Foreign litigants need to be treated fairly to ensure ease of doing business | Latest News India

India’s track record in terms of legal interventions in commercial disputes with the government has been fraught with inconsistencies, even as ease of doing business has emerged as a major priority area.

In the 1990s, for instance, India opened petroleum and natural gas exploration for private players. An international bidding process that followed had Reliance Industries Limited (RIL) and Niko Limited sign a Production Sharing Contract (PSC) for exploration before British Petroleum was inducted into it.

RIL and its partners drew migrated natural gas from basins adjoining the Krishna-Godavari (KG)-DWN-98/3 basin until the government maintained it was internally connected to the public sector undertaking Oil and Natural Gas Corporation and Cairn Energy India Ltd’s basins. The government would slap a $1.5 billion notice, seeking the disgorgement of profits along with interest based on the finding of the AP Shah Committee, which looked into the matter.

RIL and its partners invoked PSC’s arbitration terms in response to the notice. The Supreme Court adjudicated a separate issue as “international commercial arbitration” under the same agreement.

In 2023, a single judge ruled in RIL’s favour recognising this and noted the government had issued separate notices to the foreign parties. He said that the arbitration determined the interests of foreign parties as well.

A high court division bench, however, did not factor in these facts and last month ruled against RIL and its partners while overturning the single judge’s 2023 ruling.

The division bench’s ruling spotlighted the trend of interventions of courts in commercial disputes with the government. This assumes importance as India’s track record in commercial litigations is not particularly good.

The government has to litigate to secure public money but it should not be at the cost of the ease of doing business. Investors bring foreign exchange only when they have confidence in the system. Foreign litigants have to be treated fairly to ensure ease of doing business.

The law on categorising arbitrations as per their nature— international or domestic—is clear. The matter is relevant as international and domestic awards are treated differently in law. If an arbitration takes place outside India or has foreign parties, its challenge in Indian courts will be limited. If the same is domestic having Indian parties, then the courts in India have extensive powers.

Section 2(1)(f) of the Arbitration Act says if a “foreign element” in a contract is traceable, then the arbitration can only be an international commercial one. The foreign element is seen not from their role in the arbitration but rather during the execution of the contract. It is well settled that parties cannot derogate from Section 2(1)(f) mandate even with consent.

The understanding of the high court division bench on the nature of foreign elements went against Section 2(1)(f)’s plain reading. The bench had to examine the nature of the PSC agreement to understand the legal nature of the commitment between foreign parties and RIL. Without delving into this, the bench brushed aside the fact that RIL was the lead and the only party to deal with the government. Other parties did not have a role.

The high court assumed the association to be an unregistered association of sorts, having separate identities, and brought in the case within the ambit of Section 2(1)(f)(iii).

An analysis of Section 2(1)(f) shows that whatever the transaction between the parties if it happens between persons, at least one of whom is either a foreign national or Indian resident, in any country other than India or by a body corporate incorporated in any country other than India or by the foreign government, the arbitration becomes an international commercial arbitration. It does not matter whether the individual, corporate, or foreign government referred to in Section 2(1)(f) has business in India through an office in the country.

The case underscores the need for Indian courts to shed their paternal approach while upholding the rule of law and the spirit of contractual understanding with the government. It remains to be seen how it plays out in the Supreme Court, but foreign investors need to insist on international commercial arbitration wherein there is more certainty and efficiency over domestic mechanisms.

The spirit of Section 5 of the Arbitration Act to keep judicial interference away in the arbitration process remains an elusive dream in India, requiring the Supreme Court to address the issue immediately to instil confidence in foreign investments and contribute to ease of business.

Sughosh Subramanyam, a University of Cambridge graduate, is a Supreme Court advocate specialising in commercial law and arbitration