.e. to promote speedy resolution of disputes. However, the Court overcame the limits prescribed under Section 34 by exercising its plenary power under Article 142 and declared the minority decision as the enforceable award between the parties.

The precedential value of this judgment is limited in light of the previous SC decision of State of Punjab v. Rafiq Masih where it observed that orders under Article 142 do not constitute a binding legal precedent. Nevertheless, it raises an important issue of the power of the Indian courts to effectively deal with an application for setting aside an award. There have been instances in the past where courts have set aside majority awards and upheld the minority decision as the award between the parties. [Modi Entertainment v. Prasar Bharati; ONGC v. Interocean Shipping]. The SC’s approach of invoking its plenary power under Article 142 to declare the minority decision as the award between the parties suggests that the approach adopted by the courts in the past to uphold minority decisions was not proper. It further appears to be against the principles enunciated by it in previous cases that Article 142 cannot lose sight of the provisions of a statute.

As such, the Ssangyong judgment appears to indicate that if a majority award is set aside by a court under Section 34 of the 1996 Act, the minority decision cannot be upheld and the parties shall have to commence arbitral proceedings afresh. On the other hand, the approach of the SC in Ssangyong may lead the parties to agitate the dispute up to the SC in the hope to revive minority decisions through Article 142 of the Constitution of India. It is therefore necessary to bring in suitable clarifications / amendments to the Act to address this uncertainty.

The views of the authors expressed above are purely independent, and do not necessarily reflect the views of their organisations

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Vishakha Choudhary

Introduction

The juxtaposition of laws that seemingly operate in different domains has posed a continual challenge to arbitration – conventionally, in the form of concerns over arbitrability of disputes. Here, arbitrability connotes the notion that a dispute, by its nature, is capable of being adjudicated beyond public fora, through a private tribunal chosen by parties. This ‘objective’ arbitrability differs from ‘subjective’ arbitrability, which is the scope of arbitrable disputes as defined in an arbitration agreement. This post deals with objective arbitrability. In the context of intellectual property rights (‘IPR’) disputes, concerns of objective arbitrability stem from the impact arbitral awards may have on non-consenting parties. Owing to insufficient legislative engagement with this issue, judicial position on arbitrability of IPR disputes in India remains unsettled.

The notion of objective arbitrability in India

The significance of objective arbitrability is set forth in Section 34(2)(b)(i) of the Indian Arbitration and Conciliation Act, 1996, identical to Article 34(2)(b)(i) of the UNCITRAL Model Law. It stipulates that awards contemplating a non-arbitrable subject matter may be set aside.

The Supreme Court first shed light on the implications of Section 34(2)(b) in Booz Allen and Hamilton v. SBI Finance (‘Booz Allen’). The Court emphasised that the scope of arbitrable disputes must be limited to those concerning ‘rights in personam’ or personal rights enforceable against certain individuals. A contrario, ‘rights in rem’ exercisable against the world at large were excluded from the scope of arbitrable disputes. Based on this rationale, the Court identified an illustrative list of non-arbitrable disputes: criminal offences, disputes concerning family laws, insolvency and winding up, testamentary matters and tenancy disputes. Pertinently, the Court in Booz Allen cautioned against a strict application of the rem – personam distinction by famously clarifying:

This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.

Further, it also excluded from the scope of arbitration in India, disputes arising from statutes that vest exclusive jurisdiction in specified courts.

The curious case of intellectual property rights

A case-by-case approach by the Bombay High Court

The Bombay High Court in Eros International v. Telemax Links India Pvt. Ltd. (‘Telemax’) directly addressed arbitrability of IPR (Copyright) disputes. The legal provision at issue was Section 62(1) of the Indian Copyright Act, 1957, which states:

Every suit or other civil proceeding arising under this Chapter in respect of the infringement of copyright in any work or the infringement of any other right conferred by this Act shall be instituted in the district court having jurisdiction.

According to the Court, this provision only precludes infringement claims from being brought before a court hierarchically lower than the competent district court. Section 62(1) was not, however, intended to oust the jurisdiction of an arbitration tribunal. Based on this preliminary finding, the Court proceeded to analyse the nature of infringement claims. It noted that while an infringement action arising from a contractual relationship may succeed against a certain defendant, this decision would not necessitate the success of such action against a different defendant. Thus, while the overlying copyright is a ‘right in rem’ enforceable against the world at large, the specific contractual dispute over its infringement is a ‘right in personam’ action against a particular individual. Accordingly, the dispute was held to be arbitrable. Without explicitly referencing the Booz Allen obiter, the Court followed the Supreme Court’s reasoning – that is, it refrained from summarily dismissing questions of arbitrability without assessing the nature of rights at issue. The Court’s finding has been positively received in select subsequent decisions.  (See e.g., Deepak Thorat S/o Dinkar Thorat v. Vidli Restaurant Ltd., 2017 SCC OnLine Bom 7704.) Its decision also aligns with the literal approach to the interpretation of statutes followed by Indian courts. (See e.g., Swedish Match AB & Anr. v. Securities and Exchange Board of India & Anr., (2004) 11 SCC 641.)

The Bombay High Court continued to heed the Supreme Court’s warning in subsequent decisions such as Indian Performing Rights Society v. Entertainment Networks, 2016 SCC OnLine Bom 5893 (‘IPRS’). Unlike the Telemax case, the Court in IPRS was tasked with deciding whether averments of the Claimant’s right to claim royalties in relation to broadcasting of a sound recording were arbitrable. The arbitrator decided against the need to obtain a license from the Claimant, differentiating between rights held in original music works and in sound recordings. However, the Court on review found that by virtue of this decision:

[IPRS’s] …rights as a licensor were destructed in the impugned award not only against the claimant, but also against the world at large.

By distinguishing the case at hand from Telemax based on the implications of the relief granted for third parties, the Court clarified that arbitrating the case would have implications for IPRS’s rights to collect royalties on their works from third parties as well. Moreover, it would also affect several other copyright owners in the underlying musical works who were not parties to the arbitration in question. Therefore, the award was rightly set aside.

Disregarding the Booz Allen caveat

Unfortunately, similar analyses were absent from other decisions on arbitrability of IPR disputes. In Impact Metals v. MSR India (‘Impact Metals’), the Hyderabad High Court failed to consider the nature of the remedies or rights at issue to assess such arbitrability. Instead, it summarily based its decision on the illustrative list in Booz Allen, which did not expressly exclude IPR from arbitable subject-matters. This decision sets a dangerous precedent for arbitration of ‘rights in rem’ by failing to account for the implications this might have on rights of third parties. Further, the confidentiality of arbitral awards may prejudice interested third parties against whom such erga omnes legal decisions are rendered.

The Ayyaswamy v. A Paramsivam (‘Ayyaswamy’) decision paved way for further confusion. This Supreme Court decision declared patents, trademarks, and copyright disputes to be non-arbitrable in an obiter. The case is often viewed in academic discourse as a complete limitation on the arbitration of IPR disputes in India. Notably, this obiter is a ‘general’ remark by the Court, not rendered in relation to any particular set of facts. To rely on this generic statement in ignorance of the clarification made in the Booz Allen decision would be imprudent.

The Lifestyle Equities CV v. QD Seatoman Designs Pvt. Ltd. decision provides some clarification. The Court reasoned that the list of ‘non-arbitrable disputes’ in the Ayyaswamy judgment merely reiterates scholarly opinion and does not constitute the Apex Court’s ratio. Further, it went on to apply the Booz Allen caveat to reiterate that disputes relating to patent use and infringement (here, a right of ‘better usage’ vis-à-vis the other party) concern ‘rights in personam’, and therefore, are arbitrable.

Conclusion

IPR form a crucial constituent of commercial transactions and are comprised in the bundle of rights therein. To ipso facto declare them non-arbitrable would upset the purpose of the Arbitration Act, impair the efficacy of commercial arbitration and disregard party autonomy. Thus, the inflexible stance adopted in the Impact Metals and Ayyaswamy decisions is misconceived.

Admittedly, it is important to keep ‘rights in rem’ beyond the reach of arbitration. In light of the progressive reforms of the 1996 Act in recent years, this could be achieved through legislative clarifications. For example, both the United States of America and Switzerland permit the arbitration of patent infringement claims, provided that the consequent award is registered with the relevant patent authority or board. (See 35 United States Code (U.S.C) § 294(d); Article 193.2, Swiss Federal Act on Private International Law, 1989.)  This simultaneously safeguards the complementary interests of effective arbitration of IPR disputes and public interest in ‘rights in rem’. A similar legislative provision could be emulated in India. Further, the ‘arbitrable’ aspects of intellectual property could be clarified via legislation, as is the case in Hong Kong. (See Part 11A, Hong Kong Arbitration (Amendment) Ordinance, 2017 [Ord. No. 5 of 2017].)  Clarifications concerning the scope of counterclaims permissible in IPR arbitrations (such as express exclusion of counterclaims challenging the validity or registration of IPR) are also crucial. Swift action here is essential to set ghosts of the past to rest.

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Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Ritika Bansal

With the rise of e-contracts and smart contracts in commercial transactions globally, it becomes important to analyse developments in ADR such as blockchain arbitration. The concept of blockchain arbitration is very recent and it seeks to use the advantages of the technology in dispute resolution (how blockchain arbitration works can be read here). However, one important facet of understanding the feasibility of using blockchain technology in arbitrations in India is understanding whether awards rendered through such a process can be enforceable in the first place. While the 2015 Amendments to the Arbitration and Conciliation Act introduced some changes to bring the Act on par with contemporary technology, there is still lack of clarity in determining whether the peculiar form of blockchain arbitration can be facilitated through the Indian Act.

Validity of the Arbitration Agreement in Domestic Awards

One problem identified with the enforceability of blockchain arbitration awards is the lack of enforceability of the agreement itself under the New York Convention which requires such agreements to be in writing or through exchange of telegrams/telefaxes. Similarly, Section 7 of the Arbitration and Conciliation Award also requires that a valid arbitration agreement should be in “writing”. However, unlike Article II of the New York Convention, Section 7 further clarifies that an agreement would be considered as having been in writing if it has been communicated through “electronic means”. The allowance for “electronic means” was introduced through Section 3 of the Arbitration and Conciliation (Amendment) Act, 2015. Electronic means has not been defined under the Act or the Amendment Act despite the recommendation of the 246^th Law Commission Report.

However, Section 10A of the Information Technology Act, 2000 gives validity to contracts which are formed through electronic means. Electronic means is defined in the section as means used for creation of an “electronic record”. Electronic Record is further defined under Section 2(1)(t) of the Act as “data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche”. Smart contracts are made up of a series of electronic records which are transmitted and stored by the parties, thereby covering the same within the definition of an “electronic means”. Therefore it can be concluded that blockchain arbitration agreements would be valid under the amended Section 7 of the Arbitration and Conciliation Act. The question of whether the Amendment Act would apply or not to particular proceedings would depend on the date of the commencement of such proceedings.

Difficulty in Determining Territory of the Awarding Country

India has made the reciprocity reservation under Article I of the New York Convention which means that foreign awards made in only certain Contracting States of the Convention (gazetted by the Central Government) can be enforced in India. As of now, India has gazetted less than 1/3^rd of all of the Contracting States to the Convention.

An exception was carved out in the case of Transocean Shipping Agency v. Black Sea Shipping¹⁾(1998) 2 SCC 281. where an award of Ukraine was enforced in India despite “Ukraine” not being gazetted officially by the Central Government. However, the reason for the same was that the USSR (which Ukraine was a part of originally) was gazetted by India.

In blockchain arbitration, arbitrators are selected by the dispute resolution service provider once a request for arbitration is made from a smart contract. These arbitrators are usually individuals who have applied to the service providers with their expertise. The arbitral award is then given on the blockchain ledger with the copies of such a decision being made available to the parties on their respective computers (in different countries). The arbitral award in itself, however, cannot be said to have been given in any one country. This then results in the question of whether such an award can be enforced in India in light of the reciprocity clause. A strict interpretation of the Arbitration and Conciliation Act would mean that such an award cannot be enforced in India since the physical space of the internet has not been gazetted by the Central Government. Such an interpretation would, however, be antithetical to the arbitration-friendly approach being increasingly adopted by India. Conversely, allowing all awards given through blockchain arbitration could result in the intention misuse of such proceedings to prevent the application of the reciprocity reservation of India.

This question is better answered in cases where the service provider approaches an established arbitral institution to render an award. In such a case, the country, where the arbitral institution is established in, can be considered to decide whether the same would pass the test of reciprocity and enforceability in India.

Evidence of Arbitral Award

The provisions for enforceability of a domestic and a foreign arbitral award have been laid down under Sections 36 and 48 of the Arbitration and Conciliation Act respectively. An application made for enforceability of either of such awards should include an “original copy” of the award. This becomes difficult in blockchain arbitration since there is no one “original copy” of the award in these arbitrations and the award is put on the network accessible to everyone.

It can, however, be argued that the Act also allows for “duly certified” copies of the original award to be presented to the Court. The mechanism of blockchain theoretically makes it impossible for anyone to merely alter their copy of the arbitration award, which means that a copy of the award taken from the blockchain would be duly certified in itself. To make it more secure, Courts can be allowed access to the blockchain to procure a direct copy of the award.

However, unlike a foreign award²⁾EPC Limited v. Rioglass Solar SA, (2018) SCC Online 1471., a domestic award is further required to be stamped in order to be enforced under Section 36 of the Arbitration Act. Section 3 of the Stamp Act read with Schedule I, Article 12 of the Act suggests an arbitral award made in “writing” should be stamped. The question of a “written” arbitral award is similar to the question of a written arbitration agreement discussed above. The Stamp Act currently does not include “electronic means” in the definition of a written arbitral award. Pending a legislative amendment to this effect, the Stamp Act could be read to allow for “electronic” arbitral awards in keeping with the trend demonstrated in the Arbitration and Conciliation Act and the Information Technology Act towards facilitating technological advancements in commercial transactions.

Further, section 17 of the Registration Act requires domestic awards to be registered when it affects rights related to an immovable property. Only such an award which is then duly stamped and/or registered can be presented to the Court for enforcement³⁾M. Anasuya Devi v. M. Manik Reddy, (2003) 8 SCC 565. This means that giving direct access of the blockchain to the enforcing Court would not be sufficient since such an award also needs to be duly stamped and/or registered first. Direct access, in domestic awards, can be given for the purposes of proving the original award while stamping and registering the document. The copy of the award which is then duly stamped and/or registered can be considered as “original” for the purpose of making an application under Section 36 of the Arbitration and Conciliation Act. For foreign awards, direct access can simply be given to the Court in which an application for enforcement of the foreign award is made.

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Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Subhiksh Vasudev

The Arbitration & Conciliation (Amendment) Act, 2019 (“the 2019 Amendment”), which amends the Indian Arbitration & Conciliation Act, 1996 (“the Act”), came into force with effect from 9 August 2019. The Law Minister of India was recently quoted as saying in one of the press releases (after the Bill in support of the 2019 Amendment was introduced in the lower House of Parliament), that the government intended to make India a hub of domestic and international arbitration by bringing in changes in law for faster resolution of commercial disputes.

Now that the 2019 Amendment is here, this post critically analyzes some of its provisions to understand if it is indeed a step in the right direction for India to become a hub for international arbitration. The analysis and comments in this post are solely and exclusively from the standpoint of international arbitration.

Critical analysis of some key provisions of the 2019 Amendment

• The designation and grading of arbitral institutions

The 2019 Amendment introduces Section 11(3A) to the Act whereby the Supreme Court of India and the High Courts shall have the power to designate arbitral institutions, which have been graded by the Arbitration Council of India (“ACI”) under Section 43-I (also introduced by the 2019 Amendment). The underlying idea is that instead of the court stepping in to appoint arbitrator(s) in cases where parties cannot reach an agreement, the courts will designate graded arbitral institutions to perform that task (per Sections 11(4)–(6) of the Act, as amended by the 2019 Amendment). The designation aspect has already been discussed and criticized on this blog. However, it is the grading aspect which I intend to deal with some detail.

The 2019 Amendment introduces Part 1A to the Act, which is titled as ‘Arbitration Council of India’ (Sections 43A to 43M) and which empowers the Central Government to establish the ACI by an official gazette notification (Section 43B). The ACI shall be composed of (i) a retired Supreme Court or High Court judge, appointed by the Central Government in consultation with the Chief Justice of India, as its Chairperson, (ii) an eminent arbitration practitioner nominated as the Central Government Member, (iii) an eminent academician having research and teaching experience in the field of arbitration, appointed by the Central Government in consultation with the Chairperson, as the Chairperson-Member, (iv) Secretary to the Central Government in the Department of Legal Affairs, Ministry of Law and Justice and (v) Secretary to the Central Government in the Department of Expenditure, Ministry of Finance – both as ex officio members, (vi) one representative of a recognised body of commerce and industry, chosen on rotational basis by the Central Government, as a part-time member, and (vii) Chief Executive Officer-Member-Secretary, ex officio (Section 43C(1)(a)–(f)). The ACI is inter alia entrusted with grading of arbitral institutions on the basis of criteria relating to infrastructure, quality and calibre of arbitrators, performance and compliance of time limits for disposal of domestic or international commercial arbitrations (Section 43I).

The main drawback of this scheme is that it limits party autonomy in international arbitration through governmental and court interference. The ACI is a government body which shall regulate the institutionalization of arbitration in India and frame the policy for grading of arbitral institutions. The fact remains that the court’s choice in designating an arbitral institution will be limited by the options presented to it by the ACI. Consequently, the choice of a foreign party appearing before the Supreme Court and seeking appointment of an arbitrator will be limited to institutions which have ACI accreditation and to such arbitrators who may be on the panel of such arbitral institutions. The court will be equally handicapped in designating an ungraded institution – which has a global reputation for its facilities and quality of services and which wants to simply establish its local office in India, without going through the administrative hurdles of being graded by the ACI.

The 2019 Amendment, albeit aimed at institutionalizing the arbitration scene in India, leaves the discretion in the hands of courts and executive to decide who gets to be a part of this reform.  Another problem associated with this governmental control over the institutionalization process is the (possible) nepotism, red-tapism, lack of objectivity and lack of transparency in the grading process. In my experience, a foreign party often prefers to stay away from an arbitration regime with significant degree of court or governmental interference. However, it is nonetheless a welcome move by the government to acknowledge that institutional arbitration is the only way ahead to attract foreign parties to include India as the seat in their arbitration agreements.

• Timely conduct of proceedings

As per the newly introduced Section 23(4), the statement of claim and defence shall be completed within a period of six months from the date of appointment of the arbitrator(s) and as per Proviso to the amended Section 29(1), the award in the matter of international commercial arbitration may be made as expeditiously as possible with an endeavour to deliver it within 12 months from the date of completion of pleadings under Section 23(4).

Whilst it is a welcome step – certainly with the right intent – it may lead to conflicts with the rules of an arbitral institution as it overlooks the procedural aspects inherent to a complex international arbitration. In international arbitration, the arbitrators routinely hold a case management hearing, and after consultation with the parties, issue an order on the procedural timetable for completion of pleadings, conduct of hearings etc. (e.g., see Rule 24 of the 2017 ICC Arbitration Rules). However, if Section 23(4) restricts a tribunal from being in control of its proceedings, then it may be impossible to effectively conduct complex multi-party arbitrations involving massive documents, where it may be practically impossible to complete pleadings in six months. Similarly, the autonomy of parties to decide on a more flexible procedural schedule will be severely limited. Most importantly, the parties will always be wary of the fate of an award where the time requirements of Section 23(4) are not strictly abided.

• Confidentiality

As per the newly introduced Section 42A, the arbitrator, the arbitral institution and the parties to the arbitration agreement shall maintain confidentiality of all arbitral proceedings except award, where its disclosure is necessary for implementation and enforcement of award.

The ICC recently released updates to its Note to Parties and Arbitral Tribunals on the Conduct of Arbitration under the ICC Rules of Arbitration, effective 1 January 2019 in which it stated that all awards made as from 1 January 2019 may be published, no less than two years after their notification, based on an opt-out procedure (paras. 40-46). Per the opt-out procedure, any party may at any time object to publication of an award, or request that the award be sanitized or redacted. In such a case, the award will either not be published or be sanitized or redacted in accordance with the parties’ agreement.

This shows at the outset that India’s practice in publishing the award is in line with globally established arbitral institutions. However, by not incorporating an opt-out scheme in Section 42A, the legislature missed the opportunity to bring clarity to the fate of an award in terms of its publication. Who will decide that the disclosure of an award is necessary for its implementation? Will it mean full disclosure or will parties be allowed to agree on a redacted award? These uncertainties, in my view, only add to the suspense.

• Qualification of arbitrators

The ACI is also entrusted with the function of reviewing the grading of arbitrators (Section 43D(2)(c)). The qualifications, experience and norms for accreditation of arbitrators shall be such as specified in the Eighth Schedule, as introduced by the 2019 Amendment (Section 43J). The Eighth Schedule stipulates nine categories of persons (such as an Indian advocate or cost accountant or company secretary with certain level of experience or a government officer in certain cases inter alia) and only those are qualified to be an arbitrator.

Thus, a foreign scholar or foreign-registered lawyer or a retired foreign officer is outrightly disqualified to be an arbitrator under the 2019 Amendment. For obvious reasons, foreign parties will be discouraged to opt for Indian institutional arbitration where the choice of candidates as their potential arbitrators is limited by nationality, likelihood of lack of experience and specialization – both academic and professional – in handling international arbitrations.

Conclusion

In my previous blog post, I mentioned how India is often criticised as a “non-friendly” arbitration jurisdiction by the international community. The 2019 Amendment attempts to take this criticism head-on, however in my view, it makes more misses than hits in the process. Although a step in the right direction yet, India is far away from becoming a global arbitration hub.

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Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Avani Agarwal and Aditi Ramakrishnan

Class action suits were introduced in India by the 2013 Companies Act, with the hope that costs of litigation might reduce in comparison to individual cases. However, not a single class action case has been filed in the past five years. This suggests that litigation is currently not serving the interests of shareholders. Given arbitration’s various advantages as a dispute resolution mechanism, mandatory shareholder arbitration may be a good alternative for Indian investors.

While the Indian state has been actively encouraging arbitration over the past few years, domestic securities law has been growing stricter as a result of multiple large scale scandals. These conflicting trends raise questions about the legality of mandatory arbitration clauses in shareholder agreements. This post explores both the law of securities and of arbitration on the matter in order to ascertain the viability of mandatory shareholder arbitration in India.

India’s Arbitration Law – The Arbitration and Conciliation Act 1996, as amended in 2019, lays out India’s arbitration law, inspired largely by the UNCITRAL Model Law. Section 7 simply provides that an arbitration agreement is any agreement by “the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not”. The conditions provided for such an agreement, such that it has to be in writing, are unlikely to impose any restrictions. Section 8 provides that a judicial authority before which a dispute, that is the subject of an arbitration agreement, is brought, must refer the parties to an arbitration. Disputes related to corporate law in India are dealt with by a parallel structure of tribunals, established in 2013 by the Companies Act. While these National Company Law Tribunals are quasi-judicial authorities, they are entitled to refer parties to arbitration under this section (see – Richa Kar v. Actoserba Active Wholesale Pvt. Ltd).

When the word ‘mandatory’ is used, the first concern that may arise is that such a set up might violate the necessity of consent for arbitration. Indeed, the Indian Supreme Court has held that no reference can be made to arbitration unless all the parties explicitly consent (see – Afcons Infrastructure ltd v. Cherian Varkey Construction Company Pvt.). However, this requirement is not necessarily undermined by mandatory shareholder arbitration. Whenever the proposal is brought up, the existing shareholders will have to vote on it. Only those who accept the idea of arbitrating future disputes will vote positively. Shareholders who do not agree may let go of their shares or agree to be bound by the agreement nonetheless. Since the provision introduced by the agreement will be a part of the company’s public documents, all prospective shareholders are legally required to be aware of it. Based on this knowledge, they can make an informed decision about buying the company’s shares and will only agree if they consent to having any conflicts arbitrated. Consequently, Indian arbitration law does not serve as a hinderance to mandatory arbitration for shareholders.

With respect to Indian Corporate Law – There are two conceivable laws that may potentially come into conflict with and impact the viability of mandatory shareholder arbitration in India: the Companies Act 2013, and Securities and Exchange Board of India Act 1992 (“SEBI Act”).

Companies Act – An agreement for mandatory shareholder arbitration can be entered into either in the Articles of Association of a company, or a separate private agreement between the shareholders. Section 6 of the Companies Act states that the provisions of the Act would override any provisions of the articles of association that contradict it. The Companies Act also provides for a National Company Law Tribunal (“NCLT”) for the redressal of any grievances of shareholders. The question then is whether an arbitration proceeding can take place or whether the jurisdiction of the NCLT would override such a proceeding.

The Supreme Court of India has defined a standard rule as to whether or not a matter can be referred to an arbitral tribunal, in the Booz-Allen case. The test is essentially to see whether or not the actions relate to actions in rem or in personam. Actions in rem are to be adjudicated upon by courts, and those in personam may be referred to arbitration. The Bombay High Court has held that arbitration cannot be referred to even when the remedy asked for is in rem. However, the decision has been criticised and the Booz-Allen test continues to be the binding law on the matter. Therefore, it stands to reason that only cases such as winding up or certain cases of oppression and mismanagement cannot be referred to arbitration. In consonance with the broadening acceptability of arbitration, this position has been altered by some courts who say that even in cases of oppression and mismanagement, if the tribunal or court finds the petition to be mala fide, vexatious, or submitted with the intent of avoiding the arbitration clause, the dispute will be duly referred to arbitration.

Additionally, rights in personam that are derived from rights in rem are arbitrable. It must be noted at this point however, that under section 8 of the Arbitration Act, a cause of action cannot be split up to be adjudicated upon.

SEBI Act – A bare reading of the SEBI Act makes it clear that the SEBI performs public functions – it deals with matters of securities that have a larger impact on public and economic development. It ensures investor confidence, which is beneficial for economic progress. The SEBI Act creates and governs special rights. The Bombay High Court has held that if there is a legislation governing special rights and obligations, and the adjudication is reserved exclusively for a specific authority (SEBI in this case), it is contrary to public policy to allow for arbitration.

Given this, there seems to be a bar on arbitration in securities disputes. However, the SEBI itself has promulgated certain norms promoting arbitration in disputes of this nature. It has published a circular laying down procedures and guidelines for arbitration in redressing investor grievance. Further, SEBI bye-laws also provide for arbitration to resolve disputes arising out of trading between members. The bye-laws of the National Stock Exchange also contain similar provisions. It is to be noted that the disputes made explicitly arbitrable by the securities laws and rules in India are rights in personam. It seems clear, therefore, that both the company law in India and the securities law in India arrive at the same conclusion – that so long as the rights affected are in personem, they shall be referred to arbitration whenever an agreement requires this.

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Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Moazzam Khan and Shweta Sahu

With cross-border dispute resolution on the rise, currency variations and exchange rate fluctuations remain a concern in enforcement of foreign awards and decrees. It is not unusual for courts and arbitral tribunals to render judgments and awards in a foreign currency,¹⁾For example, Section 48(4) of the UK Arbitration Act 1996 provides that: “The tribunal may order the payment of a sum of money, in any currency”. which is required to be enforced in India in Indian rupees (“INR”). Consequent to fluctuations in currency rates the actual amount payable to the award-holder in INR, remains speculative, even after the arbitral award has been rendered. The Indian award debtor would prefer a conversion date on which the rupee is stronger and the inverse would be true for the foreign currency award holder. Thus, myriad dates come up for consideration before the executing court for determining the most suitable date for currency conversion rate.

What aren’t the “relevant dates” for conversion

In the landmark case of Forasol v. Oil and Natural Gas Commission,1984 Supp SCC 263, the Supreme Court examined and rejected the prospect of considering the following dates as the “relevant date” for conversion:

Date when the claim amount became due and payable:

This date does not effectively reinstate the claimant in the same position he would have been if the respondent had discharged his obligations when he should have, i.e. when the claim became due and payable. Owing to currency fluctuations, there would be a difference between the exchange rates as on date on which the amount is paid and the amount became payable. Thus, the parties are exposed to unforeseeable changes in the international monetary market.

Date of commencement of action or proceedings:

This date is marred with issues such as delay tactics by the opposite parties or prolonged litigations in court. At times, extended proceedings such reviews, appeals, revisions etc. render dispute resolution a perennial affair. This leaves parties in an uncertain and precarious position as to the actual recovery of the amounts awarded in favour of the claimant.

Date of award

In case of foreign arbitral awards, which are deemed decrees,²⁾Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (2001) 6 SCC 356; Vitol S.A v. Bhatia International Limited 2014 SCC OnLine Bom 1058; Narayan Trading Co. v. Abcom Trading Pvt. Ltd., 2012 SCC OnLine MP 8645. the date of the award may be considered as the “relevant date” for conversion of currency. Specifically speaking, where the court is satisfied that the foreign award is enforceable under the Arbitration and Conciliation Act 1996 (“Arbitration Act”), the award shall be deemed to be a decree of that court.³⁾Arbitration and Conciliation Act 1996, s 49. Similarly, domestic awards are executable as a decree of the court where the time for making an application to set aside the arbitral award has expired, or such application having been made, it has been refused.⁴⁾Arbitration and Conciliation Act 1996, s 36.

However, the choice of date of decree as the “relevant date” is ridden with issues such as challenges or objections to the award itself or appeals against subsequent orders from court.

Date of payment:

The date of payment of the decretal amount is also flecked with additional concerns. The “date of payment” may not be a practical option as the award holder would have to specify the rupee equivalent of its claim at the time of filing the execution petition since, execution must issue for a specific sum expressed in Indian currency “due upon the decree”.⁵⁾Code of Civil Procedure 1908, Order XXI Rule 11(2); Forasol v. Oil and Natural Gas Commission 1984 Supp SCC 263. This serves the purpose of satisfying the court that the claim falls within the pecuniary limit of the court’s jurisdiction.

Conclusion: What is the “relevant date” for conversion

An ideal scenario would be where the award⁶⁾Forasol v. Oil and Natural Gas Commission 1984 Supp SCC 263. or the underlying contract⁷⁾Meenakshi Saxena & Anr. v. ECGC Ltd. (Formerly known as Export Credit Guarantee Corporation of India Ltd.) and Anr. Civil Appeal No.5681/2018 (Arising out of SLP (C) No. 6286 of 2017). explicitly states the date to be considered for the purposes of the forex rate. In these scenarios, the executing court would be bound to follow such a date.

In absence of such ideal situations, the courts have determined the following dates as the relevant dates for conversion:

Relevant date of conversion for enforcement of foreign awards

Under the pre-Arbitration Act regime

For enforcing awards under the erstwhile Foreign Awards (Recognition and Enforcement) Act, 1961, on being satisfied that the foreign award is enforceable, the award was required to be filed for pronouncement of a judgement according to the award, which would be followed by a decree. The date of such decree would be the relevant date for considering the forex rate.

Under the Arbitration Act

Under the extant Arbitration Act, the effective date for considering the exchange rate is the date of rejection of objections to the enforcement of the foreign award, or when all the remedies (including appeals, revision petitions, etc.) against enforcement of the foreign award were exhausted.⁸⁾Fuerst Day Lawson Limited v. Jindal Exports Limited; Progetto Grano S.P.A. v. Shri Lal Mahal Limited; DLF Universal Limited & Ors. v. Koncar Generators and Motors Limited (2018) 190 PLR 398.

Relevant date of conversion for enforcement of domestic awards

Under the pre-Arbitration Act regime

For enforcing awards under the erstwhile Arbitration and Conciliation Act 1940, a suit was required to be filed for obtaining a decree for enforcement of the award. The date of the resultant decree passed in terms of the award, would govern the rate of exchange adopted for conversion.⁹⁾ Forasol v. Oil and Natural Gas Commission 1984 Supp SCC 263. Thus, the date of conversion would be the date when the award attained finality.¹⁰⁾Renusagar v General Electric AIR 1994 SC 860.

Under the Arbitration Act

Awards rendered in India would be enforced after refusal of applications for challenging the award¹¹⁾Arbitration and Conciliation Act 1996, s 34. or upon expiry of the time for making such applications to set aside the arbitral award.¹²⁾Arbitration and Conciliation Act 1996, s 36.

In a recent judgment, the Delhi High Court steered through the following dates:¹³⁾Trammo AG v. MMTC Limited (Ex. P. 164/2015 and Ex. Appl. (OS) 1229/2015, decided on 18 February 2019).

1. Date of award, i.e., date when the award was quantified in terms of Indian currency for payment of stamp duty
2. Date of disposal of the petition challenging the domestic award by the Single Judge of the High Court
3. Date of disposal of the appeal against the order of the Single Judge by the Division Bench of the of the High Court
4. Date of disposal of the special leave petition filed against the order of the Division Bench, by the Supreme Court of India
5. Date of disposal of the review petition filed against the order of the Supreme Court.

In doing so and applying the principles of “date of finality” of award, the Delhi High Court observed that an award becomes an executable decree immediately upon the dismissal of the challenge to the award. Thus, the date of dismissal of the challenge application would be the relevant date for consideration of the forex rate.

However, in the event of the subsequent appeals or review petitions, the relevant date would be one when the challenge to the award was finally dismissed, i.e. the date on which the award attained finality. This follows from the “doctrine of merger”, which is applicable where an appeal or revision against an order passed by a subordinate forum is modified, reversed or affirmed by a superior forum – on appeal/revision. Under the “doctrine of merger”, the decision by a subordinate forum merges in the decision by the superior forum and it is the latter which subsists, remains operative and is capable of enforcement under law.¹⁴⁾Kunhayammed v. State of Kerala, (2000) 6 SCC 359.

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Arbitration in Belgium: A Practitioner’s Guide by Edited by Niuscha Bassiri, Maarten Draye € 185

Juhi Gupta

Introduction

In a previous post, I had surmised whether the Indian courts’ tryst with the group of companies doctrine (“Doctrine”) in the arbitration context is a harbinger or aberration. If the Indian Supreme Court (“SC”) decisions in Reckitt Benckiser v. Reynders Label Printing, decided on 1 July 2019 (“Reynders Label”), and MTNL v. Canara Bank, decided on 8 August 2019 (“MTNL”) are any indication, it appears that the tryst is steadily evolving into an affair. The decisions reinforce India’s pro-arbitration outlook and at the same time clarify the parameters to employ the Doctrine to bind non-signatories to arbitration.

Non-Signatory Member of A Group of Companies Cannot be Ipso Facto Bound by Arbitration

Reynders Label involved a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) to appoint a sole arbitrator. The question was whether there was a clear mutual intention of the signatory parties to the agreement (“Agreement”) and the arbitration agreement contained therein to bind the non-signatory party. The signatory first respondent was a party to the Agreement and the non-signatory second respondent was a Belgian company. Both respondents were members of the same group of companies. Therefore, if the non-signatory was held bound by the arbitration agreement, the arbitration would become an international commercial arbitration as opposed to a domestic commercial arbitration, governed by different provisions of the Act.

In order to determine the existence of mutual intention, the SC examined whether it was manifest from the indisputable inter-parties correspondence, culminating in the Agreement, that the transactions between the petitioner and first respondent were essentially undertaken within the group of companies. Apart from alluding to the Doctrine as expounded in Chloro Controls and relied upon in Cheran Properties, the SC predominantly engaged with the Doctrine in the factual matrix. Therefore, it concerned itself with the inter-parties correspondence to analyse if the second respondent played a role in negotiating the Agreement and consequently, whether it was bound by the arbitration agreement by virtue of Section 7(4)(b) of the Act according to which an arbitration agreement can be concluded via exchange of correspondence.

The petitioner primarily relied upon correspondence from one Mr Frederik Reynders, who it claimed was the promoter of the second respondent and therefore, represented it in the negotiations. Since the second respondent was the disclosed principal of the first respondent, it was bound by the arbitration agreement, which was an integral component of the Agreement. On the other hand, the second respondent (i) submitted a counter-affidavit stating that Mr Reynders was an employee of the first respondent and could not represent or bind the second respondent to any legal obligation; (ii) argued that there was no privity of contract and that it was not involved in the negotiation, execution or enforcement of the Agreement; and (iii) argued that both respondents were merely members of the same group of companies sharing a common parent/holding company but otherwise were distinct legal entities operating independently. There was no relationship, such as that of a parent-subsidiary, between them.

The SC held that the second respondent was not a party to the Agreement and, consequently, the arbitration agreement:

“Thus, respondent No.2 was neither the signatory to the arbitration agreement nor did [it] have any causal connection with the process of negotiations preceding the agreement or the execution thereof, whatsoever. If the main plank of the applicant, that Mr. Frederik Reynders was acting for and on behalf of respondent No.2 and had the authority of respondent No.2, collapses, then it must necessarily follow that respondent No.2 was not a party to the stated agreement nor had it given assent to the arbitration agreement and, in absence thereof, even if respondent No.2 happens to be a constituent of the group of companies of which respondent No.1 is also a constituent, that will be of no avail. For, the burden is on the applicant to establish that respondent No.2 had an intention to consent to the arbitration agreement and be party thereto”. (paragraph 9, emphasis supplied)

Although this made the arbitration a domestic arbitration for which the SC did not have jurisdiction to appoint an arbitrator, the SC appointed the arbitrator since the first respondent had no objection to this. It is pertinent to note that the SC dismissed the review petition filed by the petitioner against this decision.

Parties’ Conduct and Intention to be Examined to Apply Doctrine

In MTNL, the issue was whether the non-signatory subsidiary (“CANFINA”) was bound by the arbitration agreement entered into between its parent company (“Canara Bank”) and MTNL. Interestingly, while the factual matrix was relatively straightforward to even intuitively conclude that CANFINA was bound by the arbitration agreement, the SC engaged with the Doctrine in decent depth. Briefly, the facts were that MTNL placed bonds with CANFINA under a MoU Agreement. Due to a liquidity crunch, Canara Bank purchased certain value of the bonds issued by MTNL on behalf of CANFINA. Subsequently, MTNL cancelled the bonds as a result of which disputes arose. Canara Bank objected to CANFINA being made a party to the arbitration agreement.

The SC observed that:

• The parent or subsidiary entering into an agreement, unless acting in accord with the principles of agency or representation, will be the only entity in a group to be bound by that agreement. Similarly, an arbitration agreement is governed by the same principles.
• However, a non-signatory can be bound by an arbitration agreement on the basis of the Doctrine, where the parties’ conduct evidences their clear mutual intention to bind the signatory and non-signatory. Such an intention can be evidenced ­via the non-signatory’s engagement in the negotiation or performance of the contract or any statements made by it indicating its intention to be bound by the agreement.
• The SC identified three critical factors: (i) non-signatory’s direct relationship with the signatory; (ii) direct commonality of the subject matter; and (iii) composite nature of the transaction between the parties. The SC further noted that the Doctrine has also been invoked in arbitration where there is a tight group structure with strong organisational and financial links, so as to constitute a single economic unit or reality.

Applying the aforementioned principles, the SC concluded that CANFINA was bound by the arbitration agreement:

“It will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA – the original purchaser of the Bonds. […] There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties. Therefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings. Given the tri-partite nature of the transaction, there can be a final resolution of the disputes, only if all three parties are joined in the arbitration proceedings […]”. (paragraph 10.9, emphasis supplied)

In addition, the SC noted that (i) a Committee of Disputes had referred all three parties to arbitration, pursuant to which a sole arbitrator was appointed; (ii) Canara Bank itself had circulated a draft arbitration agreement in which it had mentioned itself and CANFINA on one side and MTNL on the other side; and (iii) CANFINA had participated in all proceedings thus far and was represented by separate counsel. Accordingly, the SC concluded that CANFINA had given implied or tacit consent to being impleaded in the arbitral proceedings, which was evident from the parties’ conduct.

Implications of the Decisions

These decisions, in my opinion, are significant. They have generated or renewed discussion about the Doctrine, which will lead to more awareness and debate about its application to arbitrations, both in theory and practice. This in turn will persuade practitioners and parties to be careful about how they draft and interpret arbitration clauses where entities of a same group of companies are involved or could be potentially involved in the underlying transaction/contract.

MTNL in particular is significant because it engages with the Doctrine at a jurisprudential level and expressly predicates its decision on it: “We invoke the Group of Companies doctrine, to join Respondent No. 2 – CANFINA i.e. the wholly owned subsidiary of Respondent No. 1 – Canara Bank, in the arbitration proceedings pending before the Sole Arbitrator” (paragraph 11). It does not cite Cheran Properties, which is unfortunate as discussing and/or applying it would have aided the larger goal of cultivating jurisprudence on the Doctrine. This, however, does not dilute MTNL’s importance.

Both decisions reinforce fundamental factors that are to be considered in applying the Doctrine, such as mutual intention, direct commonality of subject matter and composite transaction. They also provide greater clarity about different factual scenarios in which the Doctrine could potentially be attracted and applied. This is particularly important given the Doctrine’s application is heavily predicated on the underlying facts and circumstances. Accordingly, they reinforce India’s dynamic and commercially pragmatic approach to arbitration and to binding non-signatories to arbitration. Internationally, uptake of the Doctrine to bind non-signatories is rare, with the exception of civil law courts to a certain extent, as compared to “traditional” devices such as piercing the corporate veil, agency and estoppel (see previous posts on this blog here and here). Therefore, India’s affair with the Doctrine could prove instructive for other jurisdictions.

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Chahat Chawla

This post covers an interesting discourse during the Singapore International Arbitration Centre’s Summit in New Delhi on 30 and 31 August 2019. In particular, the post focuses on the discussions during Panel Session 1: ‘Masterclass on the use of Institutional Procedures in Arbitration’ held on the second day of the summit. This session was moderated by Ms Sheila Ahuja (Allen & Overy LLP), and the panelists were Mr Gary Born (Wilmer Cutler Pickering Hale and Dorr LLP), Mr Bobby Chandhoke (L&L Partners), Prof Bernard Hanotiau (Hanotiau & van den Berg), Dr Michael Hwang, SC (Michael Hwang Chambers LLC), Mr Toby Landau QC (Essex Court Chambers) and Mr Andre Maniam, SC (WongPartnership LLP).

Summary of the discussion

Mr Andre Maniam, SC pointed out how institutions innovate and introduce different procedural tools to promote efficiency in the arbitration process. One such procedure discussed at length during the panel discussion was the Emergency Arbitrator (EA) provision under the SIAC Rules, 2016. Briefly, EA procedures allow parties to apply for urgent interim relief prior to the constitution of the tribunal. Accordingly, in cases where a party requires an immediate interim measure, SIAC will appoint an arbitrator (sometimes in a matter of few hours) to hear and decide an application in a time-bound manner.

Parties have frequently invoked the EA provisions under the SIAC Rules. Indeed, as of the date of this post, SIAC has received 93 applications for the appointment of EAs. Out of these 93 applications, 31 have been granted in favour of the applicant, 6 have been granted by consent, 17 have been granted in part, and 27 applications have been rejected. Further, in 8 instances the EA application was withdrawn and 4 EA applications are currently pending consideration.

It appears that there is no clear consensus in the international arbitration community regarding the applicable criteria to be used in cases of interim or emergency interim relief. It is therefore not surprising that the question of the applicable standard for provisional relief often becomes a point of contention between the disputing parties. This panel was no different.

During the panel discussion, Dr Michael Hwang, SC stated he was only dealing with interim injunctions in Singapore-seated arbitrations, but what he had to say might be applicable to:

1. Other common law countries (including India) depending on their arbitration law on interim injunctions; and
2. Other interim measures (which might, however, require other considerations than for injunctions).

In Dr Hwang’s view, for a Singapore-seated tribunal, the natural interpretation of Section 12(1)(i) (read with Section 12(5)) of the Singapore International Arbitration Act (Cap. 143A) taking into account its legislative history) was that, if an interim injunction were claimed, then it would be appropriate to apply the domestic (and practiced in various common law jurisdictions) standard applied by the Singapore Courts in granting interim injunctions based on the American Cyanamid test. Dr Hwang suggested that given that the Indian legislation had a similar legislative history as Singapore’s, it could also be argued that India-seated tribunals could apply the standards applied by the Indian Courts.

Mr Toby Landau, QC took a different view. He suggested that unless a tribunal is operating under “mandatory standards” as may be prescribed under the applicable lex arbitri, the tribunal ought to adopt an international approach. He argued that applying national court standards may pose a “danger” and prove to be a slippery slope if arbitrations were conducted in the same manner as court-based proceedings. Prof Bernard Hanotiau agreed with Mr Landau’s proposition and said that tribunals should be guided by international standards.

Mr Gary Born summarised the state of play in his treatise that the “better view” is for a tribunal to look at international sources for appropriate standards. He argued that the absence of relevant standards from most national arbitration statutes suggests that the seat of arbitration may not be a conclusive factor for the determination of the governing standards. To support this view, Mr Born argued that applying an international approach is in furtherance of the parties’ reasonable expectations for the following reasons. First, this approach will ensure the application of a uniform standard in international arbitrations. Second, this uniform standard will be applicable to all similar requests (regardless of the arbitral seat). Third and finally, this uniform standard would contribute towards achieving uniformity in the arbitral process.¹⁾See Chapter 17; page 2465: Provisional Relief in International Arbitration’, in Gary B. Born , International Commercial Arbitration (Second Edition), (Kluwer Law International; Kluwer Law International 2014.

Comment

The SIAC Rules confer powers on tribunals or emergency arbitrators (as the case may be) to grant interim relief. However, the rules do not set out a standard to be applied by the arbitrators for the grant of such relief. In view of the same, it is for the tribunal to determine on a case-by-case basis the criteria which are to be applied in a particular set of facts and circumstances. Subject to the parties’ agreement and in the absence of a mandatory standard, a tribunal would broadly choose between a local and an international standard.

Even in cases where some (or majority) of the standards prescribed under a local test and an international test overlap, an applicant in any international arbitration would be compelled to argue that a less burdensome standard ought to apply. For instance, a Claimant is likely to argue that international standards should apply in cases where a national court applies a more onerous standard. Ultimately, and as mentioned above, it will be within a tribunal’s discretion to identify the applicable standards in a given case.

Whilst the contents of the local standards may be determined by a review of the prescribed standards (if any) or by the tests adopted by a seat-court, there seems to be a debate on the breakdown of “international standards”. One view is to apply the standards as set forth under the UNCITRAL Model Law (with amendments as adopted in 2006). In this regard, it may be noted that the 2006 amendments, and, in particular the amendments with regard to standard of interim relief, were subject to extensive deliberations and consultations with various governments and stakeholders. Viewed through this lens, an argument in favour of the codification of the “international standard” under the UNCITRAL Model Law (as revised in 2006) gains some traction.

Alternatively, parties and tribunals may look at previous awards and/or scholarly work to seek guidance on the contents of “international standards”. For example, Mr Born in his treatise summarises these international standards as follows: “stated generally…most international arbitral tribunals require showings of (a) risk of serious or irreparable harm to the claimant; (b) urgency; and (c) no prejudgment on the merits, while some tribunals require the claimant to establish a prima facie case on the merits, a prima facie case on jurisdiction, and to establish that the balance of hardships weighs in its favour”.²⁾See Chapter 17; page 2468: Provisional Relief in International Arbitration’, in Gary B. Born , International Commercial Arbitration (Second Edition), (Kluwer Law International; Kluwer Law International 2014.

Therefore, in a given case and depending on the nature of interim relief being sought, the following alternative tests may be adopted by a tribunal:

1. Local/National Standards (tests adopted by the seat courts or under the governing law which applies to the substance of the dispute).
2. International Standards (as envisaged under the UNCITRAL Model Law 2006).
3. International standards as put forth by scholars and/or previous decisions.
4. Combination/hybrid version of these tests as may be deemed appropriate by a tribunal.

The SIAC India Summit 2019 did well to highlight these issues, especially given that the Indian Arbitration and Conciliation Act (Indian Act) and its 2019 amendments do not prescribe any standards for granting provisional measures. Like most national arbitration legislation, the Indian Act recognises broad powers of India-seated tribunals to grant interim relief. The Indian Act further clarifies that under section 19, tribunals shall not be bound by the Indian Code of Civil Procedure (or the Rules of Court), thereby allowing arbitrators and parties to determine the rules of procedure for the conduct of arbitration.

It will be interesting to see how India-seated tribunals approach the question of standards of emergency relief. Anecdotal evidence and recent decisions of the Bombay and the Delhi High Court seem to suggest that tribunals are likely to apply national or local standards (for instance see VIL Rohtak Jind Highway).  However, India’s efforts to develop as an international hub for arbitration may have a bearing on how tribunals approach the question of applicable standards in the coming years. (See discussions on India’s recent arbitral reforms here, here, and here).

With a rise of institutional arbitration in India, and the EA mechanisms available under most sets of institutional rules, it bears watching how the Indian Courts will view EA decisions. As suggested by Mr Bobby Chandhoke at the panel discussion, Indian Courts may continue to take the approach adopted in Raffles Design and enforce EA decisions through section 9 of the Indian Act after a re-hearing.

Taken all together, given the emphasis and focus to bring the Indian Act in conformity with global trends, one could look at the 2019 amendments (as was opined by the moderator, Ms Sheila Ahuja) as a missed opportunity to introduce legislative provisions to support EA decisions. The next round of Indian amendments may well look to the Lion City and provide for the enforceability of EA orders and awards.

The views expressed herein are personal and do not reflect the views or the position of the Singapore International Arbitration Centre. The author reserves the right to amend his position if appropriate.

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The Decision-Making Process of Investor-State Arbitration Tribunals by By Mary Mitsi € 200

Gaurav Juneja and Aayush Jain

Section 29A was inserted, by way of amendments to the Indian Arbitration and Conciliation Act (the Act), in the year 2015. With the introduction of this provision, the time-period for passing the award has been fixed at twelve months from the date the arbitral tribunal enters upon reference and is extendable by another six months with the consent of the parties. Any further extensions can only be granted by the concerned court, either prior to or after the expiry of the time period, failing which the mandate of the arbitral tribunal shall terminate.

Recently, however, the time-period of twelve months has been relaxed by way of certain important amendments to Section 29A which were notified on 30 August 2019. While this post does not intend to review the said amendments in detail, it must be mentioned that ‘international commercial arbitrations’ have now been excluded from the ambit of Section 29A.

The focus of this post will be on an interesting issue concerning the jurisdiction of courts to entertain an application for extension of time under Section 29A, which has also been the subject of a few conflicting decisions by courts in India.

Scheme of Section 29A

Section 29A inter alia provides that in case the award is not made within twelve months (or within the extended period as the case maybe), the mandate of the tribunal shall terminate unless it is extended by the ‘Court’. The expression ‘Court’ has, in turn, been defined under Section 2(1)(e) of the Act to mean:

(a) In the case of international commercial arbitrations, the High Court in exercise of its ordinary original civil jurisdiction.

(b) In the case of an arbitration other than an international commercial arbitration, the principal Civil Court of original jurisdiction in a district and includes the High Court in exercise of its ordinary original civil jurisdiction.

(In India, five High Courts (Bombay, Delhi, Madras, Calcutta and Himachal Pradesh) have ordinary original civil jurisdiction – i.e., the power to hear a fresh case. All other High Courts have appellate jurisdiction)

The question then is whether, in view of the above, the applications for extension of time for passing the award under Section 29A will lie only with the High Court in the case of international commercial arbitrations and with the principal Civil Court in the case of other arbitrations.

It must be noted that under the provisions of Section 11 of the Act (appointment of arbitrators), the competent court to entertain applications for appointment of an arbitrator is the Supreme Court of India (Supreme Court) in the case of international commercial arbitrations; and the jurisdictional High Court in the case of any other arbitrations.

It also needs to be considered that in addition to extension of time, Section 29A also provides the power to substitute one or all the arbitrators, if required. This is of importance as, in the case of an international commercial arbitration, an arbitral tribunal appointed under Section 11 of the Act by the Supreme Court can be substituted by the High Court. Similarly, an arbitral tribunal appointed by the High Court in the case of any other arbitrations may be substituted by a principal Civil Court. In the latter case, the situation is even more extraordinary since a principal Civil Court does not, in the first place, have the power to appoint an arbitrator in any circumstances.

View Taken By Courts

In the case of Nilesh Ramanbhai Patel v Bhanubhai Ramanbhai Patel (Misc. Civil Application (OJ) No. 1 of 2018 in R/Petn. under Arbitration Act No. 56 of 2016), the High Court of Gujarat (Gujarat High Court) considered whether the expression ‘Court’ in the context of Section 29A can be understood as referred in Section 2(1)(e) of the Act.

The arbitrator was appointed by the Gujarat High Court. However, the proceedings could not be concluded in the prescribed time limit. An application for extension, accordingly, was filed before the Gujarat High Court. However, it was argued that the Gujarat High Court, having appointed the arbitrator, had become ‘functus officio’ and the application for extension of time would only lie before the Civil Court.

After examining the scheme of Section 29A, the Gujarat High Court questioned whether it was the intention of the legislature to vest the Civil Court with the power to make appointment of arbitrators by substituting the arbitrators appointed by the High Court under Section 11 of the Act. The Gujarat High Court also observed that the same situation would arise in the case of international commercial arbitrations, where the power to appoint the arbitrator rests exclusively with the Supreme Court. The High Court, thus, concluded that this conflict can be avoided only by understanding the expression “Court” for the purpose of Section 29A as the Court which appointed the arbitrator.

A similar view was taken by the High Court of Bombay in Cabra Instalaciones Y Servicios, S.A. v Maharashtra State Electricity Distribution Company Limited (Commercial Arbitration Petition (L) Nos. 814-818 of 2019). The petitioner approached the High Court under Section 29A of the Act and sought an extension of six months for conclusion of the arbitral proceedings and passing the award. The arbitration was an international commercial arbitration and the arbitrator had been appointed by the Supreme Court under Section 11 of the Act.

It appears that this was the second time an extension had been sought from the High Court in this case and the mandate of the arbitral tribunal was already extended by the High Court on a previous occasion.

Notwithstanding the earlier extension, the High Court considered whether it would have the jurisdiction, under Section 29A, to entertain the application for extension of time when the arbitrator had been appointed under Section 11 of the Act by the Supreme Court.

The High Court concluded that in the case of international commercial arbitrations, it did not have the jurisdiction to pass any orders under Section 29A and such power would lie only with the Supreme Court. Noticing that Section 29A also provided for the substitution of the arbitral tribunal by the concerned Court while considering an application for extension of time, the High Court opined that this would be the exclusive power and jurisdiction of the Supreme Court.

The High Court of Kerala has, however, taken a completely different view. In M/s. URC Construction (Private) Ltd. v M/s. BEML Ltd. (2017) 4 KLT 1140, the High Court of Kerala held that in view of Section 2(1)(e) of the Act, in the case of domestic arbitrations, the application for extension of time under Section 29A would lie to the principal Civil Court since the High Court of Kerala did not possess original civil jurisdiction.

Recently, in Tecnimont SpA & Anr. v National Fertilizers Limited (MA No. 2743/2018 in Arbitration Case (C) No. 24/2016)¹⁾Khaitan & Co represented Tecnimont SpA and Tecnimont Private Limited, the Petitioners in this case., this issue also came up for consideration before the Supreme Court. As the arbitral proceedings could not be completed within 18 months (1 year plus the extended 6 months), the petitioners filed an application for extension of time before the Delhi High Court. However, as the matter was an international commercial arbitration and the arbitrator had been appointed by the Supreme Court, on seeking fresh advice in the matter, the petitioners approached the Supreme Court for extension of time. The Delhi High Court was duly apprised of these developments and the proceedings before the High Court were, accordingly, disposed of.

When the matter came up before the Supreme Court, it was argued by the petitioners that, since Section 29A also carried with it the power to substitute the arbitral tribunal, it was imperative that the application for extension of time also be heard by the Supreme Court. This request was opposed by the respondents and it was argued that under the Act, the time limit for passing the award in the case of international commercial arbitrations can only be extended by the High Court.

Eventually, however, the occasion for the Supreme Court to conclusively decide the question of law did not arise as the application for extension of time was withdrawn by the petitioners with the request that liberty may be granted to the petitioners to approach the Delhi High Court once again. The request was accepted by the Supreme Court and the matter was restored to the file of the Delhi High Court. Finally, the time limit for passing the arbitral award was extended by the Delhi High Court in view of the order passed by the Supreme Court.

Comment

It is worth considering whether it is proper for the High Court to have the power to substitute an arbitrator appointed by the Supreme Court, particularly when the power to appoint arbitrators is exclusive to the Supreme Court. In the context of international commercial arbitrations, this issue is not likely to arise anymore since, as such arbitrations stand excluded from the ambit of Section 29A pursuant to the recent amendments. It will, however, be interesting to see if this issue continues to remain relevant in so far as ongoing arbitrations are concerned.

Interestingly, in State of West Bengal v Associated Contractors (2015) 1 SCC 32, the Supreme Court held that it can, in no circumstances, be the ‘Court’ for the purpose of Section 2(1)(e) of the Act since the definition of ‘Court’ under Section 2(1)(e) was exhaustive. It must, however, be noted that this decision was in the context of Section 42 of the Act (Jurisdiction) and the question was whether the jurisdiction of all other Courts stood excluded once the parties had submitted to the jurisdiction of one Court under Section 9 of the Act. Moreover, this decision was delivered prior to the amendments to the Act in 2015, when Section 29A had not even been enacted.

Finally, while the text of Section 29A read with the definition of ‘Court’ under Section 2(1)(e) appears to be clear, it is difficult to envisage that the legislature intended to vest the power to play a role in the appointment in the principal Civil Court. In these circumstances, there is certainly merit in the argument that the definition of ‘Court’ in the context of Section 29A cannot be understood as referred to in Section 2(1)(e) of the Act. This is, thus, an aspect which certainly needs to be considered in the context of future amendments to the Act.

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The Decision-Making Process of Investor-State Arbitration Tribunals by By Mary Mitsi € 200

Amazon founder Jeff Bezos on his recent visit to India in January 2020 remarked that the 21^st century belongs to India. If that is true, it would also mean a flurry of disputes involving some Indian angle are inevitable and will keep the arbitration industry busy. Thus, even though 2019 may have drawn curtains over the decade, the evolution of arbitration in India will continue to garner immense interest from the rest of the world.

At the start of the new year (and a new decade), it is opportune to reflect the developments and discussions that kept the Indian arbitration community engaged.

The 2019 Amendments

The 2019 amendments to the Indian arbitration law came in quick succession since the last amendments in 2015. The amendments garnered global interest and remained a topic of hot discussion. Following are some of the key amendments:

• The amendments envisage the establishment of an arbitration council (43B) that will grade arbitral institutions in India (S.43I).
• The appointment of arbitrators may be delegated by the courts to these arbitral institutions to streamline the appointment of arbitrators, especially in ad-hoc arbitrations where the parties are unable to appoint an arbitration tribunal mutually (S.11).
• The amendments mandate certain qualifications for the arbitrators for their appointment by an accredited institution (by the authority given to them by the court) in an ad-hoc arbitration (where the parties are unable to appoint an arbitrator). Some of the qualifications include that the arbitrator must be one of the following: an advocate in India, a chartered accountant, a costs accountant or a company secretary with certain years of experience (the eighth schedule).
• There are provisions to ensure that arbitrations are completed in a time-bound manner. They require the pleadings to complete under six months from the appointment of the tribunal (S.23). Similarly, in domestic arbitration, a tribunal shall pass the award within twelve months of the date of completion of the pleadings (S 29A). It is worth noting that these time limits to complete the arbitration do not apply to international commercial arbitrations and are only suggestive in nature (S 29A).

A State-supported International Arbitration Institution

The New Delhi International Arbitration Centre Act 2019 (“NDIAC Act”) was passed last year. The passing of the NDIAC Act is to create a state-backed independent and autonomous regime for the promotion of institutional arbitration. The NDIAC Act seeks to declare the New Delhi International Arbitration Centre an institution of national importance and facilitate the promotion of institutional arbitration at both domestic and international levels.

A Hands-off Approach Towards BIT Arbitration?

The Delhi High Court’s refusal to grant an injunction against a BIT arbitration in Union of India v. Khaitan Holdings (Mauritius) was seen progressive in international quarters. The judgement was on an interim application and there is a lack of clarity on this point from the Supreme Court and other high courts. However, the decision is the latest on the issue and reflects the judiciary’s forward-looking mindset in terms of its non-interventionist approach to a BIT arbitration. The court, however, mentioned that Indian courts have the jurisdiction to grant anti-BIT arbitration injunctions in rare and compelling circumstances. It noted that the Arbitration and Conciliation Act, 1996 applies only to commercial arbitration and that a court may exercise jurisdiction relating to a BIT arbitration through the Code of Civil Procedure, 1908. It may be viewed in skepticism as well, since, without the application of the Arbitration and Conciliation Act, 1996, parties will find it very difficult to enforce a BIT arbitration award in India.

Pre-deposit Requirement Unconstitutional

The Supreme Court in M/s. Icomm Tele Ltd. v. Punjab State Water Supply & Sewerage Board & ANR. struck down part of an arbitration clause that required one of the parties to deposit ten percent of the amount claimed prior to commencing arbitration proceedings. The contract was between a state entity and a private party and the Supreme Court held that such a clause was arbitrary and unconstitutional. It stressed the need for arbitration to be speedy and inexpensive, to help alleviate the burdens of Indian courts. As discussed in this post, the judgement is likely limited to contracts with the state or a state entity. This is because a constitutional challenge such as this may not be available against private parties. Another argument is that where commercially minded private parties have entered into a contract under free volition and considering their business needs, they may not retract from the negotiated terms. Despite this doubt on the scope of the judgement, it has been hailed as another step towards the judiciary’s pro-arbitration stance.

Limited Scope of “Public Policy”

Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (“Ssangyong”) was a Supreme Court judgement that clarified the limited scope of the “public policy” ground for setting aside an award as amended by the Arbitration and Conciliation (Amendment) Act 2015. In Ssangyong, the Supreme Court held that the earlier broad interpretation for “fundamental policy” was changed post the 2015 amendments. It relied on the 246^th Report of the Law Commission of India which stated that the scope of the public policy ground was different (wider) for the challenge of a domestic award vis-à-vis enforcement of a foreign award. The Supreme Court further relied on the Supplementary to the 246^th Report, which stated that the amendments on the issue of setting aside an award ‘were suggested on the assumption that other terms such as “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” would not be widely construed.’

“Group of Companies” Revisited and Reinforced

As covered here, the Supreme Court in Reckitt Benckiser v. Reynders Label Printing and MTNL v. Canara Bank has reinforced the basic principles to be considered while applying the “group of companies” doctrine, such as mutual intention, a direct commonality of subject matter and composite transaction. Both cases provide a fresh and modern outlook through the principles of the settled law in circumstances that are driven by their respective unique facts. They also showcase the Indian judiciary’s maturity, which is mindful of commercial needs and interests, which may require binding non-signatories to an arbitration.

Perkins’ Perks

The last quarter of 2019 saw significant developments with the Supreme Court rendering judgments including Perkins Eastman Architects DPC v. HSCC (India) Ltd and Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors. (discussed below) that are forward-looking and will have a lasting effect on how arbitrations are conducted in India. In Perkins Eastman Architects DPC v. HSCC (India) Ltd. the Supreme Court held that a person who has an interest in the outcome of the dispute shall not appoint a sole arbitrator. This judgment will have a deep reforming effect on several government contracts where the government entity is solely entitled to appoint an arbitrator once an arbitration commences.

No Automatic Stay on Arbitral Awards

In Hindustan Construction Company Ltd. & Anr. v. Union of India & Ors. the Supreme Court settled that there will be no automatic stay on an arbitral award if it were to be challenged in a court. This is welcome judgment as it has struck down Section 87 (which had resulted in an automatic stay of an award pending the challenge) of the Arbitration & Conciliation (Amendment) Act, 2019 for being manifestly arbitrary under the Constitution of India. The removal of automatic stay was first recommended by the 246^th Report of the Law Commission of India consequently adopted by the 2015 amendment to the arbitration law. However, the 2019 amendment had the effect of undoing the changes that were brought in by the 2015 amendment. This judgment should have a decluttering effect on several matters where the parties are unable to recover the arbitration award for several years due to an automatic stay. This may not only encourage the sentiments of the parties to arbitrate, but also provide liquidity to several businesses to expand, as they will be able to secure the award amount pending the outcome of any petition of setting aside of the award.

Transitioning into 2020

• India’s Win in a BIT Arbitration

The beginning of 2020 has been eventful for India. The government recently announced that all claims brought against it in a BIT arbitration by Tenoch Holdings Limited (Cyprus), Mr Maxim Naumchenko (Russian Federation) and Mr Andrey Poluektov (Russian Federation) were dismissed in entirety. The award is not public yet. According to the government’s announcement, the arbitration was the result of the cancellation of Letters of Intent for the issuance of telecommunications licenses to provide 2G services in five telecommunications circles in India. The reason for cancellation cited by the government, among others, was India’s essential security interests. The proceedings were rather swift as the tribunal was constituted only in July 2019.

• New India-Brazil BIT

According to this report, India has also signed a new BIT with Brazil in January since it revised the model BIT in 2015. The signing comes around two years after the Union Cabinet approved signing and ratification of the Investment Cooperation and Facilitation Treaty (ICFT) between the two countries. Reports suggest that the new treaty incorporates elements from both India’s and Brazil’s model BIT. The text of the ICFT is available here.

***

As India looks forward to 2020, and if Jeff Bezos’ predictions about the 21^st century belonging to India are true, the Indian arbitration canvas will continue to be vivid.

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The automatic stay provisions in the Indian arbitration regime have been a matter of a long debate. At first blush, the automatic stay seems like the perfect protection mechanism for any award debtor; however, it often puts the award creditor in a difficult spot. Arbitral awards rarely go unchallenged in India. The automatic stay provision enables a party to use arbitration to effectively delay the settlement of legal rights or access to justice. In essence, the provision not just runs afoul of the objects and purpose of arbitration, but also runs the risk of promoting litigation at the expense of arbitration.

Pursuant to Section 36 of the Arbitration and Conciliation Act, 1996 (‘1996 ACA’), on the filing of a setting aside application under Section 34, the arbitral award could be enforced only after the Section 34 petition was rejected. Consequently, any challenge to an award of the arbitral tribunal rendered it unexecutable. In light of the same, in the case of National Aluminum Company Ltd. v. Pressteel & Fabrications Ltd. and Anr, the Supreme Court interpreted Section 34 of the 1996 ACA to allow for an automatic stay of an arbitration award on the filing and pendency of an application for setting aside of an award.

With the Arbitration and Conciliation Amendment Act 2015 (‘2015 ACA’), Section 36 of the 1996 ACA was amended, which did away with the automatic stay provisions. Accordingly, the award debtor was required to make an application seeking a stay. However, there was persistent ambiguity among various High Courts in India over the applicability of the 2015 ACA provisions.

BCCI v Kochi – A temporary halt

The 2018 Indian Supreme Court case of BCCI v Kochi revolved around the interpretation of Section 26 of the 2015 ACA (for a previous analysis on the Kluwer Arbitration Blog, see here and here). Section 26 delineates the temporal scope of the 2015 ACA and has been the source of divergent interpretations by various High Courts. The confusion was whether Section 26 is prospective and applies to both arbitral proceedings initiated on or after the commencement of the 2015 ACA and even to court proceedings in relation to arbitral proceedings initiated on or after the 2015 ACA having come into force. Consequently, the accompanying problem, which fell for contemplation before the Court, was whether the amended Section 36 of the 1996 ACA would apply to enforcement proceedings in case a challenge to such awards was made under Section 34 of the 1996 ACA.

The BCCI v Kochi case read Section 26 to imply that the 2015 ACA as a whole was to apply prospectively (i.e., to arbitral proceedings commenced after October 23, 2015 – the date on which 2015 ACA came into force). This position, nonetheless, came with an exception. The Court posited that with respect to enforcement of domestic awards under Section 36 of the 1996 ACA, the 2015 ACA was to be applied retrospectively. This is because the right to obtain an automatic stay under Section 36 was not a vested one. Therefore, there would be no automatic stay of an award unless a separate application was successfully made for such a stay. In delivering the judgment, the Court took into account past recommendations made by this Court, including the suggestions of the 246^th Law Commission Report. The Report recommended that the erstwhile Section 36 be substituted, as the automatic suspension of the execution of the award, as soon as a party seeks to challenge the award, defeated the objective of the alternate dispute resolution system to which arbitration belongs.

While one would have believed the BCCI v Kochi case to end the debate, the 2019 Amendment to the Arbitration and Conciliation Act, 2019 (‘2019 ACA’), brought the discussion back to the forefront. The 2019 ACA deleted Section 26 and introduced a new Section 87, which provides that (unless the parties agreed otherwise), the 2015 ACA amendments would apply prospectively — thus bringing back the provision of automatic stays.

The Saga Continues 

On November 27, 2019, the Supreme Court rendered a decision in Hindustan Construction Company v UOI (‘HCC Case’), which again did away with automatic stays. The petitioners (infrastructure companies) approached the Court, pointing that they were being forced into insolvency even after the Indian Government and other government-owned companies owed them over INR 6000 crores (approximately USD 850 million) pursuant to various arbitral awards. They argued that they were disabled from recovering the money due to the automatic stay provisions.

In this case, the Court struck down Section 87 as unconstitutional for being arbitrary and revived Section 26 of the 2015 ACA. The Court noted that the automatic stay provision was a “double-whammy” for firms in favor of whom arbitration awards were passed. Despite the arbitral award being in their favor, the creditors were not able to enjoy the fruits of the same, as the principal amount would be automatically stayed due to a Section 34 petition (challenging the award), which in turn takes years for final disposal.

As a consequence, the firm could become financially unhealthy and vulnerable to being declared insolvent under the Indian Insolvency Code. This retrospective resurrection of an automatic stay also results in payments already made under the amended Section 36 to award-creditors in a situation of no-stay or conditional-stay now being reversed.

Along with this absurdity, the Court noted that, on average, about six years are spent in defending these challenges. This delay defeats the very objective of the alternate dispute resolution system. The Supreme Court, therefore, brought back the position laid down by the BCCI v Kochi case, thus providing award creditors the immediate benefit of an award by way of security and not letting any automatic stay stymie the execution for several years.

Invalidity of automatic stay provisions: a welcome step?

Arbitration serves to foster profitable relationships by resolving disputes in a way that both parties regard as expeditious. Given that, disabling enforcement of the award after the entire process of arbitration is done renders the exercise pretty much futile. In fact, the automatic stay provision is often used by the award debtors to skirt away from their obligations and encourages them to file objections, howsoever pointless or frivolous. This delays the process of dispute resolution and runs antithetical to one of the most sacrosanct tenets of arbitration that is speedier resolution of disputes.

The interpretation of Section 34 of the 1996 ACA by the judiciary to provide for automatic stays was done with the intention of giving efficacy to the arbitration regime in India, an ironic result. This is particularly surprising because even under the much-criticized Arbitration Act of 1940, no provision was interpreted to provide for automatic stay of the award and the court had to explicitly order stay on awards. The introduction of automatic stay was a result of an incorrect interpretation by an earlier Supreme Court judgment and did not originally belong in the Indian arbitration framework.

To conclude, the application of amended Section 36 and the deletion of Section 87 now mirrors the pro-arbitration approach codified under the UNCITRAL Model Law. Article 36(2) of the same particularly refers to applications for setting aside or suspension of an award, in which the other party may provide appropriate security.  However, Section 36 was read to allow automatic stay of awards as soon as a setting aside petition was filed. With automatic stays now a thing of the past, this anomaly has also been resolved. Several arbitration awards, the enforcement of which was hitherto prevented by pending setting-aside applications, will now be executed with minimum judicial intervention. This would also ease the burden of Indian courts, as parties will be dissuaded from filing strategic setting aside applications. Further, it brings back the vested right of enforcement and binding nature of an arbitral award along with speedy determination and recovery of amounts contained therein. This is a welcome step in the Indian arbitration regime. It is hoped that arbitration will now be more universally and reliably used domestically over other forms of dispute resolution.

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A 3-day International Conference on Construction Law & Arbitration was held in December 2019 in New Delhi, co-hosted by the Society of Construction Law-India and the Chartered Institute of Arbitrators-India. During the course of their presentations, the panelists discussed various topics ranging from trends in construction law in the context of arbitration across global jurisdictions to approaches to cross-examination and the role of quantum experts in construction arbitration.

Considering that almost 68% of all construction law disputes pertain to delay, this post focuses on the panel discussion addressing the issue of delays in construction contracts, its treatment by arbitrators, and courts entertaining challenges from arbitral awards. This panel was chaired by Hon’ble Dr. Justice S. Muralidhar, Judge, Delhi High Court and also consisted of Mr. David Brynmor Thomas QC, Mr. Anirudh Krishnan, Mr. Sundra Rajoo, Mr. Mohan Pillay, Mr. Philip Lane Bruner.

Concurrent Delays and Consequences

Mr. David Brynmor Thomas QC focused his presentation on the vexed issue of ‘concurrent delays’ in construction contracts and its treatment across various jurisdictions. The different approaches followed by arbitrators and courts across different jurisdictions are as under:

i. Malmaison approach: In the context of an appeal against an interim arbitration award, the Technology and Construction Court (TCC), United Kingdom (UK) in Henry Boot Construction Ltd. v. Malmaison Hotel, [1999] 70 Con LR 32 adopted this approach. This approach holds that if there are two concurrent causes of delay, one of which is a relevant event beyond the control of the contractor (say extremely inclement weather), and the other is not (say shortage of labour of the contractor), then the contractor is entitled to an extension of time for the period of delay caused by the relevant event, notwithstanding the concurrent effect of the other event; but is not entitled to recover any time-related costs. According to Mr. Brynmore, this principle is also followed under Swiss law and is reflected in Article 44 of the Code of Obligations of the Swiss Civil Code.

ii. Apportionment approach: The Scottish Courts in City Inn v. Shepherd Construction Ltd., [2010] CSIH 68 declined to follow the Malmaison approach, and laid down the apportionment approach. Under this approach, where there are two competing causes of delay, neither of which is dominant, the delay should be apportioned between the contractor and the employer, based on the relative culpability of each of the factors in causing delays. This approach is also followed in other jurisdictions, such as in Hong Kong and the United Arab Emirates (“UAE”). In Hong Kong, the High Court in Hing Construction Co Ltd v Boost Investments Ltd., [2009] BLR 339 expressly approved and followed the City Inn judgment of the Scottish Courts. Similarly, Articles 287, 290 and 291 of the UAE Civil Code embody the principle that the liability for the delay ought to be apportioned between the parties in accordance with their respective degrees of fault.

It is noteworthy that while the Malmaison approach has been consistently upheld by English courts, yet there have been various decisions of the English courts factually distinguishing this approach. One of the examples in which the English courts have chosen to distinguish the Malmaison approach is Saga Cruises v. Fincantieri, [2016] EWHC 1875 (Comm.) (English High Court). In Saga Cruises, it was held that a contractor should not be entitled to the benefit of an employer’s delay event if it was already in delay and the employer’s event had no actual impact on the completion date.

It may thus be concluded that while various jurisdictions view concurrent delays differently, arbitrators/courts in the same jurisdiction may still apply settled principles of law differently, depending on the facts and wording of each particular extension of time (“EOT”) clause.

Powers οf Arbitrators to Read in Exceptions to ‘Exclusionary Clauses’ – An Indian Law Perspective

The presentation of Mr. Anirudh Krishnan  has to be viewed against the backdrop that Indian government contracts provide the Government with an upper hand to set the terms of a contract while dealing with contractors. This results in widely-worded exclusionary clauses, i.e. even if there is delay attributable to the employer, no liability for damages can be affixed on the contractor. Thus, it was imperative that the courts empower arbitrators to carve out exceptions to such clauses in order to avoid undue advantage to the employer on account of its own delay. These exceptions were broadly laid down in the following judgments:

i. General Manager, Northern Railways v. Sarvesh Chopra, AIR 2002 SC 1272 (Supreme Court of India (SC)): A contractor (the non-defaulting party) would be entitled to claim damages provided that at the time of acceptance of ‘extension of time’ for performance of the contract, the contractor gives notice of his intention to claim damages for the delay.

ii. N. Sathyapalan v. State Of Kerala, (2007) 13 SCC 43 (SC): If a delay is attributable solely to the employer, and is also significant, then a contractor would be entitled to damages, notwithstanding an exclusionary clause.

iii. Asian Techs Ltd. v. Union of India, (2009) 10 SCC 354 (SC): Exclusionary clauses would not be binding on any judicial authority, and would only prohibit the employer from entertaining any claim made by the contractor.

iv. Simplex Concrete Piles v. Union of India, CS(OS) No. 614A/2002, judgment dated 23.02.2010 (Delhi High Court): Any exclusionary clause itself is contrary to law and the public policy of India, and therefore, any such clause would be void ab-initio.

Moreover, under section 54 of the Indian Contract Act, 1872, if a defaulting party has derived `any advantage under a contract, the party in breach cannot retain the benefit and would have to compensate the non-defaulting party.

It is relevant to note that the Supreme Court of India in Central Inland Water Transport Corporation v. Brojo Nath Ganguly, AIR 1986 SC 1571 had held that the courts will not enforce and will strike down an unfair and unreasonable contract/clause entered into between parties who are not equal in bargaining power (followed in Pioneer Urban Land & Infrastructure Ltd. v. Govindan Raghavan, Civil Appeal No. 12238 of 2018, judgment dated 02.04.2019).

Mr. Philip Lane Bruner, Esq. also echoed the sentiments of Mr. Krishnan and shared his experience that courts seeking justice would not ordinarily permit an employer to get away without compensating the contractor on account of its delay.

Time is of the Εssence in Construction Contracts

While there is no gainsaying in stating that time is of the essence in construction contracts, Mr. Sundra Rajoo shed light on the practice in the UK to have standard contractual terms in construction contracts requiring the work to be carried out ‘regularly and diligently’. In such cases, an obligation is cast upon the contractor to proceed with the works continuously with appropriate physical resources in accordance with the contractual requirements as to time, sequence and quality of work. Any delay in progress may also entitle either party to suspend or terminate the contract. However, if there are certain clauses in the contract which make issuance of a notice as a pre-condition to invoking claims related to adherence of time schedule (as is the case with various clauses in the FIDIC standard contract), such clauses would be read to be mandatory, before any claim may be made qua the breach of the term. Failure to strictly abide by the notice clauses may result in the employer being completely discharged from his liability. It may, however, be noted that this principle is not universal in nature and different jurisdictions treat notice requirements differently.

Foreseeability of ‘Ground Conditions’

Mr. Mohan Pillay thereafter focused his presentation on the foreseeability of ground conditions by a contractor, and the expected due diligence/ independent assessment to be carried out by such contractor at the time of bidding to be able to assess the nature and scope of work, failing which the contractor would not be entitled to damages. To buttress his submissions, Mr. Pillay relied upon the judgment of the English TCC in Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar, [2014] EWHC 1028 (TCC). In Obrascon, it was held that an experienced contractor must make its own assessment of all available data and come to its own conclusions, rather than to ‘slavishly’ accept the information from the employer. Failure to carry out an independent assessment of grounds conditions would disentitle a contractor from claiming damages, and would entitle the employer to terminate the contract for delay on the part of the contractor attributable to ground conditions.

Consequences of Delay – Nature of the Types of Claims

Subsequently, Mr. Bruner highlighted that loss may be claimed by the employer/contractor under the following non-exhaustive heads on account of delay:

i. Employers: Damages for extended financing and project administration costs, extended use of facilities by contractor, loss of profits;

ii. Contractors: Additional cost of labour and field supervision, extended equipment and tool financing costs, extended overheads, lost profits on the contract & on other contracts.

However, the grant of damages is actually dependent on the fulfillment of the twin test of ‘beyond control of the party’ and ‘unforeseeable’ factors leading up to delays. In an American case Mundy v. New York, 27 N.Y.S. 469 (1894), it was held that while a flood was outside the control of the party, the flood delay was inexcusable because similar flooding had occurred previously and was thus foreseeable. These principles also form the basis of the UNIDROIT principles and are thus, universally accepted.

Conclusion

While on a normative level, it may appear that there is a disparity in the approaches of various jurisdictions on issues pertaining to construction contracts, a closer examination would reveal that the niche rules applicable to them are in principle uniformly applied by courts/arbitrators across jurisdictions.

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The issue of unilateral appointment of a sole arbitrator by a party has been in the spotlight since the Supreme Court of India’s (“SC”) decision in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (“Perkins”) on 26 November 2019. This case largely puts the issue to rest by rendering unilateral sole arbitrator appointments invalid by virtue of the 2015 amendments to the Indian Arbitration and Conciliation Act (“Act”) arbitration law as discussed under the third heading below.

Relaying the TRF’s Baton

Perkins has taken the baton from TRF Ltd. v. Energo Engineering (“TRF”) to clarify the SC’s stance on the appointment of a sole arbitrator. In TRF, the SC invalidated an arbitration clause that allowed the appointment of the Managing Director of one party, or his nominee, as the sole arbitrator. The SC struck down the clause stating that, once a party to a dispute had become ineligible by operation of law (see the third heading below) to act as a sole arbitrator, its power to appoint another in its place must also cease. It did, however, state that this analogy applied to the appointment of a sole arbitrator only, and did not apply when both the parties could appoint one arbitrator each for a three-member tribunal. The SC followed this approach in Perkins where the arbitration clause provided that only the respondent could appoint a sole arbitrator. Perkins may indeed lead to an influx of litigation because of the invalidity of such arbitration clauses. However, it is a step in the right direction as it would serve the arbitration ecosystem in India well in the long term by bringing an end to the practice of drafting unequal arbitration agreements.

The Domino Effect

In less than two months after Perkins, the Delhi High Court (HC) delivered (on 20 January 2020) a judgement on similar lines in Proddatur Cable TV Digi Services v. SITI Cable Network Limited (“Proddatur”). The HC held that while party autonomy is an underlying principle in an arbitration agreement, the procedure laid down in the arbitration clause cannot be permitted to override considerations of impartiality and fairness in arbitration proceedings. The HC squarely relied on Perkins for arriving at this conclusion.

Similarly, in Arvind Kumar Jain v. Union of India (delivered on 4 February 2020) the Delhi HC held that the respondent could not pressure the petitioner to agree to furnish a waiver under S.12(5) of the Act to appoint a sole arbitrator of the respondent’s choice.

It is a welcome trend set by TRF and strengthened by Perkins to invalidate unequal arbitration agreements where only one party is able to appoint a sole arbitrator. It is not the debate whether or not the sole arbitrator appointed by one of the parties is actually biased or partial. The premise that one of the parties has the exclusive right to appoint an arbitrator of its choice without any regard to the opposite party is by itself unfair. Thus, even if a unilaterally appointed sole arbitrator has the best of the intentions, a court would still invalidate her appointment and appoint another arbitrator. It is only reasonable for a court to not venture into the arbitrator’s integrity as it would consume time and further delay the arbitration.

Syncing the Indian Law with the International Norm

The SC in TRF grounded its reasoning on the 2015 amendments to the Act – more specifically S.12(5). Under S.12(5) of the Act, a person covered by the Seventh Schedule shall be ineligible to be appointed as an arbitrator.

Similarly, Perkins stated that “[n]aturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence (emphasis supplied) of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited.” This highlights the spirit behind the judgment.

This stance was long due and syncs India with the international understanding of this issue better known as the principle of equality. The principle of equality or equal treatment of the parties in the constitution of the arbitral tribunal means that the parties must have the possibility of participating in the constitution of the arbitral tribunal on equal terms.¹⁾Éric Loquin, ‘À la recherche du principe de l’égalité des parties dans le droit de l’arbitrage’, Gazette du Palais, 29 June – 1 July 2008, p. 5. As quoted in Chapter 3: The Right to Make a Unilateral Appointment’, in Alfonso Gomez-Acebo, Party-Appointed Arbitrators in International Commercial Arbitration, Kluwer Law International. pp. 39 – 68. It may be considered as part of the broader principle of equality of the parties. The equality of the parties is in turn part of transnational procedural public policy.²⁾Catherine Kessedjian, ‘Transnational Public Policy’, in International Arbitration 2006: Back to Basics?, ICCA Congress Series (Montreal 2006), Vol. 13, A. J. van den Berg (ed.), Kluwer Law International, 2007, p. 867. As quoted ibid. The general consequence of this principle is that parties may jointly choose a sole or presiding arbitrator, but none of the parties can make that choice alone. As far as party-appointed arbitrators are concerned, the principle requires that parties each have the possibility of making a unilateral appointment. Thus, the principle of equality is a universal limit to the freedom of the parties with regard to the appointment of arbitrators.³⁾See Lalive, Le choix de l’arbitre, p. 356, as quoted ibid. Indeed, there are circumstances where a party may waive its right to equality which are not relevant to this discussion.

Dutco is a landmark French case on the principle of equality. Although Dutco was in the context of a multi-party arbitration it is relevant in this context. In Dutco two defendants had to jointly nominate an arbitrator. They challenged this composition in the Paris Court of Appeal which saw no issue with the appointment procedure that had been standard then. However, the Cour de Cassation reversed the ruling and held that the equality of the parties in the appointment of arbitrators is a matter of public policy that can be waived only after the dispute has arisen.

In other countries such as Germany (1034 of the Code of Civil Procedure), Netherlands (1028 of Dutch Code of Civil Procedure) and Spain (Article 15 of Act on Arbitration), the principle of equality in appointing an arbitrator is enshrined in their laws. Thus, the disadvantaged party may request the domestic court to nullify the privilege of the opposite party.

Therefore, the SC’s interpretation of S.12(5) and the Seventh Schedule in TRF and Perkins aligns India with the global consensus on the issue.

Quasi-unilateral Appointments

While the law on unilateral appointment of sole arbitrators appears to be settled, grey areas remain on the appointment of a tribunal (whether of a sole arbitrator or three arbitrators) where a party is only allowed to choose an arbitrator from a panel unilaterally prepared by the opposite party.

In Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. (DMRC) (“Voestalpine”) the SC was faced with a situation where the arbitration clause entitled only the respondent to make a panel of arbitrators upon the dispute and then propose limited names from that panel. The petitioner could thereafter select its nominee from the limited list. The petitioner challenged the arbitration clause stating that the choices in the panel were determined solely by the other party and that such a mechanism for appointment would raise questions over the neutrality of the arbitrator. While the SC held that the choice of five arbitrators was too small a number for the petitioner to make a choice from (and therefore struck it down), it held that thirty-one was a good number. The SC also stressed on the need for a broad-based panel. The good intentions of the SC are reflected in the judgment. However, there are issues with the judgement: Firstly, there is no clarity on what number of names on a panel is appropriate for it to be not struck down. Secondly, there is no clarity on what constitutes a “broad-based panel”. Thirdly, such a panel that is formed only by one party is troublesome, more so when a panel is formed once the dispute has arisen. A party entitled to form such a panel post-dispute will have the exclusive benefit of appointing candidates after conducting due diligence on the candidates’ perceived disposition towards the matter. Thus, the principle of equality in the appointment of an arbitrator is compromised.

SMS Ltd. v. Rail Vikas Nigam Ltd. (“SMS”) (delivered on 14 January 2020) is another case that highlights the need for clarity on the legality of an exclusive right of one party over panel selection. In SMS, the respondent provided the petitioner a panel of thirty-seven candidates to choose its nominee from. Only eight of the thirty-seven candidates were not employed before by the respondent in some capacity. The Delhi HC relied on Voestalpine and Perkins to hold that the panel did not satisfy the test of neutrality of arbitrators, and consequently allowed the petitioner’s appointment of its nominee outside of the panel. Likewise, it appointed an arbitrator for the respondent.

While Perkins discusses Voestalpine in the context of independence and impartiality of an arbitrator, it stops there. It does not discuss it in the context of such appointments where a party could only appoint an arbitrator from the names proposed by the other party. If the SC is confronted with this issue again, it should seize the opportunity to reconsider the legality of such panels that give one party more influence over the other in the appointment of a tribunal. It would be a waste of judicial time if courts were to analyze the validity of such panels on a case to case basis. It would serve the Indian arbitration landscape better if the practice of such unequal panel formation is put to an end. The principle of equality mandates that exclusive right of panel selection by only one party is invalid.

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Most of the contemporary discourses on pre-arbitral judicial interference in India entail the scope of the judicial enquiry required before the constitution of an arbitral tribunal. As it currently stands, Section 8 (for arbitrations seated in India) and Section 45 (for foreign-seated arbitrations) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) have the potential of affecting the functioning of the arbitral proceedings. Both the sections provide that courts should refer the parties to arbitration upon a ‘prima facie’ satisfaction that a valid arbitration agreement exists. The scope of the pre-arbitral judicial intervention was also examined by the Law Commission in its 246^th Report wherein, it recommended that ‘the same test regarding scope and nature of judicial intervention, as applicable in the context of section 11, should also apply to sections 8 and 45 of the Act.’ While only Sections 8 and 45 are the subject of this post, it bears noting that the position of the judiciary (as discussed here) has been vastly inconsistent under each of the three provisions.

In the current schema of things, arbitration agreements governed by the 1996 Act are still susceptible to lengthy judicial interference as Indian courts tend to perform a de jure analysis of the existence and validity of an arbitration agreement before a tribunal is constituted.¹⁾See Garware Wallropes v. Costal Marine Constructions & Engineering, AIR 2019 SC 2053; United India Insurance v. Hyundai Engineering, AIR 2018 SC 3932. Thus, two parties who intend to resolve all their contractual disputes, including questions pertaining to the existence and validity of the arbitration agreement itself, through arbitration, do not have a means to avoid the interference of Indian courts.

In the United States, parties willing to avoid this uninvited interference have included specific clause to this effect in their arbitration agreements. This clause acts as an unambiguous reinstatement of their will to delegate all jurisdictional questions, such as existence, scope, validity of the arbitration agreement (and even arbitrability of the dispute) to the arbitrator instead of the courts. Christened by the US courts as a ‘delegation clause’, these clauses can play a significant role in saving time and cost of the parties. In this blog post, the authors make a case for the implementation of delegation clauses in Indian contracts.

The Evolution and Practice of Delegation Clause under the US Federal Arbitration Act

The idea that parties can delegate the question of existence and validity of a domestic arbitration agreement to an arbitral tribunal instead of to courts is not expressly supported by the Federal Arbitration Act (“FAA”). Section 4 of the FAA mentions that courts should refer the parties to arbitration upon being satisfied that a valid arbitration agreement existed. However, as is the case with the doctrine of separability and competence-competence, the Supreme Court of the United States (“SCOTUS”) read this idea into the FAA (in this case, Section 2) through a series of progressive decisions.

Firstly, the SCOTUS in AT&T Technologies, Inc. v. Communications Workers of America (1986) ruled that unless the parties had agreed otherwise, pre-arbitral challenges to the existence and validity of an arbitration agreement should be carried out by the courts. The SCOTUS expanded this opinion in First Options, Inc. v. Kaplan (1995) when it ruled that the presumption that challenges under Section 4 of the FAA are decided by the courts could be overcome if there was ‘clear and unmistakable’ evidence of the intention of the parties to proceed otherwise.

While these decisions laid the groundwork for recognition of delegation clauses, it was only in Rent-A-Center, West, Inc. v. Jackson (2010), that the SCOTUS truly empowered such clauses. In Rent-A-Center, the SCOTUS held that the provision under Section 4 was a ‘default rule’ instead of a mandatory one and thus, parties could overcome its application through agreement. Following the separability presumption, it was held that the delegation clause was severable from the rest of the agreement and thus, just as a challenge to the contract did not invalidate the arbitration agreement; a challenge to the arbitration agreement would not invalidate the delegation clause. The SCOTUS characterized the delegation clause as ‘a distinct mini-arbitration agreement divisible from the contract in which it resides—which just so happens also to be an arbitration agreement.’

In order to challenge the delegation of jurisdictional issues to the tribunal, the non-existence of a delegation clause should be expressly alleged, and the party should not generally challenge the arbitration agreement. Recently, arbitration clauses that refer to institutional rules acknowledging ‘competence-competence’ have also been treated as delegation clauses by the Missouri Supreme Court.

Delegation clauses, in general, have gained immense popularity in the current decade and are becoming a regular fixture in B2B contracts. The authors are of the view that the incorporation of an unambiguous delegation clause in an arbitration agreement may save the parties from the wavering operation of various sections of the 1996 Act. The parties may reflect their ‘clear and unmistakable’ intention to give the arbitrator carte blanche to finally determine issues of invalidity and non-existence of the arbitration agreement.

Importing the U.S. Approach to Delegation Clauses in Scheme of the 1996 Act of India

As far as the compatibility of the said clauses with the scheme of the 1996 Act of India is concerned, the authors note that the judicial, as well as the legislative trend, is towards minimal judicial intervention in the ‘conduct’ of arbitrations.²⁾See Mayavti Trading Pvt. Ltd. vs. Pradyuat Deb Burman, AIR 2019 SC 4284; Duro Felguera S.A. vs. Gangavaram Port Limited, AIR 2017 SC 5070. This is also evident from the recent 2019 Amendment Act which has divested the courts of their power to decide the question of ‘existence’ of an arbitration agreement while appointing an arbitrator by repealing Section 11(6A) of the 1996 Act. Undoubtedly, the practice of determining the existence of a valid arbitration agreement still continues to exist under Section 8 and Section 45 of the 1996 Act. However, the same can be brought to terms with delegation clauses in the following three ways:

Firstly, the scope of enquiry under both these sections have been incarcerated to only ‘prima facie’ satisfaction of the judicial authority. It means that any conclusion made by the judicial authority under Section 8 as to the ‘existence’ of an arbitration agreement will only remain a factual or de facto determination of existence, ‘nothing more, nothing less’. The legal analysis of ‘existence’ can unmistakably be delegated by the parties to the tribunal alone. This was also reflected in the 246^th Law Commission’s report where it noted that ‘if the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally determined by the arbitral tribunal.’

Secondly, and as already explained above, the SCOTUS has interpreted Section 4 of the FAA, as far as it relates to reference to arbitration, to reflect a ‘default rule’. Similarly, in context of Section 8 of the 1996 Act, it must be remembered that it was never the intention of the 1996 Act to mandate the courts to perform a de jure analysis of the arbitration agreement before making a reference to arbitration. If that were the case, the original Act would have contained provisions to that effect under the erstwhile Section 8 (or Section 11). The current language in Section 8 exists because courts while dealing with the pre-arbitral challenges, derogated from the objectives of the Act. Thus, the 2015 as well as the 2019 amendments were brought firstly, to ensure that judicial interference, when done, was extremely limited and secondly, to harmonize the standard of review under Sections 8, 11 and 45. This leads us to conclude that the provisions under Section 8 do not speak of a mandatory requirement by the courts to decide on the existence and validity of the arbitration agreement.

Lastly, by affirming concepts such as ‘specific question doctrine’, the Supreme Court has earlier indicated that courts may give due credence to the terms of the arbitration agreement over the non-mandatory requirements of the Act.³⁾Seth Thawardas Pherumal v. Union of India, AIR 1955 SC 468. Such a determination further re-affirms the possibility of having ‘delegation clauses’ under the Indian arbitration regime.

In sum, delegation clauses can be a vital tool in avoiding unwanted judicial interference before the tribunal takes the baton. Given the scheme of the 1996 Act and its similarity with the FAA provisions that deal with pre-arbitral challenges, the authors believe that the U.S. approach may provide guidance for implementing delegation clauses in India.

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During the recent visit of Brazilian President, Jair Bolsonaro, to India, Brazil and India inked the investment cooperation and facilitation treaty (hereinafter bilateral investment treaty – BIT).

From Brazil’s point of view, this BIT is an extension of a novel approach to foreign investment in international law based on investment facilitation and cooperation, not investment protection – something that a typical BIT entails. Brazil embraced this approach in 2015 when it launched its Model BIT. Since 2015, Brazil has signed more than 10 such treaties focusing on investment facilitation and cooperation – the one signed with India being the latest one.

From India’s point of view, this is the fourth BIT signed after adopting a new Model BIT in 2016. The previous three have been signed with Belarus, Taiwan and Kyrgyz Republic (the text is not in public domain). India’s BIT with Brazil is based on the Brazilian, not Indian model BIT, though a careful reading of the text shows that both sides have compromised to strike this deal.

The purpose of this piece is to demonstrate how the India-Brazil BIT deviates from the Indian Model BIT. I discuss deviations on the following issues: definition of investment, expropriation, and investor-State dispute settlement (ISDS).

Definition of Investment

The India-Brazil BIT, like the Indian Model BIT, adopts an enterprise-based definition of investment where an enterprise is taken together with its assets. The Indian Model BIT further requires that the enterprise must satisfy certain characteristics of investment such as commitment of capital and other resources, duration, the expectation of gain or profit, and the assumption of risk and significance for the development of the country where the investment is made. Article 2.4 of the India-Brazil BIT also provides for these characteristics of investment except for ‘significance for the development’ of the host State. The requirement that investment should be significant for the development of the host State is a subjective requirement and proving that this requirement has been met could be a challenge for foreign investors.

Expropriation

A very important feature of the India-Brazil BIT is that it only protects against direct expropriation. Article 6.3 of the BIT states: “For greater certainty, this treaty only covers direct expropriation, which occurs when an investment is nationalised or otherwise directly expropriated through a formal transfer of title or outright seizure”. Thus, indirect expropriation is outside the scope of the BIT. This provision is consistent with Brazil’s Model BIT. Brazilian lawmakers have been critical of provisions in BITs that allow foreign investors to challenge indirect expropriation claims. Brazil believes that rules on indirect expropriation open the gates for abusive claims by foreign investors that limit a State’s capacity to adopt regulatory measures to pursue public interests such as the protection of public health and environment.

The absence of rules on indirect expropriation in the India-Brazil BIT is a complete departure from Article 5 of the Indian Model BIT and also India’s BITs with Belarus and Taiwan that provide protection to foreign investment from both direct and indirect expropriation. In fact, the Indian Model BIT not only provides protection from indirect expropriation but also provides how to determine that an investment has been expropriated indirectly.

In today’s world, direct expropriations of foreign investment have become rare. Foreign investment faces challenges from regulatory conduct of a host State that may have an effect equivalent to direct expropriation without expropriating investment directly. While the possibility of foreign investors abusing the system can never be ruled out, the possibility for host States to abuse their public power to the detriment of foreign investors or impose disproportionate costs on foreign investors for pursuing public interests can also not be ruled out. Thus, leaving indirect expropriation outside the scope of the BIT creates a yawning gap in the protection of foreign investment.

Dispute Settlement    

The most important aspect of the India-Brazil BIT, inspired from Brazil’s Model BIT and other Brazilian BITs, is that it adopts a very different approach to the settlement of investment disputes. It is well known that Brazil has been a vocal opponent of the ISDS system. Thus, Brazil has developed a novel approach to settlement of investment disputes based on prevention. For this purpose, Article 13 of the India-Brazil BIT provides for the creation of a joint committee comprising officials of both the countries. This joint committee shall, inter alia, supervise the implementation and execution of the treaty and resolve disputes concerning investments of investors in an amicable manner.

Article 14 establishes the creation of national focal points or ombudsman in both the countries that would, inter alia, endeavour to follow the recommendations of the joint committee, and address differences in investment matters. Article 18 of the India-Brazil BIT provides for a dispute prevention procedure. As per this procedure, any measure of a country that the other country considers amounts to a breach of the BIT, shall be referred to the joint committee for dispute prevention. In case the joint committee is unable to prevent the dispute, then the dispute shall be referred to State to State arbitration pursuant to the procedure in Article 19.

Article 19 of the India-Brazil BIT provides for State-to-State dispute settlement (SSDS). Article 19.2 states that the purpose of SSDS arbitration is to decide on the interpretation of the treaty or observance by a country of the terms of the treaty. It further clarifies that the SSDS arbitration tribunal shall not award compensation. There is no mention of ISDS in the India-Brazil BIT. The absence of ISDS in the BIT is a clear reflection of the Brazilian stand on this issue. Brazil has been sceptical of ISDS for several reasons, including it being discriminatory against domestic investors.

The dispute settlement provisions in the India-Brazil BIT are not consistent with the dispute settlement provisions of the Indian Model BIT. The Indian Model BIT provides for both SSDS and ISDS. The investor’s access to international arbitration in the Indian Model BIT is subject to several restrictions such as exhausting local remedies for a period of five years and following a very strict time period requirements. However, not allowing ISDS means that foreign investors shall be completely dependent on the home State. If for any reason the home State does not wish to espouse the cause of the foreign investor, there will be no redress available for the foreign investor under international law. While Brazil’s concerns about ISDS are legitimate, the solution to addressing these concerns is not to do away with the system completely. Instead, it would be better to ensure that the systemic concerns that plague the ISDS model such as lack of transparency, bias in the appointment and functioning of arbitrators, etc., are addressed by undertaking the necessary reforms.

Similarities with the Indian Model BIT     

Some provisions in the India-Brazil BIT are common to the Indian Model BIT. For instance, like the Indian Model BIT, there is no most favoured nation (MFN) provision in the India-Brazil BIT, although the Brazilian Model BIT provides for a MFN provision.

Like the Indian Model BIT, Article 20.3 of the India-Brazil BIT puts taxation related regulatory measures outside the purview of the BIT. However, there is one subtle difference. Article 2.4(ii) of the Indian Model BIT states that the host state’s decision that the impugned regulatory measure is taxation-related shall be final and non-justiciable. The Article 20 language in the India-Brail BIT that gives immunity for taxation related measures does not use the language of non-justiciability. Articles 23 and 24 of the India-Brazil BIT provides for general and security exceptions respectively and resemble the general and security exceptions in the Indian Model BIT.

Conclusion

The India-Brazil BIT reflects a compromise between the Indian and Brazilian approaches to investment treaties. However, the BIT is certainly more titled towards the Brazilian approach. It does not contain ISDS and rules on indirect expropriation, which creates a gaping hole in the protection of foreign investment. The focus of the BIT is more on dispute prevention. While this is admirable, the fact that also needs to be appreciated is that host States may abuse their public power and thus BITs need to reflect a careful balance between a host State’s right to regulate and investment protection. As I have argued in my book, subsequent to being sued by several foreign investors, India adopted a Model BIT that gives precedence to the host State’s right to regulate over investment protection. The India-Brazil BIT tilts even more towards a host State’s right to regulate, thus marking a departure from India’s Model BIT. It will be interesting to see whether India, in its future BIT negotiations, would come back to its Model BIT template or be more comfortable with the Brazilian template.

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On 25 January 2020, India and Brazil signed an Investment Cooperation and Facilitation Treaty, in the presence of the Brazilian president Jair Messias Bolsonaro. Arguably the most prominent of the 3 BITs that India has signed since adopting the model BIT in December 2015. The new treaty articulates several provisions (briefly discussed below) in departure from the model version. The two nations also committed to step-up cooperation in the field of oil and natural gas, cybersecurity, science and technology, health and traditional medicine, etc. This comes in the backdrop of India opening up its market to allow 100% FDI in Coal and Lignite mining as well as in some digital media sectors. India also offered for a 100% acquisition its debt-ridden national carrier Air India at the World Economic Forum at Davos earlier this January.

The treaty incidentally also comes at a time when Venezuela – which holds the maximum oil reserves in the world (roughly 18%) – faces sanctions from the United States thereby hindering commercial dealings by other nations and businesses with the oil dependent Latin American country.

As a backgrounder, for Brazil, this is the 27^th BIT it has signed, yet there is only one which has seen light of the day. Surprisingly though, both Brazil and India are not signatories to the ICSID Convention. While Brazil has remained firm in its views that investor-state arbitration limits a state’s rights to regulate benefits to foreign investors, it may perhaps have been on the same footing as India – which has revoked 58 of its BITs in the recent past. India currently has only 14 BITs in force, with 5 in the post-signing incubation phase, including the most recent with Brazil.

A departure from the Model BIT

The new Investment Treaty, in terms of disputes and resolution, has departed considerably from the Model BIT of 2015. Her largely protective Model BIT provides for a new Investor State Dispute Settlement mechanism that requires foreign investors to exhaust local remedies for 5 years before going for international arbitration. Perhaps learning its lessons from the White Industries crises where the investor may not have anticipated that enforcing the award would take substantially longer time than procuring one from a tribunal. For the largest democracy in the world – with the fastest growing population – which has its higher judiciary clogged with close to half a million pending cases; it would make sense to prevent being accused for breach of the Fair & Equitable Treatment Standard owing to delayed adjudication. However, the instant treaty between India and Brazil completely shifts the focus from dispute resolution to dispute prevention, with no provision for investor-state arbitration, lest through their country.

Here’s a brief look at some of the key provisions

Investment has been defined narrowly to include shares, stocks, licenses, authorizations, loans to enterprises, intellectual property, and movable and immovable property. There is a categorical exclusion of several items like debt securities, portfolio investments, claims to monies arising out of commercial transactions, goodwill.

 Article 4 – Treatment of Investments

The standards of protection are provided for in Article 4, depart from the traditional Fair & Equitable Standard, preclude either nation from taking measures that constitute denial of justice, breach of due process, discrimination and abusive treatment against investments. Though in consonance with the model BIT’s Article 3, there is no most-favored nation (MFN) clause in the treaty.

 Article 10 – Investment Measures and Combating Corruption and Illegality

The Article casts a duty upon both nations to adopt measures and make efforts to prevent and fight corruption, money laundering and terrorism financing with regard to covered matters. Moreover, the treaty takes a step further in precluding any protection to investments made with capital or assets from ‘illicit’ sources. This provision rather cements the debate, at least for the purpose of this treaty, on whether corrupt investments are entitled to protection. The investment, to be recognized as such, has to be in accordance with the provisions of the treaty and in compliance with the laws of the host state, with an onus on the investors to share any information that the host state may desire, including those of corporate history and practices of the investor.

Article 13 – Joint Committee for the Administration of the Treaty

A Joint Committee envisaged under this provision would administer the treaty. The functions and responsibilities include supervising the implementation and execution of the treaty, and also consulting with investors and stakeholders on issues related to the work of the committee. But going beyond, the largely autonomous committee would, inter alia, be empowered to mediate for amicable disputes concerning investments and also, supplement rules for arbitral dispute settlement between the parties.

Article 14 – Ombudsman

Both nations shall designate an ombudsman who shall be responsible to support investors from the other party in its territory, and amongst other responsibilities, shall be tasked to address differences in investment matters with a view to help in prevention of disputes.

Article 18 – Dispute Prevention Procedure

The most striking feature of the treaty translates not to dispute resolution but dispute prevention. Grievance regarding a specific measure adopted by either nation can only be raised by the other nation, not by investors, before the Joint Committee. An investor, though, may raise objections through its representative nation, unless already raised before another dispute settlement forum (not envisaged in the treaty).

Article 19 – Dispute resolution between Parties

The dispute resolution clause does not envisage resolving disputes between investors and parties, but only between parties, i.e., the nations. The choice between an ad hoc Arbitral Tribunal or a permanent arbitration institution rests with the parties, however, there are 2 important conditions:

i. The purpose of the arbitration is to decide on interpretation of this treaty or the observance by a Party of the terms of this Treaty. The Arbitral Tribunal, however, shall be precluded from awarding compensation.

ii. The Tribunal shall be empowered to examine matters related to the following:

a. the objective, definitions, scope and general provisions.

b. treatment of investments, expropriation, compensation for losses attributable to war or other armed conflict, revolution, state of emergency, civil strife, etc., and transfer of funds.

c. treatment of protected information.

d. parties’ right to take prudential measures in relation to protection of investors, maintenance of financial institutions and financial systems.

e. amendments to the treaty, relationship with other treaties, and issues relating to the duration of the instant treaty.

iii. The parties would bear their own costs, although the tribunal may in its discretion direct any party to bear all or a substantial portion of the costs.

The treaty further lays down the criteria for the appointment of arbitrators as well as a code of conduct to be followed by the arbitrators. As it appears, an aggrieved party may ultimately seek refuge under its government to raise issues of treaty violation in arbitration, and vicariously seek enforcement of any arbitral directions regarding observance of treaty provisions.

Dispute Prevention

The treaty envisages cooperation, in pursuit of which are incorporated binding general and security exceptions; while giving due regard to each other’s sovereign prerogatives and regulatory powers. The minimization of the potential areas of disputes certainly exhibits promise in avoidance of conflicts that may escalate to the level of formal disputes. The level of governmental intervention in crystallizing those disputes may effectively mean resolution through diplomatic discussions, rather than invoking the provisions of this treaty. The promise to offer ombuds services, to act as a focal point for the other party’s investors, appears ideal. In theory, dispute prevention provisions can promote transparency, better informed investments, cooperation between investors and states, reduce blindsiding measures, save costs, prevent hostilities and eventually promote the objectives of the treaty.

Reportedly, India has been taken to investment arbitration on 24 occasions, and suffice it to say, India is wizening-up with its approach towards investments. India is currently defending 11 investment disputes, unlike its Brazilian counterpart, which has no reported ones. Indian investors on the other hand have notably resorted to Investment Arbitration on only 7 instances, of which just 3 remain pending. Though one of the largest developing economies, and one of the fastest growing, too, India still ranks 63^rd on the Ease of doing business index and a startling 163 in resolving contracts. India’s new-found approach, under which any of the 3 new treaties are yet to come in force, is yet to manifest results vis-à-vis dispute resolution. How the new dispute prevention mechanism fares is a question for tomorrow, but it surely would highlight the impact of not resorting to traditional investor-state dispute resolution in an age when investment arbitration is often being questioned.

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On 25 January 2020, India and Brazil signed an investment agreement  (the “India-Brazil BIT”). As an agreement that has been signed at the dawn of the new decade, it is symbolic for a few reasons. First, it is a south-south agreement between two large and growing economies. Second, it abandons investor-state arbitration in favor of state-to-state arbitration with an increased focus on dispute prevention. Third, unlike most investment agreements, it expressly provides that a tribunal cannot award compensation. Instead, it only permits a tribunal to interpret the BIT or order conformity of any noncomplying measure—a move potentially inspired from the WTO dispute settlement mechanism.

The India-Brazil BIT marks a significant shift from the decades-old practice of investor-state arbitration. This BIT instead brings dispute prevention to the center stage with the adversarial form of dispute resolution being a secondary consideration. Further, the adversarial form (by way of an arbitration) is available only between the states party to the treaty, reminiscent of traditional rules of diplomatic protection. This is even reflected in the Preamble, in which India and Brazil note their intention of: “Seeking to maintain a dialogue and foster government initiatives that may contribute to an increase in bilateral investments.” Consequently, the investor has no right under the India-Brazil BIT to directly bring a claim against a state.

The Global Rethink on Investor-State Arbitration

This approach of abandoning or moving away from investor-state arbitration is not anachronistic, even though it may appear so. Rather, it is a sentiment that is currently being shared by both the developing and developed world alike. There is a global rethink on investor-state arbitration today. Since 2017, UNCITRAL Working Group III has been evaluating different options for the reform of investor-state arbitration. In Europe, the European Commission has decided to cancel all intra-EU BITs. More than 168 BITs, including their sunset clauses, will terminate if/when the new multilateral treaty is ratified. There is also a proposal by the European Commission to replace investor-state arbitration with a court structure. Similarly, the EU-Canada CETA and EU’s agreements with Singapore, Vietnam, and Mexico adopt an Investment Court System to represent “a new EU approach to investment-related disputes eliminating the risk of abuse and safeguarding the right to regulate in the public interest.” Similarly, since 2018, ICSID has published a set of proposed changes to modernize its rules. Likewise, other countries are redrafting their model BITs, with several recent examples from countries such as Ecuador, Colombia, and the Netherlands, among others.

Dispute Resolution in the India-Brazil BIT: More Brazilian than Indian?

India and Brazil (both BRICS countries) have redrafted their model BITs in the recent past after elaborate consultations and discussions. Regarding the dispute resolution model, both countries adopt very different approaches. Where India’s Model BIT permits investor-state arbitration, this is only possible after an investor has exhausted local remedies before domestic courts for five years. The Brazil Model BIT abandons investor-state arbitration to create instead a unique scheme to resolve disputes through joint consultations, failing which it provides for state-to-state arbitration. This model is evocative of traditional rules of diplomatic protection in international law. An earlier post on the Blog discusses how the India-Brazil BIT varies from the India Model BIT. The India-Brazil BIT retains features from both the model BITs while also adding new elements. The approach to dispute prevention and resolution, however, appears to be influenced by the Brazilian Model BIT. Under Art. 18 of the India-Brazil BIT, any state that believes a specific measure constitutes a breach of the BIT can refer the matter to a Joint Committee comprising government representatives of both parties (the “Dispute Prevention Procedure”). Such Joint Committee can recommend findings in relation to the alleged breach of the BIT. The referral can relate to a general measure or can be in relation to a specific investor and, if it is in relation to the latter, representatives of the affected investor “may be invited to appear before the Joint Committee” (Art. 18(3)(b)). If the dispute cannot be resolved through the Dispute Prevention Procedure, the matter may be referred to arbitration between the states if both parties mutually agree to do so (Art. 19).

Prohibition on Compensation in the India-Brazil BIT

The dispute resolution clause of the India-Brazil BIT may appear to be similar to the Brazilian Model BIT, but it is different on one crucial point. It expressly takes away the power of the tribunal to award any compensation. The Brazil Model BIT in Art. 24.13 provides that the states may enter into a specific arbitration agreement and request an arbitration tribunal to examine the existence of damages and establish compensation for such damages through an arbitration award. Art. 24.13(c) further states that if the arbitration award provides monetary compensation, the state receiving such compensation shall either transfer to the holder of rights of the investment or request the arbitral tribunal to order the transfer of compensation directly to the holders of rights. However, the India-Brazil BIT does not stipulate the possibility of any specific agreement by way of which an arbitration tribunal may award any sort of compensation to either of the parties. Rather, the language appears to be prohibitory in nature. The table below contrasts the approach for dispute resolution among the various instruments in relation to the power to award monetary compensation:

The clause in the India-Brazil BIT appears to be inspired by the WTO regime where the Dispute Settlement Body appoints panels that decide whether disputed trade measures break a WTO agreement or an obligation. It recommends measures to conform with the WTO rules and how this could be done. It does not, however, award any compensation to either of the disputing parties. It remains to be seen whether remedies under customary international law such as restitution are available if they could be couched as matters dealing with the “interpretation” or “observance by a party of the terms of this Treaty” under Article 19 of the India-Brazil BIT. What is clear is that this BIT seeks to promote a dialogue between the states to resolve any outstanding issues even after they have been interpreted by the arbitration tribunal.

Evaluating the Dispute Resolution Mechanism

Critics might note that the exclusion of the possibility of investor-state arbitration requires investors to depend on diplomatic avenues between states to resolve their disputes. This they argue may hamper investor sentiment and prevent further investments. For example, an investor will likely need to have a good relationship with its state machinery to be able to persuade it to initiate a dispute on its behalf. The home state’s decision to engage with the host state may also depend on several other factors such as: the relationship with the other state at the time when a dispute has arisen; the political climate within both the states; and other deals which may be in the pipeline between both the states, giving either one of them a better bargaining power.

Others would counter that Brazil is an example of a growing economy that continues to receive substantial investments without ever having ratified a treaty providing for investor-state arbitration. Similarly, after finalizing its revised Model BIT, India sent notices terminating or not renewing BITs that had expired to at least 57 countries. The revised Indian Model BIT was largely a result of a spate of claims against India after it lost the White Industries case. The change in India’s approach towards investor-state arbitration has not necessarily hindered its image as a lucrative destination for foreign investment. India was among the top ten recipients of foreign investment in 2019. Similarly, it is among the world’s top ten improvers in the World Bank’s Doing Business report for the third consecutive year, being the only large economy to maintain the streak in the last two reports.

The efficacy of this genre of BITs remains to be established, but as is evident, states appear to be interested in testing new water. Several countries are creating and adopting different models for dispute resolution, including maintaining investor-state arbitration, abandoning investor-state arbitration, or restricting investor-state arbitration. The India-Brazil BIT fits into this narrative and provides another model for consideration to the global community. Ultimately it remains to be seen which model will prevail in this highly polarized debate. As stated by Michael J. Gelb, “Confusion is the welcome mat at the door of creativity.”

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