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Gard News 207, August/October 2012

In a welcome move for arbitration in the Asia Pacific region, India has recently gazetted China, which includes Hong Kong and Macau, as a country having a reciprocal treaty for enforcement of foreign arbitration awards.1 The enforcement of foreign arbitration awards in India nevertheless remains problematic. However, good drafting of arbitration clauses can improve the prospects of enforcement.

 

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Over the past decade, India has emerged as a regional economic power house, and is one of the fastest-growing economies in the world. An important consideration for anybody wishing to do business with an Indian company is whether one can readily enforce claims in India if a dispute arises.

Arbitration remains the preferred method of dispute resolution in the shipping industry. London arbitration has traditionally been most prevalent, but it is not at all unusual to find New York, China, Singapore, Hong Kong and other arbitration clauses in charterparties.

India and the New York Convention
India is a signatory to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). As such, it would seem perfectly reasonable for a foreign shipowner or charterer prospectively looking to enter into a charterparty and arbitration agreement with an Indian company to assume that there is no reason for concern.2 However, they would be wrong.

This is because the Indian Arbitration and Conciliation Act 1996 (the Act) sets more stringent requirements than those envisaged in the New York Convention as to what constitutes a "foreign award" for the purpose of enforcement under the Act. Technical applications and challenges to arbitration clauses or awards before the already backlogged Indian courts leading to long delays have unfortunately been common. In addition, the way in which the Indian Supreme Court has interpreted the Act has effectively put foreign arbitration awards at risk of being set aside in India.

The Indian government, in common with many other signatories, has signed the New York Convention with "reciprocity" and "commercial" requirements: "...the Government of India declare that they will apply the Convention to the recognition and enforcement of awards made only in the territory of a State, party to this Convention. They further declare that they will apply the Convention only to the differences arising out of the legal relationships, whether contractual or not, which are considered as commercial under the law of India." The reciprocity and commercial requirements have both found their way into Part II Section 44 of the Indian Arbitration and Conciliation Act 1996.

The commercial reservation is the less problematic of the two, particularly insofar as the shipping industry is concerned. Although the term "commercial" has itself not been defined in the Act, the Indian Supreme Court tended to favour a wide interpretation of the term. Guidance can also be taken from the UNCITRAL Model Law (upon which the Act is modelled), which calls for a wide interpretation of the term "so as to cover matters arising from all relationships of a commercial nature, whether contractual or not", and which considers "carriage of goods or passengers by air, sea, rail or road" to be relationships of a commercial nature.3

However, the reciprocity requirement as expressed in Section 44 of the Act is certainly more onerous than that contemplated by the New York Convention. Section 44 requires not only that the arbitration award must have been made in a convention country, but also that the particular country must also have been notified in The Gazette of India (the Gazette)4 as being a country to which the New York Convention applies.

So, for enforcement purposes in India, it is not sufficient for a country simply to have signed or ratified the New York Convention. This has caused, and can still pose, serious problems for parties wishing to enforce a foreign arbitration award in India.

The list of countries previously notified by India includes major arbitration centres such as the UK, USA, France, Greece, Norway and Japan. India has increased that list in recent years. Australia was added in 2008 and now China and Hong Kong have also been notified.

However, to put things in context, of the current 146 signatories to the New York Convention, less than a third of these have been notified in the Gazette.

The significance of India's recent notification for arbitration in the Asia Pacific region
India's notification of China, and the consequent recognition of and ability to enforce Chinese and Hong Kong arbitration awards in the Indian courts comes as a welcome move for arbitration in the Asia Pacific region. It is thought that the appeal of China, and in particular Hong Kong, as an arbitration centre for disputes with an Indian connection will be enhanced. It will allow parties greater choice of arbitration centres. In particular, parties will now have the opportunity to make a more evenly balanced choice between the two most popular Asian arbitration centres for shipping disputes, namely, Hong Kong and Singapore and the arbitration institutions based in those two jurisdictions, the Hong Kong International Arbitration Centre (HKIAC) and the Singapore International Arbitration Centre (SIAC) respectively. Singapore was gazetted some time ago and has consequently, up until now at least, enjoyed preferential status as an arbitration centre for parties where there has been an Indian connection.

Historically, the HKIAC has been, and remains, a more popular centre for parties outside China than the principal mainland Chinese arbitration centre, the China International Economic and Trade Arbitration Commission (CIETAC), which is headquartered in Beijing.

However, CIETAC has recently made significant efforts to widen its appeal outside mainland China. These efforts include the implementation of new CIETAC arbitration rules on 1st May 2012.5 The purpose of the new CIETAC rules is to bring Chinese arbitration more in line with the current international arbitration practices in other major arbitration centres. Some of the more important changes to the CIETAC rules include the ability of CIETAC to choose a non-Chinese seat for arbitration, if appropriate, and the removal of the provision making Chinese the default language of an arbitration. The new CIETAC rules and the recognition of, and ability to enforce, its awards in India could make CIETAC, and China, a more attractive choice as an arbitration centre.

The enforcement of arbitration awards in India remains problematic
Even if a foreign arbitration award was made in a country which has been notified in the Gazette of India, the enforcement of the award is by no means guaranteed. Challenges before the Indian courts on technical grounds have unfortunately been the norm.

Foreign arbitration clauses in contracts involving parties in India have routinely been challenged under Section 9 of the Act on the basis that Section 2(2) of Part I of the Act gives powers to the Indian courts to grant interim measures even though the arbitration will be, or is being, held outside India. This was confirmed by the Indian Supreme Court in Bhatia International v Bulk Trading SA and Another.6 The court held here that in the absence of an express or implied exclusion of Part I of the Act, Part I would apply to international commercial arbitrations outside India.

Building on this decision and providing some further clarity, in Max India Limited v General Binding Corporation7, the Delhi High Court held that an Indian party's application to restrain their foreign counterparty from relying on a Singapore law and arbitration provision in the relevant contract could not be sustained. That is because by expressly agreeing to submit any disputes under the contract to SIAC, the parties had impliedly excluded the application of Part I of the Act and consequently the jurisdiction of Indian courts.

The Max India decision was heralded by some in the legal industry at the time as demonstrating a clear reluctance on the part of the Indian courts to intervene in foreign arbitration proceedings. However, other decisions that have also built on the reasoning in Bhatia International v Bulk Trading SA and Another have been less positive.  In Venture Global Engineering v Satyam Computer Services Ltd8, for example, the Indian Supreme Court extended its reasoning in Bhatia to hold that the "public policy" provision in Part I Section 34 of the Act also applies to foreign arbitration awards. In so doing, the Indian Supreme Court held that foreign arbitration awards can be set aside by the Indian courts where these violate Indian statutory provisions and if they are contrary to Indian public policy.

In addition, the Indian Supreme Court's interpretation of what constitutes a contravention of public policy is very broad. In Oil & National Gas Corporation Ltd v Saw Pipes9 the Indian Supreme Court held that the public policy of India is affected where the award is against the fundamental policy of India or the interests of India, or where the award is unjust, immoral or patently illegal.

In Venture Global Engineering the Indian Supreme Court emphasised that "the extended definition of public policy" that had been set out in the Saw Pipes decision could not be bypassed by taking the award to a foreign country for enforcement such that a party would be deprived of the right to challenge the award in the Indian courts. The exception, which the Supreme Court acknowledged, remains that the Indian courts cannot set aside foreign awards where the parties have expressly or impliedly agreed to exclude the operation of Part I of the Act.

So, whilst a party might helpfully apply to the Indian courts for interim relief prior to arbitration having been commenced even to restrain the opposing party from selling its property in India during the course of the arbitration proceedings, it might be possible on other occasions to seek a stay of the arbitration proceedings on the grounds of the suitability of the issue to be determined by the arbitration tribunal.

Whatever the outcome of a Section 9 application, once the process has been initiated before the backlogged Indian courts, lengthy delay is almost certainly inevitable. The process is therefore open to abuse by unscrupulous parties wishing to delay the progress of an arbitration. Furthermore, the enforcement of a foreign arbitration award can also be challenged or delayed on public policy or other grounds.10

Good contract drafting can enhance the chances of a successful enforcement in India
Many New York Convention countries have still not been notified in the Gazette of India, effectively making arbitration awards from those countries unenforceable in India. When drafting an arbitration clause or agreement, parties should agree that the seat of the arbitration is in a country which has been notified in the gazette of India as a New York Convention country. This will make it less likely that the Indian courts will refuse the enforcement of the award on the basis that it is not a "foreign award" pursuant to Part II of the Act.

Section 2(2) of Part I of the Act gives powers to the Indian courts to grant interim measures even though the arbitration will be, or is being, held outside India. Foreign arbitration clauses in contracts involving parties in India can therefore be challenged under Section 9 of the Act. In addition, the "public policy" provision in Part I Section 34 of the Act also applies to foreign arbitration awards. The very broad interpretation of the term "public policy" by the Indian Supreme Court has left it open for the enforcement of foreign arbitration awards to be challenged before the Indian courts.

Parties drafting an arbitration clause or agreement should carefully consider the pros and cons of expressly or impliedly excluding or allowing the operation of Part I of the Act and the jurisdiction of the Indian courts. This is especially relevant in the context of injunctive and other interim relief.

If Part I of the Act is not expressly or impliedly excluded from the arbitration clause or agreement (for example, by expressly agreeing to submit disputes to arbitration in a foreign seat under a foreign set of rules), Part I will continue to apply to arbitrations outside India and the Indian courts will have the jurisdiction to grant injunctive and other interim relief even though the arbitration itself is being held in another country. This has the potential of causing delays to proceedings.

The parties may, alternatively, want to expressly preserve for themselves the ability to seek interim relief, or certain kinds of interim relief, before the Indian courts. The ability, for example, to apply to the Indian courts for an order restraining an opposing party from selling its property in India during the course of the foreign arbitration proceedings could be of considerable comfort and value to a foreign party.

The enforcement of foreign arbitration awards in India remains fraught with potential problems. However, a foreign shipowner or charterer can significantly reduce their risk, and improve the prospects of successfully enforcing their foreign arbitration award against an Indian counterparty, by careful consideration of the potential pitfalls to enforcement in India and by careful drafting of their arbitration clause or agreement.

Footnotes
1 By way of notification published on 24th March 2012.
2 The New York Convention requires, amongst other things, that contracting states recognise and enforce arbitral awards made in other states, subject to the declarations and reservations of the contracting state.
3 See Article 1 and footnotes to it of the UNCITRAL Model Law.
4 India's Official Government Gazette.
5 See www.cietac.org.
6 (2002) 4 SCC 105.
7 (FAO (OS) 193/2009).
8 (2008) 4 SCC 190.
9 (2003) 5 SCC 705.
10 Even without interim applications or challenges, enforcement of a foreign arbitration award can typically take anything from six months to three years before the Indian courts.

Any comments on this article can be e-mailed to the Gard News Editorial Team.