19 January 2010
Companies taking advantage of the vibrant growth in India's economy should take extra care to ensure that disputes can be resolved predictably and efficiently. A few precautions beyond those familiar from other jurisdictions can help to keep your disputes from being bogged down in procedural quagmires that can take years to navigate, and which offer uncertain results at the end. This article highlights a few practical considerations to keep in mind when drafting contractual dispute resolution provisions involving India.
Effective Arbitration Agreements
India is one of more than 140 nations adhering to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the purpose of which is to ensure that awards rendered in one signatory country are enforceable in all of the others. Arbitration affords any transnational transaction or investment the benefits of a neutral forum and enforceability in other Convention signatory states. Although India’s Arbitration and Conciliation Act, 1996 (the "Arbitration Act") is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law, arbitration agreements and enforcement of awards can encounter a variety of frustrating obstacles in the Indian courts. Many of those obstacles, however, can be anticipated and avoided through specifically tailored dispute resolution provisions.
- Conduct all major elements outside India. Indian courts are notorious for lengthy delays in deciding matters brought before them. As a result, arbitration is the preferred means of dispute resolution in commercial transactions involving India. When entering into a contract with an Indian party, an arbitration provision should explicitly specify (i) a non-Indian, arbitration friendly venue for the arbitration (e.g., Hong Kong, Singapore, London or New York); (ii) the preferred law that will govern the substantive law of the contract (e.g., New York or English law); (iii) the particular body of international arbitration rules to govern the actual proceedings (e.g., ICC, SIAC, LCIA or ICDR International Dispute Resolution Procedures); and (iv) a non-Indian venue (as discussed in paragraph 3 below) for any litigation not covered by arbitration.
- Exclude application of Part I of the Indian Arbitration Act. In a recent ruling, the Supreme Court of India held that Part I of the Arbitration Act permits an Indian court to vacate a foreign arbitral award for violation of India's broadly interpreted "public policy" considerations that were previously only grounds for challenging domestic (i.e., India-based) arbitration awards. The application of Part I to a foreign arbitration can present other issues that can interfere with the arbitration, such as the power of the Indian courts to appoint arbitrators in cases governed by foreign law. However, the Indian Supreme Court has also held that application of Part I of the Arbitration Act can be waived by agreement of the parties. As a result, agreements involving India or Indian counterparties should contain an arbitration provision expressly excluding the application of Part I of the Arbitration Act to any aspect of the arbitration, including any awards. Companies should, however, be mindful that under certain very limited circumstances, it might be advantageous to only partially exclude Part I in order to retain the ability to invoke the interim measures provided in Section 9 of Part I of the Arbitration Act.
- Disputes not subject to arbitration under Indian law. Matters that are not subject to arbitration in India include public rights; proceedings under the Foreign Exchange Management Act, which are quasi-criminal in nature; the validity of intellectual property rights granted by statutory authorities; taxation matters; winding up under the Companies Act, 1956; and disputes involving insolvency proceedings.
Structure Investments to Fall Within Indian Bilateral Investment Treaties
The more than 2,500 bilateral investment treaties in force around the world protect investors of the signatory states and their investments from a variety of adverse actions by the investment's host country. These treaties also commonly and importantly provide access to arbitration against the host government, without any direct arbitration agreement other than the treaty, before the World Bank's International Centre for the Settlement of Investment Disputes (ICSID).
The United Nations Conference on Trade and Development lists bilateral investment treaties between India and 30 other nations, including, Australia, Belgium, France, Germany, Korea, The Netherlands, Sweden and the United Kingdom; that list, however, does not include many other nations, including the United States.
Companies from countries that do not have treaties in effect with India may nevertheless obtain treaty protection by holding their investments in India in a country that does have a treaty. Some treaties allow for "denial of benefits" where the claimant owner has no actual operational substance in the country of its incorporation; other countries do not, and provide protection based solely on the basis of the claimant's state of incorporation. Care must be taken to identify the most robust treaty and compliance with conditions of eligibility, as well as coordination with tax strategies. However, appropriate planning in structuring the investment can provide important protection against inappropriate government actions.
Provide for any Litigation in a "Reciprocating Territory"
Indian law provides for the enforcement of judgments from certain “reciprocating territories” in "execution proceedings," effectively treating judgments from those jurisdictions as decrees of an Indian court for enforcement purposes. Obstacles to enforcement can still arise, including, for example, contentions that the foreign judgment is based on an incorrect view of Indian law or that the underlying claim is founded on a breach of Indian law or public policy. Nevertheless, a judgment from a "reciprocating territory" avoids the treatment of judgments from other jurisdictions as mere evidence, among other evidence, against the Indian party.
India has "notified" the United Kingdom, Singapore, Hong Kong, Malaysia, Canada and New Zealand as "reciprocating territories." The United States is not a “reciprocating territory.” While this option is not a substitute for a properly drafted arbitration clause, it may afford valuable options in particular transactions and minimize the risk of being embroiled in lengthy litigation in Indian courts.