The Rising Importance Of Commercial & Investment Arbitration In India

By Zia Mody & Shreyas Jayasimha

Posted: 9th August 2012 09:51

Courts in India are valiantly battling a staggering litigation overload with the Supreme Court alone having over 63, 000[1] cases pending as of June, 2012.  While courts in India have to be approached for constitutional and statutory matters, parties are at liberty to opt for arbitration for commercial disputes.  This article deals with an overview of trends in commercial arbitration and the increase of investment arbitration pertaining to India.
 
India is not a member of the International Centre for Settlement of Investment Disputes (“ICSID”), but has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“the New York Convention”), due to which Indian courts implement awards of foreign tribunals to a greater degree than the recognition given to judgements of foreign courts.  The Arbitration and Conciliation Act, 1996 (“Act”) is based on the UNCITRAL Model Law on International Commercial Arbitration (‘“Model Law”).  Part I of the Act deals with the procedure to be followed in instances where the place of arbitration is in India.  Part II makes provisions for the recognition and enforcement of foreign arbitral awards in India.  Although Part I of the Act primarily deals with arbitration in India, courts in India have expanded its scope to international arbitrations seated outside India.  In Bhatia International v Bulk Trading S.A.2  the Supreme Court extended the powers of domestic courts in India to make interim awards in respect of arbitrations seated outside India by holding that Part I would continue to apply unless excluded by the contracting parties.  This ratio famously culminated in opening all foreign arbitral decisions to the scrutiny of Indian courts under Section 34 of the Act3, apart from allowing Indian courts to hear applications to appoint arbitrators in overseas arbitrations.  There have also been a plethora of decisions on what constitutes exclusion of Part I and various High Courts have differed in their approach.  The Supreme Court is currently reconsidering Bhatia International and Venture Global amongst other decisions in Bharat Aluminium Company Limited v Kaiser Aluminium Technical Service Inc.  4and its decision is eagerly awaited. 
 
Guidance on Drafting of Commercial Arbitral Clauses
 
Foreign companies doing business in India are well advised at the first instance to have an offshore arbitration seat and to exclude the application of Part I of the Act.  This is despite decisions of Courts that have held that a foreign governing law and a foreign seat would act as an implied exclusion of Part I of the Act.   In cases where interim relief from Indian Courts is necessary or where witnesses or evidence are located in India, it would be prudent to retain the applicability of Section 9 and Section 27 of the Act.  In choosing a foreign seat, care must be taken that the chosen country has been notified in India as a reciprocating country for the enforcement of foreign awards.  Currently the most popular seats are Singapore, London, Paris and New York and it is still to be seen whether the recent notification of China would see more clauses with Hong Kong as the seat.  If all contracting parties are Indian companies then the governing law has to be Indian law but a foreign seat is often chosen.  Institutional arbitration is the norm in foreign seated arbitrations although there are a few ad hoc foreign arbitrations.  If offshore arbitration is not possible, it is highly recommended that the parties choose an arbitral institution of repute to conduct the arbitration in India.  Currently the vast majority of domestic or India seated arbitrations are ad hoc in nature and there are legitimate concerns over the efficiency of arbitrations without institutional oversight.  In addition, foreign parties often draft clauses that require chairpersons of arbitral tribunals to be of neutral nationality. 
 
Irrespective of domestic or international arbitration, parties must bear in mind the expansive interpretation of ‘public policy’ in considering challenges to arbitral awards.  Further, decisions of the Supreme Court such as N. Radhakrishnan v. Maestro Engineers5 tend to aid recalcitrant respondents by holding that allegations of fraud are in some cases inherently not arbitrable.  Lastly, delay in enforcement in India rather than lack of enforcement is the experience of most foreign parties. 
 
Impact Of Investment Arbitration On Structuring Of Investment Into India
 
Although it has long been known that while Double Taxation Avoidance Agreements can help protect the tax efficiency of an international investment and real protection for the investment itself is provided through Bilateral Investment Protection Agreements, the latter are often not given the importance they deserves in articles on investing in India.  The earlier experience of foreign investors scurrying for investment treaty protection for their investments in the Dhabol power project had receded in memory till the utility and indeed criticality of such protection was brought to the fore in White Industries Australia Limited v. Republic of India6 (“White Industries”). 
 
The recurring theme of judicial delay again played a part in India’s first loss in investment arbitration.  The claimant in White  Industries invoked the provisions of the India-Australia bilateral investment treaties (“BIT”) and itsmost favoured nation (“MFN”) clause to incorporate beneficial protections available under the India- Kuwait BIT that protected a right to ‘effective means’.  Although White Industries had earlier succeeded in a commercial arbitration against an Indian State-controlled company, it argued that the many years of delay in enforcement and consideration of the challenge to the arbitral award constituted denial of effective means as protected under BITs.  Another factor was the use of an ‘umbrella clause’ to elevate contractual claims to investment disputes.  The investment arbitration that ensued held in the claimant’s favour thus highlighting the strategic importance of structuring investments through countries protected by BITs. 
 
India is signatory to 82 BITs7, most of which are in force and some of the more popular ones include the Netherlands-India BIT and Mauritius-India BIT.  Many economic cooperation agreements and free trade agreements also contain clauses that permit claims of which, the Singapore-India Comprehensive Economic Cooperation Agreement (CECA) is prominent.  Recently, several notices have been issued by claimants against India.  Most famous of these is Vodafone which has sent a notice to enforce its rights under the India-Netherlands BIT pursuant to the Government’s efforts to amend the income tax law making all indirect transfers involving underlying assets in India liable to tax with retrospective effect.  In addition, Russia’ Sistema and ByCell, Norway’s Telenor and Malaysia’s Axiata, have initiated actions under various BITs and the CECA, pursuant to the 2G spectrum allocation dispute.  The Children’s Fund has threatened action against India to protect its investments in the State controlled company Coal India. 
 
In light of the recent events apart from the careful drafting of commercial dispute clauses, it is imperative for long term or large value investors into India to structure investments so as to take full advantage of BIT protections.
 

Zia Mody is the Founder and Senior Partner of AZB & Partners and one of India’s foremost corporate attorneys.  She holds degrees in law from the University of Cambridge and from Harvard Law School.  Zia is a non-executive director of the HSBC, Hong Kong.  She is a Vice President and member of the LondonCourt of Arbitration (LCIA).  Among her many awards, Zia has received the “Best M&A Lawyer of the Year – 201 2” award at the Legal EraAwards and she has been voted as “Business Woman of the Year, 2010” and as one of the country’s most powerful CEOs (2004 to 2008), and as one of the 15 most powerful Indianwomen leaders in 2010 by the Economic Times.  She has been selected as one of the 25 most powerful women in business by Business Today in 2004, 2006, 2007, 2009 and 2010.  AsiaLaw Profile hailed her as one of ‘The Leading Lawyers- India’ in the fields of Mergers & Acquisitions, General Corporate Practice, Dispute Resolution, Corporate Governance and Capital Markets & Corporate Finance for 2010 and 2011, while Asia Pacific Legal 500 and Chambers Global, have identified her as a leading individual in the Corporate Mergers & Acquisition, PrivateFunds, Private Equity, Litigation and Infrastructure Sectors.  “Zia Mody is an obvious choice for many clients involved in large international M&A transactions” states IFLR.
 
Zia Mody can be contacted by via email at zia.mody@azbpartners.com
 
Shreyas Jayasimha Partner at AZB & Partners, read law at National Law School of India University and was a Chevening Scholar at the University of Warwick.  His principal practice areas include litigation, arbitration and regulatory investigations and he has been trained as mediator and has been appointed as arbitrator.  Shreyas is listed in the Who’s Who of International Arbitration, is Regional Editor (South and Central Asia) of the Newsletter of the IBA Arbitration Committee and has published several articles, including co-authoring the India Chapter for Oxford’s Guide to Arbitration in Asia (2011).
 
Shreyas Jayasimha can be contacted via email at shreyas.jayasimha@azbpartners.com
 
End Notes
 
1Supreme Court of India Monthly Statement of Pending Cases as on June 30, 2012 http://supremecourtofindia.nic.in/pendingstat.htm
2[2002] 4 SCC 105
3Venture Global v. Satyam Computer Services AIR 2008 SC 1061
4Civil Appeal No7019 of 2005
5(2010)1SCC72
6UNCITRAL Arbitration in Singapore dated November 30, 2011
7http://www.finmin.nic.in/bipa/bipa_index.asp


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