On December 10 2013 the Supreme Court held that Part 1 of the Arbitration and Conciliation Act is not applicable if parties have chosen the seat of arbitration and the law governing the arbitration agreement to be outside India, even if Indian law is chosen as the law governing the substantive contract and the agreement was entered into before September 6 2013 (the date of the BALCO judgment).
The parties entered into two production sharing contracts for the exploration and production of petroleum. One of the contracts was entered into with Reliance Industries Limited, an Indian company. The other contract was entered into with BG Exploration and Production India Limited – a company incorporated in Cayman Islands. Oil and Natural Gas Corporation Limited – a state-owned oil and gas company – produces various petroleum products, including crude oil, natural gas and liquid petroleum gas. Together, the three companies were defined as the 'contractor'.
When a dispute arose between the parties, an arbitral tribunal was created. The agreement named London as the seat of arbitration. The issue before the arbitral tribunal was the arbitrability of the claims made by the petitioner in respect of royalties, cess, service tax and a comptroller and auditor general audit. In the final partial award, the arbitral tribunal held that the claimant's claims were arbitrable, but made no award on the merits of the dispute. The respondent challenged the award before the Delhi High Court. The respondent invoked the court's jurisdiction under Section 34 of the act on the following grounds:
- The contracts were signed and executed in India.
- The subject matter of the contracts was within India.
- The obligations under the contracts were performed in India.
- The contracts stipulated that they had to "be governed and interpreted in accordance with the laws of India".
- The contracts provided that "nothing in this contract" entitled either party to exercise the rights, privileges and powers conferred on them by the contract "in a manner which will contravene the laws of India" (Article 32.2).
- The contracts further stipulated that "the companies and the operations under this Contract shall be subject to all fiscal legislation of India" (Article 15.1).
The appellant challenged the maintainability of the arbitration petition on the grounds that, by choosing English law to govern their arbitration agreement and expressly agreeing to London-seated arbitration, the parties excluded the application of Part 1 of the Arbitration and Conciliation Act. The appellant contended that the courts in England and Wales have exclusive jurisdiction to entertain any challenge to the award.
The court held that the governing law of the contract (ie, the proper law of the contract) was Indian law. Therefore, regarding the contractual rights, the parties never intended to exclude Indian law entirely. English law is limited in its applicability to arbitration agreements contained in Article 33. This means that English law would apply only with regard to curial law matters (ie, conduct of the arbitral proceedings). The court also held that the question of arbitrability of the claim or dispute could not be examined solely on the basis of the applicability of the arbitration law of any country; the public policy of the country that the parties have chosen the contract to be governed by must also be applied. Therefore, according to the court, the question of arbitrability of the dispute was not purely a question of the applicable law of arbitration, but rather a broader question of public policy. The court concluded that Indian public policy cannot be adjudged under English law. Since the question of arbitrability of a claim is a larger question, effecting public policy, it should be determined by applying Indian law.
The court relied on Bhatia International v Bulk Trading SA, wherein it was held that Part 1 of the act was applicable because the parties made no clear expressed or implied intention to exclude the applicability of the Arbitration Act. The court also relied on Venture Global Engineering v Satyam Computer Services Ltd. In addition, the court held that the disputes involved rights in rem and thus due regard had to be given to Indian laws. An award that is said to be against public policy can be challenged in India, even if the seat of arbitration is outside India. Finally, the court declined to consider the law laid down by the Constitution Bench of the Delhi High Court in Bharat Aluminium v Kaiser Aluminium on the basis that the operation of the judgment was made prospective by the court.
The appellant challenged the court's decision.
The issue at hand was whether Part I of the Arbitration Act is applicable to an arbitration agreement when the seat of arbitration is outside India.
The appellant contended that once English law is selected as the proper law of arbitration, the Indian Arbitration Act 1996 is no longer applicable. In support of its submission, reliance was placed on:
- Videocon Industries Limited v Union of India;
- Yograj Infrastructure Limited v Ssang Yong Engineering;
- M/s Dozco India P Ltd v M/s Doosan Infracore Co Ltd; and
- Bharat Aluminium Company v Kaiser Aluminium Technical Services Inc.
The respondent contended that the Delhi High Court's decision was correct because it was based on the law laid down by Bhatia International and Venture Global Engineering, as the arbitration agreement was pre-BALCO. No matter whether the act was excluded, the contract was seen as a whole. In the case at hand, the contract was in India for work to be done in India over 25 years. Further, it dealt with natural resources; the Union of India is a trustee of these resources for the citizens of India. London was designated as the seat of arbitration only to provide a certain degree of comfort to the foreign parties. Hence, the respondent claimed that the contract could not be read to exclude the applicability of the act. It also contended that the high court was correct to conclude that arbitrability had to be decided by taking Indian laws into consideration, which would include the Indian Arbitration Act, not the English Arbitration Act 1996. It was further emphasised that the issues raised by the Union of India were of public law and not purely contractual as the appellants claimed. It was also submitted that the issues raised with regard to royalties were not arbitrable, as it was not a commercial issue.
The Supreme Court observed that it was bound by the decision in Bhatia International and went on to analyse the contracts in order to discover the parties' real intent with regard to the exclusion of Part 1 of the act.
The court observed that the contracts contained separate provision for the proper law of the contract and for dispute resolution through arbitration. The provision provided that if parties failed to appoint an arbitrator, the recourse could be brought to the secretary general of the Permanent Court of Arbitration in the Hague. The court held that because of this provision, it was difficult to appreciate the respondent's submission that Part 1 of the act would be applicable to the proceedings. The mention of the Permanent Court of Arbitration was interpreted as a strong indication of the exclusion of Part 1 of the act.
The court held that once the parties had consciously agreed that the juridical seat of arbitration would be London, and that English law would govern the arbitration agreement, they could no longer contend that Part 1 of the Indian Arbitration Act would also be applicable to the arbitration agreement.
The court further held that the Delhi High Court had erred in not applying the rationale of law laid down in Videocon Industries Ltd. Further, it held that the high court's decision would have led to a chaotic situation where the parties would be left rushing between India and England for redressal of their grievances. It was necessary to exclude Part 1 of the act because it was wholly inconsistent with the arbitration agreement that provided "that arbitration agreement shall be governed by English law".
The court held that the respondent's contention that the issues involved in the case related to violations of Indian public policy, thus the application of the act could not be excluded, was contrary to the well-settled law of India and other jurisdictions.
Finally, the court held that the Delhi High Court had failed to distinguish between the law applicable to the proper law of the contract and the proper law of the arbitration agreement and thus had failed to notice the doctrine of separability, which is recognised in Section 16 of the act.
The court thus set aside the lower court's decision.
For further information on this topic please contact Vikram Nankani or Neeti Sachdeva at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (email@example.com or firstname.lastname@example.org).