Arbitration Process Reconfirmed in Landmark Indian Supreme Court Decision

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On September 6, 2012, the Supreme Court of India delivered a landmark decision in Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc. In a decision that is expected to be welcomed by the international arbitration community, a five-judge constitutional bench of the court overruled Bhatia International v Bulk Trading S.A. and restricted the ability of Indian courts to interfere in foreign arbitration proceedings.

Background

In its 2002 decision in Bhatia, the Supreme Court held that Indian courts could grant interim relief under Part I of the Indian Arbitration and Conciliation Act, 1996 (the Act), which confers upon Indian courts the power to grant interim orders and set aside arbitration awards. Part I was widely considered to apply only to domestic arbitrations, since Section 2(2) of Part I states that “This Part shall apply where the place of arbitration is India.”

However, in Bhatia, the Supreme Court held that Part I applied to arbitrations with a foreign seat unless the parties opted out of such an arrangement. This was followed in later decisions like Venture Global v Satyam Computer Services, where the Supreme Court held that foreign awards could be set aside by Indian courts for violating Indian statutes and being contrary to public policy. This led to considerable confusion over the scope of the jurisdiction of Indian courts over foreign arbitrations. 

Decision

In Bharat Aluminium, the Supreme Court held that Section 2(2) of the Act applied to arbitration proceedings within India. The court upheld the distinction between the provisions of Part I and Part II of the Act and held that there could be no overlapping or intermingling of the provisions of Parts I and II of the Act.

It was also held that Part I of the Act, which deals with the commencement and conduct of arbitration, does not apply to international arbitrations held outside India. Awards passed pursuant to such proceedings would only be subject to the jurisdiction of Indian courts when they are sought to be enforced in India under Part II of the Act, which applied solely to foreign arbitral awards.

The Supreme Court affirmed that the “seat” of the arbitration would determine the court that has the jurisdiction to control the arbitration proceedings and award even if the arbitration agreement was governed by the Act.

Conclusion

The decision in Bharat Aluminium is expected to have a positive impact on arbitration and commercial transactions in India. The uncertainty over the treatment of arbitration agreements by Indian courts had been a deterrent to foreign investors over the past few years, and the decision is expected to boost foreign investment in the country as well.

The Supreme Court recognized that there was a lacuna in the law relating to obtaining interim measures in India for arbitrations held outside India. This could prevent parties from obtaining timely interim measures over assets located in India. It is for the legislature to fill this gap in the law. Until then, parties will have to rely on the arbitrators or the courts at the seat of the foreign arbitration.

It may also be noted that in order to ensure parity, the law as laid down by the Supreme Court only applies prospectively to arbitration agreements executed after the date of the judgment. Arbitration agreements executed prior to September 6, 2012, will continue to be governed by the decision in Bhatia. Parties who have not excluded the application of Part I of the Act to an arbitration agreement executed before this date may amend the agreement to specify such exclusion. It remains to be seen how the courts in India will maintain the delicate balance between following Bhatia and transitioning to the law as held in Bharat Aluminium.  

Amita Gopinath
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