The Supreme Court on 6th
September, 2012 had delivered the much awaited Constitutional Bench judgment by
taking a refreshing and encouraging view regarding Arbitration &
Conciliation Act, 1996 (hereinafter referred
to as the ‘Act’) by overruling the earlier views. The earlier observations in
Bhatia International vs Bulk Trading S.A. and Venture Global Engineering vs
Satyam Computer Services Ltd had jeopardized the position of the Foreign
Investors and Corporates and placed India in a bad light with respect to
International Commercial Arbitration.
Before going through the questions of
law raised and the fresh current views of the Constitutional Bench, we need to
understand as to why Alternative Dispute Resolution Mechanism is vital,
especially to commercial disputes. In a developing nation such as India,
economic reforms cannot become fully effective, if the law dealing with
settlement of domestic and international commercial disputes remained out of
sync with such reforms.
In Bharat Aluminium vs Kaiser
Aluminium, the Constitutional Bench of the Supreme Court headed by Chief
Justice of India has overruled the views taken in Bhatia International and
Venture Global Engineering (supra)
and put to rest the confusion created by those rulings.
To recap the earlier views, in Bhatia
International and Venture Global Engineering the Supreme Court held that the
Part I of the Act , shall be applicable
even to the arbitration that takes place
outside India. Consequently Indian courts attained jurisdiction to pass interim
reliefs as contemplated under Section 9 of the Act. Further Indian courts
entertained the applications challenging the foreign arbitral award even on
merits contemplated under Part I of the Act.
In order to reconcile the view of both
the judgments, the Constitutional Bench had analyzed the troubled Sections of
the Act in its fullest length and breadth and carried out a fine comparative
analysis with judgments of other nations. The Constitutional Bench has observed
that Arbitration Act has accepted the ‘territoriality principle’ of the Model
Law and the ‘seat’ is the center of gravity.
Part I and Part II of the Act has been
analyzed separately. Let us go through the important aspects and analysis of
the judgment in brief. Sections 1 (2), 2 (1)(e),(2),(4),(5),(7),(20) and
(28)(1)(a) of Part I and Sections 45, 48 (1)(e) of Part II have been analyzed
to understand the scope, object and ambit of the aforementioned sections. It
was observed that the Act is a consolidated Act of three acts namely Protocol
Act, 1937, Foreign Awards Act, 1961 and Arbitration Act, 1940.
In its judgement on Konkan Railways,
the Supreme Court observed that the Act and the Model Law are not strictly
identical. The model law, judgments, literature are not a guide to
interpretation of the Act. Keeping this in view, it was analyzed that the word
“only” missing in Section 2(2) of the
Act is not an instance of CASUS OMISSUS. It was also observed that it was
neither the judicial option nor a compulsion of the Court to supply the words
and interpret.
The Bench further went on to observe
that the seat of arbitration is intended to be its ‘center of gravity’.
However, center of the gravity does not mean that all the arbitration
proceeding must be held in the seat initially agreed by the parties. Any
changes in the seat during the process of the arbitration proceedings will not
affect the status of the “seat” initially agreed by the parties. Hence, the
missing word “only” in Section 2(2) does not detract from the territorial scope
of its application.
The need for interpretation of Section 2(4) & (5) was
the usage of wordings "apply to every arbitration" and "all
arbitrations" respectively and whether these wordings necessarily include
the arbitration that takes place outside India and also on the applicability
of Part I to such arbitrations. The
Bench observed that the phrase "all arbitrations" has to be read as
limited to all arbitrations that takes place within India. The two sub-sections
merely recognize that apart from the arbitrations which are consensual between
the parties, there may be other types of arbitrations which are mandatory by
statutes as it is under the Indian
Telegraph Act, 1886, Electricity Act, 2003 etc. Hence, this cannot be a ground
for applicability of Part I.
On analysis of Section 2(7) in the
context of Section 2(f), the Bench observed that the term "domestic
award" can be used to distinguish from "International award" and
"foreign award". Domestic Award made in India is purely domestic in
context. "International Award" shall mean an award from an arbitral
tribunal which is domestically seated [in India] for an International
Commercial Arbitration. Further, where the parties select a seat outside India,
an award from such foreign seated arbitral tribunal will be called a
"foreign award".
Further it was observed that, the term
‘subject matter of arbitration’
cannot be confused with ‘subject matter
of the suit’ as contemplated under Section 2 (1)(e). “The legislature has intentionally given jurisdiction to two courts i.e.
the court which would have jurisdiction where the cause of action is located
and the courts where the arbitration takes place” hence the reference in
the provision is to identify the courts having supervisory control over the
arbitration proceedings. The need for identification of courts is essential
because in an agreement parties may agree at a place which would be neutral to
both the parties. In such a case, the courts where the arbitration takes place
is required to exercise its supervisory control over the arbitral process.
The Bench has further clarified and
distinguished the difference between “seat/place” and “venue” in arbitration
while analyzing Section 20 in context with Section 2(2). Firstly “venue” is not
synonymous to “seat” in an arbitration agreement. The ‘seat/place’ of the
arbitration is the place where parties by agreement agree to have the
arbitration proceedings. Further, during the course of the arbitral process the
tribunal may shift from place to place according to arbitrators, witnesses and
parties convenience, for spot visit etc. Apart from the agreed ‘seat/place’,
wherever the arbitral tribunal sits that spots can be called as ‘venue’.
However, the Bench observed that, the change in the place of meeting for
further process or at the convenience of the parties, arbitration and
witnesses, will not change or affect the ‘seat/place’ of the arbitration. “The seat of the arbitration remains the
place initially agreed by or on behalf of the parties”. Hence, even in a
hypothetical situation, if a foreign arbitral tribunal has one or more sitting
in India for their convenience, it would not attract the applicability of Part
I, though one of the parties may be Indian National.
Further it was observed and upheld
from Conflict of Law Rules as quoted in Dicey & Morrirs that, “where the parties have failed to choose the
law governing the arbitration proceedings, those proceedings must be
considered, at any rate prima facie, as being governed by the law of the
country in which the arbitration is held, on the ground that it is the country
most closely connected with the proceedings.”
Collectively, the Bench observed that,
the ‘seat/place’ is the center of gravity of the arbitration and hence “if the parties choose another country as the seat of arbitration, inevitably they
import an acceptance that the law of that country relating to the conduct and
supervision of arbitrations will apply to the proceedings”. Therefore, if
the parties select ‘seat/place’ outside India for the purpose of arbitral
process, Part I of the Act shall not apply, though the parties might have opted
Indian Law and Arbitration Act, 1996 as their substantive law.
The Bench has examined the choice of
substantial law and procedural law in the context of Section 28 of the Act. The
law governing the conduct of the arbitration is usually procedural law or
curial law or the lex fori. The law
governing the contract and the obligation of the parties in whole is
substantial law. The Bench observed that, Section 28 makes a distinction
between domestic arbitrations and international commercial arbitrations, having
its seat in India.
The Bench observed that, “Section 28(1)(a) makes it clear that in an
arbitration under Part I to which Section 2(1)(f) does not apply, there is no
choice but for the Tribunal to decide “the dispute” by applying the Indian
“substantive law applicable to the contract”….”On the other hand, where an
arbitration under Part I is an international commercial arbitration within
Section 2(1)(f), the parties would be free to agree to any other “substantive
law” and if not so agreed, the “substantive law” applicable would be as
determined by the Tribunal”. Hence, it was concluded that the Parliament
was not with the intention to give an extra-territorial operation to Part I of
the Arbitration Act, 1996.
Part II of the Act:
It was observed that the regulation of
arbitration consists of four steps (a) the commencement of arbitration; (b) the
conduct of arbitration; (c) the challenge to the award; and (d) the recognition
or enforcement of the award.
Further it was observed that the Part
II, unlike Part I of the Act, has no provisions
regulating the conduct of arbitration
nor the challenge to the award.
Hence, the regulation of conduct of arbitration and challenge to an award would
have to be done by the courts of the country in which the arbitration is being
conducted. Such a court is then necessarily being the supervisory court which
was possessed of the power to annul the award. It was upheld that, “it follows from this that a choice of seat
for the arbitration must be a choice of forum for remedies seeking to attack
the award”
One of the most important aspects in
the judgment, while analyzing Section 48(1) (e) observed that, the country in
which the award was made is “First Alternative” and the courts under the law of
which the award was made is “Second Alternative”. Further, “the words suspended or set aside in Section 48(1)(e) cannot 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”
Therefore, a foreign arbitral award
shall be recognized and enforced by virtue of Sections 48 and 49 of Part II of
the Act. However, vide this judgment the Supreme Court has made it clear that,
Indian Courts will not have the jurisdiction to challenge the foreign arbitral
award on merits. It is only the courts of the country where the seat of the
arbitration has been held will have the jurisdiction by exercising its
‘supervisory powers’ over the arbitral process.
Interim measures etc. by Indian Courts
where the seat of arbitration is outside India:
It was observed that, “when parties voluntarily select/choose the
seat of arbitration to be outside India, they are impliedly also understood to
have chosen the necessary incidents and consequences of such choice”.
Hence, the Indian courts cannot import the provisions meant under Part I of the
Act especially Section 9 for any such interim measures, wherein the seat of the
arbitration is outside India. The parties cannot maintain Inter-Parte Suit under the Code of Civil Procedure, 1908 pending
arbitration abroad for interim measures and suit under Specific Relief Act,
1963 for grant of temporary / perpetual injunction since the primary
requirement for filing a suit is a rise of ‘cause of action’ and initiation of
arbitration proceedings cannot be construed as ‘cause of action’.
Conclusion:
The Constitution Bench concluded that,
the Part I of the Act would have no application to International Commercial
Arbitration held outside India and there can be no overlapping or intermingling
of the provisions contained in Part I with Part II of the Act. The Judgments of
Bhatia International and Venture Global Engineering were overruled. The law
laid down by this judgment shall apply prospectively, to all the arbitration
agreements executed hereafter.
There are some serious concerns such
as there is no provision for any sort of Interim relief in Part II in the Act
etc. considered by the Supreme Court in this judgment, however the Bench
observed that if at all there is a gap or lacuna, it would be for the
Parliament to rectify the same. Such a task cannot be undertaken by the Court
and thus it is a wake-up call to the Parliament.
To achieve the economic reforms
contemplated by attracting foreign investors it is necessary that the alternate
dispute resolution mechanism both by domestic and international arbitration
should be revisited by making the necessary changes and amending the provisions
of the Act.
Sukumar .A
Associate at Fox Mandal & Associates,
Bangalore
Author, Arbitration – Law and Applicability
