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Application for interim relief in a Foreign Seated International Commercial Arbitration, not maintainable under Section 9

CLR Editorial NotesA Constitutional Bench of the Supreme Court in September 2012 has delivered a landmark judgment in Bharat Aluminium Co v Kaiser Aluminium Technical Services Inc which overrules the doctrine  laid down by the Supreme Court in Bhatia International v Bulk Trading S.A. (Bhatia International).

In Bhatia International, the Supreme Court had held that Part I of the Indian Arbitration and Conciliation Act, dealing with the power of a court to grant interim relief, could be applied to arbitration disputes with a foreign seat unless the parties specifically opted out of such an arrangement. The Supreme Court set aside the doctrine in Balco V. Kaiser.

The concluding paragraphs of the Balco judgment have been reproduced below:

“198. ¦..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.

199. 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 our opinion, the provision contained in Section 2(2) of the Arbitration Act, 1996 is not in conflict with any of the provisions either in Part I or in Part II of the Arbitration Act, 1996. 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. Similarly, no suit for interim injunction simplicitor would be maintainable in India, on the basis of an international commercial arbitration with a seat outside India.

200. 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.

201. The judgment in Bhatia International (supra) was rendered by this Court on 13th March, 2002. Since then, the aforesaid judgment has been followed by all the High Courts as well as by this Court on numerous occasions. In fact, the judgment in Venture Global Engineering (supra) has been rendered on 10th January, 2008 in terms of the ratio of the decision in Bhatia International (supra). Thus, in order to do complete justice, we hereby order, that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter.”

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Case Details

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IN THE SUPREME COURT OF INDIA

Civil Appeal Nos. 7019 of 2005, 6284 of 2004 and 3678 of 2007, Transferred Case (C) No. 35 of 2007, Special Leave Petition (C) Nos. 3589-3590 and 31526-31528 of 2009, 27824 and 27841 of 2011

Decided On: 06.09.2012

Appellants: Bharat Aluminium Company and Ors. etc. etc.
Vs.
Respondent: Kaiser Aluminium Technical Service, Inc. and Ors. etc. etc.

JUDGMENT

Surinder Singh Nijjar, J.

1. Whilst hearing C.A. No. 7019 of 2005, a two Judge Bench of this Court, on 16th January, 2008, passed the following order:

In the midst of hearing of these appeals, Learned Counsel for the Appellant has referred to the three-Judges Bench decision of this Court in Bhatia International v. Bulk Trading S.A. and Anr. MANU/SC/0185/2002 : (2002) 4 SCC 105. The said decision was followed in a recent decision of two Judges Bench in Venture Global Engineering v. Satyam Computer Services Ltd. and Anr. MANU/SC/0333/2008 : 2008 (1) Scale 214. My learned brother Hon’ble Mr. Justice Markandey Katju has reservation on the correctness of the said decisions in view of the interpretation of Clause (2) of Section 2 of the Arbitration and Conciliation Act, 1996. My view is otherwise.

Place these appeals before Hon’ble CJI for listing them before any other Bench.

2. Pursuant to the aforesaid order, the appeal was placed for hearing before a three Judge Bench, which by its order dated 1st November, 2011 directed the matters to be placed before the Constitution Bench on 10th January, 2012.

3. Since the issue raised in the reference is pristinely legal, it is not necessary to make any detailed reference to the facts of the appeal. We may, however, notice the very essential facts leading to the filing of the appeal. An agreement dated 22nd April, 1993 was executed between the Appellant and the Respondent, under which the Respondent was to supply and install a computer based system for Shelter Modernization at Balco’s Korba Shelter. The agreement contained an arbitration clause for resolution of disputes arising out of the contract. The arbitration clause contained in Articles 17 and 22 was as under:

Article 17.1 – Any dispute or claim arising out of or relating to this Agreement shall be in the first instance, endeavour to be settled amicably by negotiation between the parties hereto and failing which the same will be settled by arbitration pursuant to the English Arbitration Law and subsequent amendments thereto.

Article 17.2 – The arbitration proceedings shall be carried out by two Arbitrators one appointed by BALCO and one by KATSI chosen freely and without any bias. The court of Arbitration shall be held wholly in London, England and shall use English language in the proceeding. The findings and award of the Court of Arbitration shall be final and binding upon the parties.

Article 22 – Governing Law – This agreement will be governed by the prevailing law of India and in case of Arbitration, the English law shall apply.

4. The aforesaid clause itself indicates that by reason of the agreement between the parties, the governing law of the agreement was the prevailing law of India. However, the settlement procedure for adjudication of rights or obligations under the agreement was by way of arbitration in London and the English Arbitration Law was made applicable to such proceedings. Therefore, the lex fori for the arbitration is English Law but the substantive law will be Indian Law.

5. Disputes arose between the parties with regard to the performance of the agreement. Claim was made by the Appellant for return of its investment in the modernization programme, loss, profits and other sums. The Respondent made a claim for unclaimed instalments plus interest and damages for breach of intellectual property rights. Negotiations to reach a settlement of the disputes between the parties were unsuccessful and a written notice of request for arbitration was issued by the Respondent to the Appellant by a notice dated 13th November, 1997. The disputes were duly referred to arbitration which was held in England. The arbitral tribunal made two awards dated 10th November, 2002 and 12th November, 2002 in England. The Appellant thereafter filed applications Under Section 34 of the Arbitration Act, 1996 for setting aside the aforesaid two awards in the Court of the learned District Judge, Bilaspur which were numbered as MJC Nos. 92 of 2003 and 14 of 2003, respectively. By an order dated 20th July, 2004, the learned District Judge, Bilaspur held that the applications filed by the Appellant Under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the ‘Arbitration Act, 1996’) for setting aside the foreign awards are not tenable and accordingly dismissed the same.

6. Aggrieved by the aforesaid judgment, the Appellant filed two miscellaneous appeals being Misc. Appeal Nos. 889 of 2004 and Misc. Appeal No. 890 of 2004 in the High Court of Judicature at Chattisgarh, Bilaspur. By an order dated 10th August, 2005, a Division Bench of the High Court dismissed the appeal. It was held as follows:

For the aforesaid reasons, we hold that the applications filed by the Appellant Under Section 34 of the Indian Act are not maintainable against the two foreign awards dated 10.11.2002 and 12.11.2002 and accordingly dismiss Misc. Appeal No. 889 of 2004 and Misc. Appeal No. 890 of 2004, but order that the parties shall bear their own costs.

The aforesaid decision has been challenged in this appeal.

7. We may also notice that number of other appeals and special leave petitions as well as transferred case were listed alongwith this appeal. It is not necessary to take note of the facts in all matters.

8. We may, however, briefly notice the facts in Bharati Shipyard Ltd. v. Ferrostaal AG and Anr. in SLP (C) No. 27824 of 2011 as it pertains to the applicability of Section 9 of the Arbitration Act, 1996. In this case, the Appellant, an Indian Company, entered into two Shipbuilding Contracts with Respondent No. 1 on 16th February, 2007. The Appellant was to construct vessels having Builders Hull No. 379 which was to be completed and delivered by the Appellant to the Respondent No. 1 within the time prescribed under the two Shipbuilding Contracts. The agreement contained an arbitration clause. The parties initially agreed to get their disputes settled through arbitral process under the Rules of Arbitration of the International Chamber of Commerce (ICC) at Paris, subsequently, mutually agreed on 29th November, 2010 to arbitration under the Rules of London Maritime Arbitrators Association (LMAA) in London. This agreement is said to have been reached between the parties in the interest of saving costs and time. Prior to agreement dated 29th November, 2010 relating to arbitration under LMAA Rules, Respondent No. 1 had filed two requests for arbitration in relation to both the contracts under Article 4 of ICC Rules on 12th November, 2010 recognizing that the seat of arbitration is in Paris and the substantive law applicable is English Law. In its requests for arbitration, Respondent No. 1 had pleaded in paragraphs 25 and 26 as under:

Applicable Law:

25. The Contract Clause “Governing Law, Dispute and Arbitration Miscellaneous” provides that the Contract shall be governed by the Laws of England.” The rights and obligations of the parties are therefore to be interpreted in light of English Law (the applicable law).

26. In summary:

a) disputes arising out of the Contract between the parties are to be resolved by arbitration under the ICC Rules;

b) the seat of arbitration is Paris; and

c) the substantive law to be applied in the arbitration shall be English Law.

9. Subsequently, in view of the agreement dated 29th November, 2010, the first Respondent submitted two requests for arbitration under LMAA Rules in London on 4th February, 2011. During the pendency of the aforesaid two requests, on 10th November, 2010, the first Respondent filed two applications Under Section 9 of the Arbitration Act, 1996 which are numbered as AA. No. 6/2010 and AA. No. 7/2010 seeking orders of injunction against the encashment of refund bank guarantees issued under the contracts.

10. Learned District Judge, Dakshina Kannada, Mangalore granted an ex parte ad interim injunction in both the applications restraining the Appellant from encashing the bank guarantee on 16th November, 2010. The Appellant appeared and filed its statement of objections. After hearing, the learned District Judge passed the judgments and orders on 14th January, 2011 allowing the applications filed by Respondent No. 1 Under Section 9 of the Arbitration Act, 1996.

11. Both the orders were challenged in the appeals by the Appellant before the High Court of Karnataka at Bangalore. By judgment and order dated 9th September, 2011, the High Court allowed the appeal and set aside the orders passed by the District Judge dated 14th January, 2011. In allowing the appeal, the High Court held as follows:

From the above, it is clear that Respondent No. 1 is not remedyless (sic). It is already before the Arbitral Tribunal at London. Thus, it is open for it to seek interim order of injunction for the purpose of preserving the assets as per Section 44 of the Arbitration Act, 1996 in Courts at London.

Since the parties have agreed that substantive law governing the contract is English Law and as the law governing arbitration agreement is English Law, it is open for Respondent No. 1 to approach the Courts at England to seek the interim relief.

12. This special leave petition was filed against the aforesaid judgment of the High Court.

13. We have heard very lengthy submissions on all aspects of the matter. All the Learned Counsel on both sides have made elaborate references to the commentaries of various experts in the field of International Commercial Arbitration. Reference has also been made to numerous decisions of this Court as well as the Courts in other jurisdictions.

14. Mr. C.A. Sundaram, appearing for the Appellants in C.A. No. 7019 of 2005 submits that primarily the following five questions would arise in these cases: (a) What is meant by the place of arbitration as found in Sections 2(2) and 20 of the Arbitration Act, 1996?; (b) What is the meaning of the words “under the law of which the award is passed” Under Section 48 of the Arbitration Act, 1996 and Article V(1)(e) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (hereinafter referred to as “the New York Convention”)?; (c) Does Section 2(2) bar the application of Part I of the Arbitration Act, 1996 (Part I for brevity) to arbitrations where the place is outside India?; (d) Does Part I apply at all stages of an arbitration, i.e., pre, during and post stages of the arbitral proceedings, in respect of all arbitrations, except for the areas specifically falling under Parts II and III of the Arbitration Act, 1996 (Part II and Part III hereinafter)?; and (e) Whether a suit for preservation of assets pending an arbitration proceeding is maintainable?

15. Mr. Soli Sorabjee, Mr. Sundaram, Mr. Gopal Subramanium and Dr. A.M. Singhvi, learned Senior Advocates for the Appellants have in unison emphasised that Part I and Part II are not mutually exclusive. They have submitted that the Arbitration Act, 1996 has not “adopted or incorporated the provisions of Model Law”. It has merely “taken into account” the Model Law. They have made a reference to the judgments of this Court in the case of Konkan Railway Corporation Ltd. and Anr. v. Rani Construction Pvt. Ltd. MANU/SC/0053/2002 : (2002) 2 SCC 388 and SBP and Co. v. Patel Engineering Ltd. and Anr. MANU/SC/1787/2005 : (2005) 8 SCC 618 It is emphasised that in fact the Arbitration Act, 1996 differs from the UNCITRAL Model Law on certain vital aspects. It is pointed out that one of the strongest examples is the omission of the word “only” in Section 2(2), which occurs in corresponding Article 1(2) of the Model Law. The absence of the word “only” in Section 2(2) clearly signifies that Part I shall compulsorily apply if the place of arbitration is in India. It does not mean that Part I will not apply if place of arbitration is not in India.

16. Mr. Sorabjee has emphasised that the omission of word “only” in Section 2(2) is not an instance of “CASUS OMISSUS”. The omission of the word clearly indicates that Model Law has not been bodily adopted by the Arbitration Act, 1996. All the learned senior Counsel seem to be agreed that the Arbitration Act, 1996 has to be construed by discerning the intention of the Parliament from the words and language used, i.e., the provisions of the said Act have to be construed literally without the addition of any word to any provision. Therefore, the missing word “only” can not be supplied by judicial interpretation. In support of the submission, reliance is placed on Nalinakhya Bysack v. Shyam Sunder Haldar and Ors. MANU/SC/0076/1953 : 1953 SCR 533, Magor and St. Mellons RDC v. Newport Corporation 1951 (2) All ER 839, Punjab Land Devl. and Reclamation Corporation Ltd. v. Presiding Officer, Labour Court MANU/SC/0479/1990 : (1990) 3 SCC 682 and Duport Steels Ltd. v. Sirs (1980) 1 All ER 529. It is pointed out by Mr. Sorabjee that the doctrine of ironing out the creases does not justify the substitution of a new jacket in place of the old, whose creases were to be ironed out.

17. All the Learned Counsel for the Appellants have emphasised that the Arbitration Act, 1996 has not adopted the territorial criterion/principle completely, party autonomy has been duly recognized. This, according to the Learned Counsel, is evident from the provisions in Sections 2(1)(e), 2(5), 2(7), 20 and 28. It is submitted that restricting the operation of Part I only to arbitration which takes place in India would lead to reading words into or adding words to various provisions contained in the Arbitration Act, 1996. It is emphasised that restricting the applicability of Part I to arbitrations which take place only in India would render the provisions in Sections 2(5), 2(7) and 20 redundant. Mr. Sundaram has reiterated that expression “place” in Sections 2(2) and Section 20 has to be given the same meaning. Section 20 of the Arbitration Act, 1996 stipulates that parties are free to agree on the place of arbitration outside India. Therefore, arbitrations conducted under Part I, may have geographical location outside India. Similarly, if Part I was to apply only where the place of arbitration is in India then the words “Where the place of arbitration is situated in India” in Section 28(1) were wholly unnecessary. Further, the above words qualify only Sub-section (1) of Section 28 and do not qualify Sub-section (3). The necessary implication is that Sub-section (3) was intended to apply even to foreign-seated arbitration so long as parties have chosen Arbitration Act, 1996 as law of the arbitration, which could only be if Part I is to apply to such arbitration. Therefore, it is submitted by the Learned Counsel that the ‘seat’ is not the “centre of gravity” as far as the Arbitration Act, 1996 is concerned. The Arbitration Act, 1996 is “subject matter centric” and not “seat-centric“. In support of this, the Learned Counsel placed strong reliance on the provision contained in Section 2(1) (e), which provides that “jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject matter of a suit“. This, according to the Learned Counsel, is an essential precondition for a Court to assume jurisdiction under Part I. The definition of Court in Section 2(1)(e) would necessarily mean that two foreign parties, in order to resolve a dispute arising outside India and governed by foreign law cannot invoke jurisdiction of an Indian Court by simply choosing India as the seat of arbitration. It is further submitted that in the absence of Section 9 of the Arbitration Act, 1996, no interim relief can be granted unless it is in aid of final/ substantive relief that must be claimed in the suit. On the other hand, a suit claiming any permanent relief on the substance of the dispute would tantamount to a waiver of the arbitration clause by the Plaintiff. It is, therefore, submitted by the Learned Counsel that supplying word “only” in Section 2(2) will in many cases leave a party remediless. It is further submitted that Section 2(7) clearly shows that part I would apply even to arbitrations which take place outside India. If Section 2(7) was to be restricted only to arbitrations which take place in India, there would be no need for such a provision. It is emphasised that the provision clearly states that it applies to an award made “under this part”. The aforesaid term is a clear indication to an arbitration which takes place outside India, where the parties have chosen the Arbitration Act, 1996 as the governing law of the arbitration. Mr. Sorabjee relied on National Thermal Power Corporation v. Singer Co. and Ors. MANU/SC/0146/1993 : (1992) 3 SCC 551, and submitted that Section 2(7) is a positive re-enactment of Section 9(b) of the Foreign Awards (Recognition and Enforcement) Act, 1961 (hereinafter referred to as the ‘1961 Act’). It is emphasised that Section 2(7) has been placed in Part I only to bring it in conformity with Article V(1)(e) of the New York Convention, which has been incorporated and enacted as Section 48(1)(e). The aforesaid section even though it is dealing with enforcement of awards, necessarily recognizes the jurisdiction of courts in two countries to set aside the award, namely, the courts of the country in which arbitration takes place and the country under the law of which the award was made. It is submitted that both the expressions must necessarily be given effect to and no part of the act or the section can be disregarded by describing them as fossil.

18. Mr. Sorabjee has emphasised that not giving effect to the words “under the law of which the award was made”, will allow many awards to go untested in Court. He has relied upon certain observations made by the U.K. Court in the case of Reliance Industries Ltd. v. Enron Oil and Gas India Ltd. 2002 (1) Lloyd Law Reports 645.

19. Mr. Sundaram points out that the Arbitration Act, 1996 departs from the strict territorial criterion/principle as not only it retains the features of New York Convention but significantly departs from Model Law. The Model Law has sought to bring in an era of localized/territorial arbitration (Article 1(2)). On the other hand, the Arbitration Act, 1996 recognizes and provides for de-localized arbitration. He emphasised that under Model Law, all provisions referred to localized arbitration except the exceptions in Article 1(2). Under the Arbitration Act, 1996, all provisions are de-localized, except where “place” qualification has been provided for.

20. He further submitted that in all commentaries of International Commercial Arbitration, the expression “place” is used interchangeably with “seat“. In many cases, the terms used are “place of arbitration“; “the arbitral situs“; the “locus arbitri” or “the arbitral forum“. Relying on the judgment in Braes of Doune Wind Farm (Scotland) Limited v. Alfred McAlpine Business Services Limited (2008) EWHC 426 (TCC) which has been affirmed in Shashoua and Ors. v. Sharma (2009) EWHC 957 (Comm.), he submitted that internationally “seat” is interpreted as being the “juridical seat“. Therefore, when the parties opt for a given law to govern the arbitration, it is considered to supplant the law of the geographical location of the arbitration. Therefore, the mere geographical location is not the deciding factor of the seat. He relies on the observations made by Gary B. Born in his book ‘International Commercial Arbitration’, which are as follows:

A concept of central importance to the international arbitral process is that of the arbitral seat (alternatively referred to as the “place of arbitration”, the “siege” “ort”, the arbitral “situs” the “locus arbitri” or the arbitral “forum”). The arbitral seat is the nation where an international arbitration has its legal domicile, the laws of which generally govern the arbitration proceedings in significant respects, with regard to both “internal” and “external” procedural matters.”

As discussed elsewhere, the arbitral seat is the location selected by the parties (or, sometimes, by the arbitrators, an arbitral institution, or a court) as the legal or juridical home or place of the arbitration. In one commentator’s words, the “seat” is in the vast majority of cases the country chosen as the place of the arbitration. The choice of the arbitral seat can be (and usually is) made by the parties in their arbitration agreement or selected on the parties’ behalf by either the arbitral tribunal or an arbitral institution.

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