Tuesday, September 16, 2008

Intervention of Indian Courts in Foreign Collaboration Agreements

In the short span of a decade that the Arbitration and Conciliation Act has been in force, the Supreme Court has gradually carved for itself a wider and wider role in various stages of arbitration proceedings. Its role in the appointment of arbitrators, granting interim injunctions and reviewing arbitral awards on grounds of public policy are a few examples.

Its 2002 decision in Bhatia International effectively extended the applicability of several provisions of Part I of the Arbitration Act to international commercial arbitrations outside India. An earlier post noted that in 2008, the Court further extended the Bhatia reasoning, and chose to even review foreign arbitral awards. This trend has been strengthened with a recent decision in INDTEL Technical Services v. WS Atkins PLC (Arbitration Application No. 16 of 2006, decided on 25 August, 2008).

This decision is noteworthy not just for its adherence to Bhatia, but for its decision to allow an Indian company to invoke the Indian Arbitration Act against a foreign company under a contract that was governed by foreign law. INDTEL had entered into a Memorandum of Understanding with WS Atkins PLC, and submitted a joint tender for an Indian Railways Crashworthiness Project. Before a decision could be made on the tender, Atkins withdrew the joint bid and terminated the MoU. The MoU expressly designated English law, providing that “this Agreement, its construction, validity, and performance shall be governed by and constructed in accordance with the laws of England and Wales”. However, when requests for compensation failed, INDTEL filed an application under Section 11 of the Arbitration Act, seeking the appointment of an arbitrator to settle the dispute. The question before the Court was whether this was maintainable in view of the designation of English law, and whether its decision in Bhatia could be extended to cover a situation of this sort.

The Court held that it could. In Bhatia, it had held that Part I of the Act applied to international arbitrations outside India unless there was a specific provision to the contrary. In Venture Global, it had extended this reasoning and held that a foreign arbitral award could be tested by a domestic court on public policy grounds. In this case, Atkins sought to distinguish these decisions by suggesting that the “specific provision to the contrary” did exist, in the form of the designation of a specific system of law as the applicable law. The Court rejected this suggestion, holding that what is required is not just the designation of a specific system of “substantive” law, but of “arbitration law”. In other words, unless the contract either excludes the applicability of the Indian Arbitration Act, or specifies a foreign Arbitration Act as applicable, the Indian Act will be held to apply. Interestingly, in a 1992 decision (NTPC v. Singer, (1992) 3 SCC 551), the substantive law had been specified as Indian law, but the contract was silent on the applicable arbitration law. The Court had held there that Indian arbitration law applied as a matter of presumption. The law on this aspect is therefore unclear today, although it is possible to reconcile these decisions on the basis of the content of the agreements in question.

While the decision may be open to criticism for its interpretation of the Act, it does have the merit of certainty, since it is now clear that a contract will deprive Indian courts of jurisdiction in respect of arbitration matters only if it satisfies one of the two criteria outlined above. This decision is therefore likely to be welcomed and criticised in equal measure.


Anonymous said...

A little belated, but nonetheless a question which I had.

You pointed out that the SC held that "what is required is NOT JUST the designation of a specific system of “substantive” law, but of “arbitration law”.". Does that mean that in order to escape from the wide net of the applicability of Indian Arbitration Act cast by the Court in recent years, one has to stipulate

a) the substantive law which must not be Indian


b) the arbitration law which must specify the inapplicability of Indian arbitration law or specify another law?

From a reading of this blog entry which included the words 'not just' and an earlier entry on August 5, 2008 (A Recent Pronouncement on Enforcement of Foreign Arbitral Awards - which spoke about how the Satyam case had a clause contained in Section 11.05 (c) of the Shareholders Agreement which provided that the shareholders should, at all material times act in accordance with the Companies Act and other applicable rules in India overrode the specific arbitration agreements - and this clause led to the drawing of a nexus with India)it would seem that one has to mandate both the substantive law and the arbitration law in any agreement since

a) the absence of a specific substantive law would lay open the possibility of drawing a nexus with India and

b)the absence of an arbitration law or a provision discliaming the applicability of the Indian arbitration law would lead to the applicability of Indian arbitration law.

Is that correct? I regret the long and elaborative post but this is pretty complicated.

Anonymous said...

"In other words, unless the contract either excludes the applicability of the Indian Arbitration Act, or specifies a foreign Arbitration Act as applicable, the Indian Act will be held to apply."

Would specifying the applicability of the rules of an arbitral institution to an agreement be deemed to be sufficient to exclude the aplicability of the Indian Arbitration Act as per the above statement? Or does it have to be a 'foreign Arbitration Act'?

V. Niranjan said...


Thank you for your interest. You are right, it appears that the position of law in India requires both.

For this purpose, there are two types of contracts we must consider - those which specify a seat of arbitration and either one of substantive or arbitration law, and those which do not specify a seat of arbitration but do designate a substantive foreign law. In the former case, the designated arbitration law will apply and there is no dispute. In the second case, the foreign substantive law will apply, but there is some doubt as to whether local rules of private international law are relevant.

In the early 1990s, NTPC v. Singer decided that there is a presumption that in the absence of a seat of arbitration, there is a presumption that the proper law of the contract is also the proper law of arbitration. But this presumption has been held to be limited, and of no application to the current cases.

Doesn't matter said...

I know this is a little late but as this has been a hot topic hence calls for some further discussion.

A. What happens in the event that the proper law of contract (being Foreign law) has been stated as well as the proper law of the arbitration agreement (being Foreign again) has been stated and the place of arbitration is stated to be INDIA, then can one go to Indian Courts by virtue of the Bhatia judgement?

my view is YES, but kindly clarify. Bhatia is wide enough to hold that as the seat of arbitration is India, one can go to the courts here.