Thursday, May 19, 2011

The 3/4 Formula to Determine Implied Exclusion

(In the following post, Mr Adithya Reddy, Advocate, Madras High Court, considers the law on implied exclusion of Part I of the Arbitration Act)

“…we hold that the provisions of Part I would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India the provisions of Part I would compulsory apply and parties are free to deviate only to the extent permitted by the derogable provisions of Part I. In cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions.”

The above paragraph (para. 32) of the judgment in Bhatia International v Bulk Trading S.A (“Bhatia”) has been the source of several litigations before Indian Courts on the question of what amounts to “implied” exclusion of Part I. The latest judgment on the issue came from the Supreme Court in Videocon Industries v Union of India (“Videocon Industries”). A useful post summarizing the background and findings of the judgment has already been written.

My endeavor in this post is only to try and locate a discernable pattern in all the judgments of the Supreme Court and various High Courts to see if one can arrive at precise criteria to determine if the terms of a given arbitration agreement imply exclusion of Part I. The necessity for such a criteria stems from the fact that Courts often end up spending long hours hearing lengthy arguments and writing elaborate judgments in cases of this nature which essentially involve interpretation of one brief paragraph if not a few lines, in a commercial contract. Two courts interpreting different arbitration agreements with dissimilar terms need not reach the same conclusion, but what no Court, including the Supreme Court, has tried to do is lay down definite requirements which if fulfilled will constitute implied exclusion. This will avoid protracted litigation. In fact providing precise clarity on ‘implied exclusion’ could dissuade several parties from initiating proceedings before Indian Courts.

If we look at the various judicial pronouncements the following emerge as the exhaustive components of an arbitration agreement that are required to be looked at to determine “implied exclusion”:-

a) The seat or place of arbitration which is the “place initially agreed by or on behalf of the parties” and “designated in the arbitration agreement or the terms of reference or the minutes of proceedings or in some other way as the place or "seat" of the arbitration. (Redfern and Hunter as cited in para. 14 of Dozco India Pvt Ltd Vs. Dossan Infracore Ltd) (“Dozco India Pvt Ltd”). As has been settled by the Supreme Court in both Dozco India Pvt Ltd & Videocon Industries, the fact that the arbitration agreement permits the arbitration proceedings to be held in places other than the designated seat will not change the seat of arbitration.

An arbitration with its ‘seat’ (not just a few hearings) in India is an arbitration ‘held in India’ for the purposes of Section 2(2) of the Act and Part I would compulsorily apply. Specifying a place outside India as the seat is therefore a condition precedent to find ‘implied exclusion’ of Part I. But as held in Bhatia, this by itself does not amount to ‘implied conclusion.’

In a first-of-its-kind case the Madras High Court (Financial Software & Systems v ACI Worldwide Corp 2011-2-LW-654 (“Financial Software”)) held that the concerned arbitration agreement impliedly excluded Part I even thought it did not specify the seat of arbitration. This was so because even though the agreement did not specify the seat, the Rules of the Singapore International Arbitration Centre which were the applicable curial law provided that Singapore shall be the seat of arbitration if the parties do not agree on a seat. The rules of the London Court of International Arbitration also contain a similar provision. Specifying a seat of arbitration is not required only in such cases i.e. where the curial law provides for a default seat of arbitration. Otherwise it is mandatory.

b) The ‘proper law' of contract i.e. law governing the contact creating substantive rights in the parties with respect to the dispute. At least two Supreme Court decisions -Indtel Technical Services Private Ltd. v. W.S. Atkins Rail Ltd (“Intdel”) and Citation Infowares Ltd. v. Equinox Corporation (“Citation Infowares”) make it clear that mere specification of proper law of contract as foreign does not amount to an implied exclusion of Part I. As seen earlier, the seat of arbitration has to be specified.

However, interestingly till Videocon Industries all cases that found “implied inclusion” (Max India Ltd. v. General Binding Corporation (2009) 3 Arb LR 162 (DEL) (DB) (“Max India”), DGS Realtors Pvt. Ltd. v. Realogy Corporation MANU/DE/2115/2009 (“DGS Realtors”) and Frontier Drilling A.S. v. Jagson Internatural Ltd (2003) 3 Arb. LR 548 (“Frontier Drilling”) and Financial Software Systems) relied on the fact that the proper law of contract was foreign. It was only in Videocon Industries that the Court held “implied conclusion” even though the proper law was Indian (it relied on the fact that the law governing the arbitration agreement was foreign).

Therefore, specification of proper law of contract as foreign law is neither sufficient nor necessary as criterion to determine “implied exclusion”.

c) The ‘procedural law’ of arbitration agreement i.e. law governing the obligation of the parties to submit the dispute to arbitration and to honour the award. As pointed out by the Supreme Court in Dozco India Pvt Ltd, rarely does this category of law differ from the curial law (which we shall see next). In my view it is this category of law that ought to be crucial, as it was in Videocon Industries, for the simple reason that Courts competent to interpret such law, and not Indian Courts, should decide on all issues of interpretation and scope of the arbitration agreement. The significance of a foreign law governing the arbitration agreement is explained well in the decision of the Gujarat High Court in Hardy Oil and Gas v Hindustan Oil Exploration- a decision that was approved by the Supreme Court in Videocon Industries.

However, in most cases which held exclusion of Part I the law governing the arbitration agreement was not specified. Therefore this is also not a mandatory requirement to determine exclusion of Part I.

d) The ‘curial law’ i.e. the law governing the conduct of the individual reference. The curial law, which is in most cases a set of rules, need not be specified in an arbitration agreement to exclude Part I. While express mention of Indian law as the ‘curial law’ might militate against “implied exclusion” of Part I, non-specification of such law is not material because Courts have presumed such law to be the law of the country in which the seat of arbitration resides. In Dozco India Pvt Ltd, the Supreme Court relied on Mustill & Boyd to hold that “in the absence of express agreement, there is a strong prima facie presumption that the parties intend the curial law to be the law of the 'seat' of the arbitration”. This view was first adapted by the Supreme Court in NTPC v Singer, AIR 1993 SC 998 and was espoused by the Bombay and Delhi High Courts in Frontier Drilling A.S and DGS Realtors. The presumption, though rebuttable, has been applied by Courts.

Therefore, in the absence of specific curial law the specification of a foreign seat (which in any case is mandatory) is sufficient to show the existence of a foreign curial law. As seen in the Financial Software Solutions case, the vice-versa also might be true when the curial law provides for a default seat of arbitration in the absence of a specific seat in the agreement.

What emerges from the above is simple-

a) A foreign seat of arbitration has to be provided for in the contract, to imply exclusion of Part-I.

b) Since Bhatia says that providing a foreign seat (and by implication foreign curial law) is not sufficient, there has to be a mandatory third component which is foreign.

c) Videocon Industries has clarified that the mandatory third component need not be the proper law of contract. It can even be the law governing the arbitration agreement.

While in some cases like in Max India Courts had the luxury of finding even the jurisdiction of foreign courts over disputes being specified, in all cases that upheld “implied exclusion” at least three out of the four of the above components were found to be foreign. And conversely, in all cases that upheld the applicability of Part-I less than three components were found be foreign.

So here goes the formula- Foreign Seat + Foreign Curial Law (can be presumed) + Foreign Proper Law or Foreign Law governing Arbitration Agreement = Implied Exclusion.

The only logical exception to the above formula is a case where the curial law is specifically mentioned to be Indian when the seat is foreign, thereby rebutting the presumption that the curial law is the same as that of the seat of arbitration. In which case, it is my opinion that Courts should stick to the 3/4 formula and require all the three components other than the curial law to be foreign.


Anonymous said...

Well analysed.

Rohit said...

Very interesting analysis

Sumit Rai said...

I commend the well researched and brilliantly written post. However, I beg to agree with the underlying logic.

While indeed some decisions have looked for more factors than one to be present at the same time, there is no authority to support an essential 3 of the 4 criteria.

Take videocon for example. The only thing that mattered was that in the arbitration agreement was governed by foreign law. The existence of other factors did not figure in the analysis. In an international commercial arbitration, if the clause provides for this one criteria, it is sufficient to read an exclusion. Same stands with authorities that read implied exclusion on curial law being foreign law.

It is also incorrect that in the present state of arbitration law in India a foreign curial law is presumed due to a foreign seat. This is exactly the point that Bhatia International has demolished. In Indian law as of now, seat has no effect whatsoever. Courts assume jurisdiction in every arbitration, unless its jurisdiction is excluded expressly or by implication.

Adithya said...

@sumit, the SC has spent several paras trying to establish that the seat was foreign based on Dozco. It might be incorrect to say that only the fact that the arbitration agreement was governed by foreign law made the difference.

Sumit Rai said...

@Adithya - Videocon cites Dozco only to show that the seat of arbitration and venue are two different things. It was considering the question whether the seat changed to London or not. It was always clear that the seat was outside India.

The entire discussion on Bhatia starts with the position that seat is foreign (except where seat may not be assigned at all) and then to see whether there is something else to indicate exclusion. In Videocon, that factor was solely the law of arbitration agreement (based on a wrong analogy with Hardy Oil). I don't see a combination of all to be the criteria. Even in Hardy Oil, the exclusion was read because curial law was foreign. Other factors were not determinative.

Anonymous said...

Very interesting analysis. I appreciate if someone provides me with more insights on a particular situation as follows:

One contract has only one component - "The agreement is governed by a Foreign Law"

In this situation, can we assume all the four components are foreign i.e. 1) Seat 2)Proper Law 3) Procedural Law and 4) Crucial Law.

In this situation does Indian courts have jurisdiction?

Anonymous said...

But didn't Bhatia International itself was a case where 3 out of these four factors were foreign yet Part I was held to be applicable?

In that case, the seat of arbitration was Paris, curial law was ICC Rules, and substantive law governing the contract was Swiss law.