Bhatia to BALCO – The Dilemma of Curial Law In International Commercial Arbitration

Introduction

The concept of "seat" is of vital importance in International Commercial Arbitration. Seat of arbitration has an impact on cost and convenience of the parties which can influence the parties. Seat of arbitration is extremely relevant while deciding the curial law. At the outset, it is important to clear the laws involved in contracts which contain an arbitration clause. There are primarily three systems of laws which are involved viz, i) law regarding the substantive contract, ii) law regarding arbitration agreement and its enforcement and iii) law regarding the conduct of the arbitration.[1] The curial law is related with the conduct of arbitration, which is enshrined in Part I of the Arbitration and Conciliation Act, 1996 [Hereinafter “the act”].

Section 2(2) of the Act states that “this part shall apply where the place of arbitration is in India”. Before the year 2002, in absence of any explicit or implicit agreement as to the curial law, it was deemed that the curial law would be same as the law governing the contract (the substantive law).[2]


Bhatia: the beginning of dilemma

However, in Bhatia International v. Bulk Trading (2002)[3], the Supreme Court compared the said provision with Article 1(2) of UNCITRAL Model Law[4] and held that absence of the word ‘only’ in the provision indicates the intention of the legislature to apply provision of Part I even to arbitrations which take place outside India unless the parties have expressly agreed to exclude it. This interpretation was reiterated by the SC in Venture Global Engineering v. Satyam Computer Services Ltd.[5]

The root cause of this dilemma lies in fact that the act uses the word place of arbitration instead of seat. There is catena cases under Indian jurisprudence which differentiate the seat with plac

e of arbitration. In Dozco case (2011)[6], it was held that in absence of an agreement, the curial law would be of the seat of arbitration i.e. the place at which arbitration is to be conducted on the ground that it is the most closely connected country with the proceedings. The court went on to observe that place of arbitration can be different but there can be only one seat, such places are called venues.


BALCO: south to Bhatia

The position of law was finally settled in Bharat Aluminium Co. v. Kaiser Aluminium Tehcnical Services (BALCO case, 2012)[7]. The ratio of BALCO was a one eighty degree turn around from Bhatia International, it accepted the argument that the act has adopted the territoriality principle of UNCITRAL model and hence restricted its application to arbitrations which are conducted inside the territory of India. It also clears the position about seat and venue by observing that a arbitration seated in India, may by mutual agreement hold proceedings outside the territory of India but the seat will remain the same and hence the curial law. It was also held that if in an agreement, the parties choose a foreign seat as seat of arbitration and choose the 1996 act as the curial law, the foreign seat would be read as venue. This position is not altered unless there is a conflict between the curial law of the foreign seat (or the venue for that matter) and the act. If such a conflict exists the act would remain inapplicable to the extent it is inconsistent with the curial law of the seat irrespective of the fact that the parties choose the 1996 act as the curial law.

However, the position prior to 2002 is reiterated by the SC in a few cases, prime example being Enercon case (2014)[8] the close connection test for choosing the curial law was applied. The test lays down that if the parties fail to choose the curial law, the applicable curial law would be of the country where arbitration is being held on the ground that it is most closely connected with the proceedings. This test brings subjectivity to the whole issues and hence brings confusion. The plain and unambiguous test provided of deducing the curial law from the substantive law is a better approach as it leaves no ground for confusion and hence reduces unnecessary litigation with respect to these matters.


Concluding Remarks

The present situation deviates a little from BALCO as the Law Commission of India in its 246th report recommended to amend Section 2(2) of the act in order to apply Section 9, 27, 37(1)(a) and 37(3) to arbitration which take place outside India.[9] The basis of such recommendation was if the assets of the parties are in India and the arbitration takes place outside India, inapplicability of such section would make interim relief impossible.[10]Consequently the Parliament brought the amendment in 2015 to incorporate the suggested changes.[11] Challenges will lie with agreements where parties explicitly exclude application of the amended section, it is yet to be seen whether the amendment provides for betterment or floodgates of litigation.


Footnotes:

[1] Sumitomo Heavy Industries v. ONGC Ltd, (1998) 1 SCC 305

[2] National Thermal Power Corporation v. Singer Company, (1992) 3 SCC 551

[3] Bhatia International v. Bulk Trading, (2002) 4 SCC 105

[4] Article 1(2) states – “The provisions of this Law, except articles 8, 9, 35 and 36, apply only if the place of arbitration is in the territory of this State.

[5] Venture Global Engineering v. Satyam Computer Services Ltd., (2008) 4 SCC 190

[6] Dozco India Pvt. Ltd. v. Doosan Infracore Co. Ltd., (2011) 6 SCC 179

[7] Bharat Aluminium Co. v. Kaiser Aluminium Tehcnical Services, (2012) 9 SCC 552

[8] Enercon (India) Ltd. v. Enercon GMBH, (2014) 5 SCC 1

[9] Law Commission of India, Report No. 246, available at : http://lawcommissionofindia.nic.in/reports/Report246.pdf.

[10] Ibid.

[11]Arbitration and Conciliation Act, 1996 (Amendment), 2015, available at : https://upload.indiacode.nic.in/showfileactid=AC_CEN_3_46_00004_199626_1517807323919&type=statute&filename=arbi%20amend%202015.pdf.


Submitted by,

Prakhar Raghuvanshi,

Year II, B.A.LL.B. (Hons.),

National Law University, Jodhpur.


(Image used for representational purpose only. Image Courtesy: https://blog.ipleaders.in/seat-of-arbitration/ )

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