Aligning Arbitration in India with International Practice

A commentary on a recent landmark decision of the Supreme Court of India by Jocelyn Lim

 

INTRODUCTION

The decision of the Supreme Court of India in Bharat Aluminium Co. v Kaiser Aluminium Technical Service Inc. [2012] 6 Madras Law Journal 630, was much awaited by the international arbitration community. It changed the landscape of arbitration law in India, and further aligned and harmonised the Indian Arbitration and Conciliation Act 1996 of India (“the Act”) with the UNCITRAL Model Law of International Arbitration (“Model Law”).

In this case, the Indian Supreme Court overruled its earlier judgments, such as Bhatia International v Bulk Trading [2004] 2 SCC 105 which held that Part I of the Act (which contains provisions relating to interim relief, appointment of arbitrators, setting aside of arbitral awards, etc.) applied to international arbitrations which are seated outside India.

Briefly, the pertinent points of the decision in Bharat Aluminium are as follows:

(1)   The seat of arbitration as provided by the arbitration agreement will determine the applicable law of arbitration;

(2)   Part I of the Act does not apply to an arbitration which is seated outside India;

(3)   Where arbitration is seated outside India, a party cannot file a civil suit in an Indian court in relation to the subject matter of the arbitration agreement to obtain interim relief;

(4)   In relation to an arbitral award made in an arbitration seated outside India, the jurisdiction of the Indian courts is limited only to the enforcement of the award under the Act.

The Supreme Court, however, clarified that its decision in Bharat Aluminium would only apply to arbitration agreements executed on or after 6 September 2012.

 

BRIEF FACTS

Bharat Aluminium Co. (“Balco”) and Kaiser Aluminium Technical Services, Inc. (“Kaiser”) entered into an agreement on 22 April 1993 whereby Kaiser agreed to supply and install a computer based system for Shelter Modernization at Balco’s Korba Shelter (“Agreement”).

Clauses 17 and 22 of the Agreement essentially provide that:

(a)   A dispute arising out of the Agreement shall, at first instance, be settled amicably by negotiation between the parties, failing which the dispute shall be settled by arbitration in accordance with English Arbitration Law;

(b)   The arbitration shall be held in London, England and be conducted in the English language;

(c)   The Agreement shall be governed by Indian Law and the arbitration proceedings shall be governed by English Law.

Disputes arose between the parties with regards to the performance of the Agreement. Balco claimed for the return of its investment in the modernization programme, loss, profits and other sums. Kaiser claimed for the unclaimed instalments plus interest and damages for breach of intellectual property rights. Negotiations between parties were unfruitful, resulting in Kaiser issuing a request for arbitration to Balco on 13 November 1997.

The disputes were referred to arbitration which was held in England. The arbitral tribunal made two awards dated 10 November 2002 and 12 November 2002 (“Arbitral Awards”) in favour of Kaiser. Dissatisfied with the Arbitral Awards, Balco applied to the Court of the District Judge of Bilaspur for both the Arbitral Awards to be set aside pursuant to Part I, Section 34 of the Act.

On 27 July 2004, the District Judge of Bilaspur held that the setting aside applications filed by Balco were untenable and dismissed the applications. Dissatisfied with the decision of the District Judge, Balco appealed to the High Court of Judicature of Chattisgarh, Bilaspur (“High Court Appeals”).

On 10 August 2005, the Division Bench of the High Court dismissed the High Court Appeals. It held that the applications by Balco to set aside the Arbitral Awards pursuant to Part I, Section 34 of the Act were not maintainable. Balco appealed to the Supreme Court.

 

THE APPELLANT’S ARGUMENTS

Balco advanced, inter alia, the following arguments in support of its contention that Part I of the Act applies to arbitration which takes place outside India:

(a)   The omission of the word “only” which is found in Article 1(2) of the Model Law, from Section 2(2) of the Act was an indication of deviation from the territorial principle under Article 1(2) of the Model Law and clearly signifies that Part I of the Act applies to a foreign-seated arbitration. Balco further argued that such omission clearly indicates that the Act “has not adopted or incorporated the provisions of Model Law” but has merely “taken into account” the Model Law. Therefore, the territorial principle under the Model Law should not be applicable within the context of the Act.

(b)   It is evident from the provisions of the Act, in particular Section 2(1)(e), Section 2(5), Section 2(7), Section 20 and Section 28, that the Act is not ‘seat centric’. It was further argued that, if the application of Part I of the Act is limited to arbitration which takes place in India, not only will it lead to reading words into various provisions of the Act but also render those provisions redundant.

(c)   Further, such limitation will restrict parties to a foreign-seated arbitration from approaching the Indian courts to seek interim relief under Part I, Section 9 of the Act, thus leaving parties to a foreign-seated arbitration without a remedy.

FINDINGS OF THE SUPREME COURT

No deviation from Model Law

The Supreme Court disagreed with Balco’s submissions. The Supreme Court held that the omission of the word “only” from Section 2(2) of the Act was not an indication of deviation from the territorial principle under the Model Law. The Court highlighted that at the time of enactment of the Act, the Indian Parliament had taken the Model Law into account, thereby adopted the territorial principle and limited the application of Part I of the Act to domestic-seated arbitrations.

The Supreme Court, in deciding whether Section 2(2) of the Act applies to foreign-seated arbitrations, held that the omission of the word ‘only’ merely indicates that the Model Law has not been bodily adopted. It does not mean that the territorial principle has not been accepted by the Act. The Supreme Court noted that the word “only” was also omitted from the corresponding provision in other jurisdictions and held that a plain reading of Section 2(2) of the Act, which reads as “this Part shall apply where the place of arbitration is in India”, makes it clear that Part I of the Act does not apply to foreign-seated arbitrations. Hence, the application of Part I of the Act is limited to domestic-seated arbitration.

 

“Seat Centric”

The Supreme Court rejected Balco’s submission that the relevant provisions of the Act indicates that the Act is not “seat centric” and therefore made it clear that Part I is limited to domestic-seated arbitrations. The Supreme Court held that the relevant provisions should be interpreted in light of the intention of the Indian Parliament at the time of enactment of the Act that the territorial principle should be put at the forefront of interpretation. Coupled with the clear wordings of Section 2(2) of the Act, there is no doubt that the Act is “seat centric”.

It follows that interpretation of the relevant provisions of Part I should be in the context of Section 2(2) of the Act. Thus, the arguments put forward by Balco for interpreting the relevant provisions of Part I of the Act to be applicable to foreign-seated arbitrations were devoid of merit.

The Supreme Court highlighted the distinction between “seat” and “venue” of arbitration. The former refers to the legal localisation of an arbitration whereas the latter refers to the convenient geographical locality for hearings of the arbitration. The Supreme Court, in choosing to follow the long line of established cases in England, held that the seat of arbitration will inevitably be the law which governs the conduct and supervision of the arbitration proceedings.

 

Interim relief not maintainable

Having considered that Part I of the Act does not apply to foreign-seated arbitrations, the Supreme Court then confirmed that, as far as foreign-seated arbitrations are concerned, no application for interim relief is maintainable under Part I, Section 9 or any other provision of Part I of the Act. Similarly, no application to set aside a foreign-seated arbitral award is maintainable under Part I, Section 34 of the Act in India.

In coming to its decision, the Supreme Court overruled the decisions of Bahtia International v Bulk Trading S.A. and Another [2004] 2 SCC 105 and Venture Global Engineering v Satyam Computer Services Ltd and Another [2008] 4 SCC 190. The Supreme Court recognised that the proposition accepted in those cases which empowered the Indian courts to grant interim reliefs and to set aside foreign-seated arbitral awards amounts to giving extra-territorial jurisdiction to the Indian court which was not the intention of the Indian Parliament when the Act was enacted. That proposition also undermined the underlying spirit of the Model Law which is premised on the territorial principle.

The Supreme Court was of the opinion that the non-application of Part I of the Act does not mean that parties to a foreign-seated arbitration are left without a remedy. They could still seek relief from the courts of the country where the seat of arbitration is located.


COMMENTARY

The decision of the Supreme Court is welcomed by the international arbitration community. It affirms the doctrine of minimal intervention by the Indian courts in a foreign-seated arbitration, putting arbitration in India in line with internationally accepted standards.

The principles in Bharat Aluminium apply prospectively to arbitration agreements executed after 6 September 2012. Hence, the full impact of this Supreme Court decision will most likely be felt only a few years from now. Arbitration proceedings based on arbitration agreements executed before that date, even if they are commenced after 6 September 2012, will still be governed by the old principles enunciated in the cases of Bhatia International and Venture Global Engineering.

 

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