On 6th September, 2012, a constitution bench of the Supreme Court of India, in the case of Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc [i], decided and laid down the law on the extent of intervention of Indian Courts in International Commercial Arbitrations. The bench also overruled two of its most criticized decisions i.e. the Bhatia International v. Bulk Trading [ii] (Bhatia International Case) along with the Venture Global Engineering v Satyam Computers Services [iii], (Venture Global Case).
This article seeks to bring forth the basic principles of Arbitration relevant to the changes brought about by this land-mark judgment.
DOMESTIC AND INTERNATIONAL ARBITRATION.
What is Domestic Arbitration
Domestic Arbitration takes place in
What is International Arbitration
International Arbitration can take place either within
Clause (f) of sub-section (1) of section 2 of the Indian Act defines international commercial arbitration as arbitration relating to disputes arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is:
An individual who is a national of, or habitually resident in or any country other than India
A corporate body which is incorporated in any country other than
A company or an association or a body of individuals whose central management and control is exercised in any country other than
Arbitration can take place in
LAWS THAT GOVERN ARBITRATION:
“There can be many different laws to govern the arbitration; the proper law of the contract, lex arbitri and the procedural law or the curial law.”[viii]
In an international commercial arbitration, the parties are free to choose the seat of arbitration, the rules of law as applicable to the substances of the dispute and the rules of law which govern procedure of arbitration. At the outset, it is essential to identify, state and differentiate between the laws applicable to an international arbitration proceeding.
It has been held in the case of National Thermal Power Corporation [ix] that in international commercial arbitrations, parties are at liberty to choose, expressly or by necessary implication, the law and the procedure to be made applicable.
In Naviera Amazonica Peruana S.A. Vs. Compania Internacionale De Seguros Del Peru [x], the Court of Appeal summarized as follows “All contracts which provide for arbitration and contain a foreign element may involve three potentially relevant systems of law. (1) The law governing the substantive contract. (2) The law governing the agreement to arbitrate and the performance of that agreement. (3) The law governing the conduct of the arbitration.
In the majority of cases all three will be the same. But (1) will often be different from (2) and (3). And occasionally, but rarely, (2) may also differ from (3).”
The following are the relevant systems of laws which may be carved out from any international commercial arbitration.
1. LEX ARBITRI (The law of the seat of arbitration)
The Lex Arbitri is a set of ‘mandatory’ rules of law applicable to the arbitration at the seat of the arbitration. It also can be defined as the juridical seat of arbitration. Lex arbitri also “determines the relationship between the arbitral tribunal and national courts.”
For instance, the extent to which court intervention during the arbitral proceedings is permissible.
Proper law of the contract governs issues of interpretation, performance, non-performance and liability under the contract and is determined by using the conflict of law rules.” Curial law determines and governs the procedure of the arbitration proceedings.
2. SUBSTANTIVE/PROPER LAW OF CONTRACT
An International commercial arbitration agreement may provide for different laws to govern the contract and the arbitration agreement itself. While the former is the substantive/proper law of contract, the latter is the substantive/proper law of the arbitration agreement.
Recognizing the Doctrine of Seperability, the Apex court in the case of National Thermal Power Corporation [xiii] stated that the proper law of arbitration is the substantive law governing the arbitration agreement as distinct from the proper law governing the contract as a whole. It was further held:
“The expression 'proper law of a contract' refers to the legal system by which the parties to the contract intended their contract to be governed. If their intention is expressly stated or if it can be clearly inferred from the contract itself or its surrounding circumstances, such intention determines the proper law of the contract. In the words of Lord Herchell, L.C.:
...In this case, as in all such cases, the whole of the contract must be looked at, and the contract must be regulated by the intention of the parties as appearing from the contract. It is perfectly competent to those who, under such circumstances as I have indicated, are entering into a contract, to indicate by the terms which they employ which system of law they intend to be applied to the construction of the contract, and to the determination of the rights arising out of the contract.”
It was further held:
“Where there is no express choice of the law governing the contact as a whole, or the arbitration agreement in particular, there is, in the absence of any contrary indication a presumption that the parties have intended that the proper law of the contract as well as the law governing the arbitration agreement are the same as the law of the country in which the arbitration is agreed to be held. On the other hand, where the proper law of the contract is expressly chosen by the parties, as in the present case, such law must, in the absence of an unmistakable intention to the contrary, govern the arbitration agreement which, though collateral or ancillary to the main contract, is nevertheless a part of such contract....”
The Court made it clear that where the proper law of contract is chosen by the parties, the same must be held to govern the arbitration agreement, in the absence of an unmistakable intention to the contrary.
The court further stated that there may be exceptional circumstances where the proper law of contract may differ from the proper law of arbitration agreement, but those exceptional circumstances were not discussed in the said judgment.
3. CURIAL LAW
The Curial law or the Procedural law governs the procedure of the Arbitral Proceedings. For example, the International Chamber of Commerce Rules (ICC) and the United Nations Commission on International Trade Law Rules (UNCITRAL) are such curial or procedural laws that the parties agree to abide by with regard to the manner in which the proceedings may be held by the Arbitral Tribunal.
It is sometimes possible for the curial law to be different from the law of the seat of arbitration. For instance, “parties can choose to hold arbitration in one country but make it subject to the procedural law of another country.” [xiv]
In the Union of India case[xv], arbitration clause provided for the seat to be in London but the procedural law was the Indian Arbitration Act 1940. It was held that, “English procedural law governed the proceedings, with the addition of the sections of Indian Statute that were not inconsistent with English procedure, because Indian procedural law cannot override the mandatory provisions of the English Arbitration Act 1996.”
THE ARBITRATION AND CONCILIATION ACT, 1996
The Arbitration & Conciliation Act, 1996 (‘Indian Act’) is an Act to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto. It came into force on 22.8.1996 and is deemed to have come into force on 25.1.96[xvii]
The Indian Act is divided into Parts, Chapters, and Sections along with 3 Schedules. The Indian Act is based on the Model Law (a set of 36 Articles) which was drafted to govern all international arbitrations by a working group of the UN and was finally adopted by the U.N. Commission on International Trade Law (UNCITRAL) on June 21, 1985.[xviii]
However, it must be noted that whereas the Model Law was meant for International Commercial Arbitrations, the Indian Legislature has adopted its provisions for the purpose of both, Domestic as well as International Commercial Arbitrations.
PART I of the Indian Act, inter-alia, provides for powers of the Court such as referring the Parties to Arbitration (Sec.8), Granting Interim Relief (Sec.9), Appointment of Arbitrators (Sec.11), Power to set aside award (Sec.34).
Section 2(2) of the Indian Act reads as follows:
“(2) This Part shall apply where the place of arbitration is in India.”
PART II of the Indian Act deals primarily with enforcement of Foreign Awards, where such awards are passed in countries which are signatories to the New York Convention (Chapter I) or the Geneva Convention (Chapter II).
The 1996 Act was the result of recommendations for reform, particularly in the matter of speeding up the arbitration process and reducing intervention by the court.
The Supreme Court in Food Corporation of India v. Joginderpal [xix] observed that the law of arbitration must be `simple, less technical and more responsible to the actual reality of the situations’, `responsive to the canons of justice and fair play’.
Principle of Non-Interference of Courts
The goal of the Arbitration and Conciliation Act, 1996 is evident from its statement of Object and Reasons. The primary aim of the Arbitration and Conciliation Act, 1996 is to facilitate the speedy disposal and resolution of commercial disputes, supplemented by a minimum of supervisory role from the judiciary.
The principle that the courts shall not interfere in arbitral proceedings is a fundamental theme underlying the Act. Section 5 of the Indian Act clearly states that save as provided in the provisions of Part I, no judicial authority can intervene in an Arbitration proceeding governed by the said part. The experience from the operation of this legislation, despite having been in force since the last 14 years, has not been very encouraging. Parties who have resorted to arbitration have gone away with the impression that the process is expensive and time consuming. Despite its purported goals of speedy dispute resolution, the Act has assumed a mechanism of slow motion. The interference of the Court has not been mitigated. On the other hand, most disputes have been referred to Courts before the arbitral process has been set into motion.[xx]
BHATIA INTERNATIONAL JUDGMENT
The question was whether an application filed under Section 9 of the Act in the Court of the third Additional District Judge, Indore by the foreign party against the appellant praying for interim injunction restraining the appellant from alienating, transferring and/or creating third party rights, disposing of, dealing with and/or selling their business assets and properties, was maintainable.
The Supreme Court referred to the similar provision in UNCITRAL Model law i.e. Art.1(2) which reads as follows:
“The provisions of this law, except Articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State.”
The Supreme Court highlighted the word ‘only’ and observed as follows:
“Thus Art. 1(2) of the UNCITRAL Model Law uses the word “only” to emphasize that the provisions of that law are to apply if the place of arbitration is in the territory of that State. Significantly, in Section 2(2) the word “only” has been omitted. The omission of this word changes the whole complexion of the sentence. The omission of the word “only” in Section 2(2) indicates that this subsection is only an inclusive and clarificatory provision. As stated above, it is not providing that provisions of Part I do not apply to arbitrations which take place outside India.”
The Supreme Court observed that if Part I of the Act is not made applicable to arbitration held outside India it would have serious consequences such as:
(a) amount to holding that the Legislature has left a lacunae in the said Act. There would be lacunae as neither Part I or II would apply to arbitrations held in a country which is not a signatory to the New York Convention or the Geneva Convention. It would mean that there is no law, in India, governing such arbitrations;
(b) leave a party remediless in as much as in international commercial arbitrations which take place out of India the party would not be able to apply for interim relief in India even though the properties and assets are in India Thus, a party may not be able to get any interim relief at all.
The Supreme Court made certain observations in respect of International commercial arbitrations which take place in a non-convention country. The Court observed that international commercial arbitration may be held in a non-convention country. Part II only applies to arbitrations which take place in a convention country. The Supreme Court referred to the definition of international commercial arbitration which is defined in Section 2(f) of the Act and held that the definition makes no distinction between international commercial arbitration which takes place in India or those take place outside India. The Supreme Court also observed that Sections 44 and 53 define foreign award as being award covered by arbitrations under the New York Convention and the Geneva Convention respectively. Special provisions for enforcement of these foreign awards are made in Part II of the Act. To the extent part II provides a separate definition of an arbitral award and separate provision for enforcement of foreign awards, the provision in Part I dealing with these aspects will not apply to such foreign awards.
The three-judge bench concluded that “the provisions of Part I would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India the provisions of Part I would compulsorily apply and parties are free to deviate only to the extent permitted by the derogable provisions of Part I. In cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement express or implied, exclude all or any of its provisions. In that case the laws or rules chosen by the parties would prevail. Any provision, in Part I, which is contrary to or excluded by that law or rules will not apply”.[xxii] [xxiii]
Cases that followed:
Various cases followed the precedent laid down in the Bhatia International case and worsened the effectiveness of Arbitration as an alternate dispute resolution mechanism. A few cases are as follows:
In INDTEL Technical Services v. W.S. Atkins PLC[xxiv] , the issue was the appointment of an arbitrator in an arbitration application filed under section 11(9) of the Act. The parties in that case had chosen the proper law of contract as the law of England and Wales but the proper law of arbitration was not specified. The respondent argued that in the absence of the proper law of arbitration being chosen by the parties, it must be presumed from the proper law of contract. The Court rejected this contention on the ground that it was bound by the decision in Bhatia which had clearly held that in the absence of express or implied exclusion by parties, Part I of the Act would be applicable to International Commercial Arbitrations outside India.
In Venture Global Engineering v Satyam Computers Services [xxv], the Supreme Court was of the opinion that the Indian Courts had the power to set aside foreign awards if the same were in opposition, or were contrary to the ‘public policy’ in India. The Apex court relied upon the ruling of Bhatia International and held: “That the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and to hold that where such arbitration is held in India, the provisions of Part-I would compulsorily extent permitted by the provisions of Part-I. IT is also clear that even in the case of international commercial arbitration held out of India provisions of Part-I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. We are also of the view that such an interpretation does not lead to any conflict between any of the provisions of the Act an there is no lacuna as such.”
The ruling of the Apex Court in the Case of Bhatia International (Supra) opened flood-gates of litigation and defeated the very purpose of Arbitration as an ‘alternate dispute resolution’. The judicial interpretation given by the Court rendered the principle of ‘Non-intervention of Courts’ otiose and redundant.
The above mentioned decisions literally strangled the growth of Arbitration in India. The reputation of India for its laws on Arbitration was tarnished and foreign investors and companies considered dealing with Indian companies or individuals risky.
The parties to arbitration were left to wonder whether there is an incentive to incur the time and expense of arbitrating their disputes in the first instance if such disputes are to end up in court anyway. The precedents laid down by the Apex Court in Bhatia International, Venture Global and the various cases that followed, have been seen as major set-backs and disincentives for any foreign entity to deal with or invest in the Indian economy.
LAW COMMISSION OF INDIA
Realising the glaring errors and grave consequences following the ruling of the Apex Court in Bhatia International and Venture Global (Supra), the Law Commission of India in its 176th Report, titled “The Arbitration And Conciliation (Amendment) Bill, 2001” [xxvi] inter-alia, proposed to make the following amendment to Section 2 of the Indian Act :-
In order to remove the difficulties stated above, it is proposed to amend Section 2(2) of the Arbitration and Conciliation Act, 1996 as follows:
“(2) This part shall apply only where the place of arbitration is in India. Provided that provisions of Sections 9 and 27 shall also apply to international commercial arbitration where the place of arbitration is not in India if an award made in such place is enforceable and recognized under Part II of this Act.”
However, the said bill is still pending in the Parliament of India.
BHARAT ALUMINIUM COMPANY JUDGMENT
[Bharat Aluminium Co. Vs Kaiser Aluminium Technical Service, Inc]
A Constitutional bench of the Supreme Court of India, overruled its previous decision in the Bhatia International judgment by holding that the provisions of Part I of the Indian Act does not apply to arbitrations held outside India.
A division bench of the Supreme Court, while dealing with the cases of Bhatia International and Venture Global (Supra),. expressed different views on the interpretation of Clause 2 of Section 2 of the Indian Act. Therefore, the said appeals were listed before three judge bench. The said three judge bench referred the matter to the Constitution bench.
The main questions that arose for the consideration of the bench were as follows:
(a) What is meant by the place of arbitration as found in Sections 2(2) and 20 of the Arbitration Act, 1996? ;
(b) What is the meaning of the words “under the law of which the award is passed” under Section 48 of the Arbitration Act, 1996 and Article V (1)(e) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter referred to as “the New York Convention”)?;
(c) Does Section 2(2) bar the application of Part I of the Arbitration Act, 1996 (Part I for brevity) to arbitrations where the place is outside India? ;
(d) Does Part I apply at all stages of an arbitration, i.e., pre, during and post stages of the arbitral proceedings, in respect of all arbitrations, except for the areas specifically falling under Parts II and III of the Arbitration Act, 1996 (Part II and Part III hereinafter)?; and
(e) Whether a suit for preservation of assets pending an arbitration proceeding is maintainable?
The Supreme Court, following lengthy hearings which lasted for months together, held as follows:
1. PART I of the Indian Act does not apply to arbitrations taking place outside India.
The main question before the court was whether the absence of the word ‘only’ from Sec 2 (2) would make Part I of the Act applicable to arbitrations held outside India. It was contended that there was a conscious deviation from Article 1(2) of the UNCITRAL Model laws in omitting the word ‘only’ from Section 2(2). It was further contented that if Sec 2(2) is given a restricted interpretation, it would conflict with the other provisions of the Act.
The Court however held that a plain reading of Section 2(2) makes it clear that Part I is limited in its application to arbitrations which take place in India. It followed the principle of literal interpretation and held that the omission of the word ‘only’ is of no relevance. Having regard to the intention of the Parliament it observed that Parliament by limiting the applicability of Part I, has given recognition to the principle of territoriality. It therefore held that Part I of the Arbitration Act, 1996 applies to arbitrations having their place/seat in India.
Conflict with Section 2(4) and 2(5) and interpretation of Section 2(7):-
The Court also considered the conflict between Section 2(2) and 2(4) and 2(5). It was urged that Section 2(4) makes Part I applicable to “every arbitration” under any other enactment, and thereby makes it applicable to arbitrations wherever held, whether in India or outside India. The Court however held that there was no conflict between the said provisions. Section 2(4) makes Part I applicable to “every arbitration under any other enactment for the time being in force”. Such “any other enactment” would in its ordinary meaning contemplate only an Act made by the Indian Parliament. Section 2(5) is merely an extension to Section 2(4), and has to read with Section 2(2) and 2(4) collectively.
The court further held that Section 2(7) of the Indian Act does not relax the territorial principal adopted by the Indian Act. It certainly does not introduce the concept of a delocalized arbitration into the Indian Act. The court clarified that Section 2(7) is enacted to allow the
Indian Courts to supervise over a “domestically rendered international commercial award”, which may be passed in an arbitration proceedings between two foreign parties within India.
Apart from the main question of applicability under Section 2, the Apex Court inter-alia, also held as follows:
2. No interim relief can be granted under Section 9 of the Indian Act in arbitrations held outside India –
The court clarified that where the seat of the arbitration is not in India, no interim relief can be granted to any party under Section 9 of the Indian Act. The court, in its opinion stated that giving a ‘purposive’ interpretation to section 9 would be destructive of the territorial principles upon which the UNCITRAL Model Laws are premised which have been adopted by the Indian Act. This means that no civil suit can be instituted by a party for the purpose of attaining any interim relief which is a subject matter of the arbitration proceedings.
3. Award made in a foreign country cannot be challenged under Section 34
The Supreme Court held that section 34 of the Indian Act could only be invoked to challenge an award where the seat of arbitration is in India. The Supreme Court thus over-ruled its ratio laid down in the famous case of Venture Global (Supra).
4. Non convention awards not enforceable under the Indian Act
The Court clarified that merely because the Indian Act does not cover non-convention awards, the same would not create a lacuna therein. It was held that if there was no lacuna in three different instruments i.e. i.e. the Arbitration Act, 1940 read with 1961 Act, and the Arbitration (Protocol and Convention) Act, 1937, it cannot be now said to be a lacuna when the above three laws are consolidated into one single Act i.e. the Indian Act.
5. Seat of arbitration and the applicable law.
The Court held that when the seat of arbitration is a foreign country, it is an inevitable acceptance that the law of that country would apply for the conduct and supervision of the arbitration proceedings.
It was further clarified that if the arbitration agreement provides for a seat of proceedings to a foreign country and the procedural law to be that of the Indian Act, it would not make Part I applicable or enable the courts to exercise jurisdiction over the proceedings or the award. It would only mean that the parties have contractually imported those provisions which are concerned with the internal conduct of their arbitration and which are not inconsistent with the mandatory provisions of the Procedural Law/Curial Law of the foreign country, where the arbitration is seated. This is because Part I of the Indian Act ‘only’ applies to arbitrations having their seat in India.
6. Section 28 of the Indian Act only includes international arbitrations with a seat in India:-
The counsel for the appellants argued that Section 28 is another indication of the intention of the Parliament that Part I of the Arbitration Act, 1996 was not confined to arbitrations which take place in India. The Court however held that the only purpose of Section 28 is to identify the rules that would be applicable to the “substance of dispute.” The court held that the said provision was to ensure that two or more Indian Parties do not circumvent the substantive Indian law by resorting to Arbitration. This said section makes a distinction between purely domestic arbitrations and international commercial arbitrations, with a seat in India. It merely shows that the legislature has segregated the domestic and international arbitration. Therefore, to suit India, conflict of law rules have been suitably modified, where the arbitration is in India.
The said provision will not apply where the seat is outside India. In that event, the conflict of laws rules of the country in which the arbitration takes place would have to be applied.
7. Interpretation and applicability of Part II
The counsel for the appellants argued that even some of the provisions contained in Part II would indicate that Part I of the Arbitration Act, 1996 would not be limited to the arbitrations which take place in India. It was pointed out that even though Part II deals specifically with recognition and enforcement of certain foreign awards yet provision is made for annulment of the award by two courts. Thus, it recognizes concurrent jurisdiction of courts in two countries.
The Court clarified that there is no overlapping of the provisions of Part I and Part II of the Act and THAT Part II is not merely supplementary. There is complete segregation between both the parts as Part I deals with all four phases of arbitration-commencement, conduct, challenge and recognition and enforcement whereas Part II pertains only to recognition and enforcement of foreign awards.
Reiterating the principles of Lex Arbitri, it was held that keeping in scheme with the international instruments such as the Geneva Convention and the New York Convention as well as the UNCITRAL Model Law, it is clear that the regulation of conduct of arbitration and challenge to an award would have to be done by the courts of the country in which the arbitration is being conducted.
Over-ruling its own decision in Venture Global case (Supra), the court further clarified that any award made in any international arbitration is not open to challenge under Part I Section 34 of the Indian Act.
The Supreme Court by this landmark judgment has overruled the laws laid down in the Bhatia International case, which held that Part I of the Indian act would apply to arbitrations held outside India.
This implies that the provisions of part I including but not limited to
Section 9 (Interim measures by the Court),
Section 11 (Appointment of Arbitrators),
Section 20 (Place of Arbitration) and
Section 34 (Application for setting aside arbitral award) amongst others, would only be available to any party where the International Commercial Arbitration takes place in India. Thus, Part I of the Indian Act will ‘only’ apply to those arbitrations which are seated in India.
The said case has also over-ruled the Venture Global Case, which had followed Bhatia International to hold that a foreign award made outside India could be challenged under Section 34 of the Indian Act. Therefore, any award made in International Commercial Arbitrations held outside India cannot be challenged under Section 34 of the Indian Act.
The Bhatia International and Venture Global decisions had been seen as major impediments in the growth of Arbitration as a successful mode of Alternate Dispute Resolution. The Bharat Aluminium Company judgment will go a long way to improve the tarnished image of the Indian Arbitration system.
However, it must be noted that the law laid down by the Supreme Court by this judgment shall apply prospectively, only to arbitration agreements executed hereafter. This means that all arbitration agreements executed, all arbitration proceedings pending or arbitration applications/petitions pending in the Indian Courts will remain unaffected by this judgment.
The Apex Court has clarified and settled the law as regards the intervention of Indian Courts in International Commercial Arbitrations and has upheld the doctrine of minimum intervention of courts in arbitration, which is the basic underlying objective of the Indian Act.
Anuj P. Agarwala
SOURCES AND CITATIONS
[i] Civil Appeal Number 7019 of 2005
[ii] (2002) 4 SCC 105
[iii] 2008(1) SCALE 214
[vi] Arbitration and Conciliation Act, 1996 (No. 26 of 1996)
[viii] [A. Redfern, M. Hunter, Law and Practice of International Commercial Arbitration, Sweet Maxwell, 4th Edition, 2004]
[x] 1988 (1) Lloyd’s Law Reports 116
[xii] INDTEL Technical Services v. W.S. Atkins PLC : (2008) 10 SCC 308
[xvi] A.Tweedale, K.Tweedale, op cit, chap. 7.62
[xviii] Supra, point VI
[xix] 1989 AIR 126,
[xx] Dr. Justice Sharma, M.K, “Arbitration as an ADRM”, All India Seminar on Judicial Reforms).
[xxi] Supra, Note I
[xxii] Supra, Note VI
[xxiv] (2008) 10 SCC 308
[xxv] Supra, point II
[xxvi] Available at http://lawcommissionofindia.nic.in/