Balco Judgment

The Indian Judiciary has always been frowned upon by the foreign investors and foreign lawyers alike, for interfering and delaying the arbitral proceedings having its seat outside India (Foreign Arbitrations). Hitherto, the Indian courts, based on the ratios laid down by the Hon™ble Supreme Court in Bhatia International[1] and Venture Global[2]have been passing orders under section 9 (interim measures by the court in arbitral proceedings) and section 34 (challenging the arbitral award in the court) of the Arbitration and Conciliation Act, 1996 (the Act) in respect of Foreign Arbitrations with substantive law being that of India. This has been widely criticized by the foreign investor lobby.

 However, to their great reprieve, this has now been over-ruled by the recent judgment of the Constitution Bench of the Hon™ble Supreme Court in the case of Bharat Aluminum[3] (Judgment). The judgments of Bhatia International and Venture Global have now been set aside by the aforesaid Judgment. The Judgment, inter-alia, states that Part I of the Act (inter-alia dealing with domestic arbitrations and consisting of judicial remedies thereto like the aforesaid sections 9 and 34) shall not be applicable to Foreign Arbitrations and therefore, the Indian courts cannot grant any remedies under Part I of the Act in Foreign Arbitrations. Further, the Judgment goes on to state that the court should adopt a territorial approach and that the seat of arbitration is the centre of gravity with respect to arbitration and its ancillary proceedings. The Apex Court stated that the Act has adopted the territoriality principle from UNCITRAL Model Law on arbitration. The territoriality principle means that law of the seat or place where the arbitration is held, is normally the law to govern that arbitration proceedings.

The Judgment also states that Part I and Part II (inter-alia dealing with enforcement of awards passed in Foreign Arbitrations) of the Act are separate and independent and there is no overlapping and intermingling of the provisions under the aforesaid Part I and Part II. Further, the Part I and Part II of the Act are due to the result of consolidation of earlier arbitration enactments dealing with domestic and foreign arbitrations differently under two separate acts. The Apex Court, further, held that there is no conflict between Part I and Part II of the Act and therefore, Part I is not applicable to Foreign Arbitrations.

The Judgment further stated that in a Foreign Arbitration, no application for interim relief would be maintainable under Section 9 or any other provision of the Act, as applicability of Part I of the Act is limited to all arbitrations which take place in India. Similarly, no suit for interim injunction would be maintainable in India, on the basis of an international commercial arbitration with a seat outside India.

A very interesting aspect of the Judgment is that the new ratio is applicable only prospectively and to the arbitration agreements executed after the date of the Judgment. This may be to avoid hardships to the parties who have already entered into arbitration agreements and commenced arbitral proceedings keeping in mind the legal position laid down by the aforesaid Bhatia International and Venture Global judgments. Therefore, the Apex Court has attempted to neutralize the impact of such significant change in settled legal position, by making the Judgment effective prospectively. However, the same may not appreciated by all, since the arbitration agreement already executed and the foreign arbitral proceedings already commenced would continue to be subject to interference by the Indian courts. This greatly dilutes the positives coming out of the aforesaid Judgment.