"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Wednesday, March 13, 2013

BALCO: Three Errors or a Half? Part I

Recently, two papers have been published critically analysing the judgement rendered by a five judge Bench of the Supreme Court in Bharat Aluminium Co. v. Kaiser Aluminium Technical Service Inc (BALCO). These two papers are:

  • V. Niranjan & Shantanu Narvane, ‘Bhatia International Rightly Overruled: The Consequences of Three Errors in BALCO’ (2012) 9 SCC J-26; ("Three Errors")
  • SK Dholakia & Aarthi Rajan, ‘Not Three but Half an Error in BALCO: Bhatia International Rightly Overruled’(2013) 1 SCC J-81. ("Half an Error")
These papers present virtually opposite views on certain aspects relating to BALCO. Half an Error was, in fact, a reply to Three Errors. This series of posts examines the correctness of the contentions in the said papers. The first part of this series discusses the comments in these papers on the interpretation of the term "Court" in the Arbitration and Conciliation Act, 1996 (Act or 1996 Act). The purpose of discussing the same is two fold. First and the obvious purpose is to provide a context to the discussion here as to the correctness of the contentions; second, to enable to "communicate" the arguments to those not having access to the above papers. Hence, the arguments in the said papers are discussed in detail. The next part of the series would analyse the correctness of the contentions in the said papers on BALCO's take as to the interpretation of Section 2(1)(e).

Court is defined in Section 2(1)(e) as below:

"Court" means the principal Civil Court of original jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a grade inferior to such principal Civil Court, or any Court of Small Causes;"

In BALCO, the argument was raised in support of applicability of Part I to foreign seated arbitration that a combined interpretation of Sections 2(1)(e), 20, and 28 read with Sections 45 and 48(1)(e) revealed that Part I is not seat centric but in reality subject matter centric. As regards Section 2(1)(e), it was argued that since the focus therein is on the subject-matter of the arbitration, Part I would be applicable to foreign seated arbitration irrespective of the seat as long as the subject matter of the arbitration relates to India.

Rejecting the contention, the Supreme Court held that these provisions cited should be read with "territoriality" as the focal point in view of Section 2(2). It is in this context that the court sought to interpret Section 2(1)(e). The court's observations on this aspect are summarized:
  • In Section 2(1)(e), the phrase "subject matter of arbitration" should not be confused with the phrase "subject matter of suit". "Subject matter" in the said provision is used to identify the courts having supervisory control over the arbtiration proceedings. It refers to the court which would be the seat of arbitration. The legislature has intentionally provided two courts with jurisdiction over the arbitral process. The court where cause of action arises and the court where the arbitration takes place. For instance, if the parties to the agreement are from Mumbai and Kolkata and if the arbitration is agreed to be held in a neutral place like Delhi, the courts in Delhi will have supervisory control over hte arbitral process.
  • In addition, the court where cause of action arises will also have jurisdiction and the relevant court that would have jurisdiction out of these would be governed by Section 42 of the Act.
  • The definition of "court" under Section 47 refers to the court within whose jurisdiction the asset/person against which/ whom the award is to be enforced is located. The objectives of both these definitions are different.

Arguments in the Three Errors Paper:

The below section of this post summarizes the arguments in the Three Errors paper on the above aspect:
  • Under Section 2(1)(e), the Principal Civil Court of Original Jurisdiction must have jurisdiction to decide on questions forming the subject matter of arbitration.
  • The court construed wrongly "subject matter of arbitration" to be different from "subject matter of suit" when this clearly was no the intention.
  • However, the Act does not fix jurisdiction directly but by analogy to the courts that would ordinarily, but for the arbitration, have jurisdiction in a suit. This is an "indirect way of fixing jurisdiction".
  • This meant that the court should imagine that the arbitration agreement did not exist and question whether it would have jurisdiction. If so, it would be the court for the purposes of the Act.
  • This position has been affirmed by various High Courts in decisions such as GE Countrywide Consumer Financial Services Ltd. v. SS Bhatia (2006) 129 DLT 393. The position in the 1940 Act was also similar to the one in the GE Countrywide case. See, for instance, FCI v, Evdomen Corp (1999) 2 SCC 446, Cursetji Jamshedji v RD Shiralee AIR 1943 Bom 32, Jindal Vijaynagar Steel (JSW Steel) v Jindal Praxair Oxygen (2006) 11 SCC 521.
  • Thus, Section 2(1)(e) is not consent based jurisdiction but jurisdiction based on statute.
  • The position is contrary to the well-established Indian position that jurisdiction to Indian courts cannot be conferred by contract.
  • The Supreme Court's view in BALCO would have the following consequences:
  • The court at seat of arbitration which previously never exercised jurisdiction, would not have jurisdiction.
  • Certain decisions of the Andhra Pradesh High Court (Paramita Constructions v UE Development India (2008) 3 An LT 440 and Jyothi Turbo Power Services v. Shenzhen Shandong Nuclear Power Corporation AIR 2011 AP 111) held that where parties agree to have their arbitration in a seat, that court alone would have jurisdiction. While the Supreme Court has affirmed in BALCO that the court at seat would have jurisdiction, it does not state that such court alone would have jurisdiction.
  • Due to Section 42 (which provides that where any application is made in respect of a Court, that Court alone would have exclusive jurisdiction over all the arbitral proceedings and consequent applications), a court which normally would have jurisdiction under the 1996 Act, would not have jurisdiction, if an application is made to the court at the seat.
For the aforesaid reasons, Three Errors argues that BALCO was erroneous on this aspect:

Arguments in Half an Error:
To the contrary, Half an Error says that there was no error in BALCO on this issue. Following are the contentions in the said paper:
  • The argument which led the court to discuss Section 2(1)(e) was that since Section 2(1)(e) focuses on the "subject matter of arbitration" rather than on the seat of arbitration. The court rejected this argument and the discussion on Section 2(1)(e) was to state that the seat of arbitration was the basis of jurisdiction. The court held that the interpretation of Section 2(1)(e) was consistent with the "internal logic" of BALCO.
  • The contention in Three Errors that the court apart from the court at seat could exercise supervisory jurisdiction over arbitration is not correct. The court at the seat would exercise supervisory control over arbitration.
  • The logic of BALCO and its interpretation is based on the "principle of territoriality" by which seat would have the exclusive jurisdiction over the arbitration. Such an interpretation furthers party autonomy.
  • The court held that in international commercial arbitration held in India, the arbitrations might be held even abroad. In such a scenario, Indian court retains exclusive supervisory jurisdiction.
  • The contention in Three Papers that seat theory was alien to purely domestic arbitrations and that BALCO on this issue contradicted with the settled position is not correct as these decisions were rendered when seat theory did not prevail in India.
  • If jurisdiction, as contended, is connected to the cause of action and not consent, seat theory so well established in Indian arbtiration jurisprudence would be rendered nugatory.
  • Further, if parties belonging to non-Indian countries arbitrate in India, the interpretation afforded in Three Papers would not provide an answer.
  • There is no reason why the principles of territoriality and party autonomy adopted in international commercial arbitrations should not be adopted when the seat of arbitration is India.
  • Courts at the seat of arbitration are in the best position to supervise arbitrations for the following reasons:
    • After BALCO, parties might even choose jurisdictions such as Delhi specifically for the reason that Delhi courts would exercise supervisory jurisdiction over other courts.
    • Since court cultures vary as regards speedy disposal of cases, parties must be left with the choice to select the court of their choice.
    • Such a choice would foster a culture of arbitration in India.
  • The English Arbitration Act, 1979 was specifically enacted to make London a better place of arbitration so that English courts could exercise supervisory jurisdiction in a better manner. London has become a prominent choice of forum for arbitration due to the supportive role of the English courts. With BALCO, India could potentially move ahead in that direction.
The merits of the arguments of both sides on this issue would be analysed in the next post in this series.

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