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India – Supreme Court Gives Further Reassurance On The Limits of its Jurisdiction In Cases Of Arbitration Seated Outside State.

25 June, 2014

 

Legal News & Analysis – Asia Pacific – India – Dispute Resolution

 

In a welcome addition to the recent suite of pro-arbitration decisions emanating from India, in the case of Reliance Industries Limited & Anr v Union of India, the Supreme Court of India overturned the decision of the Delhi High Court and confirmed that in circumstances where an arbitration is seated outside of India and the parties have expressly chosen a foreign law to govern the arbitration agreement, notwithstanding the choice of Indian substantive law, the Indian courts do not have jurisdiction to set aside an arbitral award. The decision, which is relevant to all agreements from the pre-BALCO era, limits the circumstances when the Indian courts can intervene in the context of foreign seated arbitrations.

 

Background

 

Two production sharing contracts were entered into by: ONGC (an Indian state-owned company), Reliance Industries Limited (Reliance) and BG Exploration and Production India Limited for the exploration and production of petroleum. A dispute arose from the terms of the contract concerning the payment of royalties, cess and service tax. Reliance issued a notice of arbitration in December 2010 and the arbitral tribunal was constituted in July 2011.

 

The contracts were governed by Indian law but contained arbitration clauses which stated that they were governed by the laws of England. It was agreed that the seat of arbitration would be London. The tribunal made a Partial Final Award in September 2012 concluding that Reliance’s claims were arbitrable and rejected Union of India’s arguments to the contrary. Union of India  challenged this award before the Delhi High Court pursuant to the provisions of Section 34 of the Indian Arbitration Act 1996 (the Act).

 

Law Governing Pre-BALCO Agreements

 

The arbitration agreement that was considered in the present case was executed prior to the Supreme Court’s landmark decision in BALCO i.e. prior to 6 September 2012. In summary, the ruling of the Supreme Court in BALCO – which held that Indian courts do not have supervisory jurisdiction over foreign seated arbitrations – does not apply to arbitration agreements executed prior to 6 September 2012. The position in respect of such agreements is that Indian courts may exercise supervisory jurisdiction over all arbitrations including foreign seated arbitrations with a nexus to India unless:

 

  • Parties had expressly chosen not to vest the court with such supervisory jurisdiction (usually by clarifying that Part I of the Act – which provides for such supervisory jurisdiction – does not apply); or
  • It was apparent from all of the facts and circumstances of the case that the parties had impliedly excluded the jurisdiction of the Indian courts.

 

Decision Of The Delhi High Court

 

Against this legal and factual background, Union of India made reference to the fact that the relevant contracts containing the arbitration agreement were signed and executed in India, their subject matter was situated in India, they were to be governed and interpreted in accordance with the laws of India and could not be performed in a manner which would contravene the laws of India. Union of India argued that, therefore, Indian law (including Part I of the Act – which provides Indian courts supervisory jurisdiction over arbitrations) could not have been excluded by the parties. Since Part I of the Act includes the Indian courts’ power to set aside arbitral awards, Union of India argued that the Delhi High Court had jurisdiction to set aside the Partial Final Award issued by the tribunal seated in London.

 

Reliance argued that by choosing English law to govern their arbitration agreement and expressly agreeing that London was to be the seat of arbitration, the parties had excluded the application of Part I of the Act.

 

The Delhi High Court upheld the contention of Union of India and held that there was no express or implied exclusion of Part I of the Act. It held that an award which is said to be against public policy can be challenged in India even though the seat of arbitration is outside India.

 

The court also held that since the substantive law of the contract was Indian law, it was more appropriate for the Indian courts to have supervisory jurisdiction over setting aside proceedings – even if the courts in London had supervisory jurisdiction over the arbitration during the pendency of the proceedings.

 

The Decision Of The Supreme Court

 

The Supreme Court confirmed that as the decision in BALCO applied prospectively only, it was bound by the pre-BALCO jurisprudence.

 

However, the Supreme Court held that as the arbitration agreement was governed by English law and since the parties had agreed that the juridical seat of the arbitration was London, the parties did expressly agree to exclude Part I of the Act. In arriving at this conclusion the court also made reference to the fact that the arbitration agreement allowed the Permanent Court of Arbitration at Hague to be approached for the appointment of an arbitrator instead of the Chief Justice of India and the arbitration proceedings were conducted in accordance with the UNCITRAL Rules.

 

The Supreme Court relied on its prior decision in Videocon Industries Ltd v Union of India & Anr (Videocon), a legally and factually similar case,in which it was held that where an arbitration agreement was governed by English law, this necessarily implied that the parties had intended to exclude the provisions of Part I of the Act. The Supreme Court rejected Union of India’s argument that Part I of the Act could not be excluded for public policy reasons as the performance of the contractual obligations in dispute would not lead to the infringement of any laws of India per se and there was no danger of violation of any statutory provisions.

 

The Supreme Court also rejected the Delhi High Court’s suggestion that different courts may have supervisory jurisdiction depending on the stage at which the supervisory courts were approached. The court held that applicability of Part I of the Act is not dependent on the nature of challenge to the award. The Supreme Court found that the High Court had failed to distinguish between the law applicable to the contract and the law applicable to the arbitration, ignored the severability of an arbitration agreement from the substantive contract and arrived at a decision that would lead to “the chaotic situation where the parties would be left rushing between India and England for redressal of their grievances“.

 

In conclusion, the Supreme Court held that the provisions of Part I of the Act had to be excluded as they were “wholly inconsistent” with the arbitration agreement that is governed by English law. As a result, any challenge to an award rendered in the arbitration proceedings would be subject to the provisions of the English Arbitration Act 1996.

 

Comment

 

The Supreme Court’s decision is a welcome clarification of the extent to which the Indian courts have jurisdiction over arbitrations seated outside India. The High Court’s decision had widened the degree to which the Indian courts could be invited to interfere with foreign seated arbitrations. It raised serious concerns and was widely criticised. The Supreme Court’s decision has now restored the Indian courts’ cautious approach to jurisdiction over foreign arbitrations even for pre-BALCO agreementsIn this regardit follows a more general pro-international arbitration trend from the Indian courts, to which the High Court’s decision was an exception.  For investors with arbitration agreements that were entered into before 6 September 2012 and to which, therefore, the BALCO decision does not apply, the Supreme Court’s decision will surely be a welcome one.

 

herbert smith Freehills

 

For further information, please contact:

 

Nicholas Peacock, Partner, Herbert Smith Freehills

nicholas.peacock@hsf.com

 

Vikas Mahendra, Herbert Smith Freehills

vikas.mahendra@hsf.com

 

Kritika Venugopal, Herbert Smith Freehills

kritika.venugopal@hsf.com


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