Indian Supreme Court Reaffirms Severability Principle of Arbitration Agreements
In 1994, Reliance Industries Limited entered into two production sharing contracts (PSCs) with the Union of India for the exploration and production of petroleum. The PSCs provided that if there was a change to India's laws or regulations which resulted in a material change to the economic benefits of the contract, the parties were obligated to revise the contract in order to maintain the expected benefits. The contractual obligations were governed by Indian law while the arbitration agreements were specifically stipulated to be governed by the laws of England with London as the seat of arbitration.
Reliance instituted arbitration proceedings to recover excess royalties and taxes paid to the government as a result of a changed method of valuing petroleum, and succeeded in obtaining a final partial award in its favour. India subsequently challenged the award before the High Court of Delhi.
India argued that Part I of India's Arbitration Act should be applied to the effect that the claims in the arbitration were not arbitrable because Reliance's claims were in essence a challenge to India's oil laws – matters that could not be excluded in a contract without violating public policy. Reliance raised a preliminary objection to the petition arguing that the arbitration agreement's governing law clause excludes the application of Part I of the Indian Arbitration Act.
The Supreme Court applied the guiding principles it had set out in Bhatia International v. Bulk Trading S.A. & Anr. which stated that Part I would apply to foreign seated arbitrations unless the parties excluded its provisions. Accordingly, it considered the intentions of the parties as to whether they had intended to exclude the Arbitration Act and found that the explicit agreement to apply English law to the agreement as well as the inclusion of certain detailed provisions contrary to Part I of the Indian Arbitration Act demonstrated a clear intention to exclude the Arbitration Act. Accordingly, it found that it had no jurisdiction over the dispute.
In coming to this decision, the Supreme Court reaffirmed the principle that an agreement to arbitrate is a separate contract, here governed by English law, distinct from the substantive contract in which it is contained, which in this case was governed by Indian law. While the methods applied by the Supreme Court in examining the parties' intentions ran contrary to the 2012 Balco decision, which had overruled Bhatia in deciding that Part I of the Arbitration Act would never apply to foreign seated arbitrations, the Balco decision was limited to agreements entered into after its ruling, whereas this clause was entered into under the former regime. The result, however, goes to reinforce the Balco principle that Indian courts will generally not intervene in foreign-seated arbitrations.
This decision therefore reinforces the non-interventionist stance being developed by the Indian courts where the seat is outside India, and provides for a gradually more predictable and pro-arbitration regime for arbitration involving Indian parties. From a practical point of view, however, arguments of public policy may still be raised and will be considered by the Indian courts at the enforcement stage.