First published in AIAJ Vol. 4 No.1 Pages 64 – 82.
A. Introduction:
A jurisdiction's credibility as an arbitration friendly one rests primarily on the efficiency and efficacy of its award enforcement regime.
This article examines the award enforcement regime in India.
B. The "Old" Law:
Prior to January 1996, the law of enforcement of arbitration awards in India was spread between three enactments. Enforcement of domestic awards was dealt with under a 1940 Act1. Enforcement of foreign awards was divided between two statutes a 1937 2Act to give effect to Geneva Convention 3awards and a 1961 Act4 to give effect to the New York Convention5 awards. As the Geneva Convention became virtually otiose (by reason of Article VII of the New York Convention) enforcement of foreign awards, for all practical purposes, was under the 1961 Act and for domestic awards was under the 1940 Act. The enforcement regime between these two statutes was however quite distinct. The 1961 Act confined challenge to an arbitral award only on the limited grounds permitted under the New York Convention. The scope of challenge to domestic awards under the 1940 Act was much wider. This Act permitted judicial scrutiny inter alia on the ground that the arbitrator had "misconducted" himself or the proceedings6 - an expression which came to be widely interpreted and awards were interfered with inter alia on the ground of fundamental errors of law apparent on the face of the record. However even under this wide judicial scrutiny regime, courts restrained themselves and interfered only when the error was grave and the judicial conscience was shocked. It may be worthwhile to cite a few illustrative cases:
- In State of Rajasthan v. Puri Construction Co.
Ltd.,7 the Supreme Court held: "over the
decades, judicial decisions have indicated the parameters of
such challenge consistent with the provisions of the
Arbitration Act. By and large the courts have disfavoured
interference with arbitration award on account of error of
law and fact on the score of mis-appreciation and misreading
of the materials on record and have shown definite
inclination to preserve the award as far as possible. This
Court has held that the court does not sit in appeal over the
award and review the reasons. The court can set aside the
award only if it is apparent from the award that there is no
evidence to support the conclusions or if the award is based
upon any legal proposition which is erroneous."
- In State of U.P. v. Allied
Constructions8, the Court held: "the
arbitrator is a Judge chosen by the parties and his decision
is final. The court is precluded from reappraising the
evidence. Even in a case where the award contains reasons,
the interference therewith would still be not available
within the jurisdiction of the court unless, of course, the
reasons are totally perverse or the judgment is based on a
wrong proposition of law. An error apparent on the face of
the records would not imply closer scrutiny of the merits of
documents and materials on record. Once it is found that the
view of the arbitrator is a plausible one, the court will
refrain itself from interfering (see U.P. SEB v. Searsole
Chemicals Ltd. and Ispat Engg. & Foundry Works v. Steel
Authority of India Ltd.)."
This article has belaboured somewhat on the "old" law since thanks to a 2003 Supreme Court Judgment (which shall be elaborated upon later) the "new" law on the subject has begun to resemble the "old" law.
C. The New Regime:
In January 1996, India enacted a new Arbitration Act (hereinafter Act or Arbitration Act).9 This Act repealed all the three previous statutes (the 1937 Act, the 1961 Act and the 1940 Act)10. The new Act has two significant parts. Part I provides for any arbitration conducted in India and enforcement of awards thereunder. Part II provides for enforcement of foreign awards. Any arbitration conducted in India or enforcement of award thereunder (whether domestic or international) is governed by Part I while enforcement of any foreign award to which the New York Convention or the Geneva Convention applies, is governed by Part II of the Act.
D. Domestic Awards:
Grounds for setting aside awards
Part I is modelled on the UNCITRAL Model Law 11and the UNCITRAL Arbitration Rules12 with few departures. The relevant provisions are briefly outlined below:
Section 13 of the Act, corresponding to Article 13 of the Model Law, provides for challenge to an arbitrator on the ground of lack of independence or impartiality or lack of qualification. In the first instance, a challenge is to be made before the arbitral tribunal itself.13 If the challenge is rejected the tribunal shall continue with the arbitral proceedings and make an award. 14Section 13 (5) of the Act provides that where the tribunal overrules a challenge and proceeds with the arbitration, the party challenging the arbitrator may make an application for setting aside the arbitral award under Section 34 of the Act (corresponding to Article 34 of the Model Law). Hence approach to a court is only at the post-award stage. This is a departure from the Model Law which provides for an approach to the court within 30 days of the arbitral tribunal rejecting the challenge.15
The second departure from the Model Law (relevant to enforcement) is to be found in Section 16 of the Act (corresponding to Article 16 of the Model Law). Section 16 incorporates the Competence Competence principle and enables the arbitral tribunal to rule on its jurisdiction, including with respect to the existence or validity of the arbitration agreement. If the arbitral tribunal rejects any objection to its jurisdiction, or to the existence or validity of the arbitration agreement, it shall continue with the arbitral proceedings and make an award. 16 Section 16 (6) provides that a party aggrieved by such award may make an application for setting aside the same in accordance with Section 34. Article 16 of the Model Law, in contrast, provides that where the arbitral tribunal overrules any objection to its jurisdiction, the party aggrieved with such decision may approach the court for resolution within 30 days. The Indian Act permits approach to the court only at the award stage (and not during the pendency of the arbitration proceedings).
Hence Sections 13 (5) and 16 (6) furnish two additional grounds for challenge of an arbitral award (over and above the ones stipulated in Section 34 of the Act referred to below).
Section 34 of the Act contains the main grounds for setting aside the award. It is based on Article 34 of the Model Law and like Article 34 states that the grounds contained therein are the "only" grounds on which an award may be set aside. However in the Indian context the word "only" prefixing the grounds is a bit of a misnomer as two additional grounds have been created by the Act itself as mentioned above. Besides another ground is to be found in an Explanation to the public policy ground in Section 34. The same reads as follows:
"Explanation.... it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award is induced or affected by fraud or corruption or was in violation of Section 75 or Section 81."
Section 75 referred to above is part of the conciliation scheme under the Act and states that the conciliator and parties shall keep confidential all matters relating to the conciliation proceedings. Section 81 prohibits any reference in arbitral or judicial proceedings to views, suggestions, admissions or proposals etc. made by parties during conciliation proceedings.
Save for the Exception, referred to above, Section 34 of the Act is a faithful reproduction of Article 34 of the Model Law.
New ground for challenge to award through judge made law.
To the above mentioned legislatively stipulated grounds, came to be added a new "judge made" ground. This came about in the Supreme Court decision of ONGC v. Saw Pipes Ltd. 17The issue here was whether an award could be set aside on the ground that the arbitral tribunal had incorrectly applied the law of liquidated damages to the case. The question turned around the scope of Section 34 of the Act (which on a plain reading does not permit a challenge on merits).
The Supreme Court in Saw Pipes came to the conclusion that the impugned award was legally flawed in so far as it allowed liquidated damages on an incorrect view of the law. In the process it held, that an award can also be challenged on the ground that it contravenes "the provisions of the Act (i.e. Arbitration Act) or any other substantive law governing the parties or is against the terms of the contract." Further, the judgment expanded the concept of public policy to add that the award would be contrary to public policy if it is "patently illegal."
The Supreme Court in Saw Pipes confined the expansion of public policy to domestic awards alone as an earlier larger Bench decision of the Court in the case of Renusagar Power Co. v. General Electrical Corporation 18had construed narrowly this ground as limited to "fundamental policy of Indian law".19
The Saw Pipes Judgment has come in for some sharp criticism from several quarters.20 Read literally the Judgment sets the clock back to the old position where an award could be challenged on merits and indeed renders the court (testing enforceability of an award) as a court of appeal. Some judicial decisions have tried to reign in the effect of Saw Pipes. One instance of this is the Supreme Court decision in the case of McDermott International Inc. v. Burn Standard Co. Ltd.21 where the Court somewhat read down Saw Pipes. It held:
"The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct the errors of arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court's jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it."
Commenting on ONGC v. Saw Pipes 22the Court held:
"We are not unmindful that the decision of this Court in ONGC had invited considerable adverse comments but the correctness or otherwise of the said decision is not in question before us. It is only for a larger Bench to consider the correctness or otherwise of the said decision. The said decision is binding on us. The said decision has been followed in a large number of cases."
A few High Court decisions have also sought to narrowly read Saw Pipes on the ground that literary construed the judgment would expand judicial review beyond all limitations contained not only under the Arbitration Act but even under the old regime. These High Court decisions have (rightly) held that one Judgment of the Supreme Court cannot render naught the entire law on the subject. The High Court of Bombay in the case of Indian Oil Corporation Ltd. v. Langkawi Shipping Ltd.23 held that to accept a literal construction on Saw Pipes:
"would be to radically alter the statutorily and judicially circumscribed limits to the Court's jurisdiction to interfere with Arbitration Awards. It would indeed confer a First Appellate Court's power on a court exercising jurisdiction under Section 34 of the 1996 Act. There is nothing in the 1996 Act which indicates such an intention on the part of the legislature. That the intention is to the contrary is clear inter alia from the Arbitration and Conciliation Bill, 1995 which preceded the 1996 Act which stated as one of its main objectives the need "to minimize the supervisory role of Courts in the Arbitral process.....
In the circumstances, the aforesaid principles laid down consistently by the Supreme Court and the various High Courts cannot be said to be no longer good law in view of the 1996 Act. Nor can it be said that the observations of the Supreme Court in Oil and Natural Gas Corporation v. SAW Pipes Ltd. (Supra), have expressly or impliedly rendered the aforesaid judgments and the principles contained therein no longer good law in view of the 1996 Act. The principles apply with equal force under the 1996 Act."24
The High Court of Gauhati following the above Bombay High Court decision held:
"The observations of the Apex Court in ONGC v. Saw Pipes, supra, did not expressly or impliedly render the ratio decidendi on the issue contained in a plethora of judgments and the laid down principles therein non est. On a due consideration of the entire gamut of the provisions of the Act and the precedential law, we unhesitantly subscribe to the view expressed in IOC Ltd., supra. The decision in Saw Pipes, supra, does not depart from the judicially evolved precepts bearing on the authority and jurisdiction of an arbitrator in determining a dispute referred to him, the norms and measures to be applied for assessment of damages and the scope of Court's interference with his findings.... The above decision does not intend, according to our construction, to efface the time tested legal prepositions and judicial tenets on arbitration and thus ought not to be construed away from the well established trend set by string of decisions preceding the same."25
The Saw Pipes Judgment has quite rightly been criticised. To begin with it is contrary to the plain language of the Arbitration Act and indeed also the spirit of the law. It's expanded judicial review is especially unsuitable in the Indian context where courts are overwhelmed with backlog. In such scenario to permit a challenge on merits would considerably delay the enforcement proceedings. A majority of parties opting for arbitrations do so to avoid court delays and legal niceties. To embroil them back into the same system at the enforcement stage would be ironic. An unfortunate side effect of this decision is that it has become a ground for parties to shift the venue of arbitration outside India (lest an arbitration in India render the award more vulnerable or judicial review delay enforcement).
Miscellaneous and procedural aspects:
(i) Steps for enforcement:
One of the declared objectives of the Act is that every final award: "is enforced in the same manner as if it were a decree of the Court".26 Hence the scheme of the Act is that it is up to the losing party to object to the award and petition the Court for setting it aside. The winning party has to make no procedural move. If the objections to the award are not sustained (or if there are no objections within the time allowed) the award itself becomes enforceable as if it were a decree of the Court.27 It would be noticed that the Indian law has thus fundamentally departed from the Model Law in this regard. The Model Law requires an application for enforcement (Article 35) and the grounds on which enforcement of an award may be refused are as set forth in Article 36 thereof. This has been departed from under the Indian regime as stated above with the result, that in so far as domestic awards are concerned, if there is no application to set aside an award under Section 34 (or if the objections if made have been rejected), the award can straightaway be executed as a decree of the court.
(ii) The relevant court:
As India is a large jurisdiction identification of the relevant court is important. For the purposes of the Act "court" means the Principal Civil Court having original jurisdiction to decide the question forming the subject matter of the arbitration, if the same were a subject matter of a suit.28 The aggrieved party can thus bring its application to set aside the award before the Court where the successful party has its office or where the cause of action in whole or in part arose or where the arbitration took place.
(iii) Time limit:
Any application for setting aside the award must be made within three months from receipt of the same. This period can be extended by the court by a further period of 30 days on sufficient cause being shown "but not thereafter."29
The Supreme Court has clarified with respect to the date from which the aforesaid limitation shall begin to run. This was in the case of Union of India v. Tecco Trichy Engineers & Contractors.30 The Court here was concerned with a situation where the award was despatched to the General Manager, Railways (Union of India) as he had referred the matter to arbitration. However the entire arbitration was conducted by the Chief Engineer. The Union of India contended that as the award had not been despatched to the concerned relevant person (the Chief Engineer) there was some delay in raising of objections. Under the circumstances the Supreme Court held that for large organisations like Governments, time would count from the date the award was received by the relevant person. It held:
"We cannot be oblivious of the fact of impersonal approach in the government departments and organisations like Railways. In the very nature of the working of government departments a decision is not taken unless the papers have reached the person concerned and then an approval, if required, of the competent authority or official above has been obtained. All this could not have taken place unless the Chief Engineer had received the copy of the award when only the delivery of the award within the meaning of sub-section (5) of Section 31 shall be deemed to have taken place."
(iv) Stamping / registration requirements:
The Arbitration Act does not talk of stamping or registration of an award. However stamping is required under the provisions of the Indian Stamp Act, 1899. Section 35 of the said Act states the documents which are required to be stamped, if inadequately stamped (or not stamped) will not be admissible in evidence "for any purpose". Further they are liable to be impounded and subjected to penal duties. Though the Indian Stamp Act is a Central Legislation, various States have prescribed their own schedule of applicable stamp duties. Hence stamp duties vary from State to State.
(v) Registration requirements:
This again is not provided for under the Arbitration Act. The Registration Act, 1908 provides that if any non-testamentary document "purports or operates to create, declare, assign limit or extinguish &., any title, right or interest" in any immovable property, the same is required to be registered and if it is not, it is invalid.31 Hence if an award purports to impact any immovable property it is required to be registered. Registration fees again varies from State to State.
The effect of non-stamping or non-registration of an award came to be considered by the Supreme Court of India in the case of M. Anasuya Devi v. Manik Reddy.32 The Court held that Section 34 of the Arbitration Act permits an award to be set aside "only" on the grounds enumerated therein and non-stamping or non-registration of an award is not one of them. Accordingly an award cannot be set aside on the ground that it is non-stamped / improperly stamped or unregistered. However if it is not, it may become relevant at the stage where it is sought to be executed as a decree. Hence the Supreme Court deferred the issue of non-stamping or non - registration to the execution stage. Since Registration fees can be quite substantial, the decision affords relief to the winning party to first overcome the objections to the award stage (Section 34) and then pay the fees.
E: Enforcement Statistics:
One may now examine the enforcement statistics, including grounds of challenge (and the fate thereof). Based on reported cases, the statistics are as follows:
High Court (Domestic Awards)
|
Sl.No |
Grounds |
Total |
Allowed |
Rejected |
Modified |
|
1 |
Jurisdiction |
246 43.53% |
43 17.47% |
197 80.08% |
6 2.43% |
|
2 |
Public Policy |
151 26.72% |
25 16.55% |
112 74.17% |
14 9.27% |
|
3 |
Limitation |
77 13.62% |
9 11.68% |
66 85.71% |
2 2.59% |
|
4 |
Violation of Natural Justice |
37 6.54% |
8 21.62% |
24 64.86% |
5 13.51% |
|
5 |
Bias |
22 3.89% |
1 4.54% |
21 95.45% |
- |
|
6 |
Non appreciation of Facts/Evidence |
14 2.47% |
1 7.14% |
13 92.85% |
- |
|
7 |
Not a reasoned award or no grounds |
9 |
- |
9 |
- |
|
8 |
Not Signed/ Stamped |
3 |
- |
3 |
- |
|
9 |
Not a party |
1 |
1 |
- |
- |
|
10 |
Non application of mind |
1 |
1 |
- |
- |
|
11 |
Wrongful rejection of defence (filing beyond time) |
1 |
- |
- |
1 |
|
12 |
No Arbitration Agreement |
1 |
1 |
- |
- |
|
13 |
Typographical Error |
1 |
- |
1 |
- |
|
14 |
Withdrawn (challenge not pursued) |
1 |
- |
1 |
- |
|
Total |
565 (1996 to Sept 2007) |
94 (16.63%) |
443 (78.41%) |
28 (4.96%) |
Supreme Court (Domestic Awards)
|
Sl.No |
Grounds |
Total |
Allowed |
Rejected |
Modified |
|
1 |
Jurisdiction |
11 68.75% |
2 12.5% |
7 43.75% |
2 12.5% |
|
2 |
Public Policy |
2 12.5% |
1 50% |
1 50% |
- |
|
3 |
Limitation |
1 6.25% |
1 100% |
- |
- |
|
4 |
Non appreciation of Facts/Evidence |
2 12.5% |
- |
1 50% |
1 50% |
|
Total |
16 (1996 to Sept 2007) |
5 (31.25%) |
8 (50%) |
3 (18.75%) |
F: Enforcement Of Foreign Awards:
We may now come to enforcement of foreign awards. This is covered by Part II of the Act, though due to a recent Supreme Court decision33 (discussed further below) the distinction between the grounds and procedures in Part I and Part II has got blurred.
The provisions of Part II of the Act give effect to the New York Convention and the Geneva Convention. India is not a party to ICSID,34 nor indeed to any other convention or treaty pertaining to enforcement of foreign awards. Since the Geneva Convention provisions are now basically otiose, this article discusses only provisions dealing with enforcement of New York Convention awards.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
