Application of the Arbitration and Conciliation Act, 1996 to foreign seated arbitrations
[Editor’s Note: With this post, we intend to continue our analysis of the new amendments to the Arbitration and Conciliation Act, 1996; returning to, and reviving the blog after a fairly long hiatus.]
The constant and all pervasive judicial interference in arbitral proceedings, delays and rising costs of arbitration in India have consistently vitiated the object and purpose of the Arbitration and Conciliation Act, 1996 [“the principal Act”]. Therefore, in order to remedy the difficulties faced in the arbitral process, the Arbitration and Conciliation (Amendment) Act, 2015 [“the Act”] was passed by the Parliament on December 23, 2015 Based on the 246th Report of the Law Commission of India [“Law Commission Report”] the Act sought to make the much-required changes to the principal Act and make India an arbitration-friendly jurisdiction.
The process of amendment is worthy to be mentioned. The amendment was introduced by way of the Arbitration and Conciliation (Amendment) Ordinance, 2015 [“the Ordinance”] promulgated by the President on October 23, 2015. Thereafter, the amendments were introduced and passed by the Parliament.
Among other amendments, the Act added a proviso to sub-section (2) of section 2 of the principal Act. The proviso is reproduced in full below:
“Provided that subject to an agreement to the contrary, the provisions of sections 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognised under the provisions of Part II of this Act.”.
The proviso has far-reaching implications and has undone the progress achieved in a catena of judgments of the Supreme Court of India [“the Supreme Court”] on the implied exclusion of the Indian arbitration law from foreign seated arbitrations.
The author traces the development of the law of implied exclusion and comments on the position of law in the light of the prospective application of the Act.
The issue of implied exclusion of the application of Indian arbitration law to foreign seated arbitrations is one that has been hotly discussed and debated among practitioners and academics alike. Part I of the principal Act contains provisions such as grant of interim measures, appointment of arbitrators, setting-aside of an arbitral awards among others relating to supervisory jurisdiction of courts in an arbitral proceeding.
The judgment of the Supreme Court in Bhatia International v Bulk Trading SA[“Bhatia International”], held that Part I of the principal Act shall apply to arbitrations, irrespective ofwhether the seat lies within or outside India. This flies in the face of the seat theory in international commercial arbitration, but was nonetheless followed as binding precedent by courts in India. This decision was overturned by a larger Bench of the Supreme Court in the case of Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc [“BALCO”], wherein Part I of the principal Act was held to not apply to foreign seated arbitrations. The BALCO judgment applies prospectively to arbitration agreements signed after September 6, 2012.
In a plethora of cases, the courts in India have excluded the applicability of Part I on the basis of implied exclusion. The courts have considered a variety of foreign factors including procedural rules of a foreign arbitral institution, seat of arbitration, and law governing the arbitration agreement in order to exclude the application of Part I of the principal Act.
In a judgment rendered by the Supreme Court on 22 September 2015 in the case of Union of India v Reliance Industries[“Reliance”], the requirement for implied exclusion was watered down to render the principal Act inapplicable on the presence of either a foreign seat or a foreign law governing the arbitration agreement. This was a welcome move for international commercial arbitration in India and was testimony to the judiciary’s commitment to party autonomy.
Matter in controversy
The addition of the proviso to sub-section (2) of section 2 in the Act renders the judgments of the Supreme Court ineffective. The Act requires an agreement expressly excluding the application of Part I of the principal Act, in the absence of which, sections 9 (interim measures by court), 27 (court assistance in taking evidence), 37(1)(a) and 37(3) (appealable orders) will be applicable to international commercial arbitration.
It is germane to note that the proviso uses the word ‘place’ instead of ‘seat’, thereby not solving the Bhatia International-BALCO dichotomy. The rationale of the proviso, as can be understood by the Law Commission Report, was to provide an efficacious remedy to a party where the assets of the opposing party are located in India and the arbitral seat is situated abroad. In order to ensure that the said assets are not disposed-off in the course of the pendency of the arbitration, rendering the party remediless before Indian courts.
The Act significantly dilutes the power of courts to examine the application of Part I of the principal Act to foreign seated arbitrations. This is due to the requirement for an ‘agreement to the contrary’ to exclude application, lack of acceptance of the recommendations of the Law Commission Report and drafting errors.
The requirement of an ‘agreement to the contrary’ is absurd as the holding of the judgments discussed above clearly point towards an implied exclusion of Part I. Such implied exclusion is necessary in the light of the already existing workload of Indian courts which leads to unnecessary and avoidable delay in arbitration.
The Law Commission Report suggested that the word ‘place’ be substituted with ‘seat’ in sub-section (2) of section 2 of the principal Act and the previously omitted word ‘only’ be added after the words ‘shall apply’ giving effect to the “seat centricity” principle in international commercial arbitration. However, the draft of the Ordinance of October 23, 2015 did not make these changes. It seems absurd that the word ‘only’ has not been added in the provision and the ‘place’ has not been replaced with ‘seat’. This drafting oversight may accentuate the multiple problems of application of part I of the principle Act.
Therefore, the courts shall be bound to evaluate the arbitration agreements and in absence of an express stipulation excluding the application, the select provisions shall be made applicable to foreign seated arbitrations. This is not in consonance with the object and purpose of the enactment and shall further cause confusion.
Prospective Application adds to the woes
In addition to the issues discussed above, the proviso shall not apply uniformly to all arbitration agreements. As per the Act, the provisions contained therein shall apply prospectively and shall not extend to pending arbitration proceedings. Although there was wide speculation as to the retrospective applicability of the Ordinance, the following section in the Act lays the controversy to rest:
- Nothing contained in this Act shall apply to the arbitral proceedings commenced, in accordance with the provisions of section 21 of the principal Act, before the commencement of this Act unless the parties otherwise agree but this Act shall apply in relation to arbitral proceedings commenced on or after the date of commencement of this Act.
It is pertinent to note that the prospective application of the Act is in terms of pending arbitral proceedings, contrary to BALCO, wherein prospective application was expressed in terms of the arbitration agreement. To ensure that the BALCO ratio applied to a relevant agreement, a novation of the agreement was sufficient.
Au contraire, the proviso requiring the express exclusion of Part I of the principal Act shall apply to arbitration agreements when the arbitration proceedings have been commenced after October 23, 2015 and only if arbitration has been commenced before the said date, the rules of implied exclusion, as expounded by the courts, find application.
Back to square one?
Undoubtedly, this provision was required in order to save the interests of parties engaged in foreign seated arbitrations with assets in India and is also in conformity with international practice on the matter. However, the drafting oversight and lack of clarity in the proviso is startling as the Act was meant to simplify the arbitration process in India.
As discussed in the previous section, the Act applies prospectively and not to pending arbitration proceedings. The amendment renders the BALCO ratio otiose. Parties may solve this problem by novation of the arbitration agreements, and specifically ensuring that Part I of the principal Act does not apply.
Further, courts may ensure the uniform application of the proviso through purposive interpretation. The absurd application of the provision may be saved by courts through rejection of certain words from the statute. It is a general rule of statutory interpretation, that a proviso like any other enactment has to be construed upon its own terms. However, the court can correct obvious drafting errors in a statute by adding, omitting and substituting words from a statute. Further, by application of the rule of purposive interpretation, a proviso may be interpreted to give effect to the intention of the Parliament.
In order to ensure that the proviso does not offend the object of the enactment, the courts may read the requirement of an ‘agreement to the contrary’, to include an agreement by implication as well. The basis of this interpretation is the judicial reasoning employed in the 2015 Reliance judgment that “it is only those agreements which stipulate or can be read to stipulate that the law governing the arbitration agreement is Indian law which would continue to be governed by the Bhatia rule”. Therefore, in order to avoid inconvenience to the parties, the statute may be interpreted to include implied exclusion in its ambit.
Therefore, the courts must apply the proviso keeping in mind the object of the statute, the language of the arbitration agreements and the existing precedent on point. It remains to be seen how this provision plays out before courts in India.
*IV Year, B.A., LL.B. (Hons.), NLU Jodhpur. Sagar is also an Associate Editor on the Editorial Board of the Indian Journal of Arbitration Law, NLU Jodhpur. The views of the author are personal.
 It must be underlined that the legislation was passed without debate in the Rajya Sabha. SeeBills on commercial courts, arbitration passed by Parliament, The Hindu (Dec. 23, 2015) http://www.thehindu.com/news/national/bills-on-commercial-courts-arbitration-passed-by-parliament/article8021839.ece; Rajya Sabha clears 4 Bills, blocks 1,The Indian Express (Dec. 24, 2015), http://indianexpress.com/article/india/india-news-india/rajya-sabha-passes-3-bills-without-debate-left-parties-walk-out-in-protest/.
 Law Commission of India, Report No. 246 Amendments to the Arbitration and Conciliation Act 1996 (Aug. 2014), http://lawcommissionofindia.nic.in/reports/Report246.pdf.
 For a detailed case law analysis on implied exclusion see Ajay Bhargava & Anchit Oswal, Implied exclusion of Part 1 of the Arbitration and Conciliation Act – tips and strategies, Int’l L. Office (June 25, 2015).
 (2002) 4 SCC 105. The Court held that “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. In that case the laws or rules chosen by the parties would prevail. Any provision, in Part I, which is contrary to or excluded by that law or rules will not apply.”
 For instance, in Venture Global Engineering v Satyam Computer Services Ltd, (2008) 4 SCC 190, the Supreme Court held that Section 34 (setting-aside of arbitral award) was applicable to an award rendered by the London Court of Arbitration (sic). See alsoIndtel Technical Services (P) Ltd v W S Atkins Rail Ltd, (2008) 10 SCC 308 and Citation Infowares Ltd v Equinox Corporation, (2009) 7 SCC 220.
(2012) 9 SCC 552.
Yograj Infrastructure Ltd v Ssang Yong Engineering and Construction Company Ltd, (2011) 9 SCC 735, ¶ 38. The application of the SIAC Rules excluded the Indian arbitration law.
Dozco India Private Ltd v Doosan Infracore Co Ltd, (2011) 6 SCC 179, ¶ 20.
Videocon Industries Ltd v Union of India, (2011) 6 SCC 161, ¶ 33. InReliance Industries Ltd v Union of India, (2014) 7 SCC 603, ¶ 60, it was held that the presence of a foreign seat coupled with a foreign law governing the arbitration agreement excludes the applicability of the principal Act. For further analysis on this point see V Niranjan, Reliance v Union of India: Implied Exclusion of Part I of the Arbitration ActIndian Corp. L. Blog (Aug. 14, 2014), http://indiacorplaw.blogspot.in/2014/08/reliance-v-union-of-india-implied.html.
SLP (Civil) No. 11396 of 2015, Judgment dated 22.09.2015 (Supreme Court of India).
Per contra, some practitioners argue that the decision may cause some confusion as the applicability of Part I may not be excluded in cases on whose facts a judgment cannot be reached on the seat of the arbitration as being outside Indiaand whether this refers to the distinction between ‘venue’ and ‘seat’ or the absence of ‘seat’ remains to be seen. See Olga Boltenko & Kartikey Mahajan, How the Reliance saga brought clarity to the applicability of Bhatia InternationalKluwer Arb. Blog (Nov. 30, 2015), http://kluwerarbitrationblog.com/2015/11/30/how-the-reliance-saga-brought-clarity-to-the-applicability-of-bhatia-international/.
See Aakanksha Kumar, The Arbitration Ordinance, 2015 – Less isn’t always more. [Part-I]Arbiter Dictum Blog (Nov. 5, 2015), https://arbiterdictum.wordpress.com/2015/11/05/the-arbitration-ordinance-2015-less-isnt-always-more-part-i/. The distinction between ‘seat’ and ‘venue’ of arbitration has been further appreciated in Enercon (India) Ltd v Enercon GmbH, (2014) 5 SCC 1, ¶ 114 [“Enercon”].
Law Commission Report, supra note 2 at p. 24, ¶ 41.
For an interesting analysis on the workload of the Supreme Court see Nick Robinson, A Quantitative Analysis of the Indian Supreme Court’s Workload 10(3), J. Empirical Legal Stud. 570 (2013); Alok Prasanna Kumar et al., The Supreme Court of India’s burgeoning backlog problem and regional disparities in access to the Supreme Court (Consultation Paper, Vidhi Centre for Legal Policy).
Law Commission Report, supra note 2 at p. 39, ¶ 1(vi). It is pertinent to note that the principal Act is based on the UNCITRAL Model Law. In drafting the principal Act, the word ‘only’ appearing in Article 1(2) of the Model Law restricting the application to domestic arbitration was omitted. This led to the Bhatia International-BALCO dichotomy.
The problems with respect to prospective application discussed above also arose from the divergence between the Law Commission Report and the Ordinance. The Law Commission had suggested the inclusion of section 85A as a means to introduce transitory provisions so that existing claims before Indian courts are not prejudiced.
Delphi TVS Diesel Systems Ltd v Union of India, WP No. 37355 of 2015, Order dated 24.11.2015 (Madras High Court). See Promod Nair, When good intentions are not good enough: The Arbitration Ordinance in India, Bar & Bench (Nov. 4, 2015), http://barandbench.com/when-good-intentions-are-not-good-enough-the-arbitration-ordinance-in-india/; Naman Joshi, Application of Provisions of the Arbitration and Conciliation (Amendment) Ordinance, 2015 to Existing ArbitrationsLaw Life Beyond (Nov. 5, 2015), https://lawlifebeyond.wordpress.com/2015/11/05/application-of-provisions-of-the-arbitration-and-conciliation-amendment-ordinance-2015-to-existing-arbitrations/. Under the general law of statutory interpretation, it is a principle of construction that every statute dealing with substantive rights is prima facie prospective unless it is expressly or by necessary implication made to have retrospective effect. However, statutes dealing with merely matters of procedure are presumed to be retrospective unless such a construction is textually inadmissible. For analysis on this point see generally,Mithilesh Kumari v Prem Bihari Khare, AIR 1989 SC 1247, 1254; Zile Singh v State of Haryana, (2004) 8 SCC 1, ¶¶ 9, 15; Justice G P Singh, Principles of Statutory Interpretation (12th ed., 2010).
Sundaram Pillai v Pattabiraman, (1985) 1 SCC 591, ¶¶ 43-44.
Inco Europe Ltd. v First Choice Distribution (a firm), (2000) 2 All ER 109, 115 (HL). It must be noted that the present proviso may not be characterized as a drafting error.
In interpreting a statute, a court may have regard to the position of common law before making the Act, the mischief sought to be remedied and the reason for the remedy. The rule, first laid down in Heydon’s case, (1584) 76 ER 637, has been accepted and affirmed by courts in India in various judgments. See Kantilal Sur v Paramnidhi Sadhukhan, AIR 1957 SC 907, 910; Bengal Immunity Co. v State of Bihar, AIR 1955 SC 661, 674.
No-Nail Cases Proprietary Ltd v No-Nail Boxes Ltd, (1944) 1 All ER 528, 529 (per Du Parcq LJ).
Reliance, supra note 10 at ¶ 20.