Section 2 (2) provides that Part I shall apply only when the place of arbitration is India. This statement was not there in the repealed 1940 Act. It seems to have become necessary because Part II of the Act is dealing with ‘foreign awards.’ It follows almost as a necessary implication that Part I does not apply where the place of arbitration is not in India.
Tracking The History of Litigation
There was however a Delhi High Court decision in 1997 in Dominent Offset P. Ltd. V. AdamovkeStrajirny, which holds that though the arbitration was to take place in London and was to be conducted by the Paris International Chamber of Commerce, Part I was applicable. The reasoning given by the court was that Sub Sec (2) of Sec 2 contains an inclusive definition and does not exclude the applicability of part I to those arbitration which are not being held in India.
The same ratio was followed in 2000 in OlexFocas Pvt. Ltd. v. Skodaexport Company Ltd.
But a different view was taken by the Calcutta High Court in 1997 in East Cost Shipping v. M.J. Scrap. The court held that provisions of Sub Sec (3), (4) and (5) of Sec. 2 are controlled by Sub Sec (2) of Sec 2 and cannot widen the scope of thereof to include arbitral proceedings being conducted outside India.
The court further laid down that sub-sec 3 seeks to exclude certain dispute from the operation of Part I, sub-sec 4 seeks to extend its scope to certain arbitral proceedings provided by the statute and sub-sec 5 merely indicates that the provisions of Part I will apply to all arbitral proceedings relating to any other laws relating to arbitration or to agreements on arbitration between India and any other foreign country.
The court went ahead and relying on the ratio laid down by SC in Morgan Stanley MF v. Kartik Das, that the court’s power to pass an interim order in connection with special Acts must be derived from that statute itself, laid down that since there is no provision in Part II, Chapter I or any other portion of the Act applicable to foreign arbitration under the New York Convention, which gives the court the power to pass interim order, so the court does not have jurisdiction to pass such interim order in cases of foreign arbitration. The court also laid down that it is well established that while interpreting statute the courts must always presume that the legislature in its wisdom intended that every part of the statute should have effect.
In 1998 in Kitechnology v. Union GmbhPlastmaschinen, where agreement was to be covered by German Law and to be held in Frankfurt, the Delhi High court held that Sec 9 of the Act will have no jurisdiction to pass an interim order.
The same ratio was re-affirmed by Delhi High Court in 2000 in Marriott International v. Ansal Hotels in following words: the expression ‘every arbitration under any other enactment’ in Sec2(4) and ‘all arbitrations’ in Sec 2(5) do not mean that Part I of the Act will apply even to arbitration taking place outside India. The applicability of Part I of the Act to “all arbitration” means that this Part will apply to all arbitration held not only under an agreement between parties but also under the provision of rules and by laws of certain associations such as associations of merchants, stock exchange and different chambers of commerce and also to arbitration under certain statutes like Indian Telegraph Act etc but only when the place of arbitration is in India. The expression ‘every arbitration under any other enactment’ in Sec 2(4) and ‘all arbitrations’ in Sec 2(5) cannot be stretched to mean an arbitration being held outside India.
The court further lay down that in case the interpretation sought to be given to Sec 2(5) of the Act is accepted, the provisions contained in Sec 2(2) of the Act will become redundant. Therefore the only way in which Sec 2(2) and Sec 2(5) of the Act can be harmoniously read together is that: Part I of the Act shall apply to all arbitration being held under an agreement between parties, under the provision of rules and by laws of certain associations such as associations of merchants, stock exchange and different chambers of commerce and also to arbitration under certain statutes like Indian Telegraph Act etc but only when the place of arbitration is in India. There is no other way in which Sec 2(5) and Sec 2(2) of the Act can be interpreted.
The 176th Law Commission of India Report
The Report stated that in several cases, Indian parties have been deprived of a right to seek prompt-interim relief under section 9 of the Act from the Court before the commencement of arbitration proceedings and after the award, in international arbitration awards, or after the passing of such awards where the seat of arbitration is outside India because sec.2(2) confines Part I of the Act to arbitrations in India.
The Report further stated that, in fact all countries which have adopted the UNCITRAL Model Law, apply Arts. 8, 9, 35 and 36 of the Model Law to international arbitration where the seat of arbitration is outside that country. This was not noticed when the 1996 Act was passed.
The commission after reiterating the exception provided to Article 8, 9, 35 and 36 in cases of place of arbitration being outside the country stated that, this aspect somehow escaped attention, when sec.2(2) was drafted in the 1996 Act. That section confined Part I (including sections 8, 9, 35 and 36) only to arbitrations where the place of arbitration is in India.
The commission the recommended that, there has been an absolute unanimity that this deficiency in sec.2 (2) has to be immediately remedied by making sec.9 (and other provisions like sections 8, 35 and 36) applicable to international arbitrations where the place of arbitration is outside India or where the place of arbitration is not specified in the arbitration agreement.
The Commission concluded that, the legal position is as follows. Whether the arbitration is international in nature or is a purely domestic arbitration between Indian nationals, where Part I applies, the place of arbitration must be in India and there is no question of the parties or the institution to which they have referred the issue of the place of arbitration under Section 2(6), taking a decision that the place of arbitration will be outside India.
The above mentioned Report of Law Commission of India makes it clear that Part I of the Act is applicable to arbitrations held in India and not outside India.
Bhatia International v Bulk Trading
Barely 6 months after Law Commission of India submitted its 176th Report in September 2001,a 3 judge bench of SC in 2002 in Bhatia International v Bulk Trading, laid down that:
In cases 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.
Reasons for Non-Applicability of Part I to Arbitration Being Held Outside India
It is submitted with respect that the above decision that Part I of the Act applies also to arbitration taking place outside India, cannot be accepted as correct. In the first place, sub-sec (2) of Sec 2 of the Act clearly provides that Part I shall apply where place of arbitration is in India.
The fact that, Part I of the Act extends to Jammu & Kashmir only, in so far relates to international commercial arbitration, does not go to show that Part I is applicable to arbitrations taking place outside India.
Sub-sec (5) of Sec 2 of the Act no doubt provides that Part I shall apply to all arbitrations and to all proceedings relating thereto; which only means that Part I shall apply whether arbitration is commercial or non commercial, ad-hoc or institutional, consensual or statutory, domestic or international; but it does not go on further to state that Part I shall apply to where the place of arbitration taking place anywhere, whether in India or not. The provision of sub-sec 5 is controlled and governed by sub-sec 2 stating that Part I shall apply where the place of arbitration is in India.
It is submitted that the words of sub-sec 2 of sec 2 are so plain, unambiguous and positive that the interpretation placed by the bench attracts criticism of its being a piece of judicial legislation.
When a positive statement is made, it is not necessary to further make a negative statement or to add the word “only”.
Taking example from the existing legislations in India:
1. In constitution of India if Article 19 states that:
Article 19.(1) All citizens shall have the right—
(a) to freedom of speech and expression;
(b) to assemble peaceably and without arms;
(c) to form associations or unions;
(d) to move freely throughout the territory of India;
(e) to reside and settle in any part of the territory of India; 1[and]
(g) to practise any profession, or to carry on any occupation, trade or business.
Going by interpretation given by Supreme Court [SC] to sub-sec 2 of sec 2, since it does not specifically state that it is a right available only to citizens of India, so it is available even to non citizens or to foreigners.
Going further since it does not specifically lay down that the state should not impose fetters on the fundamental right of freedom, so the state can go ahead and impose any kind of restriction on these fundamental rights.
2. If section 1 of the Indian penal code states that:
Section 1: Title and extent of operation of the Code.—
This Act shall be called the Indian Penal Code, and shall extend to the whole of India.
Going by interpretation given by sc to sub-sec 2 of sec 2, since it does not specifically state that it is it is not applicable to other states outside India, so it is applicable to territories outside India.
Although to support its conclusion the SC bench has described the following consequences which would ensue if its interpretation is not accepted. The result would:-
a) Amount to holding that the Legislature has left a lacuna in the said Act. There 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.
b) Lead to an anomalous situation, inasmuch Part I would apply to Jammu and Kashmir in all international commercial arbitrations but Part I would not apply to the rest of India if the arbitration takes place out of India.
c) Lead to a conflict between sub-section (2) of Section 2 on one hand and sub-sections (4) and (5) of Section 2 on the other. Further sub- section (2) of Section 2 would also be in conflict with Section 1 which provides that the Act extends to the whole of India.
d) Leave a party remediless inasmuch as in international commercial arbitrations which take place out of India the party would not be able to apply for interim relief in India even though the properties and assets are in India. Thus a party may not be able to get any interim relief at all.
But taking the above first alleged consequence it will not be proper to say that there would be no law in India governing arbitrations held in non-convention country. The law relating to awards in arbitration proceedings in non- convention countries , before the enactment of the present Act, was expressed in Badat & Co., Bombay v. East India Trading Co. It was held therein that in an award given in a non convention country enforceable in India on the same grounds and in the same circumstances in which it is enforceable in England under common law ground of justice, equity and good conscience, by bringing a suit provided by an agreement to arbitrate was made within the limits of the jurisdiction of Indian court and the award is final and binding. The present act of 1996 has not changed that law; not that there would be no law existing in India in non convention country.
Coming to the second alleged consequence, considering section 1 clause 2 and its proviso, part I applies to Jammu and Kashmir and to rest of India equally in relation to international commercial arbitration taking place in India and it would also not apply equally in relation to international commercial arbitration taking place outside India by operation of sec2 clause 2, stating that part I shall apply where the place of arbitration is in India. When part I is itself is of limited applicability by reason of words employed in section 2 clause 2, the possibility that part I would apply in J&K in international commercial arbitration taking place outside India can never arise. It must have been obviously thought unnecessary to use the limiting words “taking place in India” in the proviso to section 1 clause 2 to the words international commercial arbitration therein. In fact, the limiting words if used in the proviso to section 1 clause 2 would not have made any difference and would have been superfluous.
With regard to alleged third consequence, there appears to be no conflict between sub-sec. 2 of sec 2 on one hand and sub sec 4 and 5 of sec 2 on the other. The word every arbitration occurring in sub sec 4 do not stand alone but the entire expression, it would be seen, is “every arbitration under any other enactment.” The expression thus refers to all statutory arbitration and not to every arbitration taking place either in India or outside India. Similarly, the expression “all arbitration” used in sub sec 5 has reference to different kinds of arbitration such as ad hoc arbitration, institutional arbitration, and international commercial arbitration and so on. That expression used in that sub section means that Part I shall apply to all those arbitration. Sub sec 5 does not go further to state that Part I shall apply to all arbitration taking place anywhere, whether in India or not.
With regard to the alleged fourth consequence, it is sufficient to state that the parties have under section 20 (1) of the Act freedom of choice with regard to the place of arbitration. If they choose a place in India as the place of arbitration, Part I will apply with such remedies opens to them as are provided therein. If they choose a place of arbitration outside India, still some remedies under the applicable law would remain open to them but then they cannot complain that they have no remedies provided in Part I.
The reasoning given by the bench led it go to the length of saying that an award made in international commercial arbitration held in no-convention country is a ‘domestic award.’ Being a domestic award, such award would thus become enforceable under the provisions of Part I, and will have an edge over even foreign awards enforceable under Part II.
The key interpretation partly lies in the wording of Sec 28 of the Act. Sec 28 dealing with rules and law governing arbitration other than international commercial arbitration and arbitration which is international commercial arbitration, limits itself to these arbitrations taking place in India. It does not conspicuously provide for international commercial arbitration taking place outside India for the obvious reason that Part I does not apply to arbitration held out of India.
Also in light of Law Commission of India Report highlighting the deficiency in Sub-Sec 2 of Sec 2 making Part I applicable only to arbitration held in India without making an exception for Sections 8, 9, 35 and 36 where places of arbitration is outside India and in light of the reasoning appended above, the decision of SC in Bhatia International Case seems to be a piece of judicial legislation and an act of judicial activism, thereby usurping over the powers and domain of legislature within whose ambit the power of amendment to statue solely resides.
Scope of Term “Implied Agreement in Bhatia International Judgment”
However this series of judicial blunder didn’t end with Bhatia International case but on the other hand it encouraged more such blunders.
In 2008 SC in Venture Global v. Satyam Computers relying on Bhatia Case went ahead and held that it could test a foreign award under Sec 34 of the Act even where the seat of arbitration is outside India.
In 2008 and 2009 respectively SC in Indtel Technical Services v. WS Atkins PLC and in Citation Infowares v. Equinox Corp, extended the ratio of Bhatia International case to Sec 11, where the parties although stipulated that the contract between them to be governed by a foreign law but failed to expressly indicate a seat of arbitration. The question of scope of “implied agreement” also arose but the court rejected the submission and held that such stipulation is insufficient to constitute “implied agreement”.
These two decisions have come despite of SC’s own decision in NTPC v. Singer Co. where the court in express terms that there is a presumption that the proper law of arbitration is the same as the proper law of contract.
Effectively, this has means that the “implied agreement” exception established in Bhatia Case requires parties to meet an unusually high threshold. The result is that two parties that subject their contract to a foreign law, or provide for arbitration outside India will in all likelihood be unable to prevent an Indian Court from issuing interim orders, appointing arbitrators, examining the validity of the arbitration agreement or setting aside the award on public policy grounds, unless there is a specific and express exclusion of the Indian Act.
In addition to this the aim and object of UNICITRAL Model Law is to restrain the judicial interference with arbitration but Bhatia International Case set a trend of increasing judicial interference in foreign awards.
Validity of Interpretation Provided By Supreme Court
Although Section 2 (2) provides that Part I shall apply only when the place of arbitration is India.
But, SC in Bhatia International v Bulk Trading, laid down that:
In cases 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.
The basic rules of interpretation say that: “If the words of statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense. The words themselves do alone in such cases best declare the intent of the lawgiver”.
The results of the construction are then not a matter for the court,even though they may be strange or surprising,unreasonable or oppressive.
The SC in M V Joshi v. M U Shimpi laid down the fundamental principle of interpretation in form of a primary test: the language employed in the Act and when the words are clear and plain the court is bound to accept the expressed intention of the legislature.
The courts cannot aid the legislature’s defective phrasing of the Act, they cannot add or mend and by construction make up deficiencies which are left there.
Similarly it is wrong and dangerous to proceed by substituting some other words for words of the statute. Speaking briefly the court cannot reframe the legislation for the very good reason that it has no power to legislate.
By interpreting Sec 2 (2) in this manner so as to apply Part I of the Act to arbitration held outside India, the SC has created a case of Casus Omissus which means that a matter which should have been, but has not been provided for in a statute cannot be supplied by courts, as to do so will be legislation and not construction.
Indeed it is very difficult to understand the interpretation of SC of the scope of Section 2(2). No canon of interpretation permits Section 2 (2) being read in a different way merely because the word “only” has not been used. If this view is accepted, then the courts would be at liberty to give different interpretations to several definitions merely because a particular word or meaning was not preceded by “only”.
In light of the decision of Calcutta High Court in East Cost Shipping case, Delhi High Court in Kitechnology case and in Marriott International Hotels case and reasoning given therein and also keeping in view the Rules of Interpretation and most important of all following the 176th Law Commission of India Report, the decision of SC in Bhatia International Case appears to be erroneous and flawed. Instead of curbing confusion (if any) it has lead to more ambiguity, repugnance and inconvenience.
# (1997) 68 DLT 157
# AIR 2000Del 161
# (1997) 1 Cal. HN 444
# (1998) 47 Del RJ 397
# AIR 2000 Del 377
# AIR 2002 SC 1432
# AIR 1964 SC 538
# (2008) 10 SCC 308
# 2009 (3) Arb LR 593 (SC)
# (1992) 3 SCC 551
# AIR 2002 SC 1432
# Sussex Peerage case, (1844) 11 Cl& F 85; State of Orissa v. JoginderPatjoshi AIR 2004 SC 1039
# AW Meads v. Empror AIR 1945 FC 21; CIT v. Keshav Chandra Mandal AIR 1950 SC 265
# Smith v. East (1956) 1 All ER 855
# Nasiruddin v. Sita Ram Agarwal (2003) 2 SCC 577
# AIR 1961 SC 1494
# Crawford v. Spooner (1846) 6 Moore PC 1; Grasim Industries Ltd v. Collector of Customs
# Pinner v. Everett (1969) 3 All ER 257; MaulviHussain v. State of Gujrat (2004) 6 SCC 672
# State of Jharkhand v. Govind Singh AIR 2005 SC 294
# Hansraj Gupta v. Dehra Dun Mussoorie Electric Co. Ltd. AIR 1933 PC 63; Sri Ram Saha v. State of West Bengal AIR 2004 SC 5080
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