Implied exclusion of Part 1 of Arbitration and Conciliation Act – tips and strategies

The courts continue to retain jurisdiction over pre-BALCO arbitration agreements under the Bhatia International regime. However, through judicial precedents, theories of express and implied exclusions have been carved out to bar the application of Part I of the Arbitration and Conciliation Act 1996. The Supreme Court has recognised certain circumstances that exclude the applicability of Part I.

Applicability of Part I

The applicability of Part I is often questioned in international arbitrations. Where Part I applies, the Indian courts gain jurisdiction over matters such as interim injunctions, the appointment of arbitrators, challenges to the appointment of arbitrators and challenges to awards.

In Bhatia International v Bulk Trading SA(1) the Supreme Court interpreted the legislature's intentions in drafting the act to mean that Part I applies to international arbitrations, unless excluded by the parties. The three-judge bench of the Supreme Court held as follows:

"To conclude, we hold that the provisions of Part I would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India the provisions of Part I would compulsorily 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. 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." (Emphasis added.)

Following the judgment in Bhatia International, in Venture Global Engg v Satyam Computer Services Limited(2) the Supreme Court held that foreign awards can be challenged under Part I:

"On close scrutiny of the materials and the dictum laid down in the three-Judge Bench decision in Bhatia International we agree with the contention of Mr K.K. Venugopal and hold that paras 32 and 35 of Bhatia International make it clear that the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and to all proceedings relating thereto. We further hold that where such arbitration is held in India, the provisions of Part I would compulsorily apply and parties are free to deviate to the extent permitted by the provisions of Part I. It is also clear that even in the case 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. We are also of the view that such an interpretation does not lead to any conflict between any of the provisions of the Act and there is no lacuna as such. The matter, therefore, is concluded by the three-Judge Bench decision in Bhatia International."

The Supreme Court and various high courts used these judgments as binding precedent and settled case law.(3) However, the interpretation of the act – including the judgments on applicability – remained a matter of discussion. The courts, tribunals and scholars continued to endorse a hands-off approach in relation to arbitration, meaning that they supported limited interference of domestic courts in international arbitral procedures.(4)

The applicability of Part I to international arbitrations was again at issue before a larger bench in Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc (BALCO).(5) The matter was brought before the Constitutional Bench of the Supreme Court. During the case, the court revisited the law laid down in Bhatia International and Venture Global. In BALCO the Supreme Court upheld the territorial principle and held that arbitrations which are seated outside India will not attract Part I. However, the court held that arbitrations – including international arbitrations – which are seated in India will be governed by Part I. The BALCO judgment applied prospectively (ie, to arbitration agreements signed after the BALCO judgment (September 6 2012(6))). Therefore, all arbitration agreements entered into before September 6 2012 were still governed by Bhatia International.

This update examines the possible scenarios in which a party to a pre-BALCO arbitration agreement can successfully argue that the application of Part I of the act has been expressly or implicitly excluded. Further, this update considers various arbitration clauses in which parties have argued that their agreements fall under the doctrine of implied exclusion.

To ensure that Part I of the act does not apply, a foreign party that contractually agreed to resolve disputes with an Indian party by way of arbitration (where the agreement was made before the BALCO decision) must demonstrate the express exclusion of Part I(7) or argue and convince the court that the parties always intended to exclude the applicability of Part I. The courts will determine whether there was an intention to exclude the applicability of Part I.(8)

Below is a table containing arbitration clauses in which the courts have considered the applicability of Part I. The courts were asked to rule on the applicability of Part I after interpreting the arbitration clauses and considering other relevant factors.

Click here to view table.

Below is a matrix segregating components of arbitration agreements (or as interpreted by the court) and the applicability of Part I in respect to the above cases:

Click here to view table.

Comment

The table illustrates various instances wherein the courts, while interpreting arbitration agreements, have determined whether the parties have implicitly excluded the applicability of Part I. The wording of the arbitration agreement or clause determines whether the parties have implicitly excluded Part I. While interpreting the arbitration agreements and clauses, the courts have placed primary importance on the seat of arbitration. Therefore, the seat is crucial when analysing the parties' intent.

In Enercon the Supreme Court relied on the following judgments to determine the seat:

• BALCO – the court held that the venue of arbitration can be different from the seat; therefore, choosing a venue does not imply the seat of arbitration.
• Naviera Amazonica Peruana SA v Compania Internacional De Seguros Del Peru(45) – the court held that the law of the country where the arbitration is held has the closest connection with the proceedings; therefore, it will be the seat of the arbitration. However, the parties can agree to use a different venue.
• Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd(46) – the court found that the term 'juridical seat' implied the local court's control over the arbitral process; thus, a clause which confers exclusive jurisdiction on a court is likely to be held as the seat.
• C v D (47) – the court held that the parties must choose a seat that serves a forum for remedies.
• Sulame´rica Cia Nacional de Seguros SA v Enesa Engelharia SA(48) – "In these circumstances it is clear to me that the law with which the agreement to arbitrate has its closest and most real connection is the law of the seat of arbitration, namely, the law of England". The High Court concluded that English law was the proper law of the agreement to arbitrate.
• Shashoua v Sharma(49) – the court found that because the parties had chosen London as the venue, it would also be the seat of arbitration, as the dispute resolution clause was akin to an exclusive jurisdiction clause. The court held that, in principle, foreign courts should not decide matters which are before another court in the context of an anti-suit injunction. The choice to apply International Chamber of Commerce (ICC) rules was also considered.

The court in Enrcon held as follows:

"In the present case, even though the venue of arbitration proceedings has been fixed in London, it cannot be presumed that the parties have intended the seat to be also in London. In an international commercial arbitration, venue can often be different from the seat of arbitration. In such circumstances, the hearing of the arbitration will be conducted at the venue fixed by the parties, but this would not bring about a change in the seat of the arbitration. This is precisely the ratio in Braes of Doune [Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd, [2008] Bus LR D 137 (QBD), 2008 EWHC 426 (TCC)]. Therefore, in the present case, the seat would remain in India." (Emphasis added.)

Therefore, in determining the seat of arbitration – which is a significant factor in determining the applicability of Part I – the language used in the dispute resolution clause is paramount when discerning the parties' intentions. Further, when determining the seat, the courts will consider:

• the proper law of the main contract (in the absence of any contrary indication);(50)
• the venue;(51)
• the law applicable to the arbitration agreement; and
• the closest connection of the arbitration agreement.(52)

The choice of procedural rules (eg, the ICC, the London Court of International Arbitration (LCIA) or the Singapore International Arbitration Centre (SIAC)) is also relevant when determining the seat. If the parties make foreign law the applicable law over the contract, this is a strong indication of an implied agreement to exclude the application of Part I.(53) Further, if the parties choose a specific law to govern the arbitration (eg, English law) and the seat of arbitration is a foreign country, this would exclude the applicability of Part I, even when the proper law of the agreement is Indian law.(54)

Thus, parties with arbitration agreements which fall within the Bhatia International regime can still exclude the applicability of Part I by arguing that they implicitly excluded Part 1. However, how the parties make the following decisions, among other things, could alter the court's decision:

• designating a foreign seat (not the venue);
• designating the proper law as a foreign law;
• designating a foreign law as the proper law of the main contract; and
• agreeing to institutional rules of conduct (eg, ICC, LCIA or SIAC rules).

One question that may arise is whether an agreement between two Indian parties which contains conditions that imply the exclusion of Part I can be considered valid under Indian law. The jurisprudence thus far seems to be that two Indian parties cannot opt out of Indian law. Agreements that do attempt to opt out will be contrary to Indian law and public policy.(55) Further, arguably, parties cannot confer jurisdiction on a court which otherwise has none.(56) However, the Supreme Court has upheld an arbitration clause between two domestic Indian parties in which the parties had agreed to resolve their disputes under the Grain and Feed Trade Association, choosing to hold arbitration outside India.(57) The Supreme Court held as follows:

"The case at hand is clearly covered by Exception 1 to Section 28. Right of the parties to have recourse to legal action is not excluded by the agreement. The parties are only required to have their dispute/s adjudicated by having the same referred to arbitration. Merely because the arbitrators are situated in a foreign country cannot by itself be enough to nullify the arbitration agreement when the parties have with their eyes open willingly entered into the agreement. Moreover, in the case at hand the parties have willingly initiated the arbitration proceedings on the disputes having arisen between them. They have appointed arbitrators, participated in arbitration proceedings and suffered an award." (Emphasis added.)

Arguably, the concept of party autonomy should prevail and parties should be free to choose the judicial system that they think will be most suitable. However, the Supreme Court rejected this argument in NTPC when it observed as follows:

"The concept of party autonomy in international contracts is respected by all systems of law so far as it is not incompatible with the proper law of the contract or the mandatory procedural rules of the place where the arbitration is agreed to be conducted or any overriding public policy."

The same argument was also raised in BALCO:

"The Indian law has consciously and correctly departed from the same and chosen only the nationality test for defining an arbitration as 'international' as is apparent from Section 2(1)(f) of the Arbitration Act, 1996. Relying on the provision of Sections 2(2), 20 and 28, he further submits that the Arbitration Act, 1996 precludes Indian parties to a purely domestic dispute from choosing a place of arbitration outside India. Mr Kumar goes even further to submit that when both the parties are Indian, the substantive law governing the dispute must necessarily be Indian irrespective of the situs of the arbitration and irrespective of any provision in the contract between the parties to the contrary. He submits that the same principle applies with equal force to the arbitration law too, that is to say, that if it is not open to two Indian parties with regard to an entirely domestic dispute to derogate from the Indian laws of contract, evidence, etc. it is equally not open to them to derogate from the Indian arbitration law either. He relies on the judgment of this Court in TDM Infrastructure (P) Ltd. v. UE Development India (P) Ltd. paras 19, 20 and 23. He, however, very fairly points out that this was a case under Section 11 and the point in issue here did not specifically arise for consideration in the said case."

The Supreme Court appears not to have answered this question conclusively in BALCO. The question (ie, whether two Indian parties can agree to foreign-seated arbitration) was also unanswered in a Delhi High Court case.(58) The court held that in a tripartite agreement, the foreign party would make the arbitration clause contained in the agreement suitable for international arbitration; therefore, the court held that "the arbitral proceedings continue to be in the nature of the international commercial arbitration and the parties cannot be faulted on the count of the violation of the public policy".

Unless the courts provide further clarity, the position appears to be that the implied exclusion of Part I may be unavailable to two Indian parties which have agreed to foreign-seated arbitration.

Ajay Bhargava

Anchit Oswal

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.