January 25, 2013

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Arbitration Law In India: Overruling Bhatia International: A Vital Step To Achieve The Object Of The Act

- Ajay Monga, Advocate [ S.N.Gupta & Co. ]
- Ateev Mathur, Advocate [ S.N.Gupta & Co. ]


A friendly environment for arbitrations with least intervention of courts should be the endeavour.

It has been 18 years since the Indian Legislature adopted the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on Arbitration and enacted the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘Act’). This Act replaced India’s over 50 years’ old Arbitration Act, 1940. It was a new era for Indian Law to recognize arbitration as an effective mode of dispute resolution and give recognition to Foreign Awards.

This Act brought substantial changes to domestic arbitration but the highlighting part of this Act was that it recognized Foreign Arbitral Awards and provided for its enforcement under the New York Convention of 1958. The object of the Act was to consolidate and manage the law related to domestic arbitration, International Commercial Arbitration and Enforcement of Foreign Arbitral Awards. This Act contains 4 parts, namely, Part I – which deals with the concept of arbitration and its procedure specifically with respect to domestic arbitration happening in India; Part II deals with enforcement of certain foreign awards; Part III deals with Conciliation, and Part IV provides for certain Supplementary Provisions.

Numerous arbitrations have since been resorted to under this Act. With India’s rapid growth and economic liberalization policies, global trade increased manifold and this in turn resulted in increased bilateral contracts between the Indian and foreign entities. In these contracts which usually had a foreign flavour, the parties incorporated an Arbitration Clause and also exercised the freedom of Party Autonomy for choosing the Applicable Law and Forum. Consequently, issues as to the applicability of Part I of the Act arose before the courts when disputes arose between parties and the parties approached Indian courts other than the chosen court.

In the year 2002, a judgement was delivered by a two-judge Bench of the Supreme Court of India in the case of Bhatia International Vs. Bulk Trading SA and Another1. The Supreme Court of India, in the said case, had an occasion to deal with the question of applicability of Part I of the Act to arbitration held outside India. After deliberating upon the facts of the said case, the Supreme Court of India held that Section 2(1)(f) of the Act, which falls in Part I makes no distinction between the International Commercial Arbitration held in India or outside India. It further held that the provisions of Part I of the Act would apply to all arbitrations and to all proceedings relating thereto.

It further held that where such arbitration is held in India, the provisions of Part 1 would compulsorily apply and the parties are free to deviate only to the extent permitted by the derogable provisions of Part I. It further observed that 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. Any provision in Part I, which is contrary to or excluded by that law or rules will not apply.

The aforesaid judgement in some manner deviated from the object of the Act in as much as Part I of the Act was made applicable to all arbitrations irrespective of its seat. These judgements were the subject matter of discussion and critical examination within the arbitration community. The question was as to how can an arbitration seated outside the territories of India?

However, there was very little one could do as the provisions of the Act were interpreted by the highest Judicial court of India and thus, a precedent was made for years to come and generations to follow.This judgement was thereafter followed in various judgements notably in the case of Venture Global Engineering Vs. Satyam Computers Services Ltd. and Anr2. The case of Venture Global was dealing with the issue of challenge, in India, to a Foreign Award, passed outside India. Thus, applicability of Section 34 of the Act which deals with setting aside of award was the question for consideration. Relying on Bhatia International (supra), the Supreme Court of India in the said case held that Section 34, which falls in Part I would apply even for foreign awards.

After having held ground for nearly a decade, the Supreme Court had an occasion to re-examine this issue in the year 2008 and the matter was referred to a Two-Judge Bench, then to a Three-Judge Bench, who in turn referred it to the Constitution Bench of the Supreme Court of India, in January 2012. This was the case of Bharat Aluminium Company Vs. Kaiser Aluminium Technical Services Inc3.

It is said that “patience pays” and ultimately in September 2012, the Supreme Court in the above case of Bharat Aluminium (Supra) and other connected matters, expressed its disagreement with the interpretations/ conclusions recorded in the judgements of Bhatia International (supra) and Venture Global (supra) and ruled that Part I of the Act is applicable only to all the arbitrations which take place within the territory of India. The Supreme Court held that Section 2 (2) of the Act do not make Part I applicable to the arbitrations which take place outside India. Therefore, the Indian courts can neither set aside awards made in arbitrations, the seat of which is agreed by the parties to be outside India, nor can they intervene in any other manner.

The court observed that there can be no overlapping or intermingling of the provisions of Part I and Part II of the Act. The Apex Court also held that even if parties have chosen Indian law as Substantive law, it would not confer jurisdiction on the Indian courts to hear challenges to awards under Part I of the Act or under the scheme of the New York Convention, if the seat of such arbitration is outside India.

This judgment brings about a significant change in the arbitration scenario, as the parties to an arbitration agreement now would no longer be required to expressly exclude the applicability of provisions of Part I of the Act; it makes the drafting of an arbitration clause a lot easier now. The impact of this judgment would be enormous to international contracts containing arbitration clauses and also to economic development.

However, while concluding, the Hon’ble Supreme Court of India gave clarificatory observations that the law declared in the judgement of Bharat Aluminium (Supra) shall apply prospectively to all arbitration agreements executed hereafter. This perhaps was felt necessary in view of the fact that various proceedings had been entertained following Bhatia International (Supra) and may be some are still going on in various courts.

Though, the judgement would be well accepted by the arbitration community globally, however, the last clarificatory part of the judgement which states that its application shall apply prospectively to agreements entered hereafter, still leaves room for another challenge in the future. No doubt the Arbitration Agreements executed after the date of the judgement (6th September 2012) would be governed by the law laid down by Bharat Aluminum (Supra), however, practically speaking two laws would govern the field now for quite some time in future.

In the authors’ view, various questions would still remain a point of debate and discussion amongst the legal fraternity. What will happen if an action is commenced for the first time after the date of this judgement in respect of an arbitration agreement (Seat outside India) executed prior to the date of this judgement? It would be an initiation of fresh proceedings but would be governed by the law laid in Bhatia International (supra), which is overruled by the Supreme Court now.

What happens to an agreement which is executed just a day or a week prior to the passing of the judgement? Just because the agreement was executed when Bhatia International (Supra) was holding field, will disputes under such agreement be governed by Bhatia International (supra)? Disputes will arise, if any, may be in future, but such will be governed by Bhatia (Supra)? The situation would be challenging as the law, which the apex court held to be wrong would apply to such agreements.

The verdict in Bharat Aluminum (Supra) is a good attempt to settle the piquant controversy that has been engaging the attention of the legal fraternity in India and also globally following the earlier interpretation given to certain provisions of the Act in the case of Bhatia International (Supra) that had virtually put at naught the very virtue of the Act. Arbitration as the very name suggests is the most acknowledged legal recourse adopted to resolve controversies arising out of commercial contracts between contracting parties in an amicable and EXPEDITIOUS way. Therefore, a better worded Act is the necessity to achieve the object.

It’s time that the law of arbitration is revisited by the Indian Legislature in order to harmonize all of its provisions so that the intent and object of the Act is achieved and to make India a more receptive territory for arbitrations. A friendly environment for arbitrations with least intervention of courts should be the endeavour. The road from Bhatia to Bharat Aluminium was tough but certainly the journey ahead would be a lot smoother. It is a new road ahead for India in the field of arbitration law and this judgment is extremely helpful for prospective agreements. It is indeed a vital step in India to achieve the object of the Act and also a step to make India a territory friendly to arbitrations with minimum intervention of courts.

Disclaimer–The views expressed in this article are the personal views of the author and are purely informative in nature.

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