Saturday, June 11, 2016

Guest Post: Mere Choice of Foreign Seat can exclude Part I of Arbitration Act 1996- Pre-BALCO Arbitrations?

(The following guest post is contributed by RV Prabhat, who is a practising advocate in the Delhi High Court)
The question of applicability of the provisions of Part I of the Arbitration and Conciliation Act 1996 (hereinafter referred as 1996 Act) to the Foreign Seated Arbitrations has time and again come up before the Supreme Court of India ("Supreme Court") and various High Courts. Bhatia International[1]had initially held that the 1996 Act shall be applicable to all arbitrations, including arbitrations held outside India, unless the applicability of all or any of its provisions was excluded by parties, expressly or impliedly. Bhatia International was later overruled by a constitution bench judgment in Balco v. Kaiser[2], but only prospectively i.e. applicable only for disputes arising out of agreements which were entered after 6th September 2012. This meant that the Bhatia International judgment was still applicable to all arbitrations agreements entered prior to 6th September 2012.

Since the pronouncement of Bhatia International Judgment it has been a matter of debate, as to what is the importance that should be attached to a ‘seat’ of arbitration. In Bhatia International, the Supreme Court construed that since the word ‘only’ is missing in Section 2(2) of1996 Act (alongwith a harmonious construction of various other provisions), the 1996 Act would have application even to arbitrations seated outside India. However, if the scheme of the Act is taken into consideration, we find that the 1996 Act draws two different distinctions of the arbitrations, 1) ‘Party Centric’ distinction of ‘International Commercial Arbitration’ and ‘arbitrations other than International Commercial Arbitrations’in Part I of the Act and 2) ‘Seat Centric’ distinction of ‘Domestic Award’[3] and ‘Foreign Award’[4]. While, Bhatia International relied upon the ‘Party Centric’ principle, Balco relied upon the ‘Seat Centric’ principle. In author’s opinion, jurisdiction depends on the latter not the former. So, unlike what the Bhatia International judgment held, that Indian legislature specifically deviated from the UNCITRAL Model by not giving ‘seat’ the importance as is attached in definition provided therein, the scheme of the Act 1996 does indicate ‘seat centricity’ for determining jurisdiction.

The Supreme Court and various High Courts have considered a variety of foreign factors including procedural rules of a foreign arbitral institution[5], law governing the arbitration agreement[6]which along with the foreign seat could exclude the application of Part I of the 1996 Act.[7]

To abridge, it may be said that in all cases of Pre-Balco arbitration agreements, the Courts have been consistently holding that the ‘foreign seat’ alone is not akin to exclusive jurisdiction clause, i.e. mere choosing of a foreign seat does not confer exclusive jurisdiction to the said venue and will not exclude the applicability of Part I of the 1996 Act.

However, in a course correction, the Supreme Court in the case of Eitzen Bulk A/S v.Ashapura Minechem Ltd. &Anr.[8], has observed that the mere choosing of juridical seat of arbitration attracts the law applicable to such location and that it would not be necessary to specify which law would apply to the arbitration proceedings, since the law of the particular country would apply ipso jure.

Factual Matrix

The Charter Party agreement between the parties contained an Arbitration Clause having London as seat of arbitration and made the English law to apply to arbitration. Consequently, the Arbitration was held in London according to English Law.

A Petition under Section 34 of the 1996 Act challenging the award passed in London was filed before District Court, Jamnagar.After a series of proceedings, both before the Gujarat High Court in the appellate case arising from a decision in the Section 34 petition, as well as the Bombay High Court in the appellate case arising from the execution Petition, the case now lay before the Supreme Court.

Judgment

The main question before the Supreme Court was whether Part I of the Arbitration Act is excluded from its operation in case of a Foreign Award where the Arbitration is not held in India and is governed by foreign law. In the present case, although the Supreme Court excluded the operation of Part I of the 1996 Act owing to two factors, ie. the first being the seat of Arbitration to be in London and the second being, that the English Law was to apply to the arbitration, what was surprising was the parting observation of the Court in the matter.

The Supreme Court relied upon the judgment of Reliance Industries Limited and Anr.v. Union of India[9], which in turn relied upon Sulamerica v. Enesa, High Court of Justice (England) case, which says that seat of arbitration is an important factor in determining proper law of the arbitration agreement. The Supreme Court went on to quote the famous passage from Redfern and Hunter on International Arbitration, and observed that “as a matter of fact the mere choosing of juridical seat of arbitration attracts the law applicable to such location and that it would not be necessary to specify which law would apply to the arbitration proceedings, since the law of the particular country would apply ipso jure (emphasis supplied).”

In view of the above, the Court held that the foreign award passed in London cannot be interfered with under Section 34, which occurs in Part I of the 1996 Act and hence, dismissed the proceedings under Section 34 before the Gujarat High Court as untenable and upheld the judgment of the Bombay High Court enforcing the Foreign Award under Part II of the 1996 Act.

However, it is to be pointed out, that the Hon’ble Supreme Court while relying upon Sulamerica Case, did not notice the Court of Appeal judgment, which although upheld the judgment of the Queen’s Bench Division, in so doing, provided a rider to the principle enunciated therein and held that the closest connection will not always be the law of the seat. In sum, it held that a mere choice of seat would not lead to inference that the law of such location shall be applicable to the arbitration agreement and various factors have to be considered for determining implied choice of proper law of arbitration agreement.[10] Hence, in author’s opinion, reliance of the Supreme Court on the Queen’s Bench Division judgment of Sulamerica v. Enesa, is erroneous.

Conclusion

Prior to this judgment, as of now, the cases dealing with implied exclusion held that a mere designation of foreign seat will not exclude Part I of the 1996 Act and implicitly rejected the principle that choice of the seat of arbitration is akin to an exclusive jurisdiction clause ( for all Pre-Balco Agreements).[11]However, by this judgment Supreme Court in a course correction measure holds that a mere choice of foreign seat would attract the law applicable to such location and would suffice to exclude the applicability of Part I of the 1996 Act.

It is to be seen whether this observation is an ‘obiter dicta’ as in the present case, along with a foreign seat, applicability of foreign law to arbitration was also specifically mentioned. Hence, it is not a case where mere foreign seat was agreed between the parties. But it does not seem so, as the Supreme Court has clearly espoused that in the present facts of the case two factors evidence the intention of parties (seat as well as applicable law) to exclude applicability of Part I, however, even a factor such as designation of seat would attract the law applicable to such location. If the above observation forms part of the ratio, the judgment seems to be per incuriam in light of the various judgments of Supreme Court of coordinate Benches and larger bench of Bhatia International where it has been implicitly held that a mere choice of seat is not akin to exclusive jurisdiction clause for agreements pre-dating Balco.

In view of the above, the author is of the opinion, that the present judgment is per incuriam for the reason of being inconsistent with Supreme Court precedent and legally incorrect owing to the erroneous analysis (reliance) upon High Court Judgment of Sulamerica.


[1]Bhatia International v. Bulk Trading SA, (2002) 4 SCC 105.

[2] Bharat Aluminum and Co. vs. Kaiser Aluminium and Co. (2012) 9 SCC 552

[3]An award passed under Part I of the Act, which includes awards passed in international commercial arbitration  seated in India as well as purely domestic arbitrations between two Indian parties.See Section 2(7) of 1996 Act

[4] An award passed under Part II of the Act, where the seat of the arbitration is in a foreign country( New York Convention & Geneva Convention country)See Section 44 of 1996 Act.

[5]Yograj Infrastructure Ltd. vs. Ssangyong Engineering Construction Co. Ltd, AIR 2011 SC 3517;

[6]Videocon Industries Ltd. v. Union of India, (2011) 6 SCC 161; Reliance Industries v. Union of India, 2014 (4) CTC 75; Harmony Innovation Shipping Ltd. v. Gupta Coal India Ltd, (2015) 9 SCC 172; Max India Ltd. v. General Binding Corporation, 2009(3) ARBLR162(Delhi); Union of India v. Reliance Industries Ltd., MANU/SC/1064/2015;

[7]Please see discussion at http://indiacorplaw.blogspot.in/2014/08/reliance-v-union-of-india-implied.html

[8]CA No. 5131-5133 of 2016; CA No. 5134-5135 of 2016; CA No. 5136 of 2016; Decided on 13 May 2016. Available at http://www.judis.nic.in/supremecourt/imgs1.aspx?filename=43634l

[10]Sulamerica v. Enesa; Moore-Bick LJ laid down in Para 25-“two propositions that were not controversial but which provide the starting point for any enquiry into the proper law of an arbitration agreement are first , even if the agreement forms part of a substantive contract (as is commonly the case), its proper law may not be the same as that of the substantive contract. The second is that the proper law is to be determined by undertaking a three-stage enquiry into (i) express choice, (ii) implied choice and (iii) closest and most real connection. As a matter of principle, those three stages ought to be embarked on separately and in that order, since any choice made by the parties ought to be respected, but it has been said on many occasions that in practice stage (ii) often merges into stage (iii), because identification of the system of law with which the agreement has its closest and most real connection is likely to be an important factor in deciding whether the parties have made an implied choice of proper law.”

[11] As Balco laid down the seat centricity principle and held that choice of seat of arbitration is akin to an exclusive jurisdiction clause.

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