(Arbitration clauses have attained ubiquity in international commercial contracts, such as joint venture agreements, involving Indian companies. However, considering the short span of time that the Indian Arbitration and Conciliation Act, 1996 has been in existence, these provisions have not been fully tested in practice.
In this following post, Venugopal Mahapatra, a III Year B.A., LL.B (Hons.) student at the National Law School of India University, Bangalore, identifies one instance of difficulties that parties could possibly face in the implementation of this relatively new piece of legislation. The following is Venugopal’s analysis of a recent case)
The recent Supreme Court judgment Venture Global Engineering v. Satyam Computer Services [AIR 2008 SC 1061] has exposed the enforcement of foreign awards to a challenge on the grounds of domestic public policy. This pronouncement has deep ramifications for international commerce as it poses a significant threat to achieving uniformity and consistency in international commercial arbitration. A short analysis of the case follows.
Satyam Computer Services Limited (SCS), an Indian Company entered into an agreement with Venture Global Engineering (VGE) to create a JV company by the name of Satyam Venture Engineering Services Ltd. An arbitration clause was inserted in the shareholder agreement (SHA) executed by the companies, providing that the state law of Michigan would be the governing law of the contract.
SCS alleged that the VGE had committed an event of default under the SHA and thereby, it had exercised its option of purchasing VGE’s share in the JV company at its book value. On the failure of the parties to resolve the dispute amicably, the matter was referred to arbitration. The arbitrator directed VGE to transfer the shares to SCS and consequently, SCS filed for enforcement of the award before the US District Court, Michigan. VGE objected to the enforcement, arguing that it was in violation of FEMA regulations in India.
‘Patent illegality’ or an award contrary to substantive provisions of law had been interpreted by the apex court in ONGC [(2003) 5 S.C.C. 705] to be contrary to public policy and consequently, a ground for setting aside the award under Section 34 of the Arbitration and Conciliation Act, 1996. VGE controversially argued that as the award was against the provisions of FEMA, it would be open to challenge under Section 34. The submission was controversial because s. 34 is found in Part I of the Arbitration Act, which deals only with domestic awards, while Part II covers enforcement of foreign awards
The Supreme Court’s consideration was limited to this important question of law. In Bhatia International [(2002) 4 SCC 105], the Court had categorically erased the distinction between Part I & Part II of the Arbitration Act, stating that provisions under Part I would apply to all arbitrations and to all related proceedings. For arbitrations held in India, the provisions would be compulsorily applicable and only the derogable provisions of Part I could be deviated from. In international commercial arbitrations, held outside India, the provisions of Part I would apply by default unless the parties expressly or impliedly, excluded all or any of its provisions through agreement.
Relying on this pronouncement, the Court held that the judgment debtor cannot be deprived of his right under Section 34, Part I to invoke the bar of public policy to set aside an award, although it is not a domestic award, and although there is a specific part of the Arbitration Act devoted to such awards. The Court further held that the non-obstante clause contained in Section 11.05 (c) of the Shareholders Agreement which provided that the shareholders should, at all material times act in accordance with the Companies Act and other applicable rules in India overrode the specific arbitration agreements. The Court held that the enforcement must, therefore, be in India. The Court further remarked that as the award, its enforcement, the concerned companies and the entire transaction had a ‘close nexus’ with India, SCS cannot evade the laws of India by taking the award to foreign courts.
The above observations made by the Court impose significant limitation on the extent of contractual freedom available to the parties. The liberty available to the parties in selecting the law, the forum, and the arbitrator is the most alluring aspect of arbitration. Therefore, the UNCITRAL Model Law and general international opinion is strictly against judicial interference in arbitral agreement. Hence, in this light, the judgment deserves careful scrutiny.
The Court also held that there is no difference between Section 48 which deals with enforcement and Section 34 which deals with a challenge to the Award. This seems to be in direct conflict with its opinion in RenuSagar [1994 Supp. (1) SCC 644] which had advocated an extremely narrow scope of public policy while laying a challenge to the enforcement of foreign awards. In light of the expanded scope of public policy as laid down in the ONGC case, this judgment threatens to hinder the requirements of uniformity and consistency that UNCITRAL Model laws seek to promote.
In ONGC, the Supreme Court took the bold step of incorporating ‘patent illegality’ under the scope of ‘public policy’ under Section 34. While doing so, it had relied significantly on the distinction between enforcement of foreign awards and domestic awards to give an expansionary ambit to public policy in case of the latter. However, the Court may have undone a lot of that with this judgment.
A concept, as vague as ‘public policy’, can indeed prove to be an unruly horse, leading arbitration into unknown and undesirable territories. How far, this judgment proves detrimental to the cause of arbitration and international commerce is a question that only time can reveal.
The well written article only illuminates the irony of Indian Arbitration Law. The effect of the badly drafted statute is being worsened by the recent SC decisions.