"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.

Wednesday, September 12, 2012

Why was Bhatia International Prospectively Overruled?

The five judge Bench of the Supreme Court in BALCO v. Kaiser Aluminum (pdf) held that Part I was not applicable to international commercial arbitrations held outside India, thereby overruling Bhatia International and Venture Global. Having done so, the court held:
"200. The judgment in Bhatia International (supra) was rendered by this Court on 13th March, 2002. Since then, the aforesaid judgment has been followed by all the High Courts as well as by this Court on numerous occasions. In fact, the judgment in Venture Global Engineering (supra) has been rendered on 10th January, 2008 in terms of the ratio of the decision in Bhatia International (supra). Thus, in order to do complete justice, we hereby order, that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter."
Thus, Bhatia International and Venture Global  would no more be good law but only for arbitration agreements executed after 06.09.2012. This part of the judgement has been criticised because for the coming years, there would be two parallel regimes which the courts have to take stock of- the Bhatia International regime and the Kaiser Aluminum regime and that the former regime would stay for several years especially in respect of long term agreements.

The criticism may not be altogether justified. Imagine, for example, an Indian party and an American party agree to London arbitration  in their contract. They also agree that, except for Section 9 (interim measures from the court), Part I of the Arbitration and Conciliation Act, 1996 would not apply to such arbitration. This is in accordance with Bhatia International (see, Para 26: "...all or some of the provisions of Part I may also get excluded by an express or implied agreement of parties.”). There was an expectation that parties could approach the Indian courts for interim measures under Section 9 despite the non-applicability of other provisions of Part I. If Bhatia International was not overruled prospectively, the parties would have been put in serious jeopardy as, having drafted the arbitration clause in accordance with the prevailing law,  the right to approach the Indian court under Section 9 would have been lost due to a subsequent change in the law (See, this post in the Blog Arbitration blog which discusses the said issue). It is obvious that parties draft contracts on the basis of the law as it was prevailing then. Hence, it was just on the part of the  Supreme Court to prospectively overrule Bhatia International

The above mentioned post in the Blog Arbitration blog raises an interesting point- that if a thirty year agreement is signed on 05.09.2012 and if a dispute arises in 2027 AD and is referred to arbitration, the award under such arbitration could be subject to challenge in the Indian courts. This risk is definitely there. But three points are worth noting here. One, after a slew of judgements including Yograj Infrastructure, the Bhatia International regime was been rationalised to some extent. although unsatisfactorily. So, it is not in all cases that the award could be set aside in Indian courts. Two, long term agreements are generally drafted in India with the help of legal counsel. Therefore, in such cases, parties would have definitely agreed to a clause that would either exclude Part I fully or selectively. Three, even if Part I has not been excluded in full or in part in such agreements, nothing prevents parties to renegotiate the arbitration clauses and amend their arbitration clauses, in which case the Kaiser Aluminum regime would be applicable. I am not, however, sure that parties would want to renegotiate the arbitration clause. Assume that parties had agreed to a hypothetical clause mentioned in the above para. The right to approach the Indian court under Section 9 for interim measures would be available to the American party. However, if the parties amend their arbitration clause after 06.09.2012, the Kaiser Aluminium judgement would not permit the American party to approach the Indian courts. Therefore, renegotiation of arbitration clauses may not happen. 

More on Kaiser Aluminum in the next few weeks.

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