Guest Post: Mid-Year Arbitration Review- Part IV by Juhi Gupta

(Continuing with her mid-year arbitration review (see previous posts here, here & here), Ms. Juhi Gupta, an LL.M. graduate from Harvard Law School, has penned the fourth and last part of the series of posts on the topic. Happy reading!) 

Fundamental policy of Indian law is violated if core issues for grant of relief are not examined

National Highways Authority of India v Gwalior Jhansi Expressway Limited (Supreme Court, 13 July 2018)

The Supreme Court recently decided a very interesting case about the mandatory participation in a tender process to exercise the right of first refusal. A core issue was whether or not the impugned orders contravened the fundamental policy of Indian law. The case provides a useful illustrative example of the facts and circumstances that would lend to a finding that the fundamental policy has been violated.

Brief facts: A dispute arose between the appellant and respondent under a concession agreement regarding completion of contractual works. Arbitration was invoked and subsequently, the appellant filed an application under section 17 of the Arbitration Act before the tribunal seeking permission to complete the remaining works by going through the tender process again. The respondent moved a section 17 application asking NHAI to either infuse Rs. 400 crores to finish the project or to issue a fresh tender, subject to the respondent being granted the right of first refusal (hereinafter “ROFR”) to match the lowest bid and in the event it did, the right to complete the works subject to any conditions in the tender.

The tribunal passed an order to this effect, following which the appellant issued a fresh public tender for the balance works that was brought to the tribunal’s notice. An important stipulation that repeated in several provisions of the tender document was that if the respondent was also a responsive bidder, then the respondent shall have the option of matching the lowest bid in terms of the selection criteria. Several months later, the respondent filed an application under section 17 before the tribunal seeking permission to complete the works, claiming it was surprised by the appellant’s fresh tender of which it had only received notice on the previous day. The appellant objected saying that the respondent could have only invoked the ROFR if it had participated in the bidding process. The tribunal ruled in favour of the respondent, which was upheld by the Delhi High Court.

Issue: Whether the tribunal’s orders and the Delhi High Court order violated fundamental policy of Indian law?

Arguments: The appellant argued that (i) the respondent could not exercise the ROFR without participating in the bidding process and in violation of the tender conditions; (ii) there was nothing in the tribunal’s first order exempting the respondent from participating in the tender process or prohibiting the appellant from incorporating a condition to this effect in the tender document; (iii) the process of evaluation of tender and awarding of contract are commercial functions that are outside the purview of judicial review, especially when the decision of the statutory body (in this case the appellant) was bona fide and in public interest; and (iv) the tribunal exceeded its jurisdiction under section 17 in both orders because it could not pass an interim order concerning a separate contract (i.e. the fresh tender).

The respondent argued that (i) both the tribunal and High Court were of the view that it was not necessary for the respondent to participate in the fresh tender process to exercise the ROFR; (ii) the tribunal’s first order attained finality since the appellant did not challenge it; (iii) the respondent’s capability to complete the work was undisputed and therefore, there was no logic or rationale to require the respondent to participate in the bidding process; (iv) clause 3.2(f) of the tender document was a deeming provision that essentially declared the respondent as eligible and qualified; and (v) the respondent was not aware of the provisions of the fresh tender document as the tender was neither provided to the respondent nor placed before the tribunal.

Decision: The Supreme Court decided in favour of the appellant and set aside the tribunal’s second order and the High Court’s order, and dismissed the respondent’s section 17 application. The Court noted that the validity of the tender document was not challenged and its provisions made it clear that the respondent was required to participate in the tender process by submitting its sealed bid. The deeming clause in the document did not exempt the respondent from such participation (“…[the respondent], if it has participated in the bidding process, it shall be deemed to fulfil all the requirements of Clauses 3 to 6 of the RFP…”).

As regards the tribunal’s first order, the Court noted that there was nothing in the respondent’s application under section 17 to even remotely suggest that it should be exempted from participating in the fresh tender process. Any such exemption had to be expressly sought and granted, and disclosed in the tender documents. The Court agreed with the respondent that the tribunal’s first order was silent on requiring the respondent to participate in the bidding process as a condition precedent to exercise the ROFR; however, the respondent could not benefit from this as any exemption sought had to be expressly granted by the court. While the Court said it was “debatable” whether an arbitral tribunal could even issue an order like its first order under section 17, it did not enter into a discussion about this as that order was not challenged.

Further, the Court found fault with the tribunal’s undue appreciation of the fact that the respondent had completed a substantial portion of the contractual works and that it would be just and proper to allow it to complete the balance in spite of the respondent’s failure to take notice of the tender document that was duly released in public and disclosed to the tribunal. In addition, the respondent waited for very long to challenge the tender and even then did not file a rejoinder to challenge the appellant’s claim in its reply affidavit that the respondent was fully aware of the terms and conditions of the tender.

“The Arbitral Tribunal made no effort to ascertain as to whether the order dated 23^rd July 2016 was a blanket and unconditional order entitling the respondent to straightaway exercise ROFR without participating in the bidding process. The Arbitral Tribunal merely adverted to the objection of the appellant and rejected the same on the finding that involvement of a third party in the Project would create serious problems. It took the view that giving option to the respondent to match the lowest bid and to complete the balance work, with a condition to periodically submit the progress report to the Arbitral Tribunal for monitoring whether the balance work was successfully completed to the satisfaction of the NHAI, would be a proper and equitable arrangement. This approach is not in conformity with the fundamental policy of Indian law” (paragraph 20) [emphasis supplied].

Similarly, the Court observed that the High Court violated the fundamental policy of Indian law as it did not examine the core issues for grant or non-grant of relief to the respondent:

“The High Court did not find any error, much less manifest error, in the view taken by the Arbitral Tribunal. Further, it can be gleaned…that the High Court was more eager to know as to what prejudice would be caused to the appellant if the respondent had not participated in the bidding process. This query of the High Court is begging the question. For, that cannot be the primary basis to answer the relief claimed by the respondent in the application under Section 17 of the Act…The High Court has overlooked the fact that the appellant is a body corporate under the 1988 Act. It has to act in a just and fair manner in the matter of allocation of contract albeit the balance and unfinished work of the Project…The respondent had the option to participate in the bidding process which was not availed for reasons best known to the respondent. The High Court also overlooked the fact that the tender process was not an empty formality and with the initiation of the same, third parties, who participated in the bidding process, were likely to be prejudiced by allowing the respondent to match the lowest bid or exercise ROFR, without participating in the bidding process despite the express stipulation in that behalf in the tender documents” (paragraph 21) [emphasis supplied].

  

Non-signatories to arbitration agreement can be referred to domestic arbitration based on group of companies doctrine

Cheran Properties Limited v Kasturi and Sons Limited and Ors (Supreme Court, 24 April 2018)

Brief facts: An arbitral tribunal passed the final award in an arbitration between Kasturi and Sons Limited (hereinafter “KSL”) and Hindcorp Resorts Private Limited (HRPL) as the claimants, and Sporting Pastime India Limited (SPIL) and KC Palanisamy (KCP) as the respondents, under a shareholders agreement. The award contained a direction to SPIL and KCP to return to the claimants the documents of title and share certificates relating to 2,43,00,000 shares of SPIL. KCP’s challenge against the award under section 34 of the Arbitration Act was dismissed by the Madras High Court and subsequently the Supreme Court, thereby lending finality to the award.

Following the award, KSL filed an application before the National Companies Law Tribunal (NCLT) seeking rectification of SPIL’s register under section 111 of the Companies Act, 1956. The application was preferred against Cheran Properties Limited (hereinafter “Cheran Properties”), which had purchased SPIL’s shares as KCP’s nominee. NCLT allowed the application, which was further upheld by the appellate tribunal (NCLAT).

What is important to note is that prior to the dispute arising, KCP sent a letter to KSL as the authorised signatory of Cheran Properties (hereinafter “appellant’s letter”), requesting KSL to execute share transfer deeds for registering the transfer of shares “in the following names…[including Cheran Properties]”.

Issues: (1) were the non-signatories to the arbitration agreement bound by the agreement; and (2) did the NCLT have jurisdiction to enforce the arbitral award?

Arguments: The appellant argued that (1) it was not a party to the arbitration agreement that was entered into between KCP, KSL, SPIL and HRPL. Therefore, it was not bound by the arbitral award; (2) an arbitral award has to be enforced as a decree of a civil court and therefore, the award could not have been enforced by the NCLT; and (3) the principles of Chloro Controls are inapplicable as that case was decided in the context of an international arbitration under section 45. The provisions of section 45 of the Arbitration Act must be distinguished from the unamended section 8.

The respondents argued that (1) the shareholders agreement specifically provided that KCP’s nominees would be bound by the agreement, which would include the provision containing the arbitration agreement; (2) the appellant acted as KCP’s nominee at all material times and the appellant’s letter establishes beyond doubt that the appellant assumed all obligations under the shareholders agreement, including the remedy of arbitration; (3) an arbitral award can bind a group company, which is an affiliate of a signatory to the arbitration agreement, as decided in Chloro Controls; (4) section 35 of the Arbitration Act expressly states that an arbitral award binds parties to an arbitration and persons claiming under them; and (5) since the consequence of the arbitral award was to transfer shares to KSL, the NCLT had jurisdiction to order the formal rectification of SPIL’s register, which was the only way to effect the transfer of shares to KSL.

Decision: The Supreme Court decided the first issue in favour of the respondents. The Court relied on Chloro Controls, wherein the “group of companies” doctrine evolved under English law had been relied upon to recognise that non-signatory affiliates can be bound by an arbitration agreement in certain circumstances. Accordingly, in the present case, the Court noted:

“In holding a non-signatory bound by an arbitration agreement, the Court approaches the matter by attributing to the transactions a meaning consistent with the business sense which was intended to be ascribed to them. Therefore, factors such as the relationship of a non-signatory to a party which is a signatory to the agreement, the commonality of subject matter and the composite nature of the transaction weigh in the balance. The group of companies doctrine is essentially intended to facilitate the fulfillment of a mutually held intent between the parties, where the circumstances indicate that the intent was to bind both signatories and non-signatories. The effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory” (paragraph 17) [emphasis supplied].

The Court emphasised that the present case related to a post-award situation and therefore, the material provision was section 35, and not sections 8 and 45 as contended by the appellant. Section 35 clearly stipulates that an arbitral award shall be final and binding on the parties and persons claiming under them. The expression “persons claiming under them” widens the net of those who are bound by an arbitral award – it is a “legislative recognition [that] an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings” (paragraph 20).

The Court observed that the appellant, in purchasing the shares, was conscious of and accepted the terms of the shareholders agreement. The appellant’s letter unequivocally confirmed the acceptance of this position. The facts and circumstances demonstrate the mutual intention of the parties to bind both signatories and non-signatories to the parent agreement and consequently, the arbitration agreement contained therein. KCP was entitled to transfer his shareholding and in the appellant’s letter, KCP indicated, as authorised signatory of the appellant, that his group of companies agreed to purchase the shares.

The Supreme Court also decided the second issue in favour of the respondents. The arbitral award had attained finality and the only remedy to fully enforce the award was to seek rectification of the register under section 111 of the Companies Act.

Mere claim alleging duress and coercion without proof does not lead to arbitrable dispute

M/s ONGC Mangalore Petrochemicals Ltd. v M/s ANS Constructions Ltd. and Anr. (Supreme Court, 7 February 2018)

Brief facts: The respondent was awarded a contract by the appellant. The respondent issued a no dues/claim certificate on accepting full and final payment after execution of the work. However, subsequently, the respondent withdrew the certificate stating that it was only issued under the appellant’s duress and coercion in order to receive payment. The respondent contended that several of its running account bills remained uncleared and it had to incur other additional expenses on account of causes attributable to the appellant. The appellant meanwhile issued a completion certificate. The respondent initiated arbitration proceedings. The appellant refused to accede to the arbitration request on account of non-arbitrability of the dispute. The respondent approached the Karnataka High Court under section 11 of the Arbitration Act to appoint an arbitrator on behalf of the appellant. The High Court allowed the petition against which the appellant filed a special leave petition to the Supreme Court.

Issue: Did a dispute exist for reference to arbitration under section 11?

Arguments: The appellant argued that (i) there was no genuine and serious dispute; (ii) there was no duress or coercion; (iii) the alleged claim for losses incurred during execution of the contract could not be raised at a belated stage; and (iv) there was complete accord and satisfaction of the contract as the parties had confirmed in writing that the contract was fully and finally discharged by performance of all obligations. As such, there was no outstanding claim or dispute to be arbitrated.

The respondent argued that (i) there was a genuine and serious dispute as it had incurred losses while executing the contract that remained unpaid and even the final payment was made after delay; (ii) the no dues certificate was void as it was issued under duress and therefore had no meaning in the eyes of law; and (iii) it had the right to invoke the arbitration clause in the contract.

Decision: The Supreme Court held that there was no genuine and serious dispute for arbitration. Deciding the accord and satisfaction issue in favour of the appellant, the Court relied on a prior decision to explain the thought process behind determining a reference to arbitration under section 11 as follows:

“The Chief Justice/his designate exercising jurisdiction under Section 11 of the Act will consider whether there was really accord and satisfaction or discharge of contract by performance. If the answer is in the affirmative, he will refuse to refer the dispute to arbitration. On the other hand, if [he] comes to the conclusion that the full and final settlement receipt or discharge voucher was the result of any fraud/coercion/undue influence, he will have to hold that there was no discharge of the contract and consequently, refer the dispute to arbitration” (paragraph 20) [emphasis supplied].

Applying the law to the instant facts and circumstances, the Court concluded that there was full and final settlement of the claim and there was accord and satisfaction. The appellant was discharged of all liabilities pursuant to issuing the completion certificate. Therefore, no arbitrable dispute existed so as to warrant exercise of power under section 11. The respondent made mere bald assertions bereft of any details or particulars, which could not lead to an arbitrable dispute.

Arbitration in India: New Developments

We've not been blogging for some time but the period of lull is over. In this post, we intend to bring to the readers a few developments in Indian arbitration law and provide link comments on those developments.

Raffles Design Intl. India Pvt. Ltd v. Educomp Professional Education (Del HC: Oct. 2016): Non-applicability of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 to arbitration related court proceedings; whether Part I has been excluded?; Non-availability of relief under Section 9 to enforce orders of the arbitral tribunal; power of the court to award interim relief under S. 9 independent of the tribunal's orders; non-availability of relief under S. 27(5) (purportedly contempt) for disobedience of interim relief awarded by a Singapore seated arbitral tribunal.  

Comments: here and here

Ayyasami v. Paramasivam (SC: Oct. 2016): Disputes involving fraud are non-arbitrable; But allegations of such fraud should not only be serious and in normal course constitute a criminal offence but also that they "are also complex in nature and the decision on these issues demand extensive evidence for which civil court should appear to be more appropriate forum than the Arbitral Tribunal." The court later held: "It is only in those cases where the Court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced, the Court can sidetrack the agreement by dismissing application under Section 8 and proceed with the suit on merits."

The blogger still thinks N Radhakrishnan is based on shaky foundations and is liable to be overruled. If at all disputes of the nature mentioned in Ayyasami have to be made non-arbitrable, it could be only for the purposes of bringing such disputes tainted by serious allegations of fraud to the public domain rather than deciding it in arbitration, which is private and confidential. Unfortunately, N. Radhakrishnan and Ayyasami are based on the misconceived basis that "the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, Courts, i.e. public for a, are better suited than a private forum of arbitration." This is totally misconceived considering that English law abandoned the legal position, as has been argued in this paper.

Comments: here and here

[Note: The links are just one of many comments on the topic and there is no particular reason for providing only those links and not others. Readers may please provide links to more comprehensive analyses in the comment section of this blog post.]

Whether a Section 9 Petition Can be Disposed of Ex Parte: Full Bench of Hyderabad HC

In a recent judgement in East India Udyog Ltd. v. Maytas Infra Ltd., a Full Bench of the Hyderabad High Court had to decide whether a court hearing a petition under Section 9 of the Arbitration and Conciliation Act, 1996 could dispose of the same ex parte. The entire list of questions that was referred to the Full Bench is quoted below:

"a) Whether the Court as defined under Section 2 (e) of the Act, is entitled to dispose of the application filed under Section 9 of the Act before initiation of the arbitral proceedings under section 21 of the Act, ex- parte without giving notice to the respondents, if the facts and circumstances so warrant?
b) Whether the Court as defined under Section 2 (e) of the Act, is entitled to grant any interim order pending disposal of the interim measure application under Section 9 of the Act?
c) Whether further application pending disposal of the interim measure under Section 9 of the Act, is maintainable?"

 

Answering the above questions, the court held that a petition under Section 9 cannot be disposed of ex parte but the court could issue an ad interim ex parte order pending the proceedings under Section 9. In holding so, the court affirmed the already settled law that the powers of the court under Section 9 are akin to that of a court hearing applications for interim orders under the Code of Civil Procedure (for a more nuanced implication of this aspects, see paras 16 to 16.3 of the aforesaid decision.

 

The Full Bench of the Hyderabad HC answered the reference in the following manner:

"The Court as defined under Section 2(e) of the Act, is undoubtedly entitled to dispose of the application filed under Section 9 of the Act even before initiation of the arbitral proceedings under Section 21 of the Act. The Court, however, cannot dispose of such application ex parte without giving notice to the respondents, but Court can pass ex parte ad interim order pending the application filed under Section 9 of the Act."

Recent Developments in Indian Arbitration

In this short post, we give an overview of two recent developments in Indian Arbitration.

 

The first one pertains to the doctrine of separability and its application in the context of Section 45 (Power of Judicial Authority to Refer Parties to Arbitration) of the Arbitration and Conciliation Act, 1996 (1996 Act). Mr. Mihir Naniwadekar of the Indian Corporate Law Blog has written a post on the seeming conflict in approaches between the Supreme Court and the Bombay High Court on applying the separability doctrine in relation to the question as to whether the arbitration clause in the agreement that was novated stood extinguished. The issue is not only that of separability but also, and perhaps more importantly, of competenz-competenz- What types of jurisdictional questions pertaining to novation would the Judicial Authority/Designate decide? See the post in Indian Corporate Law blog for further details.

 

The next development is the case of Embassy Property Developments Limited v. Jumbo World Holdings Limited decided by the Madras High Court on 20 June 2013. The case is interesting because it deals in detail with the availability of interim measures under Section 9 against third parties. The availability of interim measures against third parties is a topic of great interest with there emerging a bit of clarity on the law. Read the posts that appeared in the Lex Arbitri Blog and this blog (series of posts) and also read this paper on the topic.

 

Now, coming back to the Embassy Property case, the Division Bench of the Madras High Court  held that interim measures could be ordered even against third parties to the arbitration agreement under Section 9 of the 1996 Act. On the contours of such power, the court held: 

"We are of the view that the power of this court, under Section 9 of the Arbitration and Conciliation Act, 1996, is wide in scope and it would extend even to third parties in whom the properties or goods are vested, even though such parties may not be a party to the arbitration clause in an agreement. Even though section 9 of the Arbitration and Conciliation Act, 1996, could be invoked only by a party to the arbitration agreement, the interim relief could be granted by this court even against the third parties. Unless such a power is available, under section 9 of the Arbitration and Conciliation act, 1996, the parties to the arbitral agreement could be frustrated even if they succeed in the arbitral proceedings before the Arbitration Tribunal concerned."

 

As the emphasised words clearly suggest, the High Court held that where the goods/ properties that pertain to the arbitration, interim measures would be available against third parties who claim/ enjoy rights relating to such goods/ properties. 

 

The court also observed that since Section 9 aims at preserving and protecting the subject matter of the arbitration, relief would be available even if the subject matter is in the hands of third parties. As long as a nexus is available between the subject matter and the parties to the arbitration agreement, the court could order interim measures even against third parties.

Bharat Aluminium v. Kaiser Aluminium: Interim Measures in Foreign Arbitration

September 6, 2012 would be remembered as a day when India, through its Supreme Court, shook off its image as an anti-arbitration nation. The world, including stalwarts of international arbitration hailed the judgement of the Supreme Court of India in Bharat Aluminium Co. v. Kaiser Aluminium Technical Service ("Kaiser Aluminium") as the new beginning in international arbitration. For example, Gary Born & Suzanne Spears make the following observations on Kaiser Aluminium:

"Its decision will have substantial and continuing importance, not just in India but more widely; it can be expected to mark a genuine new beginning for international arbitration in the region." (International Arbitration & India: "A Truly Excellent Judgement", Indian Journal of Arbitration Law, 2012)

Primarily, there are two aspects of the judgement: (1) the judgement holds that Part I is not applicable to International Commercial Arbitrations held outside India; (2) the judgement states that interim measures by arbitral tribunals in foreign arbitrations cannot be enforced in India and Indian courts do not have the power to order interim measures in foreign arbitrations. It is the second aspect of the judgement which is the subject matter of this post.

Kaiser Aluminium is a vindication of the stance made on previous occasions in this blog and elsewhere that the text of the Arbitration and Conciliation Act, 1996 (notwithstanding Bhatia International) does not grant the power to Indian courts under Section 9 to grant interim measures. See this post and this paper (p. 641). Our stance has been that the 1996 Act was drafted with an intent to create negative incentives for the parties to agree on a foreign arbitration clause. The mere fact that no interim measures would be available in Indian courts for obtaining or for enforcement of interim orders was deemed by the drafters to be sufficient incentive to make the parties agree to arbitration in India as the seat. This is precisely the conclusion in Kaiser Aluminium.

Arguments:

The non-availability of interim measures in foreign arbitration was canvassed as an argument in favour of applying Part I of the Act to foreign arbitrations. It was argued by Dr. AM Singhvi that Section 9 was a "stand alone" provision which was not affected by the limit of territoriality contained in Section 2(2) and that since interim orders of foreign courts were not enforceable in India, parties would be remediless if there was no right conferred to approach Indian courts for interim measures. Therefore, the counsel argued that Section 9 should be given purposive interpretation.  It was argued that if no interim measures is granted in foreign arbitration a party would be left without remedy. Further, it was contended that since Section 9 was asset specific, that is, territorial, it could be applicable even in foreign arbitration, unlike Section 34, by which a foreign arbitral award could be annulled and thus have an extra territorial application. Therefore, it was argued that Bhatia International was correct on the core issue- Section 9 was available even in foreign arbitrations since it is asset specific. Another argument put forth was that if Part I was applicable only to Domestic arbitrations, it would leave the parties remediless. For example, in Reliance Industries Ltd. v. Enron Oil and Gas, the question before the Commercial Court was whether an appeal under Section 69 of the English Arbitration Act, 1996 was available from the award. The court held in the negative as the proper law of the contract was Indian law and Section 69 allowed appeals only when there was a question of English law. This meant that there was no way in which the award could be challenged.

Judgement:
The court's judgement on the availability of interim measures to foreign arbitration is summarized below:

• Section 9 has been placed in Part I of the Act. Since Part I does not apply to foreign arbitrations, Section 9 does not apply to such arbitrations. Further, since Part II does not contain a provision for interim measures, Indian courts do not have the power to grant interim measures in foreign arbitrations.
• Bhatia International was wrong to interpret the words "in accordance with Section 36" to go only with "after making the arbitral award". As per Bhatia International, as regards foreign arbitration interim measures under Section 9 was available before or during the arbitration but not after the award was passed. this interpretation is erroneous as the text of Section 9 does not support such an interpretation ("A bare look at the aforesaid provision would indicate that there is no break up of the sentence in between the two comas at the beginning and end of the sentence. Therefore, the sentence cannot be broken into three parts as it is done in paragraph 28 of Bhatia International...")
• If Section 9 is extended to foreign arbitrations, it would do violence to the territoriality principle enshrined in Section 2(2).
• Merely because the remedies against the award in a foreign seat are more onerous does not mean that Part I should be applicable to such arbitrations. The parties have chosen their seat of arbitration by consensus and the the remedies available against the award is a consequence of the such a choice. A choice of foreign seat, likewise, implicitly means that parties would not have the right to seek interim measures from courts. If, by interpretation, the court makes Part I applicable to foreign arbitrations, it would amount to "naked usurpation of the legislative function under the thin guise of interpretation..."
• The intention of the authors of the 1996 Act is available in the text of the statute and the context of the provisions. Hence, Bhatia International was wrong to assume the role of "finishers, refiners and polishers" of the Act.
• Even a suit for inteirm relief pending arbitrations is not permitted under the Indian law. Existence of a cause of action is essential to file a civil suit. In suits seeking interim relief pending arbitrations, there is no cause of action (Order VII Rules 1 & 11(e), Order II Rules 1 & 2, Code of Civil Procedure, 1908, Sections 14(2), 37 & 38 Specific Relief Act, 1963) . An interlocutory injunction as per Indian law is available only in a civil suit claiming some final relief and such an injunction must be a part of some substantive relief claimed. An application for interim relief cannot stand on its own but is dependent on a pre-existing cause of action.
• This position of law has been affirmed in various judicial pronouncements such as Cotton Corporation of India v. United Industrial Bank, Ashok Kumar Lingala v. State of Karnataka, etc.

Thus, the court concluded that there was no provision under the Code of Civil Procedure or under the 1996 Act for interim measures in foreign arbitrations even if the 1996 Act was made the governing law of arbitration.

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.

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.

Further Confusion in the Law on Interim Measures in Non-Indian Arbitrations

Critique that Indian arbitration law is the whim and fancy of every High Court/ Supreme Court judge in India can be found in various places in this blog. Before dealing with a judgement of the Delhi High Court on interim measures in international commercial arbitration, we thought it fit to reiterate this point.

The judgement by Manmohan, J. was pursuant to an application for interim measures by Prima Buildwell Pvt Ltd (Buildwell) against Lost City Developments LLC (Lost), Cavern Hotels & Resorts FZCO (Cavern) and Dubai World. Buildwell, its affiliate, and its parent company entered into a Joint Venture Agreement in 2007. The JV Agreement provided for reference of disputes to arbitration in London under the ICC rules of arbitration.The Agreement also provided that the Governing Law would be English Law.

It was contended by Sr. Counsel Dr. AM Singhvi (for the respondents) that cause of action did not arise within the jurisdiction of the Delhi High Court and the respondents did not own assets or bank accounts in India. Further, it was contended that the petitioner had alternative forum for seeking relief and that the seat of arbitration was London and not India. Therefore, Indian courts did not have jurisdiction to entertain the application for interim measures.

The Delhi High Court held that the governing law of arbitration agreement was the English law When the parties agreed for London as the seat, the court held, the English courts had supervisory jurisdiction to grant interim measures. Shockingly, the court cited the case of Shashoua v Sharma (we had briefly discussed this case previously in this blog) and concluded that since the choice of seat operated as an exclusive jurisdiction clause, Part I was excluded . We say "shockingly" because the law as discussed in Shashoua does not prevail in India. In Shashoua, the English Court of Appeal held that designation of the seat of arbitration is akin to an exclusive jurisdiction clause- no other country except the seat has supervisory jurisdiction over the arbitration. It must be noted that after Bhatia International and a string of subsequent judgements applying Bhatia International, as per Indian law, designation of seat does not operate as an exclusive jurisdiction clause in case of international commercial arbitration held outside India. As aptly put by Mr. Niranjan of Indian Corporate Law blog, "[t]he seat of arbitration in Indian law has perhaps a more marginal role than it deserves in determining whether Part I has been impliedly excluded." The law in England and Wales is completely different from India on this issue. In accordance with Indian law, even if the seat of arbitration is outside India, Indian arbitration law would nevertheless apply unless parties excluded it expressly or impliedly. Therefore, citing Shashoua by the judge was wholly inappropriate.It must, however, be conceded that an agreement selecting the seat of arbitration should (but does not in India) operate as an exclusive jurisdiction clause. But Indian law does not recognise this. To recognise such a principle would be to overrule Bhatia International.

Further, the interim measures appear to be maintainable as Article 23 of the ICC Rules allow a party to approach a"competent judicial authority" for interim measures. The court disregarded this contention and held: 

"The question of what constitutes a competent court was also considered by a Division Bench of this court in re. Max India (supra), where it was held that courts of the country whose substantive laws govern the arbitration agreement are the competent court in respect of all matters arising under the arbitration agreement."

The Max India judgement that the Single Judge referred to was the judgement by the Division Bench of the Delhi High Court. In Max India, the substantive law of contract was Singapore; Singaporean courts were the competent courts; venue of arbitration was Singapore and the arbitration was to be conducted as per SIAC Rules. It is true that the Division Bench held that where the substantive law of contract and governing law of arbitration were Non-Indian Law and the seat was outside India, Part I was excluded. However, in Max India, no provision akin to Article 23 of the ICC Rules which allowed a party to approach any competent judicial authority was cited. In this context, it is relevant to cite certain portions of the judgement in Bhatia International:

"...Mr. Sen submits that, in this case the parties had agreed that the arbitration be as per the rules of ICC. He submits that thus by necessary implication Section 9 would not apply. In our view in such cases the question would be whether Section 9 gets excluded by the ICC Rules of Arbitration... Thus Article 23 of the ICC rules permits parties to apply to a competent judicial authority for interim and conservatory measures. Therefore, in such cases an application can be made under Section 9 of the said Act."

The distinguishing point between Max India and Bhatia seems to be that in the former case, parties had chosen Singaporean courts while in the latter there was no such choice. Parties by agreeing to ICC Rules agreed that they could approach any "competent judicial authority" for interim measures.

The judgement can be accessed from here. 

On a not-so-serious note, there are two aspects worth mentioning here. One, while Article 23.2 ICC Rules is the relevant provision, the Single Judge quoted Article 23.1 (which provides for application to the arbitral tribunal for interim measures). The reason why the judge quoted Article 23.1 instead of Article 23.2 is anybody's guess. Two, in Max India, Dr. AM Singhvi contended:

"Even when arbitral proceedings were to be conducted by SIAC at Singapore applying laws of Singapore, jurisdiction of Indian courts was not "specifically excluded" in Article 19 of the Agreement. In the absence of such specific exclusion, court in India for limited purpose of issuing direction for interim measures, to protect the property in India shall have the requisite jurisdiction..."

In this case, however, Dr. AM Singhvi contended:

"[T]he petitioners are not entitled for any relief sought and the petition is liable to be dismissed which is devoid of any jurisdiction, therefore, the court on its own should not exercise its discretion to grant any relief... The petitioners have alternative forum to seek the same relief and the appropriate and natural forum for the petitioners to seek interim relief is the Dubai World Tribunal at Dubai, where the obligations flowing from the JVA had to be ordinarily performed and is also the place where the respondents are domiciled as well as the situs of the funds which the petitioners are claiming are in a bank account or at the alternative place where the Arbitral seat exists as per the agreement which contain clause that the dispute shall be finally and exclusively settled by Arbitration in London."

In Max India, the counsel argued that an application for interim measures did lie while in this case, he contended otherwise.

Choice of Law & Applicability of Part I in India: Anita Garg v Glencore Grain

Anita Garg v Glencore Grain Rotterdam BV (11 August 2011, Del HC) is one of the most significant Indian judgements in the recent times dealing with choice of law issues issues in international commercial arbitration. The Bench consisting of Vikramjit Sen & Siddharth Mridul, JJ have analysed several concepts in international commercial arbitration such as the lex arbitri, substantive law of contract etc, apart from attempting to make sense of the rulings that dealt with the applicability of Part I of the Act to arbitrations whose seat was outside India.

 

For this reason, the judgement merits detailed consideration in this blog. We would also take this opportunity to discuss the law on choice of law in international commercial arbitration from the Indian perspective. In the first few posts, we descriptively analyse the judgement.

  

Prior History:

The judgement in this case was consequent to an appeal filed against a judgement of the Single Bench of the Delhi High Court. The Single Judge dismissed Anita Garg's petition under Section 34 challenging the arbitral awards on the ground of the principle of public policy of res judicata (check out the comment of the Single Judge's decision in the Indian Corp Law blog). After the arbitration was initiated, the Appellant’s firm had filed a suit in the civil court challenging the legality and validity of the contracts containing the arbitration clause. Meanwhile the arbitral award was passed. The said civil suit was heard along with the suit filed by the present Respondent Glencore Grain Rotterdam BV to enforce the arbitral award. The latter suit was treated as an application filed under Sections 47 and 48 of the Act for enforcement of the final award. After hearing both suits jointly, the court held the award to be enforceable and dismissed the Firm’s suit. There were several other suits/ objections filed by the Appellant (litigating under her name or in the name of the partnership firm of which she was a partner) to forestall the realization by the Respondent of the benefits of the impugned arbitral awards.

Arbitration Clause and Choice of Law

The clauses pertaining to arbitration and choice of law in the agreement read:

“Any dispute arising on this Contract shall be referred for settlement to the Arbitration by two Members of this Association's Panel of Arbitrators or their Umpire, being also a Member of this Panel. Each party to appoint one Arbitrator and having the right to reject one nominee. In the event of any party omitting to nominate an Arbitrator within ten days of receipt of notice of appointment of an Arbitrator by the other party, or of the Arbitrators failing to agree on the appointment of an Umpire, the Committee of the London Rice Brokers Association, in either case, shall have power to appoint one forthwith, who shall act on behalf of and as if nominated by the party or parties in default. Claims for arbitration other than Arbitration on quality shall be made and the Claimant's Arbitrator shall be nominated not later than 90 days after the expiry of the contract period of shipment or not later than 90 days from the date of final discharge of the ship at port of destination whichever period may last expire. The parties to the Arbitration shall have the right of appealing against any Award (except on questions of law) within thirty days from the date of Award to the London Rice Brokers Association, whose decision shall be final. Any payments arising out of the Award are to be made within 30 days of the date hereof.

14. Domicile- The Contract shall be deemed to have been made in England and the construction, validity and performance thereof shall be governed in all respects by English Law. Any dispute arising out of or in connection therewith shall be submitted to arbitration in accordance with the Rules of the London Rice Brokers' Association. The serving of proceedings upon any party by sending same to their last known address together with leaving a copy of such proceedings at the office of the London Rice Brokers' Association shall be deemed good service, rule of law or equity to the contrary notwithstanding.”

Arguments:

The judgement of the Division Bench is not well structured. The broad contentions in the appeal as can be culled out from the judgement are below:

1. The Single Judge committed an error in dismissing the petition under Section 34 on the ground that the matter was already decided (res judicata) in the application under Section 48 (originally the civil suit filed by the Respondent) because the exercise of jurisdiction under Section 48 is different from Section 34 as the scope of the former is narrower than the latter.
2. The award was served on the firm and not personally on the partners thereby falling foul of the requirement to serve the award personally to the parties concerned. This legal position was recognized in BSNL v Haryana Telecom 2010 (172) DLT 280.
3. Since the arbitral tribunal consisted of two arbitrators, the award was illegal and non est.

The respondent’s contentions are below:

1.      The Appeal is not maintainable as substantive law of contract was English Law. This legal position was affirmed in the recent decision of the Supreme Court in Videocon v. Union of India.

2.      The principle of res judicata barred the Appellant from raising objections under Section 34 when objections against the award had already been rejected in the application under Section 48.

3.      The arbitral award is not invalid merely because it provided for award by two arbitrators. The arbitration clause provided that in case the arbitrators disagreed, an umpire could be appointed to resolve the deadlock between the arbitrators. Further, this provision was not contrary to English Law.

Judgement: 

 Following is a summary of the Judgement of the High Court:

 On Maintainability of Appeal in view of Videocon v. Union of India

Applicability of Part I of the Act: [In this post, we descriptively analyse the judgement of the High Court pertaining to the applicability of Part I of the Act to international commercial arbitration.]

1.      In BhatiaInternational v Bulk Trading SA (2002), the Supreme Court rejected the contention of one of the parties that since the seat was Paris, France, a party could only approach the courts in France and not the Indian courts for interim measures for interim relief. Rejecting the contention, the Supreme Court held that the Act applied to both domestic arbitration and international commercial arbitration, unless Part I was expressly or impliedly excluded by the parties. Further, according to Bhatia, “an award is enforceable in India by invoking the provisions of the A&C Act or, significantly, even the CPC. The contract in that case did not so specify.”

2.     In VentureGlobal Engineering v Satyam Computer Services (2008), Part I was held to be applicable in view of the fact that it was not excluded by the agreement. Further, even the agreement provided that the parties were to act in accordance with the Indian Companies Act and other applicable laws in force in India. Therefore, the Supreme Court concluded that Part I was applicable to the arbitration. In Venture, “the Apex Court had recognized the distinction between substantive law or the law of contract, and the curial law governing the arbitration which is determined by the ‘seat of arbitration’, which was Paris.”

3.      In Videocon Industries v Union of India (2011), where the Supreme Court analysed the above decisions, the concerned agreement provided that the arbitration agreement was to be governed by the laws of England. According to Section 3 of the English Arbitration Act, 1996, seat of arbitration meant the juridical seat of arbitration. In view of Section 2 of that Act, where the seat of arbitration was England (including Wales & Northern Ireland), matters pertaining to the conduct of arbitration was to be regulated by the English Arbitration Act, 1996. Here, the arbitration clause provided for the applicability of Indian law as regards substantive or contractual disputes and for English Law to govern the conduct of arbitration.

4.      In NTPC v Singer (1992), the arbitration clause provided that the law applicable to the contract was the Indian law and that the courts in Delhi would have the exclusive jurisdiction for matters that arose under the Contract. There the Supreme Court had held the following:

a.       Parties had the option to choose the law governing the international commercial arbitration agreement.

b.      The parties may choose the substantive law governing the arbitration agreement as well as the procedural law governing arbitration. The choice may either be express or implied.

c.       Where the choice of the law governing the contract as a whole, or of the law governing the arbitration agreement is absent, the presumption is that the law governing the contract and the arbitration agreement would be the law of the seat of arbitration, unless a contrary there was a intention.

d.      Where the main agreement provides for choice of the law governing the contract, such law shall be, unless contrarily provided, the law governing the arbitration agreement as well, the reason being that the arbitration clause is a part of the main agreement.

e.       The substantive rights arising out of the main agreement as well as the arbitration agreement would be governed by the laws of India.

f.    Although mandatory provisions pertaining to English Law would be applicable, the jurisdiction of the English courts (and the applicability of English Law in procedural matters) would be concurrent to the jurisdiction of the Indian Courts and Indian law would operate in all matters pertaining to the arbitration to the extent that the main agreement as well as the arbitration clause were governed by Indian law.

5.      The Act is an amalgam of the domestic arbitration jurisprudence, the New York Convention, the Geneva Protocol & Geneva Convention, and the UNCITRAL Model Law on International Commercial Arbitration. None of the instruments mentioned above deal with domestic arbitration. This has resulted in the absence of clarity on domestic arbitration.

6.      As clarified in Jagannath v Union of India, the Union of India is competent to make laws for the purposes of enforcing international treaty obligations. But laws are to be enacted by the Parliament to make the treaty obligations binding. Courts have, in several instances, through Article 51 of the Indian Constitution, given weightage to international treaties. When domestic law comes into force in respect of treaties and international agreements, courts cannot rely on the treaties. In this case, “it may no longer be possible to advert to or be guided by the UNCITRAL Model Law or the New York Convention or the Geneva Convention.”

7.      “It appears to us that Parliament was not fully alive to the need to clearly provide for domestic as well as international commercial arbitration. Hence, manifold and myriad.” In the absence of separate legislations on international commercial arbitration and domestic arbitration, the Act has been pressed for regulating both regimes. “Part-I, therefore, with no possible alternative, must cover all hues of hues of (sic hues of) international commercial arbitration. On this simple premise, one need not look into various Sections to come to the same conclusion.”

We'll look at the High Court's decision on the implications of the above on choice of law by parties.

Indus Water Treaty Dispute Update: Pakistan Applies for Interim Stay

News papers have reported that Pakistan has sought interim stay on the construction activities of the Kishenganga Hydro Electric project on the Sutlej river till the final disposal of the case. The uninitiated may check out the blog posts from label titled "Arbitration: Indus Water Treaty Dispute". The Kishanganga Project is scheduled to be commissioned by January 2016.

News reports suggest that the application for interim stay would be heard by the seven member arbitral tribunal during the August 25-27 August this year. 

Pakistani newspapers report infighting among the members of its legal team. Allegations such as favoritism in the appointment of lawyers have been made. Also, the papers report difference of opinion in obtaining interim stay of the Kishanganga project even during the first hearing. In fact, people watching the arbitration closely were slightly surprised when Pakistan did not seek an interim stay of the project during the first hearing of the arbitration.

We'll keep readers updated on the hearings.

Further Discussion on Videocon Industries v UoI (Exclusion of Part I of the ACA 96)

In the last post on this issue, we had analysed the decision of the Delhi High Court in the case of Videocon Industries v. Union of India. We summarize our conclusions reached in the previous post below:

• The seat of arbitration as per the provisions of the Production Sharing Contract (PSC) was Malaysia. However, parties agreed to transfer the seat itself (and not merely to have the hearings outside Malaysia) to London.
• Interference by the Delhi High Court under Section 9 for the reason that there was a dispute between the parties as to the seat of arbitration was unwarranted.

The next portion of this post deals with the case before the Supreme Court.

Arguments of the Parties before the Supreme Court:
For Videocon: Summary of Videocon's arguments are:

• Delhi High Court did not have jurisdiction to pass an order under Section 9 to stay the arbitral proceedings because such relief was beyond the scope of Section 9, especially in view of Section 5.
• Even if such relief could be granted under Section 9, the Delhi High Court did not have jurisdiction as Part I was impliedly excluded by the parties as the lex arbitri was English Laws.
• Having agreed for the shifting of seat, UoI is estopped from arguing that the seat of arbitration was Kuala Lumpur.
• If UoI was aggrieved by the partial award, it could have applied to the English courts to annul the said award.

For UoI:

• As per the arbitration agreement, Kuala Lumpur was the seat of arbitration. Once Kuala Lumpur was the seat of arbitration, the seat could not have been changed except by amending the PSC as per Article 35.2.
• Arbitral tribunal was not entitled to determine the seat of arbitration and the record by the tribunal of proceedings to that effect.
• The PSC was between ONGC Ltd., Videocon Petroleum, Command Petroleum and Ravva Oil and therefore the venue of arbitration cannot be treated to have been amended on the basis of the agreement between the two parties to the arbitration agreement. Any changes in the PSC required concurrence by all the parties. Every written agreement was to be in the name of the President of India and shifting the seat to London did not change the juridical seat of arbitration. Therefore, London was the seat of arbitration.

Decision of the Supreme Court:
According to the Supreme Court, two questions arose for its consideration

1. Whether Kuala Lumpur was the designated seat of arbitration?
2. Whether the Delhi High Court could entertain the petition filed by UoI under Section 9?

Decision on Kuala Lumpur as the Seat of Arbitration: The Supreme Court's reasoning and decision on this question is summarized below:

• The PSC was entered into between five parties with Kuala Lumpur being the seat of arbitration. If the parties were to amend the PSC, they could do so only by amending the PSC as per Article 35.2 through a written instrument. Therefore, there was no transfer of seat but of shifting of venues to different places for convenience.
• There is no provision in the Arbitration and Conciliation Act by which seat could be changed by the arbitral tribunal. 
• The distinction between the seat and holding hearings in venues other than the seat has, however, been recognized in international arbitration. Even in Dozco India Ltd. V. Doosan Infracore, the Supreme Court recognized the difference between juridical seat of arbitration and hearings taking place in a jurisdiction outside the seat. [Section 53 English Arbitration Act, 1996]
• Therefore, there was no agreement to transfer the seat of arbitration to London. The agreement was merely an agreement to hold proceedings outside the seat.

Decision on Implied Excludability of Part I: On the second question, the Court stated that the three judge Bench of the Supreme Court in Bhatia International held that in respect of arbitrations taking place outside India even non-derogable provisions of Part I could be excluded impliedly and that the ratio of Bhatia International was applied in Venture Global. Further, the court held that in Hardy Oil and Gas, the Gujarat High Court had held that Part I was since the Governing Law of arbitration was English Law, Indian courts had no jurisdiction. According to the court, the Gujarat High Court in Hardy Oil and Gas correctly applied the ratio of Bhatia International.

On the basis of the above reasoning the court held that the choice of substantive law of the arbitration agreement as English law implied that Parties had agreed to exclude provisions of Part I. Therefore, the court concluded that the petition under Section 9 was not maintainable.

Comment:
We had previously contended that it was not necessary for the Delhi High Court to rely on the uncertainty of the seat of arbitration for interfering in the arbitral proceedings under Section 9. We are unsure why the Supreme Court had to decide the issue of the seat of arbitration. Perhaps, the parties had raised arguments on this. In any case, we consider it unnecessary for the court to have done so as the fundamental issue before the Delhi High Court was whether Part I of the Arbitration and Conciliation Act, 1996 (Act) was excluded in view of the arbitral clause. Therefore, we’ll address the issue as to the seat subsequent to the analysis on implied exclusion of Part I.

Implied Exclusion of Part I: By merely choosing foreign laws, Part I could be impliedly excluded; but unless it is excluded, Part I would apply even to arbitrations held outside India. This principle, whose source is Bhatia International, is fairly well established. But what is not well-established is what are the choices to be made that would lead to exclusion of Part I. The contours of implied excludability is a matter of considerable confusion.

The Supreme Court was of the opinion that Hardy Oil and Gas was a case similar to Videocon. In Hardy Oil and Gas, the substantive law of the contract was Indian Law, the law governing arbitration was English Law, the arbitration was to be conducted as per Rules of the London Court of International Arbitration and the venue was London. The Gujarat High Court held that Part I was impliedly excluded because the parties had expressly chosen English Law to be the law governing arbitration. It may also be noted that the facts in Hardy Oil and Gas are virtually similar to the present case because as per the arbitration clause in the case, the law of the arbitration agreement was English Law. It would do well to quote the relevant clause in Hardy Oil and Gas:

"9.5 Governing Law and Arbitration
1. This Agreement (except for the provisions of Clause 9.5.4 relating to arbitration) shall be governed by and construed in accordance with the substantive laws of India.
2. Any dispute or difference of whatever nature arising under, out of, or in connection with this Agreement, including any question regarding its existence, validity or termination... shall at the instance of any Party be referred to and finally resolved by Arbitration under the rules of the London Court of International Arbitration (SLCIA), which Rules (Rules) are deemed to be incorporated by reference into this clause.
...
4. The place of arbitration shall be London and the language of arbitration shall be English. The law governing arbitration will be the English law.
5. Any decision or award of an arbitral tribunal shall be final and binding on the Parties."

On the face of it, it could be argued that Indian Law was the substantive law of arbitration agreement. But on a close reading.of Article 9.5.1 we would argue that apart from the governing law of arbitration being English Law, the governing law of arbitration agreement was also English Law because of the bracketed portions of 9.5.1.

It must however be noted that in Hardy Oil and Gas, the Gujarat High Court did not go into the question of whether a choice of a foreign law as the substantive law of the arbitration agreement impliedly excluded Part I. At least the decision of the Gujarat High Court discloses no analysis to that effect. Therefore, according to this blawgger, the ratio of Hardy Oil and Gas is that a choice of a foreign arbitral seat acts as a an exclusive jurisdiction clause and Part I is deemed to be impliedly excluded for the same. This is confirmed by the Supreme Court’s decision in Videocon, relevant portion of which is quoted below:

“In our opinion, the learned Single Judge of Gujarat High Court had rightly followed the conclusion recorded [in Bhatia International] and held that the District Court, Vadodara did not have jurisdiction to entertain the petition filed under Section 9 of the Act because the parties had agreed that the law governing arbitration will be English Law”. (emphasis supplied)

However, the reasoning of the Supreme Court in Videocon was that the choice of English Law as the law of arbitration agreement meant that Part I was excluded. The court held:

“In the present case also, the parties had agreed that notwithstanding Article 33.1, the arbitration agreement contained in Article 34 shall be governed by laws of England. This necessarily implies that the parties had agreed to exclude the provisions of Part I of the Act. As a corollary to the above conclusion, we hold that the Delhi High Court did not have the jurisdiction to entertain the petition filed by the respondents under Section 9 of the Act and the mere fact that the appellant had earlier filed similar petitions was not sufficient to clothe that High Court with the jurisdiction to entertain the petition filed by the respondents.” (emphasis supplied)

As is apparent from the above two quotes, in Hardy Oil and Gas, the Gujarat High Court held that a mere choice of foreign arbitration law as the governing law meant that Part I was excluded.

In Videocon the arbitration agreement was an English Arbitration Agreement. The court held that because there the substantive law of arbitration agreement was English Law, it was implied that Part I was excluded. The court did not explain why. One plausible explanation would be that the validity and the interpretation of the arbitration agreement in Videocon was to be decided in accordance with English Law. As per English Law, an agreement to have a matter arbitrated in a seat operates similar to an exclusive jurisdiction clause and no court in another country would have jurisdiction over the arbitration proceedings [Shashoua v. Sharma], unless the parties have agreed otherwise. Therefore, the choice of English Law as the substantive law of arbitration agreement meant that no other country had jurisdiction over the matter. However, the question would be whether English Law prohibits a party from seeking interim relief in any other jurisdiction. Probably this should have been the methodology of analysis by the Supreme Court.

Even so, shouldn’t the question of whether the English Arbitration Agreement excluded the applicability of the Indian Act have been a question of fact (being a question as to foreign law)?

In any case, the law as it stands today post-Videocon is that if the arbitration agreement is governed by a foreign law, if the seat of arbitration is foreign, Part I would be impliedly excluded even if the substantive law of arbitration the main agreement was Indian Law. This decision does not deal with the law pertaining to implied exclusion of Part I if the substantive law of contract is Indian Law and the seat of arbitration is not India.

We'll look at the issue of transfer of the seat in another post.