"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."
-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.
In 1960, India's then Prime Minister Shri Jawaharlal Nehru and Pakistan's then President Field Marshal Mohammad Ayub Khan, under the aegis of the World Bank, inked a treaty known as the Indus Water Treaty 1960 (IWT) in order to agree upon the mechanics of utilization of the Indus Basin (mainly comprising of six rivers- Indus, Ravi, Beas, Chenab, Jhelum and Sutlej) the to each country's mutual benefit. IWT has been lauded as one of the best examples of settlement of inter-country water disputes (p 183, International water law: selected writings of Professor Charles B. Bourne). In fact, some argue that the IWT has significantly contributed to the development of international water law (including the Helsinki Rules on the Uses of the Waters of International Rivers).
Indo-Pak Dispute over the Indus River Basin:
Even pre-independence, there were differences between the Punjab (located upstream) and the Sind (located downstream, a part of the Bombay province) in relation to water sharing and building of dams in the Indus basin, especially in regard to the Sutlej river. In 1935, a commission known as the Anderson Commission/ the Indus Commission was appointed to resolve disputes relating to water allocation. Post independence, India and Pakistan had severe differences over harnessing the Indus river. On 1st April 1948, the Indian Punjab government stopped flow of the river to the Pakistani Punjab region, thus escalating tensions between India and Pakistan. In 1950, both countries considered several agreeable models of water sharing, including the joint development management and management of the Indus basin (Joint management model is not something new to International Law. In the petroleum sector, countries have, despite serious border disputes, agreed upon joint licensing of petroleum exploration blocks to private players. See, Ana E. Bastida et al, Cross-Border Unitization and Joint Development Agreements: An International Law Perspective 29 Hous. J. Int'l L. 355 (2007) and David M. Ong, Joint Development Of Common Offshore Oil And Gas Deposits: “Mere” State Practice Or Customary International Law? 93 Am. J. Int'l L. 771 (1999) for a survey of such arrangements in the petroleum sector ).
In the 1950s, both parties tried to negotiate a settlement but failed. The building of the Bhakra dam had an adverse effect on the negotiations, especially from Pakistan's point of view as Pakistan viewed the building of the dam as denying them water supplies. While Pakistan was of the view that the discordance should to be resolved by a neutral tribunal, India considered it undignified as it showed two countries' inability to resolve disputes among them.
Money: The Catalyst:
Since India and Pakistan could not resolve the issue by mutual discussions, the World Bank offered its good offices to act as mediator in resolving the dispute. Money acted as a catalyst in making India and Pakistan keep their border disputes in abeyance and enter into the IWT. When the Bhakra-Nangal projects were conceived in India, World Bank was reluctant to finance the Nangal project because the Nangal project's viability depended on the Bhakra project and Bhakra project involved the the disputed waters, which was the cause of the reluctance of the World Bank. India was asked to resolve the Indus water dispute so that World Bank could consider financing of the Bhakra as well as the Nangal projects. USA, through David Lilienthal, was considering means of resolution of the dispute (as a part of its strategy to ensure that the world, and India, does not fall into the hands of communism) and came to a conclusion that intervention by a neutral third party like World Bank would be ideal for resolving the dispute. Consequently, and after prolonged negotiations, India and Pakistan signed the IWT in 1960.
Kishanganga Dispute:
For more than thirty years, India has been planning to build a dam in the Kishanganga River (a tributary of the Jhelum river, which forms a part of the Indus basin) for producing hydroelectricity. Media reports suggest that the said project involves diversion of water from one tributary of the Jhelum river to another tributary of the same river. Pakistan alleges that India is not permitted under the IWT to do so. The main provisions in this regard are Article III , Annexure D and E of the IWT. Pakistan also has some concerns about the design of the dam. Hence, Pakistan has invoked arbitration under the provisions of the IWT. Chiefly, Article IX and Annexure G of the IWT deal with arbitration. According to Annexure G, the arbitral tribunal would consist of seven arbitrators, two arbitrators to be appointed by each party and three umpires to be appointed by special procedures detailed in Annexure G to the IWT.
Pakistan has reportedly nominated Jan Paulsson and Justice Bruno Simma as their arbitrators. Readers who follow developments in arbitration need no introduction to Jan Paulsson. He is the President of the London Court of International arbitration and an authoritative figure in international arbitration. Justice Simma is a judge of the International Court of Justice.
In this blog, we generally do not follow non-commercial arbitration as non-commercial arbitration is a huge area encompassing several fields such as disputes under investment treaties, public law disputes, sports disputes etc, making it difficult to follow. However, we will make an exception to this case and endeavour to bring updates on the case.
Note:
1. Most of the information on the history of the IWT has been taken from a Ph.D. thesis submitted by Undala Z. Alam to the Durham University. The said thesis is a comprehensive work on the subject and can be downloaded from here.
2. For a critique of the Indus Water Treaty, see Manav Bhatnagar, Reconsidering the Indus Water Treaty, 22 Tul. Envtl. L.J. 271 (2009).
Early this month, following the RNRL v. RIL judgement, we had touched upon a few important legal aspects that formed the primary basis for the RNRL v. RIL Judgement. This post goes a step further in briefly analysing the history of petroleum exploration and its implications on the petroleum regulatory regime. If one reads the RNRL v. RIL Judgements (I use the plural because there are two judgements- the majority (MAJ) by Sathasivam, J. & Balakrishnan CJI and the minority (MIJ) by Sudershan Reddy, J.), one would notice the sizeable research that went into in writing both the judgements. Kudos to the judges, their legal research assistants, counsels and experts, and to the government for assisting the judges.
The petroleum industry were eagerly awaiting the judgement for several reasons. A few of them are:
The judgement would, in a very very BIG way affect government policies regarding energy, in general, and natural gas, in particular.
Natural gas is the next big thing in the energy industry (It already has become so, I guess). We hear many gas based power plants coming up and existing power plants turning to natural gas for feedstock.
The judgement would have tremendous impact on Production Sharing Contracts entered into between the Government and companies for exploration and production of petroleum (the term includes natural gas too)
However, the judgement will have profound impact not only on the petroleum industry in India (and consequently those industries that rely on natural gas as fuel such as power, fertilizer) but also on other industries such as mining etc. Hence, it is of utmost significance to read it closely.
To (unjustifiably) generalise, the decision has given a carte blanche to the government on laying down the law and regulating the petroleum industry. The MIJ also seems to be in the same page as the MAJ on the vast powers of the Union in regulating the natural gas industry but has, very very interestingly, laid down significant restraints on the exercise of such power by the Union. The MIJ has wonderfully analysed the petroleum industry, the history of production sharing contracts and the structure of petroleum regulation in India. The MIJ reads like a law review article. It is divided into give parts and a conclusion, arranged into a neat scheme, with several footnotes and a glossary. It is structured this way:
Part I: Prologue
Part II: The Factual Matrix
Part III: Summary of the Submissions of the Parties
Part IV: Whose Gas is it Anyway? Whether a Contractor becomes the Owner of the Gas?
Part V: Whose Company is it Anyway?
Conclusion
Glossary
The Prologue begins with a couple of quotes, one from the Digest ordained to be complied by the Roman emperor Justinian I and the other by Dr. BR Ambedkar. The quotes seem to criticise the way in which the two stinkingly rich brothers entered into a private deal over a resource that essentially belongs to the nation and which ought to be used to "ameliorate the social and economic conditions in which our people live and suffer" and "to further the Constitutional goals".
In Parts II & III, the judge discusses the facts and the submission of the parties. We skip these for the time being. We go directly to Part IV as the contents of Part IV is the subject of discussion.
Regulation of Natural Gas Industry: What is striking about the MIJ is the analysis of the history, politics and economics of the petroleum industry, specifically, and of neoliberalism and privatization in general (Para 73). He has tried to place the Gas Dispute in the context of the problems that historically arose in the industry and the ways in which sovereign states reacted to them.The MIJ has identified nine kinds of mischiefs that have historically occurred:
(1) of oil companies not producing even after discovery and not relinquishing the area of exploration;
(2) of oil companies forming into pools and trusts to reduce production levels and keep the market prices at a high level;
(3) of oil companies financing armed revolutions and interfering in political aspects;
(4)of oil companies claiming ownership rights over the areas in which oil could be produced from;
(5) of oil companies claiming permanent rights to extract petroleum resources in-situ and taking the physical quantities away for marketing elsewhere;
(6) of under development of facilities for refining the petroleum and the Nation not having access to channels to market and distribute the resources;
(7) of deception by oil companies via low posted prices, and thereby reducing the royalty payments to the sovereign owners and reaping higher rewards in downstream activities that were also controlled by the oil companies;
(8) sovereign owners not having any rights to determine what levels of production can take place and without rights in management of petroleum operations; and
(9) joint off take agreements between oil companies and downstream divisions amongst them that controlled production, at an international level, keeping posted prices low so that even if sovereigns tried to take over the industry, they could be beaten down with production from elsewhere;
A survey into the history of petroleum exploitation would reveal that private parties, especially in the middle east, obtained huge areas of land for petroleum exploitation over which they claimed exclusive ownership. I recommend to readers this book which is an excellent survey of the history of the petroleum industry. Readers might also want to read this paper published by Oxford Energy on PSCs. According to the said paper, in 1901, the Shah of Persia (present day Iran) gave a Concession of 6,00,000 square km of land to William D'Arcy for a period of sixty years! The way in which this Concession was obtained is a fascinating story. The notable point in the story was that Britain seemingly gave its full support and backing to the Concession in view of its race with Russia for imperialistic dominance over Persia. In the traditional Concession Agreements, Vast geographical areas were given to the private entities (Foreign Oil Companies) and the ownership of the petroleum produced was vested with them. Due to several events post II World War, including events leading to the independence of several African, South American and Asian countries, the oil producing nations began to assert sovereignty over their natural resources including over petroleum.They started either nationalising the petroleum industry or renegotiating the Concession Agreements. Indonesia, in the sixties, popularised the concept of production sharing, where the ownership of petroleum was with the sovereign and the private entity was allowed to take a share (called as 'take') of the petroleum produced. Since then PSCs have become a popular instrument adopted by countries for allowing petroleum exploration and exploitation.
For these reasons, the MIJ points out that sovereign nations have arranged their petroleum legal regime to address these mischiefs. The MIJ emphatically states that the PSC that formed the subject of the Gas Dispute has to be seen in the context of these historical developments.
More on this, and on the constitutional and regulatory regime of petroleum exploration and exploitation in the future posts.
Abstract:
The claim that arbitrators do not create precedent recurs throughout the arbitration literature. As an empirical matter, however, it is increasingly clear that, in some arbitration systems, arbitrators often cite to other arbitrators, claim to rely on past awards, and promote adjudicatory consistency as an important system norm. Much like courts, then, arbitrators can (but do not always) create precedent that guides future behavior and provides a language in which disputants, lawyers, and adjudicators can express and resolve grievances. This Article provides a theoretical foundation for understanding the conditions under which such precedent will (or will not) arise. It identifies three considerations that may account for the development of precedent across a range of arbitration systems: (1) whether the arbitration system is structurally conducive to the creation of precedent; (2) whether arbitral precedent functions to fill gaps in (or displace) state-supplied law; and (3) whether arbitrators are likely to be viewed as legitimate producers of law in the relevant context. After explaining the relevance of these considerations, the Article explores how they might apply in different arbitration contexts and sets forth a research agenda capable of shedding light on arbitration not only as a mechanism for resolving disputes, but also as a mechanism for generating robust systems of privately made law.
Abstract:
The "third path" of justice would constitute a theoretical approach and a proposal. Having ascertained the exhaustion of exclusive systems - in the social, economic, political, thought and justice areas - the formal structuring of a model of justice is proposed, which, without foregoing the positive aspects of the current justice administration system, is built on the foundations of free will, trust, knowledge and technological development. This brief treatise deals with programme lines and courses of action of ADR/ODR - alternative methods or processes for dispute resolution for the catalytic controversies of a phenomenon which has spontaneously emerged -with the aim of yielding elements capable of formulating this new system, a synthesis of two which, paradoxically, were operative until fairly recently.
Abstract:
Do participants in mediation and arbitration have attorneys? Do they need them? Although the phenomenon of pro se litigation has received substantial attention in recent years, few commentators or policymakers have focused on these questions. The failure to focus on the possible need for representation in mediation and arbitration is based on an often unstated premise that because ADR processes are purportedly non-adversarial or less adversarial than litigation, disputants need representation less in ADR than they do in litigation. This Article suggests that the failure to focus on the possible need for representation in mediation and arbitration is fundamentally misguided. It is wrong to assume that representation is always more important or necessary in litigation than in ADR processes. Mediation and arbitration can often be quite formal , adversarial, and complex. Moreover, lawyers are not necessarily more important in complex than in simple cases. Attorneys are also needed to balance power inequalities and provide emotional support or voice to their clients. After considering relevant social science research on these points the Article provides some practical suggestions for courts, legislators, and legal services providers.
A few months back, we had posted a brief comment on a decision of the Supreme Court in IOC v. Raja Transport. The decision was relating to the validity of an arbitration clause which provided for a senior executive of one of the parties to the contract as the sole arbitrator.
In that case, the Supreme Court held valid such a clause but advised PSUs to change their practice of nominating their own senior employees as arbitrators in view of the avowed objectives of independence and impartiality of the arbitral process. The court held:
It is now well settled by a series of decisions of this Court that arbitration agreements in government contracts providing that an employee of the Department (usually a high official unconnected with the work or the contract) will be the Arbitrator, are neither void nor unenforceable
If a party, with open eyes and full knowledge and comprehension of the said provision enters into a contract with a government/statutory corporation/public sector undertaking containing an arbitration agreement providing that one of its Secretaries/Directors shall be the arbitrator, he can not subsequently turn around and contend that he is agreeable for settlement of disputes by arbitration, but not by the named arbitrator who is an employee of the other party. No party can say he will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance or is void being contrary to the provisions of the Act, and such part is severable from the remaining part of the agreement. The arbitration clause is a package which may provide for what disputes are arbitrable, at what stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what law would govern the parties etc. A party to the contract cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named Arbitrator contained in the arbitration clause.
There can however be a justifiable apprehension about the independence or impartiality of an Employee-Arbitrator, if such person was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject matter of the dispute. Where however the named arbitrator though a senior officer of the government/statutory body/government company, had nothing to do with execution of the subject contract, there can be no justification for anyone doubting his independence or impartiality, in the absence of any specific evidence. Therefore, senior officer/s (usually heads of department or equivalent) of a government/statutory corporation/ public sector undertaking, not associated with the contract, are considered to be independent and impartial and are not barred from functioning as Arbitrators merely because their employer is a party to the contract
The position may be different where the person named as the Arbitrator is an employee of a company or body or individual other than the state and its instrumentalities.
In Denel (Proprietary Limited) v. Bharat Electronics Ltd. and Anr., the arbitration clause in the contract provided for reference of disputes to Managing Director of BEL or his nominee. Despite recognition of validity of such clauses, the Supreme Court has, in Denel (Proprietary Limited) v. Bharat Electronics Ltd. and Anr., appointed Retired Justice Arijit Pasayat in view of the peculiar circumstances in the case. The peculiar cirumstance was this: Though BEL accepted liability in regard to the dispute, it could not pay Denel because the Ministry of Defence, Government of India had specifically directed BEL not to pay the money under the invoices which formed the subject matter of the dispute. If the Managing Director was appointed as arbitrator, he would be bound by the direction of his superior authorities, that is, the Ministry of Defence. Hence the court held that there was a justifiable doubt as to his independence to decide the matter fairly and appointed an arbitrator on its own
We hope to do a series on posts on the Supreme Court judgement (Reliance Judgment) in RNRL v. RIL natural gas dispute and our focus will be chiefly on Production Sharing Contracts and natural gas policy of the Government.
This post is a doctrinal prelude to the analysis of the judgements, the main purpose being to place the Reliance Dispute in the context of the prevailing constitutional regime entitling the Union to regulate petroleum resources. Here, we seek to analyse the following concepts that have been the bases for both the judgements (Justice Sudarshan Reddy formed the minority and Justice Sadasivam and CJI KG Balakrishnan constituted the majority):
Ownership of Petroleum Resources
Association of Natural Gas & Ors. v. Union of India & Ors.
Public Trust Doctrine
Ownership of Petroleum Resources:
If you go to the website of the Directorate General of Hydrocarbons and download the latest Model Production Sharing Contract, you will notice that the legal structure of PSCs for onshore (Exploration Blocks on land) and offshore Blocks (located in sea/ ocean) are a bit different. This is mainly because of the federal structure of the Indian polity as envisaged by the Constitution of India. Article 297 provides that :
(1) All lands, minerals and other things of value underlying the ocean within the territorial waters, or the continental shelf, or the exclusive economic zone, of India shall vest in the Union and be held for the purposes of the Union. (2) All other resources of the exclusive economic zone of India shall also vest in the Union and be held for the purposes of the Union.
(3) The limits of the territorial waters, the continental shelf, the exclusive economic zone, and other maritime zones, of India shall be such as may be specified, from time to time, by or under any law made by Parliament.
Thus, the ownership of all natural resources, including hydrocarbons, in the territorial waters and exclusive econonomic zones would vest in the Union and shall be used for the purposes of the Union. But what about ownership of natural resources in onshore areas? There is no express provision of the Constitution vesting ownership on States of minerals found under lands within their boundaries. However, it may be noted that the right to minerals (including hydrocarbons in any form) in the States vest with the States. Many States have enacted laws vesting rights over minerals found within their territory with the State Government. For example, see S. 41 of the Punjab Land Revenue Act, 1887; S. 70 of the Karnataka Land Revenue Act; S. 69A of the Bombay Land Revenue Code, 1879 (as applicable to the State of Gujarat).Notwithstanding the same, the power to enter into contracts with regard to the exploration and exploitation of minerals is with the Union, probably because of the fact that Petroleum and related substances are resources that may be found only in specific geographical regions in India (like Mumbai High, Gujarat, KG Offshore etc) but are resources of national importance and no single State or a group of States should claim monopoly overt them. Just imagine a situation where the Union has no right over oil produced in, say Gujarat, or say KG region. Such a situation would result in few states enjoying access to fuel while many parts of India would be denied effective access to fuel. In order to overcome such a situation, Petroleum resources were placed within the domain of the Union. This, it may be noted, was not an innovation attributable to the makers of our Constitution. Section 100 r/w Entry 36 of Schedule VII to the Government of India Act, 1935 placed regulation of mines and oilfields within the Federal domain. Entry 36 read:
"Regulation of mines and oilfields and mineral development to the extent to which such regulation and development under Federal control is declared by Federal Law to be expedient in the public interest."
Association of Natural Gas & Ors. v. Union of India & Ors.
In 2000, Gujarat enacted the Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act, 2000 to regulate transmission, supply and distribution of natural gas in the interests of the general public and to promote gas industry in Gujarat, and for that purpose, to establish a gas regulatory authority. In 2001, a reference was made by the President of India under Article 143(1) of the Constitution of India, asking the Supreme Court to answer the following questions:
Whether natural gas in whatever physical form including Liquefied Natural Gas (LNG) is a Union subject covered by Entry 53 of List I and the Union has exclusive legislative competence to enact laws on natural gas. (sic ?)
Whether States have legislative competence to make laws on the subject of natural gas and Liquefied Natural Gas under Entry 25 of List II of the Seventh Schedule to the Constitution.(sic ?)
Whether the State of Gujarat had legislative competence to enact Gujarat Gas (Regulation of Transmission, Supply and Distribution) Act 2001.(sic ?)
Entry 53 List I read:
"Regulation and development of oilfields and mineral oil resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable."
Entry 25 List II read:
"Gas and gas works"
Though a literal reading of the above entries to Schedule VII of the Constitution led to a conclusion that natural gas would be covered under Entry 25 of List II, the Constitution Bench of the Supreme Court, after going through various definitions of petroleum and the nature of natural gas, held:
Natural Gas including Liquefied Natural Gas (LNG) is a Union subject covered by Entry 53 of List I and the Union has exclusive legislative competence to enact laws on natural gas.
The States have no legislative competence to make Saws on the subject of natural gas and liquefied natural gas under Entry 25 of List II of the Seventh Schedule to the Constitution.
The Gujarat Gas (Regulation of Transmission, Supply & Distribution) Act, 2001, so far as the provisions contained therein relating to the natural gas or liquefied natural gas (LNG) are concerned, is without any legislative competence and the Act is to that extent ultra vires of the Constitution.
Notably, the Constitution Bench, of which the CJI KG Balakrishnan formed a part, held:
"For free and smooth flow of trade, commerce and industry throughout the length and breadth of the country, natural gas and other petroleum products play a vital role".
Thus, the Supreme Court, even in 2004, was in favour of exclusive control of natural gas by the Union. The Reliance Judgement on ownership of natural gas is an unequivocal reiteration of the said position of the Supreme Court: that no other entity other than the Union has control over natural gas.
The Association of Natural Gas judgement was a landmark judgement not because it laid down something novel but because it reiterated the Union's unequivocal, absolute jurisdiction to regulate petroleum and natural gas. If we look at the existing laws regulating the petroleum sector, they are heavily in favour of the Union. This has led to many federalism related issues, especially relating to determination of royalty that the states would be entitled to.
Public Trust Doctrine:
The doctrine of public trust was first introduced into the Indian jurisprudence in MC Mehta v Kamal Nath where it was held that certain natural resources are held by the state in trust for the public and it would be unjust to let them to be harnessed for private gain. State merely holds these resources on behalf of public.
The doctrine was borrowed from the American jurisprudence, which borrowed it from the English common law, which in turn borrowed it from Roman law. While the Supreme Court (and the lawyers who argued for its introduction) must be appreciated in introducing the doctrine, we need not have had to draw the doctrine from American and the Roman Law for inspiration on state restrictions in dealing with natural resources. The history of the Indian sub-continent provides ample support that the doctrine of public trust existed even in ancient India. For example, Arahat Mahinda, son of King Ashoka, and founder of Buddhism in Sri Lanka, had admonished the King of Sri Lanka for hunting:
I am sure that considering the fact that the tribal king in ancient India was regarded as the protector of cattle, the public trust doctine would have prevailed atleast in some points of history in the Indian Sub-continent. I leave it to legal historians in India (by the way, are there any?) to find out if public trust doctrine prevailed in India. The point about studying Indian legal history (or histories?) is that it would provide rich conceptions and other tools in dealing with several problems that we face today. We should also look into Indian legal history and also the legal history of other Civilisations to find how these people constructed law and society to provide answers to various problems.
Getting back to the public trust doctrine in present day India, in Intellectuals Forum, Tirupathi v. State of A.P. and Ors., the Supreme Court cast doubts on the inalienability aspect of the public trust doctrine. It held that:
“...[T]he doctrine does not exactly prohibit the alienation of the property held as a public trust. However, when the state holds a resource that is freely available for the use of the public, it provides for a high degree of judicial scrutiny upon any action of the Government, no matter how consistent with the existing legislations, that attempts to restrict such free use. To properly scrutinize such actions of the Government, the Courts must make a distinction between the government's general obligation to act for the public benefit, and the special, more demanding obligation which it may have as a trustee of certain public resources.” (Emphasis mine)
The Supreme Court, quoting, Joseph L. Sax, The public Trust Doctrine in Natural Resource Law: Effective Judicial Intervention, 68 Mich. L. Rev. 471-566 (1970) laid down the following restrictions on the state regarding resources held in public trust:
the property subject to the trust must not only be used for a public purpose, but it must be held available for use by the general public;
the property may not be sold, even for fair cash equivalent
the property must be maintained for particular types of use. (i) either traditional uses, or (ii) some uses particular to that form of resources.
This is the legal background in which the Reliance dispute will be analysed.
A Bench of the Supreme Court, consisting of CJI KG Balakrishnan & Justices Deepak Verma and BS Chauhan, has laid down seven guidelines for writing judgements. See this post in the Legal Perspectives blog regarding the same.
The previous post in this blog contained a summary of the RNRL v. RIL Judgement. You can download the RNRL v. RIL Judgement which the Supreme Court delivered this morning from here. I got it from JUDIS.
I am sure most of us are aware of the RIL-RNRL natural gas dispute. The matter was pending before the Supreme Court for a long time. Judgement in the case was reserved in mid-December. The SC has delivered judgement this morning. News reports suggest that the case has been decided in favour of RIL by a 2:1 majority. Business Standard reports the following as the summary of the judgement:
"RIL does not have absolute marketing right over gas; price subject to government approval: SC. Family MoU not legally binding, says SC in RIL-RNRL case. Terms of production sharing contract will have over-riding effect: SC.
RIL directed to initiate in six weeks, re-negotiation with RNRL in terms of Gas Sale Master Agreement so that right of RNRL is safeguarded.
Judgement in RIL-RNRL gas dispute case majority verdict delivered by Chief Justice K G Balakrishnan; Justice P Sathasivam reads out verdict. Gas is government asset till it reaches consumer: SC.
Supreme Court holds petition filed by RNRL before company court as maintainable, as court had sanctioned the original demerger scheme.
Ambani family MoU technically not binding, as it's between two brothers - Anil and Mukesh and mother Kokilaben, and three million shareholders of RIL-RNRL did not know its contents.
Ambani family MoU can be a means of arriving at suitable arrangement but cannot be the sole means for a suitable arrangement, says Justice Sathasivam.
Since MoU not made public, it doesn't fall in corporate domain: SC in RIL-RNRL gas dispute case. Supreme Court rules in favour of RIL by 2-1. Chief Justice backs Sathasivam's verdict. Production Sharing Contract meant for regulating supply of gas and under PSC it's for government to evaluate price of fuel. On Govt role, SC says since gas is national asset public interest has to be looked into first. Suitable arrangement must not be suitable only for RIL, but also for shareholders of RNRL and it's RIL's obligation to look after it."
In my last post titled 'Review of the Consultation Paper on Proposed Amendments to the Arbitration and Conciliation Act, 1996 - Part I', I had criticised the law as laid down by the Supreme Court extending the applicability of Part I of the Arbitration and Conciliation Act, 1996 to even international commercial arbitrations held outside India. I had forgotten to mention another aspect of the issue: One result of such extension was that it allowed a party to challenge an award even if the seat of arbitration resulting in the award was outside India (Venture Engineering). What was held in Bhatia International and Venture Engineering was that parties could, while choosing a Non-Indian seat , contract out the applicability of Part I expressly or impliedly. When Venture Engineering held that even Section 34 would apply to such Non-Indian international commercial arbitrations and arbitral awards could be set aside for violation of public policy, it had the effect of creation of a new conception of public policy, one that is probably not found in any other jurisdiction- public policy that could be 'contracted out' at the option of a party. In other words, an Optional public Policy... Sounds oxy'moronic', isn't it?
Mr. Bhushan Shah, a reader of this blog, has agreed to post a descriptive comment on the Consultation Paper published by the law ministry a month back on the proposed amendments to the Arbitration and Conciliation Act, 1996. Mr. Shah is an International Lawyer at Drew & Napier LLC, Singapore. You can find his comment on the Consultation Paper below:
Consultation Paper: Proposed Changes in Arbitration Law in India
Justice delayed is justice denied. Litigation in India is a prolonged process and it takes years for commercial disputes to be resolved before the courts. The Indian Parliament enacted the Arbitration and Conciliation Act, 1996 (‘Act’) with the objective to provide speedy disposal of the dispute with the least amount of intervention by the judicial system. However certain judgments by the High Courts and Supreme Court of India (collectively referred as ‘Courts’) allowed judicial intervention in arbitration proceedings and curtail party autonomy. These judgments have been widely criticized by practitioners world wide as it invites unnecessary interference from the courts and defeats the main objective of the Act.
The Union Ministry of Law and Justice (‘Law Ministry’) recently released a consultation paper (‘the Paper’) proposing key amendments to bring the Act into parity with international standards. The key amendments proposed in the Paper by the Law Ministry are as follows:-
Application of Part I – Section 2(2) of the Act: Existing Section 2(2) in Part I of the Act reads as follows: “This part shall apply where the place of arbitration is in India”. There are conflicting views of the Courts about the applicability of Part I in respect of international commercial arbitration, where the seat of arbitration is not in India.
Supreme Court in the case of Bhatia International v Bulk Trading[(2002) 4 SCC 105] held that in the absence of the word ‘only’ in Section 2(2), Part I of the Act would apply to arbitration held outside India, so long as the law of India governed the contract. Accordingly, the Supreme Court granted interim measures with respect of disputes which the parties had agreed to submit for arbitration to the International Chamber of Commerce in Paris.
In Venture Global Engineering v Satyam Computer Services Limited [(2008) 4 SCC 190], the Supreme Court, following the Bhatia International decision, held that Part I of the Act does apply to foreign awards and parties may make an application under Section 34 of the Act to set aside such awards.
In order to curtail interference from the Courts, the Paper proposes to amend Section 2(2) of the Act as follows:
“(2) This part shall apply only where the place of arbitration is in India. Provided that provisions of section 9 and 27 shall also apply to international commercial arbitration where the place of arbitration is not in India, if an award made in such place is enforceable and recognized under Part II of this Act.”
Thus, the proposed amendment seeks to exclude the applicability of all the provisions of Part I of the Act except for Section 9 (Application for interim reliefs) and Section 27 (Court Assistance in taking evidence) for arbitrations held outside India. Further, from the reading of the provision, it appears that Parties cannot contract out of Section 9 and Section 27 of the Act.
Amendment of Section 11– Appointment of Arbitrators: Under the current Act, the power to appoint an arbitrator is vested in the Chief Justice of the Supreme Court (for international arbitration), or the Chief Justice of the High Court (for domestic arbitration). The Paper proposes to vest these powers in the Supreme Court and High Court itself, rather than to the Chief Justices of these institutions, as well as not allowing for appeal from the orders of these Courts. Further the Paper proposes to introduce the following two sub-sections:
Sub-section 13 - Institutional Arbitration: Making it mandatory for the Courts to refer the appointment of an arbitrator to an arbitration institution in respect of a commercial dispute of specific value. The proposed law aims to shift the focus from ‘ad hoc arbitration’ to ‘institutional arbitration’.
Sub-section 14 – Appointment of an arbitrator within 60 days: The appointment of an arbitrator by the Courts shall be made as expeditious as possible and endeavour shall be made to dispose the matter within 60 days from the date of service of notice on the opposite party.
Amendment of Section 28 – Rule applicable to the substance of the dispute: Existing Section 28(3) of the Act provides that the arbitration tribunal shall decide the dispute in accordance with the terms of the contract and also after taking into account the usage of the trade applicable to the transaction. In ONGC v Saw Pipe Limited [(2003) 5 SCC 705], the Supreme Court held than an award that is contrary to the terms of the contract would be patently illegal and could be challenged under Section 34 of the Act. The Paper proposes to amend Section 28(3) as follows:-
“In all cases, the arbitration tribunal shall take into account the terms of the contract and trade usage applicable to the transaction.”
Thus the Paper seeks to clarify that an arbitral tribunal only needs to take into account the terms of the contract. The proposed amendment should lead to less interference by the Courts on the ground that the award is against the terms of the contract.
Amendment of Section 34 – Providing meaning to public policy: In the ONCG case, the Supreme Court under Section 34(2)(b)(ii) of the Act opined that the expression ‘public policy’ should be given a broader meaning and accordingly held that an arbitral award is patently illegal when it is contrary to the terms of substantive provisions of law, or a provision of the Act, or against the terms of the contract. To nullify the effect of this case, the Paper proposes to insert Explanation II to Section 34 and narrow the scope of public policy as a ground for setting aside an award. Accordingly, an award will be considered to be in conflict with public policy only when it conflicts with the following:
the fundamental policy of India; or
an interest of India; or
justice / morality.
The proposed amendment also seeks to harmonize Section 34 with that of Sections 13 and 16 of the Act. The Paper suggests an additional sub-clause under Section 34, one that provides a ground of challenge to an award on the basis of rejection of a plea of bias under Section 13 of the Act as well on the ground of lack of jurisdiction under Section 16.
Insertion of new Section 34A- Additional ground of challenge an award on patent and serious illegality: The Paper proposes to insert an additional ground of ‘patent and serious illegality of a domestic arbitration award’. The proposed Section 34A clarified that while considering such a ground, the Court must be satisfied that such an illegality has caused or is likely to cause substantial injustice to the applicant. However, this author believes that the proposed section is unwarranted and may invite unnecessary intervention from the Courts.
Substitution of Section 36 – Enforcement of the Award: Theexisting Section 36 of the Act provides that enforcement of the award will be automatically stayed once an application is made to set aside the award. However, this has led to an increase in the misuse of the provision whereby the party filing an application does so only for the purpose of delaying the execution of the award. In order to put a stop to this practice, the Paper proposes to substitute Section 36. The substituted section does not provide for an automatic stay on the enforcement of award unless a separate application is filed for grating the stay and the Court agrees to stay the award by recording its reasons. The substituted section further provides that while granting stay of the operation of the award, the Court may also grant interim measures to protect the interests of the party in whose favour the award is passed.
Implied arbitration clause in commercial contracts of high consideration: Further, with a view to promote institutional arbitration and avoid pleas regarding validity of the arbitration agreement, the Paper proposes that with respect of commercial contracts of high threshold value (i.e. Rs 5 crore or more), there should be a deemed arbitration clause unless the parties expressly and in writing agree otherwise.
The Paper also proposes following miscellaneous amendments:
An amendment of Section 12- Disclosure of interest by the Arbitrator;
An amendment of Section 31- Change in the interest rate from 18% to 1% higher than the current rate of interest fixed by the Reserve Bank of India; and
An amendment to the definition of ‘Court’ in Section 2: A challenge against an arbitral award involving a commercial dispute shall lie before the Commercial Division of the High Court under Section 34 and an appeal against an order passed by the Commercial Division of the High Court shall lie directly before the Supreme Court.
The Law Ministry has invited suggestions on the feasibility and necessity of the proposed amendments within 30 days of release of the Consultation Paper.
Comments
Speedy disposal of commercial disputes is one of the essential requirements for growth and development in the Indian economy. The proposed amendments to curtail Court intervention and to promote institutional arbitration are steps in the right direction. Lets us hope that the Law Ministry, after taking suggestions from industry and legal practitioners, quickly amends the Act to improve business confidence and certainty.
- Bhushan Shah
[The author is working as an International Lawyer at Drew & Napier LLC, Singapore. The views expressed herein are his own.]
On 8th April 2010, the Ministry of Law and Justice (“Ministry”) released a consultation paper on the proposal to amend the Arbitration Conciliation Act, 1996 ("ACA" or "Act"). The CP has identified the below areas of the ACA that require reforms. They are:
Applicability of Part I of the Act to international commercial arbitration (ICA) held outside India.
Inclusion of the framework of institutional arbitration in the procedure of appointment of arbitrators under Section 11 over what is already in existence.
Disclosure by an arbitrator of the existence of past/ present relationship with parties/ their counsel that are likely to give rise to justifiable doubts as to the arbitrator's independence or impartiality
Mandate on the arbitral tribunal to take into account the terms of the contract and trade usage applicable to the transaction.
Reduction in the Interest Rate that could be awarded by the arbitral tribunal
Nullification of the test of patent illegality in the ground of public policy under Section 34(2)(b)(ii) for setting aside arbitral award and insertion of Section 34A enabling a court to set aside a non-international commercial arbitral award on the ground of patent and serious illegality that has caused or is likely to case substantial injustice
Harmonisation of Section 34 with Section 13 and 16.
Insertion of an additional procedural step of filing an application to stay enforcement/ operation of an award by an applicant under Section 34.
Constitution of an arbitration division in the High Courts for dealing with applications for setting aside arbitral awards under Section 34.
Deemed arbitration clauses in high value commercial contracts
We had promised in this blog that we would be commenting on the same. This post briefly discusses the first of the ten proposals of the Consultation Paper (CP) and critically analyses the same.
Applicability of Part I of the Act to International Commercial Arbitration (ICA) held outside India:
The law as it stands today on the applicability of Part I of the Act to ICA held outside in India is this: Part I would be applicable to ICA held outside India. But parties could exclude the applicability of Part I expressly or impliedly.
The CP proposes to amend the law to ensure that:
Part I applies only to arbitration held in India.
However, Sections 9 (Interim measures, etc. by court) and 27 (Court assistance in taking evidence) would be applicable even if the seat of arbitration is a non-Indian territory in which, if an award is passed therefrom, it would be recognisable and enforceable under Part II of the Act.
The rationale for the said amendment seems to be the following:
There exists a contradiction in the decisions in that certain decisions (Bhatia International, for example) hold that Part I would apply to international commercial arbitration held outside India (hereinafter “foreign arbitration”) while certain decisions [Shreejee Traco(I) Pvt. Ltd. Vs. Paper Line International Inc (2003) 9 SCC 79] hold otherwise.
According to the widely accepted seat theory, the laws of the forum or the seat of arbitration govern the arbitration. Hence, Part I should not be applicable to arbitrations whose seat is not in India. However, the language of Part I does give rise to “practical problems” as it does not enable a court to grant interim orders in case the seat is outside India or the assistance of an Indian court to obtain evidence.
Bhatia International was wrong in stating that Part I would apply to foreign arbitrations because a reading otherwise would mean that foreign arbitrations in non-convention countries are left without remedy under the Act because the said decision ignores the principle of reciprocity in international law as recognised by the Supreme Court in Badat & Co. v, East India Trading Co. (AIR 1964 SC 538: [1964] 4 SCR 19: MANU/SC/0011/1963)
In order to appreciate the changes suggested by the Ministry, it would do well to recap and see why the three Bench court in Bhatia International went around the language of Section 2(2) to hold that Part I of the Act would apply to foreign arbitrations.
The apex court in Bhatia International held that if Part I was held not applicable to foreign arbitrations:
There would be no law governing arbitrations held in non-convention countries (Non-convention countries are those countries which are part of neither the Geneva Convention nor the New York Convention. Egs. Republic of Yemen, Belize, Comoros, East Timor, Eritrea, Ethiopia, Fiji, North Korea, Libya, Namibia, Somalia, Sudan, Tajikistan, Turkmenistan)
it would lead to an anomalous situation where Part I would apply to Jammu & Kashmir in all ICA (including foreign arbitration) but for the rest of India Part I would not apply to foreign arbitration.
Sections 2(4) and (5) would be in conflict with Section 2(2) of the Act
a party would have no remedy to obtain interim relief even if the assets which are the subject matter of such application for interim relief is in India.
On the basis of the above, the court went on to hold:
“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." (Paragraph 32)
Several practitioners had criticised the reasoning in Bhatia International as grossly erroneous. The CP rightly points out that the apex court failed to take note of the “well established principle” of reciprocity in enforcement of arbitral awards. The CP even points out that the Supreme Court has, in the past, recognised the said principle in Badat & Co. v, East India Trading Co. (AIR 1964 SC 538: [1964] 4 SCR 19: MANU/SC/0011/1963). Reciprocity is one of the fundamental principles of international law and the court should have taken the same into consideration. Even subsequent decisions, both by the High Courts and the later Benches of the Supreme Court have accepted the reasoning of Bhatia International and have considered non-applicability of the Act to arbitrations in non-convention countries as an error on the part of the drafters. It is submitted that the omission to consider arbitration in non-convention countries was deliberate and in accordance with sound principles of international law, which, unfortunately, the Indian judiciary did not and does not realise. For example, in Bharti Televentures Ltd. v. DSS Enterprises Prv. Ltd. [(2005(2) Arb. LR 561 (Delhi)], the Delhi High Court comments:
“[T]here may be instances where one of the parties is not of Indian nationality and is also not a citizen of a country which is not a signatory either of the New York Convention or the Geneva Conventions. In actuality the drafters have overlooked the possibility of an international arbitration between an Indian party and another from a `non-convention' country.” (Paragraph 5)
Against Bhatia International, the CP rightly points out:
“[I]t is well established that the awards rendered in countries with which India does not have reciprocal arrangements cannot be enforced in India as if it were a decree.”
They have to be brought before the civil court for enforcement.
In fact, Sections 44 and 53 (both reproduced below) of Part II of the Act clearly recognise reciprocity.
Section 44: Definition. -In this Chapter, unless the context otherwise requires, “foreign award” means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960-
(a) In pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and
(b) In one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.” (emphasis added)
Section 53:
“Interpretation. -In this Chapter “foreign award” means an arbitral award on differences relating to matters considered as commercial under the law in force in India made after the 28th day of July, 1924, -
(a) In pursuance of an agreement for arbitration to which the Protocol set forth in the Second Schedule applies, and
(b) Between persons of whom one is subject to the jurisdiction of some one of such Powers as the Central Government, being satisfied that reciprocal provisions have been made, may, by notification in the Official Gazette, declare to be parties to the Convention set forth in the Third Schedule, and of whom the other is subject to the jurisdiction of some other of the Powers aforesaid, and
(c) In one of such territories as the Central Government, being satisfied that reciprocal provisions have been made, may, by like notification, declare to be territories, to which the said Convention applies, And for the purposes of this Chapter an award shall not be deemed to be final if any proceedings for the purpose of contesting the validity of the award are pending in the country in which it was made.” (emphasis added)
Hence, Bhatia International and the later courts were grossly wrong in ignoring the principle of reciprocity. Reciprocity means several things in International Law. However, in the context under discussion, reciprocity or reciprocal treatment by state ‘A’ refers to granting certain benefits (whether by virtue of a treaty or otherwise) to a state ‘B’ which has extended such or similar benefits to state ‘A’. Provisions of this nature are not specific to the 1996 Act. The Indian Legislature has, in the past, enacted laws affording a particular treatment to certain states which have granted same or similar treatment to India. See, for example, S 44 of the Designs Act, 2000; Ss. 105, 105L, Chapter VIIA of the Code of Criminal Procedure, 1973; S 7(1)(ic) of the Advocates Act, 1961; S. 14 of the Notaries Act, 1952; S. 10(4)(b) of the Dentists Act, 1948; S. 10 of the Indian Nursing Council Act, 1947, S. 118 of the Government of India Act, 1935.
In the context of Part II of the Act [as well as the Arbitration (Protocol and Convention) Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961], reciprocity meant that the special treatment (especially of treating an award as a decree) would be applicable to arbitral awards from states which are contracting parties to the respective Convention. In this regard, it may be noted that as per Article I(1) the Convention would apply to any “arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought”, which would include even a State not party to the Convention. However, Article I(3) of the New York Convention allowed signatories to make what is generally known as the “reciprocity reservation”. Article I(3) provides:
“When signing, ratifying or acceding to this Convention, or notifying extension under article X hereof, any State may on the basis of reciprocity, declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State. It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration.” (emphasis mine)
India has made the reciprocity reservation as well as the commercial reservation. Thus, the Executive (by taking the reciprocity reservation) and the Legislature (by enacting the same in Act) had intended to confer the benefits of the Conventions only to territories which have been signatories to one of the Conventions and have enacted reciprocal provisions to the satisfaction of the Central Government. But the Judiciary has abrogated this decision and has treated Non-Convention awards more favourably than even the Convention awards that could enforcement under Part II of the Act.
Theoretically, by imposing an additional requirement of compliance with S. 34, India may be in breach for the New York Convention because it adds an additional requirement of compliance of Section 34 on the basis of which a foreign award could be enforced. This was not envisaged in the New York Convention.
The second justification that Bhatia International puts forth is that if Part I is not held to apply to Foreign Arbitrations, it would lead to an anomalous situation where Part I would apply to Jammu & Kashmir in all ICA (including foreign arbitration) but for the rest of India Part I would not apply to foreign arbitration. There is no anomaly as feared by the court. Relevant portion of Section 1(2) of the Act provides: "It extends to the whole of India:
Provided that Parts, I, III and IV shall extend to the State of Jammu and Kashmir only in so far as they relate to international commercial arbitration or, as the case may be, international commercial conciliation."
The Supreme Court’s justification was that if Part I can apply to Jammu & Kashmir as regards international commercial arbitrations held outside India, it would be absurd to contend that Part I would not apply to international commercial arbitrations held outside India. Such an interpretation is not in accord with the purpose behind which Proviso to Section 1(2) was enacted. The Supreme Court has assumed, wrongly, that Part I would apply to Jammu & Kashmir as regards international commercial arbitrations held outside India. The said proviso ought to be read in conjunction with Section 2(2) which provides that Part I would apply where the place of arbitration is in India. Section 2(2) reads: “This Part shall apply where the place of arbitration is in India.” This would mean that Part I would apply to international commercial arbitrations held in Jammu and Kashmir and not to international commercial arbitrations held outside India. Further, the purpose of the proviso ought to be understood from the perspective of the Constitution of India. The Constitution of India (Article 370) empowers the Parliament of India to legislate only on certain matters in respect of Jammu & Kashmir. Consequently, on matters relating to domestic arbitration in the State of Jammu & Kashmir, Jammu & Kashmir has its own Arbitration law known as the Jammu and Kashmir Arbitration and Conciliation Act, 1997 (“J &K Act”). The Long Title provides:
An Act to consolidate and amend the law relating to domestic arbitration, to define the law relating to conciliation and for matters connected therewith or incidental thereto .
Since the matters relating to foreign relations and enforcement of treaties as per the Constitution of India are matters on which the State of Jammu and Kashmir is not competent to enact, laws Proviso to Section 1(2) has been made applicable to Jammu & Kashmir. Hence, this justification to extend Part I to ICA outside India falls flat.
The third justification that Bhatia offered was that if Part I is not made applicable to ICA outside India, Sections 2(4) and (5) would be in conflict with Section 2(2) of the Act. The Court held:
The words "every arbitration" in sub- section (4) of Section 2 and the words "all arbitrations and all proceedings relating thereto" in sub-section (5) of Section 2 are wide. Sub-sections (4) and (5) of Section 2 are not made subject to sub- section (2) of Section 2. It is significant that sub-section (5) is made subject to sub-section (4) but not to sub-section (2). To accept Mr. Sen's submission would necessitate adding words in sub-sections (4) and (5) of Section 2, which the Legislature has purposely omitted to add viz. "Subject to provision of sub-section (2)". However read in the manner set out hereinabove [i.e., reading Part I as applicable to arbitrations held outside India] there would also be no conflict between sub-section (2) of Section 2 and sub-sections (4) and/or (5) of Section 2.
Thus, according to the Supreme Court, the terms “every arbitration” in S. 2(4) and “all arbitrations” in S. 2(5) encompass all kinds of arbitration, whether within India or outside India. Such a view is wrong. The purpose of S. 2(4), reproduced below, was to apply 1996 Act to arbitration under other enactments and not for arbitrations whose seat was outside India.
(4) This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except in so far as the provision of this Part are inconsistent with that other enactment or with any rules made thereunder;
Some examples of other statutes providing for resolution of disputes through arbitration are Electricity Act, 2003, S. 10A of the Industrial Disputes Act of 1947, etc. Thus S. 2(4) in no way warrants inclusion within its compass of arbitrations held outside India.
Section 2(5) provides:
Subject to the provisions of sub-section (4), and save in so far as is otherwise provided by any law for the time being in force or in any agreement in force between India and any other country or countries, this Part shall apply to all arbitrations and to all proceedings relating thereto. The purpose of insertion of S. 2(5) in the statute needs to be seen. The corresponding provision in the UML, Article 1(1) was to make subject the law adopted from the UML to any treaty between the adopting nation and a foreign country. S. 2(5) was intended to save a treaty/ law providing for contours of application of a treaty dealing with arbitration or conciliation [that is, treaties between India and other countries]. This view is reiterated by this lengthy quote from the Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration: Report of the Secretary-General on the corresponding Article 1(1) of the UML (A/CN.9/264) :
“9. According to paragraph (1) of article 1, "this Law" applies "subject to any multilateral or bilateral agreement which has effect in this State". [At that time (during the drafting of the Model Law), the text of Article 1(1) was slightly different from what was finally adopted in the UML as 1(1). Article 1(1) at that time read: “This Law applies to international commercial arbitration, subject to any multilateral or bilateral agreement which has effect in this State.” (emphasis supplied)] [This] has been retained as a useful declaration of the legislative intent not to affect the validity and operation of multilateral and bilateral agreements in force in State X.
10. The proviso would be of primary relevance with regard to treaties devoted to the same subject-matter as that dealt with in the Model Law. Prominent examples of such multilateral treaties are the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958; hereinafter referred to as the 1958 New York Convention), the European Convention on International Commercial Arbitration (Geneva, 1961; hereinafter referred to as the 1961 Geneva Convention), the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington, 1965; hereinafter referred to as the 1965 Washington Convention) and the Inter- American Convention on International Commercial Arbitration (Panama, 1975).
11. It should be noted, however, that the scope of the proviso is wider in that it also covers treaties which are devoted to other subject-matters but contain provisions on arbitration. An example would be the United Nations Convention on the Carriage of Goods by Sea, 1978 (Hamburg)...”
Hence, there seems to be no conflict between S. 2(2) on the one hand and Ss. 2(4) and (5) on the other.
The fourth, and the most telling, justification that the court afforded in Bhatia International was that Part I did not provide for interim measures in international commercial arbitrations held outside India. This, it may be noted, was the chief question that confronted the court in Bhatia International. Prior to Bhatia International, there was discordance between the High Courts on the power of a court to order interim measures of protection in ICA held outside India. Some High Courts held that the statute afforded no power for awarding interim measures of protection in such cases, while others held that since Part I was applicable even to ICA outside India, a court could, under S. 9, order interim measures to be taken in such cases. In Bhatia International, it was argued that since Article 1(2), of the UML which allowed for interim measures of protection even if the seat of arbitration was not in the country where the application for such measures is sought, was not adopted in India, it was the legislative intent not to extend the power of court to order interim measures in case of arbitrations held outside India. Though this was emphatically rejected by the Supreme Court, there is tremendous force in this contention. Contrary to the judiciary’s opinion that the Act was not a well drafted legislation, it is submitted that the 1996 Act is a carefully crafted legislation. Though the said law is an adoption of UML, any standard text book on arbitration will tell you that there are several small but pro-arbitration changes which were meant to ensure speedy and efficient arbitration. Such a carefully drafted law not providing for interim measures might not have been an unintended or erroneous omission. The lacuna may have been deliberate. By not providing for interim measures for ICA held outside India, the drafters might have intended to encourage, albeit forcefully, parties to choose India as the seat of arbitration. The motive of the drafters might have been to aid Indian parties to avoid costly arbitration outside India, and to develop the arbitration industry in India.
In any case, Post-Bhatia International, it has been the recommendation of many that the law ought to be amended to restrict the applicability of Part I to limited provisions, primarily in respect of the power of courts to order interim measures of protection in ICA held outside India.
The CP was right in contending that Bhatia International ignores the seat theory of arbitration, which is the prevailing norm in international commercial arbitration worldwide. The Model Law was based on the seat theory and so is the Act. The seat theory holds that the seat of the arbitration is the lex arbitri as regards the arbitration. Lex arbitri is the law that “grants the parties or the arbitrators the freedom to set the rules, which may also impose some restrictions on them, and which-even more importantly- will control the use of that freedom and sanction any abuses by setting aside the award." [Gabrielle Kaufmann-Kohler, Identifying and Applying the Law Governing the Arbitration Procedure - The Role of the Law of the Place of Arbitration; Kluwer]. Lex arbitri is a very important aspect of ICA because it gives the “legal touch” to the arbitration, which may at times be decided without reference to any law at all. When the lex arbitri recognises an arbitral award to be valid, if the seat is in a country which is the party to, say, New York Convention, on satisfaction of the conditions specified in the New York Convention, it could be afforded the status of a decree in another New York Convention country. The seat theory has been recognised in New York Convention. Even the UNCITRAL Model Law recognizes this expressly. According to Article 1(2):
"The provisions of this Law, except articles 8, 9, 35 and 36 apply only if the place of arbitration is in the territory of this State."
The UNCITRAL in its analytical commentary to the Model Law on ICA makes note of the dilemma of the drafters as to whether to make the place of arbitration as the determinative factor for the applicability of the law. Another possibility was to recognize the parties’ freedom in selecting a law other than that of the place of arbitration and to cover all arbitrations taking place in state X (the place of arbitration), unless the parties chose the law of another state, as well as those “foreign” arbitrations for which parties select the law of X. The drafters chose the first solution giving express recognition to the territoriality principle, providing also that Ss. 8, 9, 35 and 36 “are intended to cover arbitration agreements or awards without regard to the place of arbitration or any choice of procedural law. By adding an additional requirement of compliance with S. 34 in case of foreign awards, Bhatia and Venturehave put the fabric of international commercial arbitration vis-a-vis India into disarray.
The CP seeks to amend the law, not in accordance with the Law Commission's 2001 report but in accordance with (atleast in substance, though not in form) the Report by Justice Saraf Committee on Arbitration, 2005. The changes suggested are welcome. But one question, raised in Venture, remains unanswered:
If a party seeks to enforce outside India, an award made in international commercial arbitration held outside India, and such enforcement outside India has the effect of evading Indian legal and regulatory provisions to which the transaction forming the subject of the award is subject to, what is the recourse? [modified after posting]
Should it leave it to the discretion of the foreign court where such enforcement application is made? The Consultation Paper has suggested the easy answer to the easy question [as to whether it was right to extend Part I to ICA held outside India], but is conspicuously silent on the tougher one.
(a) it deals with the question as to whether an arbitration agreement is binding on a party which is a company, when it (the arbitration clause contained in a contract) was signed by a person who sought to represent the said company even before the said company was incorporated.
(b) In an application filed under S. 11 of the Arbitration and Conciliation Act, 1996 (Act) for the appointment of arbitrator prior to the decision of the 7 Bench Supreme Court in SBP & Co. v. Patel Engineering, whether, the designate (and thereafter the appellate court) should decide issue as to validity of the arbitration agreement or should leave such a question to the arbitral tribunal?
Facts:
March 2002: Andhra Pradesh Tourism Development Corpn. (APTDC) and Pampa Hotels Ltd (Pampa) allegedly entered into two agreements, Lease Agreement (LA) and Development & Management Agreement (DMA), for a particular purpose. The two agreements contained arbitration clauses.
April 2003: Pampa was incorporated in terms of the Companies Act, 1956.
April 2004: Alleged termination and taking over possession of property that formed the subject matter of the said transaction by APTDC. Disputes arose between the parties.
March 2005: Pampa filed an application for appointment of arbitrators.
16.08.2005: Designate of the Chief Justice appointed an arbitrator in terms of Section 11 of the Act.
26.10.2005: A 7 Bench Supreme Court, in SBP & Co. v. Patel Engineering, overruling the law as it stood then, held, inter alia, that issues regarding the validity of arbitration agreements raised in applications for appointment of arbitrator under Section 11 ought to be decided finally by the Chief Justice or his designate under Section 11 and such a decision will be binding on the parties and the arbitral tribunal.
22.11.2005: A Special Leave Petition was filed by APTDC challenging the decision of the said designate.
Questions before the Court:
Two questions were raised before the court:
(i) where the party seeking arbitration is a company which was not in existence on the date of the signing of the contract containing the arbitration agreement, whether it can be said that there is an arbitration agreement between the parties ?
(ii) whether the question as to the existence or validity of the. arbitration agreement, has to be decided by the Chief Justice/Designate when considering the petition under Section 11 of the Act or by the Arbitrator ?
Decision and Comment:
On the first question, the court held that since Pampa was incorporated in 2003, a year after the two agreements were signed, there was no contract, let alone an arbitration agreement between Pampa and APTDC. Hence, the court held that Pampa had not become a legal entity at the time of signing of the agreements and hence the arbitration agreement is not binding on Pampa.
On the second question, the court correctly pointed out that the same was answered by a seven bench Supreme Court in SBP & Co. v. Patel Engineering (SBP). However, since the order for appointment of the arbitral tribunal was made prior to SBP on the basis of the law as it was existing then (as per Konkan Railway v. Mehul Construction and Konkan Railway v. Rani Construction, the court cited SBP [para 46(xi) of SBP] where it was held that SBP would not affect appointments made prior to SBP and the decision would prospectively apply to future applications and would apply to pending applications. In view of the same, the court came to the conclusion that in the instant case, since the appointment was made prior to the decision in SBP, the appointment was final and valid, and could not be challenged under Article 136 of the Constitution of India.
Having identified the correct law that the court could not decide on the validity of arbitration agreement, why did the court decide the first question? The court unnecessarily hijacked the jurisdiction of the arbitral tribunal. The court should have ideally held that it did not have the jurisdiction to interfere and should have left it to the tribunal to decide the issue as to validity of the arbitration agreement. Instead the court held that the arbitrator would have to decide on the question on the basis of the decision of the court and such a decision would only be an academic exercise. In fact, deciding on such a question was considered by the Supreme Court in Maharshi Dayanand University v. Anand Co-op. [AIR 2007 SC 2441: (2007) 5 SCC 295]as unnecessary and improper ("We think that in the circumstances, this is a question that must be left to be decided by the arbitrator, since in terms of Section 16 of the Act the question can be raised before the arbitrator. Considering that we are dealing with the pre S.B.P. & Company (supra) dispensation, we do not think that it is necessary or proper for us to go into that question and decide the same in these proceedings"). Having cited Maharshi Dayanand University, I wonder why the court went ahead and decided on the issue relating to validity of the arbitration agreement.
Though the decision is not clear, the court seems to have cited Sarwan Kumar v. ML Aggarwal for supporting its case. However, in Sarwan Kumar, the Supreme Court seems to have only said that a court could invoke (that is, resort to) the doctrine of prospective overruling in its discretion when justice requires so. Sarwan Kumar does not support the stand of the supreme court to decide a matter when the statute had clearly allocated the jurisdiction to somebody else. This is not judicial activism, this is judicial hijacking!
