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.
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