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In a recent judgement, the Supreme Court of India held that a foreign arbitration award recognised and upheld by the foreign court where it was sought to be enforced, is nevertheless, amenable to challenge in an Indian court. This judgement adopts a strained interpretation of the Arbitration and Conciliation Act, 1996, and throws into grave doubt our commitment to international commercial arbitration. It is likely to affect pending and future transactions and impact India’s credibility in the international market.

Let us examine the case in some detail. Venture Global, an American Corporation, entered into a joint venture with Satyam, an Indian company to incorporate a new company in which each held a 50% equity share. The agreement provided for resolution of disputes by arbitration. When disputes arose, Satyam invoked the arbitration clause with the London Court of International Arbitration. An award was passed in Satyam’s favour directing Venture Global to transfer shares to Satyam. Satyam moved a petition in the United States District Court in Michigan seeking enforcement of the award. Venture Global resisted the petition, claiming that the award was in violation of Indian laws, in particular, the FEMA, 1999. The objections were, however, rejected and the US Court upheld the award.

In the meantime, Venture Global filed a suit in the City Civil Court, Secunderabad, to quash the award. An injunction was passed in favour of Venture Global, restraining Satyam from effecting a transfer of shares. Satyam successfully challenged the order and also succeeded in having the suit filed by Venture Global dismissed. An appeal by Venture Global was rejected by the High Court on the ground that the award was a foreign award and could not be challenged under the Arbitration Act. The appeal before the Supreme Court by Venture Global was resisted by Satyam on several grounds:

  • That no suit could lie to set aside a foreign award under the Arbitration and Conciliation Act of 1996.

  • That an action to set aside a foreign award would lie before the competent authority of the country in which, or under the law of which, that award was made, a principle internationally recognised.

  • That an application under Section 34 in Part-I of the Act under which a domestic award can be set aside, could not apply to a foreign award which would be governed by Part-II of the Act. A foreign award could not be challenged in India but its enforcement could be resisted under Section 48, under Part-II.

  • That Venture Global had availed of the opportunity to oppose enforcement of the award in the United States and having failed there, could not take its chances before the courts in India.

The Supreme Court allowed the appeal and ruled that a foreign award was amenable to challenge under Section 34 on a construction that Part I of the Act applies to foreign awards. It was only in a case where the parties specifically chose to exclude the application of Part I of the Act that such challenge would not be available.

This ruling could have disastrous consequences for international commercial agreements and foreign awards passed thereon by opening up the floodgates for challenge. The object of the Arbitration and Conciliation Act, 1996, which is based on the New York Convention, is to facilitate international commerce and business, to ensure finality of foreign awards and to minimise judicial interference, particularly when awards have been passed by international commercial experts. This judgment has the contrary effect. It is also somewhat ironical that the award, having been upheld in the United States on the application of the Indian party, was reopened at the instance of an American party , who having failed in its own home country, managed to get an ex-parte injunction in an Indian District Court !

Over the last few years, the Supreme Court has delivered a series of judgments which amount to a serious inroad into arbitral autonomy. Indian district courts do not have the expertise to deal with complex commercial dealings, much less to sit in judgment over awards passed by international commercial experts, who the parties have chosen to repose their faith in. Not to mention that our courts are hopelessly overburdened with arrears and are hardly in a position to take on new challenges.

The Indian judicial system with its notorious delays and deficiencies has been internationally regarded as a deterrent to doing business in India. At a time when India is experiencing an unprecedented economic growth, the legal system must shake off that image and assist in inspiring global confidence in India by supporting and respecting an internationally accepted dispute resolution mechanism. Instead, given the recent judicial pronouncements, international arbitrations are going to be left to the mercy of district judges in India.

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