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Legal Pulse: Radical arbitration reforms, int'l arbitration-meddling Satyam case to be history

India's law ministry has proposed to nullify the controversial Supreme Court judgement of Venture Global Engineering vs Satyam Computers Services by amending the Arbitration Act and preventing Indian courts from challenging international arbitral awards. Other proposals include making institutional arbitration mandatory for disputes over Rs 5 crores and narrowing "public policy" in light of the ONGC v Saw Pipes case.

India's Ministry of Law and Justice published a 190-page consultation paper on 8 April 2010, with one of the proposals aiming to nullify the power of Indian courts to challenge awards made in foreign arbitrations if they were "in conflict with the public policy of India", alerted Mumbai start-up firm M Dhruva & Partners.

The controversial principle was first established in 2008 when the Supreme Court interpreted the Arbitration & Conciliation Act 1996 in the landmark judgement of Venture Global Engineering vs Satyam Computers Services, in which it decided that Satyam Computers could not enforce an award made in a London-based arbitration against Venture Global under Indian law.

Such interference by the Indian courts meant that parties could not rely on the finality of decisions and awards made by arbitral tribunals. The lack of arbitration as an effective alternative dispute resolution mechanism made India an unattractive place to do business in for foreign companies, as legal disputes with Indian entities can easily exceed a decade in the overloaded courts that have more than 30m pending cases.

Litigation partner at Mumbai law firm M Dhruva & Partners, Manthan Unadkat, said: "In some cases, courts have interpreted the provisions of the [Arbitration] Act in such a way which defeats the main object of such legislation. Therefore, it becomes necessary to remove the difficulties and lacunas in the Act so that Alternate Dispute Resolution method may become more popular."

The Law Ministry's consultation paper has now proposed changes to the legislation to close this loophole.

"A look at the proposed amendments sets forth that the foreign arbitral awards or international commercial arbitrations would not be governed by Part I of the [Arbitration] Act," explained Unadkat. The new amendment would expressly set out that Indian courts only have jurisdiction over Indian arbitrations. "This proposal would nullify the law established by various Supreme Court judgments, namely Venture Global vs Satyam Computers and many such judgments."

The consultation paper has also proposed several other reforms to the Arbitration Act, such as narrowing the grounds on which courts could interfere in domestic arbitrations, stricter timelines to arbitration and a proposal to make institutional arbitration mandatory in disputes of over Rs 5 crores ($1.12m) unless expressly excluded by the parties in writing.

Making arbitration mandatory for certain disputes is potentially controversial. M Dhruva associate Aditi Hansaria commented: "It is pertinent to note that the said proposal negates the well-established principal of arbitration which is the autonomy of the parties and thus would invite enormous criticism."

Hansaria added that another important proposal was the giving of a narrower meaning to the term 'public policy' while allowing the enforcement of an arbitration award, as against the wider meaning suggested by the Supreme Court in the famous case of Oil & Natural Gas Corporation (ONGC) Ltd. vs. Saw Pipes.

"However the concern of SC in ONGC vs. Saw Pipes of unavailability of any remedy in case an award being 'patently illegal' has been taken care by insertion of a new section 34A," said Hansaria. "Further it is provides that as against the present law the application for setting aside the arbitral award under section 34 would not amount to an automatic stay for enforcement of the award thereby attempting to avoid frivolous litigation."

Despite some difficulties, however, Unadkat was supportive of the proposals. "It is anticipated that the above amendments would portray India to be an arbitration friendly country and increase the popularity of alternate dispute resolutions in India."

"It's a good first step," agreed London Court of International Arbitration (LCIA) India registrar Ajay Thomas, adding: "It is something which was a long-felt demand from the profession and industry that the [Arbitration] Act should be amended."

Norton Rose dispute resolution senior associate Sherina Petit commented: "I think that this is an extremely positive step and shows that the law ministry is alive to the negative effect judgments like Satyam and Saw Pipes are having on India being a forum for international arbitration. This is also extremely encouraging particularly since India has weathered the recession better than most countries and is now an attractive proposition for foreign companies to do business with."

However, she added that it would be interesting how the Indian courts would interpret and put into effect the amendments. "Of course the amendments are still in draft form but it is to be seen how the business community takes to provisions like arbitration being made mandatory for large disputes. This could potentially be quite controversial."

Currently the majority of Indian arbitrations take place under so-called ad hoc arbitration rules in India, which are not run by any institutional arbitral body. Most contracts with both international and Indian parties, however, prefer clauses for institutional arbitrations under bodies such as the LCIA, the ICC International Court of Arbitration or the Singapore International Arbitration Centre.

Singapore is a popular destination for all Indian international arbitration due to its geographic proximity and its more arbitration-friendly courts.

India's law minister Veerappa Moily has publicly stated in the past that he wants India to become the top destination for legal services in South Asia, and has floated proposals to cut the backlog of court cases although positive outcomes of plans have so far been limited.

Download the law ministry's full proposal on reforming the Arbitration Act here.

Read our feature on the pains of litigation and arbitrating in India.

It will be interesting however to see  how the Courts in India will interpret the amendments and put the act into effect.   
Of course the amendments are still in draft form but it is to be seen how the business community takes to provisions like arbitration being made mandatory for large disputes. This could potentially be quite controversial.
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