Overturning a much criticized judicial precedent laid down by a Division Bench (consisting of three judges) of the Supreme Court of India ("Supreme Court") in the case of Bhatia International v. Bulk Trading S.A. & Anr. in 2002 ("Bhatia International"), a Constitutional Bench (consisting of five judges) of the Supreme Court has effectively removed any interference by Indian courts in relation to arbitrations which have their 'seat' outside India.
The Arbitration and Conciliation Act, 1996, as amended ("Act") is the primary Indian legislation dealing with arbitration. The Act is based on the UNCITRAL Model Law on International Commercial Arbitration. Part I of the Act regulates domestic arbitrations and international commercial arbitrations with their 'seat' in India. The 'seat' of the arbitration refers to the place or legal domicile of the arbitration as opposed to the place where the hearings are conducted (also known as the 'venue'). Part I of the Act enables the provision of judicial support in relation to arbitration proceedings including appointment of arbitrators, provision of interim relief and the setting aside of an arbitral award. Part II of the Act, on the other hand, only governs the enforcement of foreign arbitral awards.
The Supreme Court in Bhatia International ruled that any arbitration having its 'seat' outside India is also subject to Part I of the Act unless the parties had by express or implied agreement excluded it. Consequently, there has been significant interference by Indian courts even where the 'seat' of the arbitration is not in India. This has greatly undermined the benefits of using arbitration with a foreign 'seat' to resolve international commercial disputes involving Indian law or Indian parties.
The Constitutional Bench of the Supreme Court reconsidered the provisions of the Act in the case of Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc. ("BALCO") and has unequivocally laid down the following:
- Part I of the Act is strictly limited in its application to domestic arbitrations and international commercial arbitrations having their 'seat' in India. The Supreme Court reaffirmed the significance of the 'seat' of the arbitration in determining the court that will have the power to exercise supervisory control of the arbitration proceedings and the arbitral award even if the arbitration agreement calls for the arbitration proceedings to be governed by the Act. The courts of the country in which the arbitration is conducted would regulate the conduct of such arbitration and an award may be challenged before them.
- Part II of the Act only deals with arbitration proceedings with their seat outside India, classifying them as foreign arbitral awards.
- Indian courts have no power under the Act to annul a foreign arbitral award. Such an award can only be set aside or suspended in accordance with the laws of the country in which the arbitration has its 'seat' or in accordance with the procedural law of the arbitration proceedings (which are quite often one and the same). Indian courts can no longer annul a foreign arbitral award on the exclusive grounds that Indian law governed the substance of the contract. Consequently, Indian courts only have the power to refuse enforcement of a foreign arbitral award under the grounds specified in Section 48 of the Act.
- Parties to an arbitration agreement cannot approach Indian courts for interim relief in relation to arbitrations which have their 'seat' outside of India. Interim relief can be sought from the courts in the 'seat' of the arbitration proceedings.
The Supreme Court has specified that the judgment will have prospective effect and will therefore be applicable only to arbitration agreements executed after September 6, 2012. Arbitration agreements executed prior to this date will continue to be governed by the decision in the Bhatia International case. The BALCO judgment is expected to increase the use of institutions (such as the Singapore International Arbitration Centre (SIAC)) for dispute resolution, by entities doing business in India or with Indian entities.