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Another Setback for Indian Arbitration (and Foreign Investors)

Spring 2008
International Disputes Quarterly
Dipen Sabharwal

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The recent decision of the Supreme Court of India in Venture Global Engineering v. Satyam Computer Services Ltd. ("Venture Global") has served another blow to the fledgling Indian arbitration regime and, in the process, sounded warning bells for those doing business in India.

Four years ago, the Supreme Court ruled that any domestic arbitral award found to contravene Indian statutory provisions could be set aside by Indian courts for violating "public policy" (ONGC v. SAW Pipes). This sweeping interpretation of "public policy" introduced potentially limitless judicial review of Indian arbitral awards — something that the Indian Arbitration Act 1996 (the "1996 Act") was intended to eliminate. The SAW Pipes decision was roundly criticised — both within and outside India — with practitioners expressing the hope that the Supreme Court would reconsider its approach.

Unfortunately, these hopes have been dampened following the decision in Venture Global, which extends to the international arena the broad powers to set aside awards which previously were limited to domestic arbitrations. Parties now can challenge "foreign awards" (i.e., awards in arbitrations outside India) before Indian courts on the grounds that they violate Indian statutory provisions and are contrary to Indian public policy.

As a result, even if transactions are structured to ensure that disputes are arbitrated outside India, the post-Venture Global risk is that parties will find spurious grounds to unwind arbitral awards in Indian courts, thereby undermining the parties' original bargain. The only saving grace is that the Supreme Court acknowledged that parties can draft suitable language in their contracts to eliminate (or at least reduce) the scope for such judicial review.

Decision
Venture Global Engineering ("Venture"), a US corporation, entered into a joint venture with Satyam Computer Services Limited ("Satyam"), an Indian company. Their Shareholders' Agreement provided for arbitration under the rules of the London Court of International Arbitration. Satyam alleged that Venture committed an event of default under the Shareholders Agreement which entitled Satyam to buy Venture's shares in the joint venture. To this end, Satyam commenced arbitration, secured a favourable award and sought to enforce the award in the courts of Michigan.

Venture responded by asking a court in Secunderabad, India, to set aside the award on the ground that the transfer of shares required by the award would contravene Indian law. The matter reached the Supreme Court on appeal on the issue of whether a foreign award can be set aside if it violates Indian statutory provisions and is thereby deemed to contravene Indian public policy.

In deciding the issue, the Supreme Court relied principally on an earlier decision, Bhatia International v. Bulk Trading, which held that provisions of Part I of the 1996 Act — stated to cover only domestic arbitrations — apply equally to foreign arbitrations. The Bhatia decision was in the context of the power of Indian courts to grant interim measures (e.g., injunctions) in foreign arbitrations.

In Venture Global, the Court extended its reasoning in Bhatia to explicitly hold that the "public policy" provision in Part I of the 1996 Act (section 34 of the 1996 Act), which (after SAW Pipes) allowed Indian courts to set aside domestic arbitral awards found to contravene Indian statutory provisions, applies also to foreign awards.

Simply put, the Supreme Court held that foreign awards can be set aside by Indian courts under section 34 of the 1996 Act i.e., for violating Indian statutory provisions and being contrary to Indian public policy.

Specifically, the Court emphasized that the "extended definition of public policy" articulated in SAW Pipes could not be "bypassed by taking the award to a foreign country for enforcement" such that a party would be "deprived of the right to challenge the award in Indian courts." The Supreme Court acknowledged, however, that Indian courts cannot set aside foreign awards where "the parties by agreement, express or implied" exclude the provisions of Part I of the Act.

Having decided the principal legal issue, the Supreme Court referred the matter back to the Secunderabad court to dispose of the action on its merits.

Net Result
While the Venture Global ruling is not entirely surprising — the Court effectively made explicit that which was implicit after the Bhatia decision — it is nonetheless disappointing for the international arbitration community, and potentially dispiriting for Indian and foreign investors alike. Decisions such as these are crippling the potential of arbitration to be a viable method for dispute resolution for transactions involving Indian parties.

If disputes are to end up in court anyway — and the experience after SAW Pipes suggests that losing parties in arbitration almost invariably challenge awards on "public policy" grounds — there is no incentive for parties to incur the time and expense of arbitrating in the first instance. Worse, the potential for protracted litigation in Indian courts inevitably leads to a risk premium being factored into Indian deals.

Some Indian lawyers have suggested that the residual power of Indian courts to review and set aside foreign arbitral awards at the enforcement stage is desirable — perhaps even necessary — to protect the interests of vulnerable Indian parties who may not have had a fair hearing before a foreign tribunal. In Venture Global, however, it was a foreign party (Venture) — not an Indian party (Satyam) — which benefited from the intervention of Indian courts, thereby demonstrating that expansive judicial review is very much a double-edged sword.

In sum, it is more important than ever for parties wishing to minimise intervention by Indian courts to carefully draft their arbitration clauses, and specifically exclude the applicability of Part I of the Indian Arbitration Act.

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