The jurisdiction of the Indian courts in relation to international commercial arbitration remains a complex issue. The Supreme Court has attempted to strike a balance between the courts, arbitrators and parties through a series of judicial pronouncements spanning the last decade and a half. Many believe that the Supreme Court's decision in Bharat Aluminium Co v Kaiser Aluminium Technical Services, Inc ('BALCO')(1) addressed the majority of the confusion surrounding international arbitration and presumably settled the position for the foreseeable future. However, the Supreme Court's recent decision in Harmony Innovation Shipping Limited v Gupta Coal India Limited has significantly altered what appeared to be the settled position on the application of Section 9 of the Arbitration and Conciliation Act 1996 in relation to international commercial arbitration. Further, the decision has raised many questions regarding the applicability of the principles laid down in BALCO and Bhatia International v Bulk Trading SA(2) with regard to addendums and revisions added to earlier agreements. This update discusses the position of law in light of the Supreme Court's recent judgment.
On October 2010 the parties entered an agreement (the principal agreement) in respect of 24 voyages to transport coal belonging to the appellant, Harmony Innovations Shipping Limited, from Indonesia to India. The respondent, M/s Gupta Coal India Limited, made only 15 voyages, which led to disputes, following which arbitration was initiated and an award was passed. Following the award, the appellant filed an application seeking enforcement of the award.
While the arbitration proceedings regarding the aforementioned agreement were pending, an addendum to the principal agreement was executed in relation to the remaining voyages on March 3 2013.
Certain disputes arose between the parties in relation to the addendum and arbitration was initiated with regard to those disputes. The appellant then filed an application under the act seeking attachment of the cargoes as interim relief. The Second Additional Ernakulum District Court granted a conditional order of attachment.
The respondent appealed the Second Additional Ernakulum District Court's order before the Kerala High Court on the grounds that it had no jurisdiction to issue the impugned order and thus it was invalid. The appellant argued that the principal agreement had been entered into before BALCO and therefore was governed by the principles laid down in Bhatia.
After considering the principal agreement and addendum and further analysing the decisions in Bhatia and Venture Global Engineering v Satyam Computer Services Limited,(3) the high court set aside the order on the grounds that Section 9 of the act was limited to domestic arbitration and did not apply to international arbitration. The high court further held that Clause 5 of the contract (the arbitration clause) clearly spelled out that the contract was to be governed and construed according to English law.
Clause 5 reads as follows:
"If any dispute or difference should arise under this charter, general average/arbitration in London to apply, one to be appointed by each of the parties hereto, the third by the two so chosen, and their decision or that of any two of them, shall be final and binding, and this agreement may, for enforcing the same, be made a rule of Court. Said three parties to be commercial men who are the members of the London Arbitrators Association. This contract is to be governed and construed according to English Law. For disputes where total amount claim by either party does not exceed USD 50,000 the arbitration should be conducted in accordance with small claims procedure of the London Maritime Arbitration Association."
Thus, while the contract did not provide for a specific law to govern the arbitration clause, it stipulated that the agreement would be governed and construed according to English law.
Further, the high court stated that as BALCO was declaratory in nature, it applied to all cases, not only those that came after the decision was issued. The fact that the principal agreement was entered into before BALCO had no bearing; thus, the high court dismissed the petition under Section 9 of the act. The high court's order was appealed before the Supreme Court.
Supreme Court appeal
Express or implied exclusion of Part I of the act
The appellant relied on the Supreme Court's decision in Citation Infoware Ltd v Equinox Corp,(4) wherein it was held that unless Part I of the act was excluded by agreement (either expressly or implicitly), it would apply, even if the international commercial agreements were governed by the laws of another country. The appellant argued that no express or implied exclusion of the applicability of Part I existed and therefore the Indian courts had jurisdiction.
The respondent relied on Reliance Industries Limited v Union of India,(5) wherein the Supreme Court discussed the principles in Bhatia and held that since the juridical seat of arbitration was in London and the laws governing the arbitration were English laws, Part I of the act had been implicitly excluded.
The appellant contended that while the agreement was governed and construed according to English law, it was interpreted as curial law, not substantive law; thus, the seat of arbitration was not implied. The appellant further contended that to apply the principles of implied exclusion, the Supreme Court had to test the presumed intention of the parties by adopting an objective approach.
The respondent referenced various phrases in the arbitration clause, including that:
- arbitration was to be held in London;
- the arbitrators had to be members of the London Arbitrators Association; and
- the contract had to be governed and construed according to English Law.
Further, the arbitration clause stated that if the dispute was for an amount less than $50,000, arbitration would be conducted in accordance with the London Maritime Arbitration Association's small claims procedure. No reference was made to any other law. Therefore, the presumed intention was that London would be the seat of arbitration.
Fair result test
The appellant submitted that the agreement did not exclude (either expressly or implicitly) Part I of the act. That said, to establish whether there was implied exclusion of the Indian courts' jurisdiction, the Supreme Court had to test the presumed intention of the parties. To do so, the Supreme Court had to consider the commercial background of the parties, the context in which the contract was entered and the circumstances of the parties in order to avoid issuing an unreasonable or unfair judgment. The appellant argued that it would be at a disadvantage if the court held that Part I of the act was inapplicable.
The respondent contended that since the juridical seat was London and the parties had entered into the addendum after 2012, they had intended to exclude the jurisdiction of the Indian courts and make London the seat of arbitration. The respondent referenced Section 3 of the UK Arbitration Act 1996, which reads as follows:
"The seat of the arbitration.—In this Part 'the seat of the arbitration' means the juridical seat of the arbitration designated—
- by the parties to the arbitration agreement, or
- by any arbitral or other institution or person vested by the parties with powers in that regard, or
- by the Arbitral Tribunal if so authorised by the parties, or determined, in the absence of any such designation, having regard to the parties' agreement and all the relevant circumstances."
In this respect, the respondent argued that the juridical seat of arbitration would be London, as the parties had agreed that the arbitrators would be commercial businesspeople who were members of the London Arbitrators Association, and that if the claim was for an amount less than $50,000 the London Maritime Arbitration Association's small claims procedure would apply.
Supreme Court decision
The Supreme Court analysed a plethora of decisions to establish its methodology with regard to determining what law governed the arbitration and the juridical seat and considered the following questions:
- Did Bhatia or Reliance Industries Ltd apply?
- Did the addendum attract the principles laid down in BALCO and thereby prevent the Indian courts from having jurisdiction?
With regard to the first question, the Supreme Court considered the presumed intention of the parties and the construction of the arbitration clause, which clearly stated that:
- arbitration would be held in London if any dispute or difference arose under the charter;
- the arbitrators were to be commercial businesspeople who were members of the London Arbitrators Association;
- the contract was to be construed under and governed by English law; and
- arbitration for a sum less than $50,000 would be conducted in accordance with the London Maritime Arbitration Association's small claims procedure.
The agreement made no reference to any other governing law for the arbitration clause.
The Supreme Court relied on Section 3 of the UK act, which states that the seat of arbitration means the juridical seat of arbitration, and held that the presumed intention of the parties was to assign London as the juridical seat of arbitration. Moreover, the commercial background, context in which the contract was entered and the parties' circumstances also led to this conclusion.
With regard to the second question, the Supreme Court noted that Bhatia was rendered on March 13 2002, while the Constitution Bench issued a verdict in BALCO on September 6 2012. In the case at hand, the arbitration agreement was executed before BALCO, while the addendum came into force on March 3 2013. Thus, the Supreme Court held that the principles in Bhatia applied, as there was nothing in the addendum regarding arbitration and thus it was governed by the principles outlined in the principal agreement.
Further, the Supreme Court interpreted the arbitration clause as a proper or substantial clause, rather than a curial or procedural one, and thus concluded that the seat of arbitration was London.
While the Supreme Court concurred with the high court and found that the Indian courts had no jurisdiction, it made this determination based on the principles laid down in Bhatia, not BALCO.
Finally, while considering the various principles set out in Bhatia to reach its conclusion, the Supreme Court held that the construction of the arbitration clause prevented the Indian courts from having jurisdiction.
Arguably, the Supreme Court should have considered the construction and interpretation of the principal agreement and the subsequent addendum. While the Supreme Court rightly relied on the doctrines of presumed intention and fair result, it applied them only to the arbitration clause. The doctrines should have been relied on further in order to interpret the intentions of the parties when they included the addendum. Moreover, the doctrines should have been applied to the agreement as a whole, not only the arbitration clause, as this would have presumably brought to light the material and genuine intentions of the parties.
In addition, the Supreme Court should have determined whether the parties intended to reject the application of Bhatia by including the 2013 addendum, assuming that the arbitration clause was similar to the principal agreement. Doing so would have clarified the Supreme Court's position with regard to addendums and revisions added to earlier agreements and established a court precedent for parties to follow.
As the addendum was included in 2013 (well after BALCO came into force), arguably, the principles in BALCO should have been applied, rather than those set out in Bhatia. However, the Supreme Court dismissed this contention in a short reasoning, stating that the interpretation of the addendum had no impact on its decision. The Supreme Court's failure to address this contention may lead to similar disputes, which in turn could further complicate this area of law.
Moreover, the Supreme Court considered the following factors to conclude, in accordance with Bhatia, that the arbitration clause had implicitly excluded the jurisdiction of the Indian courts:
- The law governing the agreement was English law.
- The arbitral tribunal was to be composed of members of the London Arbitrators Association.
- Section 3 of the UK Arbitration Act expressly stipulates that the seat of arbitration means the juridical seat of arbitration.
To make its determination, the Supreme Court relied on its decision in Yograj Infrastructure Ltd v Ssang Yong Engg,(6) wherein the Singapore International Arbitration Rules (SIAC Rules) were the curial law regulating the arbitration procedures. Rule 32 of the SIAC Rules states that if the seat of arbitration is Singapore, the law governing the arbitration is the Singapore International Arbitration Act. By virtue of Rule 32, the Supreme Court held that the Indian law did not apply to the arbitration proceedings. The Supreme Court opined that in the absence of any other stipulation in the arbitration clause regarding the laws governing the arbitration proceedings, the law governing the contract will apply.
In light of the Supreme Court's ruling in Harmony Innovation Shipping and Yograj Infrastructure, hypothetically, in a case involving an addendum between parties post-BALCO, the Indian courts may hold the power to govern the arbitration agreement, in accordance with Bhatia, if:
- the law governing the contract is the Indian Contract Act 1872;
- the curial law is the rules of an arbitration association with no rule similar to Rule 32 of the SIAC Rules; and
- the law governing the arbitration agreement is silent with regard to jurisdiction.
Although BALCO has provided much clarity, misinterpretation regarding its application remains. As such, the courts should provide clear-cut principles of interpretation post-BALCO and Bhatia with specific reference to modifications of principal agreements.
Harmony Innovation Shipping was as an opportunity for the Supreme Court to clarify the aspects of Bhatia and BALCO which are still ambiguous. However, the Supreme Court appears to have missed this opportunity. Further, the Supreme Court could have clarified the various issues that have emerged post-BALCO and set a precedent with regard to the interpretation of contracts and applicability of the principles set out in Bhatia and BALCO. However, in the absence of any further clarity – and until the Supreme Court considers the application of Bhatia and BALCO in relation to addendums to principal agreements – interested parties must draft arbitration clauses in addendums carefully. Phrases such as "if any dispute or difference should arise under this addendum" can be inserted to avoid confusion. Parties may even wish to consider terminating the principal agreement and entering into a new agreement to ensure that the principals in BALCO can be applied without issue. In essence, parties must agree to an intended outcome before drafting additional clauses.
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