This article has been written by Veddant Majumdar.
The much-awaited judgement in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (hereinafter referred to as “BALCO”) laid down clearly that part I of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) does not apply to foreign seated international commercial arbitrations. It reduced intervention by Indian courts, respected party autonomy and jurisdiction of the arbitral tribunals and also acted incoherence to the principle of territoriality.
However, a negative implication also emanated from the judgement, that parties to any foreign seated arbitration could not claim any remedy under Part I of the Act, via interim measures by a court under Section 9, this would render parties remediless in times of need. Parties to foreign seated arbitrations would also have a hard time remedying/modifying the agreements entered into prior to the incoming of the BALCO judgement. The journey to the BALCO judgement, its implications and aftermath are discussed in the article below.
The precursor to BALCO in regard to the principal of territoriality was the Bhatia Intenational v. Bulk Trading S.A, (hereinafter referred to as “BHATIA”) which ruled in favour of the applicability of Part 1 to even those arbitration proceedings where the seat of arbitration was outside India. In the said case, the Hon’ble Supreme Court held that in cases of arbitration, including International Commercial Arbitration held in India, Part I of the Act would apply squarely, with the exception of certain derogable provisions, (which Section 9 is not) which parties can mutually agree to derogate from. For an arbitration having its seat outside India, Pt. II would apply (except the derogable provisions which the parties mutually agree to derogate from) in addition to the provisions of Pt. I, which the parties do not mutually agree in their arbitration agreement to derogate from.
The Act had sought reference from the Model Law. The provision analogous to section 2(2) of the Act contains the word ‘only’ in the Model Law in Article 1(2) of the latter. Sections 2(2) of the Act provides that Part I will apply where the place of arbitration is in India. The said judgment held that the omission of ‘only’ from section 2(2) of the Act was evidence of the intent of the Indian legislature to permit Part I of the Act to apply to arbitrations seated even outside India. Sections 2(4) of the Act provides that Part I shall apply to ‘every’ arbitration. Section 2(5) states that Part I shall apply to all arbitrations and to all proceedings relating thereto. On a conjoint reading of the aforementioned provisions, the court held that an interpretation consistent with all the said provisions is that Part I of the Act applies to all arbitrations.
However, this judgement received criticism from world over for the municipal courts having exhibited an interventionist approach to the arbitral process, and thereby having affected arbitral autonomy in the negative.
The BALCO judgement
In BALCO, a two-judge bench of the Supreme Court expressed reservations about the decision in BHATIA and referred the matter to a three-judge bench of the Supreme Court that included the Chief Justice of India. The matter was ultimately referred to a 5 judge-bench. Considering the significance of the subject matter in question, the court also invited amicus curiae briefs from leading arbitral institutions operating in India.
Exclusion of the word ‘only’
The court held that S.2(2) of the Act is to be construed as a clarifying provision of application of the law, and not as an enabling provision as was held in the BHATIA case. Further, it held that S.2(2) was a legislative declaration of the doctrine of territoriality, and to apply Part 1 to foreign seated arbitrations is to misconstrue S.2(2). The court opined that the absence of the word ‘only’ did not imply that the Indian legislature intended to make Part I applicable to even foreign seated arbitrations. The Hon’ble Supreme Court settled the law by ruling that Part I of the act applies to only arbitrations with their seat in India.
Reason to exclude the word ‘only’
The origin of the word “only” in Article 1(2) of the Model Law can be traced from the deliberations held on the scope of application of Article 1 in the 330th meeting, June, 1985 of UNCITRAL. The cause for inclusion of the word “only” in Article 1(2) was discussed in the said meeting. Article 1(2) enumerates certain exceptions i.e. exceptions relating to Articles 8, 9, 35 & 36
The word “only” was included in order to clarify that except for Articles 8, 9, 35 & 36 which could have extra territorial effect if so legislated by the State, the other provisions would be applicable on a strict territorial basis. The UNCITRAL Model Law is a guiding law for reference for all states to adapt from, therefore, the word “only” is mandatory for all other provisions barring case the provisions with regard to interim relief etc, in Section 2(2) of the Act, which could have extra-territorial application only if the state legislature so intended.
The court here opined that since no express exception was carved out for the provision of interim relief by a municipal court in a foreign seated arbitration, like there is in the Model Law, no provision of Part I, including the provision for interim measures by a domestic court, (S.9 of the Act) shall apply to foreign seated arbitrations.
Downsides of BALCO
The much-glorified BALCO judgment; interestingly also has a number of downsides to it. The result of the court’s finding is that the party against whom the arbitral ward is made, is rendered essentially remediless if such party has its assets situated in India. In addition to it, the benefit of this judgement can be availed only prospectively, i.e it excludes retrospective application.
No Interim Reliefs available to the Parties
By the judgment of the Apex Court in BALCO, the provisions of Part I of the Act, including the power of the Court to grant interim relief under section 9 of the Act, were made inapplicable to the international commercial arbitrations having their seat outside India, in addition to which, the Court has also held that a separate inter-parte suit solely for an interim relief in an arbitration pending outside India would be unmaintainable as per the Code of Civil Procedure; in the dearth of a provision which could cater to such a situation. Further, the court also rejected the contention that parties would be rendered remediless in such a scenario, while opining that parties were free to seek appropriate remedies in their chosen jurisdiction.
The exclusion of the interim relief provisions is far from acting in furtherance of the arbitral process and au contraire, defeats it. In respect of foreign seated arbitrations, where the subject matter of the dispute is situated in India, no party can now seek any interim relief under Part I of the Act.
In such foreign seated arbitrations where the subject matter of the dispute is situated in India, this exclusion of interim relief under the Act could specifically prove detrimental to the arbitral process. In such an event, purpose of the arbitration proceedings may get defeated even if a favourable award is passed, as the party against whom the award has been passed, if it has assets in India, can during the pendency such arbitration, dispose of such assets with a view to defeat any award that may be made against such party outside India.
The application of the principles laid down in the said judgement would be made applicable to the arbitration agreements executed on or after 7th September, 2012. Prima facie, it might not appear to be troublesome, but in exercise of prudence and basic farsightedness, the parties who have executed arbitration agreement(s) on or prior to 6th September, 2012, providing for foreign seated international commercial arbitrations, would be required to repeat the cumbersome process of reviewing all such arguments in the light of the rulings in the BALCO Case and amending the agreement(s), if required, to avoid any ambiguity.
The BALCO judgement put forth a pro-arbitration stance by letting go of the interventionist approach held by the Indian judiciary until then and opined in furtherance of arbitral autonomy. It also had several downsides too; be it lack of any interim relief in foreign seated arbitrations or excluding retrospective application of the judgment. These downsides could have the ill effects of unrighteous disposal of the subject matter of arbitration and confusion as to execution of arbitration agreements, as is explained above.
The 2015 Amendment Act, however, compensated for some of the shortcomings in BALCO by adding a proviso to S.2(2) of the Act which laid down that the provision for interim relief by the court (S.9) shall be applicable to even foreign seated arbitrations.
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