In this issue of International Dispute Resolution Update we explore the following:
India is a party to the New York Convention and has adopted the Model Law. International arbitration in India is governed by the provisions of the Arbitration and Conciliation Act 1996 (Act).
Enforcement of Australian foreign arbitral awards in India
India recently issued a notification recognising Australia as a territory to which the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) applies. As a result, foreign arbitral awards made in Australia are now enforceable (subject to the provisions of the New York Convention). The notification was required under section 44 of the Act which provides, in relation to the enforcement of New York Convention Awards, that:
In this Chapter, unless the context otherwise requires, ‘foreign award’ means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960—
(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
(b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.
Public policy
While this is a welcome development, concerns still exist as to the practical enforcement of foreign arbitral awards in India. In early 2008, the Supreme Court of India in the case of Venture Global Engineering v Satyam Computer Services, Ltd (2008(1) ARBLR1 37 (SC)), considered whether an award could be challenged on the grounds of public policy.
A Michigan-based company, Venture Global Engineering (Venture Global) and Satyam Computer Services (Satyam), an Indian company, entered into a joint venture agreement to create a company called Satyam Venture Engineering Services Ltd. Venture Global and Satyam each had 50 per cent of the equity shareholding in the joint venture company. A shareholders agreement executed contemporaneously contained an arbitration clause. In mid-2005 Satyam commenced arbitration through the London Court of International Arbitration which resulted in the handing down of an award in its favour directing Venture Global to transfer its shareholding to Satyam. Satyam sought recognition and enforcement of the award in Michigan, United States. Venture Global objected to the enforcement of the award on the grounds that it ordered the transfer of shares in violation of Indian Laws and Regulations (including the Foreign Exchange Management Act 1999). At the same time, Venture Global commenced proceedings in India challenging the award. The matter was heard at first instance in the District Court, on appeal in the High Court and subsequently in the Supreme Court.
Venture Global’s grounds for challenge derived from section 34 of the Act pursuant to which a party could invoke public policy to set aside an award. Public policy in India had been defined as including (a) the fundamental policy of India, the interests of India, justice or morality and patent illegality. The Supreme Court accepted that by taking the award to Michigan for enforcement, Satyam sought to avoid the regulatory regime in India which would have applied to the proposed share transfer and refused enforcement in India on the grounds that to allow recognition and enforcement would be contrary to public policy within that country.
Lessons learned
The decision of the Supreme Court of India in Venture Global provides guidance as to matters which should be considered in the drafting of arbitration clauses in contracts where there is some connection with India.
In the course of its judgment, the Supreme Court made it clear that parties to an international arbitration agreement could, if they so wished, agree that Part I of the Act (which covered procedural matters including the recognition and enforcement of awards) would not apply to their arbitration. In doing so, the parties would not lose the right to have a foreign arbitral award recognised and enforced as a New York Convention Award under Part II of the Act. However, unless the parties expressly turned their mind to this question and recorded their agreement to the contrary in the arbitration clause, Part I of the Act would, also clearly apply to international commercial arbitration.
Paharpur Cooling Towers Ltd v Paramount (WA) Ltd1
The Western Australian Court of Appeal recently considered the reach of an arbitration agreement where the relevant clause was contained only in the principal agreement between the parties and not clearly expressed to extend to ancillary documents.
Paharpur Cooling Towers Ltd (Paharpur) was an overseas cooling tower manufacturer. It entered into an agreement with Paramount (WA) Ltd pursuant to which Paharpur would design, supply and supervise the installation of two cooling towers for an ammonia plant being constructed by Paramount for Burrup Fertilisers Pty Ltd (Burrup Fertilisers). Paramount agreed to provide a bill of exchange (accepted by Paramount and Burrup Fertilisers) payable to Paharpur 180 days from the date of the last shipment of equipment.
Payment was not made and Paharpur commenced action in the Supreme Court against:
- Paramount for monies owing under the contract
- Burrup Fertisilisers and Pankaj Oswal for the same amount (as trustees of a trust which had provided a guarantee of Paramount’s obligations under the contract), and
- Paramount and Burrup Fertilisers for monies owing under the bill of exchange.
Paramount, in response, commenced arbitration against Paharpur under clause 22 of the design contract. The notice of arbitration included all disputes under the design contract and the bill of exchange. Clause 22 of the design contract provided that if a dispute could not be resolved pursuant to an agreed process under that clause, then Paramount (as the principal under the design contract) at its sole discretion:
shall determine whether the parties resolve the dispute by litigation within the jurisdiction of the courts of Western Australia or arbitration under the Commercial Arbitration Act …
‘Dispute’ was defined as:
a dispute or difference between the parties as to the construction of the Contract or as to any matter or thing of whatsoever nature arising, whether antecedent to the Contract and relating to its formation or arising under or in connection with the Contract, including any claim at common law, in tort, under statute or for restitution based on unjust enrichment or for rectification or frustration or a dispute concerning a direction given and/or acts or failing to act by the Engineer or the Engineer’s Representative or interference by the Principle’s Representative.
Paramount sought a stay of the litigation pursuant to section 7 of the International Arbitration Act 1974 (IA Act), alternatively section 53(1) of the Commercial Arbitration Act 1985 (WA) (CA Act) or through an exercise of the inherent jurisdiction of the court. It claimed that the dispute concerning the bill of exchange was a separate stand alone contract and that disputes under it were not the intended subject of the arbitration agreement in the design contract.
The Supreme Court, at first instance, concluded that the arbitration clause was sufficiently wide to encompass the claim of Paharpur under the bill of exchange and granted Paramount’s application. Paharpur appealed.
The Court of Appeal took a different view. It found that the dispute under the bill of exchange was not a dispute within the meaning of clause 22 of the design contract and that the reference in clause 2 of the contract to a dispute or difference between the parties intended to apply to a dispute between the parties to the design contract only. It was not intended to apply to a dispute involving the parties and a stranger to the design contract. While the court acknowledged that parties may intend one stop adjudication for their disputes, the court noted that this principle does not readily apply in the same way where the dispute in question is not limited to the parties to the arbitration agreement. It follows therefore, that Paharpur’s claim in relation to the bill of exchange not giving rise to a dispute within the meaning of clause 22, neither section 7 of the IA Act nor section 53 of the CA Act apply. The Court of Appeal ordered that the stay of the litigation insofar as it related to the dispute concerning the bill of exchange be set aside.
Observations
The decision in the above case makes it clear that where a commercial entity is executing (either simultaneously or consequentially) a number of documents related to the same transaction, the entity must examine each document separately to determine the dispute resolution process applicable to disputes concerning that document.
If it is the intention of the parties that all related disputes be determined in the one forum, express words must be used in each transaction document to implement this agreement. This is particularly the case where there are different parties to each of the agreements. Provision may also be required within the dispute process to accommodate parties with a place of business outside Australia (which may result in arbitration under the IA Act, rather than arbitration under a state Act).
Vasp Group Pty Limited v Service Stream Limited
Paharpur was considered by the Supreme Court of New South Wales in the later case of Vasp Group Pty Limited v Service Stream Limited.2 This case involved an application for a stay under the Commercial Arbitration Act 1984 (NSW). The stay was sought on grounds that the dispute which had arisen between the parties was within the dispute resolution provision of the relevant contract. The court accepted the argument, however noted that a subsequent stay application may be appropriate:
… if the possibility of fragmentation (as referred to by the Full Court in Western Australia in Paharpur Cooling Towers Pty Ltd v Paramount (WA) Ltd becomes a reality or a distinct possibility.
While this finding (and qualification) was open to the court where the application for a stay was made under the CA Act, parties should be aware that this approach may fail where the arbitration was an international commercial arbitration conducted under the UNCITRAL Model Law and the application for the stay was made under the provisions of the IA Act.
Section 7(2) of the IA Act provides that where proceedings instituted by a party to a relevant arbitration agreement against another party to the agreement are pending in court and the proceedings involve the determination of a matter that, in pursuance of the agreement, is capable of settlement by arbitration, on application of a party to the agreement, the court shall, by order, upon such conditions (if any) as it thinks fit, stay the proceedings or so much of the proceedings as involves the determination of that matter, as the case may be, and refer the parties to arbitration in respect of that matter. This provision implements Article II of the New York Convention which provides that:
The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
There are no time constraints on the bringing of any application for a stay under these provisions. However, Article 8 of the Model Law provides as follows:
(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.
(Emphasis added)
The option of deferring an application for a stay until such time as the full extent of the dispute has been determined may not therefore provide a valid course for parties who are proceeding under the UNCITRAL Model Law.
Endnotes
1. [2008] WASCA 110
2. [2008] NSWSC 1182
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