"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, August 18, 2014

Part III of the Comments on the Law Commission's 246th Report: "Amendment to Arbitration and Conciliation Act, 1996"

In the last two posts (here and here), we had commented on certain aspects of the amendments proposed by the Law Commission in its 246th Report. In the last two posts, we had dealt with about few amendments. We continue to do the same in the remainings posts on the topic. 

Prospective Overruling of BALCO:
We all know that the five judge Bench in Bharat Aluminium Co. v. Kaiser Aluminium Co. deemed it fit to overrule Bhatia International prospectively (details can be read here). While we in this blog have been supporters of such prospective overruling, the generally prevailing opinion seems to be that prospective overruling was bad (see, for instance here).

The Law Commission has discussed this issue in two places in the following manner:

"40. However, the decision in BALCO was expressly given prospective effect and applied to arbitration agreements executed after the date of the judgment."

"41. While the decision in BALCO is a step in the right direction and would drastically reduce judicial intervention in foreign arbitrations, the Commission feels that there are still a few areas that are likely to be problematic... (ii) While the decision in BALCO was made prospective to ensure that hotly negotiated bargains are not overturned overnight, it results in a situation where Courts, despite knowing that the decision in Bhatia is no longer good law, are forced to apply it whenever they are faced with a case arising from an arbitration agreement executed pre-BALCO."

On the basis of the above, the Commission has proposed the below amendment:

(2A) Notwithstanding any judgment/ decree to the contrary, the amendment to this sub-section (2) shall not apply to applications which are pending before any judicial authority on the date of such amendment, and which have arisen in relation to arbitrations where the date of the arbitration agreement is prior to 06.09.2012.”

From the above discussion, it is unclear if the Law Commission had a definitive opinion on that issue. Nevertheless, the Law Commission chose to abrogate the prospective overruling in BALCO of Bhatia International.  What is siginificant is the absence of a comprehensive discussion on the merits and demerits of the prospective overruling. In BALCO, the Supreme Court had stated the following in respect of the issue:

"201. 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, according to the Supreme Court, since Bhatia International and Venture Global were applied by numerous courts since 2002 and 2008 respectively, it was difficult to apply the same retrospectively. Against this, the Law Commission hardly countenances the reasoning of the Supreme Court except to state that it has resulted in a situation where courts apply Bhatia International in agreements concluded before 6 September 2012. What is surprising is that the Law Commission seems to agree with BALCO's reasoning ("While the decision in BALCO was made prospective to ensure that hotly negotiated bargains are not overturned overnight"). Would the mere fact that courts are to apply Bhatia International to agreements concluded prior to the said date be a ground for overruling the prospective overruling of Bhatia International? This blawgger is not convinced of the Law Commission's reasoning. The Supreme Court was correct in prospectively overruling Bhatia International. (For arguments in support thereof, see here and here). There are two sides to the issue. Irrespective of whether the Supreme Court was correct or not in prospectively overruling Bhatia International, the Law Commission could have at least analysed the merits and demerits of each side.

Following are some of the reasons why the Supreme Court was probably right in prospectively overruling Bhatia International:

  • The harm that would be done to the expectations of parties had Supreme Court not overruled Bhatia International prospectively to arbitration agreements entered into from the date of the judgement would have been worse. Criticisms against the same seek to sacrifice practicality at the altar of technicality.
  • Critiques point out that that BALCO puts claimants under arbitration agreements which were concluded prior to Bhatia International in a worse position for having relied on the right law as affirmed by BALCO than those who relied on the wrong position stated in Bhatia International is also not wholly correct for the following reasons: 
    • The contention that the “generally accepted view” in India prior to Bhatia International was that Part I of the 1996 Act was applicable only to domestic arbitrations and not foreign arbitrations is not wholly correct. There are several decisions of High Courts which have decided that Part I would apply even to foreign arbitrations.
    • Further, there are several cases where Bhatia International was applied to the claimants under arbitration agreements entered into prior to the judgement in Bhatia International.  Hence, the criticism that Bhatia International puts pre-Bhatia International parties to arbitration agreements in a worse position is not correct. Claimants under agreements entered into prior to Bhatia International virtually sail in the same boat as those under agreements entered into when Bhatia International held the field.
    • Even assuming the correctness of the contention that BALCO puts the pre-Bhatia International claimants in a worse position even though they relied on the correct position of law, the same would not become a “fit case” for review as was contended  considering the practical difficulties that parties who relied on Bhatia International and drafted their arbitration agreements would face, as was discussed above.
  • The criticism that BALCO should not have made the judgement prospectively applicable to agreements as Bhatia International and subsequent decisions did not affect the validity of arbitration clauses providing for the seat abroad but provided that in such  cases, Indian courts would have jurisdiction and consequently, that BALCO should have applied prospectively to commencement of proceedings and not to agreements ignores the fact that parties would have modelled their arbitration clauses based on the law as it existed during the Bhatia International regime. Applying BALCO even to such agreements would make affect the parties’ settled expectations as to their rights under the arbitration clauses.
While these aspects may not be accepted by the Law Commission, the least it could do is to discuss properly the merits and demerits of both approaches and then come to a conclusion. After all, the Law Commission's proposal is to overturn a judgement of the highest court in India, and that too, of a Bench consisting of five judges. 

More on the amendments in the next post. 

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