Siddhartha Law Collage, Dehradun

Contempt of Court

(Project submitted for the partial fulfilment for the degree of B.B.A L.L.B 4th Year)

Submitted to: - Submitted by:

Ass. Prof. Prashant Pandey Pawan Bharti

Faculty of Law B.B.A LLB (VIIIth Sem.)

Batch :( 2015-2020)

Siddhartha Law College, Dehradun

(Affiliated to Uttrakhand Technical University, Dehradun)

1
ACKNOWLEDGEMENT

I take this opportunity to convey my sincere thanks and gratitude to all those who have directly
or indirectly helped and contributed towards the completion of this project.

First and foremost, I would like to thank Ass. Prof. Prashant Pandey for his constant
guidance and support throughout this project. During the project, I realized that the degree of
relevance of the learning being imparted in the class is very high. The learning enabled me to
get a better understanding of the nitty-gritty of the subject which I studied.

I would also like to thank my batch mates for the discussions that I had with them. All these
have resulted in the enrichment of my knowledge and their inputs have helped me to
incorporate relevant issues into my project.

Last but not the least I would like to thank God and my parents for their Co-operation and
help.

2
 Table of Contents

INTRODUCTION.................................................................................................................................... 4

ARBITRATION IN INDIA ................................................................................................................... 5

a) A brief history of Arbitration law in India ..................................................................................... 5
b) The Arbitration Act, 1940 .............................................................................................................. 6
c) The Arbitration and Conciliation Act, 1996 ................................................................................. 6

WORKING OF ARBITRATION IN INDIA ..................................................................................... 8

a) Types of Arbitration Practice - Institutional Arbitration and Ad Hoc Arbitration .................... 8
b) Fast Track Arbitrations ................................................................................................................ 10

A CRITICAL ANALYSIS OF THE SUCCESS OF ARBITRATION UNDER THE 1996

ACT 11
a) Speedy Justice ............................................................................................................................. 12
b) Cost-Effectiveness ....................................................................................................................... 12
i) Cost of Arbitration vis-à-vis Cost of Litigation .......................................................................... 13
c) Extent of Judicial Intervention under the 1996 Act.................................................................. 14
i) Public Policy ............................................................................................................................... 14
ii) Abuse of the doctrine of Public Policy in India after Bhatia International Case ........................ 16
iii) A Change in the Interventionist Approach towards Foreign Awards ..................................... 18
iv) The aftermath of BALCO judgment ....................................................................................... 19
d) Comparative Study of 1940 Act and 1996 Act............................ Error! Bookmark not defined.
e) Enforcement of Awards .................................................................. Error! Bookmark not defined.

246TH REPORT OF THE LAW COMMISSION OF INDIA ....... Error! Bookmark not defined.

CONCLUSION.......................................................................................... Error! Bookmark not defined.

BIBLIOGRAPHY .................................................................................................................................. 23

3
 INTRODUCTION

The significant increase in the economic development of nations over the last few decades has
been accompanied by a considerable increase in the number of commercial disputes as well. In
India too, rapid globalization of the economy and the resulting increase in competition has led to
an increase in commercial disputes. At the same time, however, the rate of industrial growth,
modernization, and improvement of socio-economic circumstances has, in many instances,
outpaced the rate of growth of dispute resolution mechanisms. In many parts of India, rapid
development has meant increased caseloads for already overburdened courts, further leading to
notoriously slow adjudication of commercial disputes.1 As a result, alternative dispute resolution
mechanisms, including arbitration, have become more crucial for businesses operating in India as
well as those doing businesses with Indian firms.

Keeping in mind the broader goal of exploring links between the quality of legal performance
and economic growth, this research paper is an attempt to critically evaluate arbitration in India
as a legal institution. To this end, this paper presents an empirical inquiry into the state of
arbitration, as well as a more theoretical examination of the political economy and arbitration as
developed and practiced in India. In sum, although the huge influx of overseas commercial
transactions spurred by the growth of the Indian economy has resulted in a significant increase of
commercial disputes, arbitration practice has lagged behind.

In this paper, the evolution of arbitration law and practice in India has been explored, including
how the present arbitration system in India is still plagued with many loopholes and
shortcomings, and the quality of arbitration has not adequately developed as a quick and cost-
effective mechanism for resolution of commercial disputes.

1
30 million cases pending in courts, www.rtiindia.org, last visited on 20th November 2014

4
 ARBITRATION IN INDIA

a) A brief history of Arbitration law in India

Arbitration has a long history in India. In ancient times, people often voluntarily submitted their
disputes to a group of wise men of a community, called the panchayat, for a binding resolution.2

Modern arbitration law in India was created by the Bengal Regulations in 1772, during the
British rule. The Bengal Regulations provided for reference by a court to arbitration, with the
consent of the parties, in lawsuits for accounts, partnership deeds, and breach of contract,
amongst others.3

Until 1996, the law governing arbitration in India consisted mainly of three statutes: (i) the 1937
Arbitration (Protocol and Convention) Act, (ii) the 1940 Indian Arbitration Act, and (iii) the
1961 Foreign Awards (Recognition and Enforcement) Act.4 The 1940 Act was the general law
governing arbitration in India along the lines of the English Arbitration Act of 1934, and both the
1937 and the 1961 Acts were designed to enforce foreign arbitral awards (the 1961 Act
implemented the New York Convention of 1958).5

The government enacted the Arbitration and Conciliation Act, 1996 (the 1996 Act) in an effort to
modernize the outdated 1940 Act. The 1996 Act is a comprehensive piece of legislation modeled
on the lines of the UNCITRAL Model Law. This Act repealed all the three previous statutes (the
1937 Act, the 1961 Act and the 1940 Act).6 Its primary purpose was to encourage arbitration as a
cost-effective and quick mechanism for the settlement of commercial disputes. The 1996 Act
covers both domestic arbitration and international commercial arbitration.

2
K Ravi Kumar, ‘Alternative Dispute Resolution in Construction Industry’, International Council of Consultants
(ICC) papers, www.iccindia.org. at p 2.
3
Ibid.
4
Ibid.
5
The New York Convention of 1958.
6
The 1996 Act, Section 85.

5
 b) The Arbitration Act, 1940

The Arbitration Act, 1940, dealt with only domestic arbitration. Under the 1940 Act, intervention
of the court was required in all the three stages of arbitration, i.e. prior to the reference of the
dispute to the arbitral tribunal, in the duration of the proceedings before the arbitral tribunal, and
after the award was passed by the arbitral tribunal. Before an arbitral tribunal took cognizance of
a dispute, court intervention was required to set the arbitration proceedings in motion. The
existence of an agreement and of a dispute was required to be proved. During the course of the
proceedings, the intervention of the court was necessary for the extension of time for making an
award. Finally, before the award could be enforced, it was required to be made the rule of the
court.

While the 1940 Act was perceived to be a good piece of legislation in its actual operation and
implementation by all concerned - the parties, arbitrators, lawyers and the courts, it proved to be
ineffective and was widely felt to have become outdated.7

c) The Arbitration and Conciliation Act, 1996

The 1996 Act, which repealed the 1940 Act, was enacted to provide an effective and expeditious
dispute resolution framework, which would inspire confidence in the Indian dispute resolution
system, attract foreign investments and reassure international investors in the reliability of the
Indian legal system to provide an expeditious dispute resolution mechanism.

The 1996 Act contains two unusual features that differed from the UNCITRAL Model Law.
First, while the UNICITRAL Model Law was designed to apply only to international commercial
arbitrations,8 the 1996 Act applies both to international and domestic arbitrations. Second, the
1996 Act goes beyond the UNICITRAL Model Law in the area of minimizing judicial

7
Arbitration and Conciliation Act, 1996, Statement of Objects and Reasons
8
Article 1 of the UNICITRAL Model Law

6
intervention.9 The Statement of Objects and Reasons of the Act recognizes that India’s economic
reforms will become effective only if the nation’s dispute resolution provisions are in tune with
international regime.10

Further, the 1996 Act has two significant parts - Part I provides for any arbitration conducted in
India and enforcement of awards there under. Part II provides for enforcement of foreign
awards. Any arbitration conducted in India or enforcement of award there under (whether
domestic or international) is governed by Part I, while enforcement of any foreign award to
which the New York Convention or the Geneva Convention applies, is governed by Part II of the
1996 Act. Part II is thus, by its very nature not a complete code.

This led to judicial innovation by the Supreme Court in the case of Bhatia International v. Bulk
Trading.11 Here the Indian court’s jurisdiction was invoked by a party seeking interim measures
of protection in relation to arbitration under the ICC Rules to be conducted in Paris. The
provision for interim measure (section 9) was to be found in Part I alone (which applies only to
domestic arbitration). Hence the Court was faced with a situation that there was no proprio
vigore legal provision under which it could grant interim measure of protection. Creatively
interpreting the Act, the Supreme Court held that the “general provisions” of Part I would apply
also to offshore arbitrations, unless the parties expressly or impliedly exclude applicability of the
same. Hence by judicial innovation, the Supreme Court extended applicability of the general
provisions of Part I to off-shore arbitrations as well.12

The changes brought about by the 1996 Act were so drastic that the entire case law built up over
the previous fifty-six years on arbitration was rendered superfluous.13 Unfortunately, there was
no widespread debate and understanding of the changes before such an important legislative
change was enacted.14 The Government of India enacted the 1996 Act by an ordinance, and then

9
S K Dholakia, ‘Analytical Appraisal of the Arbitration and Conciliation (Amendment) Bill, 2003’, at page 3,
ICA’s Arbitration Quarterly, ICA, New Delhi, 2005 vol. XXXIX/No.4.
10
Sumeet Kachwaha and Dharmendra Rautray, Kachwaha & Partners, Arbitration in India (April 9, 2010)
https://ipba.org/media/fck/files/ArbitrationinIndia.pdf last visited on 20th November 2014.
11
(2002) 4 SCC 105
12
Ibid.
13
Sundaram Finance v. NEPC Ltd (1999) 2 SCC 479. The Supreme Court held at p 484 thus: ‘The provisions of this
Act (the 1996 Act) have, therefore, to be interpreted and construed independently and in fact reference to the 1940
Act may actually lead to misconstruction.’
14
Id at 6

7
extended its life by another ordinance, before Parliament eventually passed it without reference
to a Parliamentary Committee, a standard practice for important enactments.15 In the absence of
case laws and general understanding of the Act in the context of international commercial
arbitration, several provisions of the 1996 Act were brought before the courts, which interpreted
the provisions in the usual manner.16

The Law Commission of India prepared a report on the experience of the 1996 Act and
suggested a number of amendments.17 Based on the recommendations of the Commission; the
Government of India introduced the Arbitration and Conciliation (Amendment) Bill, 2003, in
Parliament for amending the 1996 Act18 which was subsequently withdrawn.

WORKING OF ARBITRATION IN INDIA

Arbitration in India is still evolving. One of the objectives of the 1996 Act was to achieve the
twin goals of cheap and quick resolution of disputes, but current ground realities indicate that
these goals are yet to be achieved. The ground realities can be ascertained from the study and
analysis of the various aspects in conducting arbitration, which are discussed in the following
paragraphs.

a) Types of Arbitration Practice - Institutional Arbitration and Ad

Hoc Arbitration

Arbitrations conducted in India are mostly ad hoc. The concept of institutional arbitration,
though gradually creeping in the arbitration system in India, has yet to make an impact. There are
a number of advantages of institutional arbitration over ad hoc arbitration in India, some of
which are discussed below:

15
Id at 6
16
Id at 6
17
176th Report of the Law Commission of India
18
The Arbitration and Conciliation (Amendment) Bill, 2003 was introduced in Parliament on December 22, 2003. It
is available on the website www.lawmin.nic.in.

8
 In ad hoc arbitration, the procedures have to be agreed upon by the parties and the
arbitrator. This requires co-operation between the parties and involves a lot of time.
When a dispute is in existence, it is difficult to expect cooperation among the parties. In
institutional arbitration, on the other hand, the procedural rules are already established by
the institution. Formulating rules is therefore no cause for concern. The fees are also
fixed and regulated under rules of the institution.
 In ad hoc arbitration, infrastructure facilities for conducting arbitration pose a problem
and parties are often compelled to resort to hiring facilities of expensive hotels, which
increase the cost of arbitration. Other problems include getting trained staff and library
facilities for ready reference. In contrast, in institutional arbitration, the institution will
have ready facilities to conduct arbitration, trained secretarial/administrative staff, as well
as library facilities. There will be professionalism in conducting arbitration.
 In institutional arbitration, the arbitral institutions maintain a panel of arbitrators along
with their profile. The parties can choose the arbitrators from the panel. Such arbitral
institutions also provide for specialized arbitrators. These advantages are not available to
the parties in ad hoc arbitration.
 In institutional arbitration, many arbitral institutions such as the International Chamber of
Commerce (ICC) have an experienced committee to scrutinize the arbitral awards. Before
the award is finalized and given to the parties, the experienced panel scrutinizes it. As a
result, the possibilities of the court setting aside the award is minimal, because the
scrutiny removes possible legal/technical flaws and defects in the award. This facility is
not available in ad hoc arbitration, where the likelihood of court interference is higher.
 In institutional arbitration, the arbitrators are governed by the rules of the institution, and
they may be removed from the panel for not conducting the arbitration properly. In ad
hoc arbitration, the arbitrators are not subject to such institutional removal sanctions.
 In the event the arbitrator becomes incapable of continuing as arbitrator in an institutional
arbitration, substitutes can be easily located and the procedure for arbitration remains the
same. This advantage is not available in an ad hoc arbitration, where one party (whose
nominee arbitrator is incapacitated) has to re-appoint the new arbitrator. This requires co-
operation of the parties and can be time consuming.

9
  In institutional arbitration, as the secretarial and administrative staffs are subject to the
discipline of the institution, it is easy to maintain confidentiality of the proceedings. In ad
hoc arbitration, it is difficult to expect professionalism from the secretarial staff.

In spite of the numerous advantages of institutional arbitration over ad hoc arbitration, there is
currently an overwhelming tendency in India to resort to ad hoc arbitration mechanisms. This
tendency is counterproductive, since there is considerable scope for parties to be aggrieved by
the functioning of ad hoc tribunals. An empirical survey will reveal that a considerable extent of
litigation in the lower courts deals with challenges to awards given by ad hoc arbitration
tribunals.19

Some of the arbitral institutions in India are the Chambers of Commerce (organized by either
region or trade), the Indian Council of Arbitration (ICA), the Federation of Indian Chamber of
Commerce and Industry (FICCI), and the International Centre for Alternate Dispute Resolution
(ICADR).

b) Fast Track Arbitrations

Establishment of fast track arbitrations is a recent trend aimed at achieving timely results,
thereby lowering the costs and difficulties associated with traditional arbitration. Fast track
arbitration is a time-bound arbitration, with stricter rules of procedure, which do not allow any
laxity or scope for extensions of time and the resultant delays, and the reduced span of time
makes it more cost-effective.20

Fast track arbitration is required in a number of disputes such as infringement of

patents/trademarks, destruction of evidence, marketing of products in violation of
patent/trademark laws, construction disputes in time-bound projects, licensing contracts, and
franchises where urgent decisions are required.

19
Inaugural address by Justice K G Balakrishnan, Chief Justice of India, on International Conference on
‘Institutional Arbitration in Infrastructure and Construction’, New Delhi, October 16, 2008.
20
Fast track arbitrations are best suited in those cases in which oral hearings and witnesses are necessary.

10
The 1996 Act has built-in provisions for fast track arbitration. Section 11(2) of the 1996 Act
provides that the parties are free to agree on a procedure for appointing an arbitrator.
Theoretically, under Section 11(6) of the 1996 Act,21 a party does not have to approach a court
for appointment of an arbitrator, if the agreement provides for a mechanism to deal with the
failure of the other party to appoint the arbitrator. Thus, the parties are given complete autonomy
in choosing the fastest possible method of appointing an arbitrator, and constituting a valid
arbitral tribunal. Section 13(1) confers the freedom on parties to choose the fastest way to
challenge an arbitral award. Section 13(4) expedites arbitral proceedings by providing that if a
challenge to an arbitral proceeding is not successful, the arbitral tribunal shall continue
proceedings and pass an award. Section 23(3) of the 1996 Act enables parties to fix time limits
for filing of claims, replies and counter claims. Section 24(1) also permits the parties to do away
with the requirement of an oral hearing, if they so desire. More importantly, Section 25
authorizes an arbitral tribunal to proceed ex parte in the event of default of a party. Section 29
even empowers the presiding arbitrator to decide questions of procedure.22

A CRITICAL ANALYSIS OF THE SUCCESS OF

ARBITRATION UNDER THE 1996 ACT

The 1996 Act was brought on the statute book as the earlier law, the 1940 Act, did not live up to
the aspirations of the people of India in general, and the business community in particular.23
Even though the 1996 Act was enacted to plug the loopholes of 1940 Act, the arbitral system that
evolved under it led to its failure. The main purpose of the Act was to provide a speedy and
efficacious dispute resolution mechanism to the existing judicial system, marred with inordinate
delays and backlog of cases. But an analysis of the arbitration system, as practiced under the
1996 Act, reveals that it failed to achieve its desired objectives.

21
Section 11(6) of the Arbitration and Conciliation Act, 1996, provides for appointment of an arbitrator by the
parties in case of failure by the parties to appoint the arbitrators.
22
Indu Malhotra, ‘Fast Track Arbitration’ at p.8, ICA’s Arbitration Quarterly, ICA, 2006, vol. XLI/No.1
23
Professor Anurag Agarwal, ‘Resolving Business Disputes in India by Arbitration: Problems due to the Definition
of ‘Court’, at p.10 Indian Institute of Management, Ahmadabad, 2008,
http://vslir.iimahd.ernet.in:8080/xmlui/handle/123456789/86 last visited on 17th November 2014.

11
 a) Speedy Justice

Arbitration in India is rampant with delays that hamper the efficient dispensation of dispute
resolution. Though the 1996 Act confers greater autonomy on arbitrators and insulates them from
judicial interference, it does not fix any time period for completion of proceedings. This is a
departure from the 1940 Act, which fixed the time period for completion of arbitration
proceedings. The time frame for completion of the arbitration proceedings was done away with,
on the presumption that the root cause of delays in arbitration is judicial interference, and that
granting greater autonomy to the arbitrators would solve the problem. However, the reality is
quite different. Arbitrators, who are mostly retired judges, usually treat the arbitration
proceedings in the same manner as traditional litigations, and are willing to give long and
frequent adjournments, as and when sought by the parties.24

Although the scope of judicial intervention under the 1996 Act has been curtailed to a great
extent, courts through judicial interpretation have widened the scope of judicial review, resulting
in the admission of large number of cases that ought to be dismissed at the first instance.
Moreover, the parties usually approach arbitration with a similar mindset as for litigation, with
the result that awards invariably end up in courts, increasing the timeframe for resolution of the
disputes. Parties also abuse the existing provision that allows ‘automatic stay’ of the execution of
the awards on mere filing of an application for challenge of the awards. So, the objective of
arbitration as a mechanism for speedy resolution of disputes gets obstructed due to obtrusive
delays.

b) Cost-Effectiveness

Arbitration is generally considered cheaper over traditional litigation, and is one of the reasons
for parties to resort to it. However, the ground realities show that arbitration in India, particularly
ad hoc arbitration, is becoming quite expensive vis-à-vis traditional litigation. A cost analysis on
arbitration vis-à-vis litigation will throw light on the higher cost of arbitration over litigation.

24
Id at 22.

12
However, the ground realities show that arbitration in India, particularly ad hoc arbitration, is
becoming quite expensive vis-à-vis traditional litigation. A cost analysis on arbitration vis-à-vis
litigation will throw light on the higher cost of arbitration over litigation.

i) Cost of Arbitration vis-à-vis Cost of Litigation

Although arbitration is considered to be a cheaper mechanism for the settlement of

disputes, there is a growing concern in India that arbitration has become a costly affair
due to the high fee of the arbitrators and liberal adjournments.33 This is particularly true
for ad hoc arbitrations. Arbitration is more cost-effective than litigation only if the
number of arbitration proceedings is limited. The prevalent procedure before the
arbitrators is as follows - at the first hearing, the claimant is directed to file his claim
statement and documents in support thereof; at the second hearing, the opposing parties
are directed to file their reply and documents; at the third hearing, the claimant files his
rejoinder. At each of these stages, there are usually at least two or three adjournments.
Sometimes, applications for interim directions are also filed by either party, which
increases the number of arbitration sittings for deciding such interim applications. The
first occasion for considering any question of jurisdiction does not normally arise until
the arbitral tribunal has issued at least six adjournments.25

If the respondent is the State or a public sector undertaking, the number of adjournments
is higher as it takes more time for these parties in internally finalizing pleadings and
documents that are to be filed before the arbitral tribunal. Parties pay a fee to the
arbitrators for each hearing and thus spend a substantial amount of money. 26 This is in
addition to the other costs involved.

In contrast, law suits, if admitted, are certainly cheaper, even though they take substantial
amounts of time to resolve. This is because lawyers’ fees are the only major expenditure
in litigation, and lawyers usually charge the same, if not more, as per litigation hearing.

25
Law Commission of India, 176th Report on Arbitration and Conciliation (Amendment) Bill, 2001 at p 68.
26
Ibid.

13
 Litigation may be more costly in certain cases, because procedural delays add to the cost
of settling disputes. That is, the costs associated with management of time and money
resources - not to mention keeping plants or production offline - can outweigh the costs
of arbitration.

Issues of speed and cost-efficiency are the hallmarks of the arbitration procedure, and are
often identified as the core reasons why arbitration very clearly surpasses litigation as a
suitable choice for dispute resolution, especially with respect to commercial disputes.
However, the prevalent high cost of arbitration in India, as discussed above is a factor
that prevents arbitration from being an effective mechanism for resolution of commercial
disputes. For this reason, arbitration is not progressing in the manner it should in order to
keep pace with the increase in commercial disputes due to the inflow of international as
well as commercial transactions.

c) Extent of Judicial Intervention under the 1996 Act

One of the main objectives of the 1996 Act was to give more powers to the arbitrators and reduce
the supervisory role of the court in the arbitral process.27 In effect, judicial intervention is
common under the 1996 Act. Such intervention takes the form of determination in case of
challenge of awards. Such a propensity to exercise their authority to intervene may be
attributable to their skepticism that arbitration is not effective at resolving disputes or the judges’
vested concern that their jurisdiction will be adversely eroded.28

i) Public Policy
"Public Policy is an unruly horse, and when you get astride it you never know where it will
carry you."29

27
Arbitration and Conciliation Act, 1996, Statement of Objects and Reasons.
28
Pramod Nair, ‘Quo vadis arbitration in India?’ Business Line, October 19, 2006. Pramod Nair is a Visiting Fellow
at the Lauterpatch Research Centre for International Law, University of Cambridge.
29
Mr Justice Burrough noted "Public Policy is an unruly horse, and when you get astride it you never know where it
will carry you. It may lead you from sound law. It is never argued at all but when other points fail” Richardson v.
Mellish (1824) 2 Bing 228.

14
 The term ‘public policy’ has been used twice in the 1996 Act. An award can be set aside
under Section 34 of the 1996 Act (Part I) if the award is in conflict with the public policy of
India. Further, a foreign award may be refused enforcement under Section 48 of the 1996 Act
(Part II of the 1996 Act) if the award is contrary to the public policy of India.

The first time the question of public policy arose as an exception for enforcement of a foreign
arbitral award was in the case of Renusagar Power Electric co v. General Electric Co
(“Renusagar”)30, which involved enforcement of an ICC Award. This was the pre-1996 Act
case and the award was being enforced under the 1961 Act.

The Supreme Court held that the expression "public policy" in Section 7(1)(b)(ii) of the 1961
Act meant the public policy as applied by the Indian courts. It recognized that:

"Public policy connotes some matter which concerns the public good and the public interest.
The concept of what is for the public good or the public interest or what is injurious or
harmful to the public good or public interest has varied from time to time."

The Supreme Court held that the expression "public policy" could be construed widely or
narrowly and adopted a narrow view in reference to the enforcement of a foreign award. The
Court stated that the term "public policy" "has been used in a narrower sense and in order to
attract to the bar of public policy the enforcement of the award must invoke something more
than the violation of the law of India. Applying the said criteria it must be held that the
enforcement of a foreign award would be refused on the ground that it is contrary to public
policy if such enforcement would be contrary to:

 Fundamental policy of Indian law; or

 The interests of India; or
 Justice or morality.”

The defence of public policy to set aside an award under Section 34 of the 1996 Act then
arose in the case of Oil and Natural Gas Corporation v. Saw Pipes Ltd31 case ("Saw Pipes

30
AIR 1994 SC 860
31
(2003) 5 SCC 705

15
 case"). The issue was whether an award made in India could be set aside on the ground of
public policy; that the arbitral tribunal had incorrectly applied the law of liquidated damages.

Despite the Renusagar precedent, the Supreme Court held that any arbitral award which
violates Indian statutory provisions is "patently illegal" and contrary to public policy. The
court in Saw Pipes differentiated the case from that of Renusagar on the ground that the
question in the latter case was related to an execution of an award which had attained finality
under the 1961 Act. By contrast, in Saw Pipes, the validity of the award was in question. The
argument accepted by the court was that the foreign award could be set aside under the
relevant law by the competent authority where it was being enforced. Thus, in the Saw Pipes
case the domestic award would be supervised by Indian courts as they were the primary
courts. Further, it held that if a narrow meaning was given to the term "public policy," some
of the provisions under the 1996 Act would become inapplicable. Therefore, the Supreme
Court interpreted Section 34 (2)(b)(ii) of the 1996 Act to include the additional ground of
"patent illegality"32. The illegality must go to the "root of the matter" and must not be of a
trivial nature. In another case, the Supreme Court held that an award that is contrary to the
specific terms of the contract is patently illegal and can be thus set aside on public policy
grounds.33

ii) Abuse of the doctrine of Public Policy in India after Bhatia International
Case

The Supreme Court of India gave a narrow interpretation to ‘public policy’ in Renusagar and
a broader interpretation in the Saw Pipes case. In effect, this means that there existed
different interpretations to the term ‘public policy’ for refusing to set aside an arbitral award
due to public policy on one hand and for refusing to enforce a foreign award due to public
policy on the other hand. This however changed after the ruling of the Supreme Court in
Bhatia International Vs Bulk Trading.34

32
Ibid.
33
Hindustan Zinc Ltd v Friends Coal Carbonization, [2006] 4 SCC 445 (India)
34
2002 (4) SCC 105 (‘Bhatia’)

16
 In Bhatia International, the court categorically erased the distinction between Part I & Part II
of the Act, stating that provisions of Part I would apply to all arbitrations and all related
proceedings. For arbitrations held in India, the provisions would be compulsorily applicable
and only the derogable provisions of Part I could be deviated from. In international
commercial arbitrations, held outside India, the provisions of Part I would apply by default
unless the parties expressly or impliedly, excluded all or any of its provisions.35

On the basis of the Bhatia decision, the Indian courts went on to set aside a foreign
arbitration award36 and appointed an arbitrator in proceedings seated outside of India.37

The effect of these and other judgments was to prompt many parties to commercial contracts
to draft arbitration clauses explicitly excluding the application of Part I of the Act. At the
same time, in response to growing professional and academic criticism of the arbitration
“unfriendliness” of the Bhatia principle, the Indian lower courts started to take a narrow view
of the Indian court’s right to intervene in foreign arbitrations.38

These judgments were widely criticized and they led to a situation where as soon as a foreign
award was issued, parties often strategically challenged the arbitration award in Indian courts
on the grounds of public policy. This went against the basic principle of mutual recognition
and enforcement of arbitral awards expressed in the New York Convention. Recognition of
an international arbitration award is of paramount importance. Unless parties can be sure that
at the end of the arbitration proceedings, if not complied with voluntarily, they will be able to
enforce the award, an award in their favor will only be a pyrrhic victory. 39 The only practical
solution was that the parties routinely agreed in their arbitration clauses that Part I of the Act
was not applicable.40

35
Sherina Petit and Matthew Townsend with Sneha Janakiraman, International Arbitration in India at p.16
International arbitration report – issue 1
36
Venture Global Engineering Vs Satyam Computer Services Limited (2008) 4 SCC 190.
37
Intel Technical Services Pvt Ltd Vs WS Atkins Plc (2008) 10 SCC 308
38
Ibid.
39
Julian D Lew, Loukas Mistelis And Stefan Kroll, Comparative International Commercial Arbitration 688 (2003).
40
Following Bhatia International v. Bulk Trading (2002) 4 SCC 105 (India).

17
 In early 2012, the Supreme Court began hearing a number of consolidated appeals on the
Bhatia issue. The court also heard interventions by interested organizations, including the
SIAC and LCIA41 India.

iii) A Change in the Interventionist Approach towards Foreign Awards

On September 6, 2012, a five-member constitutional bench in Bharat Aluminium

Company v. Kaiser Aluminium Technical Services (BALCO)42, overturned the Bhatia
principle and held that Part I of the Act applies only to arbitrations seated in India.

In supporting its judgment, the court made clear that in its view it was the parties’ choice of
seat, as opposed to the law governing the contract or arbitration agreement, which
determined whether the Indian courts had jurisdiction. This was welcome clarification of a
point which had been a source of confusion in previous Supreme Court judgments.

In the Supreme Court’s words:

“…the choice of another country as the seat of arbitration inevitably imports an acceptance
that the law of that country relating to the conduct and supervision of arbitrations will apply
to the proceedings.” Therefore, “…the choice of another country as the seat of arbitration
inevitably imports an acceptance that the law of that country relating to the conduct and
supervision of arbitrations will apply to the proceedings.”

The court further clarified that, due to the territoriality principle adopted by the Act, Part I
and Part II of the Act are mutually exclusive. Accordingly, the power to set aside an
arbitration award under section 34 of Part I of the Act does not apply to arbitrations seated
outside India. Such power applies only to arbitrations seated in India.

While BALCO limited the scope for the Indian courts to interfere in the conduct of foreign
seated arbitrations, it nonetheless left untouched other controversial pronouncements of the
Supreme Court as to the public policy grounds for challenge to an award including the scope

41
Singapore International Arbitration Centre (SIAC) and London Court of International Arbitration (LCIA).
42
2012 (8) SCALE 333 (India)

18
 of such challenge. As discussed earlier, in ONGC Vs Saw Pipes43 the Supreme Court had
held that an award that conflicted with Indian law would be contrary to public policy and
therefore unenforceable. The obvious concern for parties was that the Saw Pipes case opened
the door at the enforcement stage to the substantive review of the merits of any award
rendered outside of India. Parties to offshore arbitration proceedings, having evaded the
interference of the Indian courts at the procedural stage, may have nonetheless had to
encounter it at enforcement. However, in Shri Lal Mahal Ltd Vs Progetto Grano 44 Spa, the
Supreme Court addressed this concern. The Supreme Court held that the expression “public
policy of India” should be given a narrow meaning and that the enforcement of a foreign
award would be refused on this ground only if it is contrary to the fundamental policy of
Indian law; interests of India; and justice or morality. The Supreme Court reinforced its
decision in Renusagar Power Company Ltd Vs General Electric Company and overruled the
expansive interpretation of public policy as laid down in Phulchand Exports.45 This has
provided welcome relief to parties involved in foreign seated arbitrations.

iv) The aftermath of BALCO judgment

The BALCO decision was a positive development for India’s investment and business
climate, as it reduced the scope of interference by the Indian courts in offshore arbitration.
This judgment means that India has reverted to the position prior to Bhatia International.46

Nonetheless, there remain at least two elements of the post-BALCO arbitral regime which
may have a negative impact on the certainty of the arbitral process.

 Parties with arbitration agreements executed before September 6, 2012 are still
subject to the pre-BALCO system. This is because the judgment is phrased only to
“…apply prospectively, to all arbitration agreements executed hereafter”. Parties
with arbitration agreements executed before September 6, 2012 therefore remain
subject to the Bhatia regime. The reason given is "to do complete justice", but this is

43
Id at 33 p.18
44
(Civil Appeal No. 5085 of 2013 arising from SLP(c) No. 13721 of 2012).
45
Phulchand Exports Ltd v. OOO Patriot (2011) 10 SCC 300
46
Ashurst international arbitration group, The renewal of arbitration in India: BALCO v. Kaiser Aluminium
publishes on Sept 2012 at https://www.ashurst.com/doc.aspx?id_Content=8246, last visited on 25th November 2014

19
 a curious restriction: why should the previous case law, which the Supreme Court
concluded is wrong, continue to apply to agreements which will undoubtedly generate
arbitrations for years to come?
 For parties entering into new arbitral agreements, to which the BALCO judgment
applies, a substantial benefit of “offshore” arbitration – the ability to apply to the
Indian courts for interim measures in support of such proceedings - is no longer
available.
In its judgment, the Supreme Court held that there is “complete segregation” between
Part I and Part II of the Act, meaning that “…any of the provisions contained in Part I
cannot be made applicable to Foreign Awards…”. Unfortunately, Part I contains not
only powers which can be used to derail offshore arbitration proceedings but also
those which can assist them, principally the power laid out in section 9 of Part I of the
Act to order interim measures in support of arbitration proceedings.
While the Supreme Court acknowledged that the segregation doctrine would prohibit
Indian courts granting interim measures in support of foreign arbitrations, they
observed that this issue could not be resolved by the Supreme Court but instead was
“a matter to be redressed by the legislature”. Until such reforms are implemented,
parties to arbitration proceedings seated outside of India will be unable to apply to the
Indian courts to preserve assets or evidence, compel attendance of a witness or obtain
an order for security for costs in India.47

CONCLUSION

The 1996 Act was enacted to achieve the purpose of quick and cost-effective dispute resolution.
Arbitration occupies a prime position in commercial dispute resolution in India. An examination

47
Id at 37 p.20

20
of the working of arbitration in India reveals that arbitration as an institution is still evolving, and
has not yet reached the stage to effectively fulfill the needs accentuated with commercial growth.

Viewed in its totality, India does not come across as a jurisdiction which carries an anti-
arbitration bias. Notwithstanding the interventionist instincts and expanded judicial review,
Indian courts do restrain themselves from interfering with arbitral awards. Apart from the
proposed amendments in the Arbitration and Conciliation Act 1996 given in the 246th report of
the Law Commission of India, there are still inherent problems that hinder the working of
successful arbitration in India.

In view of the same, following are the recommendations that can be made:48

1. Universities in India could create a separate faculty or department for arbitration law to
encourage specialized study, incisive research and practical application of Arbitration
law.

2. All arbitrators, judges and lawyers should make efforts to change general attitude towards
arbitration. It is necessary for the players in arbitration proceedings (i.e. arbitrators,
judges and lawyers) to know and to understand the direction of the new law, respect the
will of the parties set out in arbitration clauses, and observe the dichotomy between
arbitration and litigation. This change in the mindset must focus on the need to make the
system more effective, attractive and functional.49

3. The government should disseminate knowledge of the benefits of alternate dispute

resolution mechanisms to foster growth of an international arbitration culture amongst
lawyers, judges and national courts. The real problem in enforcing foreign awards around
the globe despite the enabling provision of the New York Convention, 1958, is not a legal
one; but it is a lack of awareness particularly, amongst lawyers and judges, of the benefits
of international arbitration and of its true consensual nature.

48
Id at 47, p.32
Excerpt from the article ‘Arbitrating Commercial and Construction Contracts’ published in ICA’s Arbitration
49

Quarterly and webcasted in ICA’s official website.

21
4. There is an emerging trend to go for settlement of business disputes by institutional
arbitration, provided such institutions maintain quality standards in conducting
proceedings. The standards are evaluated in terms of professional arbitrators,
infrastructure facilities, time and cost saving procedures and uniformity of laws -
standards that will make the ADR system more sound and acceptable among the business
community. Independent institutions should impart training for nurturing competent
professionals who are trained to delve into the crux of the dispute for its resolution.

_____________________________

22
 BIBLIOGRAPHY

1) Primary Sources
 The Arbitration Act 1940
 Arbitration and Conciliation Act 1996
 The New York Convention of 1958.
 UNICITRAL Model Law
 176th Report of the Law Commission of India
 246th Report of the Law Commission of India

2) Secondary Sources

a) Articles
 K Ravi Kumar, ‘Alternative Dispute Resolution in Construction Industry’,
International Council of Consultants (ICC)
 Sherina Petit and Matthew Townsend with Sneha Janakiraman, International
Arbitration in India International arbitration report – issue 1
 Sumeet Kachwaha and Dharmendra Rautray, Kachwaha & Partners, Arbitration
in India (April 9, 2010)

b) Books
 Julian D Lew, Loukas Mistelis and Stefan Kroll, Comparative International
Commercial Arbitration.

c) Papers
 Indu Malhotra, ‘Fast Track Arbitration’, ICA’s Arbitration Quarterly, ICA, 2006,
vol. XLI/No.1
 Krishna Kanta Handiqui State Open University, Introduction to the Arbitration
And Concilliation Act.
 Pramod Nair, ‘Quo vadis arbitration in India?’ Business Line, October 19, 2006,
University of Cambridge.
 S K Dholakia, ‘Analytical Appraisal of the Arbitration and Conciliation
(Amendment) Bill, 2003’, ICA’s Arbitration Quarterly, ICA, New Delhi, 2005
vol. XXXIX/No.4.
 Sharma, Krishna Development and Practice of Arbitration in India –Has it
Evolved as an Effective Legal Institution

23
  Sunil Malhotra, ‘Enforcement of Arbitral Awards’, at p 20, ICA’s Arbitration
Quarterly, ICA, 2006, vol. XL/No.4.

d) Websites
 Ashurst international arbitration group, The renewal of arbitration in India:
BALCO v. Kaiser Aluminium publishes on Sept 2012 at www.ashurst.com
 K Ravi Kumar, ‘Alternative Dispute Resolution in Construction Industry’
www.iccindia.org
 Mandhani, Apporva, Law Commission recommends major changes to Arbitration
and Conciliation Act published on 8th August 2014 at www.livelaw.in
 Professor Anurag Agarwal, ‘Resolving Business Disputes in India by Arbitration:
Problems due to the Definition of ‘Court’, Indian Institute of Management,
Ahmadabad, 2008. www.vslir.iimahd.ernet.in
 Ray, Ashutosh, Law Commission’s Report to Revamp the Indian Arbitration
Experience, published on 23rd August 2014 on Kluwer Arbitration Blog.
www.kluwerarbitrationblog.com

24