Post-Bhatia Developments in Indian Arbitration Law: Part I

(This post is contributed by Mr. Sharad Bansal)

Some judicial pronouncements play a pivotal role, defining the scope and the manner in which a particular legislation is to be held applicable. The decision of the Supreme Court in Bhatia International v. Bulk Trading S.A. : (2002) 4 SCC 105 : is one of them. The Court in Bhatia held that Part I of the Arbitration and Conciliation Act [“the Act”] is applicable to international commercial arbitration [“ICA”] even where the seat of arbitration is outside India, unless there is express or implied exclusion by parties. This post looks into the manner in which Bhatia has subsequently been applied by the Supreme Court and the relevance of the law of presumption of proper law of arbitration from the proper law of contract laid down in NTPC v. Singer : (1992) 3 SCC 551 : in light of the ruling in Bhatia.

The Supreme Court in INDTEL Technical Services v. W.S. Atkins PLC : (2008) 10 SCC 308 was required to look into the ruling in NTPC vis-a-vis that in Bhatia. The issue was the appointment of an arbitrator in an arbitration application filed under section 11(9) of the Act. The parties in that case had chosen the proper law of contract as the law of England and Wales but the proper law of arbitration was not specified. The respondent relied on NTPC to argue that in the absence of the proper law of arbitration being chosen by the parties, it must be presumed from the proper law of contract. The Court rejected this contention on the ground that it was bound by the decision in Bhatia which had clearly held that in the absence of express or implied exclusion by parties, Part I of the Act would be applicable to ICA outside India. It is significant to note the Court’s observation acknowledging the universality of the NTPC rule when it said: “It is no doubt true that it is fairly well-settled that when an arbitration agreement is silent as to the law and procedure to be followed in implementing the arbitration agreement, the law governing the said agreement would ordinarily be the same as the law governing the contract itself”. Hence, the determining factor that led the Court to hold that Part I would apply was the fact that it was bound by the decision in Bhatia. With due respect, it is submitted the Court in INDTEL ought to have relied on the NTPC rule to hold that there was implied exclusion of Part I. This is because parties in Bhatia had not chosen the proper law of contract whereas this was chosen by the parties in INDTEL. Hence, NTPC and Bhatia could have been reconciled to hold thus: Part I of the Act would continue to apply to international commercial arbitrations held outside India. However, where the parties have chosen the proper law of contract, the proper law of arbitration would be inferred from the same and it would amount to an implied exclusion of Part I.

A similar issue arose before the Supreme Court (Sirpurkar J.) in Citation Infowares Ltd. v. Equinox Corporation : (2009) 7 SCC 220. In an application filed under section 11(5) of the Act for the appointment of an arbitrator, the Court had to decide upon the applicability of Part I of the Act to an ICA where the parties had chosen only the proper law of contract. Relying on the decisions of the Court in Bhatia and INDTEL, the Court held that Part I of the Act would apply and thus, the application under section 11(5) would be maintainable. However, it observed that where the proper law of contract has been chosen by the parties and the seat of arbitration has been specified, the proper law of arbitration would be the same as the proper law of contract and Part I of the Act would be impliedly excluded. Since the seat was not chosen by the parties, the Court went on to hold that Part I would continue to apply. Hence, the observation to this extent would be obiter dictum and would have a significant effect in deciding the instances in which Part I of the Act stands impliedly excluded.

Two particularly noteworthy decisions of the Supreme Court following Bhatia are Shreejee Traco (I) Pvt. Ltd. V. Paperline International Inc. : (2003) 9 SCC 79 : and Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. : AIR 2005 SC 3766. In Shreejee Traco, while deciding an arbitration application under section 11(4) of the Act, the Court held that when section 2(2) says that Part I would apply where the place of arbitration is in India, it implies that Part I would not apply where the place of arbitration is not in India. However, this decision of the Court is per incuriam because although it came after Bhatia, it did not consider the pronouncement in Bhatia which expressly rejected this interpretation. Further, in Shin-Etsu, while deciding upon the standard of scrutiny in an application under section 45 of the Act, the Court held that the proper law of arbitration is presumed from the proper law of contract. It relied on the NTPC rule for the same. However, the Court did not take into account the decision in Bhatia or the concept of implied exclusion. Hence, this ruling of the Court too, is per incuriam.

In a recent decision – Dozco India v. Doosan : 2010 (9) UJ 4521 (SC) – the question of exclusion of Part I of the Act again came up before the Supreme Court. An application for appointment of an arbitrator under section 11(6) of the Arbitration Act was filed and the respondent contested the maintainability of the application on the ground that the arbitration agreement between the parties “expressly excluded” Part I of the Act. The parties in the Arbitration agreement had specified the law governing the arbitration agreement, the seat of arbitration and the rules that would govern the arbitration proceedings. The petitioner relied on the rulings in INDTEL and Citation to argue in favour of maintainability of the application. However, the Court (Sirpurkar J.) distinguished both these cases on the ground that parties in this case had specified the seat of arbitration and the law governing the arbitration procedure in the arbitration agreement. The Court opined that this amounts to an “express exclusion” of Part I the Act. Mr. V. Niranjan, expressing his disagreement with the Court on this particular aspect of the judgment, has argued that courts in future may differ on whether this constitutes express exclusion of Part I. While in agreement with Mr. Niranjan’s criticism, it is submitted that Doosan is a positive step towards broadening the hitherto narrow arena of instances where Part I of the Act is excluded, whether impliedly or expressly.