Case Update: Bharat Aluminium

In a previous post, we updated readers about the recent Indian Supreme Court decision of Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc, Civil Appeal No. 7019 of 2005. The case is significant because it overturns two prior decisions of the Indian Supreme Court which had raised considerable concern within the international arbitration community.

The two cases in issue are Bhatia International Vs. Bulk Trading S.A. & Anr., (2002) 4 SCC 105 which was later followed in Venture Global Engineering Vs. Satyam Computer Services Ltd. & Anr. 2008 (1) Scale 214.

It should be recalled that under the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention“), contracting states are obligated to recognise and enforce foreign arbitral awards subject only to the limited grounds set out at Article V. This is replicated in Article 35 of the UNCITRAL Model Law.

There is, however, nothing to prevent a state under the New York Convention from adopting a more supervisory role over non-foreign arbitrations and awards – non-foreign in this sense has a territorial connotation and generally refers to arbitrations conducted by nationals of the state within the state or foreign parties choosing to have the state as the seat of their arbitration.  

As we had previously explained, the Bhatia International case raised considerable concern within the arbitration community because it gave the Indian courts an opportunity to intervene in a foreign award as if it were a Indian award. This was particularly so in respect of the concept of “patent illegality” under Indian law, allowing arbitration awards to be set aside on the basis of an error of law.

Subsequently, there was mounting concern within the arbitration community when the Indian Supreme Court then set aside a foreign international arbitration award on the basis that Part I  of the Indian Arbitration and Conciliation Act 1996 (“Indian Arbitration Act“) applied and that the award was “patently illegal” – in Venture Global Engineering v Satyam Computer Services Ltd, (2008) 4 SCC 190 the Indian Supreme Court applied section 34 of Part I of the Indian Arbitration Act and set aside a London LCIA award on that basis.

The Indian Supreme Court decision in Bharat Aluminium has finally settled the issue by deciding that the two decisions were erroneously made. Accordingly, Part I of the Indian Arbitration Act does not apply to arbitrations seated outside of India. However, this ruling only applies prospectively to arbitration agreements executed after 6 September 2012. Pertinently, this does not automatically include all arbitrations initiated after 6 September 2012.

Appellants’ Arguments as to why Part I applies to Foreign Arbitrations

Article 1(2) of the Model Law states in material part that “[t]he provisions of this Law…apply only if the place of arbitration is in the territory of this State“. Section 2(2) of the Indian Arbitration Act states that “[t]his Part [I] shall apply where the place of arbitration is in India“.

One of the issues before the Indian Supreme Court was whether the omission of the word “only” in section 2(2) of the Indian Arbitration Act was material. In other words, whether the omission meant that the Indian Parliament meant for Part I to depart from the Model Law approach (as per section 1(2)). If so, then it would be a shift from a supervisory jurisdiction which is territorial in nature (as it is under the Model Law), to one that is based on subject-matter instead.

The appellants raised the following arguments (see paragraphs [15] and [17]):

  1. The omission of the word “only” signified the intent of the Indian Parliament to deviate from the territorial approach such that it intended for Part I to apply even to arbitrations seated outside India. The appellants argued that Part I and Part II were not mutually exclusive. Furthermore, it was also argued that the Indian Arbitration Act had not “adopted or incorporated the provisions of [the] Model Law” but had merely “taken [the Model Law] into account” (see paragraph [15]). In this respect, the omission of the word “only” was deliberate and “clearly indicate[d] that [the] Model law ha[d] not been bodily adopted by the [Indian Arbitration Act]“.

  2. Restricting the operation of Part I only to arbitrations which take place in India would lead to reading words into or adding words to various provisions contained in the Indian Arbitration Act.

  3. Restricting the operation of Part I would also render certain provisions (sections 2(5), 2(7) and 20) redundant.

  4. A reading of the word “place” should be consistent in both sections 2(2) and 20. Insofar as Section 20 states that parties are free to agree on a place of arbitration outside India, it was argued that there could be Part I arbitrations conducted outside India.

  5. If Part I was only to apply to arbitrations in India, then the words in section 28(1) “[w]here the place of arbitration is situated in India” would be unnecessary and should instead be read as Parliament’s intention to give Part I extra-territorial effect.

  6. The same phrase only qualifies subsection (1) of section 28 and does not qualify subsection (3). Accordingly, section 28(3) was intended to apply to foreign arbitrations so long as parties chose the Indian Arbitration Act as the law of the arbitration. This could only be the case if Part I applies to such arbitrations.

  7. Parties to a foreign arbitration would be left without a remedy if the Indian courts were not permitted to assert jurisdiction over a foreign arbitration and thereby grant interim relief in aid of that arbitration.

Decision and Reasoning

(I) Omission of word “only”

The Indian Supreme Court held that the omission of the word “only” did not mean that the Indian Parliament consciously decided to depart from the territorial principle/criterion. Just because the Indian Parliament did not chose to adopt the Model Law wholesale did not mean that it had departed from the territorial principle/criterion (see paragraph [60]).

The Supreme Court considered that on a plain reading of section 2(2), it was clear that Part I was limited in its application to arbitrations which take place in India.

The Indian Supreme Court considered that in light of the legislative history of the Indian Arbitration Act, the omission of the word “only” was not material. First, the use of the word “only” would have been superfluous (see paragraph [68]) and would only have been necessary if certain exceptions under the Model Law were incorporated into the Indian Arbitration Act. Since none of those exceptions were adopted, the phrase would have been redundant.

Second, the scheme of the Indian Arbitration Act “ma[de] it abundantly clear that the territorial principles, accepted in the UNCITRAL Model Law, ha[d] been adopted by the [Act]” (see paragraph [39]). In this respect, the Supreme Court held that the UNCITRAL Rules adopted a strict territorial principle (see paragraph [70] citing paragraphs 72 to 80 of the Report of the UNCITRAL on the work of its 18th Session in Vienna between 3rd to 21st June, 1985).

Third, the acceptance of the territorial principle in UNCITRAL was “duly recognised by most of the experts and commentators on International Commercial Arbitration” (see paragraph [71]).

Fourth, the Supreme Court rejected the argument that the Indian Arbitration Act does not make the seat of the arbitration the so-called centre of gravity of the arbitration (see paragraph [72]). The Supreme Court recognised the distinction between the seat of the arbitration and a convenient venue to hold the hearings. In this respect, “the law of the seat or place where the arbitration is held, is normally the law to govern that arbitration. The territorial link between the place of arbitration and the law governing that arbitration is well established in the international instruments [i.e. the New York Convention and the UNCITRAL Model Law]” (see paragraph [74]).

Finally, there were other countries which had dropped the word “only” from their domestic arbitration statute (see paragraph [77]), for e.g. the Swiss Private International Law Act 1987 and the UK Arbitration Act 1996.

(II) No derogation from territorial principle in section 2(2)

The Supreme Court considered that there was no conflict between the various subsections of section 2. The appellants argued that Section 2(4) makes Part I applicable to “every arbitration” under any other enactment and therefore made it applicable to arbitrations wherever held, whether in India or outside India. The Supreme Court considered this argument “devoid of merit” (see paragraph [82]).

Section 2(4) makes Part I applicable to “every arbitration under any other enactment for the time being in force”. The Supreme Court considered that this provision simply recognised that apart from consensual arbitrations, there were also arbitrations convened under statute (Indian Telegraph Act 1886) or the bye-laws of private associations.

The Supreme Court similarly held that section 2(5) “[did] not admit of an interpretation that any of the provisions of Part I would have any application to arbitration which takes place outside India“. Section 2(5) reads,

Subject to the provisions of sub-section (4), and save insofar as is otherwise provided by any law for the time being in force or in any agreement in force between India and any other country or countries, this Part shall apply to all arbitrations and to all proceedings relating thereto.

In this respect, the Supreme Court pointed out that subsection (5) was subject to subsection (4) and had to be read together with subsection (2). Accordingly, subsection (5) was not a standalone provision but had to be read as part of the entire chapter for its correct meaning. Essentially, the phrase ‘all arbitrations’ in Section 2(5) meant that “Part I applies to all [arbitrations] where Part I is otherwise applicable” (see paragraph [84]).

(III) Reference to awards being domestic awards does not indicate that Part I applies to arbitrations held outside India

Section 2(7) states that “[a]n arbitral award made under this Part shall be considered as a domestic award“. In the view of the Supreme Court, this did not “relax the territorial principle…[and] certainly [did] not introduce the concept of a delocalised arbitration into the Arbitration Act” (see paragraph [88]).

The Supreme Court considered that the true purpose of this provision was not to extend the jurisdiction of Part I of the Indian Arbitration Act to a foreign arbitration, but to draw a distinction between awards under Part I (domestic awards) and Part II (foreign awards) (see paragraph [88]).

The Supreme Court also considered that section 2(7) was enacted to prevent a situation where two foreign parties arbitrated in India under a foreign arbitration act and sought to claim that their award was a “non-domestic” award for the purposes of enforcing that award as an award under Part II as opposed to Part I (see paragraph [94]).

(IV) The concept of party autonomy and jurisdiction does not detract from the territorial principle

The appellants sought to argue that the concept of party autonomy and jurisdiction in sections 2(1)(e), section 20 and section 28 read with section 45 and section 48(1)(e) made the jurisdiction of the Indian Arbitration Act subject-centric as opposed to seat-centric (see paragraph [95]). The Supreme Court disagreed.

With respect to section 2(1)(e) which defines “Court” i.e. the courts with “jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject matter of a suit”, it was argued that this definition “would necessarily mean that two foreign parties, in order to resolve a dispute arising outside India and governed by foreign law cannot invoke jurisdiction of an Indian Court by simply choosing India as the seat of arbitration“.

The Supreme Court took the view that the term “subject matter of the arbitration” ought not to be confused with “subject matter of the suit”. In this regard, its purpose was to identify the courts with supervisory jurisdiction over the arbitration proceedings. Section 2(1)(e) was meant to give jurisdiction to more than one court i.e. the courts where the cause of action is located and the courts where the arbitration takes place would both have jurisdiction over the parties (see paragraph [96]). Without section 2(1)(e), the courts where the arbitration takes place would not have jurisdiction over the arbitration.

Furthermore, section 2(1)(e) was a purely jurisdictional provision which “can have no relevance to the question whether Part I applies to arbitrations which take place outside India” (see paragraph [97]).

In respect of the arguments relating to section 20, which involved parties’ choice of the place of arbitration, the Supreme Court considered that it did “not support the submission of the extra-territorial applicability of Part I” (see paragraph [99]). Section 20 reads,

“20. Place of arbitration –

(1) The parties are free to agree on the place of arbitration.

(2) Failing any agreement referred to in sub-section (1), the place of arbitration shall be determined by the arbitral tribunal having regard to the circumstances of the case, including the convenience of the parties.

(3) Notwithstanding sub-section (1) or sub-section (2), the arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of documents, good or other property.”

Section 20 had to be read in light of the territorial limitation in section 2(2). Specifically, the use of the phrase “place” in section 20(3) should be read as a reference to venue and not the seat of arbitration (see section 20(1) and (2) which confusingly uses the phrase “place” as well”) (see paragraph [100]). Whilst parties may choose to have the venue of their hearings at a convenient location outside of India, this would not change the seat of the arbitration which would still be India.

(V) Conflict of law provision is also not an argument for an extra-territorial Part I

The Supreme Court held that section 28 was a conflict of law provision (see paragraph [128]) which draws a distinction between domestic arbitrations, international arbitrations seated in India and foreign arbitrations and their applicable conflict of laws rule. The phrase “where the place of arbitration is situated in India” is therefore “not indicative of the fact that the intention of Parliament was to give an extra-territorial operation to Part I of the [Indian] Arbitration Act” (see paragraph [123]).

(VI) Part I and Part II apply to different arbitrations and awards

Part I of the Indian Arbitration Act deals with Indian arbitrations and Indian awards while Part II deals with foreign awards. The appellants sought to argue that some of the provisions contained in Part II would indicate that Part I would not be limited to arbitrations which take place in India. It was also argued that Part II was not a complete code as it relies on provisions in Part I. Finally, it was submitted that if Part I only applied to arbitrations within India, then the Indian courts would be precluded from granting any interim or interlocutory relief under section 9 in aid of foreign arbitrations (see paragraph [124]).

The Supreme Court disagreed that (i) there was any overlap of the provisions in Part I and Part II; and that (ii) the provisions in Part II were supplementary to Part I. Rather, the Supreme Court held that there was a “complete segregation between the two parts” (see paragraph [125]). The Supreme Court drew a distinction between, on the one hand, its supervisory jurisdiction as the court of the seat of the arbitration in Part I, and on the other, its jurisdiction as the enforcement court under Part II (see paragraphs [128] and [129]).

(VII) Reference to arbitration provision does not assert extra-territoriality

Section 45 provides that, “Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed” (emphasis added).

The appellants argued that the underlined words in section 45 “necessarily indicate[d] that provisions of Part I would apply to foreign seated arbitration proceedings“. The Supreme Court explained that this simply gave the Indian courts power to refer parties to arbitration when these parties had made an arbitration agreement referred to in section 44. It held that the appellants’ confusion of the appellants stemmed from the phrase “judicial authority” which was “not a recognition by the Parliament that Part I [would] apply to international commercial arbitrations held outside India“. Instead, the phrase was merely “a legacy from the 1940 Act, which covered purely domestic arbitrations, between two or more Indian parties, within the territory of India” (see paragraph [130]).

The Supreme Court also recognised that section 45 was perhaps superfluous in light of section 19 which was to the same effect, but considered that this in and of itself was insufficient to “alter the scope and ambit of the field of applicability of Part I to include international commercial arbitrations, which take place out of India” (see paragraph [131]). In any event, the previous versions of the UK Arbitration Act 1950 and 1975 had similar provisions.

(VIII) Indian courts’ discretion to refuse recognition of a foreign award because it has been set aside does not create concurrent jurisdiction for the Indian courts to set aside awards

Section 48 of Part II of the Indian Arbitration Act and in particular 48(1)(e) grants the Indian courts jurisdiction and discretion to refuse to set aside a foreign award where “the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made“. The equivalent ground can be found at Article V(1)(e) of the New York Convention as well as Article 36(1)(a)(v) of the Model Law.

The Supreme Court held at paragraph [138] that,

[t]he provision sets out the defences open to the party to resist enforcement of a foreign award. The words ‘suspended or set aside’, in Clause (e) of Section 48(1) can not be interpreted to mean that, by necessary implication, the foreign award sought to be enforced in India can also be challenged on merits in Indian Courts. The provision merely recognizes that courts of the two nations which are competent to annul or suspend an award. It does not ipso facto confer jurisdiction on such Courts for the annulment of an award made outside the country. Such jurisdiction has to be specifically provided, in the relevant national legislation of the country in which the Court concerned is located. So far as India is concerned, the [Indian Arbitration Act] does not confer any such jurisdiction on the Indian Courts to annul an international commercial award made outside India “.

The Supreme Court also held that the jurisdiction for the Indian courts to annul or set aside an award is found in section 34. Section 34 is under Part I of the Indian Arbitration Act and is therefore only applicable to awards made in India. To decide otherwise would be to incorporate section 34 into Part II of the Indian Arbitration Act and therefore contrary to the Indian Parliament’s intention to confine section 34 to arbitrations and their awards held and made within India (see paragraph [138]).

The Supreme Court also pointed out the mischief that would occur if there were concurrent jurisdictions to set aside awards and noted that it “would be a recipe for litigation and confusion” (see paragraph [143]). Here, they pointed to the Venture Global case which “epitomized the kind of chaos which would be created by two court systems, in two different countries, exercising concurrent jurisdiction over the same dispute” (see paragraph [146]).

Indian Courts have no power to grant interim measures where the seat of arbitration is outside of India

The Supreme Court noted that in the event that Part I did not apply to arbitrations outside of India, parties would have no remedy where they sought interim relief from the Indian courts under section 9 in support of such foreign arbitrations (see paragraph [159]).

Since some of the respondents were seeking interim relief from the court, they argued that even if Part I were deemed not to apply to foreign arbitrations, section 9 was a standalone provision which was not affected by the territorial limit set out in section 2(2) and should therefore continue to apply to arbitrations outside India (see paragraph [159]). The respondents also argued that contra section 34, section 9 was ancillary to and supportive of the arbitration proceedings whereas section 34 “would interfere with the final award“. The respondents also argued that section 9 had no extra-territorial effect, whereas setting aside a foreign award under section 34 would. Accordingly, section 9 should be seen as sui generis.

The Supreme Court disagreed. First, section 9 is under Part I and therefore cannot simply be granted “a special status“. Second, no equivalent provision is to be found in Part II. Third, the powers under section 9 are predicated on proceedings under section 36 i.e. enforcement of a domestic award. Finally, to extend section 9 extra-territorially “would be to do violence to the policy of the territoriality declared in Section 2(2) of the [Indian] Arbitration Act” (see paragraph [163]).

The Supreme Court took the position that parties who have chosen to have their arbitration outside of India “are impliedly also understood to have chosen the necessary incidents and consequences of such choice” (see paragraph [166]). In any event, the Supreme Court felt that if this posed any problems to parties then that was a matter to be resolved through legislation (see paragraph [168]).

Separately, the Supreme Court also considered that the pendency of foreign arbitration proceedings would not be a standalone cause of action for the Indian courts to be seized of jurisdiction in order to grant interim relief (see paragraph [179]). In fact, any such suit started in the Indian courts would likely be stayed under the Indian Arbitration Act and would fall afoul of other specific Indian statues (see paragraph [183]). Finally, citing English and Indian case law, the Indian Supreme Court held that the Indian courts had no power to grant standalone interim injunctions and could only do so in aid of a final injunction/principal relief claimed in the suit (see paragraphs [184] to [194]).

Conclusion

While the Bharat Aluminium decision provides greater clarity to the Indian courts’ approach in recognising and enforcing foreign arbitral awards and confirms that the concept of “patent illegality” does not apply to such arbitrations, the full impact of the decision will most likely only be felt a few years from now.

That is because the decisions in Bharat Aluminium apply prospectively to “all the arbitration agreements executed [after the date of this decision i.e. 6 September 2012]“. Presumably, the Indian courts are still seized with jurisdiction to grant interim measures in aid of foreign arbitration proceedings pursuant to arbitration agreements executed before this date.

It is less clear, however, what approach the Indian courts’ will take with regard to reviewing foreign arbitral awards for “patent illegality” where such awards are made pursuant to arbitration agreements executed before 6 September 2012. Parties will no doubt continue to cite the cases of Bhatia International and Venture Global, however, it is uncertain what persuasive value they will have in light of the decision in Bharat Aluminium.

Post Bharat Aluminium, Indian courts no longer have the power to grant interim or interlocutory relief in aid of foreign arbitral proceedings commenced pursuant to arbitration agreements executed after 6 September 2012.

Interestingly, India now finds itself in the same position as Singapore post Swift Fortune Ltd v Magnifica Marine SA, [2007] 1 SLR(R) 629 and before the 2010 amendments to the IAA. In Swift Fortune, the Singapore Court of Appeal decided that section 12(7) of the previous version of the IAA, which granted powers to the Singapore courts to grant interim relief in aid of arbitration, did not apply to foreign arbitrations. The approach adopted by Singapore in its 2010 amendment to the IAA was to remove section 12(7) and incorporate a new section 12A instead. Section 12A(1) provides that the Singapore High Court may make an interim order in support of foreign arbitrations subject to section 12A(3), which in turn permits the High Court to take into account the place of the arbitration when deciding whether to grant such interim relief.

These amendments brought Singapore’s legislation in line with the 2006 amendments to the Model Law. Article 17J of Model Law provides that “[a] court shall have the same power of issuing an interim measure in relation to arbitration proceedings, irrespective of whether their place is in the territory of this State, as it has in relation to proceedings in courts. The court shall exercise such power in accordance with its own procedures in consideration of the specific features of international arbitration“.

About Shaun Lee

International Dispute Resolution and Arbitration lawyer. Fellow of the Chartered Institute of Arbitration. Panel of Arbitrators and Panelist for Domain Name Dispute Resolution at the KLRCA.
This entry was posted in Arbitration, India and tagged , , , , , , . Bookmark the permalink.

4 Responses to Case Update: Bharat Aluminium

  1. Asha says:

    Interesting analysis and comparison with Singapore. Lets see how the law progresses in India.

  2. Pingback: Case Update: (1) Lack of substantive jurisdiction in respect of one respondent does not affect award as against the other respondent; (2) Substantive jurisdiction not affected by finding of liability under a different agreement | Singapore International A

  3. Pingback: Case Update: (1) Lack of substantive jurisdiction in respect of one respondent affects award as against the other respondent; (2) Substantive jurisdiction not affected by finding of liability under a different agreement | Singapore International Arbitrati

  4. Pingback: Arbitration India: Technology, Media & Telecommunications | Singapore International Arbitration Blog

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