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INDIAN SUPREME COURT OVERRULES BHATIA INTERNATIONAL – OR DOES IT?

In this post, SUMIT RAI updates us on the constitutional bench decision of the Supreme Court of India which held that Indian courts would have no jurisdiction over arbitration held outside India.

The good news is that the Supreme Court of India has overruled the severely criticized decisions in Bhatia International vs. Bulk Trading and Venture Global vs. Satyam Computers. In short, the Supreme Court held that the intention of legislature was clear that the territoriality principle was adopted in India as recommended under the UNCITRAL Model Law. Indian courts would, therefore, have no juisdiction over international commercial arbitration held outside India.

The Court held that seat was the centre of gravity of arbitration. Choice of seat would ipso facto amount to the choice of lex arbitri. Courts of seat would have exclusive jurisdiction in matters related to appointment, interim measures, challenge and other like provisions contained in Part I of the Indian Arbitration Act.

Court refused to add words to the Act to allow interim measures under S. 9 (analogous to Art 9 of the Model Law) in case of arbitration seated outside India. It also rejected the argument that parties could file a suit under the civil procedure for interim protection in case of foreign seated arbitration. Court held that as the law stands today, parties may well be rendered remediless in such situation – but this was a lacunae for the legislature to address and not the court. It noted that statutory interpretation could not be guided by attempt to avoid harship.

Court also clarified that if parties chose a seat and a different arbitration law, court will interpret whether the choice of seat (in light of all circumstances) amount to a choice of venue or juridical seat. If the court concludes that parties intended to chose the juridical seat by indicating the place, the law of that place will be the law of arbitration. The other law indicated in such agreements will only apply to the extent it is not contrary to  the mandatory law of seat. This brings Indian law in sync the English law, which has often been cited as the ideal solution in such situation by commentators.

But, there is bad news as well. In many ways, the bad news overshadows the good for now. In the last paragraph of the decision, the Court has held that the law as laid down in this decision would be applicable only to arbitration agreements entered into after 6th September 2012. Such wide prospective overruling may turn to be counterproductive. While acknowledging the legal error, it is baffling why the Court opened doors for it to remain applicable in future, without limitation, to all agreements entered into until yesterday.

Take for example a concession agreement for 30 years entered on 5th September 2012 which provides for arbitration seated in London. In the 25th year (2027), parties refer their disputes to arbitration. An award under such arbitration would be subject to challenge in Indian courts (due to the wide prospective overruling) following the ratio in Venture Global. I do not see any rational for this.

Having said that, there was definitely a need to provide for such a solution for applicability of S. 9 (interim measures). Since the overruling renders parties remediless, that part of the decision could have been made applicable only to agreements entered into after the date of the decision – so that parties could be said to have made an informed choice.

The decision of the constitutional bench is the best thing that has happened to Indian arbitration since the enactment of the 1996 Act which adopted the Model Law. The decision has gone beyond its narrow reference and clarified many minor issues of great implication. In more ways than one, it has aligned Indian arbitral regime to transnational standards. Hopefully, some clarification on the scope of the prospective overruling will clear the clouds that still threaten to linger in the otherwise clearing sky.

Text of the decision

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One response »

  1. JAIDEEP VERMA, ADVOCATE, BARODA

    thanx for the succint analysis.

    Reply

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