"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.

Monday, October 25, 2010

What Amounts to Exclusion of Part I? A Survey of Post- Bhatia Judgements


Recently, there were two notable analyses in two blogs on the issue of what amounts to exclusion of Part I of the Arbitration and Conciliation Act, 1996. The two posts are:
 Both the posts are extremely informative on the point as to what amounts to the exclusion of Part I of the Arbitration and Conciliation Act, 1996. We suggest readers to have a look at these posts to understand the issues pertaining to the applicability of Part I of the Act. The purpose of this post is not to replicate the efforts expended in these posts. The purpose is altogether different.

One of the fundamental objectives of the Indian Arbitration and Conciliation Act, 1996, while adopting the structure of the UNCTIRAL Model Law on International Commercial Arbitration, 1985 (UML) and the UNCITRAL Conciliation Rules 1980 was to update the law on arbitration and make at as nearly as possible in tune with the general principles prevailing throughout the world. An important reason why the Act was based on UML is that UML provided a simple but efficient model to adopt so that international commerce is not hindered by hyper technicalities that law (at times) brings forth.

We hypothesize that one of the depressing side effects of Bhatia International and the judgements that followed Bhatia International is that law has become uncertain and has defeated the fundamental objective of the 1996 Act, that is, to enact a simplistic and efficient law on arbitration, primarily for two reasons:

·         The law regarding what amounts to exclusion of Indian law has been extremely murky, with judges finding it extremely difficult to grasp firmly established principles of international commercial arbitration, creating precedents that conflict with co-ordinate benches, that impliedly overrule previous decisions or even not following decisions of higher courts, and

·         Due to the above, the principles pertaining to choice of governing law of arbitration, governing law of contract and the choice of forum in internationally recognized arbitration clause have been rendered nugatory Post-Bhatia International, thus eroding one of the chief purposes of the 1996 Act.

The malefic effect of Bhatia International is not restricted to the law pertaining to interim measures in foreign arbitrations- it has extended its tentacles to even the law pertaining to appointment of arbitrators, setting aside foreign arbitral awards etc. It applies to any issue that is addressed by Part I of the Act.

This blog shall, in the next few months, aim to establish this hypothesis [We do hope that before this series of posts on the topic gets over there would be an amendment to the Act.]. There is nothing novel about this hypothesis. But what we would try to do here is to see the entire thing from a transactional lawyer’s perspective.

We’ll do two things:
  • We’ll survey the law laid down in Bhatia International as applied by the High Courts and the Supreme Court Post-Bhatia International.
  • We will attempt to explain what the law should be Post-Bhatia International on the issue of what ought to amount to the exclusion of Part I of the Act.

 [Note: We have obtained the judgements that apply the law in Bhatia International from Manupatra (with the search parameter “Bhatia International” in their arbitration database). We’ll not look at Indian Kanoon (but will try to provide Indian Kanoon links to most judgements) because the Manupatra search is sufficient to establish our point and it also seems to cover the popular (or notorious, depending on one's point of view) cases.  

We’ll start off with Nirma Ltd. v. Lentjes Energy (India) Pvt. Ltd., decided by the High Court of Gujarat. The Agreement in question was governed by the laws of India. The venue of arbitration was London and the rules applicable were the Rules of conciliation and arbitration of the International Chamber of Commerce. The court held: (We quote the relevant provisions of the judgement and also state what it implies so that readers can point out if we make an error in the reading of the judgement. So pardon the lengthy quotes)

In the present case, under Articles 16.2 and 16.4 of the agreement between the appellant and the respondent No. 2, the agreement was to be governed according to the laws of India which will include the said Act. The provisions of section 9 of the said Act are not excluded under that agreement. This Court will, therefore, have powers under section 9 of the said Act to issue interim injunction against the respondent No. 2 even if arbitration proceedings on the basis of that agreement are pending before the ICC, London…”

So, according to the court:
  • mere choice of governing law of the contract (a.k.a substantive law of contract and also the substantive law of the arbitration agreement because the arbitration clause is a part of the main agreement) as Indian law (with the seat being a foreign seat and rules being a foreign institutional arbitration rules)* would not exclude the applicability of Part I.
  • This is because “laws of India”, as per the court, would include all laws of India and not merely the substantive contract law or the substantive arbitration law# (those portions of the arbitration law which lay down the law relating to the validity of arbitration agreements, if it is a part of the arbitration law). 
·         What follows from the above is the mere choice of a foreign seat or a foreign institutional arbitration rule is insufficient to exclude Part I unless one excludes the applicability of Indian law altogether.

The parties in the previous case once again approached the High Court of Gujarat. This time the issue was whether the court could set aside the partial award made by the ICC tribunal. A bench of the High Court of Gujarat of the same strength as the previous one, on the same arbitration clause, held:

In the instant case, there is no doubt about the fact that the arbitration in question is an international commercial arbitration and the proper law governing the arbitration is the law of India. Applying the above principles evolved in NTPC (supra) and Bhatia International (supra), not only that the provisions of the Arbitration Act apply to the arbitration, but the Court of competent jurisdiction in India has jurisdiction to entertain applications in accordance with law. In the context of Section 34 of the Act, the above view is further fortified by the fact that it provides for recourse to a Court against an "arbitral" award without deploying the words "domestic award" or "foreign award"… The Indian Act having been enacted after taking into account the Model Law and the Rules, the omission of either of the above alternative clauses in Article 34 indicates a conscious choice and decision to allow recourse to a Court against any award, whether made in the territory of India or made under the Act.

·         Thus the court held that even S 34 would apply to challenge foreign awards.

The next case is the case of Liverpool and London Steamship Protection and Indeminity Association Ltd. v.  Arabian Tankers Co., LLC and Ors., where London as the chosen venue and the Rules of the London Maritime Arbitration Association was to be applied. The Law of the Contract was English law. The court held:

Once that be the case what emerges is that the substantive law of the contract is English law, the law of the Arbitration agreement is the English Arbitration Act 1996 and the arbitral procedure or the curial law would be the Rules of the London Maritime Arbitration Association. Once this is considered the substantive law of the contract, the law of the arbitral agreement and the curial law would be as existing in England, but for Rules 47-C and 48 framed by the petitioner. Under Rules 47-C and 48 framed by the petitioner arrears of insurance premium result in creating a lien on the ship which will entitle seizure, attachment or arrest of assets for any amounts owed to the association. Under Rule 48 the rights of lien can be enforced in any jurisdiction in accordance with local law in such jurisdiction and it has to be construed in accordance with English law.”

·         Thus, where the substantive law of contract was English Law, the venue was London and the procedural rules to be applicable was the Rules of the London Maritime Association, there would have been a clear exclusion of Part I. However, since the Rules themselves provided for the applicability of Indian law (local law) for certain purposes, parties are deemed to have chosen not to exclude Indian law as regards certain matters.

Note that each High Court has tried to make sense of Bhatia International and apply it to the existing facts. What emerges from the above decision is that parties are left to their whim and fancy to apply Part I in relation to specific aspects of their agreements and not others. In effect, Part I, including the public policy ground to set aside awards is entirely optional. More on this later.  

We’ll survey the rest of the decisions in subsequent posts.
* added after posting
# Law of the Arbitration Agreement is a better, commonly used term.

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