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India – Proposed Amendments To The Arbitration & Conciliation Act, 1996: Remedying The Fall-Out From Bhatia International And BALCO.

14 October, 2014

 

Legal News & Analysis – Asia Pacific – India – Dispute Resolution

 

Introduction


The promulgation of the Arbitration & Conciliation Act of 1996 (the “Act”), (which repealed earlier legislation between 1940 and 1961), was considered at the time it came into force, as a shot in the arm for a quick and cost effective form of alternative dispute resolution through arbitration. The Act of 1996 (which is modeled on the UNCITRAL Model Law on International Commercial Arbitration), updated the law of arbitration in India to make it more responsive to contemporary requirements. The Act sought to restrict the intervention of courts and envisaged co-operation between the judicial and arbitral process. 


Almost two decades later, the hoopla has given way to embarrassment. Indian courts are seen to be particularly interventionist, exercising jurisdiction even in cases where the seat of the arbitration is outside India and such intervention coupled with the gross delays suffered by any case in the Indian judicial system has resulted in a country which seeks to be a global player, being shunned in most dispute resolution clauses.


Two landmark Supreme Court decisions (Bhatia  International v. Bulk Trading S.A & Anr1. and Bharat Aluminum & Company & Ors. v. Kaiser Aluminum  Technical Service Inc. & Ors2. (“BALCO”)), and two previous proposals for amendment of the Act3, have nally culminated in the 20 Law Commission in its Report No. 246, which has had a fresh look at the various lacunae (in the Act and rulings of court), over the years, and suggested some long awaited and critical amendments.


In this article, we discuss how the proposed amendments seek to remedy the fall-out from Bhatia International and BALCO, and other cross-border issues.


Background


Although one of the Act’s objectives (as stated in its Statement of Objects and Reasons), was “to minimise the supervisory role of courts in the arbitral process”, Indian courts have been reluctant in the extreme to give up jurisdiction even in cases of arbitration with a foreign seat. In its landmark (but much criticized), judgment in Bhatia International, the Supreme Court held that Part I of the Act, would also apply to such arbitrations (and Indian courts would be entitled to exercise jurisdiction), unless excluded by the parties. (Note that Part I deals with the conduct of an arbitration, as opposed to Part II, which deals with only enforcement of foreign awards by Indian courts). This was a well intentioned judgment, noting that should the Act not be so interpreted, parties in arbitrations seated outside India would be left remediless insofar as their ability to obtain interim reliefs (or enforce interim orders of foreign courts and tribunals), through Indian courts is concerned. 


Bhatia International was passed with good intentions, noting that if Part I were held to be not applicable, then there would be no mechanism for a party thereto to obtain interim reliefs in India, leaving it remediless even though properties / assets may be located in India4. The result may be that the arbitration could be frustrated and this could never have been the intention of the Legislature.


Bhatia International if properly applied, could have been a step in aid of arbitration; instead it became the bane of many foreign parties. The judgment was used by Indian parties and Indian courts as an excuse to intervene in any arbitration notwithstanding that it took place outside India. Illustratively, in Venture Global Engineering v. Satyam Computer Services  Ltd. & Anr.5, they relied on Bhatia International to rule that Indian courts could even entertain challenges to foreign awards under Section 34, which was in Part I of the Act. In Venture Global and other subsequent cases, Indian courts almost negated the object of minimal intervention by the court. Not surprisingly, the decision in Venture Global attracted widespread criticism from both the legal and business communities in India and abroad.


The decisions in Bhatia International, Venture Globaland other cases, were referred to a Constitution Bench of ve judges which culminated in the decision in BALCO, where the Supreme Court overruled the various decisions and held that Part I of the Act will henceforth (i.e. from September 6, 2012, onwards) not be applicable to foreign seated arbitrations. By holding that Part I would not apply to foreign seated arbitrations, it also excluded the remedy of interim reliefs being able to parties arbitrating in a foreign seat although it recognized that by doing so it may leave a party remediless. The Court noted that once the parties voluntarily chose to arbitrate outside India, they were deemed to have understood the consequences of such choice. The Court opined that the approach in Bhatia International to remove the hardship to parties, was not permissible under law, and even though the BALCO interpretation led to there being lacunas in the Act, it was of the view that it was the duty of a court only to interpret the law and up to the Parliament to ll any lacunas that may exist. 


Proposed Amendments


1. Part I Not To Apply To Foreign Seated Arbitrations


One of the reasons for the Supreme Court’s reasoning in Bhatia International was that Section 2(2) provides that Part I “shall apply where the place of arbitration is in India”. It does not use the words “only in India” and does not provide that Part I does not apply to arbitrations which take place outside India. This indicated that Section 2(2) was an inclusive and clarificatory provision. 


Perhaps keeping in mind the rationale behind Bhatia International, it is proposed to amend Section 2(2) to read “This Part shall apply only where the seat of arbitration is in India”, making it clear that Part I would not otherwise apply to foreign seated arbitrations.


2. The Concept Of The ‘Seat’ Of Arbitration


Anew denition of ‘seat’, has been inserted as Section 2(1)(hh), dening “seat” to mean the “juridical seat of arbitration”.


The proposed amendment to Section 2(2), i.e. “This Part shall apply only where the seat of arbitration is in India”.


Both the above amendments clarify the importance and juridical concept of the ‘seat’, as opposed to ‘place’ or ‘venue’ of the arbitration. (The juridical concept of the ‘seat’ was explained in BALCO where the Supreme Court explained that the seat would determine the curial law which governed the arbitration proceedings). Amendments have also been proposed in Sections 206 , 287  and 318 of the Act, replacing the phrase ‘place of arbitration’, with ‘seat of arbitration’ or ‘venue of the arbitration’, to make the provisions consistent with international usage of the concept of a ‘seat’.


Amendments have also been proposed in Sections 209 , 2810 and 3111  of the Act, replacing the phrase ‘place of arbitration’, with ‘seat of arbitration’ or ‘venue of arbitration’, to make the provisions consistent with international usage of the concept of a ‘seat’.
Section 20 is amended to provide that parties (or failing their agreement, the tribunal), could agree on the seat as also the venue of arbitration, thus differentiating the juridical seat, which would be relevant from the point of view of the curial law that would apply and the courts which would have jurisdiction over the arbitration, and the venue or place of the hearings, that could change or be different from the location of the seat, for convenience of the parties.


3. Access To Indian Courts In Foreign Seated Arbitrations


Owing to the difculties faced by parties in the (mis)interpretation of the law pursuant to Bhatia International, the Consultation Paper of April 2010 proposed an amendment to the effect that Part I would not apply where the seat of arbitration was outside  India, except for Sections 912 and 2713, which would continue to apply.


To similar effect, the Law Commission has proposed to insert a Proviso to Section 2(2) which states that “subject to an express agreement to the contrary”, the 14 provisions of Sections 9, 27, 37(1)(a) and 37(3) shall apply to foreign seated arbitrations provided that an award emanating therefrom would be enforceable and recognized under Part II of the Act (i.e. an award under the New York Convention or the Geneva Protocol and Convention).

 

4. Overruling Of Bhatia International Prospectively


BALCO applies prospectively, i.e. only to agreements executed after the date of the judgment (September 6, 2012). The impact is that this judgment will not affect agreements already executed, even though disputes and consequent arbitrations may arise thereafter. All such existing agreements, disputes and arbitrations, would then continue to be governed by the ruling in Bhatia International


This was noted by the Law Commission which stated that, “While the decision in BALCO was made prospective to ensure that hotly negotiated bargains are not overturned overnight, it results in a situation where Courts, despite knowing that the decision in Bhatia is no longer good law, are forced to apply it whenever they are faced with a case arising from an arbitration agreement executed pre-BALCO.


Keeping the prospective ruling in BALCO in mind, the Commission has proposed the insertion of Section 2(2A), which to the effect that the provisions of the amended Section 2(2), would not apply to “applications which are pending before any judicial authority on the date of such amendment, and which have arisen in relation to arbitrations where the date of the arbitration agreement is prior to 06.09.2012.” The effect of this ruling is to bring the amendments in accordance with the prospective application of the BALCO ruling, and relegate parties in such cases, to the ruling in Bhatia International.


That said, this does not mean that Indian courts would interfere in every case. Bhatia International clearly provided that Part I would apply unless it was excluded, either expressly or impliedly, by parties. More recent judgments (for instance, Reliance Industries v. Union of India15), have ruled to the effect that where the seat and the procedural law of the arbitration are clearly outside India, that amounts to an exclusion of Part I of the Act by parties and in such cases, Indian courts would not have jurisdiction.


5. No provision Included For Arbitrations / Awards Emanating From Non-Convention Countries


In Bhatia International, the Supreme Court has also noted that there appeared to be a lacuna in the Act insofar as arbitrations in countries which were non-signatories to the New York Convention were concerned. It therefore concluded that therefore, Part I also applied to such arbitrations and in view of Section 2(7) (which provides that award made under Part I shall be considered domestic award), awards passed thereunder would be treated as domestic awards and enforceable under Part I (and not Part II, which applies only to awards under the New York Convention and Geneva Protocol and Convention).


This issue was not considered in BALCO and has also not been considered by the Law Commission. As a result, any such awards would not be enforceable by Indian courts under the Act. While it is arguable that a successful party may le a suit on such an award, there is also no provision in the CPC which provides for enforcement of such awards and it is uncertain then how a successful party may enforce such an award.


Conclusion:


It is clear that a considerable amount of thought has gone into the proposed amendments and should they be nally effected, they should, as hoped by the Objects and Reasons of the Arbitration and Conciliation Bill, 1995, make the Act as amended, “more responsive to contemporary requirements”.

 

End Notes:

 

1 (2002) 4 SCC 105
(2012) 9 SCC 552
(i) the Arbitration & Conciliation (Amendment) Bill, 2003 (ii) the Consultation Paper on proposed amendments to the Arbitration & Conciliation Act, 1996, issued by the Ministry of Law & Justice on April 8, 2010.
4 There is no provision in the Act or the Code of Civil Procedure, 1908 (the @CPCA), for enforcement of an interim order from a foreign court or arbitral tribunal.
5 AIR 2010 SC 3371
6 Section 20 – Place of arbitration
7 Section 28 – Rules applicable to substance of dispute
8 Section 31 – Form and contents of arbitral award
9 Section 20 – Place of arbitration
10 Section 28 – Rules applicable to substance of dispute
11 Section 31 – Form and contents of arbitral award
12 Section 9 – Interim measures etc. by Court
13 Section 27 – Court assistance in taking evidence
14 Section 37 – Appealable orders
15 2014 (7) SCALE 401

 

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