"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, June 29, 2010

Interest Rate Indexing in Commercial Contracts: Part I

Often, in many commercial contracts in India, the interest rate (especially for delay in payment under the contract or the rate of interest in the arbitral award) is linked to the Benchmark Prime Lending Rate (BPLR) of the State Bank of India (SBIPLR or SBAR).  These rates are chiefly used in loan agreements between businesses and banks. In international transactions, contract interest rates are usually linked to LIBOR. Recently, there has been a new development regarding BPLR, which has necessitated discussion on this topic.

In case  you are a student, we suggest you request your banking law lecturer to teach about interest rate indexes, LIBOR and BPLR because if you plan to become a business lawyer, whether as a teacher or a transactional lawyer or an advocate, you would necessarily be dealing with these aspects in one form or the other. The objective of this post is to introduce and discuss the notion of BPLR. In the next post in this series, we would be discussing the topic's current relevance. We would also  give links at the end of the next post to resources in case you want to have a deeper knowledge on this subject.

PLR and its Evolution:
Prime Lending Rate is the interest rate which a bank charges for loans to its most creditworthy borrowers. Section 4 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 defines PLR in respect of SBI to mean "the Prime Lending Rate of the Stale Bank of India which is available to the best borrowers of the bank."

Many news paper editorials and other articles in the internet define BPLR to be the interest rate which bank charges for its most creditworthy borrowers. But defining BPLR as such is to ignore certain historical developments which we are noted below.

Prior to October 1994, interest rate on lending was heavily regulated. In October 1994, the lending rates were significantly deregulated: Banks could determine the lending rates for loans over Rs. 2 lakhs. However, the banks were also required to declare their prime lending rate, determined after approval of their board of directors. For loans above Rs. 2 lakhs, the PLR acted as the floor rate (minimum rate). In 1997, banks were allowed to charge PLR independent of each other. In April 1998 of the same year, for loans upto Rs. 2 lakhs, PLR was made the ceiling rate.  For loans in certain categories, banks were allowed to charge interest rate independent of PLR.

In the Statement by the Governer of the RBI on Monetary and Credit Policy for 2001-2002  (19 April 2001), Dr. Bimal Jalan noted that there were requests from bankers that the PLR should be mae a benchmark rate instead of making it a floor rate. The Governer noted that Sub-PLR loans were becoming common in the international arena, though the traditional view was that PLR should be the floor rate for loans for teh highest credit worthy borrowers. Dr. Jalan declared:

"83. Keeping in view the international practice and to provide further operational flexibility to commercial banks in deciding their lending rates, it has been decided to relax the requirement of PLR being the floor rate for loans above Rs.2 lakh. Banks will be able to offer loans at below-PLR rates to exporters or other creditworthy borrowers including public enterprises on the lines of a transparent and objective policy approved by their Boards."
However, the policy of PLR being the ceiling rate for below Rs. 2 lakh loans continued. 2002 was the year in which the RBI got serious about monitoring of lending rates and required banks to furnish information on the lending rates. The PLR of different banks varied widely. Hence, in his Statement on Monetary and Credit Policy 2003-2004 (29 April 2003), the Governer of the RBI advised the banks to announce a Benchmark Prime Lending Rate.(BPLR) with the approval of their boards. In calculating the BPLR, the banks were advised to take into consideration:
  1. actual cost of funds,
  2. operating expenses and
  3. a minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin.
 The purpose of this recommendation was to ensure that PLR of banks tends towards the actual cost of lending. Pursuant to this, the IBA [Indian Banks Association] issued detailed guidelines in November 2003 [I tried to find this circular in the internet but could not. In case anyone has a copy, kindly share it with us.] on the determination of the BPLR. The Report of the Working Group on BPLR (October 2009) observes, on the difference in purpose of the PLR and the BPLR:

"The BPLR system was expected to be a step forward from the PLR system, which more or less represented the minimum lending rates, to that of one which stood as a benchmark or a refernce rate around which most of the banks' lending was expected to take place."

For now, readers can check out this page of Indian Banks Association for BPLRs of various banks. More on this topic in a subsequent post.

Friday, June 25, 2010

RIL-RNRL Dispute

The Ambani Brothers have finally settled the gas dispute by signing a revised Gas Sales Master Agreement (GSMA). Readers may note that the Supreme Court had, on 7th May, ordered RIL and RNRL to renegotiate the GSMA and held, among other things, that:

"b) The EGOM has already set the price of gas for the purpose of the PSC. The parties must abide by this, and other conditions placed by the Government policy. The GSMA/GSPA deeply affects the interests of the shareholders of both the companies. These interests must be balanced. This balance cannot be struck by the court as the court does not have the power under Sections 391-394 to create new conditions under the scheme. In view of the same, RIL is directed to initiate renegotiation with RNRL within six weeks the terms of the GSMA so that their interests are safeguarded and finalize the same within eight weeks thereafter and the resultant decision be placed before the Company Court for necessary orders.

c) While renegotiating the terms of GSMA, the following must be kept in mind:
1) The terms of the PSC shall have an over-riding effect;
2) The parties cannot violate the policy of the Government in the form of the Gas Utilization Policy and national interests;
3) The parties should take into account the MoU, even though it is not legally binding, it is a commitment which reflects the good interests of both the parties;

d) The parties must restrict their negotiations within the conditions of the Government policy, as reflected inter alia by the Gas Utilization Policy and EGOM decisions.

[emphasis supplied]

Newsreports suggest that RIL and RNRL have finally entered into a GSMA in terms of the SC Judgement. You can access the news report of the Economic Times from here.

Wednesday, June 23, 2010

Rent-A-Center v Jacskon

Rent-A-Center v Jacskon has been one of the most closely followed cases in the recent past. The case was pending before the US Supreme Court for some time. The oral arguments took place in April this year. A couple of days back (21 June 2010), the US Supreme Court has delivered the judgement.

The case involves the question as to whether under the Federal Arbitration Act, a district court could decide a claim that the arbitration agreement was unconscionable, when the arbitration agreement explicitly assigned that task to the arbitrator.

In a few days, we will have a detailed post on this case and analyse the Indian position concerning the said question. In the meanwhile, readers can access the judgement from this link.

Tuesday, June 22, 2010

Fortnightly Roundup of SSRN Articles on Arbitration (June 1-15)

Andrej Savin, The Arbitration Exception and Protection of Arbitration Agreements in the EU

Arbitral proceedings are excluded from the scope of Brussels I Regulation on the Recognition and Enforcement of Foreign Judicial Awards. This exception, a result of the fact that the 1958 New York Convention serves successfully as a primary instrument for the recognition and enforcement of arbitral awards, creates a number of difficulties both for arbitral tribunals and for regular courts.

The first part of this article looks at the exception from Article 1(2)(d) of the Regulation through official commentaries and court cases of the European Court of Justice. Although there is confirmation in the latter that arbitration is excluded, the inconsistencies and doubts about the article’s scope continue to put parties in doubt.

The second part analyzes some difficulties which arise out of Article 1(2)(d) and which are encountered in practice. Among these are the problem of the arbitration agreement’s validity, the issues of interim measures and court assistance and the problem of recognition and enforcement of judgments made in violation of arbitration agreements.

The third part analyzes the recent initiatives for reforming the Regulation. Before all, a look is taken at the so-called Heidelberg Report which the European Commission ordered as a basis for its own Green Book on the changes and the Report that follows it. Attention is also drawn to other suggestions which look at arbitration exception.

Lorenzo Casini, The Making of a Lex Sportiva: The Court of Arbitration for Sport 'Der Ernährer'

The purpose of this paper is to examine the structure and functions of the Court of Arbitration for Sport (CAS), in order to highlight a number of problems concerning judicial activities at the global level more generally. Section 1 will outline CAS’ organization and functions, from its inception to the present date. In particular, this section will show how the history of the CAS is reminiscent of a famous German novel based on a biblical saga, “Joseph and his brothers” by Thomas Mann. Put briefly, the CAS was originally the “favourite son” of the Olympic movement’s founding fathers; it subsequently became the target of its envious “brothers” - i.e. the International Federations and other sporting arbitration institutions - which viewed the CAS as a dangerous enemy; ultimately, the CAS defeated its opponents, gained independence and brought normative harmonization, thereby becoming “the Nourisher” (Der Ernährer) of global sports law. Section 2 will focus on the role of CAS in making a lex sportiva, and it will take into account three different functions: the development of common legal principles; the interpretation of global norms and the influence on sports law-making; and the harmonization of global sports law. Section 3 will consider the relationships between the CAS and public authorities (both public administrations and domestic courts), in order to verify the extent to which the CAS and its judicial system are self-contained and autonomous from States. Lastly, section 4 will address the importance of creating bodies like CAS in the global arena, and it will identify the main challenges raised by this form of transnational judicial activity. The analysis of CAS and its role as law-maker, in fact, allows us to shed light on broader global governance trends affecting areas such as the institutional design of global regimes, with specific regard to the separation of powers and the emergence of judicial activities.

Thomas V. Burch, Manifest Disregard and the Imperfect Procedural Justice of Arbitration

Arbitration is an efficient dispute-resolution system that respects parties’ right to an accurate award. But because arbitration is designed to be efficient, accuracy is not guaranteed. This presents a challenge when courts are asked to confirm or vacate arbitrators’ decisions. Judges dislike approving inaccurate awards, especially in cases where parties have unequal bargaining power. Yet, judges also recognize arbitration’s limited-review principle. So they are forced to balance their desire for accuracy against arbitration’s efficiency policy. Efficiency typically wins at the expense of accurate outcomes.

This Article contends that courts place too much emphasis on the efficiency policy in mandatory arbitration. Consider the narrow manifest disregard standard that most courts apply. It is virtually impossible to vacate an award under this standard because the court must have proof that the arbitrator consciously disregarded known, applicable law. Consequently, parties subjected to mandatory arbitration have little chance of overturning inaccurate awards, which is problematic from a procedural justice standpoint because parties like decision control. This Article proposes giving parties greater decision control by allowing them to appeal arbitrators’ awards for legal error. This expanded standard creates a procedural mechanism for correcting arbitrators’ mistakes, thereby enhancing mandatory arbitration’s procedural justice.

Alessandra Asteriti & Christian J. Tams, Transparency and Representation of the Public Interest in Investment Treaty Arbitration

This article addresses one of the crucial tensions facing modern investment arbitration: that between confidentiality and privacy on the one hand and transparency and inclusiveness on the other. It begins by reviewing how investment arbitration frameworks have addressed this tension so far, noting the traditional focus on confidentiality and privacy and the more recent trend towards transparency and inclusiveness of proceedings before ICSID and/or NAFTA tribunals.

In line with the central methodological premise of the book, the chapter then moves on to compare domestic public law approaches to questions of transparency and public interest representation. Having reviewed U.S., English, French, German and Greek law, it shows that domestic public law seems to accept the principle of transparency and provides for various forms of indirect public interest representation (e.g. through amicus curiae briefs) but also different forms of public interest claims. While this approach cannot be directly transposed to the international legal order, it can clearly – and arguably should – guide the approach of investment lawyers. In any event, the experience of many domestic legal systems suggests that there is no reason to be overly afraid of transparency and some degree of public interest representation.

Christian Tietje, The Applicability of the Energy Charter Treaty in ICSID Arbitration of EU Nationals vs. EU Member States

The relationship between EC law and international investment law has gained increasing attention. This is due to ongoing proceedings before the European Court of Justice (ECJ) concerning the compatibility of bilateral investment treaties (BITs) of EU Member States with EC law, several arbitral proceedings of investors versus EU Member States based on BITs between EU Member States and/or concerning substantive legal problems that are somehow related to EC law (e.g. Eastern Sugar). Insufficient attention, however, has so far been paid to the relationship between EC law and the Energy Charter Treaty (ECT) with regard to the specific situation of a possible arbitral proceeding of an EU national versus an EU Member State. As the ECT is a plurilateral treaty that has been concluded as a so-called mixed agreement by the EC and all its Member States, the questions that arise are to a large extent different than in the Eastern Sugar/BIT situation.

Accordingly this paper discusses the applicability of the ECT in ICSID arbitrations of EU nationals versus EU Member States. The first part of the paper provides an introduction to the applicable law concerning the admissibility and merits of ECT/ICSID proceedings. The second part discusses the public international status of the ECT towards the EC and its Member States and analyses the legal phenomenon of ‘mixed agreements’ within the EC and its Member States. The author continues to examine the general aspects concerning the legally-binding effects of mixed agreements such as the ECT from a public international law perspective. Following the emphasis upon a number of intrinsic legal principles of public international law, the author argues that the ECT as a mixed agreement under EC law does not influence the comprehensive legally-binding effect of the ECT treaty in view of the EC and its Member States under public international law. In the third part of the paper the contributor adheres to providing an overview of the exemptions to the comprehensive binding effects regarding mixed agreements, focussing particularly on the analysis of possible limitations of the legally-binding inter se relationship as a result of explicit and implicit ECT standards. Subsequently an intermediate conclusion is presented, which underlines that from a public international law perspective, an inter se modification of the ECT by EC law is not possible. The author continues to contextualise Part III and V of the ECT and concludes that no competency is given therein to the EC. In the last part of the paper the contributor assesses the associated sub problem of the conflicting jurisdiction in the sense of Art. 292 EC and discusses the irrelevance of Art. 307 EC from an international public law perspective in relation to ECT/ICSID proceedings.The paper closes by providing an analysis of the legal principles of lex arbitri and ordre public concerning the applicability of EC law in an ECT/ICSID proceeding. The author concludes that the legal provisions of the ECT are applicable in an ICSID proceeding of an EU national versus an EU Member State; similarly it is established that EC law does not influence such proceedings which are exclusively governed by public international law.
Emilia Onyema, The Doctrine of Separability Under Nigerian Law

This article examines the provisions of the Nigerian Arbitration and Conciliation Act and judicial pronouncements from the higher courts of record in Nigeria, to determine the question whether the doctrine of separability or autonomy of the arbitration clause from the underlying contract is recognised and applied in Nigeria.

Notable cases cited: The Owners of the MV Lupex v Nigerian Overseas Chartering & Shipping Ltd; Fiona Trust & Holding Corporation & Others v Perivalov & Others; Nigerian Telecommunications plc v Pentascope Int'l BV Pte Ltd.

Nicholas Pengelley, This Pig Won't Fly: Death Threats as Grounds for Refusing Enforcement of an Arbitral Award

Do death threats allegedly made by one party to an arbitration agreement, which deter the other party from attending the arbitration hearing out of fear for his safety, constitute grounds for a court exercising its discretion to refuse enforcement of a foreign arbitral award? This question is considered in the light of current Ontario litigation with particular reference to the inability of a party to present his case, and public policy.

Gus Van Harten, Thinking Twice About a Gold Rush: Pacific Rim v. El Salvador

This is a short op-ed on Pacific Rim's CAFTA claim against El Salvador. It discusses the tension between stability and change in law and the role played by investment treaty arbitrators in resolving this tension.

Institute for the Advancement Of the American Legal System, Civil Litigation Survey of Chief Legal Officers and General Counsel Belonging to the Association of Corporate Counsel

This Report sets forth the results of the Institute for the Advancement of the American Legal System’s civil litigation survey of Chief Legal Officers and General Counsel belonging to the Association of Corporate Counsel. This survey explored the opinions of those who lead corporate legal departments – one per company – in an effort to capture how businesses experience the American civil justice process. The survey’s goal was to achieve a better understanding of the litigant’s perspective. While businesses are certainly a specific category of litigants, they are an important one, and their often repeat contact with the civil justice system is relevant to obtaining a complete picture of the status of that system.

Karsten Nowrot, International Investment Law and the Republic of Ecuador: From Arbitral Bilateralism to Judicial Regionalism

Following more than two decades of unprecedented expansion, the legal regime on the protection of foreign investments has more recently become – again – increasingly controversially debated. There are clear indications in state practice, that an increasing number of countries assume a more cautious or even openly critical position on the current predominant approach in international investment law. This applies also to the recently renewed suspicion displayed by many Latin American countries in this regard. Among the Latin American countries, it is in particular also Ecuador, which has in recent years emerged as one of the main opponents of the current state of international investment law in general and international investment arbitration in particular.

Ecuador not only adopted an increasingly critical stance on this issue but has also – in contrast to many other Latin American countries – in fact already employed a variety of measures in the domestic and international realm that clearly signal this state’s intention to exit the present system and to establish a new alternative scheme of international investment protection.

Against this background, the contribution is intended to analyse some international legal implications of Ecuador’s actions aimed at largely disconnecting itself from the present framework of international investment protection. Furthermore, some broader conceptual thoughts on the perspectives for the future design of international investment agreements in the Latin American context will be provided. For this purpose, the contribution has been divided into three main parts.

The first part is devoted to an identification and overview of the characteristics and importance of the currently predominant scheme of international investment protection, including certain public interest challenges arising from the present design. In the second part some legal implications and thus possible short-term effects of Ecuador’s recent policy responses to these public interest challenges are evaluated. Finally, the third part includes some thoughts on potential medium-term alternatives enjoyed by Latin American countries to initiate and implement a reformation of the international legal framework on investment protection. In this connection, it will be argued that the adoption of a regional investment agreement including the creation of a Latin American court of investment law – although appearing at first sight a rather ambitious (and not only to many foreign investors probably suspicious) alternative – can in the medium-term perspective be considered as an acceptable, politically feasible and thus viable option to facilitate a reconciliation, on modified terms, between countries like Ecuador and the international legal regime on the protection of foreign investments.

James Thuo Gathii, Alternative and Critical: The Contribution of Research and Scholarship on Developing Countries to International Legal Theory

The first set of articles provides an explanation of international law from the viewpoint that international law is culturally constitutive and historically contingent. Obiora Okafor’s article demonstrates that the frailty of the nation state in Africa is partly connected to the impositions of Eurocentric notions of the nation-state on culturally heterogenousheterogeneous African nations, which led to a view of illegitimacy in the eyes of sub-state groups. Balakrishnan Rajagopal uses an ahistorical reading of international legal history to show how Third World resistance as a factor in expansion, consolidation, and renewal of international institutions has been underestimated.

The second set of articles argues that international law can play a mediating role in addressing some legal gaps in market reform. Amy Chua explains the fundamental conflict between free markets and democracy. Eleanor Fox demonstrates that market failures in competition policy can result from the removal of market restraints. Kenneth Vandevelde examines bilateral investment treaties and raises concerns about their narrow focus.

The last set of articles argues that notions of international law, development policy, and local custom do not have predetermined outcomes. Amr Shalakany discusses how bias is not the discernible and determinate outcome of doctrines and institutions in his examination of international commercial arbitration. Celestine Nyamu examines gender hierarchy and demonstrates that custom has both positive and negative impacts on women, which runs counter to the assumptions in human rights and development policy.

Thursday, June 17, 2010

Bhushan Steel Ltd. v. Singapore International Arbitration Centre & Anr.

Case No: IA No. 11355/2009 & CS (OS) No. 1392/2009
Court: High Court of Delhi 
Bench: Manmohan Singh, J. 
Date: 4 June 2010

Below is the arbitration clause in the contracts between the Bhushan Steel Ltd, an Indian company and a Danish company.

In the event of any question of dispute arising under the contract, the same shall be referred to the award of arbitrators to be nominated one each by the sellers and buyers within 30 days notice from either side or in the case of arbitrators not agreeing then to the award of an umpire to be appointed by the arbitrators in writing prior to proceeding with the arbitration. The decision of the arbitrators or the umpire as the case may be shall be final and binding on both parties. The arbitration will take place in Singapore as per the international law.”

We'll call the Indian company by the acronym of its name- "BS" and the Danish company as "DC'. The facts leading to this decision are:

2007: Fourteen Sales Contracts were entered into between BS and DC for the sale and purchase of certain goods. The parties were in accord with the quality and quantity of the goods. Curiously, the parties agreed that the specifications of the goods were to be determined at the time of placing of the purchase orders.

July- November 2007: 776 units of the goods under eight contracts were despatched to DC. The said goods were received without objection by DC. Invoices for the said goods were also sent to DC. 

16.01.2008: BS received a letter from DC stating that the goods supplied under the contracts were not in accordance with the specifications of DC. BS sent its surveyor to verify if the goods were not in consonance with the specifications. The surveyor found DC's complaint to be wrong. Also, the surveyor found that only 32 of the 776 units of goods remained in the possession of DC. Yet, DC chose to make advance payment for the goods under the remaining contracts, consequent to which BS started making the goods. Subsequently, however, BS was informed by DC not to dispatch the said goods till further directions from DC. BS has allegedly suffered a loss of USD 777,297.23 as BS could not sell the goods in open market as the goods were tailor-made to DC's specs.

11.06.2008: BS received a notice from DC stating that BS was liable to pay DC Rs. 4,278,689.88 plus interest @12%. Further DC also asked BS to deliver the remaining goods in the contract.

18.06.2008: BS replied that it was DC which had to pay USD 777,297.23to BS. Further BS also contended that arbitration clause was vague, and was therefore, not valid.

05.01.2009: DC initiated winding up proceedings against BS and had asked for payment of money due to it under the said contracts.

DC sent a notice invoking arbitration against BS in respect of the allegedly defective goods supplied under the first eight contracts. Against the said notice, BS filed a suit before the Delhi High Court for:  
  1. declaring the arbitration clause as vague and therefore incapable of being enforced
  2. declaring that Singapore International Arbitration Centre (SIAC) had not jurisdiction in respect of the matter
  3. declaring that the contracts in the transactions were to be interpreted as per the substantive laws of India.
  4. grant permanent injunction against SIAC and DC preventing them from initiating arbitration proceedings
  5. declaring that there were no arbitrable disputes between BS and DC. 
An interlocutory application was filed by DC under Order VII Rule 11(d) of the CPC.  Rule 11(d) reads:

"The plaint shall be rejected in the following cases:
(d) where the suit appears from the statement in the plaint to be barred by any law:

DC, the second Defendant has sought to argue the following against the plaint:
  • The suit is barred by S 5 of the Arbitration and Conciliation Act, 1996.
  • The suit by BS was a counter to the winding up proceedings initiated by DC against BS and was merely a dilatory tactic adopted by BS to delay the arbitration.
  • The issue regarding the validity of the arbitration clause could be canvassed before the arbitral tribunal and not by a separate suit.
  • BS had acquisced to the arbitration clause and hence the suit is not maintainable by the reasons of waiver, estoppel and acquiscence.
  • The suit is undervalued and is without adequate court fee.
Tha plaintiff, BS, had argued that the bar under S 5 is only as regards matters that cover Part I and not matters under Part II, which are, by their very nature, 'international'. S 5 of the Arbitration and Conciliation Act, 1996 (Act) reads:
"Extent of judicial intervention. -Notwithstanding anything contained in any other law for the time being in force, in matter governed by this Part, no judicial authority shall intervene except where so provided in this Part."

BS argued that the suit filed by it could be barred on satisfaction of the requirements under S 45 of the Act. S 45 reads:

"Power of judicial authority to refer parties to arbitration. -Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908) a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed."

BS further alleged that DC had not deliberately made an application under S 45 because that would mean that the judicial authority referred to thereunder would have to decide on the validity of the arbitration clause, which would be dangerous to DC's case.

BS cited S 9 of the Code of Civil Procedure, 1908 (CPC) and certain decisions underlying it and contended that the bar to sue should be express.

BS also argued that DC had wrongfully brought the suit under Order VII Rule 11 when it should have approached the court under S 45 of the Act. It intent, BS argued, was not to delay the arbitration but to contend that the arbitration clause was vague and unenforceable.

On the contention as to S 5 not applying to arbitrations which are 'international' in character, DC argued that as per Bhatia International Part I would apply to arbitration held even outside India.


The court framed two issues:
  1. Whether the suit is barred under Order VII Rule 11(d) of the CPC?
  2. Whether S 5 of the Act bars the jurisdiction of this court to take cognisance of the suit? If this is in the negative, is the present suit barred by any other law for the time being in force as per the said Rule 11(d)?

The court held that the contention of BS that the application under Order VII Rule 11(d) is not maintainable does not hold good because an application under the said rule could be filed at any time before the conclusion of the trial. S 5 is very clear. It begins with a non-obstante clause and the judicial authority referred to in S 5 would clearly include even civil courts. The purpose of S 5 was to limit the extent of judicial intervention in arbitration only for necessary purposes. In the exercise of its powere, the courts should not bypass settled law. 

Further, Part I would apply, by virtue of Bhatia International, to even arbitrations that are the subject matter of Part II of the Act, unless they were excluded. In this case, Part I was not excluded. Part I could be excluded by one or all of the following ways:

"(a) There must be no agreement as to the governing law of the contract, governing law being presumed to be the law of arbitration also;
(b) There must be no agreement as to the place of arbitration; and/ or
(c) It must be shown that if no interim action is taken, a party would be remidiless."

Plaintiff's contention to counter the argument of estoppel/ waiver that the arbitration clause had to be treated independently of the main contract did not find favour with the court. The court held that severability of the arbitration clause from the main agreement was only for the purpose of enabling the arbitral tribunal to rule on its own jurisdiction. After having signed and acted upon a contract, a party cannot later rescind the terms of the contract by quoting a statutory provision out of context. Further, the plaintiff had raised invoices by attaching the contracts in their entirety.

Under the Singaporean International Arbitration Act (SIAA), the place of arbitraiton is Singapore. Further, the arbitration is international as BS is situated outside Singapore. Also, as per the SIAA, UNCITRAL Model Law on International Commercial Arbitration (UML) would be applicable in case of international arbitrations.

Also, the words "international law" in the arbitration clause "were intended to mean the [UML]..." The governing law as per the arbitration clause was to be the UML and the venue was Singapore. The court stated:

"43. It is evident from the above that the arbitration clause in the sales contract clearly provides the governing law as well as the place of arbitration in case of disputes between the parties. The 'International Law' which is stated to be applicable to the dispute clearly exlcudes this Court's jurisdiction in the present matter."

The court found that the arbitration clause was valid in view of the fact of reliance of the said clause by the plaintiff.


Clarification: In  Para 43 of the the judgement quoted above, the judge referred to governing law being Singaporean law. Note that this is probably not the reference to the governing law of the contract but to the governing law of arbitration. If the governing law of the contract was 'international law', I am not sure if such a choice could be sustained. As Redfern and Hunter say:

"There is no reason in principle why [parties] should not select public international law, or alternatively the general principles of law as the law which is to govern their contractual relationship... [T]he problem of adopting international law [] as the system of law which is to govern a commercial relationship is not a problem of principle, but of practice. International law [is] concerned primarily concerned with the relationship between states, is not particularly well equipped to deal with detailed contractual matters..." (p. 119-121)

Maintainability of the Suit and the Validity of the Arbitration Agreement: If the question before the judge is only regarding maintainability of the suit (or even the validity of the arbitration agreement,) what is the need to take note of detailed facts relating to performance of the contract? Such recording of facts might have serious implications when the arbitral tribunal or the award-reviewing/ enforcing courts deal with the matter. For example, what if the tribunal's finding on a fact is contrary to that of the High Cout judge? In this case, several such facts have been recorded by the Single Judge. For instance, the judge states that the allegedly defective goods were received by DC without any objection. How does this help in the ultimate decision-making on the issues?

Saraf & Jhunjhunuwala, in their book titled 'Law of Arbitration and Conciliation' state:

"Section 5 does not bar filing of a suit in the court in a case where there is an arbitration agreement. Section 8 of the Act deals with that situation. What Section 5 provides is that in the matter governed by the Act, i.e. in arbitral proceedings, no judicial authority shall intervene except as provided in the Act." (p. 120, 5th ed.)

On this point. the learned authors have cited (and so have the counsel for BS) the case of PK Bajaj v. Reminiscent India Television Ltd. 2006(2) Arb. LR 361 (Delhi): MANU/DE/8612/2006 (Bajaj) where a Single Bench of the same High Court has held that "[Section 5] does not say that a suit will not lie in case there is an arbitration agreement in respect of the dispute between the parties. All that it says is that in case there is any matter governed by this part of the Act, the judicial intervention would be only as provided in this Act."

In Bajaj, Reminiscent India Television Ltd., the Defendant (RIT) had entered into an agreement with one Mr. Aman Bajaj. The agreement contained an arbitration clause and also provided that Mumbai courts would have jurisdiction for entertaining matters related to the agreement (Note that such forum selection clauses are regarded as subject to the arbitration clauses). In this case, arbitration was invoked by RIT against PK Bajaj when PK Bajaj was not a party to the agreement. PK Bajaj filed a suit in the Delhi High Court contending that he was not a party to the contract (consequently the arbitration agreement). In the same suit, RIT had filed an interlocutory application, stating that in view of Order VII Rule 11 CPC read with Section 5 of the Act, the suit has to be dismissed. Justice Manju Goel disagreed with RIT, dismissed the IA and also imposed costs amounting to Rs 3000 on RIT.

Bajaj, like, Bhushan Steel, is a decision by a single judge. Bhushan Steel has reached a conclusion that it diametrically opposite to Bajaj. While Bhushan Steel states that a court could dismiss ,by virtue of Order VII Rule 11 CPC read with S 5 of the Act, a suit in respect of a dispute under contract containing arbitration clause, Bajaj states that the appropriate remedy is S 8 of the Act and not Order VII Rule 11 CPC read with S 5 of the Act. I fail to understand why the judge in Bhushan Steel failed to analyse Bajaj and clearly state why he disagreed with Bajaj.

The law as it stands as regards S 8 and S 45 is this: when the court refers a matter to arbitration it has to be satisfied of the existence of the arbitration agreement. S 45 clearly provides that the court cannot refer a matter to arbitration if it "finds that the [arbitration] agreement is null and void, inoperative or incapable of being performed". By invoking Order VII Rule 11(d) CPC, the court has circumvented the statutory requirement of determination of the validity of arbitration clause when such circumvention was not possible under S 45 of the Act. Note that the court actually decided on the validity of the arbitration clause. Should the court have done so? The simple question that the court had to decide was whether the suit was liable to be dismissed under Order VII Rule 11(d) CPC read with S 5 of the Act. Why did the judge decide on the validity of the arbitration clause? If the suit was not maintainable by virtue of the said provisions, shouldn't the judge have simply dismissed the suit without giving any finding on the validity of the arbitration clause?

Drafting of the Arbitration Clause: The arbitration clause quoted above provides for the following:

1. Two arbitrators are to be appointed to resolve the dispute.
2. In case there is no unanimity between the arbitrators on the award, an umpire is to be appointed in writing.
3. Such appointment is to be done even prior to proceeding with arbitration
4. In case there is no unanimity between the arbitrators, the decision of the umpire (and not the majority of arbitrators) would be final and binding on the parties
5. The venue of arbitration would be Singapore
6. The arbitration would be conducted in accordance with 'international law'.

I am surprised at how parties choose such an irregular arbitration clause when there are innumerable model clauses available these days. Despite that, I think the said clause creates an unambiguous intent to arbitrate disputes under the contracts. Even the complicated appointment procedure cannot be held to be unenforceable. The arbitral tribunal, as per the clause, would consist of two arbitrators. If there is no unanmimity in their decision, the matter would have to be referred to an umpire (Curiously, the clause also provides impliedly that even if the umpire comes to a decision that is not in complete agreement with either of the arbitrators, his decision would be final). The clause provides that the arbitration will take place in Singapore. What seems to be ambiguous is the choice of law. The arbitration is supposed to take place as per international law. The Single Judge interpreted the term 'international law' to the UNCITRAL Model Law which is made applicable in Singapore by the SIAA in case of international arbitrations. Lucky for DC- the seat of arbitration was Sinapore and not New York or France or London. If it was France or London or New York how could the court have interpreted 'international law'? Most websites of the International arbitration institutions provide for model arbitral clauses that parties could incorporate in their agreements. 

[Note: On the validity of the arbitartion agreement in this case, the justification that can been made to validate the arbitration clause is the almost universal principle of severability of invalid protions of a contract from the valid portions. Clearly, the choice of international law is vague. Even in the absence of such a choice, the arbitration would, in any case, be conducted in accordance with the UML (SIAA). (Note that this severability is not the same as the severability doctrine which implies that the arbitration clause forming a part of a contract is deemed independent of the contract).] 

Wednesday, June 16, 2010

Indus Water Treaty Dispute: Further Developments

On 27th May 2010, we had dealt with the arbitration between Pakistan and India in relation to the Indus Water Treaty, 1960.We had stated that Pakistan had invoked arbitration under the said Treaty alleging that India's plan to build the Kishanganga Hydroelectricity Project was contrary to the Treaty. We had also stated that Pakistan had appointed Jan Paulsson and Justice Bruno Simma as arbitrators. 

The Hindu has reported that the Indian government, after consulting with lawyers R.K.P. Shankar Dass and Fali Nariman (both the said lawyers were reportedly involved in the Baglihar dam dispute under the same Treaty) has planned to appoint Peter Tomka, a judge of the International Court of Justice, and Lucius Caflisch, an academician as India's arbitrators.

As per the Treaty, each party to the arbitration is to appoint two arbitrators and the four arbitrators so appointed would appoint three arbitrators.  The Hindu states that India is supposed to respond within 30 days from the receipt of the notice by Pakistan invoking arbitration. It seems India has received it on 18th May and has to respond by 17 June.

The news report in the Hindu can be accessed from here.

Thursday, June 10, 2010

Links of Interest

In the Law and Legal Developments blog, there was a discussion on the UK Supreme Court's case of Inveresk plc (Respondent) v Tullis Russell Papermakers Limited (Appellant) (Scotland), where the Doctrine of Retention was analysed. The said blog has also analysed Indian cases on the point. Really interesting. Do check them out, in case you have not already done so. The posts from the said blog on the said issue can be accessed from here, here, here and here.

The Kasab Judgement, where death penalty was awarded to the Mumbai 26/11 terrorist, can be accessed from here (thanks to Bar and Bench for providing us with the link).
In RTS Flexible Systems Limited v. Molkerei Alois Müller Gmbh & Company KG, the UK Supreme Court has dealt with a tricky issue on Letters of Intent . We will be doing a post on this case soon. Till then, you can read the judgement of the UK Supreme Court or, in case you don't have the time, you can read this short press release on the judgement. The judgement can be accessed from here.

By the way, check out the "Law Reviews/ Journals" Gadget on the bottom left of the blog. We have given a list of links to the some most popular law reviews/ law journals. The links lead to the current issues of the journals.Over the next few days, we will be coming up with a comprehensive list of such links. 

Tuesday, June 8, 2010

Consultation Paper on Amendments to Arbitration Law: Further Comments on Interest Rate and Commercial Division of High Courts

On 8th April 2010, the Ministry of Law and Justice published a document titled Consultation Paper on the Amendments to Arbitration and Conciliation Act, 1996 (CP). On CP, we had four posts touching upon the following aspects:

Post I: Descriptive Analysis of the CP
Post II & III: Analysis of the First Proposal: On Section 2(2) of the Arbitration and Conciliation Act, 1996 (Act) to nullify Bhatia International
Post IV: Amendments to Section 31(7) on the default rate of interest 

This short post is deals with the following aspects
  1. Further Observations on Interest Rate under S 31(7)
  2. Proposal to amend provisions of the Act for constitution of Commercial Division of High Courts Bill, 2009
Further Observations on S 31(7):
As stated above, in our previous post, we had analysed the proposal for amending S 31(7) of the Act, reducing the interest rate from 18%. One of our observations on the said proposal was that there was no adequate justification for reducing the interest rate from 18% (the only justification of 'economic crisis' is, in our humble opinion, no justification at all when economic crises are temporary phenomena).S 31(7) is quoted below:

"(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment

In 2001, the Law Commission, in its 176th Report observed:

"After due consideration, the Commission has felt that there is no justification for reducing the rate below 18%. Hence no amendment is necessary in section 31(7)(b)."

Even the Saraf Committee, in its report in 2005, did not find any reason to amend S 31(7). In view of the above, we fail to understand why an amendment is needed to reduce the said rate of 18%. In any case, parties are free to agree for a lesser rate of interest.

Proposal to amend provisions of the Act for constitution of Commercial Division of High Courts Bill, 2009:
In 2009, a Bill was passed in the Lok Sabha on 18 December 2009, known as the Commercial Division of High Courts Bill, 2009. We had written a post on the said Bill, which can be found here. According to the said Bill, "[a]n application under section 34 or section 36 or an appeal under section 37 of the Arbitration and Conciliation Act, 1996 shall be deemed to be a commercial dispute if the amount in dispute or claim relates to a specified value" and shall be dealt with by the Commercial Division of the High Court.

The Arbitration and Conciliation (Amendment) Bill, 2003 provided for the establishment of an Arbitration Division in the High Court of competent jurisdiction consisting of "one or more Division Benches of the High Court" and such Bench shall hear all aspects relating to challenge and execution of arbitral awards.

The Saraf Committee was in consonance with the said Bill stating the recommendation as salutary (but recommended that the provisions of S 37A ought to be modified to make it clear that the Arbitration Bench "will be a Division Bench of not less than two judges"). Broadly, on two counts, this development would prove to be advantageous. One, it would considerably save time and money of business entities. Two, it would (hopefully) lead to a bunch of judges specialised in commercial law.

* Title changed after posting

Thursday, June 3, 2010

Interest Rate under the Indian Arbitration and Conciliation Act, 1996

In this blog, we had three posts on the consultation paper (CP) released by the Ministry of Law and Justice (Ministry) proposing to amend the law of arbitration in India. One was a guest post that gave a descriptive analysis of what the CP was all about. The other two posts (which can be found here and here) were on the suggestions of the Ministry regarding the applicability of Part I of the Arbitration and Conciliation Act, 1996 to international commercial arbitrations held outside India. The aim of this post is to analyse the proposal relating to the rate of interest [readers may please note that we have not dealt with the CP in the same order as the CP does; For example, the aspect relating to the applicability of Part I of the Act was designated as (A) in the CP and the proposal relating to interest rate is (E) in the CP. Nevertheless, we will try to cover all the aspects of the CP].

Article 31(7) of the Act provides:

"(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen percentum per annum from the date of the award to the date of payment

The rate of interest, by default, has been fixed at 18% per annum. The parties could, however, agree to the contrary, providing for a different interest rate.

The CP proposes that since the said 18% per annum rate of interest in this economic scenario is too harsh, the interest rate ought to be linked to the interest rate fixed by the Reserve Bank of India (RBI). Hence, the CP seeks to modify S 31(7)(b) as follows:

'(b) A sum directed to be paid by arbitral award shall carry interest at the rate of one percent higher then the current rate of interest from the date of award to the date of payment.

Explanation- The expression “Current rate of interest” shall have same meaning as assigned to it under clause (b) of Section 2 of the Interest Act, 1978.

S 2(b) of the Interest Act, 1978 reads as follows:

'(b) "current rate of interest" means the highest of the maximum rates at which interest may be paid on different classes of deposits (other than those maintained in savings account or those maintained by charitable or religious institutions) by different classes of scheduled banks in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under the Banking Regulation Act, 1949 (10 of 1949).

Explanation.-- In this clause, "scheduled bank" means a bank, not being a co-operative bank, transacting any business authorised by the Banking Regulation Act, 1949 (10 of 1949);

As per the RBI’s website, the Prime Lending Rates (PLR) of different banks are between 11-12%. This article in Business Standard describes the Benchmark Prime Lending Rates of various Indian Banks.

Effectively, the Ministry proposes to fix the interest rate at around 12%. The only justification it provides is the 'present economic scenario'. We are not sure whether this is an adequate justification. Three points are worth noting here. One, at the time when the CP was released (April 2010), the Indian economy had already started recovering (so did many countries in the world). Two, the amendments proposed are far-reaching amendments, meant to extend the longevity and usefulness of the Act. From this perspective, I am not sure if this provision has to be amended on the basis of a temporary phenomenon like economic crisis. What would happen once the economic crisis is over? cessante ratione legis cessat ipsa lex. Three, what was the basis of fixing the interest rate at 18% in Section 31(7)(b)? The CP does not discuss the reason for the law as it exists.

The point which we are making in this post is that before the said provision is amended as per the Ministry’s proposal, the following must be examined:
  1. What was the basis for S 31(7)(b) to fix interest rates at 18%?
  2. Why is the new proposal to fix it at the PLR?
  3. Prudent basis/ bases for fixing interest rates must be determined and then incorporated in the Act.
Interest is the payment which would an entity would be entitled to (over and above the principal)* , had the principal amount been available to it for its use from a particular point of time in the past. The question is how is this sum to be determined? In general, an entity would be entitled to an interest rate which is equivalent to the interest rate which it would have obtained had it invested the principal amount in the least risky investment available in the market. However, the problem arises when an entity would have used the particular amount to obtain returns at a percentage that is far higher than the interest rate which the least risky investment would give. The ideal solution in such a case would be to link the interest rate to the performance of the entity. This would be the correct compensation that an entity would be entitled to had it been in possession of that principal amount.

We do not pretend to be experts on aspects relating to finance. However, readers may spare some time and read this well-researched thirty page (including end notes) article titled ‘Interest as Damages’ by Sénéchal and Gotanda, 47 Colum. J. Transnat'l L. 491 (2009). The authors have posted a draft of the said article in SSRN (though I am not sure if both are identical) which you can download from here. The authors discuss, inter alia, the bases on which interest rates should be determined and come to a conclusion that interest rates in respect of publicly traded corporations should be calculated by referring to the weighted average cost of capital and for privately held firms, interest ought to be calculated by adding up a risk–free rate (which is theoretically impossible) and risk premium.

* Added after posting