In a move that should make India significantly more attractive to foreign investors, a five-judge bench of the Supreme Court of India has reversed precedent the court set in a 2002 decision that conflicted with commonly held principles of international arbitration by effectively giving Indian courts jurisdiction over arbitration proceedings set in other countries.

At best, the 2002 ruling threw a shadow of uncertainty over arbitration agreements and internationally seated arbitrations with Indian counterparties; at worst, it painted India as an arbitration-hostile, interventionist jurisdiction.

The Supreme Court overturned that decision Sept. 6, limiting the reach of the Indian judiciary into international arbitrations in a lengthy ruling in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.

“This is a very significant decision for Indian arbitration and a very strong indication from the Indian judiciary that India is friendly to international arbitration and that it wants its law to be interpreted in a manner consistent with the international arbitration laws of other jurisdictions,” says Christopher Tahbaz, co-chair of the Asian litigation group at Debevoise & Plimpton.

Bhatia’s Wake

Bharat Aluminium arose surrounding a 1993 commercial agreement that Bharat Aluminium (BALCO), based in India, entered into with Kaiser, a U.S. company. The agreement included an arbitration clause for the resolution of disputes arising out of the contract, providing that arbitration proceedings would be held in London and that the findings and award of the arbitration court would be “final and binding.”

A dispute arose regarding performance of the agreement. BALCO and Kaiser failed to reach a settlement, and an English arbitral tribunal made two awards in 2002. BALCO filed applications under the Indian Arbitration Act of 1996 to set aside the awards, and a number of decisions and challenges followed.

The case led to a full examination and rethinking of Bhatia International v. Bulk Trading S.A., the 2002 decision in which the Supreme Court of India held that Part I of the Indian Arbitration Act of 1996, which governs arbitration procedure, could apply to arbitrations outside of India.

“The arbitration world, both inside and outside of India, was pretty critical of the decision; it effectively meant that for a period of a decade or so, the Indian courts were able to, and in fact did, intervene in arbitration proceedings based overseas,” says Tom Canning, member of the litigation and arbitration group at Milbank, Tweed, Hadley & McCloy in London.

Subsequent cases drove home the impact of Bhatia International, a case that dealt with interim relief (injunctive relief) that upheld a foreign arbitration award. For instance, in Indtel Technical Services v. W.S. Atkins Plc., the Indian Supreme Court held in 2008 that Indian courts can select and appoint arbitrators in commercial arbitration proceedings held outside of India. The same year, in Venture Global Engineering v. Satyam Computer Services Ltd., the Supreme Court said Bhatia International authorized it to set aside foreign international arbitration awards that conflicted with Indian statute or public policy.

The post-Bhatia International landscape did allow parties to specify in arbitration clauses that Part I of the Arbitration Act would not apply to international arbitrations. Contracts designed after Bhatia International were often written to provide as many safeguards as possible.

Still, the case law created uncertainty about whether India was friendly to international arbitration and whether parties that had entered arbitration agreements in an attempt to avoid the sluggish pace of the Indian court system would be ensnared regardless.

Crystal Clear

Bharat Aluminium reverses the effects of Bhatia International by stating clearly that Part I of the Arbitration Act of 1996 “would have no application to International Commercial Arbitration held outside India” and “is applicable only to all the arbitrations which take place within the territory of India.”

Part II of the Arbitration Act, which explicitly applies to international arbitrations, addresses the enforcement of foreign arbitration awards within India and limits intervention by Indian courts into such proceedings, and the court in Bharat Aluminium said it is “crystal clear” that there can be no overlapping of the provisions in Part I and the provisions in Part II.

“The investor can now, to a large degree, feel comfortable that the Indian courts will not become involved, and this is often important to foreign investors because they are aware of how long the litigation process in India frequently takes,” Canning says. “The Indian courts’ ability to influence and intervene in foreign arbitration proceedings is now effectively the same as the courts of most arbitration-friendly jurisdictions.”

Detailed Analysis

In its opinion, the court delves into the history and intent behind the Arbitration Act of 1996. The court concludes, “It is clear that the regulation of conduct or arbitration and challenge to an award would have to be done by the courts of the country in which the arbitration is being conducted. … This is in keeping with the scheme of international instruments, such as the Geneva Convention and the New York Convention as well as the [United Nations Commission on International Trade Law (UNCITRAL)] Model Law” on which the Indian Arbitration Act of 1996 was based. The court makes clear that such international instruments clearly establish the territoriality principle, or “the territorial link between the place of arbitration and the law governing that arbitration.”

The Arbitration Act of 1996 was adopted in an attempt to “remove the anomalies” in the Arbitration Act of 1940 by introducing provisions based on the UNCITRAL Model Laws, the court said, and the 1996 legislation has thus adopted the territoriality principle, which precludes Part I from applying to a foreign-seated arbitration.

“It is clear from reading the decision that the highest court in India has tried to reassert some of the principles that are key to India becoming an arbitration-friendly jurisdiction,” Canning says.

Although the court stated outright that it did not agree with the conclusions in Bhatia International and Venture Global, it said the law as it declared in Bharat Aluminium would only apply prospectively to arbitration agreements entered into after the date of the judgment.

“I would have liked the Supreme Court to have gone a step further and declared Bhatia as wrong, instead of prospectively overruling it,” says Sumeet Lall, a partner at Clasis Law in New Delhi.

Nonetheless, the judgment is a positive step in the right direction, Lall says.