Sunday, June 13, 2010

The Enigma of Foreign Commercial Arbitration and India

We bring you a guest post from two dynamic legal academics, Prabhash Ranjan and Daniel Mathew. Both are assistant professors at NUJS Kolkata, with Prabhash being on temporary leave to finish his PhD at King's College, London.

Ranjan and Mathew argue that moves to amend the Indian Arbitration Act to facilitate enforcement of foreign commercial arbitral awards fail to take into account the dynamics of one species of international commercial arbitration (ICA), namely investment related disputes. Without much ado, I give you their cogently argued piece below:

The Enigma of Foreign Commercial Arbitration and India

By Prabhash Ranjan and Daniel Mathew


Mr Veraapa Moily, after taking charge as law minister in UPA –II, has inarguably raised the otherwise ‘unexciting’ profile of law ministry to a ministry that has an enormous role to play in India’s development. His zeal to change the face of legal system is commendable – whether it is checking corruption in judiciary or reforming legal education. One of the high priority items on Mr Moily’s industrious reform-list is to amend the Indian arbitration act of 1996. Recently, the law ministry issued a consultation paper that talked about the changes that should be made in the Arbitration and Conciliation Act of 1996 (Indian arbitration law) in order to make arbitration an effective alternative dispute resolution system.

One of the key changes proposed is related to international commercial arbitration (ICA) aimed at making enforcement of foreign arbitral awards in India easier. This proposed change has been extolled by corporate law firms and business, alike, because it will allow foreign investors to easily enforce ICA awards in India. Arguably, this will play a role in making India an attractive destination for foreign capital. However, the exhilaration over India becoming an ICA-friendly country, due to this amendment, has missed a key point related to investment treaty arbitration. ICA, according to the current Indian arbitration law is, understood as a system of dispute resolution where at least one party is foreign and where commercial legal disputes are resolved through arbitration.

While it is true that investment treaty arbitration is also a type of ICA under Indian arbitration law since it involves a foreign party aiming to settle a commercial dispute; there is a fundamental difference. Generally ICA involves pure commercial contractual disputes between two private parties or between a private party and state whereas investment treaty arbitration involves commercial disputes between a foreign investor (private party) and a sovereign state where the foreign investor challenges state’s sovereign function as breaching the bilateral investment treaty (BIT) - international treaties signed bilaterally by countries to protect investments of each other. Thus, these disputes are not just commercial in nature – they involve adjudication over country’s sovereign functions by an international arbitral tribunal.

There are numerous cases where such foreign arbitrations have found country’s sovereign functions breaching the BIT, consequently resulting in countries being ordered to pay millions of dollars as damages to foreign investors. For example, in a dispute between a US investor and Argentina, Argentina was ordered to pay US $133.2 million in compensation by an international arbitration tribunal that found Argentina’s sovereign monetary policy violating the US-Argentina BIT. India has already signed more than 70 BITs and has plans to sign many more. Thus, the possibility of such investor-state disputes arising, in the future, is real. In this light, arguably, the euphoria that proposed amendment to the arbitration act will make enforcement of foreign arbitral awards easier, in India, is partly misplaced.

In order to understand, why we argue that this jubilation is partly misplaced, it is important for the reader to first understand what the problem is in the arbitration law of India on foreign arbitral awards that Mr Moily wishes to correct. Indian arbitration law allows challenge to an arbitral award (both domestic and foreign) on grounds of ‘public policy’. Challenge could be construed either as setting aside an arbitral award or refusing its enforcement on grounds that doing so would be contrary to ‘public policy’. Though rather difficult to define precisely, usage of public policy as a ground to challenge an arbitral award remains ubiquitous.

The Supreme Court gave a clear enunciation of what was meant by ‘public policy’ of India in 1994 in a case called Renusagar Power Co v. General Electric Co. The court concluded that when resisting enforcement of foreign arbitral awards in India ‘public policy’ of India had to be accorded a restricted view. The court restricted ‘public policy’ to the following three components - a) fundamental policy of Indian law; or b) interests of India, or c) justice or morality.

In 2003, almost a decade later, the apex court, once again dealing with ‘public policy’ in ONGC v. Saw Pipes, added to the ambit of this list another ground, that of patent illegality. Patent illegality was defined as an illegality that went to the root of the matter and was not of trivial nature. An award was also patently illegal if it was so unfair and unjust so as to shock the conscious of the court. Since the context in this case was challenge to a domestic arbitral award, one could draw a critical distinction. Patent illegality as a ground was to apply only in cases of domestic award and not to foreign arbitral awards.

These two views, Renusagar and Saw Pipes, came to be known as ‘narrow’ and ‘broad’ view of ‘public policy’. Thus for setting aside of domestic arbitral award there was one understanding of public policy (broad meaning), and a different one (narrow meaning) for resisting enforcement of foreign arbitral award. An extremely interesting twist to the whole scenario was given in a decision of the apex court in Venture Global Engineering v. Satyam Computers in 2008. Drawing inspiration from another landmark case (Bhatia International v. Bulk Trading decided in 2002), the court, in Venture Global, concluded that the broad view of ‘public policy’ could be restored to for setting aside even a foreign arbitral award.

Thus, now even a foreign arbitral award has to meet the challenge of compliance with substantive provisions of Indian law (patent illegality) apart from the other three grounds given in Renusagar. Since Venture Global, it has been argued that enforcement of foreign arbitral awards will become very difficult in India. To remedy the situation, the new consultation paper of the law ministry has discussed an amendment to the Indian Arbitration Act whereby ‘public policy’ would be statutorily limited to the ‘narrow view’ mentioned above.

This however does not really solve the problem with regard to foreign arbitral awards issued under investment treaty arbitration, since within the ‘narrow meaning’ of public policy remains the requirement of ‘interests of India’. In cases where an investment treaty arbitral award rules against India’s sovereign function requiring the payment of millions of dollars as damages to the foreign investor, the Indian government can challenge such awards as being against ‘interests of India’ and thus against ‘public policy’. Since this term has unfortunately not been defined yet and worse not qualified, it will result in probable situations where courts will read India’s sovereign, economic and financial interests into ‘public policy’. Thus, the enigma on enforcement of those foreign commercial arbitral awards that arise out of investment treaty arbitration continues, even with the proposed amendment.

This can be sorted only if Indian lawyers and policy makers start recognising that investment treaty arbitration is a different type of ICA requiring different type of legislative and institutional response. It is important to find a statutory solution to enforcement of investment treaty arbitration awards before such arbitral disputes arise rather than putting the cart before the horse.

5 comments:

Renu Gupta said...

Hi

I have a few queries:

1. You have stated that the court in Renusagar’s case restricted ‘public policy’ to the following three components - a) fundamental policy of Indian law; or b) interests of India, or c) justice or morality, which definition of public policy was widened to include a patent illegality, in ONGC case. Patent illegality was defined as an illegality that went to the root of the matter and was not of trivial nature.

To my mind, even the three components in Renusagar’s case were broad enough to accommodate cases of a patent illegality, perhaps under the head ‘fundamental policy of Indian law’.

I am unclear on the exact meaning which could be given to each of these three components and the fourth one added subsequently, since each one of them seems broad enough to cover everything under the sun.

2. You have stated that in cases where an investment treaty arbitral award rules against India’s sovereign function requiring the payment of millions of dollars as damages to the foreign investor, the Indian government can challenge such awards as being against ‘interests of India’ and thus against ‘public policy’.

Although it appears to be an interesting argument, giving effect to the same, would defeat the very purpose of investment treaty arbitration, wherein, two countries enter into a bilateral investment treaty, providing for certain terms and conditions for facilitating cross-border investments and resolution of disputes.

Mere remittance of money from India to a country outside India, in pursuance of an arbitral award (or if challenged, a court decree), would perhaps not be against the “interest of India” or “public policy” of India. Could you elaborate on this please?

Are there any precedents to this effect in any other jurisdiction?

3. I think since bilateral investment treaties are entered into between two states, the disputing parties would be states. I am not clear as to how could there be a dispute between state and a private party under investment treaty arbitration.

Thanks

Aditya Swarup said...

The author(s) go by the assumption that investor- state disputes are purely under the ambit of private international law.
This is generally false as they also haev a public international law aspect. The implementation of such an award then, is also a binding international obligation under a treaty.
Most treaties have the "final and binding clause" which itself has come up for interpretation in many investor state disputes.

However, point well made. The argument would not stand if India were to become a party to the ICSID. In fact, it is interesting to note that India in some of its BITS (eg: India kazakhistan) is using the additional facility of the ICSID as one of its options for dispute settlement.

Badri said...

@ Renu Gupta
On point 3, kindly note that BITs generally provide for dispute resolution mechanisms in case of dispute between investor of on party to the BIT and the other party. See, for example, Article 9 of the Austria- India BIT (http://www.unctad.org/sections/dite/iia/docs/bits/austria_india.pdf) or Article 12 of the Article 12 of the Australia-India BIT (http://www.unctad.org/sections/dite/iia/docs/bits/australia_india.pdf)

oskeladden said...

Let's not forget the third category in Renusagar: "justice and morality". You can't get a broader catch-all than that - what on earth is an "unjust" award anyway?

As I argued in a recent piece, there's definitely good reason to believe that real problem is that the Indian courts (and sizeable sections of the Bar and the business community) don't quite trust arbitration as yet, and until they do, they will keep finding ways to read broad supervisory powers into the ACA. India isn't the only country where this's been happening.

Prabhash said...

Many thanks for your comments. I was travelling and hence the delay in replying back. I apolosgise for the same.

@Renu - your question on ONGC will be answered by my co-author - Damiel Mathew.

as regards your other points -

1. you are right in saying that is ever country is allowed to challenge compensation then it will defeat the very purpose of investment treaty arbitration. However, here the question is not just of transferring money under an arbitral award, which might happen in a pure ICA dispute. In investment treaty disputes, you have the arbitral tribunals ruling against sovereign functions of the host state such as monetary policy, urban policy, affirmative action for the weaker sections of the society etc. Thus, the comopensation issue needs to be seen in light of rulings against such soveriegn functions.

2. Although BITs are signed between countries, it is the unique character of BITs that it gives direct power to investors to bring claims against the host states. All BITs contain provisions that empower private investors to bring claims against any action of the host state if, in the view of the investor, such actions are breaches of the BIT.

@Aditya Swarup

We do not go by the assumption that all investor-state disputes are under private international law. I don't know how you got this impression. We have discussed questions of sovereing actions being challenged by investors, which caanot happen under private international law. A clear distinction needs to be made between investor-state disputes which are contractual and which are treaty based disputes.