January 14, 2008

Supreme Court Upholds – International Arbitration Awards can be challenged in Indian courts

The International commercial arbitration space has once again been closely examined by the Hon’ble Supreme Court of India. Relying on its earlier judgment in the case of Bhatia International vs. Bulk Trading S.A. & Anr (2002) 4 SCC 105 wherein it held that Part 1 of the Act was applicable to international commercial arbitration, the Hon’ble Supreme Court has ensured that the parties to international commercial arbitration do not remain remediless under the provisions of the Arbitration & Conciliation Act 1996 (“The Act”) and are given full protection under the Indian law.

International commercial arbitration as defined in Section 2(1)(f) of the Act means an arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is -

1. an individual who is a national of, or habitually resident in, any country other than India; or

2. a body corporate which is incorporated in any country other than India; or

3. a company or an association or a body of individuals whose central management and control is exercised in any country other than India; or

4. the Government of a foreign country;

The Hon’ble Supreme Court of India has, by its judgment dated January 10, 2008, passed in Appeal (Civil) No. 309 of 2008 arising out of SLP (C) No. 8491 of 2007 (Venture Global Engineering Vs. Satyam Computer Services Ltd. & Anr.), held that the provisions of Part 1 of the Act shall apply to international commercial arbitration unless the parties thereto have agreed to exclude any or all of its provisions. The said judgment sets aside an order of the Andhra Pradesh High Court. 

Part 1 of the Act contains various provisions including what constitutes an arbitration agreement, the composition of the arbitral tribunal, jurisdiction, conduct of arbitral proceedings, making of an arbitral award, termination of proceedings. It is pertinent to note that provisions under Part 1 also enable the Courts to grant interim relief, enable parties to challenge the arbitral award and even provides for finality and enforcement of an arbitral award. 

The brief facts of the case are that a US-based company called Venture Global Engineering had entered into a joint venture agreement (“JV”) with Satyam Computer Services Ltd. to constitute a company named as Satyam Venture Engineering Services Ltd. As per the terms of the JV, both parties were equal shareholders. According to the shareholders agreement executed between the two partners, disputes have to be resolved amicably and, failing resolution, such disputes are to be referred to arbitration. A reference was made to arbitration and an award came to be passed directing Venture Global Engineering to transfer the shares to Satyam Computer Services Ltd. A petition was filed by Satyam Computer Services Ltd. before the United States District Court, Eastern District Court of Michigan, to recognize and enforce the award.

Venture Global Engineering (“Appellant”) filed a suit in the Civil Court of Secunderabad in Andhra Pradesh, seeking to set aside the award and for a permanent injunction on the transfer of shares under the Award. The Civil Court rejected the plea of the Appellant and the order was challenged in the High Court of Andhra Pradesh. On February 27, 2007, the High Court dismissed the appeal holding that the award cannot be challenged even if it is against the public policy and in contravention of statutory provisions. The Appellant thereafter preferred an appeal before the Supreme Court of India.

The Supreme Court stated that in their view, a proper and conjoint reading of all the provisions of the Act indicated that Part 1 of the Act was to apply to international commercial arbitration which takes place out of India, unless the parties by agreement (express or implied), had chosen to exclude it or any of its provisions. The Court also stated that such an interpretation had to be preferred to the interpretations adopted by various other High Courts including Orissa, Bombay, Delhi and Madras and such an interpretation would not leave a party remediless.

The Court stated that paragraphs 32 and 35 of Bhatia International made it clear that the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and to all proceeding relating thereto. The Court held that where such arbitration is held in India, the provisions of Part 1 would compulsorily apply and parties were free to deviate to the extent permitted by the provisions of Part 1. The Court further stated that that even in the case of international commercial arbitrations held out of India, provisions of Part 1 of the Act would apply unless the parties by agreement, express or implied, excluded all or any of its provisions.

Implications:

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