Public Policy in International Arbitration

8/7/2019 Public Policy in International Arbitration

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A form of Alternative Dispute Resolution

Specifically, it is a legal alternative to litigation

Parties to a dispute agree to submit their respectivepositions (through agreement or hearing) to a

NEUTRAL third party called the Arbitrator (s) or

Arbiter (s) for resolution


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Ad-hoc Arbitration

Institutional Arbitration

Statutory Arbitration

Domestic or International Arbitration

Foreign Arbitration


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The Geneva Protocol on Arbitration Clauses of 1923

The Geneva Convention on the Execution of Foreign

Arbitral Awards, 1927 and

The NewYork Convention of 1958


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The governing arbitration statute in India

Based on the Model Law on International Commercial

Arbitration adopted by the United Nations

Commission on International Trade Law (UNCITRAL)in 1985

Applies to both domestic arbitration in India and to

international arbitration


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Arbitration where at least one of the parties is:

An individual who is a national of, or habitually resident inany country other than India; or

A body corporate which is incorporated in any countryother than India; or

A company or an association or a body of individualswhose central management and control is exercised in any

country other than India; or

The Government of a foreign country


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Minimise the supervisory role of courts in the arbitralprocess and

Provide that every final arbitral award is enforced in

the same manner as if it were a decree of the Court


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Foreign PartyGeneral Electric Co., a company incorporated under the laws

of State of NewYork in USA

Terms of Contract GE to supply equipment and power services to Renusagar

power for setting up a thermal power plant Items to be delivered in 15 months from the effective date

Completion of the plant to be done within 30 months Payment to be made in installments Execution of unconditional negotiable promissory notes

for all the installments


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Arbitration Clause

Any disagreement which the parties are unable to resolve bysincere negotiation shall be finally settled in accordance with

the Arbitration Rules of the International Chamber ofCommerce

Problem

Some delay of General Electric in adhering to the timeschedule for supply of equipment

Consequently, Renusagar rescheduled the paymentinstallments and certain installments were unpaid underdue dates.


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Supreme Court gave narrow interpretation to thewords public policy and held that

1. Payment of interest on interest (compound interest),2. Possibility of violation of FERA,

3. Payment of damages,

4. Possibility of unjust enrichment by General Electric

did not amount to or was not contrary to the publicpolicy of India


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Renusagar was thus

Correctly decided

Took a narrow view of the word public policy Left little scope of judicial interference in arbitration

proceedings and final determination of awards


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Foreign Party

SAW Pipes Ltd., a company incorporated in Europe

Terms of Contract

ONGC ordered pipes from SAW Pipes Ltd. on certainterms and conditions

Arbitration clause for dispute resolution


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Problem

Pipes was unable to conform to the time schedule forsupplies due to the strike of the workers in Europe foralmost two months

SAW Pipes informed these facts to ONGC which in turn

replied that damages as per the contract would have to bepaid

SAW Pipes thereafter supplied the pipes

ONGC deducted a large sum from the bill on account ofdelay without there being any adjudication ordetermination by a third party


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Arbitration passed an order in favour of SAW Pipes

Order challenged before High Court and thereafter divisionbench but both dismissed the petition

Appeal to Supreme Court under Article 136 (Special LeavePetition) heard by 2 Judges concluded that ONGC was

justified in deducting the amount and the arbitrators were

wrong in awarding the amount with interest and set asidethe award

The Court held that any arbitral award which violates Indianstatutory provisions is patently illegal and contrary topublic policy


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Equating patent illegality to an error of law, the Court paved

way for losing parties in arbitral process to have their day in Indiancourts

Thus resurrected the potentially limitless judicial review which the1996 Act was designed to eliminate

Decision widely criticized in the International community

3 years later, Supreme Court had an opportunity to refer the

matter to a larger Bench which it did not

The Bench in Renusagar case held that the term public policy ofIndia was to be interpreted in a narrow sense, whereas theDivision Bench in ONGC case interpreted it in a narrow sense

A huge step backwards in laws relating to alternate dispute

resolution in the era of globalization


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Foreign Party

Venture Global Engineering (VGE) incorporated in the USA

T

erms of Contract A joint venture agreement to constitute a company named

Satyam Venture Engineering Services Ltd. (SVES) in whichbothVGE and SCSL have 50 per cent equity shareholding

Shareholders Agreement (SHA) executed between the

parties provides that disputes have to be resolvedamicably between the parties and failing such resolution,the disputes are to be referred to arbitration


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Problem SCSL alleged that owing to a breach in SHA VGE had purchased

shares in SVES at its book value owing to several venture companiesbecoming insolvent

Case Proceedings London Court of International Arbitration appointed arbitrator passed

an award directingVGE to transfer the shares to SCSL The City Civil Court, Secunderabad passed an interim order of

injunction restraining SCSL

The Andhra Pradesh HC suspended the trial courts order holding thatthe award cannot be challenged even if it is against the public policy VGE asserted that the award violated the Foreign Exchange

Management Act, 1999, and therefore constituted a conflict with thepublic policy of India.


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SC Final Judgment

The provisions of Part I of the Act (Arbitration andConciliation Act, 1996) would apply to all arbitrationsincluding international commercial arbitrations

Where such arbitration is held in India, the provisions of

Part-I would compulsorily apply and parties are free todeviate to the extent permitted by the provisions of Part-I

Even in the case of international commercial arbitrationsheld out of India provisions of Part-I would apply unless

the parties by agreement, express or implied, exclude allor any of its provisions


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Arbitration & Conciliation Act, 1996 is divided into four parts.

The first two parts consists as follows:

Part I deals with domestic arbitration

Part II deals with provisions relating to enforcement of New YorkConvention Awards and Geneva Convention Awards in India

This has been the basis of all the Arbitration clauses

incorporated in the contract between various Indian andForeign companies until now

However, with the case ofVGE vs. SCSL, Part I of the Act ismade applicable to all international commercial arbitrations

This has led to a great deal of mistrust, confusion and uproar

amongst the foreign companies


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Arbitration in India is not for the faint-hearted

Continued intervention of courts in arbitration is

harmful in two ways

A pro-arbitration stance would reduce the pressure on thecourts in a legal system plagued by delays

For foreign investment, it is imperative that its legal

system provides efficient and predictable remedies to

foreign investors. Foreign investors typically preferarbitration and have shied away from Indian courts due toprolonged delays in litigation


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Recent judgment in the Satyam case has made Part 1 of the

1996 Act applicable to all International arbitrations Many foreign companies having relevant business interests

in India have relied heavily upon Indian law based on the ACTitself and already opted for Arbitration procedures

This recent judgment has infused a strong feeling of

insecurity in dealings of foreign companies with their Indiancounterparts.

So, it is largely upto the Indian Judiciary to step in andcontain the interventionist role it has assumed for itself andhave greater trust in the arbitral process


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Public Policy in International Arbitration

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