Thursday, April 30, 2015

Application of Part I on Arbitration Agreements preceding BALCO

[The following guest post is contributed by Gunjan Chhabra, who is a practicing advocate in various courts of Delhi and is currently working with Rajani, Singhania & Partners. She can be reached at]

The judgment of the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc[1] (BALCO) made it abundantly clear that Part I of the Arbitration and Conciliation Act, 1996 would not be applicable to arbitrations with a foreign seat. However, the judgment clearly laid down: “197. The judgment in Bhatia International was rendered by this Court on 13.03.2002. Since then, the aforesaid judgment has been followed by all High Courts as well as by this Court on numerous occasions…. 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”. Thus, there always remained a gap as to the fate of those arbitration agreements which were executed before BALCO.

Although the case of Reliance Industries Ltd[2] was a step taken towards clarification of pre-BALCO arbitration clauses, yet the issue still remains shrouded in mystery. Another step was taken by the Supreme Court on 10 March 2015 in the Case of Harmony Innovation Shipping Ltd. v. Gupta Coal India Ltd. & Anr. The judgment is in appeal from the Order of the High Court, setting aside the decision of the Additional District Judge Ernakulum, allowing the Petition under Section 9 filed by Harmony Innovation while directing Gupta Coal to furnish security to the tune of US$ 11,15,400 and conditionally attaching its cargo, as an interim measure of protection. The District Judge, following BALCO had held that as there was no exclusion of Part I of the Arbitration and Conciliation Act, 1996 in the agreement, Part I was to apply, and had accordingly afforded relief to the Respondent. The judgement was a disposition on the principles laid down by Bhatia International v. Bulk Trading S.A.,[3] which is the law to be followed for Pre-BALCO arbitration clauses having seat of arbitration outside India. Bhatia International laid down: “Thus in respect of arbitrations which take place outside India, even the non-derogable provisions of Part I can be excluded. Such an agreement may be express or implied.”

The implied exclusion of Part I is what the court then goes on to explain by propounding the ratio of various case laws, which were Pre-BALCO. The court relied on Reliance Industries Ltd. to reiterate that all contracts which deal with any foreign element involve three potentially relevant systems of law:-

(i) The law governing the substantive contract: This is the law governing the performance of the contract itself and is the proper law

(ii) The law governing the agreement to arbitrate and the performance of that agreement: This is the law governing filing, enforcement and setting aside of award (Reliance Industries) and the law to determine arbitrability of the dispute (Sumitomo Heavy Industries[4])

(iii) The law governing the conduct of the arbitration: This is the curial law or procedural law, which is the law in which the arbitration proceedings have to be conducted (Sumitomo Heavy Industries).

Furthermore, in absence of any other stipulation in the contract, proper law is the law applicable to the arbitral tribunal itself.[5] However, in case the contract specifically provides for a separate curial law, then proper law is not the curial law and the curial law would determine whether part I would apply or not. If the curial law excludes application of Part I, then it would no longer apply to the agreement, even if the proper law of contract is the law of India.

Another interesting concept argued by the senior counsel for Harmony Innovation was the concept of “presumed intention”. It was his averment that where the parties have not expressly excluded Part I, then to be able to interpret “implied exclusion”, the court has to test “presumed intention” of the parties, that is to ascertain what would have been the intention of reasonable parties in the position of actual parties to the contract. The doctrine of “presumed intention” of the parties applies where parties did not, due to unforeseen circumstances, have an actual intention in respect of a particular clause in issue, in which case it is a task upon the judge to interpret the contract, not subjectively, but objectively. However, in the present case, the Court did not pay much heed to the concept, in view of specific and unequivocal clauses of the contract.

In Harmony Innovation (Supra), the Court finally held that Part I would not apply, owing to the following specific provisions in the contract:-

(i) Arbitration in London to Apply

 (ii) Arbitrators are to be members of the London Arbitration Association

 (iii) Contract is to be governed and construed according to English Law

 (iv) No indication of any other stipulation relating to applicability of any other law to the agreement. 

(v) If dispute is for an amount less than US$50000 then, the arbitration should be conducted in accordance with small claims procedure of the London Maritime Arbitration Association.

Owing to the above stipulations, the Supreme Court held that the courts in India did not have jurisdiction as there was an implied exclusion and on these grounds the appeal was dismissed.

To conclude, it may be said that although there is not much to criticize the judgment given by the Hon’ble Supreme Court, it has yet again failed to settle the law once and for all in respect of Pre-BALCO arbitration agreements. The fact of the matter is that the judgment in BALCO laid down the correct interpretation of existing law and did not propound any new law. Thus, the judgment of BALCO is declaratory in nature and should apply to all arbitration clauses alike, not just those entered into after 06.09.2012. That being the fact of the matter, the Court could have settled the issue of foreign seated arbitrations Pre-BALCO once and for all. However, till date the law still stands that the test of express or implied exclusion of Part I propounded by Bhatia International is valid.

- Gunjan Chhabra

[1] (2012) 9 SCC 552.
[2] Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603.
[3] (2002)4SCC105
[4] Sumitomo Heavy Industries Ltd. v. ONGC Ltd. 1998(1)SCC305
[5] Yograj Infrastructure Ltd. v. Ssangyong Engineering & Construction Co. Ltd. 2012(2)SCJ185


Captain Nemo said...

Idrish Mohammed said...

How will a interim order awarded by foreign court/arbitral tribunal be enforced in Indian?