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BHATIA INTERNATIONAL RATIO UNDER THE SCANNER AT INDIAN SUPREME COURT

In this post, SUMIT RAI briefly addresses some of the most important submissions made by the parties arguing in favour of confirming the Bhatia International ratio during the widely followed five-member constitutional bench review by the Indian Supreme Court.

As reported earlier, a five judge constitutional bench of the Indian Supreme Court has started hearing arguments in the widely followed review of the Bhatia International ratio. I review here, some of the most important arguments made in favour of confirming the ratio.

This decision of a three member bench of the Supreme Court had allowed for application of Part I of the Arbitration & Conciliation Act, 1996 (“Indian Act”) to arbitration seated outside India. Before moving on with the post, let me lay some background for those not initiated with the controversy, so that you follow the issues in contention in the present review:

  1. Indian Act is divided into 5 parts. For the purposes of this post, the division of Part I and II are relevant. Part I is primarily an adapted version of the Model Law – retaining the arrangement of provisions and language, with some variations in the text to adapt the Model Law as an Indian legislation. Thus, Part I contains provisions inter alia for court’s powers to grant interim relief (S.9), court’s power to appoint arbitrator (S.11), and challenge of arbitration awards (S.34). It must also be noted that while Model Law is a recommended legislation for International Commercial Arbitration, the Indian Act has adopted it for both domestic and international commercial arbitration.
  2. The analogous provision to Art. 1(2), Model Law which provides for territorial application of the legislation has been modified in the Indian Act (S.2(2)). The Indian provision reads “[t]his Part shall apply to arbitration held in India”. Significantly, the word ‘only’ has been dropped. Also, exceptions for certain provisions such as Art. 9 (interim measures) in the Model Law version, so as to allow their extra-territorial application, has not been retained.
  3. Relying, among many other strange things, on the omission of the word ‘only’, Bhatia International held that the provision was not a limiting provision. It held that Part I would also apply to arbitration not held in India, unless parties expressly or by implication excluded its application.
  4. This decision was an attempt to delimit the application of S.9, as it was clear to the court that any other interpretation would render parties remediless – as far as obtaining interim relief in India with respect to arbitration seated outside India was concerned.
  5. However, the court summarized its ratio in ruthlessly wide fashion (see ¶32). It held that Part I would apply to all arbitration. It would compulsorily apply to arbitration held in India and can be modified as far as its derogable provisions are concerned. It would also apply to international commercial arbitration held outside India unless expressly or by implication excluded.
  6. While Bhatia International dealt with S.9, subsequent decisions of the Supreme Court applied the ratio to S. 11 (See Indtel Technical Services v. W.S. Atkins) for appointment of arbitrators and eventually to S. 34 (See Venture Global v. Satyam Computers), allowing foreign arbitral awards to be challenged in India.

The Bhatia International ratio has caused significant damage to the Indian arbitration regime. While the Indian government continues to endlessly moot an amendment, the Supreme Court has put it under the scanner finally. 10 days of arguments have been made and the parties arguing in favour of confirming the Bhatia ratio have completed their submissions. A brief summary and comments on some of their significant arguments:

  1. Difference in the language of Art. 1(2) of the Model Law and S. 2(2) of the Indian Act clearly indicates legislative intent not to limit application of Indian Act based on place / seat of arbitration. In my opinion, this is the strongest and probably the only inevitable reason why the Indian Act, as it stands today, is difficult to be interpreted any other way than Bhatia International. The Indian Act is, to a large extent, a verbatim reproduction of the Model Law. Therefore, a specific omission must be given some meaning.  Absence of the word ‘only’ and deletion of exceptions with respect to certain provision would lead any strict interpretation to reach the result that Part I is not intended to be limited to arbitration seated in India. This is not to assert that the situation is any better for that. But then, legislative correction is best left to the legislature. It is not the role of courts.
  2. Enforcement and Challenge are different remedies under the Indian Act. Even though Part II of Indian Act provides for special provisions with respect to enforcement of foreign awards, the challenge procedure being a distinct remedy will still apply to domestic awards. This argument deserves to be rejected without much ado. A basic reading of arbitration jurisprudence shows that indeed challenge and enforcement are not the same thing. But, to suggest that a court can set-aside foreign awards is to go back on the progress achieved as back as 1958 through the New York Convention. The only remedy against a foreign award is to oppose its enforcement in terms of Art. V of the New York Convention, which has been adopted by the Indian legislature in Part II of the Indian Act.
  3. During the arguments, the Court remarked that allowing Part I to apply to all arbitration without reference to seat would lead to extra-territorial application of the Indian Act – which would be unconstitutional. In response it was argued that there was a distinction in the definition of ‘court’ in the Indian Act and that in the Model Law. The Indian Act defines it as the principal civil court that would have jurisdiction on the subject matter of arbitration if the same was subject matter of a suit. Thus, it was argued, allowing Part I of the Indian Act to apply to arbitration held outside India cannot be extra-territorial and would be limited by the principles of Civil Procedure Code (CPC) governing jurisdiction of courts. This is definitely a winning argument to the extent it answers the court’s concerns. However, this does not take into account that jurisdiction of court is derived from specific provision in the Indian legislation and not from the definition of ‘court’ per se. In my opinion, the definition is merely to resolve any conflict between various courts in India and to provide an objective principle to determine which court in India would have the jurisdiction – only if such powers are bestowed upon Indian courts under the Indian Act in the first place. This argument also brings to light important lacunae in the Indian Act. What happens if a Malaysian and an Australian party chose India as seat in a contract being performed in Singapore? Going by the definition of ‘court’, no Indian court shall have jurisdiction, as neither the Respondent would be subject to their jurisdiction nor the subject-matter would have arisen in the territorial limits of any Indian court’s jurisdiction. It is therefore important that in any interpretation of this definition, such aspects are taken into account.
  4. An illustration cited by most counsels supporting the expansive jurisdiction of Indian courts was – if the parties chose the seat of arbitration as London but provide that the law of arbitration shall be Indian law, then Indian courts must have jurisdiction without reference to seat in order to uphold party autonomy. This illustration was cited to show that primacy of seat would otherwise lead to defeating party autonomy, which should be placed on a higher pedestal than the primacy of seat. This argument intends to turn the interpretation of the Act citing a scenario arising out of an ambiguous arbitration clause. To appreciate the fallacy of this argument, one must look only and appreciate fully the legal fiction of the ‘seat of arbitration’. Seat of arbitration denotes nothing but the law of arbitration. A choice of seat is a choice of law of arbitration, and party autonomy is not victorious, as suggested by ignoring this choice merely because an equivocal additional choice of the same law is expressed in the arbitration agreement. Unfortunately, Model Law or the Indian Act have not taken into account such a situation and there is no specific solution provided therein. However, the English Arbitration Act, 1996 had the foresight to provide for this situation specifically – and some other jurisdictions have adopted similar solution through interpretation. The English solution (see S.4(5)) is to treat seat as determinative of the law of arbitration and to take into account an additional choice as if it was an agreement between parties about a non-mandatory provision – akin to choice of institutional rules.
  5. Many arguments addressed the various systems of law applicable to arbitration. In a nutshell and at the expense of oversimplification, the argument primarily focused on a strange distinction of when these laws apply. It was submitted that the law of seat applies to the procedure of arbitration and thus ceases to apply once the award is rendered. The validity of the arbitration is governed by the law of arbitration agreement – which should follow the substantive law of contract in the absence of specific choice. This would mean that effectively, the court of the proper law of contract shall have the powers to set-aside arbitral awards. I believe the genesis of such arguments lie in the strong reliance that Indian courts have had to place on conflict of law principles to determine jurisdiction post-Bhatia International. To escape the wide scope of Bhatia International, many subsequent decisions have tried to rule out jurisdiction through similar logic as in this argument. Any correction, therefore, of Bhatia International must deal with this branch of its many fallout – it must once and for all be clarified that law of arbitration governs not only the procedure but the entire process of arbitration from the stage of reference to challenge of award. Law of arbitration agreement, on the other hand, governs the validity of the arbitration agreement. In absence of a specific choice, whether law of arbitration agreement must follow the proper law of contract or the law of seat is a debate for another day – and not a straightforward one.
  6. Court asked almost all counsels their view on whether a suit under CPC could be filed for interim relief in cases where the arbitration is seated outside India, if it was held that Part I was not applicable in such scenario. It seems the prima facie view of the court is that Part I should not be applicable to arbitration seated outside India. However, the prospect of leaving parties remediless by closing doors on interim measures under S. 9 is a troubling scenario, to which the court seems to suggest the solution by opening doors of interim injunction under Order 39 of CPC. I am especially concerned by implications of this solution. It is an accepted position currently that CPC does not apply to arbitration. Unless the court words an exception for interim relief for foreign seated arbitration with great care and restraint, opening the doors of CPC can lead to hitherto unknown problems – creation of a monster to deal with another. Order 39 CPC provides for an application in a suit pending before a civil court. How, then, does one approach the court in a foreign seated arbitration? By legal fiction of considering arbitration akin to a ‘suit’ under CPC? What fallout would that have? Unfortunately, these questions have not yet been either asked or answered during the proceedings.
  7. One of the counsels argued that while Part I may not apply to arbitration seated outside India, S. 9 owing to the nature of relief it offered would still apply. It was submitted that S.9 was a ‘seat-neutral’ provision. It is difficult to see how that can be. The ‘seat-neutrality’ of interim measure provision (Art. 9 ML) is derived from the specific language of Art. 1(2), which is not a part of the Indian Act.

The hearings are in full swing with the parties arguing against confirming Bhatia International having the floor now. Whichever way this goes, the decision in this case will define the future course of international arbitration in India. In the meantime, it seems arbitration is the last thing currently in the mind of the legislature. Thus a clean-slate reform of the law will have to wait for long. Until then, we hinge all our hopes on this five-judge bench of the Supreme Court.

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  1. Pingback: NEWSFLASH: WHITE INDUSTRIES’ INVESTMENT CLAIM PREVAILS AGAINST INDIA « BLOG ARBITRATION

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