India: Re-Visiting Bhatia International

Last Updated: 27 November 2012
Article by Niyati Nath and Khursheed Vajifdar

A five-member constitutional bench of the Indian Supreme Court (the 'Court') is currently reconsidering the ratio articulated by the Court in Bhatia International v Bulk Trading SA [2002] 4 SCC 105.

The Indian Arbitration and Conciliation Act 1996 (the 'Act') has four distinct parts, of which Parts I and II are relevant for this article. Part I applies where the place of arbitration is in India; among other things it confers powers on the Indian courts to grant interim measures (section 9), to appoint and replace arbitrators (section 11) and to set aside arbitral awards (section 34). Part II is concerned with the recognition and enforcement in India of foreign awards that fall within the scope of the 1958 New York Convention and the 1927 Geneva Convention.

In the case of Bhatia, a three-judge bench of the Court considered the matter of a request to an Indian court for interim measures of protection by a party to an arbitration seated in Paris. One of the respondents had sought interim relief from the court under Part I of the Act. The appellant objected that the application could not be allowed on the basis that Part I did not apply to arbitrations seated outside India. The district judge held that the application was maintainable. The matter eventually reached the Court on a second appeal.

The Court held that the provisions of Part I of the Act apply to all arbitrations, including international commercial arbitrations seated outside India, unless the parties have expressly or impliedly excluded its application. The Court's reasons for the finding were as follows:

  • If the Act does not assure parties to an arbitration governed by Part II the right to apply for interim relief pursuant to section 9 (Part I), the parties will find themselves without a remedy, as far as obtaining interim relief in India is concerned.
  • Section 2(2) of the Act provides that Part I will apply where the place of arbitration is in India and section 2(4) of the Act uses the words 'every arbitration'. Section 2(5) refers to 'all arbitrations and to all proceedings relating thereto'. Section 2 is in Part I of the Act. The Court was of the view that the finding that Part I applies to all arbitrations resolves any apparent inconsistency between these provisions.
  • The Act is based on the UNCITRAL Model Law (the 'Model Law'). The provision of the Model Law that is analogous to section 2(2) of the Act states that the law, with the exception of certain provisions, will apply only if the arbitration takes place in the territory of the state. The Court reads the omission of the word 'only' in section 2(2) as further evidence of legislative intent to permit Part I of the Act to apply to arbitrations that take place outside India.
  • Section 44 states that a foreign award is an award issued in a territory that is a signatory to the New York Convention and that has been notified by the Government of India as a reciprocating territory. Awards issued in arbitration proceedings that take place in countries that are not signatories to the New York Convention and/or are not notified as reciprocating territories ('non-Convention awards') are not foreign awards and are not governed by Part II of the Act. Section 2(7) states that an arbitral award made under Part I shall be considered a domestic award. The Court observed that there would be no need to define an award as a domestic award unless the intention was to address awards that would otherwise not be covered by this definition, such as non-Convention awards. The Court was of the view that the legislature intended Part I to apply to all arbitrations. This interpretation facilitates the enforcement of non-Convention awards in India.

The ratio in Bhatia was subsequently extended in other decisions to permit Indian courts to set aside foreign awards1 and to appoint arbitrators in arbitrations seated outside India.2 Bhatia and the string of cases that follow it have been widely criticised for judicial over-reach and for creating significant uncertainty and delay in arbitrations that are seated outside India but involve Indian counter-parties or laws. It has thus become standard practice in India-related commercial transactions and arbitration agreements to expressly exclude the application of Part I to arbitrations seated outside India, with a view to escape the consequences of Bhatia.

The Indian judiciary has also evinced discomfort with the findings in Bhatia and its like-minded successors. It has, in recent decisions sought to restrict the applicability of Part I of the Act to arbitrations seated outside India. Indian courts have also demonstrated a willingness to infer implied exclusions of Part I where parties have chosen a foreign seat and a foreign law to govern the arbitration.3

In December 2011, while considering the case of Bharat Aluminium v Kaiser Aluminium,4 the Court decided that a fivemember constitutional bench of the Court would reconsider the Court's own ruling in Bhatia. The Court invited interested parties to intervene in order to assist the Court as amicus curiae. In response, the London Court of International Arbitration India (LCIA India), the Singapore International Arbitration Centre (SIAC) and the Nani Palkhivala Arbitration Centre intervened in the proceedings. Hearings commenced on 10 January 2012 and continued until 29 February 2012. An array of counsel presented their views to the constitutional bench. They made the following submissions, amongst others:

  • The law of the seat or place where the arbitration is held is the appropriate law to govern the arbitration. The theory and practice of international commercial arbitration supports the territorial link between the seat of arbitration and the law governing the arbitration. The Model Law on which the Act is based adopts the territorial principle, as does the Act. The territoriality principle mandates the regulation of the conduct of the arbitration and challenge to the award by the courts of the country in which the arbitration is conducted.
  • An Indian court may grant interim relief only if so authorised by the law. Section 9 of the Act enables the court to grant interim measures of protection before or during arbitral proceedings or at any time after the making of an arbitral award but before the award is enforced pursuant to section 36 of the Act. These powers are wider than the powers available to a civil court under the general Indian law. Part I of the Act (including section 9) does not apply to arbitration seated outside India; consequently, Indian courts cannot grant interim relief in an arbitration seated outside India pursuant to the general law.
  • Non Convention awards cannot be enforced pursuant to the Act as neither Part I nor Part II apply. They may be enforced in India by filing a suit that seeks enforcement of the award under the Code of Civil Procedure (CPC). The award will have to be proven in the suit.
  • The only remedy against a foreign award is to oppose its enforcement pursuant to Part II of the Act. One cannot seek to have the award set aside pursuant to section 34 (Part I).
  • Counsel supporting Bhatia submitted that section 9 is applicable to all arbitrations irrespective of the seat of arbitration. If section 9 is held not to apply to an arbitration seated outside India where a party's assets are located within India, then such arbitration will be rendered infructuous. The nature of the relief granted pursuant to section 9 is interim and conservatory. Such relief does not militate against the principle that courts ought not to interfere in arbitration proceedings. The rules for arbitration promulgated by the LCIA, the SIAC and UNCITRAL are hospitable to the idea of parties seeking interim measures of protection from national courts.

While the constitutional bench appeared to be of the prima facie view that Part I ought not to apply to arbitrations seated outside India, it was troubled at the prospect of leaving a party to an arbitration seated outside India without recourse to the provisions of section 9. The Court asked counsel for their views on:

  • whether parties may instead apply to the Indian courts for an interlocutory order pursuant to order 39 of the CPC; and
  • whether an Indian court may grant interim relief to parties pursuant to sections 8 and 45 of the Act. These provisions permit a judicial authority to refer the parties to arbitration at the request of one of the parties, where there is an arbitration agreement. Section 8 applies to arbitrations governed by Part I while section 45 applies to arbitrations governed by Part II.

Some counsel expressed the view that a party to an arbitration seated outside India may, in fact, file a suit seeking a Mareva injunction to freeze the assets of the other party. Most were of the view, however, that the remedy of an interlocutory order pursuant to the CPC is not available or ought not to be available for the following reasons:

  • where the arbitration is yet to be initiated, the suit seeking interlocutory orders pursuant to order 39 may amount to a waiver of the party's right to arbitrate in respect of the same cause of action;
  • where the arbitration is pending at the time of filing such suit, the suit will not have a separate cause of action from the pending arbitration and will not be maintainable;
  • the final relief in the suit will in fact be an interim relief. This is not permitted by Indian law;
  • the court's powers to grant interim relief pursuant to section 9 of the Act are far wider than the powers granted pursuant to the CPC and thus, in relation to arbitrations where section 9 does not apply, Indian courts are not authorised by general law to grant the interim relief envisaged by section 9;
  • in the case of Siskina v DistosCompaniaNaviera SA [1979] AC 210, an English court considered whether it had the jurisdiction to order interim measures in respect of substantive proceedings outside its jurisdiction, merely on the basis that certain assets were located within its jurisdiction. The court held that interlocutory relief does not exist in isolation. If a court does not have jurisdiction to decide a dispute in relation to the underlying cause of action, it may not grant interlocutory relief; and
  • the courts of the seat of arbitration have jurisdiction to issue interim measures in an arbitration proceeding. If Indian courts are given concurrent jurisdiction, there is a danger that parallel proceedings will be commenced before both sets of courts that may result in multiple and mutually inconsistent decisions. This will create further uncertainty and delays.

In response to the question of whether interim relief may be granted by Indian courts in arbitrations seated outside India pursuant to section 45 of the Act, most counsel replied in the negative.

At the time of writing, the judgment is awaited. All eyes are on this litigation, with investors, Indian and foreign corporations and the international legal community waiting eagerly for the Court's ruling. The Court has the opportunity to overturn Bhatia, to reduce the scope of judicial interference in arbitrations seated outside India and to improve the climate for enforcement of foreign awards in India.

Footnotes

1 Venture Global Engineering v Satyam Computer Services Ltd [2008] 4 SCC 190.

2 Indtel Technical Services Pvt Ltd v WS Atkins Plc [2008] 10 SCC 308.

3 Videocon Industries Ltd v Union of India [2011] 6 SCC 161; Yograj Infrastructure Ltd v Sang Yong Engineering and Construction Co Ltd [2011] 9 SCC 735.

4 Civil Appeal No 7019 of 2005.

This article first appeared in the September 2012 issue of the Arbitration Newsletter of the Legal Practice Division of the International Bar Association (Vol 17, No 2), and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.

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