Arbitration as a dispute resolution mechanism has always been the preferred option despite the challenges it has faced time and again as to how effective it really is. In some instances, the challenge has been due to the power vested with Indian courts to set aside arbitral awards citing wider issues of ‘public policy’. In certain other instances, it has been a debated interpretation of the provisions of the Arbitration and Conciliation Act, 1996 (Indian Arbitration Act) as to whether Indian courts can intervene in matters governed by foreign seated arbitrations.
A couple of recent decisions that are summarized below have set an encouraging path that courts should adopt while dealing with such issues. For a clearer understanding, it is relevant to examine the current legal framework and the law laid down by courts.
The Indian Arbitration Act is divided into two parts – Part I applies to arbitrations that take place within India and Part II applies to international commercial arbitrations that are held outside India. The question that is often raised by contracting parties is whether Indian courts will have jurisdiction over arbitrations governed by Part II of the Indian Arbitration Act i.e. international commercial arbitrations. The decision in Bhatia International laid down that Part I of the Indian Arbitration Act would equally extend to arbitrations that are held outside India, unless it was expressly or impliedly excluded by the parties. This decision was widely debated in as much that the very essence of arbitration as an effective dispute resolution mechanism would stand to reason.
In the landmark Balco decision in 2012, the Hon’ble Supreme Court, in its wisdom and realizing the interpretational fallacy of the decision in the Bhatia International case, finally reversed the decision and confirmed the legal position that Part I of the Indian Arbitration Act would apply only to arbitrations seated in India. The Hon’ble Supreme Court upheld the principle of territoriality and settled the position that Part I of the Indian Arbitration Act would have no application to international commercial arbitrations held outside India. It was however specifically stated that the said position of law would be applicable only as regards arbitration agreements executed after the date of the Balco judgment i.e. 6 September 2012. The question therefore remained as to the position of the arbitration agreements executed prior to 6 September 2012.
Early this year in the matter between World Sport Group (WSG) and MSM Satellite, the question that arose was whether arbitration as a dispute resolution mechanism would be available should there be any determination required of matters alleging fraud, misrepresentation or the like. In this matter, although a division bench of the Hon’ble Bombay High Court initially granted relief to MSM, the Hon’ble Supreme Court overturned the decision in favour of WSG by applying the doctrine of severability since the contract containing the arbitration provision was itself being challenged. It was held by the Hon’ble Supreme Court that the agreement of the parties to resort to arbitration was not rendered inoperative merely for the reason that allegations of fraud have to be inquired into. This decision marked a shift from the approach traditionally followed by Indian courts that allegations like fraud or misrepresentation can only be inquired by courts and not arbitrators.
In a more recent decision involving Reliance Industries Limited and Union of India, the matter in question was whether an express choice of law to govern an arbitration agreement would ensure that Part I of the Indian Arbitration Act will not be applicable even where parties have not expressly excluded Part I. The Hon’ble Supreme Court made a distinction as between the substantive law governing the main contract and the law governing the arbitration agreement. With this decision of the Hon’ble Supreme Court, it now appears clear that even pre‐Balco arbitration agreements would have enough protection provided they have contractually and expressly agreed that foreign law would govern the arbitration agreement, which would then imply exclusion of Part I of the Indian Arbitration Act, and consequentially, exclusion of the jurisdiction of Indian courts.
It is also relevant to note that in the Reliance Industries matter, the Hon’ble Supreme Court while holding that Part I of the Indian Arbitration Act would not be applicable also held that in the event a final award is made against the Union of India pursuant to the arbitration held outside India, the enforceability of the same in India can be resisted on the ground of public policy. It was also specifically accepted that such principle of public policy will necessarily be applied by courts in England (which was the forum contractually agreed between the parties) should arbitrability be challenged, given that the substantive law governing the contract is Indian law.
On the one hand, this decision settles the law as to the inapplicability of Part I to arbitrations held outside India, where parties have expressly or impliedly excluded its applicability. It also clarified the position that even where issues of public policy are involved, foreign courts can be approached to seek appropriate remedy and the issue of public policy alone will not dilute the contractual understanding and agreement of the parties to subject all their disputes to arbitration outside India and seek all their remedies before courts outside India.
While the law on this has been emerging positively, it is necessary that while drafting contracts with an arbitration mechanism for dispute resolution, clear and precise provisions are incorporated to reflect the intention of the parties taking into account the law laid down in various decisions from time to time. These decisions clearly reflect a proarbitration stand of Indian courts and should provide the necessary confidence to the contracting parties involved in international commercial transactions.