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Risks when resolving disputes with an Indian nexus

There has been a considerable growth in the number and breadth of domestic and cross-border disputes in India in recent years. The backlogs in the system are notorious and the statistics striking – 55,000 cases pending before the Supreme Court, 4.2 million cases pending before the High Court, with the overall total of cases pending (including lower courts) estimated to be 24 million (24% of which have been pending for 5-10 years).

The many reasons for these delays are discussed elsewhere. The risk for banks is that disputes with an Indian nexus end up before the Indian courts, notwithstanding a foreign (offshore) dispute resolution clause.

On arbitration, many commentators have noted that, whilst India is a signatory to the New York Convention, offshore arbitration (ie where the “seat” of arbitration is outside India) can become the subject of the exercise of “long arm” jurisdiction of the Indian courts.

One fiercely debated aspect of this “long arm” jurisdiction centres on whether the Indian court has power to review foreign arbitral awards under the Indian Arbitration Act 1996. Relying on the Supreme Court decisions of 2002 (Bhatia International) and 2008 (Venture Global Engineering) it has been argued that the Indian court did have jurisdiction to review offshore arbitration awards under Part I of the Act. As a result, banks entering into contracts either under Indian law or with Indian parties risked being dragged before the Indian courts, despite their contracts containing an offshore arbitration agreement.

Earlier this month, a five judge Constitutional Bench of the Supreme Court overruled Bhatia and Venture Global, holding that Part I of the Arbitration Act is applicable only to arbitration proceedings which take place inside India (not to foreign seated arbitrations). By this ruling the Supreme Court made it clear that the Indian courts do not have the power to annul foreign arbitral awards. This decision is good news for investors.

There is, however, a sting in the tail. The Supreme Court stated that its ruling is to be applied prospectively “to all the arbitration agreements executed hereafter”. This suggests that, assuming an Indian nexus, banks with contracts containing offshore arbitration clauses concluded prior to 6 September 2012 may still be subject to review by the Indian courts (unless expressly excluded), notwithstanding that the Supreme Court has declared that such an approach is wrong as matter of Indian law.

More widely, there are some signs of optimism – most notably a National Litigation Policy 2010 which, amongst other things, aims to reduce the average length of proceedings from 15 to 3 years. Further, legislation establishing a new Commercial Division of the High Court which provides for a fast track procedure for commercial disputes over INR 50 million (approximately USD 1 million) has been introduced. Also specialised statutory tribunals have been established in certain sectors (including debt recovery for banks) and the courts are beginning to encourage the use of ADR.

The position regarding dispute resolution in India remains mixed and continues to throw up many challenges for financial institutions dealing with Indian parties and operating in India itself.

There is a sting in the tail. The Supreme Court stated that its ruling is to be applied prospectively 'to all the arbitration agreements executed hereafter'.

Legal and Regulatory Risk Note
Asia