India: Practical Realignment Of Arbitration Law By The Supreme Court Of India: An Analysis

Arbitration in India has been one of the rather uncertain fields of jurisprudence. The lack of uniformity in the judiciary's approach, multiple levels of challenge (which are more often than not exploited as appeals) and overburdened courts suffering from chronic delays, have largely impeded India's growth as a preferred jurisdiction for international arbitration(s). One of the most discussed, criticised and written upon issues in this sphere has been the over-reaching attitude of the Indian courts to sweep within their jurisdiction arbitral proceedings "seated" outside India. The law, as it exists today, in relation to foreign seated arbitrations, arising out of agreements entered into after 6th September 2012, has been settled by the constitutional bench of the Supreme Court in Bharat Aluminium Company v Kaiser Aluminium Services Inc.1 (Balco). In the said case, the Supreme Court has held that Part 1 of the Arbitration and Conciliation Act, 1996 (Act) shall not be applicable to foreign seated arbitral proceedings.

Balco, therefore, overruled the earlier decision in Bhatia International v Bulk Trading S.A.2 (Bhatia) (which was followed in Venture Global Engineering v Satyam Computer Services Limited3) which held that even in case of arbitrations held outside India, Part 1 of the Act shall be applicable, unless the same is excluded either expressly or impliedly by the parties. The decision in Bhatia, needless to mention, led to an anomalous situation wherein the under-equipped courts in India were forced to entertain petitions under Part 1 of the Act even in foreign seated arbitrations. Further, it is also not difficult to imagine the continual hardship caused to a party who has to defend a favourable award passed in a foreign institutional arbitration before courts in India and witness the sluggish (often endless) judicial vagaries. The approach of the apex court in the Bhatia case, wherein the court assumed within its jurisdiction those arbitrations which had their seat outside India, led to the reference of the decision in Bhatia to the constitutional bench in the Balco case.

As the applicability of the decision in the Balco case was made prospective i.e., only to agreements which were entered after 6th September 2012, the agreements entered before the said date still continue to be governed under the Bhatia case regime; a regime which has been evolving constantly. The fate of such agreements, and the subsequent arbitral proceedings in view of the constantly evolving judicial approach, forms the subject of discussion in this Article.

In this regard, one may take note of the recent case of Carzonrent India Pvt. Ltd v Hertz International Limited4 (Carzonrent) decided by the Delhi High Court. This case presented the Delhi High Court with an interesting occasion to decide the applicability of Part 1 of the Act to an award under the Bhatia regime, in an International Commercial Arbitration seated at Singapore. The Respondent in the Carzonrent case had objected to the very maintainability of the petition under Section 34 of the Act, inter alia, relying on the decision of the Supreme Court in Reliance Industries Limited & Another v Union of India5 (Reliance), which was followed by the Supreme Court in a very recent judgment in Harmony Innovation Shipping Limited Vs. Gupta Coal India Limited6 (Harmony).

The Delhi High Court, in its judgment, while noting the above decisions, observed that there have been decisions subsequent to Balco where the Supreme Court had to apply the law as explained in Bhatia. However, the Court missed the significant shift in the law governing such awards, as recorded in Reliance. Contrasting to the ratio of the Reliance case, the Delhi High Court upheld the maintainability of the petition on the basis of "closest and most real connection test", while noting the following parameters:

  1. There is absolutely no connection between Singapore and the present contract except that the seat of the arbitration was in Singapore.
  2. The Petitioner is an Indian party and the Respondent is incorporated in U.S.A.
  3. The contract was to be performed entirely in India.
  4. The governing law of the contract is Indian law.

Applying the above test, the Delhi High Court observed that there was no implied exclusion (one of the requirements under the Bhatia regime) of Part 1 of the Act, and accordingly held that petition under Section 34 of the Act was maintainable.

It is interesting to note that the Reliance case, which was cited before the Delhi High Court in the Carzonrent case, noted that the crux of the issue before it was whether Part I of the Act would be applicable to the Award, given by a Tribunal seated in London. The Supreme Court further noted that it was conscious of the fact that the decision in the Balco case is prospective and that the matter at hand fell under the Bhatia regime. After a brief discussion of the relevant clauses of the agreement in question and the international jurisprudence on the subject, the Supreme Court in the Reliance case concluded that the seat of the arbitration would tantamount to an exclusive jurisdiction clause. In doing so, the Supreme Court heavily relied upon its earlier decision in Videocon Industries Limited vs. Union of India7 (Videocon) to hold that court below erred in not applying the ratio of Videocon to the case at hand. Just to recapitulate, in the Videocon case, the Supreme Court had held that where the parties agree to a foreign law as governing law of the arbitration agreement, the Indian courts did not have the jurisdiction to entertain a petition under Section 9 of the Act.

It is to be noted that the Supreme Court, while dealing with the Reliance case (falling under the Bhatia regime), conveniently extended the ratio of the Balco case by taking recourse to the reasoning of the Videocon case and certain English judgments to conclude that, seat of the arbitration would tantamount to an exclusive jurisdiction clause. The Supreme Court, accordingly excluded the applicability of Part 1 of the Act. The relevant observation of Supreme Court in the Reliance case is as follows:

"45. In our opinion, it is too late in the day to contend that the seat of arbitration is not analogous to an exclusive jurisdiction clause....."

By doing so, the Supreme Court in the Reliance case has endeavoured to negate the prospective applicability of the Balco case, decided by the constitutional bench. The Reliance case marks a major shift in law for agreements entered into under the Bhatia regime, as under the said regime, the Parties had to go a step further and prove an express or implied exclusion of Part 1 of the Act even where the seat was situated outside India. The decision in Reliance, therefore, leads to the inescapable conclusion that even under the pre-Balco regime, the seat of the arbitration, if located outside India, would confer exclusive jurisdiction on the courts of that place and Indian courts cannot assume jurisdiction over such matters.

To conclude, while the decision in the Reliance case is a welcome step in the process of aligning the Indian municipal law with international practice and procedure, the same, however, raises concerns in relation to the consistency of judicial opinion in India on this aspect. The decision in the Reliance case is likely to come at the cost of those parties who, under the Bhatia regime, preferred objections in India and are now barred by limitation, from filing objections in the courts of the country where the seat was located. One can imagine this to be a crucial factor, which the Apex Court must have considered while making the ruling in the Balco case prospective. Interestingly, the same pen has authored both, the Reliance and Balco judgments.

Therefore, the question as to whether the judgment in the Reliance case will serve the ends which it seeks to meet, or not, will be answered only in time. However, the Reliance case can, surely, be seen as a ray of hope for the countless foreign awards weakening in the registries of various courts in the India, which may finally see light of the day.

Footnotes

1. (2012) 9 SCC 552

2. (2002) 4 SCC 105

3. (2008) 4 SCC 190

4. O.M.P. 193/2013 and O.M.P. 732/2013

5. (2014) 7 SCC 603

6. AIR 2015 SC 1504

7. (2011) 6 SCC 161

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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