In the landmark decision of Reliance Industries Limited & Anr. v Union of India handed down on 28 May 2014, the Indian Supreme Court has confirmed that the Indian courts do not have jurisdiction to set aside an arbitral award in circumstances where the parties have agreed (i) to refer disputes to arbitration with a seat in London and (ii) provided for English law to govern their arbitration agreement. Rather, any application to set aside an award in this case should be made to the English courts.
International investors who have entered into an arbitration agreement with an Indian counterparty before 6 September 2012 which does not expressly exclude Part I of the Indian Arbitration and Conciliation Act 1996 Act (the 1996 Act), are likely to be interested in this judgment. We explain why below, and also set out a more detailed analysis of the judgment.
Allen & Overy act for Reliance Industries Limited (Reliance) and BG Exploration and Production India (BG) Limited in the underlying arbitration proceedings and also advised on the related Indian court proceedings including this appeal before the Supreme Court.
Why is the judgment significant?
Part I of the 1996 Act contains provisions which enable the Indian courts to exercise supervisory jurisdiction in arbitration proceedings, including to review and set aside arbitral awards. Even though Part I states that it applies where the place of arbitration is in India, there has been a long line of cases to the effect that the Indian courts can exercise supervisory jurisdiction in foreign seated arbitrations. These cases were the subject of widespread commentary and criticism in the international arbitration community.
In Bharat Aluminium v Kaiser Aluminium (2012) 9 SCC 552 (Balco), the Supreme Court confirmed that Part I of the 1996 Act does not apply to arbitration agreements entered into after 6 September 2012 which provide for a foreign seat.
However, for arbitration agreements entered into before 6 September 2012, the question of whether Part I of the 1996 Act applies (and therefore whether foreign awards can be reviewed and set aside in India) falls to be determined by reference to the earlier decision in Bhatia International v Bulk Trading SA and Anr. (2002) 4 SCC 105. In particular, the court will examine whether the parties expressly or impliedly excluded Part I.
Following the decision in Bhatia, many parties included a provision expressly excluding Part I in their arbitration agreements when contracting with Indian counterparties. However, numerous contracts were entered into before the 1996 Act came into force, and the question is therefore how they should be interpreted.
In this case, the arbitration agreement was entered into in 1994, and the Supreme Court considered whether the parties had excluded Part I. The Supreme Court concluded that, by selecting (i) London as the seat and (ii) English law as the governing law of the arbitration agreement, the parties agreed to exclude Part I. As a result, the Indian courts do not have jurisdiction to review and set aside arbitral awards in the present case: any such application must be made before the English courts as the courts of the seat.
This is another instance in which the Supreme Court has rendered a pro international arbitration judgment which limits the degree to which Indian courts can interfere in international arbitration proceedings. The Hon’ble Mr. Justice Surinder Singh Nijjar sat on the bench in this case and in Balco, and it is hoped the trend in favour of such decisions will continue following his imminent retirement from the Supreme Court bench.
Nevertheless, it is worth reminding foreign investors that when contracting with Indian parties it is advisable to refer disputes to arbitration with a seat outside India in order to minimise the scope for judicial intervention by the Indian courts during the course of the arbitration proceedings.
Background facts
The present case concerns two Production Sharing Contracts dated 22 December 1994 between the Government of India on the one hand (the Government) and Reliance, BG (previously Enron Oil and Gas India Limited) and Oil and Natural Gas Corporation Limited (ONGC) on the other hand relating to the Panna Mukta and Tapti oil and gas fields (the PSCs).
Each of the PSCs contain the following provisions:
32.1 Subject to the provisions of Article 33.12, this Contract shall be governed and interpreted in accordance with the laws of India.
32.2 Nothing in this Contract shall entitle the Government or the Contractor to exercise the rights, privileges and powers conferred upon it by this Contract in a manner which will contravene the laws of India.
33.12 The venue of conciliation or arbitration proceedings … shall be London, England. The arbitration agreement … shall be governed by the laws of England.
The PSCs were subsequently amended in 2004/2005 to change the “venue/seat” of arbitration from London to Paris.
The PSCs also made provision for the application of the UNCITRAL Arbitration Rules as the procedural rules of any arbitration proceedings, and the Permanent Court of Arbitration at the Hague (the PCA) as the appointing authority. Notably, the PSCs were entered into prior to the enactment of the 1996 Act and prior to the judgment of the Supreme Court in Bhatia.
Various disputes arose between the parties which were referred to international arbitration by Reliance and BG in December 2010. The arbitral tribunal (the Tribunal) was constituted in early 2011 and comprised Mr Peter Leaver QC, the Hon’ble Justice B.P. Jeevan Reddy and Mr Christopher Lau SC as the presiding arbitrator.
At a hearing in July 2011, the parties to the arbitration agreed that the “juridical seat (or legal place)” of arbitration for the purposes of the present arbitration proceedings would be London, England and subsequently entered into a Final Partial Consent Award to that effect on 14 September 2011, which was also signed by the Tribunal (the Consent Award).
The Government disputed the arbitrability of certain claims advanced by Reliance and BG, including claims seeking reimbursement from the Government in respect of certain taxes pursuant to fiscal stability provisions contained in the PSCs. The Tribunal determined the claims to be arbitrable as a matter of English law – being the law of the arbitration agreement and thus the law applicable to the question of arbitrability – by way of a unanimous Final Partial Award on Arbitrability dated 12 September 2012 (the Arbitrability Award).
In December 2012, the Government commenced proceedings in the Delhi High Court by way of a petition filed under section 34 of the 1996 Act to challenge the Arbitrability Award. Reliance and BG objected to the maintainability of the petition on the basis that the parties, having expressly chosen a foreign seat of arbitration and foreign law to govern their arbitration agreement, had excluded Part I of the 1996 Act. Thus, applying the principle in Bhatia, they submitted that the Indian courts had no jurisdiction to entertain a challenge to the Arbitrability Award.
Following written submissions and an oral hearing, the Delhi High Court rendered a judgment on 22 March 2013 rejecting the jurisdictional objection raised by Reliance and BG and holding that Part I of the 1996 Act had not been excluded. The decision of the Delhi High Court was premised on the following key findings:
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that English law was only the curial law of the arbitration and did not extend to questions of arbitrability or challenges to an award;
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that arbitrability was required to be decided on the touchstone of Indian law and Indian public policy, which would not be considered if Part I did not apply; and
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that, following the Supreme Court’s findings in Venture Global Engineering vs Satyam Computer Services Ltd & Anr. (2008) 4 SCC 190, Article 32.2 was a ‘non-obstante’ clause which had overriding effect over the arbitration agreement contained in Article 33.12.
Reliance and BG applied to the Supreme Court of India by way of a Special Leave Petition (SLP) to challenge the decision of the Delhi High Court in accordance with Article 136 of the Constitution of India.
On 12 July 2013, the Supreme Court granted leave to hear the SLP and listed the matter for final disposal on 3 September 2013. Following a number of adjournments, substantive hearings took place before a two-judge Supreme Court Bench – consisting of the Hon’ble Mr. Justice Surinder Singh Nijjar and the Hon’ble Mr. Justice A.K. Sikri – between March and April 2014. The Bench formally closed the proceedings on 26 April 2014 and rendered a final judgment on 28 May 2014.
Key findings in the judgment
In a comprehensive 72-page judgment, the Bench upheld the appeal by Reliance and BG and found that the Delhi High Court had no jurisdiction to entertain the Government’s petition commenced under section 34 of the 1996 Act on the basis that the application of Part I of the 1996 Act had been excluded by the parties.
The key findings in the judgment are as follows:
A. The applicable test:-
The Supreme Court held that in light of the prospective nature of the decision in Balco – which held that Part I of the 1996 Act does not apply to foreign-seated arbitration proceedings arising from arbitration agreements entered into after 6 September 2012 – the Bench was bound by the law laid out in the Bhatia judgment. The operative finding in Bhatia was that “[i]n cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions”.
Applying the Bhatia test, the Supreme Court held that once the parties had “consciously agreed” that the juridical seat of the arbitration would be London and that the arbitration agreement would be governed by the laws of England, this “would clearly show that the parties have by express agreement excluded the applicability of Part I of the [Indian Arbitration Act]” and it was no longer open to them to contend that the provisions of Part I of the 1996 Act would also be applicable to their arbitration agreement (paras 43 and 58).
B. Foreign seat and governing law:-
A consistent theme in the judgment is the reliance placed on the dual elements of foreign seat and foreign law governing the arbitration agreement. In that regard, the Supreme Court criticised the Delhi High Court for not applying the ratio of the law laid down in Videocon Industries v Union of India (2011) 6 SCC 161.
In Videocon, the Supreme Court found, on almost identical facts, that the Delhi High Court did not have jurisdiction to entertain the petition filed by the Union of India under section 9 of the 1996 Act. The Bench observed that Videocon considered both the seat and governing law of the arbitration agreement in reaching that finding. It therefore likewise took into account both factors in the present case and concluded that, since the parties to the PSCs had agreed to a seat in London and English law to govern the arbitration agreement, “the ratio in Videocon Industries Limited (supra) would be relevant and binding in the present appeal” (para 47). In holding that it was bound by the ratio in Videocon, the Bench also observed that the Videocon judgment was subsequent to and made upon consideration of Venture Global, a judgment relied upon heavily by the Delhi High Court and the Government in asserting the application of the 1996 Act (para 48), and addressed further below.
C. Other factors pointing to exclusion of Part I:
Following a close examination of the other provisions within Article 33, the Supreme Court bolstered its finding that the parties intended to exclude the 1996 Act by their choice of the PCA as the appointing authority (rather than the Chief Justice of India) as well as their choice of the UNCITRAL Arbitration Rules to govern the arbitration proceedings (para 38).
Other issues addressed in the judgment
The Supreme Court decision also proceeded to tackle and reject three key bases upon which the Delhi High Court judgment was founded.
1. Interplay between Articles 32 and 33:-
At the heart of the Government’s case and the Delhi High Court’s judgment was the argument that Article 32.2 – the so-called ‘non-obstante’ clause – had overriding effect over the arbitration agreement and thus the 1996 Act could not be said to have been excluded. Despite the strong emphasis placed on this by the Delhi High Court and the Government, the Supreme Court rejected the proposition that Article 32.2 was a ‘non-obstante’ clause.
The Bench remarked that the Delhi High Court had failed to distinguish between the law applicable to the proper law of the contract and the proper law of the arbitration agreement, and that in doing so, had “failed to notice that by now it is settled, in almost all international jurisdictions, that the agreement to arbitrate is a separate contract distinct from the substantive contract which contains the arbitration agreement” (para 60). It also noted that this doctrine of separability was statutorily recognised in section 16 of the 1996 Act.
It ultimately found that Articles 32 and 33 “do not overlap” (para 38). The expression “laws of India” in Articles 32.1 and 32.2 referred only to the contractual obligations to be performed by the parties under the substantive contract, and because Article 32.1 was made expressly subject to Article 33.12, the arbitration agreement contained in Article 33.12 was separate to and not governed by Article 32.1 (para 41).
2. Venture Global:-
The Supreme Court rejected the view that the 1996 Act should apply in light of the decision in Venture Global. It found that the Venture Global judgment comprised two parts, both of which could be distinguished in the present circumstances, as follows:
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The first part of the judgment adopted the Bhatia test, and although on the facts of Venture Global the outcome was that Part I of the 1996 Act did apply, the application of the same test to the present PSCs leads to the opposite conclusion;
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In the second part of the Venture Global judgment the Court was persuaded to take the view that Part I of the 1996 Act applied since enforcement of the award would violate the laws of India. However, the Bench concluded that in the present case the disputes were contractual in nature and performance of the underlying obligations in the disputes would not violate Indian law.
3. Public policy:-
The Supreme Court also rejected the Government’s argument that, because the underlying disputes invoked matters relating to the public policy of India, Part I of the 1996 Act would be applicable.
The Bench observed that the “[a]pplicability of Part I of [the Indian Arbitration Act] is not dependent on the nature of challenge to the award. Whether or not the award is challenged on the ground of public policy, it would have to satisfy the pre-condition that the [Indian Arbitration Act] is applicable to the arbitration agreement.” (para 72)
Concluding remarks
As referred to above, this is another instance in which the Supreme Court has rendered a pro international arbitration judgment, which limits the degree to which Indian courts can interfere in international arbitration proceedings. It is particularly relevant to parties who have entered into an arbitration agreement with an Indian counterparty before 6 September 2012 that does not expressly exclude Part I of the 1996 Act. Provided such contracts refer disputes to arbitration with a foreign seat, and the arbitration agreement is not governed by Indian law, then pursuant to this judgment Part I of the 1996 Act will not apply, and the Indian courts will not have jurisdiction to review or set aside arbitral awards.
The Supreme Court’s extensive analysis and application of various leading English and Indian authorities lends significant weight to the findings in this judgment. Importantly, the judgment reinforces certain fundamental principles of international arbitration, including:
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The application of the principle in C v D that agreement to an English seat constitutes an agreement to the exclusive supervisory jurisdiction of the English courts;
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The application of the doctrine of separability, enshrined in section 16 of the 1996 Act, which echoes the findings of the recent Supreme Court judgment in Enercon (India) Ltd. & Ors. v Enercon GmbH & Anr. Civil Appeal No. 2086 of 2014 (Arising out of SLP (C) No. 10924 of 2013) and Civil Appeal No. 2087 of 2014 (Arising out of SLP (C) No. 10906 of 2013); and
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The need to avoid a situation in which the courts of two jurisdictions exercising concurrent supervisory jurisdiction, a point also made in Enercon.
Of course the Indian courts will have jurisdiction if enforcement is sought in India under Part II of the 1996 Act. Nevertheless, in another relatively recent pro international arbitration judgment, the Supreme Court in Shri Lal Mahal Ltd. v Progetto Grano SpA (2014) 2 SCC 433 confirmed that a narrow definition of public policy should be applied when considering an application to enforce a foreign award under Part II of the 1996 Act. In summary, enforcement of a foreign award may only be refused by the Indian courts on public policy grounds if such enforcement would be contrary to (i) fundamental policy of Indian law; (ii) the interests of India; or (iii) justice or morality. The Supreme Court confirmed that “The scope of inquiry under Section 48 does not permit review of the foreign award on the merits… While considering the enforceability of foreign awards, the court does not exercise appellate jurisdiction over the foreign award…”. A broader interpretation of public policy continues to apply under Part I in respect of arbitration awards rendered in India, which is an important reason why foreign investors should insist on a seat outside India when contracting with Indian counterparties wherever possible.