Thursday, September 6, 2012

The Supreme Court overrules Bhatia International and Venture Global

The Supreme Court has overruled Bhatia International, and has once and for all held that the supposed omission of the word “only” from section 2(2) has no significance (see below). Importantly, it has also held that a party cannot file a civil suit in relation to the subject matter of the arbitration agreement in order to obtain interim relief. The Court has overruled these decisions prospectively, that is, the law declared today will apply only to arbitration agreements made (not suits/petitions filed) after 06.09.2012. This means that any application for relief under sections 9 or 34 in respect of foreign-seated arbitrations will continue to be governed by the old law (including the law on implied exclusion) if existing arbitration agreements are not amended.

For a summary of the issues before the Court, readers may wish to refer to our account of the judgments of the High Courts under appeal. In today’s judgment, delivered by Nijjar, J. on behalf of the Constitution Bench, the Court has made several important observations on these and other issues of Indian arbitration law. The following summary briefly describes these observations, with a reference to the paragraph number. We will have an opportunity to comment in more detail in the days to come.

  1. Section 2(2) and the reasoning in Bhatia International
    1. The omission of the word “only” does not mean that Parliament intended to make Part I applicable to foreign-seated arbitrations. The reason for the omission is explained by the 330th Meeting of the drafters of the Model Law on 19 June 1985. The reason is that article 1(2) of the Model Law had the words “except articles 8, 9, 35 and 36”, and therefore had to insert the word “only” to clarify that these provisions would apply also to domestic arbitrations (Para 63, 68).
    2. 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 (Para 85).
    3. The proviso to s 1(2), in relation to Jammu & Kashmir, does not mean that the Act has extra-territorial application. It simply provides for the application of the J&K law (Para 55)
    4. There is no “lacuna” in the Act therefore not applying to non-Convention awards. Such awards cannot be enforced under Part I (Para 175)
  2. Section 2(7), which uses the words “domestic award”, contrasts domestic award with foreign award, not international award; that is, an international commercial arbitration in India is not a foreign award. This in fact indicates that Bhatia International was wrongly decided (paras 88 and 94).
  3. In international arbitration, jurisdiction is generally determined by the “seat” of arbitration. The “seat” is a juridical concept, which is not affected by where hearings are conducted (Paras 72 and 100). In the rare case where the parties choose a seat of arbitration and a lex arbitri which do not coincide, it is a matter of construction whether the designation of the foreign seat was in fact a reference to the place of arbitration.
  4. The two “alternatives” in section 48(1)(e), ie the court of the country in which the award was made (the country of the seat) and the court of the country under the law of which the award was made do not confer concurrent jurisdiction. The legislative history of art V(1)(e) of the NY Convention shows that the objective was to provide for the second alternative where the first alternative is unavailable (ie, where the country of the seat does not entertain a challenge to the award). Further, section 48 does not confer jurisdiction to set aside an award: such jurisdiction must be found in the applicable national law. Section 48 merely provides that a domestic court may decline to enforce an award if the conditions in the provision are satisfied. In any event, the words “under the law of which” are a reference to the lex arbitri, not the law governing the substance of the agreement (Paras 137, 148).
  5. Parts I and II are mutually exclusive. The Indian Act, like the UNCITRAL Model Law, is founded on the “territoriality principle”. Therefore, Sections 9 and 34 of the Act apply only if the seat of arbitration is in India. This does not render a party seeking interim relief remediless. Even if it does, that is a matter for the legislature, not the courts (Para 167).
  6. No civil suit can be instituted purely for interim relief, because interim relief is granted on the strength of the final relief sought on a recognised cause of action. The prayer for interim relief cannot itself constitute the cause of action for a suit (Paras 187, 197)


Anshuman said...

In light of the above ruling, do you think that in an international commercial arbitration, parties will be able to approach Indian courts to seek interim relief if the arbitration clause provides for:

i) foreign seat of arbitration;
ii) Indian law as proper law of contract; and
iii) excludes Part I except sections 9 and 37.

In essence, can parties cherry pick sections of Part I even if the arbitration is outside India?

Rohan Bagai said...

The Supreme Court enounces the correct interpretation of law (as it always stood), yet applies it only to arbitration agreements executed after the date of the judgment.

V. Niranjan said...

No, they cannot. If the seat of arbitration is outside India, section 2(2) of the Act (as construed by the Court in Balco) will make Part I inapplicable. Now, there is one possibility, to which the Court refers at paragraph 100: that the parties choose a foreign seat, but also the Indian Arbitration Act 1996. The Court holds that it is a matter of construction whether the "seat" would be construed as "venue" (see Naviera Amazonica) or the presumptive application of the foreign lex arbitri would override the designation of the Indian Act.

Gokkamokka said...

From a practical perspective, will it lead to parties signing separate arbitration agreements from today restating the dispute resolution clauses in their original agreement in a separate agreement to take advantage of the ruling. Separately, will the practice of explicitly excluding Part I in an agreement continue ?

DigitalAsian said...

Step in the right direction for India Inc.

Subhang Nair said...

The judgment premises its interpretation of the Act on the territoriality doctrine under the UNCITRAL Model law, which Indian law has imported. Section 9's applicability is also rejected on this basis (Para 170). However, isn't this whole premise flawed in light of Article 17J of the UNCITRAL Model Law? It clearly laws down that the territoriality requirement no longer exists for the purposes of providing interim relief.
By the way, awesome summary.

V. Niranjan said...

Subhang, interesting point. I think there are two answers to it. The first is that the Supreme Court is, in the ultimate analysis, ascertaining what Indian Parliament intended in 1996. The Model Law - choosing as it did a seat-based approach in preference to delocalisation - was therefore relevant not of itself, but as an index of Parliament's intent. Secondly, there is no doubt that many countries that adopt the territorial approach make an exception for interim measures - the English Act is an example. But Indian Parliament has not. Whether it ought to have done so, or ought to do so now, is not a matter for the courts. And as to legislative history, I think the Court's conclusion on s 2(2) is clearly correct, in view of the deliberations at the 330th Meeting on 19 June 1985 (para 68).

Subhang said...

But the 330th Meeting's deliberations only act as a defence to the casus omissus argument. They do not, by themselves, affirm that s.2(2) means Part I applies only to domestic arbitrations. That apart, I don't object to the Court's interpretation of s.2(2). The issue lies with the Court's observations that applying Section 9 to foreign arbitrations "would be destructive of the territorial principles upon which the UNCITRAL Model Laws are premised, which have been adopted by the Arbitration Act, 1996." Here, the Court has gone beyond looking at the Model Law as an index of parliamentary intent. Rather, they seem to hold that the Act itself must be interpreted in a manner which is harmonious with the Model Law's principles. If that is the case, then their interpretation of Section 9 is flawed.
Also, given this fact and Dr.Singhvi's other arguments, an interpretation applying Section 9 to foreign arbitrations could be validly made by the Court, as a refinement of the Act. Deferring it to the legislature's domain was not necessary. Though a hardline positivist may disagree with me on this.

V. Niranjan said...

That's right. To the extent the Court relies on the Model Law as a source of prevailing international practice, it could perhaps have considered the effect of exceptions in favour of interim relief. But I'm not sure your second point is right: positivism apart, the (in my view) insurmountable objection to the arguments on s 9 is that s 9 is housed in Part I. The Court found (I think correctly) that s 2(2) not only does not "expand" Part I to foreign arbitrations, it "limits" it to India-seated arbitrations (see paragraphs 78 and 79). In other words, section 2(2) impliedly provides that Part I applies "only" to arbitrations with an Indian seat (which, of course, sits uncomfortably with the Court's disclaimer at para 62 that it is not adding the word "only" to s 2(2), but that is another question altogether). Now, if this is right, no provision in Part I, including s 9, can apply unless the seat is in India. The Court could not have carved out an exception for s 9 consistently with its primary finding on s 2(2). No doubt this may cause hardship to some parties who need interim relief - but I do not see how the court can provide a remedy as a matter of construction, unless it holds that s 2(2) is not an exclusionary provision (in which event we are back to Bhatia).

Subhang said...

Fair enough. Thanks. One more doubt though. The Court, in the last part of Para 100 and Para 122, makes observations that, where an agreement contemplates a seat outside India and also application of the Arbitration Act, Part I would be inapplicable "to the extent inconsistent with the arbitration law of the seat". Does this imply that parties may contractually import provisions of Part I and they would apply unless they are in conflict with the law of the seat?

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