Indian Supreme Court's Landmark Judgement on Arbitration: An Insight

Hence, there comes a decision to nullify the draconian effects of Bhatia International v. Bulk Trading S.A. Though many would have already understood what I am referring to, many foreign readers and new learners of the subject would be bewildered as to what is so special about the judgement delivered by the Constitutional Bench of the Supreme Court of India consisting of five judges including the Chief Justice in Bharat Aluminium Co. v Kaiser Aluminium Technical Service. 

This post shall put before the readers the context of the case and also address to some concerns which has left the lawyers, investors and academicians craving for a little more.

What led to this landmark case was the confusion on Applicability of Part I to Part II of the Arbitration and Conciliation Act.  While Part I deals with arbitration happening within India, Part II deals with enforcement of foreign awards.

In 2002, a three judge bench in Bhatia International set the precedent that Part I shall apply to Part II of the Act. As a result, all the later decisions in various cases followed the suit.  This created a lot of ruckus as almost all the foreign awards were tried and tested in the national courts as if they were domestic awards. In many situations, foreign awards were not only refused enforcement according to Part II of the Act but were also set aside, something which is only possible to the domestic awards under Part I.  This kind of treatment made the foreign awards susceptible to death by long drawn legal battles in Indian courts.

Seeing the situation getting worse with many matters reaching the Supreme Court, this Constitutional Bench was set up (Reported here). Better late than never, though it took a massive decade, the judgment is nevertheless a welcome decision. The Supreme Court has clearly decided that Part I and part II are mutually exclusive and no portion of Part I shall be applicable to Part II. Rejecting the argument of the appellant that the 1996 Act provides for delocalised arbitration, the court found that India has adopted the territorial principle, thereby limiting the applicability of Part I to arbitrations which take place in India.

“We are of the considered opinion that Part I of the Arbitration Act, 1996 would have no application to International Commercial Arbitration held outside India. Therefore, such awards would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996.”

This, of course means that foreign awards will not be subject to provisions of Part I. This eventually means that the court intervention would significantly reduce and foreign awards would no longer be at the mercy of Section 34 of Part I which carries enormous power of setting aside an award.  Further, the Supreme Court has also stated that a foreign award could only be set aside where the award was made and only in a rare circumstance where this is not possible, it could be set aside under the law of the country governing arbitration agreement which the award was made.

In arriving at this decision, the Supreme Court has done a commendable job by minutely going into the 1996 Act and clarifying the relevant provisions keeping in view the international standards and most importantly the objects and reasons of the Act itself.  While arriving at its decision, the court has discussed the founding concepts of international arbitration putting them in sync with the 1996 Act in a very skillful manner, as if there never was any sort of confusion in the Act.

Though, all may seem hunky-dory, the judgment comes with its own unique concerns. The Supreme Court while strictly demarcating the divide between Part I and Part II has afforded to leave the parties remediless in international arbitration taking outside India in terms of approaching the court for interim measures which falls under Part I under Section 9, allowing  the option only for domestic arbitration. According to the Supreme Court it is better to leave it to the legislature to do the needful; the court cannot enter in its shoes.  Similarly, the fate of awards from non-convention (non signatories to New York Convention) countries has been left in lurch as Act will not apply at all to such awards unlike the earlier position where Part I applied to such awards. The next cause of concern being that in the very last sentence of the judgment where the court specifies that law declared by it through this judgment shall only apply to prospective arbitration agreements.  Does that mean all the cases coming to courts till then would be decided as per the old precedent as laid down in Bhatia and Venture? Well, only time will tell how the courts across the nation treat the numerous cases where the arbitration agreements have been entered into and which may come before the court anytime in future.

As for now, the judgement has given many reasons to celebrate. How about declaring 6th September, the Indian Arbitration Day?