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Indian Supreme Court to Reconsider Bhatia International

In this post, SUMIT RAI reports on the recent reference to a five-member bench of the Indian Supreme Court to reconsider the ratio in Bhatia International and Satyam Computers; skeptically adding that a solution to the impasse may not be reached anytime soon.

A three-member bench of the Indian Supreme Court, chaired by the Chief Justice, has referred the Bhatia International ratio for reconsideration to a five-member constitutional bench on 1st November 2011. The Supreme Court has also invited anyone interested in being heard on the issue to file an intervention. The matter is to be placed before the five-member bench on 10th January 2012.

The reference was made in the case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. In early 2008, Justice Katju (now retired) while sitting in a division bench had expressed his reservation on the correctness of the Bhatia ratio and the apex court’s decision in Satyam Computers following that ratio. He had particularly expressed doubts over the interpretation given to section 2(2) of the Indian Arbitration Act (1996). Following this, the case was placed before a three-member bench, which has now referred it to a five-member bench.

Bhatia International had placed the Indian arbitral regime in a parallel world by delimiting territorial application of the Indian Arbitration Act. The transnational standard, as also laid down in the UNCITRAL Model Law, is to limit the application of municipal arbitration legislation to arbitrations seated within the territory of such state. This is contained in art. 1(2) of the Model Law, which also lays down exceptions for certain provisions that apply without reference to the seat – including art. 9 (interim measures).

Indian Act, being based on the Model Law, has a similar provision in section 2(2). However, the Indian Act has no exceptions and has deleted the word ‘only’ used in art. 1(2) of the Model Law. Section 2(2) thus reads, “This Part shall apply where the place of arbitration is in India”. The Bhatia decision interpreted the absence of the word ‘only’ to mean that this was an enabling and not a limiting provision. Ergo, it held, the Indian Act would apply to all arbitrations including international arbitrations seated outside India – unless parties, expressly or by implication, excluded some or all of the provisions of Indian Act.

The Bhatia ratio, it is widely believed, was an attempt by the Supreme Court to allow parties to move Indian courts for interim measures even in cases where the arbitration was seated outside India. An interpretation holding that the Indian Act would only apply to arbitrations held in India would have closed any opportunity of seeking essential interim measures for foreign-seated arbitrations. Initially, therefore, the decision did not attract any significant criticism. However, soon the wide ratio of Bhatia International was followed by the apex court to hold that (a) Indian courts could appoint arbitrators in foreign-seated arbitration (See, Indtel Technical Services); and (b) that Indian courts could set-aside foreign awards (See, Venture Global v. Satyam Computers).

The Indian Supreme Court seems to have recognized the blunder in Bhatia International and Satyam Computers – as evidenced from its decisions in the last couple of years. Since Bhatia International is a three-member bench decision of the apex court – it acts as a binding precedent. The trend in the apex court recently has, therefore, been to read an implied exclusion of the Indian Act in foreign-seated arbitration. In such attempt, the court has often ignored basic concepts governing arbitration (See e.g. Videocon Industries and Yograj Infrastructure). This has resulted in mushrooming of inconclusive, unpredictable, and conflicting precedents.

The Indian Law Ministry, in April 2010, had proposed an amendment to correct the error made and followed since the decision in Bhatia International (the Law Ministry’s Consultation Paper is available here). However, no progress on that proposal has yet been made. The reference to a larger bench, thus, comes as another ray of hope for the long-suffering Indian arbitral regime. However, given that the apex court took over 3 years since the reference was made by a division bench to a three-member bench (in Jan. 2008) to finally refer it further to a larger bench (Nov. 2011) – it is unlikely that the constitutional bench will render a decision anytime soon.

Will the Bhatia ratio be finally corrected through an amendment by the legislature or a decision of the five-member bench of the apex court? I am not very tempted to place my bet on either.

Further Reading

A lot has been written on various aspects of the Bhatia International saga. For those interested, here is a selected list of recommended readings:

  1.  Raghav Sharma, Bhatia International v. Bulk Trading S.A.: Ambushing International Commercial Arbitration Outside India?, 26 J. Int. Arb. 357 (2009) [a comprehensive review and critique of the court’s rationale in the Bhatia decision].
  2. Alok Jain, Yet Another Misad-Venture by Indian Courts in the Satyam Judgment?, 26 Arb. Int. 251 (2010) [a detailed critique and analysis of the Satyam decision].
  3. Sumit Rai, Positive or Double Negative? Critique of Videocon Industries v. Union of India, 2011 (4) Int. A.L.R. 138 [a critique of the Videocon decision and the collateral damage by the Bhatia ratio on the Indian arbitral regime].
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6 responses »

  1. It is bad for the sanctity of international arbitration law to have foreiign arbitral awards interefed with by municipal courts.

    Reply
  2. Pingback: Making a Favourable National Law on Arbitration: How Difficult can it be? « BLOG ARBITRATION

  3. What the arbitration needs is that there is no interference from the courts outside the country of seat. At the same time, we sometimes need interim measures being ordered by such courts…

    Reply
  4. Hi, just wanted to point out that the purpose of the case is not directly to reconsider Bhatia and Satyam. The case involves the issue of whether an Indian court can set aside a foreign award under Section 34 of the 1996 Act. To this extent, it may constitute a reconsideration of Satyam.

    Important to remember also that Bhatia is a 3-judge Bench decision. If this Bench feels that it does not agree with Bhatia on an issue, it may have to refer the matter to a Constitution Bench (5-judge Bench) which would be the least Bench strength required to reconsider or overrule Bhatia.

    Vivek

    Reply
    • Vivek
      The recent reference (reported here) is indeed to a five judge constitutional bench and therefore, it will be in a position to reconsider the Bhatia ratio. Also, I agree the reference is not directly to review either Bhatia or Satyam case. I have therefore taken care to note that the larger bench will consider the ratio of these decisions, not these cases itself.

  5. Pingback: BHATIA INTERNATIONA RATIO UNDER THE SCANNER AT INDIAN SUPREME COURT « BLOG ARBITRATION

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