"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.

Friday, September 7, 2012

Bharat Aluminium v. Kaiser Aluminium: A Summary

As readers of this blog and the followers of Indian arbitration are aware, it has taken about a decade for the
Bhatia International judgement to be overruled by a Bench consisting of Five judges of the Supreme Court in Kaiser Aluminium (pdf). For those who are new to Bhatia International and its legacy, see this post (here) and this paper (pdf) on the decision and its effects on  arbitration in India. We do not wish to dwelve upon the aspects covered by these posts and the said paper. In Bhatia International, it was held by a three judge Bench of the Supreme Court that Part I would apply even to international commercial arbitrations held outside India. Thus, in effect, courts in India had jurisdiction even over international commercial arbitrations held outside India. This meant, among other things, that the Indian courts could set aside awards in arbitrations whose seat were outside India. The contentions of counsel would be subjected to a detailed analysis in a subsequent post, if at all. We go straight to summarize the relevant portsions of the judgement in Kaiser Aluminium delivered today (on 06.09.2012). The judgement deals with the history of arbitration law in India and at the international level. These will not be dealt with in this post:

1. In Para 14(b) of Bhatia International, it was held: "(b) Lead to an anomalous situation, inasmuch as Part I would apply to Jammu and Kashmir in all international commercial arbitrations but Part I would not apply to the rest of India if the arbitration takes place out of India." The conclusion in the above para of Bhatia International is incorrect. Section 1(2) is the same as was in the Arbitration Act, 1940 (1940 Act). The said section 1(2) read: "It extends to the whole of India (except the State of Jammu and Kashmir).” In addition, the 1996 Act contains the following proviso to Section 1(2): “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 above proviso is only to incorporate the special provisions pertaining to International Commercial Arbitration. These aspects were not dealt with under the 1940 Act and therefore the proviso was necessary. No anomaly would be  created as Section 2(2) would apply equally to arbitrations is Jammu and Kashmir and the courts in J & K would not have jurisdictions as regards ICA held outside India. Sectio 2(2) is not therefore affectd by the said  proviso. Purely domestic awards would be governed by the relevant J & K Arbitration statute.

2. Section 2(2) bars jurisdiction of Indian courts as regards arbitration held outside India. The opposite conclusion reached in Bhatia International is overruled. The exclusion of "only" in Section 2(2) is not a case of casus omissus and the omission is not a mistake.A plain reading of Section 2(2) makes it clear that Part I does not apply to arbitrations held outside India.

3. The relevant Model Law Article 1(2) used the wordd "only" as it contained exceptions to the territorial applicability and certain provisions such as interim measures were applicable even for arbitrations held outside the relevant country.  Therefore "only" was to stress the fact that except for such provisions, the Model Law was applicable to the relevant  country alone. Since those exceptions have not been retained in the 1996 Act, use of "only" was not necessary in Section 2(2). In fact the Swiss Private International Law Act 1987 and the English Arbitration Act, 1996 have dropped off "only"  as well.

4. If Part I was applicable to international commercial arbitrations outside India, certain words would have to be added to Section 2(2) which is not permissible.

5. Bhatia International's conclusion that Section 2(2) conflicts Sections 2(4) or (5) is erroneous.Section 2(4) only deals with arbitrations under other enactments. This provision has to be read in conjunction with Section 2(2) and would operate only as regards arbitrations in India under any enactment in force. This is in consonance to Article 245 of the Constitution which provides that Parliament may make laws for thewhole or part of India. Similarly Section 2(5) must be read in conjunction with Section 2(2)."All arbitrations" in Section 2(5) is to be read with as all arbitrations in India in view of Section 2(2).

6. It was contended that Section 2(7) indicates that Part I would apply to arbitrations outside india. It reads:
"An arbitral award made under this Part shall be considered as a domestic award.” This does not in any way dilute the adherence to the territoriality principle adopted in the 1996 Act nor does it provide for delocalized arbitration. The need for defining "domestic awards" was to distinguish it with "foreign awarsds" which are covered by Part II of the Act. Further, the definition also clarifies that even if the award was rendered in an international commercial arbitration held in India, such award is a domestic award.

7. The definitions Sections in Part I and II clarify the respective applicability of Parts I and II. Section 2 begins with the expression “In this part, unless the context otherwise requires……” Similarly Sections 44 and 53 gives the  interpretation of foreign awards for the purposes of Chapters I and II of Part II.

8. It was contended that Section 9(b) of the Foreign Awards (recognition & Enforcement) Act, 1961, not retained in the 1996 Act provided that nothing there was applicable to award in an arbitration agreement governed by Indian law.  There is no link between the deletion of 9(b) and the applicability of Part I to foreign arbitrations. The purpose behind Section 2(7) was to foreclose the possibility that an arbitration in India between two foreign parties should  be construed to be a non-domestic arbitration and provisions pertaining to foreign awards would be invoked to enforce such an award in India. 

9. Section 2(1)(e) which defines "courts" deals with courts which would exercise supervisory control over the  arbitral process. Thus, if neither party belongs to Delhi but both arbitrate in Delhi, the Delhi courts would have supervisory jurisdiction over the arbitral process. This is apart from the courts which would have had the jurisdiction as cause of action arose within such court's jurisdiction. This has no relevance to the applicability of Part I of the Act to non-domestic arbitrations. Section 20 which provides that parties could agree to the place of arbitration and that in case of failure by parties the tribunal will determine the appropriate place, is only meant to operate in arbitrations where place is India but parties have not selected the particular location in India. Further, for practical considerations a tribunal may meet even outside India as provided in Section 20(3). Thus, there is a distinction between "seat" and "venue". An agreement has to be construed independently to see if The foreign “seat” would be read as in fact only providing  for a venue where the hearings would be held, in view of the choice of the 1996 Act as being the curial law or Whether the specific designation of a foreign seat, "necessarily carrying with it the choice of that country’s Arbitration / curial law, would prevail over and subsume the conflicting  selection choice by the parties of the
 1996 Act". If the agreement provides for an Indian seat, Part I would be applicable. If it provides for a foreign seat, Part I would be inapplicable to the extent inconsistent with the arbitration law of the seat, even if the agreement states that the 1996 Act shall govern the arbitration proceedings.

10. The choice of a foreign country as the seat necessarily implies that the law of the seat regarding conduct and supervision of arbitration will apply. Therefore, if the seat is a foreign country, Part I would not be applicable to enable Indian courts exercise supervisory jurisdiction. But "it would only mean that the parties have contractually imported from the Arbitration Act, 1996, those provisions which are concerned with the internal conduct of their arbitration and which are not inconsistent with the mandatory provisions of the English Procedural Law/Curial Law.

11. Section 28 provides an option in a domestic international commercial arbitration for the parties to choose a different substantive contract law and is not indicative of the intent to make Part I applicable to foreign arbitrations.

12. It was contended that Part II recognised jurisdiction of two courts to exercise jurisdiction to annul the award- courts of seat and the courts of the country under the laws of which the award was made.This provision imported from the New York Convention is only to recognise that two Courts may have jurisdiction to annul an award.Thus, there is a complete segregation between Part I and II in the Act. Regulation of arbitration consists of four steps (a) commencement, (b) conduct, (c) challenge and (d) recognition and enforcement. Part I deals with all the four but as regards domestic arbitration while Part II deals with only (a) commencement and (b) recognition and enforcement. Thus, the conduct and the challenge of arbitrations are to be done in the country having supervisory jurisdiction over the arbitration. This is in consonance with the schemes in international instruments such as the New York Convention and the UNCITRAL Model Law on International Commercial Arbitration.

13. The use of expression “notwithstanding anything contained in Part I, or in the Code of Civil Procedure, 1908”, in Section 45 of the Arbitration Act, 1996 do not indicate the extra territorial applicability of Part I. These were the expressions used in the 1961 Act and since the 1996 Act is also a consolidating statute, it is not rare for a consolidating act to retain the expressions used in the previous Acts

14. It was argued that the expression that enforcement of a foreign award may be refused when the award “has been set aside or suspended ” “under the law of which” that award was made in Section 48(1)(e) indicated Part I was applicable to foreign arbitrations. This is not so. The said provision has been imported from the New York Convention. The said provision merely recognises the two courts have jurisdiction to annul and does not confer jurisdiction on a court to annul an award made outside the jurisdiction of the seat. It may be noted that the second alternative, that is, "under the law of which" the Award was made was inserted to state that in case the national legislation in the seat did not permit challenge, challenge could be made in the law under which the award was made. Thus the "second alternative" is not really an alternative but only operates in case of the absence of provision of challenge in the "first alternative", that is, the law of the seat. A similar situation resulted in Venture Engineering where the award was set aside under the laws governing the applicable law, Indian law. Furthermore, it is to be noted that the expression "under the law" in Section 45 does not denote the substantive law of contract but the procedural law of arbitration.
15. As regards applicability of Section 9 to foreign arbitrations, the power cannot be imputed to a court by the process of interpretion and doing the same would violate the principle of territoriality in Section 2(2) of the Act.

16. In Bhatia International, a non-convention award was interpreted to be included in Part I of the 1996 Act as the court considered it to be a lacuna that the said Act did not cover such awards. There is no such lacuna. Further, no interim relief could be claimed in respect of a foreign arbitration through a civil suit as an interim relief could only be in furtherance of the main relief. There is no power to a civil court to grant interim relief in relation to a foreign arbitration even if parties agree that 1996 Act should govern the arbitration even if it is a foreign seat.

17. Therefore, Bhatia International and venture Engineering are clearly erroneous and are overruled. Since Bhatia International and Venture Engineering have been applied by numerous courts, the law declared in this
judgement would be applicable prospectively to all arbitration agreements executed hereafter.

The judgement will be analysed in detail in this blog in the coming weeks. Its impact on Bhatia International is clear- the choice of a foreign seat would operate as an exclusive jurisdiction clause and exclude the applicability of Part I and no interim measures would be available in arbitrations held in foreign seats. But there are certain observations, summarized in paras 10 and 11 above, which have the potential to generate controversies. These will be dealt with in greater detail, starting next week, hopefully.

1 comment:

Puneet said...

The seat of arbitration is critical. Even if the arbitration is held outside India, and if courts in india have exclusive jurisdiction, it might imply that the seat is Indian and the foreign venue is simply for convenience. In that case, Part I would apply. This still leaves scope for interpretation.