International Arbitration Yearbook 2020-2021 – India

A. LEGISLATION AND RULES

A.1 Legislation

The Indian Arbitration and Conciliation Act 1996 (“Act”) is the primary legislation governing arbitration in India. The Act has undergone a series of amendments over the years and 2019 saw the introduction of the Arbitration and Conciliation (Amendment) Act 2019 (“Amendment Act 2019”), which focused on improving the eco-system for commercial arbitration in India and developing an institutional arbitration program that can benefit both domestic and international market participants.

The Amendment Act 2019 introduced a number of changes, the key change being the establishment of a statutory authority called the Arbitration Council of India (ACI). The ACI is required to, inter alia, identify and grade qualifying arbitration institutions to be considered for designation, by High Courts or the Supreme Court for the appointment of arbitrators. The ACI has been tasked with the objective of promoting and encouraging arbitration, mediation, conciliation and other alternative dispute resolution mechanisms in India. The ACI has been vested with the power to frame guidelines for the establishment, operation and maintenance of professional standards in relation to the conduct of arbitration in India.  The ACI has also been vested with the power to frame policies governing the grading of arbitral institutions and arbitrators and recognize professional institutes providing accreditation of arbitrators. The intent of the legislature in establishing the ACI as the nodal agency for promotion and development of arbitration in India is clear from section 43D(2) of the Amendment Act 2019, which states that the ACI may act as a forum for the exchange of views and techniques to be adopted for creating a platform to make India a robust center for domestic and international arbitration and conciliation. The ACI is also tasked with making recommendations to the Government of India on various measures to be adopted to make provision for easy resolution of commercial disputes in India.

On 4 November 2020, the President of India promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2020 (“Ordinance”).  The Ordinance aims to address certain concerns that had been raised by stakeholders after the enactment of the Amendment Act 2019.  The primary purpose of the Ordinance was stated to be, to ensure that all the stakeholder parties get an opportunity to seek an unconditional stay of enforcement of arbitral awards, where the underlying arbitration agreement or contract or making of the arbitral award are induced by fraud or corruption.

Highlights of the Ordinance include:

  • Automatic stay on arbitral awards

The Ordinance provides that an unconditional stay can be granted on the enforcement of an arbitral award (even during the pendency of the setting aside application) if the court is satisfied on prima facie basis that: (a) the arbitration agreement or contract which is the basis of the arbitral award, or, (b) the making of the arbitral award, was induced or effected by fraud or corruption.[1] This above amendment is applicable to all court cases arising out of or in relation to arbitral proceedings, irrespective of whether the arbitral or court proceedings were commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act 2015. [2]

  • Qualification of arbitrators

The Amendment Act 2019 had specified certain qualifications, experience and accreditation norms for arbitrators in its eighth schedule. [3]  The Amendment Act 2019 stated that a person will not be qualified to be an arbitrator unless such person is or has been: (a) an advocate within the meaning of the Advocates Act 1961 having ten years of practice; (b) a chartered accountant within the meaning of the Chartered Accountants Act 1949 having ten years of experience; (c) a cost accountant within the meaning of the Cost and Works Accountants Act 1959 having ten years of experience; (d) a company secretary within the meaning of the Company Secretaries Act 1980 having ten years of experience; (e) an officer of the Indian Legal Service; (f) an officer with a law degree having ten years of experience in the legal matters in the government, autonomous body, public sector undertaking or at a senior level managerial position in private sector; (g) an officer with an engineering degree having ten years of experience as an engineer in the government, an autonomous body, public sector undertaking or at a senior level managerial position in the private sector or being self-employed; (h) an officer having senior level experience of administration in the Government of India or any state government in India, or having experience of senior level management of a public sector undertaking or a government company or a private company of repute; or (i) a person having educational qualification at degree level with ten years of experience in a scientific or technical stream in the fields of telecom, information technology, intellectual property rights or other specialised areas in the government, an autonomous body, public sector undertaking or a senior level managerial position in a private sector, as the case may be.

The Ordinance omits this schedule of qualifications for arbitrators and states that the qualifications, experience and norms for accreditation of arbitrations will be specified by regulations.  Presently, no such regulations have been passed after the Ordinance was promulgated.  On 4 February 2021, a bill to amend the Act was introduced in the Lok Sabha, i.e. lower house of the Parliament (“2021 Bill”). The 2021 Bill seeks to repeal the Ordinance and proposes similar amendments as that of the Ordinance with effect from November 04, 2020, being the date when the Ordinance came into effect.

A.2 Institutions, Rules and Infrastructure

The year 2020 did not have any significant developments concerning local arbitration institutions in India.  In 2019, the New Delhi International Arbitration Centre Act 2019 (“NDIAC Act”) was passed and came into force with effect from 2 March 2019.  The NDIAC Act was passed to establish the New Delhi International Arbitration Centre (“NDIAC”) in place of the existing International Centre for Alternative Dispute Resolution (“ICADR”) which was set up in 1995. The main objective of the NDIAC[4] is to bring targeted reforms to develop itself as a flagship institution for conducting international and domestic arbitration, and to inter alia promote research and study, providing teaching and training, and organizing conferences and seminars in arbitration, conciliation, mediation and other alternative dispute resolution matters; provide facilities and administrative assistance for conciliation, mediation and arbitral proceedings and maintain panels of accredited arbitrators, conciliators and mediators both at national and international level or specialists such as surveyors and investigators.[5]

In March 2020, the Government of India called for public consultation and comments on the New Delhi International Arbitration Centre (Terms and Conditions and Salary and Allowances Payable to the Chairperson and Full-time Members) Rules, 2020, the New Delhi International Arbitration Centre (Travelling and other Allowances Payable to Part-time Members) Rules, 2020, New Delhi International Arbitration Centre (Number of Officers and Employees of the Secretariat of the Centre) Rules, 2020, New Delhi International Arbitration Centre (Qualifications, Experience, Method of Selection and the Functions of the Registrar, Counsel and other Officers and Employees of the Centre) Rules, 2020.  These rules are procedural in nature and are to be passed under the NDIAC Act.

B. CASES

B.1 Investment Treaty Arbitrations

India executed a new BIT with Brazil on 25 January 2020.[6] It is important to note that after the radical policy revamp introduced by the Government of India in 2017 which resulted in the termination of a number of BITs, the government has only entered into new BITs with four nations, namely Belarus, Taiwan, Kyrgyzstan and Brazil, and is in the process of negotiations with Cambodia and Philippines as well.

On 25 September 2020, the international arbitral tribunal constituted in the case of Vodafone International Holdings BV (“Vodafone”) v. The Republic of India held that India had violated the fair and equitable treatment provision guaranteed to Vodafone under the 1995 BIT between India and the Kingdom of Netherlands.  To briefly revisit the background to this matter, the Supreme Court of India[7] had discharged Vodafone of the tax liability imposed on it by the Income Tax Department for the Hutchinson Essar Limited – Vodafone share deal, holding that the sale of shares in question did not amount to transfer of a capital asset within the meaning of section 2(14) of the Income Tax Act 1961. After this verdict of the Supreme Court, the Parliament passed a retrospective law[8] which brought disposing of or parting with an asset into the term “transfer”.  Further, it was clarified that an asset or a capital asset being any share in a company incorporated outside India shall be deemed to be situated in India. Aggrieved by this, Vodafone invoked arbitration under the India–Netherlands BIT in 2012 before the Permanent Court of Arbitration.  It was this arbitral tribunal that held that India violated the fair and equitable treatment clause under the India–Netherland BIT, and therefore directed India to reimburse approximately USD 11.5 million to Vodafone. India has challenged the BIT award in a Singapore court.

On 23 December 2020, the arbitral tribunal constituted in the case of Cairn Energy PLC (“Cairn”) v. The Republic of India held that India had failed to accord Cairn’s investments fair and equitable treatment and therefore had breached its obligation under the UK-India BIT. The arbitral tribunal awarded Cairn an amount of USD 1.2 billion, plus interest and costs. The dispute had arisen out of the demand of approximately USD 1.4 billion by the Income Tax department in taxes on alleged capital gains made by Cairn on the basis of the retrospective law passed by the Indian Parliament after the Supreme Court decision in the Vodafone case. India is currently considering options in respect of the arbitral award including legal remedies before appropriate fora.

In previous editions of the Baker McKenzie International Arbitration Yearbook, we have reported that Nissan Motor Co. Ltd., Japan (“Nissan”), secured a win against India’s jurisdictional objection in an investment treaty arbitration instituted under the 2011 Comprehensive Economic Partnership Agreement between Japan and India (“CEPA”). Nissan had initiated UNCITRAL arbitration proceedings under CEPA against India, in respect of disputes arising out of a memorandum of understanding entered into among the Government of Tamil Nadu (“GoTN”), Nissan and Renault S.A.S. (“Renault”) on 22 February 2008 (“2008 MoU”). As an update, sources indicate that Nissan and GoTN have arrived at a mutual settlement and both parties are in the process of withdrawing their respective legal claims and challenges.

B.2 Instrument bearing arbitration clause to be stamped

A three-judge bench of the Supreme Court of India in Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities and Others v. Bhaskar Raju and Brothers and Others[9], held that when any instrument is relied upon as containing the arbitration agreement, the court is duty-bound to consider whether the document is properly stamped or not, even if an objection to that effect is not raised. The court held that in cases where any instrument is not properly stamped, the instrument should be impounded and dealt with in the manner specified under section 38 of the Indian Stamp Act 1899. The court, relying on its own judgment in SMS Tea Estates (P) Limited v. Chandmari Tea Co. (P) Limited[10], ruled that an arbitration clause in the unstamped instrument cannot be acted upon. Further, if the deficit duty and penalty is paid in the manner set out in section 35 or section 40 of the Stamp Act 1899, the court held that the instrument can be acted upon or admitted in evidence by the court.

However, a different three-judge Bench of the Supreme Court in N.N. Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. & Ors[11] disagreed with its earlier decisions wherein it had held that the statutory bar contained in section 35 of the Indian Stamp Act 1899 would also render the arbitration agreement contained in such an instrument as being non-existent, unenforceable, or invalid, pending payment of stamp duty on the substantive contract/instrument. The court overruled the judgment in SMS Tea Estates[12] case stating that it did not lay down the correct position in law on the following two issues: (a) that an arbitration agreement in an unstamped commercial contract cannot be acted upon, or is rendered unenforceable in law; (b) that an arbitration agreement would be invalid where the contract or instrument is voidable at the option of a party such as under section 19 of the Contract Act 1872.

This issue has now been referred to a larger bench of the Supreme Court.

B.3 Applicability of Limitation Act 1963

In Government of India v. Vedanta Ltd. & Ors.[13], the Supreme Court allowed the enforcement of a Malaysian seated foreign award under section 47 of the Act passed in favor of Vedanta Limited and against the Government of India.  The legal issue in this case arose from a product-sharing agreement that had been executed between the government and Cairn India Limited.  Vedanta stepped into the shoes of Cairn India at a later point in time and the contract was executed for the purpose of separating oil and gas from a seaward field. The government claimed that Vedanta had caused an unjust misfortune to the public exchequer and thereafter the matter was referred to international arbitration. In upholding the foreign arbitral award, the Supreme Court held that enforcement might be rejected just on the off chance that it disregards the state’s most essential ideas of profound quality and equity, which has been understood to imply that there ought to be incredible faltering in declining requirement, except if it is gotten through dishonor or fraud, or unjustifiable methods.  Further, the Supreme Court separately held that the period of limitation for filing a petition for enforcement of a foreign award under sections 47 and 49 of the Act would be governed by Article 137 of the Limitation Act 1963, which prescribed a period of three years from “when the right to apply accrues”. In case of delay, a party may file an application under section 5 of the Limitation Act 1963, for condonation.

The Vedanta judgment supports a pro-enforcement approach being adopted by the Supreme Court towards foreign arbitral awards, which can go a long way in promoting India as a favorable arbitration hub.

B.4 Arbitrability of disputes involving questions of fraud

The Supreme Court of India in the case of Avitel Post Studioz Limited & Ors. v. HSBC PI Holdings (Mauritius) Ltd[14] ruled on the issue of arbitrability of disputes involving questions of fraud. The Supreme Court held that arbitration can be refused only where serious allegations of fraud are involved and set out two tests to state that serious allegations of fraud would arise only if either of the two tests were met. The first test is to consider whether the arbitration agreement between the parties cannot be said to exist. This relates to situations where the party against whom the breach is alleged cannot be said to have entered into the agreement relating to the arbitration at all. The second test is to consider whether allegations of arbitrariness, fraud or bad faith (mala fide) conduct are made against the State or its instrumentations.  In such situations, the matter would not be arbitrable since the questions raised would be a matter of public law, thereby necessitating the hearing of the case by a writ court. The court further held that the judgment in N. Radhakrishnan v. Maestro Engineers[15], which had held that allegations of fraud are not arbitrable, lacks precedential value and cannot be applied as a precedent for application of the fraud mantra to negate arbitral proceedings.

B.5 Lease / tenancy matters are arbitrable

In Vidya Drolia and Ors. v. Durga Trading Corporation[16], the Supreme Court held that disputes between a landlord and a tenant under the Transfer of Property Act 1882 (“TP Act”) are arbitrable as they pertain to rights in personam.  It was however clarified that the disputes between a landlord and a tenant that are specifically governed by rent control legislation in India, are not arbitrable. This is on account of the fact that a specific court or forum has been given exclusive jurisdiction to apply and decide special rights and obligations in these situations. The court also held that disputes relating to a mortgage under the TP Act were incapable of being settled by arbitration since they involved rights in rem as opposed to rights in personam.  Lastly, the Supreme Court also held that disputes relating to lease/tenancy agreements governed by the TP Act are also arbitrable.

B.6 Execution of foreign arbitral award arising out of two-tier arbitration

The Supreme Court of India in the case of Centrotrade Minerals and Metals Inc. v. Hindustan Copper Limited[17]ordered the execution of a foreign arbitral award that arose out of a two-tier arbitration mechanism. A dispute arose between the parties with regard to the quantity of dry weight of copper concentrate delivered. Clause 14 of the agreement between the parties contained a two-tier arbitration agreement by which the first tier was to be settled by arbitration in India. If either party disagreed with the result, that party would have the right to appeal to a second arbitration to be held by the ICC in London. The court relied on its own judgment in 2017 in the case of Centrotrade Minerals and Metals Inc. v. Hindustan Copper Limited, between the same parties, wherein it was held that two-tier arbitration agreements, such as the arbitration agreement between the parties, were valid and legally permissible under the Act and that there was nothing under the Act which prohibited a two-tier arbitration mechanism, where the first arbitration proceeding is conducted under part I of the Act and an appeal therefrom is conducted under part II of the Act.

B.7 Patent illegality is a ground to set aside domestic arbitral award

The Supreme Court in the case of Patel Engineering Limited v. North Eastern Electric Power Corporation Limited̰[18], reaffirmed its decision in Associate Builders v. Delhi Development Authority[19] and SsangYong Engineering and Construction Limited v. National Highways Authority of India[20], where it had considered patent illegality as a ground to set aside domestic arbitral awards. Relying on these cases, the Supreme Court defined the scope of patent illegality to be available as a ground if: (a) thḛ decision of the arbitrator is found to be perverse, or so irrational that no reasonable person would have arrived at the same; or, (b) the construction of the contract is such that no fair or reasonable person would take; or, (c) that the view of the arbitrator is not even a possible view.

B.8 Minimal interference by courts in enforcement of foreign awards

In Vijay Karia & Ors. v Prysmian Cavi e Sistemi S.r.l & Ors[21],  the Supreme Court held that a foreign award may be enforced even if inconsistent with the provisions of the Foreign Exchange Management Act 1999 (“FEMA”). The court held that a violation of the fundamental policy of Indian law must amount to a breach of some legal principles or legislation that is so basic to Indian law that is not susceptible to being compromised. These would be the core values of India’s public policy as a nation, reflected not only in statutes but also time-honored, hallowed principles which are followed by the courts. The Supreme Court held that a breach under FEMA can never be held to be a violation of the fundamental policy of Indian law since approval or permission could subsequently be obtained from the Reserve Bank of India for the transaction.

B.9 Seat and Place of Arbitration

In BGS SGS Soma JV v. NHPC Ltd. [22],  the Supreme Court held that when parties have selected a seat of arbitration, or if the arbitral tribunal has determined a seat, such a determination automatically confers jurisdiction on the courts at such seat of arbitration for the purposes of interim orders and challenges to an award. The Supreme Court further held that when a seat has not been designated by the arbitration agreement, and only a convenient venue has been designated, an application under section 9 may then be preferred in any court where a part of the cause of action has arisen. The earlier court before which an application has been made would be deemed the court having exclusive jurisdiction and all further applications must lie before this court by virtue of section 42 of the Act. The court held that in the absence of any contrary indications, the designation of a “venue” in an arbitration clause can indicate the “seat” of the arbitration, while holding that the decision in Hardy Exploration[23] is not good law as it did not follow the “Shashoua Principle” which was confirmed by the Constitution Bench of the Supreme Court in Bharat Aluminium Company v. Kaiser Aluminium Technical Service Inc. & Ors.[24]

In Hindustan Construction Company Ltd v. NHPC Limited[25],  the Supreme Court relied upon its decision in BGS Soma to state that as New Delhi was the chosen seat of arbitration between the parties, all applications under part I of the Act were to be made only before the courts at New Delhi.

In  Mankatsu Impex Private Ltd v. Airvisual Limited[26], the Supreme Court considered whether an application for appointment of an arbitrator would be made before Hong Kong or New Delhi as the arbitration agreement Memorandum of Understanding (“MoU”) did not explicitly provide for the “seat” of the arbitration but identified Hong Kong as the “place” of arbitration. The Supreme Court held that the words ‘place of arbitration shall be Hong Kong’ would independently not be sufficient to hold Hong Kong to be the seat of arbitration.  The court would have to look at other clauses in the MoU and the conduct of the parties to determine the seat. In this particular case, as the MoU further stated that “any dispute, controversy, difference arising out of or relating to the MoU shall be referred to and finally resolved by arbitration administered in Hong Kong”, the court held that the seat of arbitration is Hong Kong. Therefore, the laws of Hong Kong would govern the arbitration (including for the appointment of the arbitrator).

B.10 Section 34 petition is not maintainable against a foreign arbitral award

In Noy Vallesina Engineering SpA v. Jindal Drugs Limited & Ors.[27], the Supreme Court held that in a case where the contract is entered into or an award is rendered, before September 6, 2012 (i.e. before the decision in Bharat Aluminium Company v. Kaiser Aluminium Technical Service Inc. & Ors.[28]), a petition under section 34 of the Act is not maintainable against a foreign award.

B.11 Arbitrability of disputes under Trust Act

In Dr. Bina Modi v. Lalit Kumar Modi[29], the Delhi High Court held that issues under the Trusts Act cannot be the subject matter of arbitration. Relying upon Vimal Kishor Shah v. Jayesh Dinesh Shah[30], the court held that disputes relating to trust, trustees and beneficiaries arising out of the trust deed and the Trusts Act 1882 are not capable of being decided by the arbitrator despite the existence of an arbitration agreement to that effect between the parties. It was further held that the court would have jurisdiction to grant an anti-arbitration injunction where the party seeking the injunction can demonstrate that the agreement is null and void, inoperative or incapable of being performed. The Delhi High Court judgment has been challenged before the Supreme Court of India.

B.12 Act does not prohibit Indian parties from choosing foreign arbitral seat

In GE Power Conversion India Private Limited v. PASL Wind Solutions Private Ltd.[31], the Gujarat High Court held that the Act does not per se prohibit two Indian parties from choosing a foreign seat as the seat of an arbitral proceeding. Such an agreement would not violate the Act the public policy of India or the Indian Contract Act 1872. It further held that the nationality of the parties has no relevance for considering the applicability of part II of the Act which is solely based on whether the foreign seat of arbitration is signatory to the New York Convention. If this requirement is fulfilled, part II of the Act will be applicable.

In Dholi Spintex Pvt. Ltd v. Louis Dreyfus Company India Pvt. Ltd.[32], the Delhi High Court held that an arbitration agreement/clause is independent of the underlying contract. Accordingly, the parties may choose a different governing law for the arbitration clause, from the substantive law of the underlying contract. The High Court also clarified that two Indian parties can choose a foreign law as the law governing an arbitration under the contract.

B.13 Emergency Arbitration under Indian Law

In Future Retail Limited v. Amazon.com NV Investment Holdings LLC[33], Future Retail sought an injunction on the ground that the order passed by the emergency arbitrator under the Arbitration Rules of SIAC lacked jurisdiction (coram non judice), was invalid and had no legal status under the Indian law. The Delhi High Court refused to grant the injunction as sought by Future Retail and inter alia held that orders passed by an emergency arbitrator were valid under the Act and that an emergency arbitrator was not coram non judice.

Authors:

Aditya Vikram Bhat, Senior Partner
Priyanka Shetty, Counsel
Adoksh Shastry, Senior Associate

Footnotes:

[1] Section 2 of the Ordinance.
[2] Explanation to section 2 of the Ordinance.
[4] Section 14 of the NDIAC Act.
[5] Section 14 of the NDIAC Act.
[6]Available on https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/5912/download (Last accessed on January 22, 2021 at 06:00 P.M. IST).
[7] Vodafone International Holdings BV v. Union of India and Ors, (2012) 6 SCC 613.
[8] Finance Act 2012, Section 9(1).
[9] Dharmaratnakara Rai Bahadur Arcot Narainswamy Mudaliar Chattram & Other Charities and Others v. Bhaskar Raju and Brothers and Others, (2020) 3 SCC 612.
[10] SMS Tea Estates (P) Limited v. Chandmari Tea Co. (P) Limited, (2011) 14 SCC 66.
[11] N.N. Global Mercantile Pvt. Ltd. v Indo Unique Flame Ltd. & Ors, Civil Appeal Nos. 3802-3803/2020.
[12] Supra
[13] Government of India v. Vedanta Ltd. & Ors, 2020 SCC OnLine SC 749.
[14] Avitel Post Studioz Limited & Ors. v. HSBC PI Holdings (Mauritius) Ltd, 2020 SCC OnLine SC 656.
[15] N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72.
[16] Vidya Drolia and Ors. v. Durga Trading Corporation, 2020 SCC OnLine SC 1018.
[17] Centrotrade Minerals and Metals Inc. v. Hindustan Copper Limited, 2020 SCC OnLine SC 479.
[18] Patel Engineering Limited v. North Eastern Electric Power Corporation Limited, 2020 SCC OnLine SC 466.
[19] Associate Builders v. Delhi Development Authority, (2015) 3 SCC 49.
[20] SsangYong Engineering and Construction Limited v. National Highways Authority of India, (2019) 15 SCC 131.
[21] Vijay Karia & Ors. v Prysmian Cavi e Sistemi S.r.l & Ors., 2020 SCC OnLine SC 177.
[22] BGS SGS Soma JV v. NHPC Ltd., (2020) 4 SCC 234.
[23] Union of India v. Hardy Exploration and Production (India) Inc., 2019 (13) SCC 472.
[24] Bharat Aluminium Company v. Kaiser Aluminium Technical Service Inc. & Ors., 2012 (9) SCC 552.
[25] Hindustan Construction Company Limited v. NHPC Limited, 2020 SCC OnLine SC 305.
[26] Mankatsu Impex Private Ltd v. Airvisual Limited, 2020 SCC OnLine SC 301.
[27] Noy Vallesina Engineering SpA v. Jindal Drugs Limited & Ors., 2020 SCC OnLine SC 957.
[28] Bharat Aluminium Company v. Kaiser Aluminium Technical Service Inc. & Ors., 2012 (9) SCC 552.
[29] Dr. Bina Modi v. Lalit Kumar Modi, 2020 SCC Online Del 1678.
[30] Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788.
[31] GE Power Conversion India Private Limited v. PASL Wind Solutions Private Ltd., 2020 SCC OnLine Guj 2432.
[32] Dholi Spintex Pvt. Ltd v. Louis Dreyfus Company India Pvt. Ltd., 2020 SCC Online Del 1476.
[33] Future Retail Limited v. Amazon.com NV Investment Holdings LLC, 2020 SCC OnLine Del 1636.

Published In:Baker McKenzie
Date: May 17, 2021