Friday, January 13, 2012

Constitution Bench on Bhatia International: First Week of Arguments


A Constitution Bench comprising the Chief Justice and Justices Jain, Nijjar, Khehar and Desai heard arguments this week in Bharat Aluminium v Kaiser Aluminium Technical Services, in which the principal issue is whether Part I of the Arbitration and Conciliation Act, 1996 applies to arbitrations where the seat of arbitration is outside India. As is well known, and as we have discussed on several occasions, a three-judge Bench of the Court answered this question in the affirmative in Bhatia International in the context of section 9 (interim measures), and subsequent decisions have applied other provisions of Part I (section 11, section 34 etc.) to such arbitrations.  Also before the Court are important questions of the conflict of laws arising from these decisions, principally the juridical significance of the “seat of arbitration” and whether questions of validity of an award are governed by the lex arbitri or the law governing the contract (“the proper law”).
Before giving an account of the first week of arguments in the Supreme Court, it is perhaps useful to describe the manner in which these issues are before the Constitution Bench. This batch of appeals arises from a number of judgments of High Courts across the country, some of which have held that an application under section 34 is not maintainable to challenge a foreign arbitral award in cases in which the parties have provided that the lex arbitri is English (or other foreign) law, even though the proper law is Indian law. Other High Courts have considered whether a petition under section 9 is maintainable, and there are therefore two issues before the Court: (i) the scope of section 2(2) of the 1996 Act and whether Bhatia International was correctly decided; (ii) whether, if the designation of a foreign lex arbitri has the effect of excluding Part I, there is any distinction between provisions that apply during the conduct of arbitral proceedings (such as section 9) and those which apply after the award is made (such as section 34), particularly when Indian law is the proper law.
Although Mr Sundaram, senior counsel for the appellants, opened the appeal by submitting that Bhatia International was correctly decided in its entirety, the thrust of his submissions was that even if the designation of a foreign lex arbitri makes section 9 inapplicable on the ground that the parties themselves have contracted out of it, the right to challenge an award is governed not by the lex arbitri but by the proper law. If this submission is accepted by the Constitution Bench, it would mean that it is open to a party to invoke the jurisdiction of the Indian court under section 34 to challenge a foreign award made pursuant to a contract governed by Indian law, even though it is not open to him to invoke the jurisdiction of the court under section 9 or section 11 during the conduct of arbitral proceedings. Developing this submission, counsel pointed out that denying a section 34 challenge to a judgment debtor in a foreign award could make him “remediless” if the judgment creditor chooses not to enforce the award in India (for section 48 is a shield, not a sword), which may be especially anomalous if the foreign award in question is contrary to Indian public policy, but not contrary to the public policy of the country in which the judgment creditor seeks enforcement. Counsel relied for this submission inter alia on certain observations made by Bharucha J. in Sumitomo Heavy Industries v ONGC, on the expression “under the law of which” in section 48(1)(e), and argued therefore that the recent judgment of the Court in Videocon Industries, on which we have commented here, is wrongly decided.
The Chief Justice put to counsel the possibility that the judgment debtor in the hypothetical described above can challenge the foreign award in the country of the seat: for example, if an award is made pursuant to a contract governed by Indian law but which designates London as the seat of arbitration or English law as the lex arbitri, the judgment debtor can challenge the award under the equivalent of section 34 in the foreign jurisdiction, although he cannot challenge it in India or set up Indian public policy as a ground unless the judgment creditor chooses to enforce it in India (and even if he does, the award is merely not “enforced”, not “set aside”). To this counsel’s answer was inter alia that section 69 of the English Arbitration Act, 1996 does not permit an appeal on a question of law in a contract governed by foreign law (since section 82(1)(a) defines a question of law as a “a question of the law of England and Wales”) and that in any event that it may not be possible to set up Indian public policy in the court of the seat.
Mr Sorabjee, also for the appellants, developed these points by concentrating on the applicable principles of conflict of laws and relied heavily on the judgment of Bharucha J. in Sumitomo for the proposition that while interim measures may be governed by the lex arbitri, the right to challenge an award is governed by the proper law. The Bench put to counsel questions relating to the difference between the tests applicable under section 2(1)(f) and section 2(7), and also about how the extent to which Parliament intended to depart from the New York Convention/Geneva Protocol, and the UNCITRAL Model Law on International Commercial Arbitration. On the third day, Mr Gopal Subramanium submitted that it is wrong to start with the assumption that any interference by a court in the arbitral process is “antithetical” to arbitration because arbitration, to be effective, requires the assistance of the national court. Counsel also emphasised that Parliament, in defining “international commercial arbitration” in section 2(1)(f) based on article 1(3) of the Model Law, chose not to use the “seat of arbitration” (which features in article 1(3)), and suggested therefore that the “seat” may not be decisive in determining whether section 34 applies to a foreign award. Counsel will continue his arguments on Tuesday.
The Constitution Bench’s judgment is likely to be the last word on what has proven to be a hotly contested issue in Indian arbitration law and is also likely to clarify certain unresolved questions on the conflict of laws rules applicable to arbitration in India. Arguments continue next week.

5 comments:

Prateek Andharia said...
This comment has been removed by the author.
Sumimoto said...

Hi Niranjan,

This is to bring your attention to certain inaccuracies in paragraph 1of your post.

The principal issue in the batch of appeals is "whether Part I of the Arbitration and Conciliation Act, 1996 is applicable to International Commercial Arbitration?" It is not "whether Part I of the Arbitration and Conciliation Act, 1996 is applicable to arbitrations where the seat is outside India". This is because the Arbitration and Conciliation Act, 1996 does not define International Commercial Arbitration on the basis of "seat" of arbitration.

Incidentally, one of the issues in TNSEB v. Videocon Industries, which is also being heard alongwith BALCO v. KATSI (the lead matter), is "whether an arbitration where the seat is outside India is an International Commercial Arbitration." This is exactly why Mr. Subramaniam spent the latter half of Thursday submitting that the Arbitration and Conciliation Act, 1996, unlike the Model Law, does not take into account "seat" while determining if an arbitration is, in fact, "international" in nature.

V. Niranjan said...

@Sumimoto, that is correct, as is mentioned in paragraph 5 of the post.

Renu Gupta said...

I would like to specify a few english decisions, which clarify the law on this position, specifically the significance of the seat of arbitration and accordingly, its relevance in terms of deciding challenges to an arbitral award.

http://www.bailii.org/ew/cases/EWCA/Civ/2007/1282.html

http://www.bailii.org/ew/cases/EWHC/Comm/2001/481.html

http://www.bailii.org/ew/cases/EWHC/Comm/2007/1713.html

One would really hope that the Indian Supreme Court draws from the wealth of jurisprudence in other jurisdictions. It is a question discussed thoroughly in most advanced jurisdictions and there is some form of a certainty attached to the outcome as well.

Anonymous said...

Now the decision of the Supreme Court -Constitution Bench-has been delivered and held:
"The judgment in Bhatia International (supra) was rendered by this
Court on 13th March, 2002. Since then, the aforesaid judgment has been
followed by all the High Courts as well as by this Court on numerous
occasions. In fact, the judgment in Venture Global Engineering (supra) has
been rendered on 10th January, 2008 in terms of the ratio of the decision
in Bhatia International (supra). Thus, in order to do complete justice, we
hereby order, that the law now declared by this Court shall apply
prospectively, to all the arbitration agreements executed hereafter."
Copy of the judgment available at:
http://bkgupta.lawyersclubindia.com