Australia: Investors Beware - Indian Supreme Court Asserts Jurisdiction To Set Aside Foreign Arbitral Awards

Key Point

• The court held that foreign arbitral awards can be set aside if it contravenes public policy.

Australian companies seeking to take advantage of opportunities in India should be aware of a recent decision of the Indian Supreme Court which exposes foreign arbitral awards to challenge in Indian courts.

Arbitration is a backbone for protecting international commercial arrangements. In the event of a dispute commercial parties can resolve their differences without having to resort to the courts in the other party's country of residence or incorporation.

International arbitration is regarded to be very effective in the international business arena because arbitral awards are readily enforceable under the New York Convention in most of the world's key economic nations. These awards can only be challenged on very limited grounds.

Unfortunately, the Indian Supreme Court's decision in Venture Global Engineering, USA v Satyman Computer Services Limited, India, shows a worrying trend by Indian courts to set aside foreign arbitral awards. In particular, the court adopted the view that a foreign arbitral award which is inconsistent with Indian domestic law could be set aside for a contravention of "public policy".

In 2003 the Supreme Court in Oil & Natural Gas Corporation Ltd v Saw Pipes Ltd gave the term "contravention of public policy" such a broad interpretation that it allowed for almost unlimited judicial review by the courts. That decision was much criticised throughout the international business community and it was expected that the Supreme Court would review its approach. The Supreme Court has instead given investor confidence a further blow by expanding such review to foreign awards.

One aspect that contributes to the discomfort amongst investors following the Venture Global decision is that the Indian Supreme Court accepted jurisdiction to set aside an award which was rendered in a foreign jurisdiction (London) for which enforcement was sought outside India (Michigan, USA).

What are the consequences of the decision?

The decision has serious consequences for companies that are doing business in India or business elsewhere with Indian parties. In particular, the decision illustrates that irrespective of the seat of an arbitration, or where enforcement of an award is sought, an Indian court may exercise jurisdiction to set aside an award merely because of a potentially tenuous nexus to India.

In this regard, the Indian Supreme Court is exercising a form of jurisdiction over the arbitration award that is not contemplated by the New York Convention, The full legal consequences of this are not clear. The fact that an Indian court has set aside an award may however discourage courts in a third state from subsequently enforcing the award, even where this may arguably be contrary to the New York Convention.

What's the solution?

Importantly, the Supreme Court in Venture Global acknowledged that parties can draft suitable language in their contract to eliminate judicial review and that the court should respect the written terms of the arbitration agreement.

For a start, companies should never include provisions in arbitration agreements that may be construed to conflict with the governing law of the contract. The Supreme Court was undoubtedly influenced by an ambiguous provision of the shareholder agreement which required the parties to act at all times "in accordance with the Companies Act and other applicable Acts/Rules being in force, in India at any time".

More importantly, parties engaged in any business arrangement that links them to India should include in their arbitration agreements a provision which explicitly excludes the operation of Part 1 of the Indian Arbitration and Conciliation Act 1996.

In any event, it is advisable to seek expert advise on these issues when an Indian party is likely to become involved in a business transction. This will ultimately save time, money and hopefully an unwanted visit to the Indian courts.

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