We continue our analysis from our last post.
7. The
opening words of S. 28
S. 28 of the
A&C Act, 1996 which deals with the applicable substantive law in an
arbitration under Part I of the A&C Act, 1996 reads as under:
Rules applicable to substance of dispute
Where the place of arbitration is situate in
India...
It was submitted
that S. 28 which falls in Part I of the A&C Act, 1996 opens with the words where the place of arbitration is situate in
India. It was submitted that there would be no requirement of reiterating
this fact if S. 2(2) were interpreted to mean that Part I applied to
arbitrations taking place in India only. It was thus submitted that the
presence of these words in S. 28, and conversely the absence of the same in
other provisions in Part I, indicated that Part I in fact applied to all
arbitrations irrespective of the situs.
The argument
though attractive fails to see the reason behind the necessity of reiterating
the words where the place of arbitration
is situate in India in S. 28. The said provision deals with substantive law
applicable to a dispute in an arbitration. Where both parties to an arbitration
agreement are Indian, the substantive law applicable would necessarily have to
be India. However where one or more parties are non-Indian, the parties would
be free to decide the law applicable to the substance of the dispute. The
presence of the words where the place of
arbitration is situate in India is necessary to give effect to the latter
scenario, i.e. possibility of an international commercial arbitration (where at
least one party is non-Indian) taking place in India. The Supreme Court thus
held that the provision could not be interpreted to be indicative of the intent
of the Legislature to give an extra-territorial effect to Part I of the A&C
Act, 1996.
8. Operation
and scope of Part I and Part II
It was suggested
before the Supreme Court that Part I and Part II are overlapping in nature and
this reinforces the extra territorial applicability of the A&C Act, 1996.
The Supreme
Court held that the two parts are mutually exclusive. The Supreme Court
observed that regulation of arbitration consists of four steps (a) the commencement
of arbitration; (b) the conduct of arbitration; (c) the challenge
to the award; and (d) the recognition or enforcement of the award.
Part I of the Arbitration Act, 1996 regulates arbitrations at all the four
stages. Part II, however, regulates
arbitration only in respect of commencement and recognition or enforcement of
foreign awards.
The Supreme Court further held that the regulation of conduct of arbitration and
challenge to an award is to be done by the courts of the country in which the
arbitration is being conducted.
This in turn means that Part I of the A&C Act, 1996 which regulates the
conduct of arbitration would only be applicable to arbitrations with situs in
India.
It was also
submitted that the use of the non-obstante clause “Notwithstanding anything contained in Part I or the Code of Civil
Procedure, 1908...” in S. 45 (which falls in Part II) indicated that
provisions of Part II were designed to apply to arbitrations to which Part I
applied unless expressly barred. The Supreme Court observed that the
non-obstante clause was a legislative tool used in the Foreign Awards (Recognition
and Enforcement) Act, 1961 which had been repeated. Further the Supreme Court
held that the non-obstante clause was added out of abundant caution
and as such reinforced the stark division of the two Parts.
9. The
use of the words judicial authority
It was submitted
that the words judicial authority in
S. 45 (which falls in Part II) referred to a term wider than courts as the Part
II related to foreign awards. The submission was extended to state that the use
of the same words judicial authority in
various provisions in Part I as opposed to the use of the word court indicated that Part I was also
applicable extra-territorially.
The Supreme
Court found that no such interpretation could be drawn. Rather it opined that
the words judicial authority had been
used in various provisions to cover any form of adjudicating body so as to
minimize intervention
in the arbitral process. It further found that the term could be a legislative
hangover from the Arbitration Act, 1940.
10. Courts
having jurisdiction to set aside awards
S. 48(1)(e),
which falls in Part II of the A&C Act, 1996 deals with grounds for refusal
of enforcement of a foreign award made in a Convention country. The same is
identical to A. V(1)(e) of the New York Convention and reads as under:
(1) Enforcement
of a foreign award may be refused, at the request of the party against whom it
is invoked, only if that party furnishes to the court proof that----
...
(e) the award has not yet become binding on
the parties, or has been set aside or suspended by a competent authority of the
country in which, or under the law of which, that award was made.
It was submitted
that the said provision recognized that two courts had concurrent jurisdiction
to set aside an award, i.e. the courts of the country where the award was made
and courts of the country under the law of which the award was made. It was thus
submitted that Indian Courts could set aside awards made outside India but
subject to Indian Law. As a result it was submitted that S. 34 which falls in
Part I and relates to grounds for setting aside of an award would apply to
awards resulting from all arbitrations, including which were seated outside
India. It was thus submitted that the Satyam
decision was correct and that S. 34 and also other provisions of Part I
were applicable extra-territorially.
The Supreme
Court recognized that the New York Convention was indeed suggestive of two
courts which could be competent to set aside the award. However the same could
not be extended to mean that therefore under S. 34 of the A&C Act, 1996
foreign awards could be set aside. To interpret so would amount to legislation
by the Court. Jurisdiction if any had to be given expressly by the Legislature.
In the absence of the same S. 34 could not be applied to set aside foreign
awards. In expressing so the Supreme Court overruled the Satyam decision.
The Supreme
Court then digressed from the main contention and clarified that in any event A.
V(1)(e) could not be read to mean that the two courts would have concurrent
jurisdiction to set aside the award. Rather the primary court would be the
court of the country where the award was made. The secondary court would be the
court of the country under the law of which the award was made.
The Supreme Court held that to give concurrent jurisdiction would lead to
complex situations as arose in the Satyam
decision. The
Supreme Court also opined on the term under
the law of which and held that the same referred to procedural law.
The Court examined various international authorities and case law on these
aspects
and went on to warn that to understand the term to mean substantive law would be to ignore the spirit underlying the New
York Convention which embodies a consensus evolved to encourage consensual
resolution of complicated, intricate and in many cases very sensitive
International Commercial Disputes.
11. Lacuna
in respect of arbitrations in Non-Convention countries
It was canvassed
that if Part I was found applicable only to arbitrations seated in India and
Part II was found applicable only to arbitrations in Convention countries, the
same would create a lacuna in the law as arbitrations in Non-Convention
countries would not be regulated by the A&C Act, 1996.
The Supreme
Court rejected the submission on the ground that arbitrations in Non-Convention
countries were never governed by Indian laws whether under the older regime of
law or under the A&C Act, 1996. Therefore there was no lacuna.
In our opinion
the submission is fundamentally flawed as the A&C Act, 1996 does not even
apply to arbitrations in Convention countries which have no reciprocity
provisions towards arbitrations in India.
This indicates a far narrower scope of Indian law over foreign awards and
cannot be termed as a lacuna but rather a legislative intent. The Supreme
Court’s decision in rejecting the submission thus stands good.
12. Hardship
due to non-availability of S. 9 interim relief in arbitrations seated abroad
As the Supreme
Court had dismissed all submissions which had earlier found favour in the Bhatia and Satyam decision, a last gasp submission was made. It was contended
that if Part I were found to be applicable only to arbitrations with seat in
India, then in an arbitration with its seat outside India, a party would be
left remediless in respect of assets located in India as S. 9, which falls in
Part I, would no longer be available. To prevent such lack of remedy it was
submitted that S. 9 should be permitted to be applied irrespective of where the
arbitration is held. It was submitted that such an interpretation would
actually result in an intra-territorial operation of S. 9 as the assets would
be located within India and not an extra-territorial operation in terms of an
arbitration situated abroad.
The Supreme
Court disagreed and held that S. 9 could not be construed as a stand-alone
provision. It held that schematically the provision was placed in Part I and
referred to the courts’ powers in granting relief before or during arbitral
proceedings or at any time after making of the arbitral award but before it is
enforced in accordance with S. 36.
The Supreme Court held that S. 36 also was found in Part I and hence S. 9 had
to be construed as part and parcel of Part I. The Supreme Court held that
extending the applicability of S. 9 to arbitrations which take place outside
India would be to do violence to the policy of territoriality declared in S.
2(2) of the A&C Act, 1996.
The Supreme
Court then held
Once the parties have chosen voluntarily
that the seat of the arbitration shall be outside India, they are impliedly
also understood to have chosen the necessary incidents and consequences of such
choice. We, therefore, do not find any substance in the submissions made by the
learned counsel for the appellants, that if applicability of Part I is limited
to arbitrations which take place in India, it would leave many parties
remediless. If that be so, it is a matter to be redressed by the legislature.
The Supreme Court
went on to explain that in the Bhatia
decision it had erroneously attempted to act as “finishers”, “refiners” and
“polishers” of the Arbitration Act, 1996 assuming that the Arbitration Act,
1996 required varied degrees of further “processing”
as the task of filling up lacuna if any was that of the Legislature.
The Supreme Court thus rejected
all submissions made towards upholding the position of law as decided in the Bhatia and Satyam decisions. It held in its conclusion:
We are unable to accept the submission of the learned counsel for the
appellants that the Arbitration Act 1996 does not
make seat of the arbitration as the centre
of gravity of the arbitration.
The A&C Act 1996 has accepted the territoriality principle
which has been adopted in the UNCITRAL Model Law. Section 2(2) makes a
declaration that Part I of the Arbitration Act, 1996 shall apply to all
arbitrations which take place within 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. In our opinion, the provisions
contained in Arbitration Act, 1996 make it crystal clear that there can be no
overlapping or intermingling of the provisions contained in Part I with the
provisions contained in Part II of the Arbitration Act, 1996.
With utmost respect, we are unable to agree with the conclusions
recorded in the judgments of this Court in Bhatia International (supra) and Venture Global Engineering (supra).... In a foreign seated
international commercial arbitration, no application for interim relief would
be maintainable under Section 9 or any other provision, as applicability of
Part I of the Arbitration Act, 1996 is limited to all arbitrations which take
place in India.
We
conclude that Part I of the Arbitration Act, 1996 is applicable only to all the arbitrations which take place within the territory of India.[20]
In our next post we shall conclude our analysis of the decision.