DEVELOPMENT OF ARBITRATION LAW IN INDIA

Authour: Utkarsh Srivastava
Advocate-on-Record, Supreme Court of India

Present Article illustrates the development of Arbitration Law in India in the context of supervisory jurisdiction of courts over the subject matter of arbitration and the procedure of arbitration.

HISTORY OF THE LAW OF ARBITRATION

Prior to the year 1940, 3 (three) Acts governed the law of Arbitration in India.

The Arbitration (Protocol and Convention) Act 1937 (enacted in accordance with Geneva Convention)
Arbitration Act 1940 (hereinafter referred to as “1940 Act”) – which dealt with domestic awards.

Foreign Awards (Recognition and Enforcement) Act 1961 – which dealt with foreign awards. (enacted in accordance with New York Convention)

All these were consolidated into one Act, the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “1996 Act”) which also includes the law relating to conciliation as per UNCITRAL Model Law.

SEAT OF ARBITRATION

Under the 1940 Act, there was no concept of situs of arbitration. However, S.2(c) of the 1940 Act prescribed the jurisdiction of courts in arbitration as the jurisdiction given to a court having jurisdiction over civil proceedings, treating the subject matter of the arbitration as same as the subject-matter under a suit.

Article 20 of the UNCITRAL Model Law on International Commercial Arbitration, encompasses the “Place of Arbitration”, which forms the basis of the concept of ‘place of arbitration’ or ‘seat of arbitration’ in the 1996 Act. Article 20 reads as follows,

“20. Place of arbitration.—

(1) The parties are free to agree on the place of arbitration. Failing such agreement, the place of arbitration shall be determined by the Arbitral Tribunal having regard to the circumstances of the case, including the convenience of the parties.

(2) Notwithstanding the provisions of paragraph (1) of this article, the Arbitral Tribunal may, unless otherwise agreed by the parties, meet at any place it considers appropriate for consultation among its members, for hearing witnesses, experts or the parties, or for inspection of goods, other property or documents.”

Thus, S.20 was inserted by the legislature under the 1996 Act.

DOCTRINE OF CONCURRENT JURISDICTION

In NTPC v. Singer Co. & Ors., (1992) 3 SCC 551, the Hon’ble Supreme Court has held that Lex Arbitri (law governing the arbitration agreement) would determine which system of law would be applicable.

Where the parties have exclusively agreed to two different choices of law, one governing the arbitration agreement and the other arbitration proceedings, then both the Courts will have jurisdiction (Concurrent Jurisdiction).

Thus, for first time, the Doctrine of Concurrent Jurisdiction was laid down.

In Sumitomo Heavy Industries Ltd. v. ONGC Ltd. & Ors., 1998 (1) SCC 565, it was held by the Hon’ble Supreme Court of India that:

(i) S. 47 of 1940 Act provided that the 1940 Act applies to all the arbitrations and proceedings thereunder.

(ii) Where the parties chose both the lex arbitri i.e. the law governing the arbitration agreement and lex curiae i.e. the curial law, the law governing the arbitrators’ conduct and procedure. There will be concurrent jurisdiction conferred upon both the courts having jurisdiction as per lex arbitri and lex curiae. However, the jurisdiction of curial law administering the curial law ceases to exist once the arbitration concludes.

(iii) Court administering the law governing the arbitration agreement will continue to exercise concurrent jurisdiction when it comes to enforce the arbitration agreement even after the arbitration has concluded to give effect to the award.

In Bhatia International v. Bulk Trading S.A. (2002) 4 SCC 105, it was held that,

Part I of 1996 Act applied to both

domestic arbitrations that take place in India; and
international commercial arbitrations outside India,

unless the arbitration agreement states to the contrary. Even if the seat or place of arbitration is outside India, the courts in India will have concurrent jurisdiction as per S. 2(1)(e) of the 1996 Act along with courts situated in the seat jurisdiction.

It was observed that S. 2(2) nowhere specifies that Part I will ‘only’ apply to arbitrations in India.
It was thus held that Part I would apply to all arbitrations outside India except in cases where parties explicitly exclude the provisions of Part I by agreement, express or implied. In that case, the laws and rules agreed by the parties would prevail.

Similar view was taken by Hon’ble Supreme Court in Venture Global Engineering v. Satyam Computer Services Ltd. (2008) 4 SCC 190. In this judgment, it was further clarified in the judgment that Part II provides a special set of provisions that are applicable only to “foreign awards” passed in international commercial arbitrations. However, this in no manner means that Part I is inapplicable.

“19. Mr Nariman heavily relied on para 26 of Bhatia International which we have extracted supra. According to him, the said paragraph contains not only the submissions of Mr Sen, who appeared for Bhatia International therein but also the ultimate conclusion of the Bench. He reiterated that the Court concluded:

1. 1. 1. 1. … Thus Section 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 reason 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 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.

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1. 1. On close scrutiny of the materials and the dictum laid down in the three-Judge Bench decision in Bhatia International we agree with the contention of Mr K.K. Venugopal and hold that paras 32 and 35 of Bhatia International1 make it clear that the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and to all proceedings relating thereto. We further hold that where such arbitration is held in India, the provisions of Part I would compulsorily apply and parties are free to deviate to the extent permitted by the provisions of Part I. It is also clear that even in the case 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. We are also of the view that such an interpretation does not lead to any conflict between any of the provisions of the Act and there is no lacuna as such. The matter, therefore, is concluded by the three-Judge Bench decision in Bhatia International.
  2. The learned Senior Counsel for the respondent based on para 26 submitted that in the case of foreign award which was passed outside India is not enforceable in India by invoking the provisions of the Act or CPC. However, after critical analysis of para 26, we are unable to accept the argument of the learned Senior Counsel for the respondent. Paras 26 and 27 start by dealing with the arguments of Mr Sen who argued that Part I is not applicable to foreign awards. It is only in the sentence starting at the bottom of para 26 that the phrase “it must immediately be clarified” that the finding of the Court is rendered. That finding is to the effect that an express or implied agreement of parties can exclude the applicability of Part I. The finding specifically states: “But if not so excluded, the provisions of Part I will also apply to all ‘foreign awards’. …”

(Emphasis supplied)

However, the judgment in Bhatia International (Supra) was referred to a larger bench in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012) 9 SCC 552. (“BALCO”)

POST BALCO

In this landmark judgment, the Hon’ble Supreme Court of India held that the conclusions reached by the court in Bhatia International (Supra) are neither supported by the text nor the context of the provisions of S. 1(2) and proviso thereto or S. 2(2) of the 1996 Act.

It held that the applicability of Part I is limited to arbitrations that take place in India. Parliament through S.1(2) and S.2(2) of 1996 Act has clearly given recognition to the territorial principle that Part I will only apply to arbitrations having their place / seat in India. The relevant observations read as under:

“64. […]Thereafter, this Court has given further instances of provisions of the Arbitration Act, 1996, not being in conformity with the Model Law and concluded that “… The Model Law and judgments and literature thereon are, therefore, not a guide to the interpretation of the Act and, especially of Section 11 thereof”. The aforesaid position, according to Mr Sorabjee has not been disagreed with by this Court in SBP & Co. We agree with the submission of Mr Sorabjee that the omission of the word “only” in Section 2(2) is not an instance of “casus omissus”. It clearly indicates that the Model Law has not been bodily adopted by the Arbitration Act, 1996. But that cannot mean that the territorial principle has not been accepted. We would also agree with Mr Sorabjee that it is not the function of the court to supply the supposed omission, which can only be done by Parliament. In our opinion, legislative surgery is not a judicial option, nor a compulsion, whilst interpreting an Act or a provision in the Act.

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1. We are unable to accept the submission of the learned counsel for the appellants that the omission of the word “only” from Section 2(2) indicates that applicability of Part I of the Arbitration Act, 1996 is not limited to the arbitrations that take place in India. We are also unable to accept that Section 2(2) would make Part I applicable even to arbitrations which take place outside India. In our opinion, a plain reading of Section 2(2) makes it clear that Part I is limited in its application to arbitrations which take place in India. We are in agreement with the submissions made by the learned counsel for the respondents, and the interveners in support of the respondents, that Parliament by limiting the applicability of Part I to arbitrations which take place in India has expressed a legislative declaration. It has clearly given recognition to the territorial principle. Necessarily therefore, it has enacted that Part I of the Arbitration Act, 1996 applies to arbitrations having their place/seat in India.

xxx

1. […] Therefore, the Arbitration Act, 1996 consolidates the law on domestic arbitrations by incorporating the provisions to expressly deal with the domestic as well as international commercial arbitration by taking into account the 1985 Uncitral Model Laws. It is not confined to the New York Convention, which is concerned only with enforcement of certain foreign awards. It is also necessary to appreciate that the Arbitration Act, 1996 seeks to remove the anomalies that existed in the Arbitration Act, 1940 by introducing provisions based on the Uncitral Model Laws, which deals with international commercial arbitrations and also extends it to commercial domestic arbitrations. Uncitral Model Law has unequivocally accepted the territorial principle. Similarly, the Arbitration Act, 1996 has also adopted the territorial principle, thereby limiting the applicability of Part I to arbitrations, which take place in India.

xxx

1. We are of the opinion that the omission of the word “only” in Section 2(2) of the Arbitration Act, 1996 does not detract from the territorial scope of its application as embodied in Article 1(2) of the Model Law. The article merely states that the arbitration law as enacted in a given State shall apply if the arbitration is in the territory of that State. The absence of the word “only” which is found in Article 1(2) of the Model Law, from Section 2(2) of the Arbitration Act, 1996 does not change the content/import of Section 2(2) as limiting the application of Part I of the Arbitration Act, 1996 to arbitrations where the place/seat is in India.
2. For the reasons stated above, we are unable to support conclusion reached in Bhatia International and Venture Global Engg., that Part I would also apply to arbitrations that do not take place in India.

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1. We quote the above in extenso only to demonstrate that Section 2(2) is not merely stating the obvious. It would not be a repetition of what is already stated in Section 1(2) of the Arbitration Act, 1996 which provides that “it extends to the whole of India”. Since the consolidated Arbitration Act, 1996 deals with domestic, commercial and international commercial arbitrators, it was necessary to remove the uncertainty that the Arbitration Act, 1996 could also apply to arbitrations which do not take place in India. Therefore, Section 2(2) merely reinforces the limits of operation of the Arbitration Act, 1996 to India.”

(Emphasis supplied)

It was also observed that the words “subject-matter of arbitration” in addition to “subject-matter of suit”, under Section 2(1)(e) has conferred jurisdiction to 2(two) courts, i.e. the court having jurisdiction over cause of action and the one having jurisdiction over the seat of arbitration. Yet, the expression “subject-matter of suit” is confined only to Part I, and thus whenever it is found that the seat of arbitration is outside India, Part I would be inapplicable. The courts situated where the subject-matter of arbitration lies will have supervisory jurisdiction over the arbitration. The relevant observations read as under:

“95. The learned counsel for the appellants have submitted that Section 2(1)(e), Section 20 and Section 28 read with Section 45 and Section 48(1)(e) make it clear that Part I is not limited only to arbitrations which take place in India. That these provisions indicate that the Arbitration Act, 1996 is subject-matter centric and not exclusively seat-centric. That therefore, “seat” is not the “centre of gravity” so far as the Arbitration Act, 1996 is concerned. We are of the considered opinion that the aforesaid provisions have to be interpreted by keeping the principle of territoriality at the forefront. We have earlier observed that Section 2(2) does not make Part I applicable to arbitrations seated or held outside India. In view of the expression used in Section 2(2), the maxim expressum facit cessare tacitum, would not permit by interpretation to hold that Part I would also apply to arbitrations held outside the territory of India. The expression “this Part shall apply where the place of arbitration is in India” necessarily excludes application of Part I to arbitration seated or held outside India. It appears to us that neither of the provisions relied upon by the learned counsel for the appellants would make any section of Part I applicable to arbitration seated outside India. It will be apposite now to consider each of the aforesaid provisions in turn.

96. […] We are of the opinion, the term “subject-matter of the arbitration” cannot be confused with “subject-matter of the suit”. The term “subject-matter” in Section 2(1)(e) is confined to Part I. It has a reference and connection with the process of dispute resolution. Its purpose is to identify the courts having supervisory control over the arbitration proceedings. Hence, it refers to a court which would essentially be a court of the seat of the arbitration process. In our opinion, the provision in Section 2(1)(e) has to be construed keeping in view the provisions in Section 20 which give recognition to party autonomy. Accepting the narrow construction as projected by the learned counsel for the appellants would, in fact, render Section 20 nugatory. In our view, the legislature has intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the courts where the arbitration takes place. This was necessary as on many occasions the agreement may provide for a seat of arbitration at a place which would be neutral to both the parties. Therefore, the courts where the arbitration takes place would be required to exercise supervisory control over the arbitral process. For example, if the arbitration is held in Delhi, where neither of the parties are from Delhi, (Delhi having been chosen as a neutral place as between a party from Mumbai and the other from Kolkata) and the tribunal sitting in Delhi passes an interim order under Section 17 of the Arbitration Act, 1996, the appeal against such an interim order under Section 37 must lie to the courts of Delhi being the courts having supervisory jurisdiction over the arbitration proceedings and the tribunal. This would be irrespective of the fact that the obligations to be performed under the contract were to be performed either at Mumbai or at Kolkata, and only arbitration is to take place in Delhi. In such circumstances, both the courts would have jurisdiction i.e. the court within whose jurisdiction the subject-matter of the suit is situated and the courts within the jurisdiction of which the dispute resolution i.e. arbitration is located.

97. The definition of Section 2(1)(e) includes “subject matter of the arbitration” to give jurisdiction to the courts where the arbitration takes place, which otherwise would not exist. On the other hand, Section 47 which is in Part II of the Arbitration Act, 1996 dealing with enforcement of certain foreign awards has defined the term “court” as a court having jurisdiction over the subject-matter of the award. This has a clear reference to a court within whose jurisdiction the asset/person is located, against which/whom the enforcement of the international arbitral award is sought. The provisions contained in Section 2(1)(e) being purely jurisdictional in nature can have no relevance to the question whether Part I applies to arbitrations which take place outside India.

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Only if the agreement of the parties is construed to provide for the “seat”/“place” of arbitration being in India — would Part I of the Arbitration Act, 1996 be applicable. If the agreement is held to provide for a “seat”/“place” outside India, Part I would be inapplicable to the extent inconsistent with the arbitration law of the seat, even if the agreement purports to provide that the Arbitration Act, 1996 shall govern the arbitration proceedings.

xxx

117. It would, therefore, follow that if the arbitration agreement is found or held to provide for a seat/place of arbitration outside India, then the provision that the Arbitration Act, 1996 would govern the arbitration proceedings, would not make Part I of the Arbitration Act, 1996 applicable or enable the Indian courts to exercise supervisory jurisdiction over the arbitration or the award. It would only mean that the parties have contractually imported from the Arbitration Act, 1996, those provisions which are concerned with the internal conduct of their arbitration and which are not inconsistent with the mandatory provisions of the English procedural law/curial law. This necessarily follows from the fact that Part I applies only to arbitrations having their seat/place in India.”

(Emphasis supplied)

Thereafter, in UOI v. Reliance Industries Ltd., (2015) 10 SCC 213, this court held that although the doctrine of concurrent jurisdiction has been overruled in BALCO Judgment (Supra), it would not mean that arbitration agreements before the BALCO judgment will continue continue to be governed by Bhatia International.

Recently, while considering the history of arbitration, both Pre BALCO and Post BALCO, in M/s Arif Azim Co. Ltd. v. M/s Micromax Informatics FZE, 2024 INSC 850, Hon’ble Supreme Court of India concluded that,

“39. Thus, the legal position that emerges from a conspectus of all the decisions referred to above is that Part I of the Act and the provisions thereunder only applies where the arbitration takes place in India i.e., where either (I) the seat of arbitration is in India OR (II) the law governing the arbitration agreement is Indian law. As a natural corollary to the above, the position of law may be summarized as under: –

- - Arbitration agreements executed after 06.09.2012 where the seat of arbitration is outside India, Part I of the Act, 1996 and the provisions thereunder will not be applicable and would fall beyond the jurisdiction of Indian courts by virtue of the decision of this Court in BALCO (supra).
  - Even those arbitration agreements that have been executed prior to 06.09.2012 and thus, governed by Bhatia International (supra), Part I of the Act, 1996 may not necessarily be applicable, if its application has been excluded by the parties in the arbitration agreement either explicitly by designating the seat of arbitration outside India or implicitly by choosing the law governing the agreement to be any other law other than Indian law, by virtue of Reliance Industries (supra).
  - Thus, irrespective of the date of execution of arbitration agreement, Part I of the Act, 1996 will be applicable only to those arbitration agreements where the seat or place of arbitration is in India OR in the absence of any categorical finding as to the place or seat of arbitration, where such agreement stipulates or can be read to stipulate that the law governing the arbitration agreement would be Indian law.”

…[Emphasis Supplied]

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