You are on page 1of 16

Journal of International Arbitration 26(3): 357–372, 2009.

© 2009 Kluwer Law International. Printed in The Netherlands.

Bhatia International v. Bulk Trading S.A.: Ambushing


International Commercial Arbitration Outside India?
Bhatia International v. Bulk Trading S.A.: Ambushing International Commercial Arbitration Outside India?

Raghav Sharma*
Journal of International Arbitration

Michael

Moser

Dominique

In Bhatia International v. Bulk Trading S.A., the Indian Supreme Court ruled that the Arbitration and
Journal of InternationalHascher
Arbitration
2009 Volume 26 Issue 3

Conciliation Act, 1996 (“the Act”), applies to international commercial arbitrations held outside India. In its
aftermath, this ruling has been misconstrued and misapplied by the Indian courts to fundamentally alter
the nature of the Act and widen their jurisdiction over such international commercial arbitrations. This article
critically examines the ruling, identifies the law laid down, explains the limits of its application, and offers
positive suggestions for unwary foreign parties to avoid its trap.

I. Introduction
Bhatia International v. Bulk Trading S.A.1 is a ruling of momentous significance as it
empowers the Indian courts to intervene in international commercial arbitrations held
outside India irrespective of the proper law governing the arbitration agreement. The
extent of intervention extends from the grant of interim measures and the appointment
of arbitrators to the vacatur of an award resulting from such arbitrations.
This article provides an in-depth insight into the ruling, identifies the law laid down,
and explains the limits of the applicability of its ratio decidendi. Thereafter, it critically
examines subsequent rulings of the Indian courts which have interpreted and applied this
decision. It argues that the failure on the part of Indian courts to understand the true
import of this decision has mired international commercial arbitrations held outside India
in legal uncertainty as regards the validity and enforceability of awards arising out of them
in India. In this light, it offers practical solutions for circumventing the effect of these rul-
ings to foreign parties desirous of avoiding litigation in Indian courts over matters relating
to such arbitrations.

II. Nature of Dispute


Bhatia International (appellant) and Bulk Trading S.A. (respondent) entered into a
contract with an arbitration clause providing for arbitration as per the rules of the Inter-
national Chamber of Commerce (ICC). A sole arbitrator was appointed by the ICC at
the request of the respondent and the parties agreed for arbitration to be held in Paris.
Thereafter, the respondent filed an application under section 9 of the Act in the District
Court, Indore, for obtaining an order of injunction restraining the appellant from

* Raghav Sharma, B.Sc. LL.B. (Corporate Law Honours), National Law University, Jodhpur (India). The
author may be contacted at <raghavsharma1986@gmail.com>.
1
(2002) 4 S.C.C. 105.
358 journal of international arbitration

transferring its business assets and properties located in India. The appellant opposed the
application by contending that Part I of the Act, which contains section 9, applies only
to arbitrations conducted in India. Dismissing this objection, the lower court admitted
the application. An appeal was made to the Supreme Court to decide whether an Indian
court can provide interim relief under section 9 in cases where an international commer-
cial arbitration is held outside India.

III. Contentions of Parties


The respondent argued that a conjoint reading of the provisions of the Act shows
that Part I applies to arbitrations outside India unless the parties exclude its applicability by
their agreement.2 In opposition, the appellant presented the following set of arguments:
(1) Section 2(2)3 specifically provides that Part I of the Act applies only to arbitra-
tions held inside India. For arbitrations held outside India, Part II of the Act
would apply.4
(2) Article 1(2) of the United Nations Commission On International Trade Law
(UNCITRAL) Model Law on International Commercial Arbitration provides
that Article 9 (which corresponds to section 9 of the Act) can be used by a party
even when the arbitration is not held in the territory of the state. The Act,
which is based on the UNCITRAL Model Law, omits the aforesaid wording.
This implies that the legislative intent was to render Part I inapplicable to arbi-
trations outside India.5
(3) Though section 2(4)6 and (5)7 use the words “every arbitration” and “all arbitra-
tions and to all proceedings relating thereto” respectively, they are qualified by
section 2(2) and would apply only when such arbitrations are held in India.8
(4) Foreign awards are governed by Part II which does not contain any provision
similar to section 9. This deliberate omission signifies that arbitrations outside
India are to be governed by the law of the place of arbitration or the applicable
institutional rules.9
(5) Section 9 provides that the application should be made either before or during
the arbitration or after the making of the award but before its enforcement

2
Id. para. 13, at 115.
3
The text of s. 2(2) reads: “This Part shall apply where the place of arbitration is in India.”
4
Bhatia Int’l, supra note 1, para. 4, at 113.
5
Id. para. 4, at 113.
6
The text of s. 2(4) reads: “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 arbi-
tration 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.”
7
The text of s. 2(5) reads: “Subject to the provisions of sub-section (4), and save in so far as is otherwise pro-
vided 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.”
8
Bhatia Int’l, supra note 1, para. 6, at 113–14.
9
Id. para. 8, at 114.
BHATIA INTERNATIONAL V. BULK TRADING S.A. 359

under section 36. As section 36 deals with enforcement of domestic awards only,
it implies that section 9 was not intended to apply to arbitrations leading to for-
eign awards.10
(6) Section 5 proscribes any judicial intervention in arbitration proceedings except
as provided under the Act. Interim measures by Indian courts would violate this
salutary principle of minimum judicial intervention on which the Act is based.11

IV. Reasoning of the Court


The court accepted the respondent’s contention that Part I applies to international
commercial arbitration held outside India. To support its conclusion, it offered the fol-
lowing strands of reasoning.

A. Lacuna in respect of non-convention countries


Part II of the Act does not apply to awards made in non-Convention countries, that
is, countries which have not signed and ratified the New York Convention, 1958 and the
Geneva Convention, 1927. In the court’s opinion, such a lacuna could not have been
intended by the legislature. Thus, it concluded that a territorial limitation cannot be read
into Part I.12

B. Proviso to section 1(2)


Section 1(2)13 states that the Act extends to the whole of India but puts a proviso that
in relation to the state of Jammu and Kashmir (“J & K”), it applies only in case of inter-
national commercial arbitration. The court reasoned that this proviso does not stipulate
that Part I would apply to J & K only when the international commercial arbitration is
held in J & K, that is, by implication it will apply in cases where international commercial
arbitration is held outside J & K.Thus, it would be anomalous to hold the contrary in the
case of the rest of India.14

C. Inferences from definitions


In the court’s opinion, the definition of “international commercial arbitration” in
section 2(f ) makes no distinction between such arbitrations taking place in India and
those taking place outside India. Further, the definition of “court” does not provide that

10
Id. para. 9.
11
Id. para. 10.
12
Id. para. 16, at 117.
13
The text of s. 1(2) reads: “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.”
14
Bhatia Int’l, supra note 1, para. 17, at 118.
360 journal of international arbitration

Indian courts would not have jurisdiction when international commercial arbitration
takes place outside India.15 Lastly, the legislature would not have defined a “domestic
award” under section 2(7) unless the intention was to cover awards from non-Convention
countries (otherwise such awards would not be domestic awards).16

D. Inferences from sections 8, 28


Section 817 permits a judicial authority to refer the parties to arbitration when an
action in respect of a dispute covered by an arbitration agreement is brought before it.
The court opined that if Part I was intended to apply only to arbitrations inside India, the
legislature would have used the term “court” instead of the term “judicial authority.” The
use of the latter term signifies that the legislature contemplated that in an international
commercial arbitration held outside India, the matter may be taken before a judicial
authority outside India. Thus, the term judicial authority has been used.18 Further, sec-
tion 28 opens with the words “where the place of arbitration is in India.” The court rea-
soned that the use of these words was not necessary unless the Act was applicable to
arbitrations held outside India.19

E. Language of section 2(2)


The court opined that section 2(2) does not specify that Part I is to “only” apply
where the place of arbitration is in India. This implies that it is only an inclusive and
clarificatory provision.20 It explained the significance of this omission in the following
words:
By omitting to provide that Part I will not apply to international commercial arbitrations which
take place outside India the affect would be that Part I would also apply to international commer-
cial arbitrations held out of India. But by not specifically providing that the provisions of Part I
apply to international commercial arbitrations held out of India, the intention of the Legislature
appears to be to ally parties to provide by agreement that Part I or any provision therein will not
apply. Thus in respect of arbitrations which take place outside India even the non-derivable pro-
visions of Part I can be excluded. Such an agreement may be express or implied.21
Further, section 2(4) and (5) are not subject to section 2(2). These sections provide that
the Act is applicable to “every arbitration” and “all arbitrations and proceedings relating
thereto” respectively. The use of words of such wide import cannot be restricted by

15
Id. para. 20, at 119.
16
Id. para. 23, at 120.
17
The text of s. 8(1) reads: “A judicial authority before which an action is brought in a matter, which is the
subject of an arbitration agreement, shall, if a party so applies not later than when submitting his first statement on
the substance of the dispute, refer the parties to arbitration.”
18
Bhatia Int’l, supra note 1, para. 24, at 120.
19
Id. para. 25, at 120–21.
20
Id. para. 27, at 122.
21
Id. para. 21, at 119.
BHATIA INTERNATIONAL V. BULK TRADING S.A. 361

reference to section 2(2) as it would amount to reading in words which are not present
in these sections.22
Judged on the touchstone of logic, the court’s elaborate reasoning seems flimsy. First,
the reliance on the proviso to section 1(2) is misplaced. It is true that the proviso does not
stipulate any territorial limitation for international commercial arbitration in the case of J
& K. However, this cannot be used as a reason to declare that Part I has extraterritorial
application. On a fair reading, the proviso means that whatever is applicable to the rest of
India in respect of international commercial arbitration is also applicable to the state of J
& K. This plain reading cannot be distorted and reversed in logic. Thus, the correct
approach is to determine whether Part I applies to international commercial arbitration
outside India, and then to say whether it has the same effect in case of J & K as well.
Secondly, it is hardly to be expected that a definitional section will discuss the terri-
torial applicability of Part I. When the legislature defines “court,” there is no reason for it
to say that Indian courts will not have jurisdiction in case of international commercial
arbitration held outside India. Similarly, the definition of international commercial arbi-
tration would specify the substance of the term and not its territorial application.
Thirdly, it is preposterous to reason that the legislature used the term “judicial
authority” in section 8 to confer jurisdiction on authorities outside India. Keeping the
fundamental principles of legislative competence in mind, can such a thing ever be done
by the Indian legislature?
Fourthly, it is important to understand the import of section 2(4) and (5), which
does not really conflict with section 2(2), as the court opined. The words “every arbitra-
tion” in section 2(4) have not been used in isolation.The section does not merely say that
“this Part shall apply to every arbitration,” as the court seems to portray it. It was incum-
bent on the court to read the language of the entire section before undertaking the task
of interpretation. On a fair reading, the section applies the Act to all “statutory arbitra-
tions,” which are compulsory arbitrations provided for by certain special laws for the res-
olution of disputes in respect of claims arising under them.23 Such laws are obviously
Indian and the place of arbitration in such cases would be India. The Act applies to “stat-
utory” arbitrations to the extent it is not inconsistent with any special provisions made in
such laws. Similarly, section 2(5) provides that the only exceptions to the applicability of
the Act are statutory arbitrations, provisions made in any other law, or any international
treaty which so specifies. In all other cases of arbitration the Act is applicable. Clearly, it
is a provision dealing with the subject matter of the Act, that is, in what cases the Act will
apply and what are the exceptions thereto in terms of kind of arbitrations. It does not
relate to the territorial application of the Act, which is specified in section 2(2). On a
conjoint reading, they imply that Part I applies to every arbitration and all proceedings
relating thereto where the place of arbitration is in India.

22
Id. para. 22.
23
A total of 21 federal statutes and 33 provincial statutes provide for statutory arbitration, Justice R.S. Bach-
awat’s Law of Arbitration and Conciliation 96–100 (K.K.Venugopa ed., 4th ed. 2005).
362 journal of international arbitration

Lastly, the Act is based on the UNCITRAL Model Law and it makes sense to inter-
pret the former based on the general principles underlying the latter.24 Article 1(2) of the
Model Law provides that only Articles 8, 9, 35, and 36 have an extraterritorial applica-
tion, that is, even a party to an arbitration conducted outside the state can use them. Arti-
cles 35 and 36 correspond to sections 44 and 48 respectively in Part II of the Act and bear
no relevance for the purpose of the present discussion. The Model Law makes an excep-
tion to the territorial application only in case of Articles 8 and 9, as they are non-intrusive
provisions and facilitate resolution of dispute through arbitration. In contrast, the reason-
ing of the court in Bhatia International is to make the whole of Part I applicable to inter-
national commercial arbitrations outside India. Even before the enactment of the Act, the
Indian courts did not possess such wide power of supervision over such arbitrations. How
could the legislature, while professing the objectives of minimizing judicial intervention
in arbitral process25 and aligning the Indian law with progressive developments on the
international plane, widen the jurisdiction of Indian courts to such an extent?
Though the reasoning of the court may be strewn with logical pitfalls, it should be
kept in mind that the decision is not without a silver lining. First, the applicability of Part
I to international commercial arbitrations held outside India may benefit the parties by
allowing them to obtain effective interim measures in respect of property situated in
India. Though the arbitral tribunals have the power to grant interim measures, there is no
provision in the Act which calls for recognition and enforcement of such interim orders
by the Indian courts.26 Thus, the parties can move the Indian courts to seek effective
interim measures.27 Secondly, the arbitral tribunal can seek the assistance of the Indian
courts to obtain evidence in the form of witness testimony, production of documents,
or inspection of property under section 27. Thirdly, in case of arbitrations held in non-
Convention countries, this ruling ensures easy enforceability of such an award as a decree
of court as per section 36. The court was primarily motivated by the desire of avoiding
situations where parties would be left remediless.28

24
See R.M. Investment & Trading Co. Pvt. Ltd. v. Boeing Co., (1994) 4 S.C.C. 541; Sundaram Finance Ltd.
v. NEPC India Ltd., (1999) 2 S.C.C. 479; Malaysian Airlines Systems Bhd. (II) v. STIC Travels (P.) Ltd., 2000 (7)
S.C.A.L.E. 724; Rashtriya Ispat Nigam Ltd. v.Verma Transport Co., (2006) 7 S.C.C. 275; Gas Authority of India Ltd.
v. Keti Construction (I) Ltd., (2007) 5 S.C.C. 38; India Household and Healthcare Ltd. v. LG Household and
Healthcare Ltd., (2007) 5 S.C.C. 510.
25
See s. 5; Konkan Railway Corp. Ltd. v. Mehul Construction Co., A.I.R. 2000 S.C. 2821; Shin-Etsu Chem-
ical Co. Ltd. v. Aksh Optifibre Ltd., A.I.R. 2005 S.C. 3766.
26
The Act is based on the old UNCITRAL Model Law of 1985, which does not contain a provision on the
international recognition and enforcement of the interim orders of arbitral tribunals. An amendment was made in the
Model Law in 2006 to incorporate art. 17H on this aspect, but no corresponding change has been made in the Act.
Art. 17H reads: “An interim measure issued by an arbitral tribunal shall be recognized as binding and, unless other-
wise provided by the arbitral tribunal, enforced upon application to the competent court, irrespective of the country
in which it was issued, subject to the provisions of article 17I which provides grounds for refusing so.”
27
Bhatia Int’l, supra note 1, para. 14, at 116.
28
Id. para. 35, at 124.
BHATIA INTERNATIONAL V. BULK TRADING S.A. 363

V. Law Laid Down in BHATIA INTERNATIONAL


Under Article 141 of the Constitution of India, the law declared by the Supreme
Court is binding on all the lower courts. Further, all the benches of lower or coordinate
strength of the Supreme Court religiously follow the law laid down by a previous
bench.29 The Supreme Court adheres to a principle of unwritten law which leaves the
task of interpretation of a previous bench’s decision to subsequent benches.
The correctness of the ruling in Bhatia International has been doubted only once,30
and the later decisions have accepted its binding authority.31 These decisions deal with
crucial issues like the nature of awards arising out of international commercial arbitration
held outside India (domestic award or foreign award), setting aside such an award under
section 34, and appointment of arbitrators under section 11 in such cases. In respect of
these cases, the author argues that the law declared in Bhatia International has been mis-
construed and misapplied by subsequent courts to widen the jurisdiction of Indian courts
over matters pertaining to international commercial arbitrations held outside India.

VI. Judicial Adventure in VENTURE GLOBAL


In a recent ruling, Venture Global Engineering v. Satyam Computer Services Ltd. (“Venture
Global”),32 a smaller bench of two judges culled the law laid down in Bhatia International.
In Venture Global, the dispute related to the appellant’s commission of an event of default
under a shareholders’ agreement with the respondent in respect of their joint venture in
India. The respondent claimed its right to buy the appellant’s shareholding in the joint
venture, and an award was made in its favour in an international commercial arbitration
held at the London Court of International Arbitration. The respondent sought to enforce
the award through a U.S. District Court in Michigan. In response, the appellant instituted
a suit in India for setting aside the award under section 34 of the Act. The Indian lower
courts held that a foreign award cannot be set aside by the Indian courts under section
34.Thus, the Supreme Court was presented with the question whether section 34 applies
to such awards.
The arguments hinged on the interpretation of paragraph 26 of Bhatia International,
which is quoted in extenso for proper appreciation:
Mr. Sen had also submitted that Part II, which deals with enforcement of foreign awards, does not
contain any provision similar to Section 9 or Section 17. As indicated earlier Mr. Sen had submit-
ted that this indicated the intention of Legislature not to apply Sections 9 and 17 to arbitrations,
like the present, which are taking place in a foreign country. The said Act is one consolidated and
integrated Act. General provisions applicable to all arbitrations will not be repeated in all chapters

29
See Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2005) 2 S.C.C. 673.
30
Centrotrade Minerals & Metals Inc. v. Hindustan Copper Ltd., 2006 (5) S.C.A.L.E. 535, para. 109, at 563,
as per S.B. Sinha, J.
31
INDTEL Technical Services Pvt. Ltd. v. W.S. Atkins PLC, 2008 (11) S.C.A.L.E. 735; Aurohill Global Com-
modities Ltd. v. M.S.T.C. Ltd., A.I.R. 2007 S.C. 2706, para. 12, at 2708; National Agricultural Co-op. Marketing
Federation India Ltd. v. Gains Trading Ltd., (2007) 5 S.C.C. 692, para. 7, at 696.
32
A.I.R. 2008 S.C. 1061.
364 journal of international arbitration

or parts. The general provisions will apply to all chapters or parts unless the statute expressly states
that they are not to apply or where, in respect of a matter, there is a separate provision in a separate
Chapter or Part. Part II deals with enforcement of foreign awards. Thus, Sections 44 in (Chapter
I) and Section 53 (in Chapter II) define foreign awards, as being awards covered by arbitrations
under the New York Convention and the Geneva Convention respectively. Part II then contains
provisions for enforcement of “foreign awards” which necessarily would be different. For that rea-
son special provisions for enforcement of foreign awards are made in Part II. To the extent that
Part II provides a separate definition of an arbitral award and separate provisions for enforcement
of foreign awards, the provisions in Part I dealing with these aspects will not apply to such foreign
awards. It must immediately be clarified that the arbitration not having taken place in India, all or
some of the provisions of Part I may also be excluded by an express or implied agreement of the
parties. But if not so excluded the provisions of Part I will also apply to “foreign awards.” The
opening words of Sections 45 and 54, which are in Part II, read “notwithstanding anything con-
tained in Part I.” Such a non-obstante clause had to be put in because the provisions of Part I
apply to Part II.
The appellant contended that the law declared by the court in that case was only that
Part I applies to international commercial arbitrations outside India, unless expressly or
impliedly excluded by the agreement of parties.33 The respondent argued that in addition
to this principle, the court also laid down that “[t]o the extent that Part II provides a sep-
arate definition of an arbitral award and separate provisions for enforcement of foreign
awards, provisions of Part I dealing with these aspects will not apply to such foreign
awards.”34 As per the respondent, section 48 is a special provision in Part II dealing with
enforcement of foreign awards and thus, it prevails over section 34 in Part I.
The court accepted the appellant’s interpretation that the finding of the court in
Bhatia International is limited to the last sentence in paragraph 26: “it must be immediately
clarified that … the provisions of Part I apply to Part II.” The rest of the paragraph was
brushed aside as being merely the argument of counsel, Mr. Sen, and not the reasoning
of the court. Thus, the court ruled that section 34 was applicable in such cases and the
Indian courts have the power to set aside foreign awards arising out of international com-
mercial arbitration held outside India.
The ruling has fundamentally altered the jurisdiction of Indian courts in respect of
foreign awards. Previously, such awards could only be scrutinized under section 48 at the
enforcement stage. The most significant distinction between sections 34 and 48 is the
wider definition of public policy under the former. While “patent illegality” is a part of
public policy under section 34, it is excluded for the purpose of judicial review under
section 48.35 Thus, such awards have become vulnerable to being set aside on the ground of
violation of Indian public policy and law. More importantly, the setting aside of a foreign
award has an international effect of rendering the award unenforceable in all Convention
countries, while the refusal to enforce has an effect limited to only that country. 36

33
Id. para. 13, at 1067.
34
Id. para. 12.
35
Oil & Natural Gas Co. Ltd. v. Saw Pipes Ltd., A.I.R. 2003 S.C. 2629.
36
Eckhard R. Hellbeck & Carolyn B. Lamm, The Enforcement of Foreign Arbitral Awards Under the New York Con-
vention: Recent Developments, Int’l A.L.R. 137–43 (No. 5, 2002).
BHATIA INTERNATIONAL V. BULK TRADING S.A. 365

However, the ruling proceeds on a misinterpretation of Bhatia International. On a


close reading, paragraph 26 bears out two propositions of law and not one:
(a) Special provisions in Part II, particularly those relating to definition and enforce-
ment of foreign awards, would override general provisions on the same matters
in Part I. All other general provisions of Part I would apply to international
commercial arbitrations held outside India. (Proposition A)
(b) In an international commercial arbitration outside India, parties can exclude the
provisions of Part I by an express or implied agreement. (Proposition B)
Counsel, Mr. Sen, argued that the absence of section 9 in Part II implies that the
provision is inapplicable in case of international commercial arbitration held outside
India. Why would he argue a contrary proposition that the Act is a consolidated one and
general provisions in Part I will not be repeated in Part II? A sensible construction leads
to a firm conclusion that the finding of the court in Bhatia International begins from: “The
said Act is one consolidated and integrated Act.” Secondly, the finding identified in Ven-
ture Global reads: “It must immediately be clarified that the arbitration not having taken
place in India, all or some of the provisions of Part I may also get excluded by an express
or implied agreement of parties.”The sentence uses the word “also” which shows that the
exclusion of Part I by the parties is in addition to the finding rendered above by the
court. Thirdly, in Bhatia International, the court specifically declared that section 3637
applies to a domestic award.38 As apparent from its text, section 36 is inextricably linked
to section 34. Thus, if section 36 applies to domestic awards, section 34 cannot have a
wider application. The ruling in Venture Global ignores this part of the ruling of Bhatia
International.
It may be argued in support of Venture Global that the ruling in Bhatia International
itself offers a conclusion in paragraph 32:
To conclude, we hold that the provisions of Part I would apply to all arbitrations and to all pro-
ceedings relating thereto. Where such arbitration is held in India the provisions of Part I would
compulsory apply and parties are free to deviate only to the extent permitted by the derogable
provisions of Part I. In cases of international commercial arbitrations held out of India provisions
of Part I would apply unless the parties by agreement, express or implied, exclude all or any of its
provisions. In that case the laws or rules chosen by the parties would prevail. Any provision, in
Part I, which is contrary to or excluded by that law or rules will not apply.
Read in isolation, this paragraph does suggest that the court’s finding is limited to
Proposition B. Its importance stems from the fact that it offers a “conclusion” of the rul-
ing rendered by the court. However, it is noteworthy that the absence of reiteration by
the court of Proposition A in this concluding paragraph has an obvious explanation.
Proposition A embodies a general proposition of law which does not need reiteration, or

37
The text of s. 36 reads: “Where the time for making an application to set aside the arbitral award under sec-
tion 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.”
38
Bhatia Int’l, supra note 1, para. 28, at 122.
366 journal of international arbitration

even an express declaration by the court, for its truth to be established (generalibus specialia
derogant).39
Lastly, the interpretation adopted in Venture Global leads to stranger conclusions. The
finding in Venture Global reads:
It must immediately be clarified that the arbitration not having taken place in India, all or some of
the provisions of Part I may also get excluded by an express or implied agreement of parties. But
if not so excluded the provisions of Part I will also apply to “foreign awards.” The opening words
of Sections 45 and 54, which are in Part II, read “notwithstanding anything contained in Part I.”
Such a non-obstante clause had to be put in because the provisions of Part I apply to Part II.
(emphasis added)
The statement emphasized above is unqualified. In paragraph 32 as well, it states that
“provisions of Part I would apply to all arbitrations and to all proceedings relating
thereto.” A foreign award results when the arbitration is held in a country which has
signed and ratified either the New York Convention or the Geneva Convention. Such an
arbitration may be an international commercial arbitration or arbitration purely between
foreign parties. By adopting only this part as finding of the court, the ruling in Venture
Global has opened a Pandora’s Box. For example, let us take a situation where two foreign
companies, A Ltd. and B Ltd., enter into a joint venture agreement and incorporate a
joint venture company in India. They provide an arbitration clause which is to be gov-
erned by a foreign law, with the arbitration to be conducted outside India. An award
resulting thereby would be a foreign award and if a party applies for court intervention in
India, it seems likely that Bhatia International would come to its aid after Venture Global.
The other party would be unable to avoid the unforeseen risk of litigation in Indian
courts. Thus, it is necessary to read the text of Bhatia International in a holistic manner
without ignoring the context.
The interpretation of Bhatia International suggested by the author is accepted by a
series of High Court decisions. In Bharat Aluminium Co. Ltd. v. Kaiser Aluminium Technical
Services Inc., the agreement between the parties was governed by Indian law while the
proper law of arbitration agreement was specified as English law. The awards made in an
arbitration held in London came to be challenged under section 34. The court held that
paragraph 26 of Bhatia International laid down two propositions. It refused to admit the
application on the ground that section 48(1)(e) is a special provision in Part II which
excludes the applicability of section 34. Thus, only English courts were competent to set
aside the foreign award.40 A similar interpretation was made in Goldcrest Exports v. Swissoen
N.V.,41 holding that sections 48 and 49 form a special code for foreign awards. The
court specifically noted that a misreading of Bhatia International to come to a contrary
conclusion would alter the entire scheme of the Act. It would lead to absurd results

39
If a special provision is made on a certain matter, that matter is excluded from the general provision. See G.P.
Singh, Principle of Statutory Interpretation 133 (9th ed. 2005).
40
Vikrant Tyre Ltd. v. Techno Export Foreign Trade Co. Ltd., I.L.R. 2005 (Kar.) 4738.
41
2005 (3) A.R.B.L.R. 58 (Bom.).
BHATIA INTERNATIONAL V. BULK TRADING S.A. 367

whereby one party can challenge a foreign award twice, under section 34 as well as
under section 48.42

VII. Award Outside India: Foreign or Domestic?


Under the Act, domestic awards are governed by Part I and may be set aside under
section 34, while foreign awards can only be scrutinized for enforcement under section
48 (subject to the exception declared in Venture Global). The ruling in Bhatia International
has been misconstrued and misapplied to obliterate this distinction in the case of awards
resulting from international commercial arbitration held outside India. In Hindustan Cop-
per Ltd. v. Centrotrade Metals and Minerals Inc.,43 the award was made in an international
commercial arbitration held at London. The proper law of the arbitration agreement was
Indian law. In a proceeding brought for the enforcement of the award under section 48,
the Calcutta High Court held that it could not be enforced as it was not a foreign award.
The court reasoned that an award from an arbitration agreement governed by Indian law
would be a domestic award as held in National Thermal Power Corp. v. Singer Co.44 How-
ever, it went on to rely on Bhatia International for its conclusion. Section 2(7) specifies that
an award made under Part I would be regarded as a “domestic award.” Since Bhatia Inter-
national makes Part I applicable to such arbitrations, it held that the award would be a
domestic award as per section 2(7). In similar circumstances, the Gujarat High Court
came to the same conclusion applying the ratio of Bhatia International.45
The aforesaid decision of the Calcutta High Court was overruled by the Supreme
Court in Centrotrade Minerals and Metals Inc. v. Hindustan Copper Ltd.46 However, the
Supreme Court did not consider that the judgment of Bhatia International came to the
contrary conclusion. The court ruled that such an award is a foreign award, as territori-
ality is the only criteria under section 44.47 Further, the decision has itself been referred
to a larger bench for reconsideration as the judges disagreed on the permissibility of two-
tier arbitration under the Act.
It is significant to note that the reasoning adopted by these two High Court judg-
ments is in accordance with the ruling in Venture Global. Like the latter, they completely
ignore Proposition A. A proper reading of Bhatia International makes it clear that the def-
inition of award is a special provision in Part II which overrides section 2(7) in Part I.
However, until Venture Global is not corrected, awards made outside India and governed
by foreign laws would be domestic awards and deprived of the advantages under the New
York Convention. It must be admitted that adoption of such interpretations would alter

42
Inventa Fischer G.m.b.H. & Co. v. Polygenta Technologies Ltd., 2005 (2) A.R.B.L.R. 125 (Bom.); Force
Shipping Ltd. v. Ashapura Minechem Ltd., 2003 (3) A.R.B.L.R. 32 (Bom.); J.K. Industries Ltd. v. D.S. Stratagem
Trade A.G., OMP No. 484/2004, decided on December 4, 2007 by Delhi High Court.
43
A.I.R. 2005 Cal. 133.
44
A.I.R. 1993 S.C. 998.
45
Nirma v. Lurgi Energie und Entsorgung G.m.b.H. & Ors., A.I.R. 2003 Guj. 145.
46
2006 (5) S.C.A.L.E. 535.
47
Id. para. 37, at 551 and para. 159, at 574.
368 journal of international arbitration

the Act beyond comprehension. Indian courts would have whatever jurisdiction they
wanted over awards made in foreign territories. Parliament could not have intended such
preposterous results.

VIII. Misapplication of Proposition B


The author is quite sceptical over the issue of whether subsequent benches of the
Supreme Court have made a single serious effort to appreciate the import of Bhatia Inter-
national.There is no disagreement that parties can exclude the applicability of Part I by an
express or implied agreement to that effect. However, one is at a loss to understand the
meaning of the expression “implied agreement.” Is the designation of a foreign law as the
proper law of the arbitration agreement sufficient to exclude Part I? If not, what is
required beyond such a designation?
In Bhatia International, it was argued that the agreement of the parties to arbitrate as
per the ICC Rules itself meant that section 9 was excluded by necessary implication.48
The court rejected the argument by holding that Article 23 of the ICC Rules allowed
parties to obtain interim orders from competent judicial authorities. Thus, section 9 was
not excluded thereby.49 The ruling itself indicates that mere designation of foreign law or
special arbitral rules is not sufficient to exclude Part I. The real test is whether any provi-
sion in Part I is contrary to or is excluded by the rules or law designated by the parties.
Consequentially, this requires the court to examine the law or rules designated by the
parties and confirm whether the provision of Part I sought to be invoked is contrary to
or excluded by that law or rules.
It is surprising to note that even this simple test has been ignored by the subsequent
judgments of the Supreme Court. The ruling in Indtel Technical Services Pvt. Ltd. v. W.S.
Atkins Rail Ltd.50 is illustrative in this regard. The case involved an exclusive collaboration
agreement between the applicant and the respondent for participating in the tender proc-
ess of Indian Railways Crashworthiness Project. As per the agreement, the proper law was
designated as the law of England and Wales. The applicant alleged several breaches of the
collaboration agreement by the respondent, which were denied by the latter. After failure
of negotiation and mediation, the applicant filed an application before the Chief Justice
of India (C.J.I.) under section 11(9) for the appointment of a sole arbitrator.51 The appli-
cant relied on Bhatia International to urge that since Part I would apply to international
arbitrations irrespective of their seat, the C.J.I. had the requisite jurisdiction. The
respondent argued that the proper law of the arbitration agreement, when not specified
by the parties, is the same as the proper law of the main contract, as per the ruling in

48
Bhatia Int’l, supra note 1, para. 33, at 123.
49
Id. paras. 33, 34, at 123–24.
50
2008 (11) S.C.A.L.E. 735.
51
Under s. 11, the Chief Justice of the Supreme Court (Chief Justice of India (C.J.I.)) has the power to appoint
an arbitrator on request of one of the parties in an international commercial arbitration where the parties have failed
to agree on the appointment of an arbitrator or an arbitral panel. In domestic arbitrations, this power is exercised by
the Chief Justice of the appropriate High Court.
BHATIA INTERNATIONAL V. BULK TRADING S.A. 369

National Thermal Power Corp. v. Singer Co.52 Thus, the designation of a foreign law would
necessarily imply that the arbitral proceedings were intended to be subject to the juris-
diction of the courts of England and Wales and this would constitute an agreement to the
contrary as declared in Bhatia International.53
The court accepted that the proper law of the arbitration agreement was the law of
England and Wales.54 However, the nominee of the C.J.I. assumed jurisdiction to appoint
an arbitrator on the following grounds:55
What, however, distinguishes the various decisions and views of the authorities in this case is the
fact that in the Bhatia International case … this court laid down the proposition that notwithstand-
ing the provisions of Section 2(2) of the Arbitration and Conciliation Act, 1996, indicating that
Part I of the said Act would apply where the place of arbitration is in India, even in respect of
International Commercial agreements, which are to be governed by laws of another country, the
parties would be entitled to invoke the provisions of Part I of the aforesaid Act and consequently
the application made under Section 11 thereof would be maintainable.
Thereafter, the nominee of the C.J.I. applied Proposition B of Bhatia International and
held that the provisions of Part I were not excluded expressly or by implication in the
present case. Clearly, this interpretation of Bhatia International is patently erroneous. The
ruling never declared that Part I would apply to international commercial agreements
which are to be governed by the laws of another country. Instead, the applicability of
Bhatia International depends upon the seat of arbitration. In this case, the seat of arbitration
was not specified in the agreement. Thus, as per section 20, it had to be determined by
the arbitral tribunal. How can the law of Bhatia International be applied on the conjecture
that the seat would be outside India? Secondly, even if we assume that Bhatia International
is applicable, the C.J.I.’s nominee misapplied the test of Proposition B. The laws of
England and Wales were not discussed to check whether they are contrary to or exclude
the application under section 11 of the Act. It is important to note that section 18 of the
Arbitration Act 1996 (U.K.), permits a party to make an application for appointment of
arbitrators to the courts in the United Kingdom. The nominee was required to deter-
mine whether section 18 runs contrary to or would exclude section 11. The casual
approach adopted in this case is a clear deviation from Bhatia International.
In Aurohill Global Commodities Ltd. v. M.S.T.C. Ltd.,56 the arbitration clause provided
for arbitration in London, in accordance with the rules of arbitration of Great Britain.
Further, the parties conferred exclusive jurisdiction on competent British courts to
decide all matters, disputes, and differences relating to the contract, including arbitration
proceedings instituted or to be instituted. The C.J.I.’s nominee applied Bhatia International
and assumed jurisdiction under section 11 to appoint an arbitrator. In this case as well, no
test was applied to check whether the laws of Great Britain exclude the applicability of
section 11.
52
A.I.R. 1993 S.C. 998.
53
Indtel Technical Services Pvt. Ltd., supra note 50, para. 22, at 742.
54
Id. para. 24, at 742.
55
Id.
56
A.I.R. 2007 S.C. 2706.
370 journal of international arbitration

The author considers it apt to make one more observation regarding the nature of
applications filed in the aforesaid cases. In Bhatia International, one of the arguments raised
by counsel for the appellant was that the construction adopted by the court would lead
to increased court interference in arbitral proceedings, which is proscribed by section 5
of the Act. The court rejected this argument by ruling that: “Section 9 does not permit
any or all applications. It only permits applications for interim measures mentioned in
clauses (i) and (ii) thereof. Thus there cannot be applications under Section 9 for stay of
arbitral proceedings or to challenge the existence or validity of arbitration agreements or
the jurisdiction of the arbitral tribunal. All such challenges would have to be made before
the arbitral tribunal under the said Act.” In Deccan Asian Infrastructure (Mauritius) Inc. v.
BPL Communications Ltd.,57 while dealing with an application for stay of arbitration pro-
ceedings conducted in London, the court held that these observations made in Bhatia
International cannot be treated as obiter dictum58 and refused the application.
A fair inference is that the court in Bhatia International was not inclined to permit
application of provisions which lead to court interference in arbitral proceedings. It was
satisfied that the questions of existence or validity of arbitration agreements were not
being impinged upon by the interpretation adopted by it and thus, the object of section
5 was intact. However, these later decisions have permitted applicability of section 11 to
international commercial arbitration held outside India. It has been declared by a seven-
judge bench in SBP & Co. v. Patel Engineering Ltd.59 that, on an application under section
11, it is mandatory for the C.J.I. and his nominee to decide the questions of their juris-
diction, which include the existence or validity of the arbitration agreement. Decisions
made at this stage are binding on the arbitral tribunal. This removes one of the bases of
the reasoning adopted in Bhatia International. The author thinks it is high time for the
Supreme Court to reconsider these issues in its future judgments.
At the other end of the spectrum, the ruling in Hardly Oil & Gas Ltd. v. Hindustan
Oil Exploration Co. Ltd.60 interprets Proposition B in a different way. In this case, the sub-
stantive law governing the agreement between the parties was Indian law. However, the
proper law of the arbitration agreement was English law and the place of arbitration was
specified as London. The appellant filed for interim measures under section 9. The court
refused to intervene, relying on Proposition B. It ruled that if the parties had agreed to
be governed by any law other than Indian law, the same would prevail. The designation
of English law meant that the same would apply in case of any dispute regarding arbitra-
tion. Thus, mere designation of foreign law was held sufficient to exclude the applicabil-
ity of section 9. It was further held that the parties would not be without remedy as the
English courts could pass appropriate orders. The inexecutability of such orders in India
was considered to be of no consequence. It is important to note that the arbitration in
this case was to be held as per the London Court of International Arbitration (LCIA)

57
2005 (2) A.R.B.L.R. 450 (Kar.).
58
Noy Vallesina Engineering S.p.A. v. Jindal Drugs Ltd., 2006 (3) A.R.B.L.R. 510 (Bom.).
59
A.I.R. 2006 S.C. 450.
60
(2006) 1 G.L.R. 658.
BHATIA INTERNATIONAL V. BULK TRADING S.A. 371

Rules. Rule 25.3 of the LCIA permits parties to obtain interim measures from compe-
tent state courts. This provision is similar to Rule 9 of the ICC Rules, which was exam-
ined in Bhatia International. Clearly, the conclusion could not have been different if the
proper test had been applied.
A second case in point is Frontier Drilling A.S. v. Jagson International Ltd.,61 where an
application for interim orders under section 9 was under consideration. The proper law
of the arbitration agreement was English law and the arbitral proceedings were to be con-
ducted in London. The Bombay High Court regarded this as sufficient to prima facie
exclude the maintainability of the application. However, the court raised the question of
whether it could still consider the application on account of supervening events. In this
case, the respondent had moved the Delhi High Court for declaration of nullity of the
arbitration clause and an order was passed by that court restraining the petitioners from
taking any action in pursuance of the arbitration agreement. The court opined that the
order restrained the petitioners from obtaining any relief from the English courts. Thus,
it held that even though in a normal case the court had no jurisdiction, the subsequent
events required it to entertain the application on considerations of justice.
Amidst the aforesaid incorrect applications, the case of National Aluminium Co. v.
Gerald Metals62 applies the test properly. On a proper reading of Bhatia International, the
court held that mere designation of foreign law as the proper law of the arbitration agree-
ment was not sufficient to impliedly exclude Part I. It accepted the real test indicated
supra.
The problem of increasingly absurd interpretations of Bhatia International is illustrated
by the case of Dr. Reddy’s Laboratories Ltd. v. Bombay Trading Co. Pvt. Ltd.63 In this case, the
place of arbitration was Bombay or any other agreed place within India. Counsel argued
that even the Chief Justice of a High Court can make the appointment of an arbitrator
in case of an international commercial arbitration, as Part I equally applies to interna-
tional and domestic arbitrations after Bhatia International. The court rejected this prepos-
terous argument, holding that section 11(9) only empowers the Chief Justice of the
Supreme Court to make such an appointment. Further, it held that Bhatia International
dealt with the applicability of section 9 and not with the question of who is the appoint-
ing authority under section 11.

IX. Conclusion
In the case of international commercial arbitration that is to be held outside India,
foreign parties can avoid unforeseen interference by the Indian courts through a proper
arbitration agreement. It would be risky to rely on the mere fact that a foreign law has
been designated as the proper law of the arbitration agreement. Hence, parties should
exclude Part I of the Act by an express stipulation. However, it is not prudent to exclude
61
2003 (3) A.R.B.L.R. 548 (Bom.).
62
2004 (2) A.R.B.L.R. 382 (A.P.).
63
2005 (1) A.R.B.L.R. 82 (A.P.).
372 journal of international arbitration

the whole of Part I. The author suggests that foreign parties should ensure that intrusive
provisions like sections 11 and 34 should be expressly excluded, but non-intrusive provi-
sions such as sections 9 and 27, which can be beneficial to the parties in arbitration pro-
ceedings, should not be excluded.
In conclusion, the author offers a few words of wisdom for the Indian courts which
are blindly applying a few sentences from Bhatia International. The UNCITRAL Model
Law favours an approach of limiting as well as clearly defining the involvement of
national courts in international commercial arbitration.64 It spells out the need to protect
the arbitral process from unpredictable or disruptive court interference, particularly for
the benefit of foreign parties.65 The rulings of Indian courts are at odds with these reali-
ties. Bhatia International did not hold that Part I applies to everything in every possible
way. The Indian courts need to understand that the ruling says something beyond a single
sentence, and as with every judgment, a sensible reading of it has to be contextual.

64
Text of Model Law (amended in 2006), Explanatory Note para. 15, at 27 (2008), available at
<www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf>.
65
Id. para. 17.

You might also like