On May 11 2011 a two-judge bench of the Supreme Court issued its judgment in Videocon Industries Limited v Union of India (Civil Appeal 4269/2011). The court clarified that on a correct interpretation of the Arbitration and Conciliation Act 1996 and relevant judgments, application of Part I of the act would be held to have been excluded by the parties to an arbitration agreement who had agreed that the arbitration agreement will be governed by foreign law.
Provisions of the act
In order to understand the far-reaching implications of Videocon, it is imperative to understand the broad scheme of the act and the law laid down by the Supreme Court in the context of the applicability of the act to international commercial arbitrations. Part I of the act contains several provisions that allow judicial interference with the arbitration proceedings. Some instances of such judicial interference under the act include provisions relating to:
- passing interim orders (Section 9);
- appointing arbitrators (Section 11);
- terminating the mandate of an arbitrator (Section 14(2));
- offering court assistance in taking evidence (Section 27);
- setting aside an award (Section 34); and
- referring disputes to arbitration in insolvency proceedings (Section 41).
The courts in India have considered the question of the applicability of these provisions in respect of international commercial arbitrations even where the seat of arbitration is not in India and the jurisdiction of the Indian courts in that context.
In Bhatia International v Bulk Trading (2002 (4) SCC 105) the Supreme Court held that Part I would apply to all domestic arbitrations and also to international commercial arbitrations held outside India, unless the parties had by express or implied agreement excluded all or any of the provisions of Part I of the act.
In Venture Global Engineering v Satyam Computers Services (2008 (1) SCALE 214) the Supreme Court reiterated its decision in Bhatia International. This case dealt with an award made in England through an arbitral process conducted by the London Court of International Arbitration. The Apex Court held that Part I of the act would be applicable to such award and hence the courts in India would have jurisdiction under Sections 9 and 34 of the act and entertain a challenge to its validity.
In Videocon the Supreme Court accepted the law as laid down by Bhatia International - namely, Part I of the act is applicable to international commercial arbitrations and deals essentially with the question of express or implied exclusion of Part I of the act in the facts of the case. The court considered whether, by choosing English law as the governing law of the arbitration agreement, the parties expressly or by implication excluded the applicability of Part I.
The disputes in Videocon arose out of a production sharing contract entered into by the Government of India with a consortium of four companies for exploring, mining and producing hydrocarbons in India. Under Clause 33.1, the governing law of the agreement was Indian law, yet under Clause 34.12 the venue of the arbitration was Kuala Lumpur, Malaysia and the arbitration agreement was to be governed by English law.
Due to the outbreak of an epidemic in Kuala Lampur, the venue of the arbitral tribunal was shifted first to Amsterdam and then subsequently to London. The parties consented to shifting the venue of arbitration and in March 2005 a partial award was passed by the arbitral tribunal against the Indian government. The government challenged the partial award in the courts of Malaysia. A plea was taken by the consortium that only the courts in England had jurisdiction to entertain any challenge against the award in view of Clause 34.12.
After filing the petition before the courts in Malaysia, the Union of India made a request to the tribunal to conduct the remaining arbitral proceedings in Kuala Lumpur, but this request was rejected and it was declared that the remaining arbitral proceedings must be held in London.
The government then approached the Delhi High Court under Section 9 (Part I) of the act seeking a stay of the arbitral proceedings. This was contested by the consortium on the grounds that courts in India do not have jurisdiction to entertain challenges to the arbitral award. The Delhi High Court reasoned that since the parties had chosen the governing law of the agreement to be Indian law, the Indian courts had jurisdiction to entertain the petition.
An appeal was filed before the Supreme Court, which disagreed with the reasoning of the Delhi High Court. It held that as the emphatic choice of law governing the arbitration agreement was English law, notwithstanding the fact that the agreement itself was governed by Indian law, this implied that the parties had agreed to exclude the provisions of Part I of the act. Accordingly, it was held that the courts in India did not have jurisdiction to entertain a Section 9 petition filed under Part I of the act.
The Videocon judgment did not consider two earlier decisions of the Supreme Court in which similar, if not identical arguments were canvassed and rejected. In both Indtel Technical Services Private Ltd v WS Atkins Rail Ltd (2008 (10) SCC 308) and Citation Infowares Ltd v Equinox Corporation (2009 (7) SCC 220) it was held that international commercial arbitrations where the governing law of the contract is a foreign law, Part I of the act would still apply, and that a mere choice of a foreign law as the governing law of the agreement cannot be construed as an express or implied exclusion of Part I of the act.
In Indtel a single judge of the Supreme Court examined the applicability of Part I on the appointment of an arbitrator under Section 11 of the act. In this case the arbitration clause provided that the agreement would be governed by and construed in accordance with English law. No choice of law had been expressed specifically considering the arbitration agreement.
However, after having noticed the wording of the clause, the court agreed with the contention of the respondent, opposing the jurisdiction of the Supreme Court, 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 arbitration agreement will ordinarily be the same as the law governing the contract itself. However this was held not to be an implied exclusion of Part I of the act. The application made under Section 11 was held to be maintainable before the Indian courts and an arbitrator was appointed by the Supreme Court in the case.
The Indtel case was followed by another decision of a single judge in the Citation case, in which the Supreme Court was again required to decide the issue in the context of an application under Section 11 of the act. The relevant clause provided that the agreement would be governed by and interpreted in accordance with the laws of California. Again, no specific choice of law regarding the arbitration agreement was incorporated. Relying upon the judgments in Indtel and Bhatia International, the Supreme Court held that notwithstanding that the parties intended specifically in this case that the law governing the contract would be Californian law, it was not possible to read such choice of foreign law governing the agreement as case of an implied exclusion.
The Videocon case therefore lays down a beneficial ratio for arbitration, as it expands on the principle of minimal judicial interference in the arbitration arena. It restricts the scope of judicial interference under Part I of the act in international commercial arbitrations after giving a purposive reading to the intent of the parties behind the choice of law governing arbitration agreements.
For further information on this topic please contact Sanjeev Kapoor at Khaitan & Co by telephone (+91 11 4151 5454), fax (+91 11 4151 5318) or email ([email protected]).