The Indian Supreme Court issued its long-awaited decision in Bharat Aluminium Co v. Kaiser Aluminium Technical Services (‘BALCO’) on September 6, 2012. The lengthy BALCO judgement is likely to be remembered as the watershed case that inaugurated a new era in Indian arbitration.
The overall goal of the BALCO decision is to protect the future from previous incorrect and anachronistic rulings, as well as to encourage Indian courts to become more arbitration-friendly and thus less likely to participate in the arbitral phase, in accordance with the fundamental theory and ethos of the New York Convention and UNCITRAL Model Rule.
To that end, BALCO lives up to the buzz created in the international arbitration community earlier this year when it was announced that the Indian Supreme Court was hearing a case seeking reconsideration of its earlier decisions in Bhatia International v. Bulk Trading SA and Venture Global Engineering v. Satyam Computer Services Ltd.
The parties had agreed on the supply of equipment as well as the modernization and upgrading of industrial facilities. Unavoidable differences arose, leading to arbitration in England, with awards in favour of the Respondent. The Appellant had gone to the Chhattisgarh High Court under Section 34 of the Act to have the award set aside.
BHATIA INTERNATIONAL VS BULK TRADING S.A.
The precedent for BALCO in terms of territoriality was Bhatia International v. Bulk Trading S.A (hereinafter referred to as “BHATIA”), which found in favour of the applicability of Part 1 to even those arbitration proceedings where the seat of arbitration was outside India.
In the aforementioned 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) from which parties could mutually agree. For an arbitration with a seat outside India, Pt. II would apply (save for the derogable elements that the parties mutually agree to deviate from) in addition to the provisions of Pt. I that the parties do not mutually agree to deviate from in their arbitration agreement.
The Model Law has been cited in the Act. In the Model Law, the provision comparable to section 2(2) of the Act bears the word ‘only’ in Article 1(2). Part I of the Act is applicable where the venue of arbitration is in India, according to Section 2(2) of the Act.
The aforementioned decision found that the deletion of the word “only” from section 2(2) of the Act demonstrated the Indian legislature’s intent to allow Part I of the Act to apply to arbitrations convened even outside India. According to Section 2(4) of the Act, Part I applies to “every” arbitration. According to Section 2(5), Part I applies to all arbitrations and related proceedings.
However, this decision drew condemnation from around the world for the municipal courts’ interventionist attitude to the arbitral procedure, which had a severe impact on arbitral autonomy.
In BALCO, a two-judge Supreme Court bench voiced misgivings about the BHATIA ruling and submitted the case to a three-judge Supreme Court bench, which included the Chief Justice of India. The case was eventually assigned to a five-judge bench. Given the gravity of the situation, the court also requested amicus curiae briefs from major arbitral institutes in India.
The term ‘only’ has been removed.
The court ruled that Section 2(2) of the Act should be interpreted as a clarifying provision of the law’s applicability, rather than as an enabling element, as was held in the BHATIA case. Furthermore, it ruled that Section 2(2) constituted a legislative proclamation of the territoriality theory, and that applying Part 1 to foreign-seated arbitrations was misconstruing Section 2(2)(2).
The absence of the word ‘only’, the court reasoned, did not infer that the Indian legislature intended to make Part I applicable to even foreign-seated arbitrations. The legislation was established by the Hon’ble Supreme Court, which ruled that Part I of the Act applies solely to arbitrations with their seat in India.
Reason for omitting the word “only”
The word “only” appears in Article 1(2) of the Model Law as a result of discussions on the extent of applicability of Article 1 at UNCITRAL’s 330th meeting in June 1985. The rationale for including the word “only” in Article 1(2) was considered at the aforementioned conference. Article 1(2) lists a number of exceptions, including those relating to Articles 8, 9, 35, and 36. Article 8 provides for the stay of judicial proceedings covered by an arbitration agreement; Article 9 provides for temporary relief; and Articles 35 and 36 provide for the execution of Foreign Awards.
The term ‘only’ was added to explain that, with the exception of Articles 8, 9, 35, and 36, which may have extra territorial effect if the State so enacted, the other clauses would be strictly territorial in nature. The UNCITRAL Model Law is a guiding law for all states to adapt from, so the word ‘only’ is mandatory for all other provisions, with the exception of the provisions in Section 2(2) of the Act regarding interim relief and so on, which could have extra-territorial application only if the state legislature so intended.
The court in this case held that because no express exception was carved out for the provision of interim relief by a municipal court in a foreign seated arbitration, as there is in the Model Law, no provision of Part I, including the provision for interim measures by a domestic court (Section 9 of the Act), shall apply to foreign seated arbitrations.
The BALCO decision is not a panacea for all of the problems associated with Indian arbitration, but it is a great first move in the right direction by the Indian Supreme Court. Although there is no doubt a long and difficult path ahead, fraught with complex legal and legislative challenges, before India can be referred to as an arbitration-friendly jurisdiction, the BALCO decision provides reason to anticipate that a new and exciting era for arbitration in India has begun.
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