Discuss the challenges to International Arbitral awards conducted in India

The author in this article discusses the challenges to awards passed in International Commercial Arbitration conducted in India. The author further discusses the related laws and the judicial pronouncements on the same.
Estimated Reading Time: 10 minutes

Introduction

“The Indian legislature and judiciary have a fundamental choice to make – to respect party autonomy and finality of arbitral awards as envisaged by the 1996 Act or impose judicial supervision on arbitration and revert to the days of the 1940 Act. This choice will shape the course of Indian arbitration for the next decade and beyond”. Let us discuss the challenges faced by international arbitral awards.

Alok Ray and Dipen Sabharwal[1]

The Indian Arbitration and conciliation Act 1996, is based on the UNCITRAL Model Law of 1985. The model law was key legislation in respect of international commercial arbitration. Furthermore, the law is modelled after the UNCITRAL arbitration rules of 1976. The Indian Arbitration and Conciliation Act, 1996 is composite legislation. The provisions of the Act dealing with domestic arbitration; arbitral awards; appointment of an arbitrator; international commercial arbitration and much more. As in the title itself, the Act follows the UNCITRAL Conciliation Rules of 1980 to deal with conciliation issues.

The Indian Arbitration and conciliation Act, 1996 provides for certain grounds to challenge an arbitral award. The position of courts on this matter has undergone a significant shift. The courts have held that domestic awards can be set aside.[2] Recently, the position of a foreign award has also undergone a significant change. Enforceable under Part II of the Act, a foreign award is enforceable only if rendered in a country that is a signatory to the “New York Convention” or “Geneva Convention”. Furthermore, for such awards to be enforceable, the territory should be notified by the central government of India. The IAC Act, 1996 deems any such Award be it domestic or foreign to be a decree of the court and they can be executed as such.

Foreign & Domestic Arbitral Awards

The constant struggle of maintaining a distinction between the setting aside of domestic and foreign awards in recent times has led to a lot of cases being filed in various courts all over India. In one such recent case of Venture Global Engineering v. Satyam Computer Services Ltd.[3] The court upholding its judgment in Bhatia International v. Bulk Trading[4] held that “even though there was no provision in Part II of the Act providing for the challenge to a foreign award, a petition to set aside the same would lie under Section 34 Part I of the Act (i.e. it applied the domestic award provisions to foreign awards). The Court held that the property in question shares in an Indian company) is situated in India and necessarily Indian law would need to be followed to execute the award. In such a situation the award must be validated on the touchstone of public policy of India and the Indian public policy cannot be given a go by through the device of the award being enforced on foreign shores”. The judgment was a wrong one or erroneous one since it failed to perceive the interpretations given in its earlier judgments by a much larger bench. The earlier judgment of Saw Pipeshad the court limit the interpretation to a domestic level. This was misread by in the Venture Global case by the Supreme court.”

Challenges to International Arbitral Awards

The constant battle between international arbitral awards and domestic arbitral awards is a challenge for The Indian Arbitration and Conciliation Act, 1996. The challenge is to as objective and fair as it is to ensure that there is a finality in the award.[5] S.34[6] IAC, Act deals with setting aside of arbitral awards and the application given therein. The section contains three grounds based on which alone, an arbitral award could be set aside. The important part of the section is the ‘public policy’ part.

The importance of understanding this section arises due to a particular term that allows for setting an arbitral award. The term is “public policy”. There has been a lot of debate, concurring as well as dissenting opinions on what is in contravention of the said term. Only after several judgments made decided on the matter, the 2015 amendment to The Indian Arbitration and Conciliation Act, 1996 added an explanation to explanation to the section 34. The Amendment has clarified that “Contravention of Public Policy” would mean that an award was in contravention of section 75 or 81, or contravention to the fundamental policy India; or it was against the basic morality or justice in India.

Arbitral awards are international arbitral awards or domestic is generally regarded to be final. They are also binding between the parties and offer no opportunity or possibility of challenging the said award. This means that if the parties believe that the arbitrator has erred in their judgment while passing the arbitral award even if thought to be in contravention of any law, there are no possibilities of re-opening the arbitral award. At times parties to an arbitration are not participating in an arbitration voluntarily and are forced to engage in such arbitration. This happens even when there is no valid clause of arbitration in an agreement and due to virtue or doctrine of severability/ competence sometimes expressed in Section 16 of the Indian Act.[7]

Section 34 of The Indian Arbitration and Conciliation Act, 1996 enshrines certain grounds based on which an arbitral award may be challenged and set aside. Section enumerates two basic grounds on which an arbitral award can be set aside. The grounds that are mentioned in section 34(2)(a) state that certain grounds such as the improper composition of the arbitral tribunal, malfeasance in the appointment of the arbitrator, challenge to the validity of an arbitration agreement, other such procedural and substantive issues that come up during arbitrations are dealt under this subsection. The prerequisite to challenging an award on these grounds is very basic in the sense that the party challenging the award must provide the evidence/proof any such violations or grounds to exist in the first place. Section 34(2)(b) of the Act, provides the much-debated ground of “public policy”. If a court is in belief and has no contentions to the fact that the award conflicts with the public policy of India, then the court may set aside such an award by the tribunal. This is also possible if the subject of the arbitration is found to be dealt better with the courts as the arbitrator might lack the capabilities to handle it.

The Supreme Court in Sangyong Engineering & Construction co. Ltd. V. National Highways Authority of India[8] held that “the ground of ‘patent illegality’ is available only for the challenge of domestic arbitral awards under Section 34 of the Act. Inter alia, patent illegality would include the following: i. Patent illegality appearing on the face of the award, which goes into the root of the matter, and is not a merely an erroneous application of the law. Contravention of a statute not lined to public policy or public interest cannot be brought in by the backdoor for setting aside an award on the ground of patent illegality. ii. If the arbitrator fails to give reasons for an award. iii. If the arbitrator construes the contract in a manner no fair-minded or reasonable person would.iv. When a decision is perverse, based on no evidence or ignores vital evidence in arriving at the decision”. Before the judgment, the parties were required to apply (single) for an automatic stay. But due to the recent judgments, it has become imperative that the parties file another application that seeks a stay of an arbitral award specifically by mentioning the need for such a stay.[9]

India is highly regarded as an “Arbitration Friendly” country. But the fact that The Indian Arbitration and Conciliation Act, 1996 is yet to solve the problem of interference of an Indian Court in matters of arbitration. The Law Commission on multiple occasions has proposed amendments to the Indian Act of 1996. One such recommendation included a reduction of the meaning and scope of “public policy”. The Legislators and the governments through an increase in trained arbitrators, lawyers, and judges could help in these cases. Other proposals of increasing institutional arbitrations and the deployment expert witness and other such methods could help the international arbitration scene in India.

Grounds for Challenge to International Arbitral Awards

  1. Pre 2015 Amendment
  2. One of the parties to the arbitration was incapable in some of the other ways.
  3. The Arbitration agreement between the parties is deemed to be not valid or is contested by one of the parties to be not valid under the governing laws at the time of challenge;
  4. When one of the parties to the arbitration is not given adequate chance to represent their case or not given a proper notice of arbitration leading to a failure in participating in the arbitration;
  5. When the award passed by the tribunal is beyond the scope of the arbitration or has no relevance with the subject matter of the arbitration dispute;
  6. When the Arbitral tribunal is not formed as per the given procedure under part I of the Act, or when the arbitration procedure is not being followed;
  7. The subject matter of the arbitration is not suitable to be handled by the tribunal under the prevailing law at the time;
  8. The award passed out by the arbitration tribunal is in contravention of the “Public Policy” of India.
  9. POST -2015 AMENDMENT
  10. The grounds that were present in Section 34(2)(a) to (f) before the amendment have remained unchanged even after the 2015 amendment;
  11. The most important addition by the 2015 amendment to the Act of 1996 was the explanation provided for the term “public policy” present in section 34(2)(b). The Amendment clarifies that: that an award was in contravention of section 75 or 81; or in contravention to the fundamental policy India; or it was against the basic morality or justice in India.[10]
  12. A new ground of patent illegality has been added by the 2015 amendment. It is said that if the court finds the award to be vitiated by patent illegality, the court may set such an award aside. But for international commercial arbitration seated in India, the ground is outside the purview of law and thus an award cannot be set aside on such ground;
  13. The 2015 amendment states that an award passed by a tribunal cannot be set aside by a court solely because there was an error in the application of law or understanding of the evidence available;
  14. If it is disputed that an award is in contravention of the policy of Indian laws, a court will not review the merits of such an application.

Recent Judgement on International Arbitral awards

Recently, in the case of Vijay Karia. v. PrysmianCavi E Sistemi SRL[11]S. While hearing the case tried to shed some light on the matter of foreign awards and their enforceability. Will such awards be under the jurisdiction of courts for review and under what circumstances can they even be considered to have contravened the law? the ground that was the topic of the dispute was the “public policy of India”. The award in question, in this case, was alleged to be in contravention of FEMA, 1999 (. Foreign Exchange Management Act, 1999). The International Arbitral awards were also alleged to be contravening the Indian laws of exchange control. The reason for attrition was that the award directed the parties who resided in India as residents were asked to transfer the shares outside India at a discounted price. S.C upon hearing the dispute concluded that a breach of domestic law can never amount to a fundamental breach in India’s policy regarding laws. The court established a rule that the breach in question has to be so basic to the fundamental policy of India that even a minor breach of law or principle will amount to a breach that is not accepted by the courts or the policy itself. Such breaches in the most fundamental values of Indian policy that are reflected in statutes and laws around the country, followed by the courts are sacred. In effect, this meant that a challenge to an arbitral award passed by a tribunal that is, in essence, an India-seated international commercial arbitration tribunal which is founded on the ground that the same violates FEMA regulations would no longer be sustainable.

IMPACT- The decision of S.C in Vijay Karia brought a welcomed change in the legal fraternity as it finally cleared up the doubt surrounding the revoking of an award passed by the tribunal situated in India. The case law serves as a protection against the technical challenges that were raised against an arbitral award before the case law. Another feature of the case law was to safeguard the rights of the foreign party in such cases.The judgment has been deemed to act as a much-needed booster shot to the confidence of foreign parties in India as a viable location for arbitration.

Conclusion

It is settled that an arbitration tribunal shall not have the power to review its arbitral award. Due to such cases, therefore, an arbitral tribunal is not allowed to review an application for setting aside an arbitral award. Thus stopping an arbitration tribunal from passing an award that has been corrected due to its own mistakes in the first place. Section 34(4) of the Arbitration Act would thus essentially become applicable in such cases and the award won’t be set aside. There already exists procedure enshrined U/s 33 of the arbitration Act to rectify mistakes of typographical, clerical, etc., in the award passed by an arbitration tribunal.

Also read Group Of Companies Doctrine and Indian laws


[1]Aloke Ray and Dipen Sabharwal, What Next for Indian Arbitration?,http://www.whitecase.com/files/Publication/cfee45a1-1484-4233-9a98 21226c148e18/Presentation/PublicationAttachment/9ab9418b-755a-4639-9f75- 03a96723d26a/What_Next_for_Indian_Arbitration_Article2.pdf

[2]ONGC v. Saw Pipes, (2003) 5 SCC 705; RenuSagar Power Co. Ltd. v. General Electric Co, (1994) Supp (1) SCC 644.

[3] (2008) 4 SCC 190.

[4](2002) 4 SCC 105.

[5]P.C. Rao & William Sheffield (Eds.), Alternative Dispute Resolution: What It Is And How It Works (1997). Also See, William W. Park, Arbitration Of International Business Disputes: Studies In Law And Practice 204 (2006)

[6]Reads– “Application for setting aside arbitral award”.

[7] Indian Arbitration and conciliation Act, 1996

[8] Civil Appeal No. 4779 of 2019

[9] Ecopack India Paper Cup Pvt. Ltd. v. Sphere International, 2018 SCC OnLineBom 540.

[10] Section 34(2)(b), The Indian Arbitration & Conciliation Act, 1996.

[11]2020 SCC OnLine SC 177.

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