India: SC Overrules Bhatia International: Conversation With Intervenor's Counsel Promod Nair

Last Updated: 19 October 2016
Article by Promod Nair

A Constitution bench of the Supreme Court yesterday, delivered a landmark judgment in Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc (Balco) overruling the doctrine laid down in 2002 by the same Court in Bhatia International v Bulk Trading S.A. (Bhatia International).

In Bhatia International, the Supreme Court had held that Part I of the Indian Arbitration and Conciliation Act, 1996 dealing with the power of a court to grant interim relief, could be applied to arbitration disputes with a foreign seat unless the parties specifically opted out of such an arrangement.

The Bench said, "We are of the considered opinion that Part I of the Arbitration Act, 1996, would have no application to international commercial arbitration held outside India. Therefore, such awards would only be subject to the jurisdiction of Indian courts when the same are sought to be enforced in India in accordance with the provision contained in Part II of the Arbitration Act, 1996."

In its 190-page judgment the Bench observed, inter alia, that "No suit for interim injunction would be mainainable in India, on the basis of an international commercial arbitration with a seat outside India. Part I of the Arbitration Act, 1996, is applicable only to all the arbitrations which take place within the territory of India".

The judgement, which comes into effect prospectively, was delivered by a Constitutional Bench comprising of Chief Justice S. H. Kapadia and Justices D. K. Jain, S. S. Nijjar, Ranjana Desai and J. S. Khehar.

Bar & Bench spoke to J. Sagar Associates Dispute Resolution Partner Promod Nair, who was representing The London Court of International Arbitration, India (Intervenor) in this matter, on this landmark judgment. In this interview, Promod shares his initial reactions to the judgment, the primary main arguments in the matter, the important principles laid down by the Supreme Court and the impact of this judgment.

Bar & Bench: Your initial reaction on the judgment.

Promod Nair: In my view, the decision is an excellent outcome and one that undoes many of the mistakes of the past. The main consequence of this judgment will be to insulate arbitrations seated outside India from unwelcome interference by the Indian courts. However, if Indian courts consistently take a more sensible approach to arbitration (and hopefully this judgment will spark such a trend), that will equally give a fillip to India-seated arbitrations and the country will not be an unwelcome place to arbitrate anymore.

There is one element of the judgment that has however given rise to some serious concern. In prospectively overruling Bhatia International, the court held that the law declared by it would apply to all arbitration agreements executed after the date of the judgment. This aspect of the ruling is surprising, and a far more efficient way to conclude would have been to say that the judgment will not affect any pending proceedings but only those that are commenced after the date of the judgment.

Bar & Bench: Going back, what was the law laid down in Bhatia International that has been overruled?

Promod Nair: In Bhatia International, the Supreme Court held that Part I of the Arbitration Act 1996 also applies to arbitrations seated outside India. The court possibly arrived at this decision to ensure that a party which has an arbitration seat outside India was able to obtain interim relief in the country. However, the overbroad ratio laid down in that case had far-reaching consequences and considerably extended the scope for the Indian courts to interfere in arbitrations with a seat outside India, when the express language of the 1996 Act envisaged that they should not purport to exercise such jurisdiction. Under this line of authority, the Indian courts reopened and set aside arbitral awards rendered in arbitrations seated outside India, and have determined that they have the power to appoint arbitrators even in such arbitrations. For instance, in Venture Global, the Indian Supreme Court interpreted the Bhatia International ruling as authorizing it to set aside an LCIA award despite the fact that the arbitral award was rendered in London and that a foreign challenge to the award had already been unsuccessful. In yet another controversial extension of the Bhatia International ruling, in Intel Technical, the Supreme Court ruled that it was empowered to appoint arbitrators in the event of a deadlock between the parties even in cases where the seat of the arbitration was outside India.

The decision has been subject to widespread criticism, and was seen as an attempt by the Indian courts to exercise long-arm jurisdiction over arbitrations they had no business intervening in. Those concerns have now largely been put to rest.

Bar & Bench: What were the primary arguments both for and against Bhatia International ruling? What has the Supreme Court now held?

Promod Nair: There was a wide variety of arguments that were submitted to support the Bhatia International ruling and a rival set of arguments to counter these (which ultimately prevailed).

The pro-Bhatia arguments were essentially along the following lines:

  1. Section 2(2) of the Arbitration Act, 1996 does not preclude the application of the Act to arbitrations seated outside India
  2. Indian courts would be entitled to exercise supervisory jurisdiction over awards if the "law under which the award is passed" is Indian law
  3. The seat of the arbitration is not the sole determinant of the jurisdiction of courts under the Arbitration Act, 1996
  4. If Bhatia were to be overruled, that would leave a party remediless in India especially if interim orders are necessary to protect its rights and ensure that any award it may receive in its favour can be effectively enforced

Those arguing in favour of Bhatia being overruled contended:

  1. That section 2(2) of the Arbitration Act, 1996 barred the application of Part I to arbitrations which take place outside India. Therefore, the Indian courts can neither set aside awards made in arbitrations seated outside India, nor can they intervene in any other manner. This argument was upheld by the court which held that the Parliament intended to limit the operation of Part I of the Arbitration Act, 1996 to arbitrations seated within India.
  2. The mere fact that Indian law is chosen as the substantive law of the contract would not confer jurisdiction on the Indian courts to hear challenges to awards under the scheme of the New York Convention to which India is a party. This argument was also upheld by the court.
  3. The Indian courts do not have the power to order interim measures in cases where the seat of arbitration is outside India. That would not, by itself, leave a party remediless. This is because the parties could approach the arbitral tribunal or the courts of the seat for interim relief and it should not be assumed that such orders would not be effective to protect a party's interests. Also, where it is important for parties to have the right to approach the Indian courts for interim relief, they could achieve this simply by seating their arbitration in India. In any event, even assuming for the sake of argument that a party is effectively left remediless in a particular case in respect of an arbitration seated outside India, that cannot be a ground to make Section 9 applicable to arbitrations taking place outside India. When the language of the statute is plain and unambiguous and admits of only one meaning, even if it can lead to hardship in some cases, that cannot be a ground for the express language of the Arbitration Act, 1996 to be disregarded. These contentions were also substantially accepted by the Supreme Court.

Bar & Bench: What were some of the important principles of law declared by the Supreme Court via this decision?

Promod Nair: The court clarified the scheme of the Arbitration Act,1996 and sought to precisely delineate the jurisdiction of the courts in cases where the seat of the arbitration is in India and in cases where arbitrations are seated offshore. In the former case, Indian courts can exercise all the powers vested in them under Part 1 of the Arbitration Act, 1996 in order to supervise and/or support the arbitral process and would also be entitled to review arbitral awards. However, in cases where arbitration has a foreign seat, the role of the Indian courts is effectively confined to enforcing the arbitration agreement and also dealing with matters relating to recognition and/or enforcement of an award. In brief, the key principles laid down in the decision can be summarized as under:

  1. The principle of territoriality is the governing principle of the Arbitration Act 1996. Accordingly, the seat of arbitration determines the jurisdiction of the courts.
  2. Part I of the Arbitration Act, 1996 will apply only to arbitrations seated in India. Therefore, an Indian court will no longer be able to hear challenges to awards made in arbitrations seated offshore.
  3. The Indian courts will also not have jurisdiction to order interim measures in support of arbitration seated outside India. A suit cannot be filed for this purpose under the general law (the Code of Civil Procedure) either.
  4. The law laid down by this judgment will apply prospectively i.e., only to agreements which are concluded after the date of the judgment.

Bar & Bench: What do you think will be the impact of this decision on international commercial arbitrations?

Promod Nair: This judgment has been widely welcomed by the international arbitration community, albeit with some reservations about the prospective overruling element of the judgment. It will ensure that the Indian courts do not exercise long-arm jurisdiction over arbitrations with a foreign seat. In particular, Indian courts will no longer be able to consider challenges to foreign awards. This will reduce the scope for purely tactical challenges by a losing party (who would otherwise have had a second bite at the cherry before the Indian courts) and also considerably speed up the timelines associated with enforcing an award in India. Such delays have created serious embarrassment for India and also exposed it to liability at the international level. For instance, in the White Industries BIT arbitration, the Indian government was held responsible under international for a 10-year plus delay that a foreign investor had to encounter in seeking to enforce a foreign award in India.

Bar & Bench: Are you surprised that there is no dissenting opinion?

Promod Nair: No. The bench hearing this matter seemed fairly clear from the outset of the matter that the decision in Bhatia rested on very tenuous grounds and the law required to be restated. The bench seemed to speak with one voice during the hearing, and it was quite evident that any judgment it would hand down would be unanimous. Furthermore (and I may be biased in saying this), the errors inherent in the Bhatia International decision were so obvious that it would be very surprising if it were to be upheld by this Constitution Bench or any of its members. At the end of the day, my view is that there is little that is path-breaking in the judgment of the Constitution Bench. It simply reflects the express language, and gives effect to the legislative scheme, of the Arbitration Act, 1996 both of which were seriously distorted by the Bhatia International decision.

My own view is that the Supreme Court should not stop here. There are a number of other deeply flawed decisions that will need to be corrected- ONGC v Saw Pipes, TDM v UEDI, Patel Engineering v SBP, Radhakrishnan v Maestro Engineers etc. for Indian arbitration jurisprudence to be put on the right track. I would highly recommend readers to the roadmap laid out by Mr. Fali Nariman in his inaugural LCIA India lecture - "10 Steps to Salvage Arbitration in India"- which sets out a compelling summary of urgent tasks that the Indian judicial and legal community should embark on to revitalize arbitration in the country.

Originally published by Bar & Bench, September 7, 2012.

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.

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