Supreme Court overrules Bhatia judgment in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. - First Post

In Brief

In Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc.[1] the Constitution Bench (5 judges) of the Indian Supreme Court overruled its earlier decision in Bhatia International v. Bulk Trading SA, 2002 (4) SCC 105 and held that the Arbitration and Conciliation Act, 1996 was territorial and seat centric in nature thereby setting straight the contorted position of law in this regard in India.

Prelude

Before we launch into a narrative of the case we shall synopsize the legal position prior to the decision under review.

The law of arbitration in India prior to 1996 encompassed different statutes, viz

• The Arbitration Act, 1940 which dealt with domestic arbitrations, 
• The Protocol and Convention Act, 1937 which governed arbitrations which were covered by the Geneva Convention, 1927 
•  The Foreign Awards (Recognition and Enforcement) Act, 1961 which governed arbitrations which were covered by the New York Convention, 1958

The various statutes above contemplated extensive court intervention in the arbitral process and also ignored modern international best practices. The Indian legislature seeing the dire need to modernize and internationalize the law of arbitration consolidated the above three statutes into one condensed Arbitration and Conciliation Act, 1996. The A&C Act, 1996 draws heavily from the UNCITRAL Model Law and several of the provisions and section numbers are identical.

The A&C Act, 1996 is divided into several parts of which we are primarily concerned with Part I and II.

Part I of the A&C Act, 1996 is titled General Provisions but ostensibly deals with domestic arbitrations. Seemingly this has replaced the Arbitration Act of 1940. It contains provisions relating to mandatory reference of disputes to arbitration by courts where such disputes are covered by an arbitration clause[2], courts’ powers to grant interim relief pending the arbitration[3], appointment of, substitution of, termination of, challenges to arbitrators[4], powers of the arbitral tribunal[5], procedural aspects of the arbitration proceedings[6], the award and grounds of challenges thereto[7], the enforcement of awards[8] and several other provisions. 

Part II of the A&C Act, 1996 is entitled Enforcement of Certain Foreign Awards and thus contains provisions which deal with recognition, enforcement and challenges to enforcement of awards subject to the Geneva or New York Convention. Seemingly this has replaced the Protocol and Convention Act, 1937 and the Foreign Awards (Recognition and Enforcement) Act, 1961. Noticeably provisions such as power of courts to grant interim relief, challenges to the award, are missing from Part II. This is reasonably so as a local court’s jurisdiction over arbitrations seated outside its national jurisdiction is supposed to be limited in nature.

S. 2(2) of the A&C Act, 1996, provides the applicability of Part I of the said Act. It states:

This Part shall apply where the place of arbitration is in India.

It is noticeably different from A. 1(2) of the Model law which provides

The provisions of this Law, except articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State.

The Model Law thus follows the territorial criterion while extending to arbitrations seated abroad provisions relating to

•  mandatory reference to arbitration of disputes covered by an arbitration agreement,
• courts’ powers in granting interim measures
• enforcement of awards

The Indian legislature chose not to re-enact these exceptions in S. 2(2) and dropped the phrase only thereby creating the impression that the Part I applied to arbitrations not only seated in India but also abroad.

The Indian Supreme Court in Bhatia International v. Bulk Trading SA was faced with a peculiar situation where in an arbitration with its seat in Paris one of the parties sought measures for interim relief from the Indian Courts. The provision relating to interim relief not being found in relation to foreign awards under Part II, the Supreme Court took on an enthusiastic approach and interpreted the provision This Part shall apply where the place of arbitration is in India to mean the opposite of the phrase This Part shall apply only where the place of arbitration is in India. The absence/omission of the word only was held to mean that arbitrations seated outside India can be subject to the jurisdiction of Indian courts unless the parties had expressly or impliedly excluded the applicability of Part I of the A&C Act, 1996. The Supreme Court found that there being no implied/express exclusion in the facts of the case, S. 9, i.e. an Indian court’s powers to grant interim relief, was applicable despite the arbitration being seated outside India. The exact ratio of the Bhatia decision was as follows:

Where such arbitration is held in India the provisions of Part I would compulsory apply and parties are free to deviate only to the extent permitted by the derogable provisions of Part I. In cases of international commercial arbitrations held out of India provisions of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions.

The disastrous consequences of the Bhatia decision unfolded in a subsequent decision of the Supreme Court in Venture Global Engineering v. Satyam Computer Services Ltd., 2010 (8) SCALE 159 As the Bhatia decision made Part I applicable to arbitrations seated outside India unless the same was excluded by the parties, provisions of Part I including challenges to awards were also found to be applicable in such cases. Thus in the Satyam decision the Supreme Court found that where parties had not excluded the applicability of Part I of the A&C Act, 1996, the Indian Courts would have power to set aside an award not made in India. This decision has been criticized by several commentators including this author[9].

As can be seen over time the Indian Courts through judicial interpretation departed from the apparent territorial and seat centric approach of the A&C Act, 1996. This subjected arbitrations with situs outside India, to intervention of the Indian Courts, making Indian arbitration law anti-thetical to speedy resolution of disputes. Seeing the malady, a small but strong voice from within the Indian legal fraternity and the Indian judiciary began to grow, supported by luminaries and stakeholders outside India, in an effort to realign the Indian law to be more arbitration friendly. Several cases similar on facts to the Bhatia and Satyam cases snaked their way through the judicial hierarchy. Most met premature deaths upon application of the precedent which they were opposed to. However some managed to reach the Supreme Court at a time when the apex judicial body itself began to doubt the tenability of its earlier decisions.

This resulted in the matters being referred to the Constitution Bench of the Supreme Court for reconsidering the Bhatia and Satyam decision.

Facts

In brief the factual situation which arose in the batches of cases under review was similar to the factual scenario in the Bhatia and Satyam decisions.

In one of the cases under review[10] the parties had entered into an arbitration agreement where the lex fori agreed to was the English Law but the substantive law agreed to was the Indian law. The seat of arbitration agreed to was London. The arbitral tribunal issued its award, which award was challenged before the Indian Courts under S. 34 of the A&C Act 1996. The Supreme Court was thus called upon to decide whether S. 34, which relates to challenges to awards and which falls in Part I of the A&C Act 1996, can apply to arbitrations with situs outside India.

In another of the cases under review[11] one of the parties, who admitted that the arbitration was seated in Paris and the lex fori was French Law and the substantive law was English Law, approached the Indian courts under S. 9 for measures of interim relief pending the arbitration. The Supreme Court was thus called upon to decide whether S. 9, which relates to courts’ powers to grant interim relief and which falls in Part I of the A&C Act 1996, can apply to arbitrations with situs outside India.

Decision

The Supreme Court held that it was unable to support the conclusions recorded in the Bhatia and Satyam decisions[12] that Part I of the A&C Act, 1996 would apply to arbitrations not taking place in India.[13] The Court held that the A&C Act 1996 accepts the territorial criterion as laid down by the Model Law and that Part I of the A&C Act, 1996 would thus not be applicable to arbitrations taking place outside India. Thus no party can approach Indian courts for interim relief or for challenging an award resulting from an arbitration seated outside India. The Supreme Court however made its decision prospective in applicability.[14]

In the next post we shall commence our analysis of the decision.

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[1] Civil Appeal No. 7109 of 2005 decided on 6^th September 2012, along with Civil Appeal No. 6284 of 2004, White Industries Australia Ltd. v. Coal India Ltd., along with Case No. 35 of 2007, Harkirat Singh v. Rabobank International Holding BV, along with SLP Nos. 3589-90 of 2009, Tamil Nadu Electricity Board v. Videocon Power Ltd., along with SLP Nos. 27824 and 27841 of 2011, Bharti Shipyard Ltd. v. Ferrostaal AG and Anr.

[2] S. 8

[3] S. 9

[4] S. 10 to 15

[5] S. 16 and 17

[6] S. 18 to 26

[7] S. 29 to 35

[8] S. 36

[9] Alok N. Jain, Yet Another Misad-Venture by Indian Courts in the Satyam Judgment?, Arbitration International, Volume 26, Number 2, 2010, 251.

[10] Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., Civil Appeal No. 7109 of 2005 decided on 6^th September 2012

[11] Bharti Shipyard Ltd. v. Ferrostaal AG and Anr, SLP Nos. 27824 and 27841 of 2011 decided on 6^th September 2012

[12] Paragraph 54 and 199 of the decision

[13] Paragraph 76 of the decision

[14] Paragraph 201 of the decision

Bhatia decision overturned by Constitution Bench of Indian Supreme Court

The Indian Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Service Inc. has overturned its own decision in Bhatia International v. Bulk Trading SA and Venture Global Engineering v. Satyam Computer Services Ltd. A copy of the decision can be found here. 

We will shortly submit an analysis of the decision in an upcoming post this weekend. Happy reading!

Can a Delayed Award be Set Aside on the Ground of Delay?

Oil India Limited v. Essar Oil Limited [1]

Introduction

In a previous post we had covered the effect of the arbitral tribunal’s failure to issue an arbitral award despite efflux of time in a time bound arbitration.[2] If an arbitration is not time bound, what then would constitute delay in issuance of an arbitral award and would such delay be sufficient ground to set aside an award? In a recent decision of the High Court of Delhi, this issue cropped up once again. [3]

Facts

The concessionaire Petitioner entered into a turnkey contract for drilling of offshore wells for the purpose of oil/gas exploration with the Respondent. Under the contract the Respondent was to carry out obligations within strict timeframes. The deadlines were not met and the Petitioner terminated the contract. The Respondent invoked the arbitration clause and asked inter alia for compensation for unlawful termination of the contract. The Petitioner countersued for damages for failure to complete the obligations in due time.

The Arbitral Tribunal heard the parties at length and commenced working on the award in 2001. The award was however, issued only in 2004. The tribunal ruled in favour of the Respondent but allowed certain counterclaims of the Petitioner.

The Petitioner challenged the award in the High Court of Delhi under S. 34 of the A&C Act 1996.

Submissions

Amongst the various submissions made, the Petitioner challenged the award on the ground that it was against public policy, having been issued almost three years after it was reserved for being pronounced; the expeditious pronouncement of awards being in the interest of public policy.

The Respondent resisted the challenge by submitting that the award was issued without undue delay. The Respondent further submitted that even if the award was delayed, the Petitioner had never raised any objection to such delay and had thus waived its right to object at this belated stage. The Respondent further submitted that delay itself was not sufficient cause for an award to be set aside.

Decision

The learned single judge of the High Court of Delhi held that delay in making of an arbitral award by itself was not sufficient ground to strike down the award unless it led to circumstances which made the award patently illegal and hence against public policy. The Court further held that the Petitioner by failing to object to the delay in issuance of the award had in fact waived its rights to so challenge it. The Court concluded that there was no ground to set aside the award and dismissed the petition.

Analysis

Undue delay in rendering decisions has been held to be ground enough to overturn the courts’ decisions. In this regard see R.C. Sharma v. Union of India [4] and Kanhaiyalal v. Anupkumar [5]. But can an analogy be drawn to delay in issuing arbitral awards?

It must be noted that the Arbitration Act, 1940 permitted the Court to enlarge time for issuance of an award.

28. Power to Court only to enlarge time for making award.

(1) The Court may, if it thinks fit, whether the time for making the award has expired or not and whether the award has been made or not enlarge from time to time the time for making the award…

No such provision is contained in the present Act of 1996. But the absence of Court’s power to extend time would not go so far so as to support the proposition that undue delay in issuance of the award is ground enough to set aside the award.

Under S. 34 of the Act of 1996 the Court can set aside the award on several grounds including the award being in conflict with the public policy of India.

In ONGC v. Saw Pipes Ltd.[6] the Supreme Court of India while expanding the scope of the words “public policy” to include patently illegal awards, made an observation as under

“Further, for achieving the object of speedier disposal of dispute, justice in accordance with law cannot be sacrificed. In our view, giving limited jurisdiction to the Court for having finality to the award and resolving the dispute by speedier method would be much more frustrated by permitting patently illegal award to operate. Patently illegal award is required to be set at naught, otherwise it would promote injustice.”

In HarjiEngineering Works Pvt. Ltd. v. Bharat Heavy Electricals Ltd.[7] the Delhi High Court remarked that

“It is natural and normal for any arbitrator to forget contentions and pleas raised by the parties during the course of arguments, if there is a huge gap between the last date of hearing and the date on which the award is made. An Arbitrator should make and publish an award within a reasonable time. What is reasonable time is flexible and depends upon facts and circumstances of each case. In case there is delay, it should be explained. Abnormal delay without satisfactory explanation is undue delay and causes prejudice… An award which is passed after a period of three years from the date of last effective hearing, without satisfactory explanation for the delay, will be contrary to justice and would defeat justice. It defeats the very purpose and the fundamental basis for alternative dispute redressal mechanisms.”

The Delhi High Court set aside the award though there were other factors which also influenced its decision in this regard.

It would seem that the decision in Harji Engineering Works Pvt. Ltd. v. Bharat Heavy Electricals Ltd. has expanded the already overstretched ratio in ONGC v. Saw Pipes Ltd. by classifying delay in making of an award to be an act against public policy of India. However a discerning interpretation of the decision can lead to the conclusion that delay in issuing the award by itself is not sufficient but the nature of delay and its circumstances and consequences ought to be examined in order for it to be ground enough to set aside the award.

In Peak Chemical Corporation Inc. vs National Aluminium [8] the Delhi High Court was once again asked to decide upon this issue. The Court held that:

Significantly, delay has not been specified as one of the grounds under Section 34 of the Act for setting aside an Award. It would be straining the language of that provision to hold that delay in the pronouncement of an Award would by itself place it in "conflict with the public policy of India" within the meaning of Section 34 (2) (b) (ii) of the Act. As will be discussed hereafter, the impugned Award sets out comprehensively the facts as pleaded by the parties, the evidence, the submissions of counsel, the analysis of the facts and evidence, and the detailed reasons issue-wise. Another factor that requires to be accounted for is that the dispute between the parties has been pending since 1996. It would not be in the interests of justice to set aside the impugned Award only on the ground of delay and remand it for a fresh determination.

The approach in Peak Chemical seems sensible as delay in itself should not vitiate an arbitral award. An examination of the reasons for delay and its consequences is a must. Where the delay is occasioned by mischief or with an intent to drag proceedings or where the delay is for no plausible explanation, it can vitiate an award. Where such delay results in illegality, i.e. where the parties submissions are forgotten or overlooked and hence not considered in the award, or where the delay gives sufficient reason to speculate on the credibility, independence and impartiality of the tribunal, the same can vitiate the award.

In Unionof India v. Niko Resources Ltd.[9] the delay in issuance of the award was found to vitiate the award, moreso as the dissenting arbitrator had made a note in the award that the inexplicable delay in rendering the award was occasioned by the delayed circulation of the draft award by the two other members of the tribunal who seemed to have an unusual predetermined agreement upon the draft.

In the case under review another aspect was enunciated, which aspect is be examined by the court while deciding whether delay in issuing an award can be ground enough to set it aside. The Court must look into the action/inaction on part of the parties to determine whether a party has waived its right to object to such inordinate delay. Thus where a party was aware of the growing delay and did not object or challenge the arbitrator’s mandate under S. 14(2) on grounds of failure to act without undue delay, the party is deemed to have acquiesced in such delay and cannot be permitted to raise this ground to challenge the award.

Conclusion

    The approach can be summarized as under. Delay in pronouncement of the award by itself cannot be sufficient ground for setting aside the award. The following aspects have to be examined:

• The reason for the delay and whether any plausible explanation is forthcoming
• The circumstances surrounding the delay 
• The consequences of the delay including the effect it has had on the award (including whether any issues or submissions thereon have been overlooked in the award) 
•  Whether the party seeking to set aside the award has acquiesced in the delay and waived his rights to so challenge the award.

Thus on a case to case basis the consequences of such investigation can only decide whether delay in rendering the award can itself render the award nugatory.

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[1] Copyright Economic Laws Practice. Authored by Mr. Vikram Nankani and Mr. Alok N. Jain

[2] Bharat Oman Refineries Ltd. v. Mantech Consultants, Appeal No. 702 of 2011 decided on 2^nd May 2012

[3] Arbitration Appeal No. 12 of 2012 decided on 9^th April 2012

[4] (1976) 3 SCC 574

[5] (2003) 1 SCC 430

[6] (2003) 5 SCC 705

[7] 2008 (4) Arb LR 199 (Del)

[8] O.M.P. No. 160/2005

[9] O.M.P. No. 192 of 2010 decided on 2^nd July 2012

Scope of Court Intervention under S. 37(2)(b)

Leslie David Isaac v. Bahadur Bapuji Sanjana [1]

Introduction

To what extent a Court can be permitted to exercise jurisdiction during the life of the arbitral tribunal is an issue, the answer to which can define a legal system’s attitude towards alternative dispute resolution mechanisms. In a recent decision of the High Court of Bombay, this issue cropped up once again.[2]

Facts

The Appellant and the Respondent were partners in a partnership firm. Disputes arose, resulting in the Respondent invoking the arbitration clause in the Deed of Partnership. Under the said clause arbitration was to be carried out by a sole arbitrator mutually appointed by the parties. In the event the parties could not agree, the tribunal was to comprise of two arbitrators, one each appointed by each party.

The Respondent nominated an arbitrator and called upon the Appellant to confirm the same. The Appellant resisted the appointment in writing. The Respondent seemingly did not disclose this fact to the arbitrator and the arbitrator proceeded ex-parte. Despite the Appellant pointing out its written objection to the tribunal, the arbitrator held that she had jurisdiction and scheduled hearings for interim orders. The Appellant boycotted the hearing on account of its objection to the very formation and hence jurisdiction of the arbitral tribunal.

The arbitrator passed interim orders under S. 17 of the A&C Act, 1996, directing the Appellant to redeposit money withdrawn from the partnership firm’s accounts and restrained the Appellant from interfering in the business of the firm.

Against this interim order the Appellant moved the Bombay High Court under S. 37(2) of the A&C Act, 1996 which reads as under: 

     Appeal shall also lie to a court from an order of the arbitral tribunal 

     a).....

     b)Granting or refusing to grant an interim measure under section 17.

Submissions

The Appellant submitted that the tribunal was constituted against the agreed terms of the arbitration clause in the Deed of Partnership. The Appellant sought a declaration that the arbitral proceedings were null and void and thus the interim order passed by the Tribunal was required to be vacated.

The Respondent resisted the appeal on the ground that the scope of a Court’s jurisdiction under S. 37(2)(b) was limited to examining the arbitral tribunal’s refusal or grant of interim orders. The Respondent submitted that the Court could not go into the issue of jurisdiction of the arbitral tribunal as the same was a question which was only to be decided at the time of challenge to the arbitral award under S. 34 read with S. 16(6).

Decision

The learned single judge of the High Court of Bombay held that the bar created by S. 34 r/w S. 16(6) whereby the party against whom the issue of jurisdiction is decided by the Arbitrator against them is entitled to challenge the same along with other grounds under Section 34 of the Arbitration Act is in no way sufficient to take away the rights of the Appellate Court under Section 17 to grant and consider in this background, the merit and demerit of the appointment of the Arbitral Tribunal as it goes to the root of the matter. Merely because the Appellate Court under Section 37 against the order passed under Section 17 of the Arbitration Act cannot disturb and/or set aside the order passed by the Arbitrator under Section 16 confirming its jurisdiction, that itself cannot be the reason and/or takes away the Appellate Court's power to consider the case of the Appellant with regard to the jurisdiction at least for the time being till the Arbitral Tribunal decides all disputes and/or differences finally through the Award.

The learned judge held that the arbitral tribunal having been improperly constituted, the interim order was liable to be vacated. The learned judge however directed that the arbitration should continue and result in an award.

Analysis

Before we analyze the judgment, it is important to bear in mind that the judge has in his decision often used the words interim award interchangeably with interim orders. There is a distinction between the two. An award is final and operates not just merely during the course of the arbitral proceedings, though it may be on partial points and hence in a manner of speaking, interim. An interim order on the other hand is an order which has a lifespan only limited to the course of arbitral proceedings. While the former can be challenged and set aside under S. 34, the latter can only be appealed against under S. 37.

We now analyze the decision.

The scope of intervention by a Court in arbitral proceedings must be limited. The A&C Act, 1996 borrows from the Model Law and states under S. 5 that no judicial authority shall intervene except so provided in that part of the statute.

Court intervention under S. 37(2)(b) is limited to sitting in appeal over the interim order passed by or the refusal to pass an interim order by the Arbitral Tribunal under S. 17. In such a scenario can the court in the appeal review questions of constitution/jurisdiction of the arbitral tribunal? More so when such questions are to be exclusively dealt with by the court at the stage of challenge to the arbitral award under S. 34 r/w S. 16(6).

It is arguable that arbitration is an ADR mechanism where court intervention must be minimal as emphasized by S. 5. It is further arguable that when excusive provisions have been carved out wherein court intervention is permitted to deal with questions of constitution and jurisdiction of the arbitral tribunal, under other provisions, the court must not entertain and desist from trying such issues. Furthermore an appellate court’s jurisdiction is bound to be far more restricted. It may also be noted that the Court under S. 37(2)(b) has the power to vacate an interim order passed by the tribunal or pass an interim order which was refused by the arbitral tribunal. However no power has been granted to interfere with the arbitral process by any other means, including questioning the jurisdiction of the arbitral tribunal. It is reasonably arguable that the Court must only look into the merits of the interim order and decide whether the three requisites (prima facie case, balance of convenience and irreparable injury) exist for granting or refusing to grant the interim order.

However it is worth contemplating whether a court while sitting in appeal over an interim order can go into questions of existence of jurisdiction to pass the very interim order itself. Would such an investigation not be relevant to decide whether the interim order is null and void? The Court would possibly be out of bounds if it annulled the arbitration under S. 37(2)(b) on the ground of the interim order being wholly without jurisdiction. However would it be out of bounds if it decided that the interim order needed to be vacated for lack of jurisdiction? While the natural outcome of such a decision would mean that for all practical purposes the arbitration is infructuous as the Court has already passed opinion on the lack of jurisdiction of the arbitral tribunal, nonetheless in our opinion the Court would be well within its right to examine whether the interim order was passed wholly without jurisdiction as the same goes to the root of the interim order.

Conclusion

A halfway house solution seems to be the best approach to this issue. A Court under S. 37(2)(b) should not be barred from looking into whether the arbitral tribunal had jurisdiction to pass the interim order. However the Court must not decide finally on the point of jurisdiction but only make a prima facie observation as to the question of jurisdiction in the course of deciding whether the interim order ought to be granted or refused. The same would also uphold the principle of kompetenz kompetenz leaving the final decision of jurisdiction to the tribunal itself (such decision being capable of being challenged under S. 34) and not interrupting the arbitral process in any manner. It seems that the learned judge of the Bombay High Court has endeavoured to steer his decision towards this very end.

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[1] Authored by Mr. Vikram Nankani and Mr. Alok N. Jain. Copyright Economic Laws Practice.

[2] Arbitration Appeal No. 12 of 2012 decided on 9^th April 2012