BHATIA INTERNATIONAL Vs. BULK TRADING S.A. & ANR

CITATION

Name of the case – Bhatia International vs. Bulk Trading S.A. 7 Anr [2002] 4 SCC 105

Case Number – Civil Appeal 6527 of 2001

Date of Judgement  – 13^th March 2002

Bench –  G.B. Pattanaik, S.N. Phukan and S.N. Variava

Advocate on behalf of the appellant- B. Sen, Senior Advocate

Advocate on behalf of the respondent – C.A. Sundaram, Senior Advocate

CASE BACKGROUND

On May 9, 1997, the petitioner and the first respondent entered into a contractual agreement containing an arbitration clause stipulating adherence to the rules of the International Chamber of Commerce (ICC). Subsequently, on October 23, 1997, the first respondent initiated arbitration through the ICC, selecting Paris, France as the designated location and appointing a sole arbitrator following ICC guidelines.

Invoking Section 9[1] of the Arbitration and Conciliation Act, 1996, the first respondent sought preliminary measures from the 3rd Additional District Judge in Indore, Madhya Pradesh to secure an injunction against the petitioner and the second respondent. These measures prohibited them from transferring, selling, or granting rights to third parties concerning their business assets and property. The appellant argued that Part One of the Act does not apply when arbitration occurs outside India. However, on February 1, 2000, the 3rd Additional District Judge ruled in favor of the application, asserting jurisdiction and deeming it maintainable.

Dissatisfied with this decision, the appellant filed a writ petition before the High Court of Madhya Pradesh, Indore Bench. On October 10, 2000, the High Court dismissed the writ petition, prompting the appellant to challenge the judgment by filing a civil appeal before the Hon’ble Supreme Court of India.

ARGUMENTS PRESENTED BY THE APPELLANT

In presenting the appellant’s case, as articulated by Mr. Sen, several key arguments were advanced. Primarily, it was underscored that the provisions of Part One of the Arbitration and Conciliation Act exclusively apply to arbitrations conducted within the territorial boundaries of India. Emphasis was placed on sub-section (2) of Section 2 of the Act[2], highlighting that Part One is only applicable when the place of arbitration is within India. Consequently, it was argued that Part One does not govern arbitrations conducted outside India.

Furthermore, the appellant contended that this interpretation aligns with the UNCITRAL[3] Model Law on International Commercial Arbitration, the foundational basis for the Act. Reference was made to Article 1(2) of the UNCITRAL Model Law[4], restricts its application to arbitrations within a State’s territory. The deliberate exclusion of the adoption of Article 1(2) in the Act suggested a clear intention to exclude Part One from arbitrations outside India. It was submitted that Article 9 of the UNCITRAL Model Law[5] allows a party to apply to a court for interim relief even if the arbitration is not taking place on the territory of the State.

Regarding Section 2(1)(f) of the Act[6], defining international commercial arbitration, the appellant clarified that when such arbitration occurs outside India, Part I does not apply. Instead, Part Two, addressing foreign arbitral awards, takes precedence.

Mr. Sen highlighted the importance of Section 2, Sub-sections 3[7], 4[8], and 5[9], arguing their relevance to arbitrations conducted within India. Any alternative interpretation, according to the appellant, would conflict with Sub-section (2) and render it redundant.

In the context of the specific case, the appellant maintained that since the arbitration took place in Paris, outside India, the provisions of Part One, including Sections 9[10] and 17, are not applicable. Instead, Part Two, governing the enforcement of foreign awards, should apply. The appellant raised concerns about the absence of provisions for interim measures in Part Two, emphasizing that arbitrations outside India are governed by the jurisdiction rules of the respective location, such as the ICC Arbitration Rules.

Additionally, the appellant highlighted that Section 9, addressing interim relief, applies only to arbitrations within India, evident from its connection to Section 36[11], dealing with enforcing domestic awards. Provisions for enforcing foreign awards are explicitly outlined in sections 48[12], 49[13], 57[14], and 58[15].

Referring to Section 5[16] of the Act, the appellant emphasized the principle of minimal judicial interference, aligning with the overall intent of the Act. Consequently, they argued that the Indore court lacks jurisdiction to entertain the Section 9 application due to the inapplicability of Part One to arbitrations conducted outside India.

To support their argument, Mr. Sen cited decisions from various High Courts, including Orissa, Bombay, Madras, Delhi, and Calcutta, consistently holding that Part One does not extend to arbitrations outside India. Notably, the appellant highlighted a shift in perspective by the Delhi High Court, which initially considered Part One applicable but later affirmed its inapplicability to arbitrations conducted outside India.

Moreover, Mr. Sen cited relevant authorities, including the Division Bench of the Delhi High Court in Marriott International Inc. v. Ansal Hotels Ltd.[17] and the unreported judgment of the Calcutta High Court Division Bench in Keventor Agro Ltd. v. Seagram Company Ltd.[18] asserts that these authorities reinforced the appellant’s rationale and further supports the claim that Part One of the Arbitration and Conciliation Act does not extend to arbitrations conducted outside India.

ARGUMENTS PRESENTED BY THE RESPONDENT

Representing the respondent, Mr. Sundaram argued that a meticulous interpretation of the provision indicates that Part One of the Arbitration and Conciliation Act is intended to possess a broad scope of application, covering all arbitrations. He asserted that unless the parties explicitly exclude the provisions of Part One through their agreement, it should apply to all international commercial arbitrations, even those conducted outside the jurisdiction of India.

DECISION HANDED DOWN BY THE HON’BLE SUPREME COURT

After thorough consideration and careful deliberation, the Honourable Supreme Court concluded that there was no valid justification for intervening in the disputed judgment. Consequently, the appeal was dismissed. The court further ruled that no costs would be awarded throughout the proceedings. The Conciliation Act[19] does not extend to arbitrations conducted beyond the borders of India.

COURT’S RATIONALE

In scrutinizing the respondent’s argument regarding the applicability of Part One of the Arbitration and Conciliation Act to international commercial arbitrations conducted outside India, the Court presented several crucial points to substantiate its conclusion:

Absence of Coverage in Non-Convention Countries: The Court underscored that Part Two of the Act does not cover awards from countries that are neither signatories nor ratifiers of the New York Convention, 1958, and the Geneva Convention, 1927. This creates a significant loophole, leaving arbitrations in such non-convention countries without the application of either Part One or Part Two. The Court found it unlikely that the legislature intended for such a gap, leading to the inference that territorial limitations cannot be inferred from Part One.

Proviso to Section 1[20]: The Court highlighted the proviso to Section 1, specifying that the Act applies to the State of Jammu and Kashmir solely for international commercial arbitration. Accepting the appellant’s argument would result in inconsistency, applying Part One to Jammu and Kashmir for all international commercial arbitrations but not to the rest of India if arbitrations occur outside the country.

Reference from the Definition: The Court examined the definition of international commercial arbitration in Section 2(1)(f) and asserted that the term “judicial” does not distinguish between proceedings in India and those outside India. The definition of “judicial” does not imply a lack of jurisdiction for Indian courts in international commercial arbitrations held outside India. The Court contended that the legislature did not intend to encompass awards from non-convention countries unless explicitly stated.

Language in Section 2(2)[21]: The Court interpreted Section 2(2) as an inclusive provision that does not limit the application of Part I to proceedings exclusively within India. It reasoned that the legislature intends to allow parties to waive the non-exemption provisions of Part One, even in proceedings conducted outside India, through mutual agreement.

Conflict between Sub-section 2 and Sub-sections 4 and 5 of Section 2: The Court cautioned against potential conflicts if the appellant’s arguments are accepted, emphasizing that such acceptance would contradict Section 1, extending the Act’s applicability to the entire country. The Court stressed that sub-section 2 of Section 2 should not conflict with sub-sections 4 and 5 of the same section.

Leaving a Party Remediless: The Court expressed concerns about the appellant’s contention potentially depriving a party of legal recourse, especially in international commercial arbitrations conducted outside India. If Part One is deemed inapplicable, a party may not seek interim relief in India, even if the assets and properties involved in the arbitration are within the country.

In conclusion, the Court’s rationale is based on addressing these various issues to interpret the legislative intent behind the Arbitration and Conciliation Act. Its objective is to prevent any inconsistencies or gaps in the application of the Act.

CRITICAL ASSESSMENT OF THE JUDGEMENT

The judgment’s reliance on the proviso to Section 1(2) appears misplaced, as it fails to establish territorial limitations for Part One. A more reasonable interpretation suggests that the rules applying to the rest of India regarding international commercial arbitration also extend to Jammu and Kashmir. Therefore, using the proviso as evidence of territorial restrictions may lack a solid foundation.

Furthermore, the argument that the limitation section discusses the application covered by Part One raises questions. Defining a ‘court’ in the legislation does not necessarily imply a lack of jurisdiction for Indian courts in international commercial arbitration cases conducted outside India. The interpretation of the term should be based on its content rather than assuming its scope of application.

The judgment’s departure from the basic principles of the UNCITRAL Model Law is concerning. Article 1(2) of the Model Law specifies that only certain articles apply to non-territorial situations, allowing for arbitration outside the country. The court’s decision to apply the entire Part One to international commercial arbitrations outside India, instead of the limited application in the Model Law, seems to deviate from the global trend of reducing judicial interference in such matters.

Despite these logical fallacies, there are positive aspects to the decision. One such aspect is that applying Part One to international commercial arbitrations held outside India allows parties to seek effective interim measures for property located in India. This is particularly beneficial because, although arbitral tribunals have jurisdiction for interim relief, they may lack provisions for the recognition and enforcement of such orders by Indian courts.

Moreover, the practical benefit of the court’s acknowledgment of the arbitral tribunal’s authority to seek support from Indian courts in procuring evidence cannot be overstated. Section 27 empowers the tribunal to solicit witness testimonies, the production of documents, or the inspection of property with the aid of Indian courts.

In arbitrations conducted in countries that are not party to the convention, this ruling ensures that awards can be effortlessly enforced as a court decree according to Section 36[22]. The court’s commendable motivation to prevent situations where parties are left without a remedy contributes positively to the legal landscape.

To conclude, despite any flaws in the judgment’s reasoning, its practical implications for parties engaged in international commercial arbitrations outside India yield numerous advantageous outcomes, particularly in terms of obtaining interim measures and enforcing awards.

OVERRULING OF THE JUDGEMENT

The Supreme Court, in the case of Bharat Aluminium vs. Kaiser Aluminium[23], reversed the precedent set by the Bhatia International judgment. This significant reversal, commonly referred to as the BALCO Judgment, was handed down on September 6, 2012, with a primary focus on the application of Part One of the Arbitration and Conciliation Act to proceedings conducted outside of India.

The BALCO Judgment yielded several consequential outcomes, including the overturning of the Bhatia International decision. The Court clarified that Part One of the Act, which concerns the court’s authority to grant interim relief and set aside awards, is only applicable to courts within India.

Furthermore, the BALCO decision has a restricted scope, applying mainly to agreements entered into after September 6, 2012. In cases where foreign awards are sought for enforcement in India under Part Two of the Act, they are subject to the jurisdiction of Indian courts.

It is important to note that while the Supreme Court’s decision represents a positive step towards reducing the interference of Indian courts in international proceedings, its impact is confined to agreements formed after September 6, 2012. This underscores the enduring influence of the Bhatia International decision.

CONCLUDING REMARKS

To navigate the challenges posed by Indian courts in international commercial arbitration conducted outside India, parties can adopt a cautious approach by meticulously drafting arbitration agreements. It is crucial to recognize that relying solely on foreign law as the applicable law in the agreement may entail certain risks. Therefore, it is advisable for parties to expressly specify the applicability of Part One of the Act in their agreements. Adopting a nuanced approach, foreign parties may opt to exclude certain provisions, such as Section 11 and Section 34, while retaining others like Section 9 and Section 27, which could prove beneficial during the arbitration process.

The BALCO Judgment, aligning with the principles of the UNCITRAL Model Law, underscores the importance of safeguarding arbitration proceedings from unnecessary judicial intervention, particularly in favor of foreign parties. This represents a departure from prior decisions made by Indian courts, notably the Bhatia International case, which did not unequivocally assert the universality of Part One. Indian courts must acknowledge that their judgments carry more weight than mere literal statements, necessitating a contextual and comprehensive interpretation of each decision. This approach is essential to foster a legal environment that supports and encourages international commercial arbitration.

REFERENCES

1. Indian Kanoon, <https://indiankanoon.org/doc/110552/> accessed 10 August 2024
2. Raghav Sharma, Bhatia International v. Bulk Trading S.A.: Ambushing International Commercial Arbitration Outside India, [2009] 26 [3] J. Int. Arbitr. <https://www.researchgate.net/publication/228121405_Bhatia_International_v_Bulk_Trading_SA_Ambushing_International_Commercial_Arbitration_Outside_India > accessed 11 August 2024
3. Herbert Smith Freehills, Supreme Court of India delivers landmark arbitration decision in Bharat Aluminium, overruling Bhatia International, <https://hsfnotes.com/arbitration/2012/09/06/supreme-court-of-india-delivers-landmark-arbitration-decision-in-bharat-aluminium-overruling-bhatia-trading/ https://hsfnotes.com/arbitration/2012/11/06/supreme-court-of-india-delivers-landmark-arbitration-decision-in-bharat-aluminium-overruling-bhatia-international/ > accessed 9 August 2024
4. Prof J. Martin Hunter and Ranamit Banerjee, BHATIA, BALCO AND BEYOND: ONE STEP FORWARD, TWO STEPS BACK?, Manupatra,<https://docs.manupatra.in/newsline/articles/Upload/FB2433EA-E193-4EAC-BE78-8F2CB06A2086.pdf> accessed 12 August 2024
5. Arunima Jha, Bhatia International v/s. Bulk Trading S.A.[2002] 4 SCC 105, Legal Services India, <https://www.legalserviceindia.com/article/l445-Bhatia-International-Vs.-Bulk-Trading-S.A.html> accessed 12 August 2024

[1] Arbitration and Concilitaion Act, 1996 s 9

[2] Arbitration and Conciliation Act, 1996 s 2[2]

[3] United Nations Commission on International Trade Law

[4] UNCITRAL Model Law art 1[2]

Article 1[2] – “The provisions of this Law, except articles 8, 9, 17 H, 17 I, 17 J, 35, and 36, apply only if the place of arbitration is in the territory of this State.”

[5] UNCITRAL Model Law art 9

Article 9-   Arbitration agreement and interim measures by the court. It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure of protection and for a court to grant such measure.

[6] Arbitration and Conciliation Act, 1996 s 2 [1] [f]

[7] Arbitration and Conciliation Act, 1996 s 2[3]

Section 2[3] – This Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.

[8] Arbitration and Conciliation Act, 1996 s 2[4]

Section 2[4] – This Part except sub-section (1) of section 40, sections 41, and 43 shall apply to every arbitration under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if that other enactment were an arbitration agreement, except in so far as the provisions of this Part are inconsistent with that other enactment or with any rules made thereunder.

[9] Arbitration and Conciliation Act, 1996 s 2[5]

Section 2[5] -Subject to the provisions of sub-section (4), and save in so far as is otherwise provided by any law for the time being in force or in any agreement in force between India and any other country or countries, this Part shall apply to all arbitrations and to all proceedings relating thereto.

[10] Arbitration and Conciliation Act, 1996 s 9

[11] Arbitration and Conciliation Act 1196 s 36

[12] Arbitration and Conciliation Act, 1996 s 48

[13] Arbitration and Conciliation Act, 1996 s 49

[14] Arbitration and Conciliation Act, 1996 s 57

[15] Arbitration and Conciliation Act, 1996 s 58

[16] Arbitration and Conciliation Act, 1996 s 5

Section 5. Extent of judicial intervention—Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.

[17] Marriot International Inc. v. Ansal Hotels Limited AIR 2000 Delhi 337

[18] Keventor Agro Ltd. V. Seagram Co. Ltd. 1198 APO Nos. 490, 499 of 1997 and CS No. 592 of 1997 dated 27-1-1998[Cal]

[19] Arbitration and Conciliation Act, 1996

[20] Arbitration and Conciliation Act, 1996 s 1

Section 1(2) – It extends to the whole of India

Provided that Parts I, III and IV shall extend to the State of Jammu and Kashmir only in so far as they relate to international commercial arbitration or, as the case may be, international commercial conciliation.

[21] Arbitration and Conciliation Act, 1996 s 2[2]

Section 2(2) – This Part shall apply where the place of arbitration is in India.

[22] Arbitration and Conciliation Act, 1996 s 36

Section 36 Enforcement—Where the time for making an application to set aside the arbitral award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the Court.

[23] Bharat Aluminium v. Kaiser Aluminium Technical Services Inc. [2012] 9 SCC 552 [BALCO]