BHATIA INTERNATIONAL TO BALCO: PARADIGM SHIFT IN

ARBITRATION LAW IN INDIA.

INTRODUCTION
Arbitration is a medium which provides an effective and expeditious dispute resolution
framework unlike the Court proceedings which takes number of years in resolving disputes
between the parties. Parties submit themselves to Arbitration, as it enables a faster resolution and
disposal of the disputes between the parties and leaves very little scope for prolongation of
disputes. For this reason it inspires the confidence of Foreign Investors to invest in India and
reassure international investors in the reliability of the Indian legal system to provide an
expeditious, cheaper and flexible dispute resolution mechanism.
There have been amendments in the Arbitration and Conciliation Act. Till 1996, there were three
statutes on arbitration in India i.e., the Arbitration (Protocol and Convention) Act, 1937, the
Indian Arbitration Act, 1940 and the Foreign Awards (Recognition and Enforcement) Act, 1961.
The Arbitration Act, 1940 dealt only with arbitration that took place in India. There arose a need
for reforming the Arbitration Act, 1940 and amend the law relating to domestic arbitration,
international commercial arbitration and enforcement of foreign arbitral awards as also to define
the law relating to conciliation and for matters connected therewith or incidental thereto
1
and
thus the Arbitration and Conciliation Act of 1996 came into place. The Arbitration and
Conciliation Act, 1996 is a long leap in the direction of alternate dispute resolution systems. It is
based on UNCITRAL (United Nations Commission on International Trade Law) Model.
2

The Arbitration and Conciliation Act of 1996 has divided itself into two parts. The First part
deals with Arbitration that is conducted in India and its enforcement. The Second part provides
for arbitration conducted in a Foreign Country and enforcement of such foreign awards.
The resolution of disputes through Arbitration is the most expeditious, cheap and flexible means
of dispute resolution. Parties prefer this Statute for the resolution of their disputes for the reason
that they can decide as to whether to refer their dispute to a specific arbitrator or a panel of
arbitrators with a developed expertise in the subject matter in dispute, control on the timetable as
opposed to leaving this to the court administrators, confidentiality etc.


1
Preamble, The Arbitration and Conciliation Act, 1996
2
Ibid





Arbitration with Indian companies has been a challenge for the other (foreign) parties. Over the
years it became increasingly complex for the parties to invoke contractual dispute-resolution
clause. Enforcing foreign tribunal awards faced a unique difficulty in India. Some of the hurdles
had been resolved by the Supreme Court in BALCO case.
3
The apex court of the country, on
September the 6
th
2012 gave most awaited (landmark) judgment in BALCO case, overruling its
decisions in previous cases. This decision of the court gave the countrys standing as a
jurisdiction hospitable to international commercial arbitration a major boost.
The key issue in BALCO case involved the question about the role f Indian Courts in arbitrations
where the contracting parties have chosen the seat to be outside of India. The court took
cognizance of the matter and gave a 190 page Judgment. Supreme Court after hearing both the
parties held that Indian Courts does not have Jurisdiction to set aside awards or issue interim
orders to arbitration seated abroad. Supreme Court in its Judgment also made it clear that Part I
of the Arbitration and Conciliation Act, 1996 act does not apply to the international commercial
Arbitration seated outside India or in the words of the Honble Justice Surinder Singh Nijjar,
awards rendered by international tribunals seated outside of India, would only be subject to the
jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance
with the provisions contained in Part II of the Arbitration Act, 1996., overruling its Judgment in
Bhatia case where it held 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.
The Balco judgment has been widely appreciated for the clarity it has brought in the often
contested position on the applicability of Part I of the 1996 Act to foreign arbitrations and is a
welcome relief for parties to international commercial arbitrations who would fear undue
intervention of Indian courts. However, the Judgment was given prospecting affect that is to say
it will be applicable only to the agreements which have been entered after 6th September 2012.
Thus the judgment would not be applicable to a dispute which arose after the date of Judgment
provided that agreement took place before the date of Judgment. Thus the arbitration disputes
would still be governed by BHATIA Judgment for a foreseeable future.
With this decision, the law governing arbitrations in India has regained its lost direction.
However, the journey has only partially been covered, as efforts are required from the both the

3
Bharat Aluminum Co. v. Kaiser Aluminum Technical Services Inc., AIR 2005 Chh 21, 2006 (1) MPHT 18 CG.





judiciary, in so far as it remains consistent with its findings and approach even in respect of
pending and remanded cases, and the legislature, in so far as it provides suitable and timely
support to the arbitral process through amendments to the 1996 Act.
LAW PRIOR TO BALCO V KAISER
The Supreme Court in Bhatia International v. Bulk Trading S.A,
4
held that Part-I of the
Arbitration & Conciliation Act would apply only to international commercial arbitration held
outside India but parties could expressly or impliedly exclude the applicability of Part-I. The
Court reasoned that were Part-I to be held inapplicable to such arbitrations, the following
anomalies would arise:
1. There would be no law governing arbitrations held in non-convention countries.
2. Part-I would apply to Jammu & Kashmir in all international commercial arbitrations
(including outside arbitrations) but for the rest of India, Part-I would not apply to outside
arbitrations.
3. Ss. 2(4) and (5)
5
would be in conflict with S. 2(2) of the Act.
6

4. A party to an outside arbitration would have no remedy to obtain interim relief even if the
assets which are the subject matter of such application for interim relief are in India.
The above reasoning in Bhatia International has been widely criticized by jurists as being
grossly erroneous. One of the main justifications given by the Apex court in Bhatia International
was that Part-I did not give an option to parties of utilizing interim measures in arbitrations held
outside the territory of India. Before Bhatia International, various High Courts had given
different and often conflicting judgments relating to power of a court to order interim measures
of protection in arbitrations held outside of India, i.e., outside arbitration.




4
AIR 2002 SC 1432.
5
(4) This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration under any
other enactment for the time being in force, as if the arbitration were pursuant to an arbitration agreement and as if
that other enactment were an arbitration agreement, except in so far as the provision of this Part are inconsistent with
that other enactment or with any rules made thereunder;
(5) Subject to the provisions of sub-section (4), and save in so far as is otherwise provided by any law for the time
being in force or in any agreement in force between India and any other country or countries, this Part shall apply to
all arbitrations and to all proceedings relating thereto.
6
Sec/2(2) of The Arbitration and Conciliation Act,1996, This Part shall apply where the place of arbitration is in
India.





THE BALCO JUDGMENT
The broad thrust of the BALCO decision is to protect the future from the erroneous and
Anachronistic decisions of the past and, consistent with underlying philosophy and ethos of the
New York Convention and UNCITRAL Model law, exhort Indian courts to become more
Arbitration-friendly and thereby less prone to intervene in the arbitral process. To this end,
BALCO certainly lives up to the buzz and hype created in the international arbitration
community after news broke out earlier this year that the Indian Supreme Court was hearing a
case that sought a reconsideration of its earlier decisions in Bhatia International and Venture
Global Engineering.
The decision in Bharat Aluminium Co. v Kaiser Aluminium Technical Services overrules
previous controversial decisions from the Indian Supreme Court in the cases of Bhatia
International v Bulk Trading S.A.in 2002 and Venture Global Engineering v Satyam Computer
Services Limited in 2008. As discussed earlier, we know that in those cases, the Court held that,
unless the parties to an arbitration agreement expressly or impliedly agreed to the contrary, the
Indian courts had similar jurisdiction in foreign-seated arbitrations as they had in domestic
arbitrations seated in India, under Part I of the Arbitration and Conciliation Act 1996.
As a result of these earlier decisions, Indian courts, in a number of instances, have granted
interim measures in respect of foreign-seated arbitrations. In the case of Venture Global, the
Supreme Court was prepared to set aside an award made in a foreign seated arbitration, in
contradiction to the underlying philosophy and objectives of the New York Convention on the
enforcement and foreign arbitral awards and the UNCITRAL Model Law.
Here in the BALCO case the parties in their agreement specified that any dispute under the
Agreement would be settled in accordance with the English Arbitration Law, and the seat of
arbitration was specified to be at London. The Agreement further stated that the governing law
with respect to the Agreement was Indian law; however, arbitration proceedings were to be
governed and conducted in accordance with English Law. Disputes arose and were duly referred
to arbitration in England. The arbitral tribunal passed two awards in England which were sought
to be challenged in India u/s. 34 of the Act in the district court at Bilaspur. Successive orders of
the district court and the High Court of Chhattisgarh rejected the appeals. Therefore, BALCO
appealed to the Supreme Court.
The main issues decided by the apex court in the instant case were as follows:





I. The Word Only
Conspicuously section 2(2) of the Indian Act, which states that This Part [Part I] shall apply
where the place of arbitration is in India, did not include the world only akin to Article 1(2) of
the Model Law. The Court in Bhatia found this to be an opt-out provision wherein Part I applied
to all arbitrations unless it was expressly or implicitly excluded. The court in Bharat Aluminum
held that this was not a case of cassus omissus and the territoriality principle of arbitration still
applied. Overruling Bhatia the Court held that the word only in the Model Law was meant to
limit extra-territoriality to Arts. 8, 9, 35 & 36. Since the Indian Act did not make scope for such
extra territoriality, it was deemed redundant to include it in the legislation. Having over-ruled
Bhatia the Court finds that Part I and Part II are two independent pieces of legislation and there is
complete segregation between the two.
II. Setting Aside Foreign Awards.
Considering Bhatia stands overruled, Venture Global is left with no legal basis. The Court has
come to the obvious conclusion that an Indian Court cannot set aside a foreign award. It was
argued that the New York Convention provides for a second forum for annulment. The Court
concluded that this second alternative refers to the procedural law of arbitration rather than the
law governing the substantive portion of the contract. This second forum would be available
only in the event that the first alternative failed (i.e., competent authority of the country in which
the award was made).
III. Interim Relief.
The decision in Bharat Aluminum finally restores the territoriality principle of the Model Law. It
Recognizes that the forum where the arbitration is seated shall have sole jurisdiction over the
arbitration. This raises an interesting problem. Since Section 2(2) of the Indian Arbitration Act,
1996 does not carve out exceptions similar to Art. 1(2) of the Model Law, parties that have their
seat of arbitration outside India may not be able to get interim relief from Indian Courts. Hence
Section 9 injunctions (akin to Art. 9 of the Model Law) will be unavailable to parties seeking to
enforce the arbitral tribunals interim relief orders. It is interesting to note the dicta of the Court
that applying Section/ 9 in foreign arbitrations would be destructive of the territorial principles
upon which the UNCITRAL Model Laws are premised.







The bench observed that in a foreign seated international commercial arbitration, no application
for interim relief would be maintainable under Section 9 or any other provision, as applicability
of Part I of the Arbitration Act, 1996, is limited to all arbitrations which take place in India.
Similarly, no suit for interim injunction would be maintainable in India, on the basis of an
international commercial arbitration with a seat outside India. Part I of the Arbitration Act,
1996, is applicable only to all the arbitrations which take place within the territory of India.
Parties to foreign arbitrations can only avail of enforcement remedies in Part II of the Act, which
contains provisions similar to the New York Convention.
CONCLUSION
Indian Supreme Court has embarked on a direct inquiry as to the intention and purpose behind
the relevant provisions of the UNCITRAL Model Law and the New York Convention, as
discernible from the travaux prparatoires, in addition to appreciating how those operative
provisions are understood in several other jurisdictions. This is an important development
because it represents a paradigm shift away from its previous case-law and practice. The apex
courts willingness to do so, in fact, resoundingly conveys the message that Indian courts will no
longer hesitate to be directly guided by the terms of the relevant international conventions, as
they are understood internationally, and, if the need arises, construe Indian legislation in
conformity with the same. This is all the more significant in view of the fact that, even now, one
of the major hurdles that arbitration users face in India is the Indian courts difficulty in being
able to adapt and transition to arbitrations governed by a law based on the UNCITRAL Model
Law, despite it being enacted in 1996. As explained above, the Bhatia or Venture Global
decisions enabled Indian courts to assert jurisdiction with respect to foreign-seated arbitrations
involving an Indian party, unless the parties had expressly or impliedly agreed to the contrary.
Seen in that light, it is important to note that these decisions did not affect the validity of foreign-
seated arbitration clauses involving an Indian party. With respect, it is thus anon-sequitur to
argue that by overruling these decisions, such foreign-seated arbitration clauses would be
somehow susceptible to being invalidated as well. On the contrary, the only past transactions that
were susceptible to being invalidated in the wake of the BALCO decision were court
proceedings (either pending or those having attained finality) commenced in India on the basis of
the Bhatia or Venture Global decisions. Accordingly, the BALCO decision should have been
applied prospectively to the commencement of any proceedings in India rather than the





execution of any new arbitration agreements. This is, in fact, likely to become a contentious issue
in the future. Given the significant delays in court proceedings in India and the fact that it is not
uncommon to obtain a final decision only after litigating there for at least 7 to 10 years, the
BALCO decision effectively means that despite Bhatia and Venture Global being expressly
overruled, those precedents will ironically continue to guide the Indian courts for another decade
or so with respect to arbitration agreements entered into prior to 6 September 2012. Unless the
Indian Supreme Court subsequently backpedals on this issue, to the extent I discussed above,
there is likely to be a lot of confusion created in any attempt made by the Indian courts to
maintain two parallel regimes for the next decade or so.