Saturday 22 September 2012

Supreme Court overrules Bhatia judgment in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. - Third Post



We continue our analysis from our last post.
 
        7. The opening words of S. 28

S. 28 of the A&C Act, 1996 which deals with the applicable substantive law in an arbitration under Part I of the A&C Act, 1996 reads as under:
Rules applicable to substance of dispute
Where the place of arbitration is situate in India...

It was submitted that S. 28 which falls in Part I of the A&C Act, 1996 opens with the words where the place of arbitration is situate in India. It was submitted that there would be no requirement of reiterating this fact if S. 2(2) were interpreted to mean that Part I applied to arbitrations taking place in India only. It was thus submitted that the presence of these words in S. 28, and conversely the absence of the same in other provisions in Part I, indicated that Part I in fact applied to all arbitrations irrespective of the situs. 

The argument though attractive fails to see the reason behind the necessity of reiterating the words where the place of arbitration is situate in India in S. 28. The said provision deals with substantive law applicable to a dispute in an arbitration. Where both parties to an arbitration agreement are Indian, the substantive law applicable would necessarily have to be India. However where one or more parties are non-Indian, the parties would be free to decide the law applicable to the substance of the dispute. The presence of the words where the place of arbitration is situate in India is necessary to give effect to the latter scenario, i.e. possibility of an international commercial arbitration (where at least one party is non-Indian) taking place in India. The Supreme Court thus held that the provision could not be interpreted to be indicative of the intent of the Legislature to give an extra-territorial effect to Part I of the A&C Act, 1996.[1]

      8. Operation and scope of Part I and Part II

It was suggested before the Supreme Court that Part I and Part II are overlapping in nature and this reinforces the extra territorial applicability of the A&C Act, 1996.

The Supreme Court held that the two parts are mutually exclusive. The Supreme Court observed that 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. Part I of the Arbitration Act, 1996 regulates arbitrations at all the four stages. Part II, however, regulates arbitration only in respect of commencement and recognition or enforcement of foreign awards. [2] The Supreme Court further held that the regulation of conduct of arbitration and challenge to an award is to be done by the courts of the country in which the arbitration is being conducted.[3] This in turn means that Part I of the A&C Act, 1996 which regulates the conduct of arbitration would only be applicable to arbitrations with situs in India.

It was also submitted that the use of the non-obstante clause “Notwithstanding anything contained in Part I or the Code of Civil Procedure, 1908...” in S. 45 (which falls in Part II) indicated that provisions of Part II were designed to apply to arbitrations to which Part I applied unless expressly barred. The Supreme Court observed that the non-obstante clause was a legislative tool used in the Foreign Awards (Recognition and Enforcement) Act, 1961 which had been repeated. Further the Supreme Court held that the non-obstante clause was added out of abundant caution [4] and as such reinforced the stark division of the two Parts.

      9. The use of the words judicial authority

It was submitted that the words judicial authority in S. 45 (which falls in Part II) referred to a term wider than courts as the Part II related to foreign awards. The submission was extended to state that the use of the same words judicial authority in various provisions in Part I as opposed to the use of the word court indicated that Part I was also applicable extra-territorially.

The Supreme Court found that no such interpretation could be drawn. Rather it opined that the words judicial authority had been used in various provisions to cover any form of adjudicating body so as to minimize intervention [5] in the arbitral process. It further found that the term could be a legislative hangover from the Arbitration Act, 1940.

      10. Courts having jurisdiction to set aside awards

S. 48(1)(e), which falls in Part II of the A&C Act, 1996 deals with grounds for refusal of enforcement of a foreign award made in a Convention country. The same is identical to A. V(1)(e) of the New York Convention and reads as under:
(1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that----
...
(e) the award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.
It was submitted that the said provision recognized that two courts had concurrent jurisdiction to set aside an award, i.e. the courts of the country where the award was made and courts of the country under the law of which the award was made. It was thus submitted that Indian Courts could set aside awards made outside India but subject to Indian Law. As a result it was submitted that S. 34 which falls in Part I and relates to grounds for setting aside of an award would apply to awards resulting from all arbitrations, including which were seated outside India. It was thus submitted that the Satyam decision was correct and that S. 34 and also other provisions of Part I were applicable extra-territorially.

The Supreme Court recognized that the New York Convention was indeed suggestive of two courts which could be competent to set aside the award. However the same could not be extended to mean that therefore under S. 34 of the A&C Act, 1996 foreign awards could be set aside. To interpret so would amount to legislation by the Court. Jurisdiction if any had to be given expressly by the Legislature.[6] In the absence of the same S. 34 could not be applied to set aside foreign awards. In expressing so the Supreme Court overruled the Satyam decision.

The Supreme Court then digressed from the main contention and clarified that in any event A. V(1)(e) could not be read to mean that the two courts would have concurrent jurisdiction to set aside the award. Rather the primary court would be the court of the country where the award was made. The secondary court would be the court of the country under the law of which the award was made.[7] The Supreme Court held that to give concurrent jurisdiction would lead to complex situations as arose in the Satyam decision.[8] The Supreme Court also opined on the term under the law of which and held that the same referred to procedural law.[9] The Court examined various international authorities and case law on these aspects[10] and went on to warn that to understand the term to mean substantive law would be to ignore the spirit underlying the New York Convention which embodies a consensus evolved to encourage consensual resolution of complicated, intricate and in many cases very sensitive International Commercial Disputes.[11]

      11. Lacuna in respect of arbitrations in Non-Convention countries

It was canvassed that if Part I was found applicable only to arbitrations seated in India and Part II was found applicable only to arbitrations in Convention countries, the same would create a lacuna in the law as arbitrations in Non-Convention countries would not be regulated by the A&C Act, 1996.

The Supreme Court rejected the submission on the ground that arbitrations in Non-Convention countries were never governed by Indian laws whether under the older regime of law or under the A&C Act, 1996. Therefore there was no lacuna.

In our opinion the submission is fundamentally flawed as the A&C Act, 1996 does not even apply to arbitrations in Convention countries which have no reciprocity provisions towards arbitrations in India.[12] This indicates a far narrower scope of Indian law over foreign awards and cannot be termed as a lacuna but rather a legislative intent. The Supreme Court’s decision in rejecting the submission thus stands good.

      12. Hardship due to non-availability of S. 9 interim relief in arbitrations seated abroad

As the Supreme Court had dismissed all submissions which had earlier found favour in the Bhatia and Satyam decision, a last gasp submission was made. It was contended that if Part I were found to be applicable only to arbitrations with seat in India, then in an arbitration with its seat outside India, a party would be left remediless in respect of assets located in India as S. 9, which falls in Part I, would no longer be available. To prevent such lack of remedy it was submitted that S. 9 should be permitted to be applied irrespective of where the arbitration is held. It was submitted that such an interpretation would actually result in an intra-territorial operation of S. 9 as the assets would be located within India and not an extra-territorial operation in terms of an arbitration situated abroad.

The Supreme Court disagreed and held that S. 9 could not be construed as a stand-alone provision. It held that schematically the provision was placed in Part I and referred to the courts’ powers in granting relief before or during arbitral proceedings or at any time after making of the arbitral award but before it is enforced in accordance with S. 36. [13] The Supreme Court held that S. 36 also was found in Part I and hence S. 9 had to be construed as part and parcel of Part I. The Supreme Court held that extending the applicability of S. 9 to arbitrations which take place outside India would be to do violence to the policy of territoriality declared in S. 2(2) of the A&C Act, 1996.[14]

The Supreme Court then held
Once the parties have chosen voluntarily that the seat of the arbitration shall be outside India, they are impliedly also understood to have chosen the necessary incidents and consequences of such choice. We, therefore, do not find any substance in the submissions made by the learned counsel for the appellants, that if applicability of Part I is limited to arbitrations which take place in India, it would leave many parties remediless. If that be so, it is a matter to be redressed by the legislature.[15]
The Supreme Court went on to explain that in the Bhatia decision it had erroneously attempted to act as “finishers”, “refiners” and “polishers” of the Arbitration Act, 1996 assuming that the Arbitration Act, 1996 required varied degrees of further “processing”[16] as the task of filling up lacuna if any was that of the Legislature.

The Supreme Court thus rejected all submissions made towards upholding the position of law as decided in the Bhatia and Satyam decisions. It held in its conclusion:
We are unable to accept the submission of the learned counsel for the appellants that the Arbitration Act 1996 does not make seat of the arbitration as the centre of gravity of the arbitration.[17]
The A&C Act 1996 has accepted the territoriality principle which has been adopted in the UNCITRAL Model Law. Section 2(2) makes a declaration that Part I of the Arbitration Act, 1996 shall apply to all arbitrations which take place within India. We are of the considered opinion that Part I of the Arbitration Act, 1996 would have no application to International Commercial Arbitration held outside India. Therefore, such awards would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996. In our opinion, the provisions contained in Arbitration Act, 1996 make it crystal clear that there can be no overlapping or intermingling of the provisions contained in Part I with the provisions contained in Part II of the Arbitration Act, 1996. [18]
With utmost respect, we are unable to agree with the conclusions recorded in the judgments of this Court in Bhatia International (supra) and Venture Global Engineering (supra).... In a foreign seated international commercial arbitration, no application for interim relief would be maintainable under Section 9 or any other provision, as applicability of Part I of the Arbitration Act, 1996 is limited to all arbitrations which take place in India.[19] 
We conclude that Part I of the Arbitration Act, 1996 is applicable only to all the arbitrations which take place within the territory of India.[20]

In our next post we shall conclude our analysis of the decision.

[1] Paragraph 124 of the decision
[2] Paragraph 125 of the decision
[3] Paragraph 128 of the decision
[4] Paragraph 132 of the decision
[5] Paragraph 130 of the decision
[6] Paragraph 138 of the decision
[7] Paragraph 139 of the decision
[8] Paragraph 146 of the decision
[9] Paragraph 147 of the decision
[10] Annulment and Enforcement of International Awards, Hans Smit, (cit.); International Commercial Arbitration, Gary B. Born, Vol. 1, Kluwer Law International; Karaha Bodas Co. LLC v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 335 F 3d 357; Karaha Bodas Co. LLC (Cayman Islands) v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara -Pertamina, Yearbook of Commercial Arbitration, Vol. XXVIII, 2003, p. 752; International Electric Corporation v. Bridas Sociedad Anonima Petroleva Industrial Y Commercial, 745  F Supp 172, 178 (SDNY 1990);
[11] Paragraph 158 of the decision
[12] S. 44(b) emphasizes India’s reciprocity reservation under the New York Convention
[13] Paragraph 161 of the decision
[14] Paragraph 163 of the decision
[15] Paragraph 167 and 168 of the decision
[16] Paragraph 172 of the decision
[17] Paragraph 72 of the decision
[18] Paragraph 198 of the decision
[19] Paragraph 199 of the decision
[20] Paragraph 200 of the decision

No comments:

Post a Comment