Bharat Aluminum Company v Kaiser Aluminum Technical Services, Inc [2005] (the Balco judgment) concluding that the Indian courts would not have jurisdiction with respect to arbitrations with ‘seat outside India’, either for the purposes of granting interim relief or with respect to entertaining a challenge to foreign arbitral awards in India.
With this decision, the Supreme Court of India has revisited the permissible extent of judicial intervention in foreign arbitrations and reinforced the fundamental principles of territoriality and party autonomy. Moreover, it has given credence to the Statement of Objects and Reasons of the Arbitration and Conciliation Act 1996 (the 1996 Act), one of the objectives of which is ‘to minimise the supervisory role of courts in the arbitral process’.
The Supreme Court has held that Part I of the 1996 Act will henceforth not be applicable to any international commercial arbitration having ‘seat outside India’ irrespective of whether or not Part I has been expressly or impliedly excluded by the parties. This decision has thereby overruled, prospectively, the earlier decisions in Bhatia International v Bulk Trading SA & anor [2002] andVenture Global Engineering v Satyam Computer Services Ltd & anor [2010].
BACKGROUND
In the Balco judgment, the Constitutional Bench observed that the 1996 Act is an integrated legislation, governing both the laws relating to domestic arbitration and the enforcement of foreign arbitral awards in India based on the UNCITRAL Model Law on International Commercial Arbitration 1985 (the model law), which aims to make arbitration an effective and expeditious means of commercial dispute resolution. The 1996 Act was introduced to remedy the limitations of the then prevailing Arbitration Act 1940.
The 1996 Act is divided into three parts: Part I deals with arbitrations which have their seat in India, Part II pertains to recognition and enforcement of foreign arbitral awards in India and Part III deals with conciliation. The spheres of operation of Parts I and II were traditionally regarded as being distinct and mutually exclusive. However, the Supreme Court of India in Bhatia Internationalruled that:
‘Part I is to apply also to international commercial arbitrations which take place out of India, unless the parties by agreement, express or implied, exclude it or any of its provisions.’
The rationale behind Bhatia International was that s2(2) of the 1996 Act, which provides that Part I ‘shall apply where the place of arbitration is in India’, was merely a clarificatory and inclusive provision. The Supreme Court in Bhatia International was also of the view that the parties would be without remedy if Part I was held not to be applicable to foreign seated arbitrations in relation to the property or asset located in India.
Relying upon the principles in Bhatia International, the Supreme Court in the case of Venture Global held that unless Part I was specifically excluded, either expressly or impliedly, a foreign award can be challenged in India under s34 in Part I of the 1996 Act. These decisions almost annulled the established principles of territoriality enshrined in the model law and were criticised for judicial intervention in foreign arbitrations. While some viewed the judgments to be progressive and relief oriented, others felt that the decisions were embraced too eagerly and, in fact, opened floodgates for intervention from Indian courts even in foreign seated arbitrations. The correctness of the aforesaid decisions was referred to the Constitutional Bench of the Supreme Court of India.
ISSUES ADDRESSED IN THE BALCO JUDGMENT
The Balco judgment has sought to set right anomalies resulting from the array of decisions arising on the extent of applicability of Part I of the 1996 Act to foreign arbitrations.
The main issues addressed in the Balco judgment are:
- Place of arbitration as found in s2(2) read with ss2(4), 2(5), 2(7) and 20 of the 1996 Act.
- The significance of the words ‘under the law of the country under which the award was made’ enshrined in s48 of the 1996 Act and Article V(1)(e) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention).
- Application of Part I of 1996 Act to arbitrations where the place is outside India.
- Application of Part I to all stages of an arbitration, ie, pre-, during and post-stages of the arbitral proceedings, in respect of all arbitrations, except for the areas specifically falling under Parts II and III of the 1996 Act.
While addressing the above issues, the premises of several provisions of the 1996 Act have been clarified.
APPLICATION OF PART I OF THE ACT: VERDICT ON SS2(2) READ WITH SS2(4), 2(5), 2(7) AND 20 OF THE 1996 ACT.
In absence of the word ‘only’ in s2(2) of the 1996 Act, it was contended that although Part I shall compulsorily apply if the place of arbitration is in India, it does not mean that Part I will not apply if place of arbitration is not in India.
In response, it was submitted that the 1996 Act has given recognition to the territorial principle by limiting the applicability of Part I to arbitrations which take place in India as s2(2) of the 1996 Act bars the jurisdiction of the Indian courts as regards arbitrations held outside India. It was argued that the omission of the word ‘only’ in s2(2) was deliberate to exclude the application of Part I to international arbitrations.
Agreeing with the later submissions, the Balco judgment clarifies that the omission of the word ‘only’ in s2(2) of the 1996 Act does not mean that the parliament intended to make Part I applicable to foreign-seated arbitrations. The reason for the omission is that Article 1(2) of the model law has the words ‘except Articles 8, 9, 35 and 36’ and, therefore, had to use the word ‘only’ to clarify that these provisions would apply also to domestic arbitrations. Since the 1996 Act stipulates no such exceptions, the retention of the word ‘only’ in s2(2) of the 1996 Act would prove redundant. Such a departure from using ‘only’ did not in any way indicate a departure from the fundamental principles of territoriality.
The Court held that s2(4) of the 1996 Act, which states: ‘This Part… shall apply to every arbitration’ and s2(5) of the 1996 Act, which states ‘… this Part shall apply to all arbitrations and to all proceedings relating thereto’, are not inconsistent with s2(2) of the 1996 Act as ss2(4) and (5) have to be read in light of s2(2) and have to be construed as referring to all arbitrations held in India.
DOMESTIC AND FOREIGN AWARDS
The Court also emphasised that there is no lacuna in the 1996 Act with respect to ‘non-convention awards’, ie those awards passed in countries that were not parties to either the Geneva Convention or the New York Convention. Such awards are not enforced under Part I of the 1996 Act. Furthermore, the proviso to s1(2) in relation to Jammu and Kashmir does not mean that the 1996 Act has extra-territorial application.
With reference to s2(7) of the 1996 Act, it is held that the language enshrined in the section, which states that ‘an arbitral award made under this Part shall be considered as a domestic award’ contrasts ‘domestic award’ with ‘foreign award’ under Part II of the 1996 Act and the term ‘domestic award’ includes within its ambit international commercial arbitrations held in India. Therefore, an international commercial arbitration, with India as a seat, is not a ‘foreign award’. Thus, s2(7) of the 1996 Act, in fact, reinforces the principle of territoriality by providing that, even when two foreigners arbitrate in India, the arbitration will be governed by Part I of the 1996 Act.
SEAT AND VENUE OF ARBITRATION
It was contended that s20 of the 1996 Act stipulates that parties are free to agree on the place of arbitration outside India. Therefore, arbitrations conducted under Part I, may have geographical location outside India. It was also contended that the Indian law has chosen only the nationality test for defining arbitration as ‘international’ as is apparent from s2(1)(f) of the 1996 Act.
In response, relying on the provision of ss2(2), 20 and 28 of the 1996 Act, it was submitted that Indian parties to a purely domestic dispute were precluded from choosing a place of arbitration outside India.
In interpreting the above provisions, the Court held that in an international arbitration, the jurisdiction is determined by the ‘seat’ of arbitration, which is a juridical concept and that the concept of the seat is unaffected by the venue where the hearings are conducted. Thus, while the seat of arbitration determines the law governing the arbitration, the venue is assigned merely for the convenience of the parties and has no bearing on the law governing the arbitration.
REMEDIES UNDER S9 AND S34 OF THE 1996 ACT
While emphasising the exclusive operations under Part I and Part II of the 1996 Act, the Court held that the remedy to seek interim reliefs under s9 and the remedy to challenge an arbitral award under s34 could apply only if the seat of arbitration is in India. In view of the concept of seat, Part I (including the provisions underlying s9 and s34 of the Act), would apply to international commercial arbitrations seated in India and domestic arbitrations, while Part II of the 1996 Act applies to international commercial arbitration seated outside India.
In respect of the argument that such a decision would leave a party without remedy for purposes of seeking interim relief in India or challenging an award that is rendered in violations of s34 of the 1996 Act, the Court noted that, once the parties voluntarily chose to arbitrate outside India, they are deemed to have understood the consequences of such a choice. The approach in Bhatia International for removing the hardship to parties was not permissible under law as the duty of the court was merely to interpret the law and not rewrite the law. The Supreme Court stated categorically that it was up to the parliament to fill up any lacunas that may exist from such an interpretation of the 1996 Act.
EXTRA-TERRITORIAL APPLICATION OF PART I OF THE 1996 ACT
The Court clarified that s28 of the 1996 Act stipulates that in arbitration between Indian parties, where the place of arbitration is also India, Indian substantive law would compulsorily apply. However, in international commercial arbitrations, parties may designate any substantive law as applicable to the substance of the dispute. Thus, the Court clarified that the objective of s28 of the 1996 Act is to contrast the substantive law that may be applicable in purely domestic arbitrations to those applicable in international commercial arbitrations. This section in no way provides for the extra-territorial application of Part I of the 1996 Act.
OPERATION OF PART II OF THE 1996 ACT
In relation to s48 of the 1996 Act, the Court held that the reference made to the court of the country ‘in’ which the award was made, ie the country of the seat, and the court of the country ‘under’ the law of which the award was made, do not confer concurrent jurisdiction. The objective is to provide for a second alternative, where the first in unavailable, ie where the country of the seat does not entertain a challenge to the award. Further, s48 of the 1996 Act does not confer jurisdiction to set aside an award but merely provides that a domestic court may refuse to enforce an award if the conditions in the provision are satisfied. The expression ‘under the law which the award was made’ refers only to the curial law of the country and not substantive law governing the substance of the agreement.
In relation to the enforcement of awards rendered in international commercial arbitrations held outside India, the Court held that such awards would only be subject to the jurisdiction of the Indian courts when such awards are sought to be enforced in India in accordance with the provisions contained in Part II of the 1996 Act.
The Court further held that, while Part I of the 1996 Act regulates an arbitration at all four stages of its life (namely the commencement of arbitration, conduct of arbitration, challenge to an arbitration award and the recognition or enforcement of the award), Part II of the 1996 Act has restrictive application in that it regulates an arbitration only at the stage of recognition and enforcement of the award.
ENFORCEMENT OF NON-CONVENTION ARBITRAL AWARDS
The Court observed that India being a signatory to the New York Convention 1958 and the Geneva Protocol 1923 in relation to non-convention arbitral awards, no remedy was provided for the enforcement of such awards under the 1996 Act. As a consequence, a non-convention award cannot be incorporated into the 1996 Act by a process of interpretation and could only be done by suitable amendments made to the Act by parliament.
ANALYSIS AND IMPLICATIONS OF THE BALCO JUDGMENT
The Balco judgment has been widely appreciated for the clarity it has brought in the often contested position on the applicability of Part I of the 1996 Act to foreign arbitrations and is a welcome relief for parties to international commercial arbitrations who would fear undue intervention of Indian courts.
Since the Balco judgment has only been given prospective application ie the law laid down in this case would apply only to arbitration agreements executed subsequent to the date of judgment (6 September 2012), the implications of this decision are not as momentous as anticipated.
The Balco judgment does not provide any immediate relief to the parties present in appeal before the Supreme Court in this case. This decision will also not affect any arbitration agreement already executed, even though the disputes may arise after the date of the verdict. Therefore, in case of any existing agreement, arbitrations and disputes or proceedings currently pending as of the date of the verdict will continue to be governed by Bhatia International and subsequent decisions.
However, the parties who sign the agreement after the date of Balco judgment would be precluded from seeking the Indian courts’ assistance in the appointment of arbitrators or to challenge the awards passed in such arbitrations or seek enforcement of non-convention awards.
REVIEW OF THE BALCO JUDGMENT
Two review petitions have been filed for review of the Balco judgment:
- Ground in the first review petition: the Court has held that, since the Balco judgment applies only to arbitration agreements entered into after 6 September 2012, the law laid down in Bhatia International is still good law for all arbitration agreements up to that date. However, the Balco judgment has unequivocally stated that the law laid down in Bhatia International and Venture Global is not correct, therefore, it has been averred in the review petition that it is wrong that the Balco judgment has directed the parties to be governed by a decision that had misconstrued the provisions of the 1996 Act.
- Ground in the second review petition: since the Balco judgment has been given only a prospective application, no immediate relief is available to the parties in the present matter. It has also been averred that in long-standing agreements (of, say, 25-30 years), entered into before 6 September 2012, Indian courts would still have jurisdiction even if the dispute arises at any later stage. This makes the decision practically irrelevant for agreements entered into prior to 6 September 2012 and the interference of the Indian courts would still continue.
Therefore, in light of the above, there are still parties who would be governed by Bhatia International. It will be interesting to see how parties react to the Balco judgment by either adverting to or amending the existing agreements to come within the purview of the ruling, or alternatively, would the Indian parties want to keep the remedy before the Indian courts open for themselves. It would also be interesting to observe if long-term agreements would undergo amendments to exclude the application of Part I of the 1996 Act and gain the delocalised advantages of a pure international arbitration.
Despite the above lacunas, the judgment has commendably interpreted the law as it stands while carefully not venturing into the domain of law making, as the Balco judgment is based on the rationale that in the absence of legislative prescription, a court does not have the jurisdiction to assist a foreign-seated arbitration.1
CONCERN REGARDING REMEDY OF INTERIM RELIEF
In relation to the grant of interim reliefs, it is widely known that, while several countries exclude applicability of their domestic arbitration laws to foreign arbitrations, they still permit the parties to obtain interim relief from local courts irrespective of the seat of arbitration2. However, for all international arbitration agreements signed after 6 September 2012, the parties will no longer be permitted to approach the Indian courts for interim reliefs. It is pertinent to note that even the Ministry of Law and Justice3, proposed amendments to the 1996 Act, recognising that, while the interference of Indian courts should be reduced, the parties may require to obtain interim relief, and proposed that Part I of the 1996 Act would not apply where the seat of arbitration was outside India (except for s9 for interim measures and s27, which deals with assistance given to the court in taking evidence). However, the Balco judgment ousts the Indian court’s jurisdiction completely in foreign-seated arbitrations.
The Balco judgment is clearly a signal to the legislature to consider extending interim protection to foreign arbitrations, without encouraging unwarranted interference with the arbitral process. Therefore, in light of the above visible lacunas, which still persist with respect to interim protections, it is expedient that the parliament addresses the difficulty with suitable amendments to the 1996 Act.
FUTURE OF ARBITRATION WITH INDIAN PARTIES
With this decision, the law governing arbitrations in India has regained its lost direction. However, the journey has only partially been covered, as efforts are required from the both the judiciary, in so far as it remains consistent with its findings and approach even in respect of pending and remanded cases, and the legislature, in so far as it provides suitable and timely support to the arbitral process through amendments to the 1996 Act.
The decision given in the Balco judgment should prompt business opportunities in India and alliances with Indian parties to opt for an international commercial arbitration with a seat outside India or even chose India as the seat of arbitration, if they wish to avail of the protection of interim measures against the parties whose assets are situated in India. The Balco judgment is a significant leap towards establishing India as an arbitration-friendly jurisdiction.
NOTES
- The decision relied upon the case of Swift Fortune Ltd v Magnifica Marine SA [2007] in Singapore.
- The English Arbitration Act 1996 empowers English courts to grant interim reliefs in foreign-seated arbitrations. The arbitration laws of Hong Kong, the Netherlands and Singapore are similar in this respect as well.
- Consultation paper of April 2010.