Trajectory of International Commercial Arbitration in India and the Role of Judiciary

Prelude to an era of change

In the initial developments during the case of Guru Nanak Foundation v. Rattan Singh¹, the Supreme Court expressed its concerns with raising number of cases before the Indian courts and the time-consuming nature of matters and the expensive court proceedings, which eventually led for the parties to opt for the alternative dispute resolution mechanisms. This became the footstone for enacting the Arbitration Act, 1940². As also observed by D.A. Desai, J. in Guru Nanak case³, that the interference of judiciary in international arbitration at the time was paving the path for India to be a global arbitration hub, however the debate still follows till date as to whether interference of judiciary is a boon or bane to international arbitration in India.

The complete attribution could be placed on the Supreme Court to have significantly narrowed down the scope of judicial interference at the stage of pre-arbitration process and during the enforcement of arbitral awards. An excellent pro-arbitration approach is taken by the Supreme Court in the famous case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (BALCO)⁴. As opposed to the decision of Bhatia International v. Bulk Trading SA (Bhatia)⁵ and Venture Global Engg. v. Satyam Computer Services Ltd. (Venture Global)⁶ wherein these decisions necessarily blurred the objective of the Act with respect to the differentiation of domestic and international arbitration, as to the extent of the applicability of Part I of the Act, which was held to be applicable even to the international arbitration, unless expressly or impliedly excluded by the parties. This regressive decision was widely criticised for violating the very purpose and objective of the Act, which aims to achieve fair and efficient dispute settlement system.

Rapid shift in the narrative

The Supreme Court has delivered various landmark rulings taking a much-needed pro-arbitration approach, such as declaring the Indian arbitration law as seat-centric; referring non-signatories to an arbitration agreement to settle disputes through arbitral process; defining the scope of public policy both in domestic and foreign-seated arbitration; and diving deep into the issue of arbitrability of commercial and non-commercial disputes.

Seat-centric approach. — This approach taken by the Supreme Court in one of the most significant case of BGS SGS Soma JV v. NHPC Ltd.⁷, which finally puts an end to the conflict of seat and venue by overruling certain aspects which were earlier observed in BALCO case ⁸ , such as Part I of the Act would not be applicable to foreign-seated arbitrations. The Court opined in support of Hardy Exploration⁹ principle and in contrary to that of Shashoua¹⁰ principle. The long-standing confusion seems to have been clarified by the Supreme Court.

Foreign-seated arbitration. — In the most recent case of PASL Wind Solutions (P) Ltd. v. GE Power Conversion India (P) Ltd.,¹¹ the Supreme Court rules against the applicability of Part I of the Act which gave the envisaged the power in the courts to set aside arbitral awards in domestic and foreign-seated arbitration proceedings on general grounds. In the said case, the Supreme Court took a positively inclined approach towards foreign-seated arbitrations as opposed to that of TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd.,¹² which allowed applicability of Part I of the Act for domestic and foreign arbitrations.

Non-signatory parties. — The inclusion of non-signatories to arbitration, was observed in the decisions of Supreme Court with the application of principles such as “group of companies” invoked in MTNL v. Canara Bank¹³. The Court further reiterates that any person whose participation will allow the court to appropriately adjudicate all issues in question in the suit, even though he is not a party to the arbitration as observed in Baluram v. P. Chellathangam.¹⁴

Pre-arbitration proceedings. — The Supreme Court has taken stringent approach with regard to pre-arbitrations proceedings, as seen in the instance of United India Insurance Co. Ltd. v. Hyundai Engg. and Construction Co. Ltd.¹⁵ observing the principle of sine qua non for triggering the arbitration clause, arbitration agreement could be resorted to only if the pre- arbitration conditions are fulfilled.

The flourishing years of development

There have certain much needed amendments made to the Act, with the ever-changing phase of the international arbitration, there are significant changes introduced by amendments of 2015¹⁶, 2019¹⁷ and 2021¹⁸. These amendments aided India to make it a preferred global arbitration hub. These amendments brought in the reduction of judicial interference with respect to arbitrator's appointment. Indian courts have supported these amendments, which uphold the intent and objective of the Act.

The amendments widen the scope of the qualification of arbitrators; there were two significant amendments in this area. The 2019 Amendment added Section 43-J¹⁹ which stated qualifications, eligibility, and norms for accreditation of arbitrators. This section further directed the Eighth Schedule²⁰ to the Act, which provided an exhaustive list of qualifications that an arbitrator needed to possess. This acted as impediments and limited the scope of participation of qualified foreign lawyers from acting as arbitrators in India, as opposing to that of France.

The 2021 Amendment act has substituted Section 43-J of the Act and deleted the Eighth Schedule to the primary Act. This effectively means that the parties are free to appoint arbitrators regardless of their qualifications.

Remarkable role of the Supreme Court

BALCO case²¹ played a very significant role in the implementation of the objectives and principles of the UNCITRAL Model law, and New York Convention in Indian perspective. BALCO²² paved the way for Indian courts to opt for a more pro-arbitration approach and thereby reduce the judicial intervention in the arbitral proceedings. Further the courts do not have the jurisdiction to set aside an order passed in a foreign-seated arbitration as provided under Section 34²³ of the Act.

The parties are not necessarily required to choose impliedly or expressly to exclude the application of Part I of the Act. The practice of including this clause in the agreement as it was followed prior to Bhatia²⁴ and Venture²⁵ cases by the parties is now not required post BALCO²⁶. From this case, it is made clearly apparent that an ordinary civil complaint filed under the CPC for the purpose of seeking interim relief in assistance of foreign-seated arbitrations will not be admitted by Indian courts.

The amendment to Section 36²⁷ of the Act is perhaps the most significant amendment, bought by the Amendment Act of 2019. In the famous cases of Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee²⁸, A. Ayyasamy v. A. Paramasivam²⁹ and Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.³⁰, the Supreme Court held such that Explanation 1(i) to Section 34(2)(b) of the 1996 Act states that an award would be contrary to the public policy of India, and liable to be set aside under Section 34, only if the “the making of the award” was induced or affected by fraud or corruption.

The Supreme Court laid down a landmark precedent in Ayyasamy case³¹ , stating that the doctrine of separability. Thus, it essentially held that allegations of “serious fraud” would not be arbitrable, whereas “mere allegations” of fraud were arbitrable. The recent case furthered this decision by introducing the following two tests to determine whether mere “simple allegations” of fraud would not vitiate the effect of an arbitration agreement.

Arbitrability of a dispute

In Vidya Drolia v. Durga Trading Corpn.³² The Supreme Court examined the meaning of non-arbitrability of disputes, by giving 4 tests to determine when a dispute is non-arbitrable as under:

(i) when the cause of action and subject-matter of the dispute are related to a right in rem. Example, a right in copyright.

(ii) When cause of action and subject-matter of the dispute affect third-party rights or where they operate against the world in general. Example, matters relating to probate, testamentary matter, etc.

(iii) When cause of action and subject-matter of the dispute relate to inalienable sovereign and public interest functions of the State.

(iv) When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per the mandatory statutes since Section 2(3)³³ (scope) of the Arbitration Act itself recognises that certain disputes may not be referred to arbitration.

While laying down the above test, the Supreme Court overruled its 2010 decision in N. Radhakrishnan v. Maestro Engineers³⁴, which held that matters of fraud were not arbitrable. By doing so, the Supreme Court has cemented the judicial shift towards arbitrability of allegations of fraud in contractual disputes.

In the case of the Supreme Court in 2021, Pravin Electricals (P) Ltd.  v. Galaxy Infra and Engg. (P) Ltd.³⁵ has this inconsistency and expressed its concern in relation to what has been laid down in Vidya Drolia³⁶. The Court invited the attention of the legislature by making an observation stating that it might be needed to have a look at Sections 11(7)³⁷ and 37³⁸ in order to bring the orders passed under Sections 8³⁹ and 11 on a par on appealability.