Supreme Court’s landmark Bharat Aluminium judgment prohibits interference by Indian courts in foreign seated arbitrations
The Arbitration and Conciliation Act, 1996 (“Act”) is divided into four parts: Part I (“Arbitration”), Part II (“Enforcement of Certain Foreign Awards”), Part III (“Conciliation”) and Part IV (“Supplementary Provisions”).
Section 2(2) of Part I states in seemingly simple terms: “This Part shall apply where the place of arbitration is in India.” The fate of the law of arbitration in India, seems to have hinged on these lines and generated much heat and dust when, a 3 judge bench of the Supreme Court of India in its much criticized judgment, Bhatia International vs. Bulk Trading S.A. and Anr. (2002) 4 SCC 105 (“Bhatia International”) held that, Part I of the Act would apply not only to domestic arbitrations, but also to foreign seated arbitrations. This decision now stands overruled by the landmark 5 judge Constitution Bench judgment, Bharat Aluminium Company and Ors. vs. Kaiser Aluminium Technical Services Inc. and Ors. 2012 (3) ARBLR 515 (SC) (“Bharat Aluminium”) passed by the Supreme Court on September 6, 2012, where, in sync with the principles underlying the New York Convention and UNCITRAL Model Law and, expectations of the international arbitration community, the Supreme Court has held that, Part I will apply only to India seated arbitrations and, not to foreign seated arbitrations. Importantly, this implies that Indian courts will not exercise supervisory jurisdiction over foreign seated arbitrations or, entertain challenge to foreign awards to set them aside under Section 34 of Part I. This judgment was much awaited and it restores the damage done to India’s image as an arbitration destination by Bhatia International and, the decisions that followed its logic. The Supreme Court has ruled that Bharat Aluminium will apply prospectively i.e., for arbitration agreements entered into after September 6, 2012. This Bulletin discusses the law of arbitration before and after Bharat Aluminium and, the implications for contracting parties.
The majority of state High Courts in India had in consonance with the ethos of New York Convention and UNCITRAL Model Law acknowledged that Part I of the Act which contained provisions to facilitate arbitrations and, for challenge of domestic awards was applicable only where the seat of arbitration was in India. That, Part II which dealt with “enforcement” of foreign awards i.e., those passed in New York and Geneva Convention countries (“Convention Countries”), was applicable to foreign seated arbitrations. Thus, Part I and II were separate and mutually exclusive.
The comity between Parts I and II was upset by Bhatia International, where the Supreme Court held that, Part I was applicable not only to domestic arbitrations, but also to foreign seated arbitrations. This case had come up in appeal before the Supreme Court, when in a foreign seated arbitration under ICC (Paris) Rules, Bulk Trading (Respondent) filed a Section 9 application seeking an interim injunction restraining Bhatia International (Appellant) from alienating its business assets located in India. Section 9 which provides for
interim measures, is located in Part I of the Act and, the Supreme Court reasoned that, the Indian Legislature had left a lacuna, in as much as, no interim measures of protection were available in Part II. Therefore, if Part I was not made applicable to foreign seated arbitrations, parties will be left remediless, being unable to avail any interim reliefs in India, even if the assets were located in India. Further, there would be no arbitration law to cover non-convention countries, as neither Part I (which purportedly applied to Indian arbitrations) or, Part II (which applied to Convention Countries) would be applicable. Thus, in Bhatia International, the Supreme Court ruled, that Part I will compulsorily apply where the seat of arbitration was in India and, Part I will also apply to foreign seated arbitrations, but its application could be excluded by the parties agreement, either expressly or impliedly.
To the extent Bhatia International allowed an aggrieved party recourse to Indian courts to seek interim measures of protection under Section 9 of Part I, it provided critical support to the arbitration proceedings and was well-intentioned. It started to hurt, when extending the logic of Bhatia International, the Supreme Court in Venture Global Engineering vs. Satyam Computer Services, (2008) 4 SCC 190 (“Venture Global”) held that, foreign awards could be challenged under Section 34 of Part I. Whilst Part I allows recourse to parties to challenge and “set aside” domestic awards under Section 34, Part II merely provides for “enforcement” of foreign awards obtained in Convention Countries. A domestic award under Part I becomes enforceable as a decree of Indian court, only if the challenge to set it aside under Section 34 is unsuccessful or, after the time period for making the application for challenge has expired. The grounds to refuse enforcement of foreign award under Part II, are very nearly identical to the grounds for setting aside a domestic award under Part I. However, importantly the foreign award remains valid, unless set aside by a “competent authority” i.e., of the country in which or, under the law of which the foreign award was made. Interference by Indian courts in foreign awards to set them aside, thus had the potential to cause conflict and chaos, as a foreign award could remain still valid and enforceable in the foreign country, where it was passed.
Bhatia International and Venture Global thus became the law for the following years and, the line of decided cases that followed were widely resented by the international arbitration community for being heavy-handed and unwarranted interference in foreign seated arbitrations by Indian courts. Legal practitioners had to specifically tailor the arbitration clauses to fit this law, but overall the situation remained confusing. The parties were happy to skirt the challenge to a foreign award under Section 34 and exclude Part I, but at the same time, they wanted to have recourse to interim measures under Section 9 of Part I, where the assets were located in India.
Fortunately, the comity between Part I and Part II is now restored by Bharat Aluminium and, there is clarity on the law.
2. Genesis and ruling of Bharat Aluminium
An agreement dated April 22, 1993 was entered into between Bharat Aluminium (Appellant) and Kaiser (Respondent), under which the latter had to supply and install a computer based system for modernization of Appellant’s shelter, situated at Korba, in the state of Chhattisgarh, India. The agreement contained an arbitration clause, which inter alia provided that, the “court of arbitration shall be held wholly in London” and, arbitration proceedings
shall be governed by the English arbitration laws. The substantive law governing the agreement was to be that of India. Disputes arose between the parties with regard to performance of the agreement and Kaiser (Respondent) invoked the arbitration which was held in London. The 3 arbitrators’ panel made two awards dated November 10, 2002 and November 12, 2002 in England. Bharat Aluminium (Appellant) thereafter filed an application under Section 34 of the Act for setting aside the two awards in the district court of Bilaspur, state of Chhattisgarh. The learned district judge held that the applications filed by the Appellant for setting aside the award were not tenable and dismissed the same. Aggrieved by the aforesaid order, the Appellant filed two appeals before the High Court of Chhattisgarh. The Division Bench of the High Court by its order dated August 10, 2005 dismissed the appeals. The Appellant then filed appeals before the Supreme Court challenging the order of the High Court.
The Supreme Court’s Constitution Bench heard the matter on consecutive days over a period of several weeks, where the country’s leading arguing counsels from both sides presented their case, making elaborate references to commentaries of various experts in international arbitration, decided cases of Indian and foreign courts and, reports and commentaries with regard to New York Convention and UNCITRAL. A number of other appeals which were impacted with the same issue were tagged along with the appeal filed by Bharat Aluminium. Various provisions of the Act were thus extensively and intensively analysed and, SIAC and LCIA (India) amongst others were invited to intervene and assist the Supreme Court in coming to the decision. As the Supreme Court stated in conclusion, it had acted as “finishers”, “refiners” and “polishers” of the Act.
Those on Appellant’s side argued that, Indian legislature had deliberately omitted the word “only”, which occurs in corresponding Article 1(2) of the UNCITRAL Model Law on which the Act is based. That, absence of the word “only” in Section 2(2) indicated that Part I shall compulsorily apply if the place of arbitration was in India, but it did not mean that Part I shall not apply, if the place of arbitration was not in India. Relying on various other provisions of the Act, the Appellant’s side contrived hard to argue that, unlike UNCITRAL Model Law, the Act was not “seat centric”, but rather “subject-matter” centric and, recognized “party-autonomy” such that, the Act was not premised on the principle of territoriality or localized arbitrations.
The Supreme Court rejected the above arguments and held that, a plain reading of Section 2(2) made it clear that Part I was applicable only to arbitrations which took place in India and not to foreign seated arbitrations. The Supreme Court held that, use of the word “only” in Article 1(2) of the UNCITRAL Model Law which read as follows: “The provisions of this law, except Articles 8, 9, 17(H), 17(I), 17(J), 35 and 36 apply only if the place of arbitration is in the territories of this State” – did not negate the territoriality principle. Referring to the discussions held with regard to Article 1(2) in UNCITRAL, the Supreme Court held that, the word “only” was necessary to clarify that, other than the exceptions relating to Articles 8 (stay of judicial proceedings), 9 (interim reliefs) and 35 and 36 (enforcement of foreign awards), which would have extra-territorial effect if so legislated by the State, the other provisions of the UNCITRAL Model Law would be applicable only to the arbitrations within the State. The Indian Legislature did not retain the exceptions in Article 1(2) of the UNCITRAL Model Law and, hence there was no need to retain the word “only” in Section 2(2) of the Act.
The Supreme Court has stated that law as declared by it in Bharat Aluminum shall apply prospectively i.e., to all arbitration agreements after September 6, 2012. The full impact of this judgment will be realized gradually, but one of the most significant outcomes has already been stated by the Supreme Court itself – First, interim measures under Section 9 (which falls in Part I) are no longer available to parties in foreign seated arbitration. There are no provisions for interim measures in Part II, which deals with foreign seated arbitrations and, (as the Supreme Court explained) neither would such parties be able to file a suit for bare injunction in Indian courts, as the cause of action in such a suit would be speculative, being based upon determination of rights of parties by foreign arbitral tribunal. The parties can of course, seek interim measures of protection in the foreign country, but enforceability of interim orders obtained in a foreign court (which may be necessary, prior to constitution of arbitral tribunal) in India is doubtful. The contracting parties thus need to be mindful of this law, when drafting and negotiating dispute resolution clauses.
Second, the Supreme Court had reasoned in Bhatia International, that if Part I was not made applicable to foreign seated arbitrations, there would be no law to cover non- convention countries in India, as Part I was applicable to domestic arbitrations and, Part II to foreign awards obtained in Convention Countries. The Supreme Court had in Bhatia International, tried to overcome the Legislative lacuna, but this has now re-surfaced and the contracting parties must be cautious about choosing the seat of foreign arbitration and avoid non-convention countries.
Undoubtedly, Bharat Aluminium is a step in the right direction. It firms up the arbitration law in consonance with international arbitration jurisprudence, but at the same time, legal practitioners and, their clients have been left to grapple with the lacuna in seeking interim measures of protection where assets of parties are located in India, until such time the Indian Legislature takes quick corrective action to amend the Act. The Supreme Court has done its job well and, now its over to the Legislature to complete the rest.