State of Commercial Laws Bhatia to Balco – The Past the Present and the Future

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The decision of the Constitutional Bench of the Supreme Court, in Bharat Aluminium Co v Kaiser Aluminium Technical Service (“BALCO”), where the Supreme Court declared that Part I of the Arbitration and Conciliation Act, 1996 (the “Act”) will not apply to arbitrations conducted outside India, is likely to have an enormous impact not only on the arbitration and commercial law jurisprudence in India but also on foreign investment flowing into India. This article sets out, in brief, the issues involved in BALCO and why they are of such great significance, a comparative analysis of the decisions in Bhatia International v. Bulk Trading S.A[1] (“Bhatia”) and BALCO, a  summary of the decision in BALCO, and a few areas of concern that remain.

 

I Introduction


The decision of the Constitutional Bench of the Supreme Court, in Bharat Aluminium Co v Kaiser Aluminium Technical Service (“BALCO”), where the Supreme Court declared that Part I of the Arbitration and Conciliation Act, 1996 (the “Act”) will not apply to arbitrations conducted outside India, is likely to have an enormous impact not only on the arbitration and commercial law jurisprudence in India but also on foreign investment flowing into India. This article sets out, in brief,

 

a. The issues involved in BALCO and why they are of such great significance, 

b. A comparative analysis of the decisions in Bhatia International v. Bulk Trading S.A[1] (“Bhatia”) and BALCO,

c. A summary of the decision in BALCO,

d. A few areas of concern that remain.

 

This article only provides a preliminary analysis of the decision in BALCO – a more detailed analysis will follow subsequently.

 

II The Issues Involved

 

Section 2(2) of the Arbitration and Conciliation Act, 1996 (the “Act”), contained in Part I of the Act, states that “This Part shall apply where the place of arbitration is in India.” In comparison, Article 1(2) of the UNCITRAL Model Law provides: “The provisions of this Law, except articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State.”  The central issue therefore that was before the two judge Bench of the Supreme Court in Bhatia and before the Constitutional Bench in BALCO, was whether the exclusion of the word “only” from the Indian Statute gave rise to the implication that Part I of the Act would apply even in some situations where the arbitration was conducted outside India.

 

If Part I did apply to arbitrations conducted abroad, the most significant consequences would have been that Indian Courts would be competent to :

 

a. Set aside foreign awards pursuant to Section 34 of the Act.

b. Grant interim relief pursuant to Section 9 of the Act.

c. Appoint an arbitrator pursuant to Section 11 of the Act.

 

III The decisions in Bhatia and BALCO- a comparison

 

The Supreme Court, in Bhatia, held that

 

a. Part I mandatorily applies to all arbitrations held in India, and

b. Part I applies to arbitrations conducted outside India unless expressly or impliedly excluded.

 

The Supreme Court (in Bhatia and subsequent cases[2])  therefore concluded that pursuant to Sections 9, 11 and 34 (located in Part I of the Act) Indian Courts were competent to provide interim relief pending arbitration, appoint arbitrators and set aside arbitral awards even if the arbitration was conducted outside India. These powers existed unless Part I was expressly or impliedly excluded.

 

This position now stands overruled following BALCO. The main reasons provided by the Supreme Court in Bhatia and the answer of the Constitutional Bench in BALCO to each of these are set out in the following table. 

 

S.No

THE REASONS PROVIDED IN BHATIA

THE COUNTER IN BALCO

1

The word “only” was omitted from section 2(2) and such omission was not unintentional. Such an omission would be rendered redundant if the word “only” was to be read in to the Section.

Relying on the discussions at the time of drafting Article 1(2) of the Model Law, the Supreme Court held that the use of “only” was to ensure that the exceptions to Article 1(2) alone, i.e. Articles 8, 9, 35 & 36, had extra territorial operation. Since Section 2(2) of the Act, did not make any reference to these exceptions, there was no requirement to use the term “only”. Similar provisions exist in Switzerland and UK, and in the Statutes of these countries as well the word “only” has been deleted.

 

Furthermore, the scheme of the Act made it abundantly clear that the Act was to only have territorial effect.

2

Section 1(2) states: “It extends to the whole of India:

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 anomalous situation that would arise if it was held that Part I only applies if the arbitration is held in India is that Part I would apply to Jammu and Kashmir with respect to all international commercial arbitrations but Part I would not apply to the rest of India if the arbitration takes place out of India.

The proviso is necessary to update the Jammu and Kashmir Act, 1945, which does not contain any provision relating to International Commercial Arbitration. The Proviso to Section 1(2) therefore incorporates those provisions of the Arbitration and Conciliation Act, 1996 which relate to international commercial arbitrations into the Jammu and Kashmir legislation. Owing to Jammu and Kashmir’s special constitutional status, all other aspects of arbitration in that State are covered by a special statute (originally the 1945 Act and now by the Jammu & Kashmir Arbitration and Conciliation Act, 1997).

 

3

Sections 2(4) and 2(5) state:

“(4) This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except in so far as the provisions of this Part are inconsistent with that other enactment or with any rules made thereunder.

 

(5) Subject to the provisions of sub-section (4), and save in so far as is otherwise provided by any law for the time being in force or in any agreement in force between India and any other country or countries, this Part shall apply to all arbitrations and to all proceedings relating thereto.”

 

The reasoning in Bhatia was that if Part I does not apply to foreign arbitrations, there is a conflict between Section 2(2) and Section 2(5), which is made subject to Section 2(4) alone and not Section 2(2).  Consequently, Section 2(2) would have to be interpreted in such a manner that it did not contradict Section 2(5).

Section 2(2) does not conflict with section 2(4) or with section 2(5). Section 2(5) only means that the Act applies to all arbitrations where it would be otherwise applicable. Section 2(5) does not indicate that it would apply to arbitrations which are not held in India.

4

If Part I does not apply, an award of Tribunal in a country that is party to neither the New York nor the Geneva Convention will be unenforceable in India because it is neither a domestic or a foreign award, and this “lacuna” could not have been intended by Parliament.

The Parliament has intentionally not provided a mechanism for enforcement of a non-Convention award by not including such an award within the definition of a “foreign award” in Sections 44 and 53. That being so, Courts cannot provide an enforcement mechanism for such awards by deeming them to be domestic awards. There is therefore no lacuna that needs to be filled.

 

[In this regard, it is relevant to point out that in the 5th edition of Justice Bachawat’s Law of Arbitration and Conciliation, it is argued that non-Convention awards may be treated to be contractual debts and a civil suit may be filed to enforce such a debt. The authors of the said book state that the decision in Bhatia creates a situation by which it becomes easier to enforce non-Convention awards than Convention awards- a situation that was definitely not intended.]

 

5

A party is entirely remediless if Part I does not apply to arbitrations conducted outside India as the party would not be able to apply for interim relief in India even though the properties and assets are in India. Thus a party may not be able to get any interim relief at all.

The parties will have a remedy before the Courts at the seat of arbitration. Merely, because this remedy may be onerous does not mean that the party is left remediless. Since the parties voluntarily chose the seat, they are deemed to have voluntarily chosen the consequences of such a selection. In arguendo that the parties are left remediless, that needs to be addressed by the Legislature and not the Courts.

6

If Part I did not apply, there was no need to have used the words “where the place of arbitration is in India” in Section 28(1) because if Part I does not apply when the seat is abroad, neither will section 28.

The Supreme Court, while addressing this argument held:

“The section merely shows that the legislature has segregated the domestic and international arbitration. Therefore, to suit India, conflict of law rules have been suitably modified, where the arbitration is in India. This will not apply where the seat is outside India. In that event, the conflict of laws rules of the country in which the arbitration takes place would have to be applied. Therefore, in our opinion, the emphasis placed on the expression “where the place of arbitration is situated in India”, by the learned senior counsel for the appellants, is not indicative of the fact that the intention of Parliament was to give an extra-territorial operation to Part I of the Arbitration Act, 1996.”

 

[The above reason is not entirely satisfactory. The argument raised in Bhatia appears to be valid; however it does not justify the final conclusion reached in Bhatia. The significance of this argument is discussed in greater detail under Heading V.]

7

Use of the phrase “notwithstanding anything contained in Part I, or in the Code of Civil Procedure, 1908”, in Section 45, which is contained in Part II of the Act indicates that Part I and Part II can apply concurrently in certain situations and since Part II only applies where the place of arbitration is abroad, it would mean that Part I could apply in certain situations where the place of arbitration is foreign.

 

The Supreme Court held: “It appears that the Parliament in order to avoid any confusion has used the expression “notwithstanding anything contained in Part I” out of abundant caution, i.e., “ex abundanti cautela”.”

 

[The above reason is not entirely satisfactory. The argument raised in Bhatia appears to be valid; however it does not justify the final conclusion reached in Bhatia. The significance of this argument is discussed in greater detail under the next Heading V.]

(Please note that the above table is only aimed at providing a summary of the main strands of reasoning in Bhatia and how these reasons were countered in BALCO. The above table is not intended to provide an exhaustive discussion of every issue raised in the two cases.)

 

IV BALCO- Summary of findings

 

The primary findings of BALCO may be summarized as follows:

 

(i) Parts I and II are mutually exclusive of eachother. This is evident from the following facts:

  1. The definitions section (Section 2) in Part I begins with the line “In this part, unless the context otherwise requires……” and consequently these definitions are not applicable to Part II.
  2. Sections 44 and 53 define a foreign award for the purposes of Part II Chapter I and Part II Chapter II alone.

 

(ii) The intention of the Parliament is that the Act is territorial in nature and Sections 9 and 34 will apply only when the seat of arbitration is in India. The seat is the “centre of gravity” of arbitration.

 

(iii) That being the case even where two foreign parties arbitrate in India, Part I would apply and by virtue of Section 2(7) the award would be a domestic award. 

 

(iv)  The arbitral hearings may take place at a location other than the seat of arbitration. There is consequently a difference between “seat”/ “place” and “venue” of arbitration. However, where the arbitration agreement designates a foreign country as the “seat”/”place” of the arbitration and also selects the Arbitration Act, 1996 as the curial law/law governing the arbitration proceedings, it would be a matter of construction of the individual agreement  to decide whether the “seat” referred to in the agreement in fact referred to “venue”.

 

(v) In such a scenario, only if the seat is determined to be India, would Part I be applicable. If the seat was foreign, Part I would be inapplicable to the extent inconsistent with the arbitration law of the seat, even if the agreement provides that the Indian Statute would govern the arbitration proceedings.

 

(vi) The necessary corollary of (v) is that to the extent Indian arbitration law is not inconsistent with the law of the seat, it is possible to expressly include Part I of the Indian Statute. However, the Supreme Court went on to hold that this would not vest Indian Courts with 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 [foreign] Procedural Law/Curial Law.”

 

(vii) Section 48(1)(e) provides:

 

“48.Conditions for enforcement of foreign awards.-

(1)    Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that—-

(e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.”

 

The provision merely recognizes that courts of the two nations are competent to annul or suspend an award – it does not provide concurrent jurisdiction to two different Courts to annul an award. Such jurisdiction must be contained in the national law of the relevant countries. In the Indian context, the relevant provision is Section 34 which does not apply to arbitrations conducted abroad. The argument of the Appellant that the Indian Courts have the power to annul a foreign award on the basis of Section 48(1)(e) would therefore result in importing Section 34 into Part II, which would not be in consonance with the scheme of the Act. In any event, based on the legislative history of the New York Convention and an analysis of foreign case law, it was evident that the objective was to provide the Courts at the country under whose laws the award was made jurisdiction only when the Courts of the seat did not entertain a challenge to the award. Furthermore, it was clarified that the term “under the laws” referred only to curial law and not substantive law.

 

(viii) The provisions of the Code of Civil Procedure do not permit a party to file a civil suit seeking only interim relief. Interim relief can only be granted in a suit seeking a final relief which is based on a recognised cause of action.

 

(ix) This decision in BALCO would have prospective effect and would only apply in relation to arbitration agreements executed after the date of the judgment.

 

V Unanswered questions and certain observations

 

While the decision in BALCO is a step in the right direction and would drastically reduce judicial intervention in foreign arbitrations, there are still a few areas that are likely to be problematic. 

 

(i) Where the assets of a party are located in India, and there is a likelihood that that party will dissipate its assets in the near future, the other party will lack an efficacious remedy if the seat of the arbitration is abroad. The latter party would have two possible remedies, but none of these would be efficacious. Firstly, the latter party can obtain an interim order from a foreign Court or the arbitral tribunal itself and file a civil suit to enforce the right created by the interim order. The interim order would not be enforceable directly by filing an execution petition as it would not qualify as a “judgment” or “decree” for the purposes of Sections 13 and 44A of the Code of Civil Procedure (which provide a mechanism for enforcing foreign judgments). Secondly, in the event that the former party does not adhere to the terms of the foreign Order, the latter party can initiate proceedings for contempt in the foreign Court and enforce the judgment of the foreign Court under Sections 13 and 44A of the Code of Civil Procedure. Neither of these remedies is likely to provide a practical remedy to the party seeking to enforce the interim relief obtained by it.

 

That being the case, it is a distinct possibility that a foreign party would obtain an arbitral award in its favour only to realize that the entity against which it has to enforce the award has been stripped of its assets and has been converted into a shell company.

 

(ii) Post-BALCO, parties to a contract are not even permitted to expressly include Part I. Therefore, even if the parties wish to have arbitration abroad but have a provision conferring jurisdiction on Indian Courts, the decision in BALCO does not permit them to do so. This position appears to be contrary to the words used in Sections 28 and 45 of the Act as has been set out in S.No 6 and 7 of the Table under Heading III above. These provisions clearly indicate that there are certain circumstances under which provisions of Part I would apply to arbitrations conducted abroad. It is submitted that the scheme of the Act suggests that the only circumstance under which this would be possible is when the parties expressly include provisions of Part I as being applicable.

 

(iii) During the Bhatia era, the main apprehension was that a foreign award would be set aside on the ground that its enforcement would be opposed to “public policy”. “Public policy” had been defined very widely by the Supreme Court, in ONGC Ltd v. Saw Pipes Ltd.[3],  in the context of Section 34 of the Act. While post-BALCO, a foreign award cannot be set aside in India under Section 34 of the Act, the Supreme Court, in Phulchand Exports Ltd. v. OOO Patriot[4], has indirectly upheld the same “public policy test” as being applicable to a scrutiny under Section 48 of the Act as well (interested readers may follow this link to read more about this aspect). That being the case, a foreign award would be subject to the same scrutiny in the post-BALCO era.    

 

(iv) While the decision in BALCO was made prospective to ensure that hotly negotiated bargains are not overturned overnight, it results in a situation where Courts, despite knowing that the decision in Bhatia is no longer good law, are forced to apply it whenever they are faced with a case arising from an arbitration agreement executed pre-BALCO.   

 

Despite the areas of concern pointed out above, the decision in BALCO is the first of many steps that are needed to ensure the arbitration develops as an effective method of alternative dispute resolution in India.

 

 

 

 

Anirudh Krishnan is a graduate of NALSAR and completed his BCL at the University of Oxford. He is a qualified solicitor, England and Wales and is currently an advocate in the Madras High Court. He is also Chief Editor,Justice R.S. Bachawat’s Law of Arbitration and Conciliation. He can be contacted at anirudhkrishnan@me.com.


[1] (2002) 1 Arb LR 675.

[2] Indtel Technical Services Pvt. Ltd. v. W.S. Atkins Rail Ltd. (2008) 3 Arb LR 391, Citation Infowares Limited v. Equinox   Corporation 2009(5) UJ 2066 (SC), Venture Global Engineering v.  Satyam Computer Services Ltd (2008) 1 ARB LR  137 (SC).

[3] (2003) 5 SCC 705.

[4] 2011(11) SCALE 475.