The Arbitration and Conciliation Act, 1996 ("Act") is divided into four parts.1 First part of the Act ("Part I") deals with the arbitrations conducted in India and enforcement of such awards; second part ("Part II") deals with the enforcement of foreign arbitral awards. The question of applicability of the provisions of Part I of the Act to the international arbitrations held outside India has been pondered over by the Supreme Court of India ("Supreme Court") and various High Courts time and again.
The question was settled by the Supreme Court in the case of Bhatia International Vs Bulk Trading SA2 ("Bhatia International") by holding 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. However, the constitution bench of the Supreme Court overruled Bhatia International in the case of Bharat Aluminium co. v. Kaiser Aluminium Technical Services Inc3 ("BALCO") and held that the provisions of Part I of the Act would only apply to arbitrations seated in India.
This bulletin deals with the position of law on the applicability of provisions of Part I to foreign arbitrations since Bhatia International till date.
1. Approach of Indian Judiciary Pre-BALCO
In Bhatia International, a three-judge bench of the Supreme Court held that the provisions of Part I of the Act will be applicable to the arbitrations held outside India, unless excluded by an express or implied agreement by the parties. The relevant paragraph of the judgement is culled out below:
"32. To conclude we hold 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 compulsory 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."
The Supreme Court reaffirmed the ratio of Bhatia International in Venture Global Engineering vs. Satyam Computer Services Ltd. & Anr.4 ("Venture Global"). The ratio of Bhatia International was followed by various High Courts5 until the pronouncement of judgement in BALCO case.
Bhatia International allowed the interference of Indian courts in foreign arbitrations by giving them power, inter alia, to grant injunctions and other interim measures and even to set-aside awards made pursuant to foreign seated arbitrations. Venture Global, paved the way for much increased judicial interference by Indian courts. In Venture Global, the Supreme Court relied on its reasoning in Bhatia International to hold that the "public policy" provision in Part I of the Act, applies also to foreign awards.6 In other words, the Supreme Court held that Indian courts will have jurisdiction to set aside an award rendered outside India, for violating Indian statutory provisions and being contrary to Indian public policy. These decisions have strangled the growth of arbitration into a successful alternative dispute resolution mechanism, and have been disastrous for foreign investors, and their Indian counterparts.
2. BALCO case
Bhatia International received severe criticisms for judicial over reach and for creating significant uncertainty and delay in arbitrations that are seated outside India. Therefore, when BALCO came up before a two-judge bench of the Supreme Court they referred the matter to the Constitution bench to undo the damage caused by Bhatia International. The five-judge bench settled the law on applicability of the provisions of Part I of the Act to the arbitrations held outside India by making Part I inapplicable to the foreign arbitrations. The relevant findings of the Supreme Court in BALCO are:
- The legislature has given recognition to the territorial principle and therefore, it has enacted that Part I of the Act applies to arbitrations having their place/seat in India.7
- The absence of the word "only" from Section 2(2) of the Act8 does not change the content of the section as limiting the application of Part I of the Act to arbitrations where the place/seat is in India. It would not be applicable to the arbitrations held outside India.9
- Interpretation of Section 2(1)(e)10 makes it axiomatic that two courts have jurisdiction to adjudicate a dispute, i.e., the court within whose jurisdiction the cause of action is located and the courts where the arbitration takes place.11
- Indian Courts do not have the power to grant interim relief when the seat of arbitration is outside India.12
- Foreign arbitral awards would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Act.13
The court further clarified that agreeing to make the Indian Laws as the governing laws of arbitration, will not make Part I applicable to the case. Even if the substantive law of the arbitration is Indian Law but the seat of arbitration is outside India, the jurisdiction of Indian courts will still be barred.14
Therefore, it overruled Bhatia International and Venture Global prospectively and held that the law laid down in Bhatia International and Venture Global will only be applicable to the agreements entered into prior to September 6, 2012.15
3. Approach of Indian Judiciary Post-BALCO
The law with regard to the application of provisions of Part I of the Act to the international commercial arbitrations held outside India has changed with BALCO and consequently, the approach of the judiciary has also shifted from Bhatia International to BALCO.
3.1 Applicability of the principles laid down in BALCO
In Reliance Industries Limited and Anr. v. Union of India,16 the Supreme Court held that since the agreement was executed pre BALCO, hence the court would be bound by Bhatia International. However, the court expanded the scope of "implied exclusion" as held to be one of the grounds to exclude the jurisdiction of Indian courts in Bhatia International.
In this case, it was provided in the agreement that the juridical seat of arbitration shall be London and the arbitration agreement shall be governed by the English Law. Therefore, it was held that the parties have impliedly excluded the applicability of Part I of the Act.
Hence, it can be said that this ruling laid down two-fold test of implied exclusion, viz, (i) foreign seat and, (ii) arbitration agreement governed by foreign law.
On the similar lines, Madhya Pradesh High Court, in the case of Yograj Infrastructure Ltd. vs. Ssangyong Engg. And Construction,17 upheld that the law declared by the judgement in BALCO is prospective. In this case, the governing law for interpretation of the agreement was the law of India but the arbitration was to be governed in accordance with Singapore International Arbitration Centre Rules at Singapore. The court held that the curial law of arbitration is the law of Singapore and hence the parties have impliedly excluded the application of the provisions of Part I of the Act.
In Enercon (India) Ltd. and Ors. v. Enercon GMBH and Anr.18, the Supreme Court dealt with the issue of determination of seat of arbitration. The facts of the case reveal that the parties had agreed to resolve any dispute with respect to the contract by way of arbitration in accordance with the Indian Laws. The issue before the court was with regard to the phrase "venue shall be in London" used in the contract. The court relied on various judgements19 to conclude that "venue" of arbitration cannot be read as "seat" of arbitration. The court, while holding seat of arbitration to be India, observed that the legal seat of arbitration should not be confused with the geographically convenient place for holding hearings of the arbitration. The relevant findings of the court are reproduced below:
"In the present case, even though the venue of arbitration proceedings has been fixed in London, it cannot be presumed that the parties have intended the seat to be also in London. In an International Commercial Arbitration, venue can often be different from the seat of arbitration. In such circumstances, the hearing of the arbitration will be conducted at the venue fixed by the parties, but this would not bring about a change in the seat of the arbitration"20
BALCO also made the distinction between seat and venue. It was held in BALCO that if the arbitration agreement designates a foreign country as the "seat"/"place" of the arbitration and also select the Arbitration Act, 1996 as the curial law/law governing the arbitration proceedings then it would be a matter of construction of the individual agreement to decide whether the place such chosen would be the "seat" or "venue" for the purposes of deciding the applicability of provisions of Part I of the Act.21
Interestingly, in Konkola Copper Mines vs. Stewarts and Lloyds of India22, the Bombay High Court observed that BALCO considered various aspects of law other than the applicability of Part I of the Act. Therefore, it held that that the declaration of law to the effect that Part-I shall apply only to those arbitrations where the place of arbitration is in India shall take prospective effect but the interpretation which has been placed by the Supreme Court on the provisions of Section 2(1)(e) would apply retrospectively. Hence, entire BALCO is not applicable prospectively.
Same position of law was upheld by the Delhi High Court in the very recent case of NHPC Limited v. Hindustan Construction Company Ltd.23 It was observed by the court that only that part whereby Bhatia International and Venture Global were overruled by BALCO has been made prospective in operation. The other observations and interpretations in BALCO which do not impinge on the specific issues concerning international arbitration which were the subject matter of Bhatia International and Venture Global are not subject to the prospective declaration of law.
3.2 Effect of an addendum to the agreement post BALCO
The above cited judicial pronouncements make it clear that BALCO would only be applicable if the agreement is executed after BALCO i.e. September 6, 2012. If an agreement was entered into prior to BALCO but an amendment to the agreement is made post BALCO, which law would be applicable to such case? This question was dealt with by the Supreme Court in the case of Harmony Innovation Shipping Ltd vs. Gupta Coal India Ltd.24
In this case an agreement was entered into between the parties on October 20, 2010 in respect of 24 voyages of coal shipment belonging to the appellant from Indonesia to India. The respondent undertook only 15 voyages and that resulted in disputes. An addendum to contract was executed as regards the remaining voyages on April 3, 2013. Eventually arbitration proceedings were initiated in London and at that juncture, the appellant moved an application to the court under Section 9 of the Act seeking attachment of the cargos as an interim relief and the court issued conditional order of attachment.
The order passed by the learned Additional District Judge, was assailed before the High Court raising a contention that the impugned order was absolutely without jurisdiction and hence, unsustainable in law. The Kerala High Court set aside the impugned order by applying the principles laid down in BALCO and hence, an appeal was preferred before the Supreme Court against the impugned order of High Court.
It is pertinent to mention here that the contract provided for arbitration, in case of any dispute, in London and the parties had agreed to be governed by English Law. The Supreme Court analysed plethora of cases25 before arriving at the conclusion. The court held that since the contract was executed prior to BALCO, only an addendum to the contract was excited post BALCO and there was nothing in the addendum to suggest any arbitration, hence this case will be governed according to the law laid down in Bhatia International.
Further, the court held that the principle of implied exclusion, as enunciated in Bhatia International, will apply to the present case. Since the parties had impliedly excluded the provisions of Part I, thereby, excluding the jurisdiction of Indian courts over such arbitration. Therefore, the Supreme Court has again clarified the application of law on the arbitration agreements entered prior to BALCO.
Though, the Supreme Court did not expressly ruled that if an addendum to the agreement is executed post BALCO then the case would be governed by BALCO, however, it can be comprehended from the reasoning given by the court that if the addendum relates to the arbitration clause in the contract, then the contract will be deemed to have been executed post BALCO and the principles of BALCO will apply to such case.
3.3 Public Policy
BALCO limited the level of judicial interference in foreign seated arbitrations by taking away, inter alia, the power to grant interim relief and to set aside arbitral awards. However, it did not deal with the issue whether a foreign arbitral award can be refused enforcement by the Indian Courts on the ground of "public policy" as envisaged under section 48(2)(b)26 of the Act, which is analogous to section 34 and contains objections which can be raised by a losing party.
The courts have been entertaining the applications pertaining to set aside an award on the ground of award being opposed to the public policy of India since the enforcement of the Act. But, in the case of Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd., 27 the Supreme Court delved into the expression "public policy" to decide that an award can be set aside under section 34 if it is contrary to the public policy, which includes:
- fundamental policy of Indian law;
- the interest of India; or
- justice or morality, or
- patent illegality.
Since the expression "public policy" is used under both sections 34 and 48, the Supreme Court, in Phulchand Exports Limited v. O.OO. Patriot,28 held that "public policy" under section 48 also carries the same meaning as given to it in SAW Pipes29 case. It widened the scope of challenging the enforcement of foreign awards.
In the case of Shri Lal Mahal Ltd. v. Progetto Grano Spa,30 the Supreme Court overruled Phulchand31 case and gave narrower meaning to the expression "public policy" by omitting Patent Illegality as one of the grounds of public policy. Hence, enforcement of foreign award would be refused under Section 48(2)(b) only if such enforcement would be contrary to (i) fundamental policy of Indian law; or (ii) the interests of India; or (iii) justice or morality.
Therefore, the court has mitigated the consequences of its previously decided cases to an extent by excluding "patent illegality" from the scope of public policy. Though, this ground will still be available under section 34, but courts cannot refuse the enforcement of foreign arbitral awards seated outside in the garb of patent illegality.
BALCO excluded the jurisdiction of Indian Courts with regard to the applicability of Part I of the Act to arbitrations held outside India. However, the principle will only apply to agreements entered into after the BALCO case. Agreements executed prior to that shall continue to be governed by the law laid down in Bhatia International.
Further, BALCO has made it patently clear that recourse to the Indian court is available only if the seat of arbitration is in India. However, seat is not to be confused with the venue of arbitration. Parties can agree to have the venue of arbitration outside India but if they intend to keep India as the seat of arbitration, Part I will apply.
Keeping all the above in mind, if the intention of the parties is to have their dispute adjudicated exclusively through the agreed arbitration procedure outside India, the relevant clause should specifically say that the "seat" of arbitration is outside. Thereafter, even if the agreement is governed by laws of India, Part I of the Act will not apply.
This bulletin is prepared by Sachin (under the supervision of Ankush Goyal, Senior Associate), a 5th year law student at Hidayatullah National Law University, Raipur, who interned at PSA.
1. Part I which is headed "Arbitration"; Part II which is headed "Enforcement of Certain Foreign Awards;" Part III which is headed "Conciliation" and Part IV being "Supplementary Provisions"
2. (2002) 4 SCC 105
3. (2012) 9 SCC 552
4. (2008) 4 SCC 190
5. Nirma Ltd. vs. Lurgi Energie Und Entsorgung GMBH and Ors, AIR2003Guj145; Financial Software & Systems Pvt. Ltd. v. ACI Worldwide Corp., 2012(1)CTC337; National Aluminum Company Limited v. Gerald Metals 2004 (2) ArbLR 382 (AP); ST- CMS Electric Company Limited v. Tamil Nadu Electricity Board, OAs No. 419 and 420/2006 decided on 26.2.2007 (Mad)
6. Para 21
7. Para 63
8. Section 2(2) reads, "This Part shall apply where the place of arbitration is in India." Bhatia International held that omission of word "only" from the section suggests that the intention of the Legislature was to make provisions of Part I applicable to the arbitrations held outside India as well
9. Para 75
10. Section 2(1)(e) of the Act defines "Court" so as to mean the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes
11. Para 96
12. Para 161
13. Para 198
14. Para 196
15. Para 201
16. Civil Appeal No. 5765 of 2014 arising out of SLP (C) No. 20041 of 2013
17. Arbitration Appeal No.9/2013
18. (2014) 5 SCC 1
19. Naviera Amazonica Peruana S.A. v. Compania Internacional De Seguros Del Peru 1988 (1) Lloyd's Rep 116; Braes of Doune Wind Farm (Scotland) Limited v. Alfred McAlpine Business Services Limited (2008) EWHC 426 (TCC)
20. Para 125
21. Para 100
22. 2013 (3) ArbLR 329 (Bom)
23. FAO (OS) 131/2015 and CM 5309/2015
24. 2015 (3) SCALE 295
25. Venture Global Engg. v. Satyam Computer Services Ltd., (2008) 4 SCC 190; Indtel Technical Services (P) Ltd. v. W.S. Atkins Rail Ltd., (2008) 10 SCC 308; Reliance Industries Limited and Anr. v. Union of India (2014) 7 SCC 603; Videocon Industries Ltd. v. Union of India (2011) 6 SCC 161; Dozco India Private Ltd. v. Doosan Infracore Co. Ltd. (2011) 6 SCC 179; Yograj Infrastructure Ltd. v. Ssang Yong Engg. and Construction Co. Ltd. (2011) 9 SCC 735; Enercon (India) Ltd. v. Enercon GmbH (2014) 5 SCC 1
26. Conditions for enforcement of foreign awards
27. AIR 2003 SC 2629
28. (2011) 10 SCC 300
29. Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd., AIR 2003 SC 2629
30. Civil Appeal No. 5085 of 2013 arising from SLP(c) No. 13721 of 2012
31. Phulchand Exports Limited v. O.OO. Patriot; (2011) 10 SCC 300
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.