Application of Part I on Arbitration Agreements preceding BALCO

[The following guest post is contributed
by Gunjan Chhabra, who is a
practicing advocate in various courts of Delhi and is currently working with
Rajani, Singhania & Partners. She can be reached at
[email protected]]

The judgment of the Supreme Court
in Bharat
Aluminium Co. v. Kaiser Aluminium Technical Services Inc
[1] (BALCO) made it abundantly clear that
Part I of the Arbitration and Conciliation Act, 1996 would not be applicable to
arbitrations with a foreign seat. However, the judgment clearly laid down: “197. The judgment in Bhatia International
was rendered by this Court on 13.03.2002. Since then, the aforesaid judgment
has been followed by all High Courts as well as by this Court on numerous
occasions…. Thus in order to do complete justice, we hereby order that the law
now declared by this Court shall apply prospectively, to all the arbitration
agreements executed hereafter”.
Thus, there always remained a gap as to the
fate of those arbitration agreements which were executed before BALCO.
Although the case of Reliance
Industries Ltd
[2] was
a step taken towards clarification of pre-BALCO arbitration clauses, yet the issue
still remains shrouded in mystery. Another step was taken by the Supreme Court
on 10 March 2015 in the Case of Harmony Innovation Shipping Ltd.
v. Gupta Coal India Ltd. & Anr.
The judgment is in appeal from the
Order of the High Court, setting aside the decision of the Additional District Judge
Ernakulum, allowing the Petition under Section 9 filed by Harmony Innovation
while directing Gupta Coal to furnish security to the tune of US$ 11,15,400 and
conditionally attaching its cargo, as an interim measure of protection. The
District Judge, following BALCO had held that as there was no exclusion of Part
I of the Arbitration and Conciliation Act, 1996 in the agreement, Part I was to
apply, and had accordingly afforded relief to the Respondent. The judgement was
a disposition on the principles laid down by Bhatia International v. Bulk
Trading S.A.
which is the law to be followed for Pre-BALCO arbitration clauses having seat
of arbitration outside India. Bhatia International laid down: “Thus in respect of arbitrations which take
place outside India, even the non-derogable provisions of Part I can be
excluded. Such an agreement may be express or implied.”
The implied exclusion of Part I is
what the court then goes on to explain by propounding the ratio of various case
laws, which were Pre-BALCO. The court relied on Reliance Industries Ltd. to
reiterate that all contracts which deal with any foreign element involve three
potentially relevant systems of law:-
(i) The law governing the substantive contract:
This is the law governing the performance of the contract itself and is the
proper law
(ii) The law governing the agreement to arbitrate
and the performance of that agreement
: This is the law governing filing,
enforcement and setting aside of award (Reliance Industries) and the law to
determine arbitrability of the dispute (Sumitomo Heavy Industries[4])
(iii) The law governing the conduct of the
: This is the curial law or procedural law, which is the law in
which the arbitration proceedings have to be conducted (Sumitomo Heavy Industries).
Furthermore, in absence of any
other stipulation in the contract, proper law is the law applicable to the arbitral
tribunal itself.[5]
However, in case the contract specifically provides for a separate curial law,
then proper law is not the curial law and the curial law would determine whether
part I would apply or not. If the curial law excludes application of Part I,
then it would no longer apply to the agreement, even if the proper law of
contract is the law of India.
Another interesting concept argued
by the senior counsel for Harmony Innovation was the concept of “presumed
intention”. It was his averment that where the parties have not expressly
excluded Part I, then to be able to interpret “implied exclusion”, the court
has to test “presumed intention” of the parties, that is to ascertain what
would have been the intention of reasonable parties in the position of actual
parties to the contract. The doctrine of “presumed intention” of the parties
applies where parties did not, due to unforeseen circumstances, have an actual
intention in respect of a particular clause in issue, in which case it is a
task upon the judge to interpret the contract, not subjectively, but
objectively. However, in the present case, the Court did not pay much heed to
the concept, in view of specific and unequivocal clauses of the contract.
In Harmony Innovation (Supra),
the Court finally held that Part I would not apply, owing to the following
specific provisions in the contract:-

(i) Arbitration in
London to Apply

 (ii) Arbitrators are to
be members of the London Arbitration Association

 (iii) Contract is to be
governed and construed according to English Law

 (iv) No indication of
any other stipulation relating to applicability of any other law to the

(v) If dispute is for
an amount less than US$50000 then, the arbitration should be conducted in
accordance with small claims procedure of the London Maritime Arbitration

Owing to the above stipulations,
the Supreme Court held that the courts in India did not have jurisdiction as
there was an implied exclusion and on these grounds the appeal was dismissed.
To conclude, it may be said that
although there is not much to criticize the judgment given by the Hon’ble
Supreme Court, it has yet again failed to settle the law once and for all in
respect of Pre-BALCO arbitration agreements. The fact of the matter is that the
judgment in BALCO laid down the correct interpretation of existing law and did
not propound any new law. Thus, the judgment of BALCO is declaratory in nature
and should apply to all arbitration clauses alike, not just those entered into
after 06.09.2012. That being the fact of the matter, the Court could have
settled the issue of foreign seated arbitrations Pre-BALCO once and for all.
However, till date the law still stands that the test of express or implied
exclusion of Part I propounded by Bhatia International is valid.
– Gunjan Chhabra

[1] (2012) 9 SCC 552.
[2] Reliance Industries Ltd. v. Union of India (2014) 7 SCC 603.
[3] (2002)4SCC105
[4] Sumitomo Heavy
Industries Ltd. v. ONGC Ltd. 1998(1)SCC305
[5] Yograj Infrastructure
Ltd. v. Ssangyong Engineering & Construction Co. Ltd. 2012(2)SCJ185

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


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