Has Sumitomo Been Overruled by BALCO? A Resounding Yes!

Sumitomo v ONGC  (04.12.1997: Supreme Court of India) was a pre-1996 Act case which laid down the law on the law governing challenge to arbitral awards. The case really reflects the debate in international commercial arbitration as to the law which governs challenge to arbitral awards. Some theorists were of the view that it is the law governing the arbitration agreement which deals with the law of challenge while some are of the view that it is the law of the seat. 

In this post, we present the idea that Sumitomo has been overruled on the issue that the court was asked to adjudicate upon: Whether proceedings challenging an arbitral award are governed by the law of the seat or the law of the arbitration agreement? 

To recap the facts briefly, Sumitomo and ONGC agreed that Indian laws would govern their contractual relationships and London would be the seat of arbitration in case of disputes. The parties did not designate the law of the arbitration agreement. Disputes arose and led to an arbitral award which was in favour of Sumitomo. ONGC challenged the arbitral award in India. Sumitomo objected stating that English courts alone had the jurisdiction to set aside the arbitral award. ONGC argued otherwise and was successful before the Bombay High Court. 

On appeal, the Supreme Court decided in favour of ONGC and held that once the arbitral award was passed, the curial law ceased to operate and the law of the arbitration agreement governed the setting aside proceedings. The court based its conclusion on two grounds. The first was Mustill & Boyd's book on English arbitration and the second was the fact that the Foreign Awards (Recognition and Enforcement) Act, 1961 did not apply where the arbitral award was made under an arbitration agreement governed by Indian law. 

Section 9 of the 1961 Act provided:

"Saving. Nothing in this Act shall-(a) prejudice any rights which any person would have had of enforcing in India of any award or of availing himself in India of any award if this Act had not been passed; or(b) apply to any award made on an arbitration agreement governed by the law of India."
(emphasis supplied)

Taking the aforesaid provision into consideration, the three-judge Bench of the Supreme Court held:

"The proceedings before the arbitrator commence when he enters upon the reference and conclude with the making of the award. As the work by Mustill and Boyd aforementioned puts, it with the making of a valid award the arbitrator's authority, powers and duties in the reference come to an end and he is "functus officio" (page 404). The arbitrator is not obliged by law to file his award in court but he may be asked by the party seeking to enforce the award to do so. The need to file an award in court arises only if it is required to be enforced, and the need to challenge it arises if it being enforced. The enforcement process is subsequent to and independent of the proceedings before the arbitrator. It is not governed by the curial or procedural law that governed the procedure that the arbitrator followed in the conduct of the arbitrator.
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By reason of Section 9(b), the 1961 Act does not apply to any award made on an arbitration agreement governed by the law of India. The 1961 Act, therefore, does not apply to the arbitration agreement between the appellant and the first respondent. The 1940 Act, applies to it and, by reason of Section 14(2) thereof, the courts in India are entitled to receive the award made by the second respondent."

Thus, the choice of law rule that the three-judge Bench relied upon was that the proceedings for challenging the arbitral award and the grounds therefor were governed by the law of the arbitration agreement and not by the law of the seat. 

It is important to note that the aforesaid judugement was passed in the pre-1996 Act regime. Under the 1996 Act, the provision analogous to Section 9 of the 1961 Act does not deal with the law of the arbitration agreement. Section 51 of the 1996 Act states:

"Saving.—Nothing in this Chapter shall prejudice any rights which any person would have had of enforcing in India of any award or of availing himself in India of any award if this Chapter had not been enacted."

There is no clause in the aforesaid provision similar to Section 9(b) of the 1961 Act. Further, Section 44 makes Chapter I (New York Convention Awards) of Part II (Enforcement of Certain Foreign Awards) applicable on the basis of territoriality, as provided in Section 44(b), which reads:

"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 supplied)

Similar provisions are contained in Sections 53 and 60, which deal with Geneva Convention Awards. 

Further, the seat as the principal jurisdiction that would govern challenge proceedings has been authoritatively laid down by the five judge Bench of the Supreme Court in Bharat Aluminium v. Kaiser Aluminium (06.09.2012: Supreme Court of India). The Supreme Court held:

"120. Upon consideration of the entire matter, it was observed that - "In these circumstances it is clear to me that the law with which the agreement to arbitrate has its closest and most real connection is the law of the seat of arbitration, namely, the law of England". (Para 14). It was thereafter concluded by the High Court that English Law is the proper law of the agreement to arbitrate. (Para 15)
121. The legal position that emerges from a conspectus of all the decisions, seems to be, that the choice of another country as the seat of arbitration inevitably imports an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings.122. It would, therefore, follow that if the arbitration agreement is found or held to provide for a seat / place of arbitration outside India, then the provision that the Arbitration Act, 1996 would govern the arbitration proceedings, would not make Part I of the Arbitration Act, 1996 applicable or enable Indian Courts to exercise supervisory jurisdiction over the arbitration or the award. 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. This necessarily follows from the fact that Part I applies only to arbitrations having their seat / place in India.
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The words "suspended or set aside", in Clause (e) of Section 48(1) can not be interpreted to mean that, by necessary implication, the foreign award sought to be enforced in India can also be challenged on merits in Indian Courts. The provision merely recognizes that courts of the two nations which are competent to annul or suspend an award. It does not ipso facto confer jurisdiction on such Courts for annulment of an award made outside the country. Such jurisdiction has to be specifically provided, in the relevant national legislation of the country in which the Court concerned is located. So far as India is concerned, the Arbitration Act, 1996 does not confer any such jurisdiction on the Indian Courts to annul an international commercial award made outside India. Such provision exists in Section 34, which is placed in Part I. Therefore, the applicability of that provision is limited to the awards made in India. If the arguments of the Learned Counsel for the Appellants are accepted, it would entail incorporating the provision contained in Section 34 of the Arbitration Act, 1996, which is placed in Part I of the Arbitration Act, 1996 into Part II of the said Act. This is not permissible as the intention of the Parliament was clearly to confine the powers of the Indian Courts to set aside an award relating to international commercial arbitrations, which take place in India.
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Therefore, the word "suspended/set aside" in Section 48(1)(e) cannot be interpreted to mean that, by necessary implication, the foreign awards sought to be enforced in India can also be challenged on merits in Indian Courts. The provision only means that Indian Courts would recognize as a valid defence in the enforcement proceedings relating to a foreign award, if the Court is satisfied that the award has been set aside in one of the two countries, i.e., the "first alternative" or the "second alternative.
148. The consistent view of the international commentators seems to be that the "second alternative" refers to the procedural law of the arbitration rather than "law governing the arbitration agreement" or "underlying contract". This is even otherwise evident from the phrase "under the law, that award was made", which refers to the process of making the award (i.e., the arbitration proceeding), rather than to the formation or validity of the arbitration agreement."

The aforesaid quote clearly establishes the choice of law rule that it is the law of the seat of the arbitration which governs setting aside proceedings and not the law of the arbitration agreement. One could argue that Sumitomo still stood as a precedent for the pre-1996 Act position. Sumitomo was also relied on prior to BALCO [See, Dozco v. Doosan (2011) 6 SCC 179 & Videocon v. Union of India AIR 2011 SC 2040]. It is submitted that Sumitomo should be deemed implicitly overruled for the reason that Sumitomo's conclusion that it is the law of the arbitration agreement and not the curial law that governs challenge proceedings was made independent of Section 9(b) which has not been incorporated under the 1996 Act.

It may be noted that BALCO (2012) did not rely on or consider Sumitomo. Curiously, BALCO II (2016) (a three judge Bench) did rely on Sumitomo at Para 5:

"Party autonomy being the brooding and guiding spirit in arbitration, the parties are free to agree on application of three different laws governing their entire contract-(1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration, which is popularly and in legal parlance known as curial law. The interplay and application of these different laws to an arbitration has been succinctly explained by this Court in Sumitomo Heavy Industries Limited v. ONGC Limited and Ors. (1998) 1 SCC 305, which is one of the earliest decisions in that direction and which has been consistently followed in all the subsequent decisions including the recent Reliance Industries Limited and Anr. v. Union of India (2014) 7 SCC 603." (emphasis supplied)

BALCO II (2016) also acknowledged that Sumitomo was an authority for the proposition that in the absence of a choice of the law of the arbitration agreement, the choice of law governing the contract will also mean that the law of the arbitration agreement is chosen. To this extent, reliance on Sumitomo was correct. But the reliance in BALCO II (2016) on Sumitomo for the interplay between the law of the contract, of the arbitration agreement, and the lex arbitri (as quoted and emphasised above) is wholly wrong because such reliance contradicts with BALCO (2012).

In view of the above, the law governing challenge proceedings is not the law of the arbitration agreement but is the law of the seat. It is possible that both these laws could be the same. For instance, parties might agree that the seat of the arbitration is London and the law governing the arbitration agreement is English law but might agree on Indian laws to govern the contract (excluding the arbitration agreement). In such a case, English law will govern the setting aside proceedings not because English law is the law governing the arbitration agreement but because English law is the lex arbitri owing to the choice of London as the arbitral seat.