APPOSITE PERCEPTIVE OF ARBITRATION ACT, 1996

The Supreme Court on 6^th 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