The world has become a global village with the advent of globalization. Business organizations have expanded themselves across and beyond borders leading to an increase in cross-border transactions. Agreements and contracts executed between commercial organizations many times go ugly, thus, giving rise to disputes which are not within the confines of the municipal law of a particular country, because the transactions are 'cross-border' in nature. Adjudication of cross-border business disputes demand the expertise of a different sort, especially when the organizations in dispute are from nations which follow different legal systems. Redressal of disputes qua 'arbitration' is their best bet in such situations for arbitration is the most plausible solution.
All agreements executed between corporations inter-se primarily have the three covenants;
- 'governing law', as to the law of which country shall be taken recourse to, if and when deals between the international corporations go bitter;
- 'jurisdiction clause', as to courts of which country shall have a say in the matter in dispute, at hand; and
- 'arbitration clause', how the conflicts are to be resolved between the corporations before they are formally brought before the court of law for adjudication, such as mediation, conciliation and arbitration.
The arbitral mechanism is time-effective and cost-effective, making it convenient for parties to arrive at unbiased outcomes so that commercial relations between parties can be taken forward, healthily. To ensure the absence of actual and anticipatory biasness, it is a widespread practice for the parties involved in international commercial transactions to choose the "seat" of arbitration in a country which has nothing to do with the commercial transactions of the entities involved.
Arbitration law in India is governed by the Arbitration and Conciliation Act of 1996 ("1996 Act") based on the UNCITRAL (United Nations Commission on International Trade Law) Model Law. The 1996 Act is divided into two parts-
- 'Part I' relating to domestic arbitrations; and
- 'Part II' relating to International Commercial Arbitrations.
'International commercial arbitration' is defined under Section 2(1)(f) of the 1996 Act as an arbitration relating to disputes arising out of a legal relationship, whether contractual or not, which are considered as commercial as per the law in force in India; where one or more of the parties are entities (personal or impersonal) which reside outside India.
I. Bhatia International v. Bulk Trading SA (2012) 9 SCC 552 ("Bhatia")
The arbitration proceedings were held in Paris as per the Rules of International Chamber of Commerce ("ICC"). An application was moved under Section 9 of the 1996 Act for an order of injunction restraining transfer, alienation or creation of third-party rights on the property. The application was held to be maintainable. The court held the Part I of the 1996 Act to be applicable to arbitrations even though the place of arbitration is not in India. The court opined that remedies under Section 9 of the 1996 Act do not get excluded by the application of the ICC Rules of Arbitration. The Supreme Court held that "To conclude, we hold that the provisions of Part I of the 1996 Act would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India, the provisions of Part I would compulsorily apply and parties are free to deviate only to the extent permitted by the derogatory provisions of Part I. In cases of International Commercial Arbitrations, held out of India, provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case the laws or rules chosen by the parties would prevail. Provisions in Part I of the Act which are contrary to or excluded by that law or rules shall not apply."
II. The Supreme Court of India put all legal speculations to rest in the case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552 ("BALCO").
The Supreme Court of India affirmatively held as follows:
- The 1996 Act has accepted the territoriality principle, which has been adopted in the UNCITRAL Model Law.
- Section 2(2) of the 1996 Act makes a declaration that Part I of the 1996 Act shall apply to all arbitrations which take place within India. Part I of the 1996 Act, therefore, has no application to International Commercial Arbitrations held outside India. Provisions contained in Section 2(2) of the 1996 Act are not in conflict with any of the provisions, neither of Part I, nor of Part II of the 1996 Act.
- No application for interim relief in a foreign seated international commercial arbitration is maintainable; neither under Section 9 of the 1996 Act nor under any other provision of Part I of the 1996 Act.
- Part I of the 1996 Act is applicable only to such arbitrations which take place within the territory of India.
Thus, the BALCO case in substantiality over-ruled the Bhatia case. The law laid down by the Bhatia case, in regards to the applicability of Part I of the 1996 Act to International Commercial Arbitrations, was repealed by the BALCO case, prospectively. Thus, the Bhatia case still holds the ground and applies prospectively with respect to agreements entered into between the parties prior to 6 September 2012 (the date when the judgment in the BALCO case was rendered).
III. The judgment of Harmony Innovation Shipping Limited v Gupta Coal India Limited and another, (2016) 11 SCC 508 ("Harmony") serves as a well-written all-in-one essence of the landmark rulings of pre-BALCO on "what would constitute 'implied' and 'express' exclusion".
The Supreme Court of India in the Harmony case dealt with the anomaly of implied exclusion of Indian laws under an arbitration agreement. The agreement provided that, in case a dispute arose with the amount involving less than USD 50,000, then arbitration is to be conducted in accordance with the small claims procedure of the London Maritime Arbitration Association. The agreement in subject clearly stated that the contract executed shall be governed by (and will be construed as per) the English law qua the arbitration clause. Though there wasn't express exclusion of Indian laws (the 1996 Act), there seemed ample indication as to this through the express inclusion of various phrases such as: 'arbitration in London to apply', 'arbitrators are to be the members of the London Arbitration Association' and 'contract is to be governed and is to be construed in accordance with English law'. The agreement was executed in the pre-BALCO phase, and therefore the principles laid down in BALCO would not be applicable. However, the implied exclusion of the 1996 Act was clear from the phrases used in the agreement which evidenced the parties intended to exclude the applicability of Part I of the 1996 Act.
IV. Enercon (India) Ltd. & Ors v. Enercon GmbH & Anr, (2014) 5 SCC 1 ("Enercon") held that the "venue" of an arbitration is the geographical location chosen based on the convenience of the parties and is different from the "seat" of arbitration, which decides the appropriate jurisdiction. Enercon (India) Ltd (Enercon India) was set up pursuant to an agreement with Enercon Gmbh (Enercon Germany).
The Indian law was chosen as the law applicable to all aspects of the agreement and the arbitration. As per the Intellectual Property Licence Agreement (the IPLA) the venue of the arbitration was London, and the provisions of the 1996 Act were to apply.
Based on various English cases, it may be questioned that because the parties chose Indian law particularly for the conduct of the arbitration, are the parties likely to have intended to have fixed the seat of arbitration as London, the same as the venue? However, the Supreme Court found no other connecting factor in favor of London and so India was held as the 'seat' and London was merely chosen by the parties as a venue for the conduct of the hearings.
Relying on the 2012 BALCO decision, the court held that the parties must have intended for the seat to be in India as the parties specifically applied portions from Part I of the 1996 Act, which, in the post-BALCO phase was only effective where the seat of arbitration was India.
It is essential not to confuse the legal seat of arbitration with the geographically convenient place or places for holding hearings. If the "seat" of arbitration is in India; the 1996 Act being the curial law, recourse to Indian Courts as per Part I of the 1996 Act, including Section 9 of the 1996 Act thereof is available to the parties. The "seat" of arbitration; thus, would be the country whose law is chosen as the curial law by the parties. It was concluded that the courts of the "seat" of arbitration have the exclusive jurisdiction to exercise supervisory powers over the arbitration process. The courts of the "venue" of arbitration cannot have concurrent jurisdiction.
V. Shri Lal Mahal Ltd. vs. Progetto Grano Spa (Civil Appeal No. 5085 of 2013 arising from SLP(c) No. 13721 of 2012) ("Lal Mahal")
As per Part I and Part II of the 1996 Act (Section 34 and Section 48 of the 1996 Act respectively), an arbitral award may be set aside by the court, if the arbitral award is in conflict with the public policy of India. In Phulchand Exports Limited v. O.O.O. Patriot ((2011) 10 SCC 300) ("Phulchand"), Supreme Court held that the scope and purport of the expression under Section 34 and 48 of the 1996 Act are the same and thus broadened the meaning of 'public policy' under Section 48 of the 1996 Act. Section 48 of the 1996 Act provides the grounds on which enforcement of a foreign award in India may be refused. Section 48(2)(b) of the 1996 Act states that enforcement of an arbitral award may be refused if "the enforcement of the award would be contrary to the public policy of India". Thus, where the award is final upon an action for enforcement of the foreign award, the parties by virtue of the Phulchand decision could apply the comprehensive standard of 'public policy' and almost re-open the entire matter. The decision given in Phulchand has been overruled by Lal Mahal. The Lal Mahal case concerned a dispute between an Indian supplier and an Italian buyer in a contract for the supply of wheat.
In the Lal Mahal case, the award passed under the rules of the Grain and Feed Trade Association, London was upheld by courts in the UK, and sought to be enforced in India. Under Section 48 of the 1996 Act, objection to the enforcement of the award was raised on the ground that the award was patently illegal and in violation of 'public policy' as the award was contrary to the terms of the contract.
The Supreme Court in Lal Mahal passed a seminal judgment that established a distinction between the scope of objections of the enforceability of a foreign award under Section 48 of the 1996 Act, and challenges to set aside an award under Section 34 of the 1996 Act. The scope of the expression' public policy' was substantially curtailed by the Supreme Court.
It held that the ground of 'patent illegality' is limited to Section 34 of the 1996 Act primarily where the issue is whether the award should be set aside or not. The expression' public policy' under Section 48 of the 1996 Act would not bring within its folds the ground of 'patent illegality'.
The doctrine of 'public policy' concerning its applicability is comparatively limited in cases that involve a conflict of laws and matters which involve a foreign seated arbitration or any other foreign element. The court stated that the expression' public policy of India' as per Section 34 of the 1996 Act was required to be interpreted in the context of the jurisdiction of the court where the validity of the award was challenged and before it became final and executable. This is to be contrasted with the enforcement of an award after it becomes final.
The Supreme Court further clarified that Section 48 of the 1996 Act does not offer any opportunity for a second glance at the foreign award which is at its enforcement stage or permit review of such an award on the merits. The court declined to allow a challenge on the grounds of 'patent illegality'. Since the challenge raised required reconsideration of the merits and re-looking at the facts, the court declined to entertain the challenge and allowed enforcement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.