Introduction

Both the legislature and the courts in India have adopted a positive attitude towards arbitration.

Until 1996, the Indian Arbitration Act of 1940 ('the 1940 Act') was the general law relating to arbitration; and the Arbitration (Protocol and Convention) Act, 1937 ('the 1937 Act')1 and the Foreign Awards (Recognition and Enforcement) Act, 1961 ('the 1961 Act') 2 governed the enforcement of foreign arbitral awards. The 1961 Act contained two reservations - 'commercial' and 'reciprocity' - as provided for in the New York Convention itself. 3

In 1996, India updated its arbitration law by enacting the Arbitration and Conciliation Act, 1996 ('the 1996 Act'), repealing at the same time the 1937, the 1940 and the 1961 Acts. Part I of the 1996 Act was along the lines of the UNCITRAL Model Law on International Commercial Arbitration ('UNCITRAL Model Law') and dealt with arbitrations to be held in India; Part II dealt with arbitrations to be held outside India. 4

Indian courts, 5 including the Supreme Court of India, have rendered several decisions regarding these Acts. The following are some of the more important of these decisions rendered by the Supreme Court of India. Under the Constitution of India, the law declared by the Supreme Court of India binds all courts within the territory of India. 6 The trend has been supportive of both domestic and foreign arbitration.

Applications for the recognition or enforcement of foreign awards7 are made to the relevant courts in accordance with the procedure set out in the Code of Civil Procedure, 1908. 8[Page24:]

Enforcement of arbitration agreements

The 1940 Act gave courts discretion to decline to refer the parties to arbitration, if satisfied that there was 'sufficient reason why the matter should not be referred'. 9 However, the courts, generally, were 'unwilling to countenance breach of the solemn obligation to seek resort to the tribunal selected by [the parties]'. 10

The 1961 Act, in giving effect to the New York Convention, removed the aforementioned discretion insofar as foreign awards were concerned.

As originally enacted, the 1961 Act required the courts to refer matters to arbitration if any party to a submission made in pursuance of an agreement' commenced any legal proceedings in court. 11

The Supreme Court interpreted this phrase to mean that the courts would refer parties to arbitration only when, besides agreeing to have their disputes resolved through arbitration, they further agreed to 'submit' their disputes to arbitration, for example by appointing arbitrators. 12

Soon thereafter, Parliament amended the 1961 Act, omitting the phrase; it was no longer necessary thereafter for parties to agree a second time to 'submit' their disputes to arbitration. 13

The effect was that the courts had no discretion to refuse to refer disputes to arbitration, if the chosen venue was outside India. 14

Unfortunately, Parliament did not amend the 1937 Act. Hence, where the 1937 Act applied, the requirement of a second agreement relating to 'submission' continued to operate. 15

Parliament rectified these flaws in the 1996 Act. Thereafter, courts would have to refer the parties to arbitration, unless the agreement was null and void, inoperative or incapable of being performed. 16

Before the 1996 Act, where referral to arbitration was opposed on the ground that the arbitral tribunal could not decide the issue of arbitrability, the Supreme Court compelled the parties to resort to arbitration, holding that the arbitrators had [Page25:] jurisdiction over that issue. 17 In another case, the defendant applied for a stay of proceedings and also argued that the court lacked territorial and pecuniary jurisdiction. The plaintiff argued that the objections to the court's territorial and pecuniary jurisdiction were 'steps in the proceedings' and that the defendant's application for a stay of the suit and referral to arbitration ought to be rejected. 18 Refusing the plaintiff's submission, the Supreme Court held that the parties be referred to arbitration, deciding that the objections were not 'steps in the proceeding', as the objections were rather 'designed to prevent the court from touching upon the merits of the controversy'. 19

In another case, a lawyer had taken 'steps in the proceedings' in violation of instructions given by his client, a foreign company. The Supreme Court held that such steps by a lawyer contrary to the instructions of his client could not bind the client and granted a stay of proceedings. 20

Enforcement of awards

Under the 1940 Act

Under the 1940 Act, courts had the power to set aside, modify, or remit an award, if the arbitrators had committed an error of law apparent on the face of the award or misconducted themselves or the proceedings. 21

The phrase 'an error of law apparent on the face of the award' was construed narrowly early on, 22 and subsequent decisions have followed suit. 23

For example, the Supreme Court set aside an award on this ground, when the arbitral tribunal ordered enforcement of a contract for personal service. The plaintiff, a professor at Delhi University, brought legal proceedings following the termination of his services by the university. Under the Delhi University Act, 1922, the dispute was referred to arbitration. The arbitrator held that the university wrongfully terminated the plaintiff's services and ordered that the university reinstate him as professor. The university challenged this decision on the ground that the plaintiff's reinstatement as professor was contrary to the Specific Relief Act, 1877. 24 The court upheld the university's contention.25[Page26:]

Under the 1961 Act

Under the 1961 Act, courts have enforced foreign awards liberally. Thus, courts have held that, since the object of the 1961 Act was to facilitate and promote international trade, the 'commercial' reservation ought to be interpreted widely and liberally.

Where a US award divided business interests of brothers who had properties in India, the Supreme Court overruled the objection that, as it was a family settlement, the legal relationship was not of a 'commercial' nature. 26 In another case, an award in relation to a consultancy agreement was held by the Supreme Court to be 'commercial' in nature. 27

Similarly, the courts have interpreted the 'reciprocity' reservation liberally. Where a defendant objected to enforcement of a Ukrainian award on the ground that the Government of India had not officially declared Ukraine to be a reciprocating territory, the Supreme Court rejected the objection, holding that as the government had so designated the former Soviet Union, of which Ukraine was then a part, no fresh declaration was necessary. 28

The courts have also construed the word 'award' liberally. This is illustrated by a case in which the defendant objected to an enforcement application on the ground that an award is a decision resolving a dispute and that, in the case in question, the parties had arrived at a settlement, leaving the arbitrator with no dispute to resolve. The defendant argued that the arbitrator had merely signed a document, which, although styled as an award, was in fact a rubber-stamp rather than an award and, for this reason, was not enforceable under the Act. The Supreme Court rejected this argument. 29

At one stage, the Supreme Court held that the 1961 Act did not apply to a foreign award where the law of India governed the main contract that contained the arbitration clause. In the case in question, an ICC arbitration clause applied and the award was rendered in London. The Supreme Court based its judgment on section 9 of the 1961 Act, which excluded the application of the Act to 'any award made on an arbitration agreement governed by the law of India'. 30 As section 9 therefore made the 1961 Act inapplicable in several cases, Parliament dropped it in the 1996 Act.

In proceedings brought to enforce a foreign award, the defendant objected that the liquidated damages, to which the parties had agreed, were in excess of those allowed by the relevant Indian law. 31 The Supreme Court overruled this objection, holding that, as the law provided for reasonable compensation subject to the maximum amount allowed in the contract, the arbitral tribunal's decision awarding the maximum was not unreasonable. 32

Where an award was rendered in favour of a party which then obtained a judgment in its favour, based on that award, from a court in the United States, where the award had been rendered, it was held that the plaintiff was entitled to choose the method of enforcement it preferred - by enforcing the award or the judgment. 33

In another case, the Supreme Court enforced a foreign award, overruling the objection that the defendant was 'unable to present its case', when the defendant had voluntarily remained absent from part of the hearings. 34[Page27:]

Public policy as a ground for refusing to enforce an award

Public policy as a ground for refusing to enforce a foreign award requires special consideration in relation to Indian law. Since the 1996 Act, public policy as a ground for refusing to enforce an award has been applicable in India to all arbitrations, whether domestic or international, and whether the award was rendered in India or outside India. 35 Consequently, judgments even in domestic cases refusing to enforce an award on grounds of public policy become precedents for the enforcement of foreign awards.

Prior to 1996, public policy was not a ground for refusing enforcement of awards in domestic arbitrations. Under the 1940 Act, courts could refuse enforcement on the grounds of an 'error of law apparent on the face of the award' or 'misconduct'. The 1940 Act, however, did not expressly mention public policy as a ground for refusing the enforcement of an award.

The concept of public policy in common law countries, including India, is not the same as in civil law countries, as was highlighted in a note presented to UNCITRAL by the United Kingdom. 36 During discussions at the time of the drafting of the UNCITRAL Model Law, Lord Mustill suggested a more general formula to ensure the possibility of challenging an award whenever there was serious procedural injustice. 37 However, this suggestion was not accepted. 38

In India, the courts have endeavoured to draw a distinction between domestic and foreign awards when applying public policy as a ground for setting aside an award. Thus, in a case involving a foreign award, the Supreme Court held that the public policy ground would apply only 'if such enforcement would be contrary to (i) fundamental policy of Indian law, or (ii) the interests of India, or (iii) justice or morality'. 39 The same principle has been reiterated in other international cases. 40 Thus, where interest had been awarded on accrued interest, the defendant argued that since the law in India did not allow compound interest to be charged (except by an authorized bank), 41 enforcement of the award would violate public policy. The Supreme Court rejected this contention, holding that the law merely prevented the court from awarding interest on interest, but did not make an obligation to pay such interest - whether on the basis of a contract, usage or statute - contrary to public policy. 42

On the other hand, courts have taken a different position in relation to awards arising out of purely domestic arbitrations. Where, in a case involving domestic parties, the award had allowed interest on interest, the Supreme Court decided that the award was contrary to public policy. 43 It took a similar view in a recent case where it considered an award rendered in a purely domestic arbitration to have infringed a well-established legal principle. The Supreme Court set aside the award stating that the public policy ground was applicable if the award was vitiated by 'patent illegality'. 44[Page28:]

Conclusion

It may be inferred from the above that in India, Parliament has had a favourable attitude towards arbitration and has acted promptly to ensure the enforcement of foreign awards. The 1958 New York Convention was implemented with little delay through the 1961 Act, and when part of this Act was interpreted restrictively by the Supreme Court in 1969, Parliament quickly took steps to remove the ground for such interpretation, which was achieved through the 1973 amendment. It did likewise in the 1990s by discarding in the 1996 Act a provision in the 1961 Act that had been interpreted restrictively in 1992.

The courts too - including, in particular, the Supreme Court of India - have been favourably disposed towards arbitration, both domestic and international. They have enforced foreign awards where, in similar circumstances, they might have refused to enforce domestic awards.

However, the Supreme Court's interpretation of public policy as being sufficiently broad to entitle it to set aside an award that suffered from 'patent illegality' is a cause for concern. 45 Although the Supreme Court pointed out that that decision pertained to domestic arbitration, the possibility of confusion when it comes to foreign awards cannot be ruled out.

In light of this situation, the Law Commission of India, presided over by a retired judge of the Supreme Court, has submitted a report to the Government of India suggesting an amendment of the 1996 Act. 46 The amendment proposes an additional ground for challenging awards other than those made in international arbitrations. The proposal is that purely domestic awards should be challengeable when there is any 'error apparent on the face of the arbitral award giving rise to a substantial question of law'. 47 The fact that this additional ground would apply only to domestic awards reflects a wish to distinguish between domestic awards, which are mostly ad hoc, and international awards, which are mostly regulated by internationally recognized arbitration institutions. It is hoped that, as a result, the courts will more readily enforce international awards, since the additional ground for challenge would not be available in respect for such awards.

1
Enacted to give effect to the 1923 Geneva Protocol and the 1927 Geneva Convention relating respectively to the enforcement of arbitration agreements and the execution of foreign arbitral awards.

2
Enacted to give effect to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 ('New York Convention').

3
Article I(3) of the New York Convention. India's 'commercial' reservation meant that only foreign awards made in disputes arising out of legal relationships (contractual or otherwise) considered as commercial under the law in force in India would be enforceable under the 1961 Act. The 'reciprocity' reservation meant that only foreign awards rendered in a country officially designated by the Government of India as a reciprocating territory would be enforced.

4
Like the 1961 Act, Part II also gave effect to the New York Convention of 1958.

5
The term court is defined in the 1940 Act as 'a Civil Court having jurisdiction to decide the questions forming the subject matter of the reference if the same had been the subject matter of a suit, but does not, except for the purpose of arbitration proceedings under section 21, include a Small Cause Court'. Section 21 covers the case of parties agreeing to refer their suit to arbitration. In the 1996 Act, the term court is used to mean 'the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject matter of the arbitration if the same had been the subject matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes'.

6
Constitution of India, Article 141.

7
That is, an award rendered at a place situated outside India.

8
The 1996 Act, s. 36.

9
The 1940 Act, s. 34.

10
Michael Golodetz v. Serrajuddin & Co., AIR 1963 SC 1044; Société de Traction et d'Electricité Société Anonyme v. Kamani Engineering Co Ltd, AIR 1964 SC 558.

11
Section 3 of the 1961 Act initially read as follows: 'Notwithstanding anything contained in the Arbitration Act, 1940, or in the Code of Civil Procedure, 1908, if any party to a submission made in pursuance of an agreement to which the Convention set forth in the Schedule applies, or any person claiming through or under him commences any legal proceedings in any court against any other party to the submission or any person claiming through or under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time after appearance and before filing a written statement or taking any other step in the proceedings, apply to the court to stay the proceedings and the court, unless satisfied that the agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings.' This provision was along the lines of section 3 of the 1937 Act, which gave effect to the Geneva Protocol of 1923 and the Geneva Convention of 1927. Article 1(a) of the latter stated that for an award to be recognized or enforced, it had to be 'made in pursuance of a submission to arbitration'. This explains the phrase used in the 1937 Act, carried over into the 1961 Act.

12
V.A. Tractoroexport v. Tarapore & Co., (1969) 3 SCC 562 (majority judgment).

13
Parliament Act 47 of 1973.

14
R.M. Investment and Trading Co. v. Boeing Co., (1994) 4 SCC 541; National Agricultural Co-operative Marketing Federation v. Alimenta SA, (1989) Supp 1 SCC 308; State of Orrissa v. Klockner & Co., (1996) 8 SCC 377.

15
Ramji Dayawala & Sons v. Invest Import, (1981) 1 SCC 80.

16
Arbitration and Conciliation Act 1996, sections 45 and 54. Section 45: 'Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908, a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.'.Section 54: 'Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908, a judicial authority, on being seized of a dispute regarding a contract made between persons to whom section 53 applies and including an arbitration agreement, whether referring to present or future differences, which is valid under that section and capable of being carried into effect, shall refer the parties on the application of either of them or any person claiming through or under him to the decision of the arbitrators and such reference shall not prejudice the competence of the judicial authority in case the agreement or the arbitration cannot proceed or becomes inoperative.'Sections 45 and 54 cover arbitration agreements providing for a venue outside India. Section 8 covers arbitration agreements providing for a venue within India. In the latter case, a court would have to refer the parties to arbitration, if the defendant 'applies not later than when submitting his first statement on the substance of the dispute'. Section 8 omits the words 'null and void, inoperative or incapable of being performed'. The effect of this omission has so far not come up for consideration in court.

17
Renusagar Power Co. Ltd. v. General Electric Co., AIR 1985 SC 1156 at 1184.

18
Section 3 of the 1961 Act provided that the defendant could apply to the court for a stay of the proceedings.

19
General Electric Co. v. Renusagar Power Co., (1987) 4 SCC 137. The 1961 Act required the defendant to apply before taking any 'step in the proceedings'. That phrase does not appear in the 1996 Act.

20
Svenska Handelbanken v. Indian Charge Chrome Ltd, (1994) 2 SCC 155. Under the 1996 Act, only section 8 in Part I (dealing with arbitrations held in India) provides that the court shall refer the parties to arbitration if the defendant 'applies not later than when submitting his first statement on the substance of the dispute'. Section 2(2) states that Part I applies where the place of arbitration is in India. Part II, which gives effect to the New York Convention and thus deals with awards made in arbitrations held outside India, does not contain any similar requirement. See also State of Orissa v. Klockner & Co., (1996) 8 SCC 377.

21
Section 15 of the 1940 Act empowered courts to modify an award where a part of the award 'is based upon a matter not referred to arbitration and such part can be separated from the other part'.Section 16(1) stated: 'The court may from time to time remit the award or any matter referred to arbitration to the arbitrators or umpire for reconsideration upon such terms as it thinks fit . . . (c) where an objection to the legality of the award is apparent upon the face of it.' Section 30 stated: 'Any award shall not be set aside except on one or more of the following grounds, namely (a) that an arbitrator or umpire has misconducted himself or the proceedings . . .'

22
Champsey Bhara v. Jivraj Baloo Spinning and Weaving Co. Ltd, (1923) 50 I. A.324 (P.C.).

23
e.g. Seth Thawardas Pherumal v. Union of India, AIR 1955 SC 468; Shyama Charan Agarwala & Sons v. Union of India, (2002) 6 SCC 201.

24
Section 21(b), which prohibits courts from compelling parties to accept personal service by way of specific relief.

25
Dr S. Dutt v. University of Delhi, AIR 1958 SC 1050.

26
Harendra H. Mehta v. Mukesh H. Mehta, (1999) 5 SCC 108.

27
R.M. Investment and Trading Co. v. Boeing Co., (1994) 4 SCC 541.

28
Transocean Shipping Agency P. Ltd v. Black Sea Shipping, (1998) 2 SCC 281.

29
Harendra H. Mehta v. Mukesh H. Mehta, (1999) 5 SCC 108.

30
National Thermal Power Co. v. Singer Co., (1992) 3 SCC 551.

31
Sections 73 and 74 of the Indian Contract Act 1872.

32
Shiva Jute Baling Co. v. Hindley & Co., AIR 1959 SC 1357.

33
Harendra H. Mehta v. Mukesh H. Mehta, (1999) 5 SCC 108 at 128.

34
Renusagar Power Co. Ltd v. General Electric Co., (1994) Supp 1 SCC 644.

35
Both the New York Convention and the UNCITRAL Model Law mention public policy as a ground for refusing to enforce awards. See Article V(2)(b) of the former (the corresponding provision in the 1996 Act is section 48(2)(b)), and Article 34(2)(b) of the latter (the corresponding provision in the 1996 Act is section 34(2)(b)).

36
See UN Doc. A/CN.9/263/Add.2. For the full text of the note, see H.M. Holtzman & J.E. Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (Deventer: Kluwer, 1989) at 958.

37
See UN Doc. A/CN.9/SR 317. For further details, see H.M. Holtzman & J.E. Neuhaus, supra note 36 at 967ff.

38
In the English Arbitration Act of 1996, 'serious irregularity' is a ground for objecting to an award, see ss. 67-68.

39
Renusagar Power Co. v. General Electric Co., (1994) Supp (1) SCC 644.

40
See e.g. Harendra H. Mehta v. Mukesh H. Mehta, (1999) 5 SCC 108; Smita Conductors Ltd v. Euro Alloys Ltd, (2001) 1 SCC 728.

41
Interest Act, 1978.

42
Renusagar Power Co. v. General Electric Co., (1994) Supp (1) SCC 644 at 688.

43
Central Bank of India v. Ravindra, (2002) 1 SCC 367.

44
Oil & Natural Gas Corporation Ltd v. Saw Pipes Ltd, (2003) 5 SCC 705. The parties had agreed that a delay in the supply of material would attract damages at a certain rate, which they referred to as liquidated damages, agreeing that they did not constitute a penalty. The supply was in fact delayed. The arbitral tribunal accepted that there had been default but declined to give damages, holding that the buyer had not 'proved' actual damages.

45
See supra note 44.

46
176th Report of the Law Commission of India, 2001.

47
See Draft Arbitration and Conciliation Bill, 2001, submitted to the Government of India by the Law Commission of India. The Arbitration and Conciliation (Amendment) Bill, 2003 was introduced in the Rajya Sabha, India's upper house, on 22 December 2003. It provides that in the case of an arbitral award made in an arbitration other than an international arbitration, whether commercial or not, application may be made to a court to set aside the award on the additional ground that there is an error which is apparent on the face of the award giving rise to a substantial question of law. The bill will, of course, be debated in early 2004 and, if and when passed by the upper house, will also have to go through the Lok Sabha (House of the People) before becoming law.