12 Dec 2016 4:36 AM GMT
BackgroundThe Indian Arbitration law clearly distinguishes between the procedure that is to be followed regarding enforcement of domestic and foreign arbitral awards. A bare reading of the Arbitration and Conciliation Act, 1996 (“the Act”) would imply that Part I of the Act deals with domestic awards, while Part II of the Act is exclusive for foreign awards. Further, Chapter I of Part...
The Indian Arbitration law clearly distinguishes between the procedure that is to be followed regarding enforcement of domestic and foreign arbitral awards. A bare reading of the Arbitration and Conciliation Act, 1996 (“the Act”) would imply that Part I of the Act deals with domestic awards, while Part II of the Act is exclusive for foreign awards. Further, Chapter I of Part II states that only those foreign awards would be enforceable in India if it has been passed in a country to which New York Convention (Convention on Recognition and Enforcement of Foreign Arbitral Awards 1958) applies (For the purpose of this article, a country to which New York Convention applies shall be referred as “Convention Country”) and is further notified by the Indian government. Because of this, a contentious issue is evolved: What if an award has been made in a country which is not signatory to the New York Convention? Regarding the enforcement of such award, the Indian Supreme Court appeared to be confused itself as it can be seen in its judgments. The question remains unanswered even after the Constitution Bench decision in BALCO v. Kaiser Aluminium Technical Services Inc.
Position of India on the New York Convention
The Indian Government signed the New York Convention with the following conditions:
“In accordance with Article I of the Convention, the Government of India declare that they will apply the Convention to the recognition and enforcement of awards made only in the territory of a State, party to this Convention. They further declare that they will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the law of India.”
These conditions have been incorporated in the Part II of the Act, which deals with the enforcement of foreign arbitral awards. Under Section 44 of the Act, “foreign award” means an arbitral award on differences between persons “arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India” and is made “in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies”.
Though the term “commercial” has nowhere been defined in the Act, a broad interpretation of this term has been preferred by the Supreme Court of India. In R.M. Investment & Trading Co. Pvt. Ltd. v Boeing Co., the Court took reference from the UNCITRAL Model Law on International Commercial Arbitration (1985) which considers “commercial representation or agency” and “consulting” to be relationships of a commercial nature. (To get a wide interpretation of the term “commercial”, see footnote to Article 1(1) of UNCITRAL Model Law)
Further, it should be noted that:
“..the reciprocity requirement as it is expressed in the Act is more onerous and considerably more restrictive than what is contemplated by the New York Convention. Section 44 not only requires that the award is made in a Convention Country, but the country also has to be notified in India’s Official Gazette as being a country to which the New York Convention applies.”
That is to say the Arbitration Act lays down the process for the enforcement of all those awards that are rendered in countries to which New York Convention applies and are notified by the Indian government. However, the Act and Part II is silent on the enforcement of awards that are rendered in countries that are not notified under the gazette or those countries that are not party to New York Convention. More importantly, of the 142 countries which have signed the New York Convention to date, only about 47 countries have been notified in the Official Gazette of India as countries in which the New York Convention applies. Around 95 Convention Countries which have not been officially gazette include regular seat jurisdictions for international arbitrations such as Canada, the United Arab Emirates or New Zealand. Therefore, questions regarding recognition and enforcement of arbitral awards made in those countries are of substantial importance.
Enforcement of Non-Convention Country Award & the Legal Position in India
The issue regarding enforcement of award from non-convention country was elaborately discussed by Supreme Court in 3-judges bench judgment in Bhatia International Ltd v Bulk Trading SA. It was held that an award passed in an international commercial arbitration in a non-convention country, though not enforceable under Part II, would be treated as a domestic award and would be enforceable under the provisions of Part I of the Act.
It was of the view that S. 2(2) of the Act does not expressly provide that Part I of Act would not apply to arbitrations held outside India, as it does not use the word “only” in relation to the applicability of Part I to arbitrations held in India. The main reasoning of the Court was that if Part I of the Act only applied to arbitrations held in India, it would “amount to holding that the Legislature has left a lacunae in the said Act.” As per the Supreme Court, “[t]here would be a lacunae as neither Part I or II would apply to arbitrations held in a country which is not a signatory to the New York Convention or the Geneva Convention (hereinafter called a non-convention country). It would mean that there is no law, in India, governing such arbitrations.”
Therefore, as per the judgment, for all domestic or foreign awards passed in non-convention countries, provisions of Part I would apply and hence enforcement mechanisms as envisaged under Part I would be equally applicable to awards passed in non-convention countries.
The Bhatia judgment faced a lot of criticism. The main criticism was that it rejected the territoriality principle to distinguish Parts I and II of the Act. Soon after in Shreejee Traco (I) (P) Ltd. v Paperline International Inc., Justice RC Lahoti (as he then was) took a contrary view and held that S. 2(2) of the Act was clear and unambiguous that Part I would not apply where the place of arbitration is outside India. However, the judgment in Bhatia International prevailed as it was delivered by a larger bench of the Supreme Court.
Agreeing with what was laid down in Bhatia International, the Court in Venture Global Engineering v. Satyam Computer Services Ltd reiterated that the provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and to all proceedings relating thereto. It also held that 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. It was 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. It further said:
“By omitting to provide that Part I will not apply to international commercial arbitrations which take place outside India the effect would be that Part I would also apply to international commercial arbitrations held out of India. But by not specifically providing that the provisions of Part I apply to international commercial arbitrations held out of India, the intention of the legislature appears to be to allow parties to provide by agreement that Part I or any provision therein will not apply. Thus in respect of arbitrations which take place outside India even the non-derogable provisions of Part I can be excluded. Such an agreement may be express or implied.”
The Court, while relying heavily on Bhatia judgment, held that a foreign award can be challenged under S. 34 of the Act, since Part I of the Act would apply to such foreign awards unless it was expressly or impliedly excluded by the parties.
However, the applicability of various provisions of the Act to arbitrations held outside India was finally laid down to rest in the decision by a constitution bench of the Supreme Court. In Bharat Aluminium Co. v Kaiser Aluminium Technical Services Inc., the main issue arising was the applicability of Part I of the Act to arbitrations that take place outside India following the decisions of the court in Bhatia and Venture. The Constitution Bench overruled Bhatia and Venture and upheld the territoriality principle as fundamental to the Act. In the Court’s view, Part I of the Act would only apply to domestic and international commercial arbitrations that took place in India and would not apply to arbitrations that took place outside India. It held that “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.” It said 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, and that “if Part I were to be applicable to arbitrations seated in foreign countries, certain words would have to be added to Section 2(2)” which would be “contrary to the contextual intent and object of Section 2(2)” of the Act. It also said that there is no overlapping of the provisions in Part I and Part II; nor are the provisions in Part II supplementary to Part I. Rather there is complete segregation between the two parts. It further was of the view: “[I]f the gap or lacuna is disclosed, it would be for the Parliament to rectify the same. Such a task cannot be undertaken by the Court.”
To quote from the judgment,
“We are of the opinion that merely because the Arbitration Act, 1996 does not cover the non convention awards would not create a lacuna in the Arbitration Act, 1996. If there was no lacuna during the period in which the same law was contained in three different instruments, i.e. the Arbitration Act, 1940 read with 1961 Act, and the Arbitration (Protocol and Convention) Act, 1937, it cannot be construed as a lacuna when the same law is consolidated into one legislation, i.e. the Arbitration Act, 1996.”
“It must further be emphasised that the definition of “foreign awards” in Sections 44 and 53 of the Arbitration Act, 1996 intentionally limits it to awards made in pursuance of an agreement to which the New York Convention, 1958 or the Geneva Protocol, 1923 applies. It is obvious, therefore, that no remedy was provided for the enforcement of the “non convention awards” under the 1961 Act. Therefore, the non convention award cannot be incorporated into the Arbitration Act, 1996 by process of interpretation. The task of removing any perceived lacuna or curing any defect in the Arbitration Act, 1996 is with the Parliament… [T]he clear intention of the legislature is not to include the Non-convention Awards within the Arbitration Act, 1996.”
The position has now been made clear by the Constitution Bench that a foreign award passed in a non-convention country cannot be enforced under the Arbitration Act. However, the following question is still left unanswered: In the absence of legislative intervention, how can foreign awards rendered in a non-convention country be enforced in India?
At this moment, it is of considerable importance to refer to the judgment of the Supreme Court in the case of Badat & Co. Bombay v. East India Trading Co. which was passed much prior to enactment of the present Arbitration Act, 1996. The Supreme Court had laid down that the awards passed in a non-convention country can be enforced on grounds of justice, equity and good conscience. To quote,
“[U]nder the Arbitration Protocol and Convention Act, 1937 (VI of 1937), certain commercial awards made in foreign countries are enforceable in India as if they were made on reference to arbitration in India. The provisions of this Act, however, apply only to countries which are parties to the Protocol set forth in the First Schedule to the Act or to awards between persons of whom one is subject to the jurisdiction of some one of such powers as the Central Government being satisfied that the reciprocal provision have been made, may, by notification declare to be parties to the Convention, setforth in the Second Schedule to the Act. It is common ground that these provisions are not applicable to the awards in question. Apart from the provisions of the aforesaid statute, foreign awards and foreign judgments based upon awards are enforceable in India on the same grounds and in the same circumstances in which they are enforceable in England under the common law on grounds of justice, equity and good conscience.”
It is submitted that the Act would not apply to awards passed in a non-convention country. The Bhatia judgment had set a wrong position of law, which was also followed in Venture Global. By holding that Part I of Act would apply to awards passed in a non-convention country, the Court did what was unintended by legislative intent of the Act. The Bhatia judgment has been correctly overruled in BALCO judgment. However, it can be said that there is a flaw in the Act. The legislature has nowhere in the Act dealt with the awards passed in a non-convention country. A plain proposition would mean that the awards passed in a non-convention country cannot be enforced in India. The flaw must be rectified by the legislature. Till then, going back to what was stated by Supreme Court in Badat (1963), such awards can be enforced on “common law grounds of justice, equity and good conscience.” It is concluded that a fresh civil suit can be filed in this regard.
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