Thursday, May 12, 2011

The Supreme Court Declines an Invitation to Extend Bhatia International

The cases we have discussed on implied exclusion of Part I of the Indian Arbitration Act are composed of three variants – first, the contract designates a foreign proper law but no seat of arbitration (for example Indtel Technical Services v WS Atkins and Citation Infowares v Equinox Corporation), secondly, the contract designates a foreign seat of arbitration but no proper law, and thirdly the contract designates a foreign proper law and a foreign seat of arbitration (Dozco v Doosan). The courts had found that the first type falls short of an “implied exclusion” of Part I, but Dozco affirmed that the third suffices. The Supreme Court’s decision today in Videocon Industries v Union of India involves a fourth variant – Indian proper law, foreign seat of arbitration and foreign arbitration law*, and a Division Bench has held that the Indian courts have no jurisdiction under Part I in those circumstances.

A subsequent post will set out in more detail the impact this decision has on the state of the law. This post briefly highlights the conclusions the Supreme Court reached in Videocon. The case arose out of a Production Sharing Contract executed between a consortium of four companies of the one part and the Ministry of Petroleum and Natural Gas of the other. The contract designated Indian law as the governing of the contract, Kuala Lumpur, Malaysia as the “venue” of arbitration, unless otherwise agreed, and English law as the law governing the arbitration agreement*. It so happened that the dispute between the contractors and the Ministry coincided with the outbreak of the SARS epidemic in Kuala Lumpur, and the Tribunal duly shifted hearings initially to Amsterdam and then to London. The Tribunal passed an order which recorded that the parties consented to shifting the seat of arbitration to London. An action was brought in the Delhi High Court for a declaration that the seat of arbitration was in fact Kuala Lumpur and for a direction to the Tribunal to continue hearings there. A single judge of that Court rejected an objection to the maintainability of the application, finding that India has the “closest and most real connection” to the dispute.

The Supreme Court’s first conclusion was that the seat of arbitration remains Kuala Lumpur although hearings were conducted in Amsterdam and London because the consent of all the parties to the PSC was necessary to change the seat of arbitration. The Court also followed its decision in Dozco v Doosan to the effect that it is common in international arbitration to conduct the hearing at the place most convenient to all parties, without disturbing the juridical seat of arbitration. Notably, the Court referred to provisions of the English Arbitration Act to decide this question, because of its conclusion* that this was the designated arbitration law.

However, the Court held that the Delhi High Court had no jurisdiction to adjudicate, because it was the clear intention of the parties was to (impliedly) exclude the jurisdiction of the Indian Courts. The Court approved a judgment of a single judge of the Gujarat High Court in Hardy Oil and Gas v Hindustan Oil Exploration (Indian governing law, English arbitration law) that held that the designation of a foreign arbitration law constitutes, for the purposes of Bhatia International, “implied exclusion” of Part I of the Indian Arbitration Act.

This is an important judgment on two issues that are fundamental to Indian arbitration law – the seat of arbitration and the proper scope of implied exclusion. A more detailed post will follow.

* I had previously stated, erroneously, that the arbitration clause between the parties designated English law as the law governing the arbitration. I am grateful to Mr Sumit Rai, one of our readers, for pointing out that the clause designated English law only as the law governing the arbitration agreement. The Supreme Court appears to have assumed nevertheless that it is the law governing the arbitration itself, and counsel for both parties are reported to have argued the case on that basis. If the Court had come to the conclusion that English law merely governs the arbitration agreement, it would have been a less significant factor in ascertaining whether the parties had impliedly excluded Part I of the Indian Act. It would also have made that question considerably more difficult, because none of Hardy Oil (foreign arbitration law), Dozco v Doosan and Citation Infowares would have been on all fours with this case - although Dozco also involved a foreign seat of arbitration, the parties there had also designated a foreign law to govern the contract, whereas in Videocon Indian law was chosen as the substantive law. What is clear from the Videocon judgment, however, is that (as a matter of law) Part I is impliedly excluded when parties designate a foreign arbitration law and a foreign seat of arbitration.

5 comments:

Sumit Rai said...

There is an error in your reading of the judgment. The contract did not provide 'English law as the law governing arbitration'. The law provided that the arbitration agreement would be governed by English law. Curial law and law governing arbitration agreement are very different things.

This distinction and its effect was well understood by the Delhi HC. However, the SC has in its reasoning forgotten the difference and remarked at places that the law of arbitration is English Law. However, in the last paragraph, the Supreme Court notes that the arbitration agreement is to be governed by English Law and then concurring with Hardy Oil (Gujarat High Court) holds that there is a necessary implication that Part I is concluded. This is erroneous on the face of it as Hardy Oil deals with exclusion based on choice of curial law and not the law governing the arbitration agreement.

Another thing that the Court never answers is if it has no jurisdiction under Section 9, under what powers has it declared the change of seat by an order of the tribunal recording consent to be invalid? That part of the judgment can at best be regarded as an obiter, founded on no jurisdictional basis.

V. Niranjan said...

I agree - it does not follow that the law governing the arbitration agreement is the curial law. In fact, Art. 34.9 of the PSC (not extracted in the judgment of the Supreme Court) provides that the "arbitration proceedings shall be conducted in accordance with..." the UNCITRAL Model Law (subject to Art 34.12 in the event of conflict). I also agree that there is a difference between Hardy Oil and Videocon because Clause 9.5(4) in Hardy Oil designated law governing the arbitration, and not the law governing the arbitration agreement. In that event, the Court would have had to examine whether the designation of a foreign seat of arbitration accompanied by a foreign law governing the arbitration agreement is sufficient to constitute implied exclusion, notwithstanding Indian substantive law. If counsel's contentions have been recorded correctly, it is also worth noticing (para 9, 10) that both parties assumed that the law governing arbitration is English law.

On the second point, the Court does not indicate on what it founds its jurisdiction to decide whether the seat of arbitration changed. It may be that it did so as a preliminary issue - and it may not be obiter since the seat of arbitration is a relevant factor under Indian law in ascertaining whether the Indian courts have jurisdiction under Part I. But it is not clear on what basis the Court differed with the Tribunal's finding.

Sumit Rai said...

If you don't mind, could I ask you where you get the information regarding stuff that's not in the judgment? Also, is the Delhi HC order reported anywhere?

Thanks for the information though, it really helps understand what the SC has tried to do. The judgment does not speak for itself.

V. Niranjan said...

Thank you. The information is available in the Delhi High Court's judgment in OMP 283/2009, which more fully extracts the PSC the Government of India entered into on 28 October 1994 (the same PSC in issue in Videocon, between the same parties). I have been unable to find a copy of the order of the Delhi High Court - although some connected matters came up in the OMP above.

Sumit Rai said...

Thanks a lot. This really helps. Though it is intriguing why the decision of the Delhin HC which was appealed is not available on the court's site.