Papers published on BALCO

Ironically, the judgment of the Constitution Bench in BALCO may
turn out to be as significant for domestic arbitration as it is for finally
shattering the misconception that the omission of the word “only” in section
2(2) of the Arbitration and Conciliation Act 1996 was designed to expand the
jurisdiction of the Indian courts in relation to foreign arbitration. Some of
these questions have been explored in three articles recently published in the
Supreme Court Cases journal, of which the following is a brief summary.

Shantanu and I wrote a paper titled “Three Errors
” ((2012) 9 SCC J-26) in which we argued that while the
Court was entirely right in overruling Bhatia International on
the applicability of Part I of the Act to foreign arbitrations, it nevertheless
made-as the title of the article suggests-three significant errors on other
points. To briefly summarise:

       (1)   The conclusion in paragraph 96
that section 2(1)(e) of the Act refers to two courts, the
court of the seat and the court of the cause of action is, with respect,
clearly incorrect. Section 2(1)(e) confers jurisdiction on the court which
would have had jurisdiction to entertain a suit forming the subject matter of
the arbitration. As the Delhi High Court rightly pointed out in GE Countrywide, this
means that a court in which an application under the 1996 Act is instituted
must imagine that the arbitration clause does not exist and ascertain whether
it would have had jurisdiction to entertain a suit relating to that dispute.
So, if two parties from Mumbai and Delhi respectively choose Calcutta as the seat
of arbitration, the Calcutta High Court would not have jurisdiction to
entertain an application under the 1996 Act unless it was shown that some part
of the cause of action arose in Calcutta. Unfortunately, the Supreme Court
assumed in paragraph 96 of its judgment that section 2(1)(e) is a reference to two courts
(the court of the seat and the court of the cause of action)
and has therefore overruled by implication, a consistent view that has
prevailed for over seventy years.

   (2) The Court, with respect, misunderstood the
decision of the House of Lords in the Siskina and
consequently proceeded on the erroneous premise that an action instituted solely to
obtain interim relief in aid of foreign arbitration is alien to the common law.
Had the Court appreciated that the common law does recognise such an action, it
would then have had the opportunity to consider whether such an action is
recognised by Indian law. We suggested that such an inquiry would likely have
led the Court to conclude that such an action may be brought under section 151
CPC, addressing one of the major concerns raised by practitioners about the
consequences of BALCO.

   (3)   There was no case whatsoever for
overruling Bhatia International prospectively, considering
that the dispute related to a point of statutory construction, and in
particular a jurisdictional statute. As the House of Lords emphasised in Re Spectrum,
the power should be exercised only in wholly exceptional cases, and with
particular caution if the point the court is asked to overrule prospectively is
one of statutory construction rather than the common law (Lord Scott of Foscote
in his dissenting speech thought the power should never be
exercised in relation to statutory construction).

A response to this article titled “Not Three
but Half an Error in  BALCO
” ((2013) 1 SCC J-81) was
published by Mr SK Dholakia, Senior Advocate and Ms Aarthi Rajan, Advocate  in
which they sought to support the judgment of the Court. In summary, their
contention on section 2(1)(e) was that the “overarching seat theory” was
the basis of which BALCO was decided, and led to the conclusion that the
territorial court for domestic arbitration is solely the court
of the seat, regardless of where the cause of action arises. According to them,
in the Mumbai/Calcutta example above, the Calcutta High Court would have exclusive jurisdiction
by virtue of being the supervisory court, that is, the court
exercising territorial jurisdiction over the chosen seat of arbitration. They
make the powerful argument that if two foreign parties choose Chennai as the
seat of arbitration, and the cause of action arises entirely outside India,
neither the Madras High Court nor any other Indian court would have
jurisdiction under section 2(1)(e) even though Part I of the
Act applies (by virtue of section 2(2)), which they contend is an anomaly that
impedes the growth of arbitration where India is a neutral forum. In relation
to our argument on the maintainability of an action for interim relief in aid
of foreign arbitrations, they relied on the well-known judgments of the English
courts in Castanho and Siskina, and the recent
judgment of the High Court in Royal Westminster,
to suggest that there can be no “suit” purely for interim relief. They
also suggest that section 151 CPC cannot be invoked for this purpose because
Order 39 Rule 1 is exhaustive. In relation to prospective overruling, they
agree that using arbitration agreements (as opposed to pending
petitions or applications, for instance) entered into after 06.09.2012 as the
yardstick was erroneous, but support the use of prospective overruling in
principle, relying on Patel Engineering.

have now published a response to this article titled “Three Errors Revisited
((2013) 4 SCC J-1), explaining our original argument and responding to
some of the points raised by Mr Dholakia and Ms Rajan. We point out that the
jurisdiction of the Indian courts to supervise arbitration is statutory, not
inherent, supporting the view taken by the Delhi High Court in GE
, and therefore that it is not permissible for an Court to
assume jurisdiction not provided by section 2(1)(e) on the basis of the “overarching
seat theory
“. This cause-of-action based system of organising
jurisdiction has, for better or worse, been part of Indian law for over seventy
years. Whether that should be discarded in favour of a consent-based system of
jurisdiction is, we suggest, a decision for Parliament, not the Supreme Court.
On the maintainability of an action for interim relief in aid of foreign
arbitrations, we demonstrate that the transition from the 1882 CPC to the 1908
CPC contains indications that what is now Order 39 Rule 1 is not exhaustive
(indeed, the Calcutta High Court so held in the early 1900s), and that section
151 CPC is a possible basis on which such interim relief may be granted. We
also revisit the discussion of the common law and establish that it contains no
bar to such an action. Finally, we reiterate that it was not appropriate to
overrule Bhatia International prospectively, because the
appellants had not established that this was, to quote Lord Nicholls in Re Spectrum, “the
wholly exceptional case
” in which parties had relied on Bhatia
in organising their affairs. More generally, we suggest
that prospective overruling should not be used on a case-by-case analysis of
the “justice” of the competing claims but should proceed on the basis of
clearly established legal principle, which should distinguish between
overruling a point of common law and overruling a point of statutory

About the author

V. Niranjan

1 comment

  • I watched a matter in SC yesterday, where a party tried to take advantage of the "first error" in BALCO that you highlight in your analysis.

    Although the appeal was dismissed and the court did not seem willing to entertain any argument, it clearly is an instance to demonstrate the error and the future litigation which will ensue based on para 96 of the judgment.

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