by Raj R. Panchmatia, Associate Partner at Khaitan & Co.
Modern international commercial contracts usually tend to have arbitration as their preferred mode of dispute resolution. One can attribute this largely – other than its less palpable advantages such as party autonomy, confidentiality, venue etc – to the fact that it is relatively faster. However, till a recent change, this was subject to a caveat, for, as an eminent jurist observed, “In the Indian legal system, there is ample – sometimes excessive – due process; and one has to be patient and persevering.”
The recent change was the result of a judgement, dated September 6, 2012, of a Constitution Bench of the Supreme Court of India in the case of Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc (BALCO v Kaiser), which clarified the scope of jurisdiction of Indian Courts in international commercial arbitration. The Constitution Bench overruled the full bench decision of the Supreme Court in Bhatia International v Bulk Trading S A and Anr, (2002) 4 SCC 105) (Bhatia International) and the division bench decision of the Supreme Court, which followedBhatia International, in Venture Global Engineering v Satyam Computer Services Ltd and Anr, (2008) 1 Scale 214) (Venture Global Engineering). In Bhatia International and Venture Global Engineering the Supreme Court had held that Indian Courts could interfere to the fullest extent allowed by Part I of the Arbitration and Conciliation Act, 1996 (Act) even when the seat of arbitration was outside India.
Law Prior to BALCO v Kaiser
The Act, which was inter alia enacted to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards, was made on the basis of the UNCITRAL Model Law on International Commercial Arbitration, with a stated objective of excluding judicial interference in arbitrations. Further, the Act, which was divided into four parts, provided in Section 2 (2) that Part I, entitled “Arbitration”, will apply where the seat of arbitration is in India – thus begging the question of whether the provisions dealing with interim measures by court (Section 9 of the Act), and setting aside arbitral awards (Section 34), contained in Part I of the Act, could be resorted to if the seat of the arbitration was outside India.
The position of law prior to BALCO v Kaiser has been formulated by the Supreme Court in several of its judgments. The very first judgment that laid down the principles governing international commercial arbitration was that of Bhatia International. The issue for consideration before the Supreme Court was whether an application under Section 9 of the Act was maintainable in a foreign seat arbitration.
In what was regarded as a judgement that is in the teeth of the Act, the Supreme Court held that interim reliefs could be granted to a foreign party in India, since the provisions of Part I of the Act would apply to all arbitrations and related proceedings held outside India. While holding that Part I of the Act would compulsorily apply to arbitrations held in India, and parties would be allowed to deviate only from the derogable provisions of said Part I to the extent permitted by the Act, the Court further held that in the case of an international commercial arbitration with its seat outside India, provisions of Part I of the Act would apply unless the parties had expressly or impliedly excluded all or any of its provisions.
The decision in Bhatia International was followed in the later judgment of Venture Global Engineering. The issue for consideration before the Supreme Court in Venture Global Engineering was whether an aggrieved party to a foreign seat arbitration, is entitled to challenge a foreign award in terms of Section 34 of the Act. The Supreme Court held in the affirmative.
Another significant decision which could impact the extent of judicial interference in arbitration, is that of a single judge bench of the Supreme Court in TDM Infrastructure Private Limited v UE Development Private Limited (2008) 14 SCC 271) (TDM Infrastructure). In this case, the Supreme Court observed that Section 28, which inter alia provides that Indian law would apply to the substance of the dispute where place of arbitration is India and parties to the arbitration are Indian, was “imperative” in character. With reference to the provision, it stated that the “intention of the legislature appears to be clear that Indian nationals should not be permitted to derogate from Indian law. This is part of the public policy of the country”. Thus when parties to an arbitration agreement were Indian, the merits of the dispute must be decided in accordance with Indian law.
Thereafter in 2011, came the judgment in Yograj Infrastructure Ltd v Ssang Yong Engineering and Construction Co Ltd (AIR 2011 SC 3517) (Yograj), wherein a division bench of the Supreme Court distinguished the decision rendered in Bhatia International on the basis that the parties had expressly chosen a foreign place as the seat of the arbitration and the rules of a foreign institution to apply to the arbitral process. The legal issue in question was the maintainability of an appeal under Section 37(2) of the Act. The agreement between the parties, one Indian party and the other Korean, was to be conducted in Singapore, in accordance with the Singapore International Arbitration (SIAC) Rules. The governing law of the agreement was Indian law.
The Supreme Court held that Part I of the Act would not be applicable to the arbitration agreement, since the parties had expressly chosen the SIAC Rules as the curial law. The parties were thus bound by Rule 32 of the SIAC Rules that makes Singaporean arbitration law applicable to arbitrations with their seat in Singapore.
The way to BALCO v Kaiser
Given the state of the existing Indian law on international commercial arbitration, every award that was passed outside India became open to challenge in India. This resulted in excessive interference by Indian courts in arbitration that was held outside India (despite the stated objective of the Act and the express provisions of Section 5 of the Act). Several parties started approaching Indian courts for interim reliefs that only delayed and caused hindrances to the smooth conduct and operation of the arbitration proceedings held outside India, thereby defeating the very purpose of choosing arbitration as a favourable option for dispute resolution. BALCO v Kaiser came up for final hearing, at this point of time.
BALCO v Kaiser
In a staggering decision that spawned over a hundred and seventy pages, five judges of the Supreme Court inBALCO v Kaiser unanimously held that Part I of the Act would only apply to arbitrations whose seat was in India. The court reasoned as follows:
a. The Act has adopted the territoriality principle, which emphasizes on the seat of arbitration as opposed to the nationality of parties for the ascertainment of jurisdiction.
b.Part I of the Act and Part II of the Act are mutually exclusive. Part I applies to an award made in India, whether it is rendered in a domestic arbitration or whether it is domestically rendered in an international commercial arbitration (international award). Part II of the Act, applies to only certain foreign awards.
c. Section 2(2) lays down the scope of Part I of the Act by stating that “This Part shall apply where the place of arbitration is in India”. The absence of the word ‘only’ in Section 2(2) does not indicate that Part I was also applicable to arbitrations where the seat was outside India.
d.The ‘seat’ of the arbitration must be distinguished from the ‘venue’ of the arbitration. The seat of arbitration is location by law and the venue of arbitration is location by fact.
e.If parties expressly choose the Act as the law governing the arbitration proceedings, only those provisions of law which are concerned with the internal conduct of the arbitration and are not inconsistent with the foreign procedural law would be applicable to the arbitral proceedings. Hence, Part I would not apply as it applies only to arbitrations held in India.
f. Non-applicability of Part I to foreign seat arbitrations would not create a lacunae with respect to awards which were not made pursuant to either the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (The New York Convention) or the Protocol on Arbitration Clauses, 1923 and The Convention on the Execution of Foreign Arbitral Awards, 1927 (The Geneva Convention). Parliament had intentionally not included the aforesaid categories of awards within the definition of ‘foreign award’ in Section 44 and Section 53 of the Act since these awards were not included in the three statutes that were consolidated by the Act.
g. Section 28(1)(a) makes it clear that in an arbitration under Part I of the Act to which Section 2(1)(f) does not apply, the dispute has to be resolved using the substantive law applicable to the contract. This ensures that two or more Indian parties do not circumvent the substantive Indian law by resorting to arbitration. On the other hand, if such arbitration is an international commercial arbitration under Part I of the Act within the meaning of Section 2(1)(f) of the Act, then the parties would be free to agree on any substantive law of their choice.
h.Section 9 of the Act must be interpreted in the same way as any other provision of Part I of the Act and so parties to a foreign seat arbitration agreement would not be entitled to relief under Section 9 of the Act.
i.. Non applicability of Part I of the Act to a foreign seat arbitration agreement would not leave the parties to the same ‘remedy-less’ as once parties voluntarily choose the seat of the arbitration to be outside India, they have impliedly accepted the necessary incidents and consequences of such a choice.
j. In a foreign seat arbitration, an inter-parte suit in India for interim relief pending arbitration would not be maintainable even if it is limited to the purpose of protecting the subject matter of the arbitration. In order to obtain an injunction, the existence of a suit seeking final relief, based on a recognised cause of action, is a prerequisite.
k. Ordinarily, international arbitration law recognises the competence of courts of two nations to set aside or suspend an award: the courts in the country where the seat of arbitration is located (first alternative) and the courts of the country whose laws govern the arbitral proceeding (second alternative). The power to suspend or annul an award primarily vests in the courts of the first alternative country, the second alternative country being available only in the event of failure of the first alternative. However, in the context of India, it must be noted that the Act does not confer any jurisdiction on Indian courts to set aside an international commercial award made outside India. This is because under the Act, the power to annul an arbitral award is only provided in Section 34 of the Act. Section 34 however is contained in Part I and is, therefore, limited in its applicability to awards made in India.
The Way Forward
The Supreme Court’s judgment in BALCO v Kaiser reinforces the objective of international commercial arbitration by ensuring minimal legal intervention in arbitral proceedings conducted outside of India. It clarifies the much debated position of law on the applicability of Part I of the Act to an arbitration held outside India. Till the judgment in BALCO vKaiser was rendered, determining whether an arbitration clause had impliedly or expressly excluded Part I of the Act, in accordance with the ruling in Bhatia International, remained a highly subjective test, often resulting in prolonged proceedings. However, some issues remain unresolved.
The remedies available to an Indian party
The Supreme Court ruling, by emphasizing on the sanctity of the seat of the arbitration, has reinforced a governing principle of arbitration - that of respecting parties’ autonomy.
The decision will have a major impact on the way arbitration agreements are drafted. Till now, parties to an arbitration agreement could choose a foreign seat and also state that notwithstanding the choice of the seat, recourse to provisions contained in Part I of the Act would be permitted. Now, express introduction of such exception will also not make any of the provisions of Part I applicable.
Theoretically, a natural conclusion of the judgment should be that Indian parties will choose to make India the seat of their arbitration in future international commercial arbitration agreements, in order to ensure recourse to Indian courts for interim reliefs or for challenging the award. However, whether Indian parties will have the bargaining power to ensure that India is made the seat in an international commercial arbitration agreement is a moot point. It also remains to be seen how many Indian parties will have the resources to initiate and continue legal proceedings in a foreign country. Given these considerations, arguably some Indian parties may have still been left “remedy-less”.
Choice of proper law of Contract in an agreement between two Indian parties
The issue that arose after TDM Infrastructure was whether the Supreme Court’s observation on the applicability of Indian law to arbitrations between Indian parties would extend to such arbitrations if they were held outside India.
In TDM Infrastructure the seat of arbitration was in India and the observation was made only with reference to Section 28(1)(a), a pre-condition of whose application is that the “place of arbitration is situate in India”. However, it can be argued that the “public policy” of India would apply to Indian parties even if they were to choose to arbitrate outside of India. Furthermore, since TDM Infrastructure was rendered when the judgment in Bhatia International was still good law, even when the arbitration clause specified a foreign country as the seat of the arbitration, if on the basis of the test in Bhatia International application of Part I was found to not be excluded, Section 28 of the Act would have applied to the arbitration. Therefore, in such a situation as well, two Indian parties could have been compelled to apply Indian law to the merits of their dispute.
In BALCO v Kaiser, the Supreme Court did not explicitly discuss TDM Infrastructure, noting that it was a case under Section 11 of the Act and so choice of law was not an issue that specifically arose for consideration in the case.
Nonetheless, in BALCO v Kaiser, the Supreme Court clearly stated that with respect to an Indian seated arbitration agreement between Indian parties, there was no choice for the arbitral tribunal but to decide the merits of the dispute by applying Indian law. It is ex facie apparent that such a proposition (of applying Indian law to disputes between Indian parties) cannot be extended to foreign seat arbitrations, since Section 28 is contained in Part I of the Act, which, post the judgment in BALCO v Kaiser, does not apply to a foreign seat arbitration.
Nonetheless, the Constitution Bench has also stated that the import of Section 28 is to “ensure that two or more Indian parties do not circumvent the substantive Indian law, by resorting to arbitrations”. Arguably, such circumvention is also resorted to when two Indian parties choose foreign law as the proper law of the contract in a foreign seat arbitration agreement.
Status of arbitration petitions currently pending in Indian courts
In the concluding paragraph of its decision the Constitution Bench has stated that the law declared in BALCO vKaiser shall apply prospectively, i.e., to agreements entered into after the date of the judgement. Therefore, with respect to pending petitions filed in relation to arbitration agreements entered into before September 6, 2012, the law prior to BALCO v Kaiser would apply. Therefore, now, two interpretations of the law would be in force till disputes in agreements entered up to September 6, 2012, are resolved.
It is also significant to note that with respect to non-applicability of Section 9 of the Act to foreign seat arbitrations, the Supreme Court has stated that the responsibility of removing any “perceived lacuna” would be with the Parliament and not with it. The Government of India, in its Consultation Paper dated 7 April 2010, proposed to amend the Act so as to extend the application of Section 9 of the Act and Section 27 of the Act to foreign seat arbitrations. Given this proposal and the judgment’s limited applicability, the question of whether this judgment would go a long way in affecting international commercial contracts remain to be seen.
This article has been prepared by Khaitan & Co. Associate Partner, Mr. Raj R. Panchmatia and his associates,and has been published after due permission from the author(s).
Disclaimer : This article was originally posted on Bar & Bench, and the weblink to the same is available here.