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E-Notes

Class & Section : B.A. LL.B / BBA. LL.B III Semester

Paper Code : LLB 309
Subject : Alternative Dispute Resolution

UNIT IV

INTERNATIONAL COMMERCIAL ARBITRATION

With the growth of International Trade and Commerce, there was an increase in disputes
arising out of such transactions being adjudicated through Arbitration. Arbitration is the
favoured method for resolving international commercial disputes. When companies or
individuals from different countries do business often neither party will be willing to submit
disputes that may arise between them to the courts of the other party’s country. Each party
will view the other party’s legal system with distrust perceiving that they will not get a fair
hearing, or simply that they do not understand the other party’s legal system and feeling if
they are forced to litigate in the foreign country, they will be hampered by language and
cultural problems, and systems and procedures that they do not know anything about. One of
the problems faced in Arbitrations, related to recognition and enforcement of an Arbitral
Award made in one country by the Courts of other countries. This difficulty was sought to be
removed through various International Conventions. The first such International Convention
was the Geneva Protocol on Arbitration Clauses, 1923. The 1923 Protocol sought to make
arbitration agreements and arbitration clauses in particular enforceable internationally. It was
also sought to ensure that Awards made pursuant to such arbitration agreements would be
enforced in the territory other than the state in which they were made. The 1923 Protocol
proved to be inadequate. It was followed by the Geneva Convention on the execution of
Foreign Arbitrated Awards, 1927 and is popularly known as the "Geneva Convention of
1927".

In 1953 the International Chamber of Commerce promoted a new treaty to govern

International Commercial Arbitration. The proposals of ICC were taken up by the United
Nations Economic Social Council. This in turn led to the adoption of the convention on the
Recognition and Enforcement of Foreign Arbitral Awards at New York in 1958 (popularly
known as "the New York Convention") (hereinafter NYC). The NYC is an improvement on
the Geneva Convention of 1927. It provides for a much more simple and effective method of
recognition and enforcement of foreign arbitral awards. It gives much wider effect to the
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validity of arbitration agreement. The NYC is primarily concerned with two matters: the
recognition of, and giving effect to, arbitration agreements and the recognition, and
enforcement, of international (non-domestic) arbitral awards. India became a State Signatory
to this convention on 13th July, 1960. The Foreign Awards (Recognition and Enforcement)
Act, 1961 was enacted to give effect to the New York Convention.

International commercial arbitration is a means of resolving disputes arising under

international commercial agreements. United Nations Commission on International Trade
Law (UNICTRAL) has framed a Model Law on International Commercial Arbitration on 21
June 1985. The model law is not binding, but individual states may adopt the model law by
incorporating it into their domestic law. In 2006 the model law was amended, it now includes
more detailed provisions on interim measures. The UNCITRAL Arbitration Rules, on the
other hand, are selected by parties either as part of their contract, or after a dispute arises; to
govern the conduct of arbitration intended to resolve a dispute or disputes between
themselves. In short, the Model Law is directed at the National Governments to implement,
while the Arbitration Rules are directed at potential or actual parties to a dispute. The General
Assembly in its Resolution 40 of 1972 on 11th December, 1985 recommended that "all States
give due consideration to the Model Law on international commercial arbitration, in view of
the desirability of uniformity of the law of arbitral procedures and the specific needs of
international commercial arbitration practice.”

In an international commercial arbitration, parties are free to designate the governing law for
the substance of the dispute. If the governing law is not specified, the arbitral tribunal shall
apply the rules of law it considers appropriate in view of the surrounding circumstances.
Arbitration enables the parties to a contract, to agree that if a dispute arises, a neutral and
respected third party or parties will be appointed to resolve their dispute in accordance with
procedures that they will have a large part in devising, in a desired venue, in accordance with
a set of arbitration rules they have chosen, with a particular set of laws to give the arbitration
its legal basis (the lexarbitri) and another set of laws in accordance to which the dispute will
be resolved (lexcausa).

The choice of where an arbitration is venued, known as the seat or the place of arbitration,
has important implications and should not be made lightly. The venue of an arbitration
impacts the role of local courts in relation to the arbitration, the conduct of the arbitration,
and ultimately the enforceability of the award. Careful selection of the venue of an arbitration
is important for several reasons. First, state courts of the selected venue have a role in
supervising the arbitration and can influence the process not only before the proceedings have
been initiated, but also during the arbitral hearing. The parties, therefore, should pay attention
to the local laws and general judicial attitude towards arbitration in the chosen jurisdiction.
Secondly, the seat of arbitration may lead to the imposition of specific rules regarding the
conduct of the arbitration, whether relating to the treatment of witnesses or even who may act
as counsel or arbitrator. Thirdly, the local laws of the seat of arbitration will be important for
the enforcement of the ultimate award or for the applications seeking to annul it. The choice
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of venue impacts many other issues, including some that may significantly affect cost and
convenience. For example, the venue is frequently (although not always) the location where
the hearings are held. Thus, it is important to ensure parties and their witnesses have easy
physical and legal access to the area.

Local courts of the selected jurisdiction are often called on to provide substantial assistance to
the parties even before the arbitration process has been initiated. While many courts follow
the principle that an arbitral tribunal is empowered to rule on its own jurisdiction, this
doctrine has been undermined in India by a recent apex court decision, is not recognized at all
in China, and varies according to the wording of the arbitration clause in the United States.

Some of the most important effects of the choice of venue are revealed only at the post-award
stage. Thus, the grounds for annulment of the arbitral award vary from venue to venue. For
example, while most local courts will revoke an award for “violation of public policy,” the
interpretation of what constitutes a violation of public policy can vary tremendously between
venues. The timeframe during which the parties can demand annulment also varies
significantly by jurisdiction. Finally, the parties should remember that the award can be set
aside only in local courts of the venue under their local rules and procedures, and the
proceedings are conducted in the local language. Thus, the time and cost associated with
annulment actions will vary greatly from one venue to another.

While few countries like Australia and Singapore have a different statute for only
International Arbitrations, India has enacted laws for arbitration of both domestic and
International in single enactment repealing the earlier Arbitration Act of 1940 and the
Foreign Awards (Recognition and Enforcement) Act, 1961. The Objects and Reasons of the
Indian Arbitration and Conciliation Act, 1996 reflect the intention of incorporation of the
UNCITRAL Model Law in the Indian Arbitration Process. The Act is one “to consolidate and
amend the laws relating to domestic arbitration, international commercial arbitration and
enforcement of foreign arbitral awards as also to define the law relating to conciliation and
for matters connected therewith or incidental thereto.”

In Indian Arbitration Laws, provisions of Section 28 of the Indian Arbitration and

Conciliation Act, 1996 deals International Commercial Arbitration held in India, which says:

Where the place of arbitration is situate in India,-

In an arbitration other than an international commercial arbitration, the arbitral tribunal shall
decide the dispute submitted to arbitration in accordance with the substantive law for the time
being in force in India;

In international commercial arbitration,-

(I) the arbitral tribunal shall decide the dispute in accordance with the rules of law designated
by the parties as applicable to the substance of the dispute;
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any designation by the parties of the law or legal system of a given country shall be
construed, unless otherwise expressed, as directly referring to die substantive law of that
country and not to its conflict of laws rules; failing any designation of the law under clause
(a) by the parties, the arbitral tribunal shall apply the rules of law it considers to be
appropriate given all the circumstances surrounding the dispute.

The arbitral tribunal shall decide ex aequoet bono or as amiable compositeuronly if the
parties have expressly authorised it to do so.

In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and
shall take into account the usages of the trade applicable to the transaction.

International commercial arbitration has proven spectacularly successful in the recent past
and will no doubt continue to be so. With the great opportunities for international trade and
commerce, as the preferred form of dispute resolution of international commercial disputes,
international commercial arbitration offers practitioners new opportunities for practice, and is
deserving of close attention.

Enforcement under the New York Convention

Sections 44 to 52 of the Arbitration and Conciliation (Amendment) Act, 2015 deals with
foreign awards passed under the New York Convention.

The New York Convention defines "foreign award" as 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-

In pursuance of an agreement in writing for arbitration to which the Convention set forth in
the First Schedule applies, and

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.

From the abovementioned conditions, it is clear that there are two pre-requisites for
enforcement of foreign awards under the New York Convention. These are:

The country must be a signatory to the New York Convention.

The award shall be made in the territory of another contracting state which is a reciprocating
territory and notified as such by the Central Government.

Section 47 provides that the party applying for the enforcement of a foreign award shall, at
the time of the application, produce before the court (a) original award or a duly authenticated
copy thereof; (b) original arbitration agreement or a duly certified copy thereof; and (c) any
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evidence required to establish that the award is a foreign award. As per the new Act, the
application for enforcement of a foreign award will now only lie to High Court.

Once an application for enforcement of a foreign award is made, the other party has the
opportunity to file an objection against enforcement on the grounds recognized under Section
48 of the Act. These grounds include:

The parties to the agreement referred to in section 44 were, under the law applicable to them,
under some incapacity, or the said agreement is not valid under the law to which the parties
have subjected it or, failing any indication thereon, under the law of the country where the
award was made; or

The party against whom the award is invoked was not given proper notice of the appointment
of the arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

The award deals with a difference not contemplated by or not falling within the terms of the
submission to arbitration, or it contains decisions on matters beyond the scope of the
submission to arbitration: Provided that, if the decisions on matters submitted to arbitration
can be separated from those not so submitted, that part of the award which contains decisions
on matters submitted to arbitration may be enforced; or

The composition of the arbitral authority or the arbitral procedure was not in accordance with
the agreement of the parties, or, failing such agreement, was not in accordance with the law
of the country where the arbitration took place; or

The award has not yet become binding on the parties, or has been set aside or suspended by a
competent authority of the country in which, or under the law of which, that award was made.

The subject-matter of the difference is not capable of settlement by arbitration under the law
of India; or

The enforcement of the award would be contrary to the public policy of India.

The Amendment Act has restricted the ambit of violation of public policy for international
commercial arbitration to only include those awards that are: (i) affected by fraud or
corruption, (ii) in contravention with the fundamental policy of Indian law, or (iii) conflict
with the notions of morality or justice.

It is further provided that if an application for the setting aside or suspension of the award has
been made to a competent authority, the Court may, if it considers it proper, adjourn the
decision on the enforcement of the award and may also, on the application of the party
claiming enforcement of the award, order the other party to give suitable security.

Section 49 provides that where the Court is satisfied that the foreign award is enforceable
under this Chapter, the award shall be deemed to be a decree of that Court.
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Enforcement under the Geneva Convention

Sections 53-60 of the Arbitration and Conciliation (Amendment) Act, 2015 contains
provisions relating to foreign awards passed under the Geneva Convention.

As per the Geneva Convention, "foreign award" means an arbitral award on differences
relating to matters considered as commercial under the law in force in India made after the
28th day of July, 1924,- in pursuance of an agreement for arbitration to which the Protocol set
forth in the Second Schedule applies, and between persons of whom one is subject to the
jurisdiction of some one of such Powers as the Central Government, being satisfied that
reciprocal provisions have been made, may, by notification in the Official Gazette, declare to
be parties to the Convention set forth in the Third Schedule, and of whom the other is subject
to the jurisdiction of some other of the Powers aforesaid, and in one of such territories as the
Central Government, being satisfied that reciprocal provisions have been made, by like
notification, declare to be territories to which the said Convention applies, and for the
purposes of this Chapter, an award shall not be deemed to be final if any proceedings for the
purpose of contesting the validity of the award are pending in any country in which it was
made.

Section 56 provides that the party applying for the enforcement of a foreign award shall, at
the time of the application, produce before the court (a) original award or a duly authenticated
copy thereof; (b) evidence proving that the award has become final and (c) evidence to prove
that the award has been made in pursuance of a submission to arbitration which is valid under
the law applicable thereto and that the award has been made by the arbitral tribunal provided
for in the submission to arbitration or constituted in the manner agreed upon by the parties
and in conformity with the law governing the arbitration procedure. As per the new Act, the
application for enforcement of a foreign award will now only lie to High Court.

The conditions for enforcement of foreign awards under the Geneva Convention are provided
under Section 57 of the Arbitration and Conciliation Act, 1996. These are as follows:

The award has been made in pursuance of a submission to arbitration which is valid under the
law applicable thereto;

The subject-matter of the award is capable of settlement by arbitration under the law of India;

The award has been made by the arbitral tribunal provided for in the submission to arbitration
or constituted in the manner agreed upon by the parties and in conformity with the law
governing the arbitration procedure;

The award has become final in the country in which it has been made, in the sense that it will
not be considered as such if it is open to opposition or appeal or if it is proved that any
proceedings for the purpose of contesting the validity of the award are pending;
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The enforcement of the award is not contrary to the public policy or the law of India.

The Amendment Act has restricted the ambit of violation of public policy for international
commercial arbitration to only include those awards that are: (i) affected by fraud or
corruption, (ii) in contravention with the fundamental policy of Indian law, or (iii) conflict
with the notions of morality or justice.

However, the said section lays down that even if the aforesaid conditions are fulfilled,
enforcement of the award shall be refused if the Court is satisfied that-

The award has been annulled in the country in which it was made;

The party against whom it is sought to use the award was not given notice of the arbitration
proceedings in sufficient time to enable him to present his case; or that, being under a legal
incapacity, he was not properly represented; The award does not deal with the differences
contemplated by or falling within the terms of the submission to arbitration or that it contains
decisions on matters beyond the scope of the submission to arbitration: Provided that if the
award has not covered all the differences submitted to the arbitral tribunal, the Court may, if
it thinks fit, postpone such enforcement or grant it subject to such guarantee as the Court may
decide.

Furthermore, if the party against whom the award has been made proves that under the law
governing the arbitration procedure there is any other ground, entitling him to contest the
validity of the award, the Court may, if it thinks fit, either refuse enforcement of the award or
adjourn the consideration thereof, giving such party a reasonable time within which to have
the award annulled by the competent tribunal.

Section 58 provides that where the Court is satisfied that the foreign award is enforceable
under this Chapter, the award shall be deemed to be a decree of the Court.

Enforcement of Foreign Awards

Section 44 of the Arbitration and Conciliation Act, 1996 defines a Foreign Award as an
arbitral award on the differences relating to the matters considered as commercial under the
law in force in India. Two conditions are needed to be fulfilled in order for an award to be
qualified as a “Foreign Award”. One, it needs to deal with the differences arising out of a
legal relationship that is commercial or is considered commercial, under the laws in force in
India. Two, the country issuing the award must be a country that has been notified by the
Indian government to be a country to which the New York Convention applies. India itself is
a signatory to this convention. Only those awards, as issued by these countries, are
recognised as Foreign Awards and are enforced in India. The enforcement of these awards is
governed by the second part of the Arbitration Act.
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A three-step process is followed for the enforcement of a Foreign Award in India. First, the
party, in whose favour the award is issued, will make an application u/s 47 of the Arbitration
and Conciliation Act along with all the evidence. Second, the party against whom the award
is issued is required to raise a defense prescribed u/s 48 of the act along with all the evidence.
Lastly, if, on the basis of all the evidence adduced by the parties, the court is satisfied that the
award is enforceable, it will enforce it u/s 49 of the act.

There are two major differences in the enforcement of a domestic award and a Foreign
Award. First, a Foreign award is not capable of being executed as a decree by itself. A
procedure is required to be followed for its execution, Second, the provision of setting aside a
foreign award is absent. The only power that an Indian court has in this regard is to either
enforce it or refuse to enforce it. The problems created by this gap has been recently rectified
by the Supreme Court in Venture Global Engineering vs Satyam Computer Services Ltd and
Anr, where it said that a foreign award can be set aside by an Indian Court u/s 34 of the Act.

Where the subject matter of a Foreign Award is money, the jurisdiction will lie with the
Commercial Division of those High Courts, in whose jurisdiction, the assets of the opposite
party shall lie. In case the subject matter of the award is otherwise, the jurisdiction will lie
with the Commercial Division of those High Court which would have jurisdiction if the
subject matter of the award was a subject matter of a suit.

As for the question of limitation on foreign awards, different High Courts have given
divergent views. The High Court of Bombay, in NoyVallesina v Jindal Drugs Limited, has
said that since a Foreign Award is not a decree per se and requires enforcement by a
competent court, its application would fall within the residuary provisions of the Limitation
Act, i.e., the limitation period will be 3 years. On the other hand, the High Court of Madras,
in CompaniaNaviera ‘Sodnoc’ v. Bharat Refineries Ltd, referred to the Foreign Awards as
deemed decrees and held that the limitation period will be 12 years. The Calcutta High
Court, in Rudolf A OetkarVs Mohammed Ori (1999 SCC Online Cal), held that the residuary
Article 113 of the Limitation Act, 1963 would apply in the case if a suit is filed seeking to
enforce the foreign arbitration award and if an application seeking enforcement of the
domestic arbitration award is filed Article 137 would apply.

The Supreme Court, in M/s. Fuerst Day Lawson Ltd v. Jindal Exports Ltd,, held that a single
proceeding can have different stages. A court can, in one stage, decide upon the
enforceability of the award. Once the enforceability is decided, it can take further steps for
execution of the same.

Problems of executing Foreign Arbitral Awards in India

Getting an award issued in your favour, from an international tribunal, does not always means
good news as you still have to get your award enforced in India. Most Arbitral awards are
voluntarily complied with. The problem occurs when one of the parties disputes the award
and need for its enforcement arises. There have been various cases, where, despite receiving a
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favourable award, the party failed to get it enforced by a competent court in India. The
reasons for these failed enforcements ranges from one party deciding not to participate in the
Arbitral proceedings to other situations where the party has challenged the award on the
grounds of cost awarded or the jurisdiction of the Arbitration Tribunal.

The Arbitration and Conciliation Act, 1996 was enacted with the purpose to provide a swift
method of dispute resolution in the national and international arena. As discussed above, an
award issued by a foreign arbitral seat is not automatically enforced in India. The amount of
Litigation that is involved in enforcing a foreign arbitral award almost beats its purpose of
ensuring swift disposal of disputes. Only a handful of the parties agree to the award issued by
the Arbitrators. A majority opts the option of fighting the awards in the Indian Courts at the
stage of execution and enforcement. A foreign Arbitration award can be challenged u/s 48 of
the Act. It provides for the grounds on which a foreign Arbitral award can be challenged.
These grounds are:

Ground 1: Either party is under some Incapacity

If one or both of the parties, involved in the arbitral proceedings were under some incapacity
as per the applicable law, then such an award cannot be enforced. This incapacity can be due
to reasons such as involuntariness, fraud, duress, undue influence or misrepresentation.

The Supreme Court, in Bhaurao Dagdu Paralkar v. State of Maharashtra and Ors, observed
that “By fraud is meant an intention to deceive;. The expression “fraud” involves two
elements, deceit and injury to the person deceived“. The Court further observed that “A
fraudulent misrepresentation is called deceit and consists in leading a man into damage by
wilfully or recklessly causing him to believe and act on falsehood. It is a fraud in law if a
party makes representations, which he knows to be false, and injury in ensues therefro. “

Ground 2: Either party was not given Notice

If either party has not received a notice regarding the appointment of the arbitrator or
regarding the arbitral proceedings, it would amount to a violation of the principles of natural
Justice. Such awards are liable to be set aside. But if a party has voluntarily decided to sit out
of the arbitral proceedings, such awards will be enforced because such sitting was with his
free will. Only those awards can be challenged where one of the party was left out for reasons
that were beyond its control.

Ground 3: The Arbitral Award is beyond the scope of Arbitration

The Jurisdiction of an Arbitration Tribunal is limited by the terms of reference. No tribunal is

supposed to flout these limitations. They are only supposed to adjudicate on the questions
that have been submitted and not go beyond that. An award, which is issued in excess of the
scope of Arbitration, is liable to be set aside by the Courts.
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It is important to note here that if it is possible to separate the awards which are awarded
within limits of the terms of the arbitration from those that are awarded by exceeding those
limit, it is possible to enforce the former.

Ground 4: Legality of the Composition or Procedure of the Arbitration Tribunal

An award is liable to be quashed if:

i) the tribunal that has been composed is not in accordance with the agreement signed
between the parties

ii) the procedure followed during the arbitration proceedings was not as per the agreement
between the parties

iii) if the composition or the procedure of the arbitration is not in accordance with the law of
the country where the seat of the arbitration was situated

Ground 5: Award set aside before its enforcement

If an award, before it becomes binding on the parties, is set aside or suspended by the
authorities of that country, in whose jurisdiction it was awarded, it will not be enforceable in
the Indian Courts as the Courts of the country which issued the award has the exclusive
jurisdiction to set aside the award.

Ground 6: Dispute not capable of being resolved under Arbitration

If the nature of a dispute is such that it cannot settled be under arbitration, either because the
subject matter is not capable of being settled under different laws which are currently in force
in different countries for the time being, or, the subject matter is such that, it is not capable of
being enforced under the law currently in force in India. In such a case, the court will refuse
the enforcement of the award.

Ground 7: Public Policy

An award, issued in violation of the Public Policy of India, will not be enforceable in India.
Awards issued against public policy is a defense against the enforcement of such awards. The
courts in India are bound to refuse the enforcement of an award, which is in contravention of
the public policy in India.

Settling the dispute as to what will amount to the violation of Public Policy of India, the
Supreme Court, in Renusagar Power Co. Ltd vs General Electric Co, held that the bar of
public policy will be attracted only when there is a violation of something more than the
Indian Laws. The enforcement would be refused if the award is contrary to the fundamental
policy of Indian law or justice or public morality.
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The Delhi High Court, in Daiichi Sankyo Company Limited vs. Malvinder Mohan Singh and

Ors., held that the defense of the ground of public policy can be taken only when the award is

against the fundamental policy of India, the interest of India or justice/ morality. It does

provide the Indian Courts with an opportunity to take a second look at the award. It further

held that claims barred by limitations, awards of consequential damages and awards against

minors are liable to set aside by the Indian Courts.

Pressure by the Local Governments

A local party to an Arbitration will exercise more political power than a Foreign party. They

will try to exert this power to annul the award or at least decrease the quantum of the award.

This may result in frustrating the award issued by an International Arbitration Seat. This is

due to lack of an authority to supervise the substantive as well as the procedural examination

of the enforcement of these awards.

Inconsistent Application of Law

A Foreign Arbitral Award can be enforced in all those jurisdictions where the assets of the

opposite party are situated. The possibility, that the courts belonging to different jurisdictions

will interpret the same award differently, cannot be ruled out. Even if an award issued by an

Arbitration seated in India, it may not be enforceable in the Jurisdiction of some other

country.