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 &