Arbitration Judgments: Reliance Industries

A.  Background

The present article arises out of a Special Leave Petition, Union of India vs. Reliance Industries[1] (“Judgment-II”) whereby the Delhi High Court had dismissed an application filed under Section 14[2] of the Arbitration and the Conciliation Act, 1996 (“Act”), on the ground that the apex Court’s judgment dated 28.5.2014/Judgment-I referred below having held that Part-I of the Arbitration Act, 1996 is not applicable, such petition filed under Section 14 of the Act would not be maintainable. A review petition against the said judgment dated 28.5.2014 and a curative petition filed thereafter was also dismissed. This case is arising out of sequel from judgment Reliance Industries Ltd. another vs. Union of India[3] (“Judgment-I”) dated 28.05.2015 in which the court has discussed at length the maintainability of petition under the section 34 of the Act in proceeding outside India wherein substantive law was Indian but the juridicial seat and the law governing the arbitration agreement is English. The article outlines the judgment with focus on underlying arbitration agreement to give legal counsel a thought while drafting such agreements.

 B.   Facts of the Judgment-I

Two Production Sharing Contracts (“PSC”) were executed in this matter. The relevant clauses of the contracts insofar as they are applicable to the present controversy are as follows:

  • Applicable law Governing Contract/ Substantive Law: The agreement stated that the contract would be governed and interpreted in accordance with the laws of India.
  • Law relating to Arbitration Proceedings: The proceedings shall be conducted in accordance with the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) of 1985 except that in the event of any conflict between these rules and the provisions of this Article 33 (Sole Expert, Conciliation and Arbitration) shall govern.
  • Venue of the Conciliation or Arbitration/ Law of Seat: Unless the Parties otherwise agree, the venue shall be London, England and shall be conducted in English Language.
  • Arbitration agreement: It is contained in Article 33 of the agreement shall be governed by the laws of England.

Since, certain disputes and differences arose between the Union of India and Reliance Industries Limited sometime in 2010, the Union of India invoked the arbitration clause and appointed Mr. Peter Leaver, QC as Arbitrator. Reliance Industries Limited appointed Justice B.P. Jeevan Reddy as Arbitrator and Mr. Christopher Lau SC was appointed as Chairman of the Tribunal. On 14.9.2011, the Union of India, Reliance Industries Limited and BG Exploration and Production India Limited, agreed to change the seat of arbitration to London, England and a final partial consent award was made and duly signed by the parties to this effect. On 12.9.2012, the Arbitral Tribunal passed a final partial award, which became the subject matter of a Section 34 of the Act petition filed in the Delhi High Court by the Union of India.

The essential dispute between the parties is as to whether Part I of the Arbitration Act, 1996 would be applicable to the arbitration agreement irrespective of the fact that the seat of arbitration is outside India. To find a conclusive answer to the issue as to whether applicability of Part I of the Arbitration Act, 1996 has been excluded, it would be necessary to discover the intention of the parties. The Delhi High Court by a judgment and order dated 22.3.2013 decided that the said petition filed under Section 34 was maintainable. The apex Court in a detailed judgment dated 28.5.2014/Judgment- I reversed the judgment of the Delhi High Court.

B. Analysis of the Judgment-I

1. For Applicability of Part-I: Since the ratio of law laid down in Balco vs. Kaiser Aluminium Technical Services Inc[4]. has been made prospective in operation by the Constitution Bench itself, this Court is bound by the decision rendered in Bhatia International [5]. According to which:

“32. To conclude, we hold that the provisions of Part I would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India the provisions of Part I would compulsorily apply and parties are free to deviate only to the extent permitted by the derogable provisions of Part I. 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. In that case the laws or rules chosen by the parties would prevail. Any provision, in Part I, which is contrary to or excluded by that law or rules will not apply.”

INTERPRETATION 1: As per Bhatia International judgment (Supra) in International Commercial Arbitration Part I of the Act would apply in appropriate cases:

(i) Arbitration held in India: The Part I of the Agreement would be compulsorily applicable and parties to the agreement are free to deviate only to the extent permitted by derogable provisions of the Act.

(ii) International Commercial Arbitration: Unless parties by agreement both expressed and implied exclude all or any of the provisions.   In that case, the chosen rules would apply. But contrary provisions would not apply.

It is also important to highlight what all is covered under Part I of the Act- General Provisions, Arbitration Agreement, Composition of Arbitral Tribunal, Jurisdiction of Arbitral Tribunal, Conduct of Arbitral Proceedings, Making of arbitral award and termination of arbitration proceedings, Recourse against arbitral proceedings, Finality of arbitration award, Appeal, Limitation and jurisdiction.

2.  Analysis of PSC to determine the intention of the Parties: It must, immediately, be noticed that Articles 32.1 and 32.2 deal with the applicable law and the language of the contract as is evident from the heading of the article which is “Applicable law and language of the contract”.

  • General Analysis: The two articles do not overlap-one (Article 32) deals with the proper law of the contract, the other (Article 33) deals with ADR i.e. consultations between the parties; conciliation; reference to a sole expert and ultimately arbitration. Under Article 33, at first efforts should be made by the parties to settle the disputes among themselves (Article 33.1). If these efforts fail, the parties by agreement shall refer the dispute to a sole expert (Article 33.2).
  • Article 33.4 of the Agreement: The provision with regard to constitution of the Arbitral Tribunal provides that the Arbitral Tribunal shall consist of three arbitrators. This article also provides that each party shall appoint one arbitrator. The arbitrators appointed by the parties shall appoint the third arbitrator.
  • Article 33.5 of the Agreement: In case, the procedure under Article 33.4 fails, the aggrieved party can approach the Permanent Court of Arbitration at The Hague for appointment of an arbitrator.
  • Further, in case the two arbitrators fail to make the appointment of the third arbitrator within 30 days of the appointment of the second arbitrator, again the Secretary General of the Permanent Court of Arbitration at The Hague may, at the request of either party appoint the third arbitrator.

INTERPRETATION 2: In the face of the above discussion, the court held that it is difficult to appreciate the submission of the respondent Union of India that the Part I of the Act would be applicable to the arbitration proceedings. In the event, the Union of India intended to ensure that the Act shall apply to the arbitration proceedings, Article 33.5 of the agreement should have provided that in default of a party appointing its arbitrator, such arbitrator may, at the request of the first party be appointed by the Chief Justice of India or any person or institution designated by him. Thus, the Permanent Court of Arbitration at the Hague can be approached for the appointment of the arbitrator, in case of default by any of the parties. This, in Court’s opinion, it is a strong indication that the parties excluded applicability of the Act by consensus. Further, the arbitration proceedings are to be conducted in accordance with the UNCITRAL Rules, 1976 as in Article 33.9. It is specifically provided that the right to arbitrate disputes and claims under this contract shall survive the termination of this contract Article 33.10. The article which provides the basis of the controversy herein is Article 33.12 which provides that venue of the arbitration shall be London and that the arbitration agreement shall be governed by the laws of England. It appears, as observed earlier, that by a final partial consent award, the parties have agreed that the juridical seat (or legal place of arbitration) for the purposes of arbitration initiated under the claimants’ notice of arbitration dated 16-12-2010 shall be London, England.

In opinion of the court, the meaningful reading of the aforesaid articles of the PSC, that the proper law of the contract is Indian law; proper law of the arbitration agreement is the law of England.

3.  Seat of Arbitration and Exclusive Jurisdiction Clause: The Court went on to state in paragraph 45 that it is too late in the day to contend that the seat of arbitration is not analogous/similar to an exclusive jurisdiction clause and then went on to hold as follows:

In our opinion, these observations in Sulamerica case[6] are fully applicable to the facts and circumstances of this case. The conclusion reached by the High Court would lead to the chaotic situation where the parties would be left rushing between India and England for redressal of their grievances. The provisions of Part I of the Act (Indian) are necessarily excluded; being wholly inconsistent with the arbitration agreement, which provides “that arbitration agreement shall be governed by English law”. Thus the remedy for the respondent to challenge any award rendered in the arbitration proceedings would lie under the relevant provisions contained in the Act of England and Wales. Whether or not such an application would now be entertained by the courts in England is not for us to examine, it would have to be examined by the court of competent jurisdiction in England.”

INTERPRETATION 3: There are three important law of arbitration clause-Curial Law, Substantive law and law relating conducting arbitration proceedings.

  • The court held that it is unable to agree with the submission that since the issues involved herein relate to the public policy of India, Part I of the Act would be applicable.
  • Applicability of Part I of the Act is not dependent on the nature of challenge to the award. Whether or not the award is challenged on the ground of public policy, it would have to satisfy the pre-condition that 1996 Act is applicable to the arbitration agreement.
  • In the opinion of the apex court, the High Court has committed a jurisdictional error in holding that the provisions contained in Article 33.12 are relevant only for the determination of the curial law[7] applicable to the proceedings. The parties by agreement have provided that the juridical seat of the arbitration shall be in London. Necessary amendment has also been made in the PSCs, as recorded by the final partial consent award dated 14-9-2011. It is noteworthy that the Act does not define or mention juridical seat. The term “juridical seat” on the other hand is specifically defined in Section 3 of the English Arbitration Act. Therefore, the parties understood that the arbitration law of England would be applicable to the arbitration agreement. In view of the aforesaid, we are unable to uphold the conclusion arrived at by the Delhi High Court that the applicability of the 1996 Act to the arbitration agreement in the present case has not been excluded.

In view of the above, the Apex Court held that the petition filed by the Union of India under section 34 of the Act in the Delhi High Court is not maintainable. The Hon’ble Court overruled and set aside the conclusion of the High Court that, even though the arbitration agreement would be governed by the laws of England and that the juridical seat[8] of arbitration would be in London, Part I of the Arbitration Act would still be applicable as the laws governing the substantive contract are Indian laws. In the event a final award is made against the respondent, the enforceability of the same in India can be resisted on the ground of public policy. The conclusion of the High Court that in the event, the award is sought to be enforced outside India, it would leave the Indian party remediless is without any basis as the parties have consensually provided that the arbitration agreement will be governed by the English law.

Therefore, the remedy against the award will have to be sought in England, where the juridical seat is located. However, the court accepted the submission of the appellant that since the substantive law governing the contract is Indian law, even the courts in England, in case the arbitrability is challenged, will have to decide the issue by applying Indian law viz. the principle of public policy, etc. as it prevails in Indian law.

C.  Analysis of Judgment-II

1.  Background:  The Judgment-II is sequel to the Judgment-I and is arising out of section 14 petition filed under the Act, therefore facts need not be repeated. However, the discussion involves mention that prior to the 1996 Act, three Acts governed the law of Arbitration in India:

  • The Arbitration (Protocol and Convention) Act, 1937, which gave effect to the Geneva Convention,
  • The Arbitration Act, 1940, which dealt with domestic awards, and;
  • The Foreign Awards (Recognition and Enforcement) Act, 1961 that gave effect to the New York Convention of 1958 and which dealt with challenges to awards made which were foreign awards. 

The Judgment-II throw light on history of doctrine of concurrent jurisdiction discussed below.

2.Recognition of Concurrent Jurisdiction but Applicability of Part I on the basis of Substantive Law of Arbitration: In National Power Company vs. Singer Company[9], this Court while construing Section 9(b) of the Foreign Awards Act held that where an arbitration agreement was governed by the law of India, the Arbitration Act, 1940 alone would apply and not the Foreign Awards Act. The arbitration clause in Singer’s case read as follows:

“Clause 27 of the General Terms deals with arbitration sub-clause 7 of the said clause deals with arbitration in respect of a foreign contractor. The provision says:

27.7 In the event of foreign contractor, the arbitration shall be conducted by three arbitrators, one each to be nominated by the owner and the contractor and the third to be named by the President of the International Chamber of Commerce, Paris. Save, as above all rules of conciliation and arbitration of the International Chamber of Commerce shall apply to such arbitrations. The arbitration shall be conducted at such places as the arbitrators may determine.”

In respect of an Indian contractor, sub-clause 6.2 of Clause 27 says that the arbitration shall be conducted at New Delhi in accordance with the provisions of the Arbitration Act, 1940. It reads: “27.6.2 The arbitration shall be conducted in accordance with the provisions of the Indian Arbitration Act, 1940 or any statutory modification thereof. The venue of arbitration shall be New Delhi, India.”

The General Terms further provide: “The contract shall in all respects be construed and governed according to Indian laws.” (32.3).

The formal agreements, which the parties executed on August 17, 1982, contain a specific provision for settlement of disputes.

Article 4.1 provides:“4.1. Settlement of Disputes: It is specifically agreed by and between the parties that all the differences or disputes arising out of the contract or touching the subject-matter of the contract, shall be decided by process of settlement and arbitration as specified in Clauses 26.0 and 27.0 excluding 27.6.1 and 27.6.2., of the General Conditions of the Contract.” [para 4]

Notwithstanding that the award in that case was a foreign award, this Court held that since the substantive law of the contract was Indian law and since the arbitration clause was part of the contract, the arbitration clause would be governed by Indian law and not by the Rules of the International Chamber of Commerce. This being the case, it was held that the mere fact that the venue chosen by the ICC Court for the conduct of the arbitration proceeding was London does not exclude the operation of the Act, which dealt with domestic awards i.e. the Act of 1940.

In a significant sentence, the Court went on to hold:

“…Nevertheless, the jurisdiction exercisable by the English courts and the applicability of the laws of that country in procedural matters must be viewed as concurrent and consistent with the jurisdiction of the competent Indian courts and the operation of Indian laws in all matters concerning arbitration insofar as the main contract as well as that which is contained in the arbitration clause are governed by the laws of India.” [at para 53]

3. Doctrine of Concurrent Jurisdiction: It can be seen that this Court in Singer’s case (Supra) did not give effect to the difference between the substantive law of the contract and the law that governed the arbitration. Therefore, since a construction of Section 9(b) of the Foreign Awards Act led to the aforesaid situation and led to the doctrine of concurrent jurisdiction, the 1996 Act, while enacting Section 9 (a) of the repealed Foreign, 1961, in Section 51 thereof, was careful enough to omit Section 9 (b) of the 1961 Act which, as stated herein above, excluded the Foreign Awards Act from applying to any award made on arbitration agreements governed by the law of India. This being the case, the theory of concurrent jurisdiction was expressly given a go-by with the dropping of Section 9 (b) of the Foreign Awards Act, while enacting Part-II of the Arbitration Act, 1996, which repealed all the three earlier laws and put the law of arbitration into one statute, albeit in four different parts. However, the apex Court Bhatia International (Supra) revived this doctrine of concurrent jurisdiction by holding, in paragraph 32, that even where arbitrations are held outside India, unless the parties agree to exclude the application of Part-I of the Act either expressly or by necessary implication, the courts in India will exercise concurrent jurisdiction with the court in the country in which the foreign award was made.

Bhatia International was in the context of a Section 9 application made under Part I of the 1996 Act by the respondent in that case for interim orders to safeguard the assets of the Indian company in case a foreign award was to be executed in India against it. The reductio ad absurdum (a common argument to show that a statement is true and that its denial produces absurd results) of this doctrine of concurrent jurisdiction came to be felt in a most poignant form in the judgment of Venture Global Engineering vs. Satyam Computer Services Ltd. & Anr.[10]., by which this Court held that a foreign award would also be considered as a domestic award and the challenge procedure provided in Section 34 of the Part-I of the Act of 1996 would therefore apply. This led to a situation where the foreign award could be challenged in the country in which it is made; it could also be challenged under Part-I of the 1996 Act in India; and could be refused to be recognised and enforced under Section 48 contained in Part II of the 1996 Act.

Given this state of the law, a 5-Judge Bench of this Court in Balco Judgment (Supra), overruled both Bhatia International and Venture Global Engineering (Supra). But in so overruling these judgments, this Court went on to hold:

The judgment in Bhatia International [(2002) 4 SCC 105] was rendered by this Court on 13-3-2002. Since then, the aforesaid judgment has been followed by all the High Courts as well as by this Court on numerous occasions. In fact, the judgment in Venture Global Engineering [(2008) 4 SCC 190] has been rendered on 10-1-2008 in terms of the ratio of the decision in Bhatia International [(2002) 4 SCC 105]. Thus, in order to do complete justice, we hereby order, that the law now declared by this Court shall apply prospectively, to all the arbitration agreements executed hereafter.” [at para 197]

It will thus be seen that facts like the present case attract the Bhatia International principle of concurrent jurisdiction inasmuch as all arbitration agreements entered into before Bhatia International will govern 12.9.2012 that is the date of pronouncement of Bharat Aluminium Company’s judgment.

It is important to note that in paragraph 32 of Bhatia International itself this Court has held that Part-I of the Arbitration Act, 1996 will not apply if it has been excluded either expressly or by necessary implication. Several judgments of this Court have held that Part-I is excluded by necessary implication if it is found that on the facts of a case either the juridical seat of the arbitration is outside India or the law governing the arbitration agreement is a law other than Indian law. This is now well settled by a series of decisions of this Court Videocon Industries Ltd. vs. Union of India & Anr[11], Dozco India Pvt. Ltd. vs. Doosan Infracore Company Limited[12]; Yograj Infrastructure Limited vs. Ssang Yang Engineering and Construction Company Limited[13]the very judgment in this case reported Judgment-II and a recent judgment in Harmony Innovations Shipping Ltd. vs. Gupta Coal India Ltd. & Anr[14].

In fact, in Harmony’s case (Supra), this Court, after setting out all the aforesaid judgments, set out the arbitration clause in that case in paragraph 32 as follows:

“In view of the aforesaid propositions laid down by this Court, we are required to scan the tenor of the clauses in the agreement specifically, the arbitration clause in appropriate perspective. The said clause read as follows:

“5. 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 Page 33 33 London Maritime Arbitration Association.” [at para 32] It then held:

“Coming to the stipulations in the present arbitration clause, it is clear as day that if any dispute or difference would arise under the charter, arbitration in London to apply; that the arbitrators are to be commercial men who are members of London Arbitration Association; the contract is to be construed and governed by English Law; and that the arbitration should be conducted, if the claim is for a lesser sum, in accordance with small claims procedure of the London Maritime Arbitration Association. There is no other provision in the agreement that any other law would govern the arbitration clause.” [at para 41] “Thus, interpreting the clause in question on the bedrock of the aforesaid principles it is vivid that the intended effect is to have the seat of arbitration at London. The commercial background, the context of the contract and the circumstances of the parties and in the background in which the contract was entered into, irresistibly lead in that direction. We are not impressed by the submission that by such interpretation it will put the respondent in an advantageous position. Therefore, we think it would be appropriate to interpret the clause that it is a proper clause or substantial clause and not a curial or a procedural one by which the arbitration proceedings are to be conducted and hence, we are disposed to think that the seat of arbitration will be at London.

Having said that the implied exclusion principle stated in Bhatia International (supra) would be applicable, regard being had to the clause in the agreement, there is no need to dwell upon the contention raised pertaining to the addendum, for any interpretation placed on the said document would not make any difference to the ultimate conclusion that we have already arrived at.” [At paras 46 and 47]

It is interesting to note that even though the law governing the arbitration agreement was not specified, yet this Court held, having regard to various circumstances, that the seat of arbitration would be London and therefore, by necessary implication, the ratio of Bhatia International would not apply. The last paragraph of Bharat Aluminium’s judgment has now to be read with two caveats, both emanating from paragraph 32 of Bhatia International itself – that where the Court comes to a determination that the juridical seat is outside India or where law other than Indian law governs the arbitration agreement, Part-I of the 1996 Act would be excluded by necessary implication. Therefore, even in the cases governed by the Bhatia principle, it is only those cases in which agreements stipulate that the seat of the arbitration is in India or on whose facts a judgment cannot be reached on the seat of the arbitration as being outside India that would continue to be governed by the Bhatia principle. Also, it is only those agreements, which stipulate or can be read to stipulate that the law governing the arbitration agreement is Indian law which would continue to be governed by the Bhatia rule.

Conclusions  of Judgment II

  • The Court has already determined both that the ‘juridical seat’ of the arbitration is at London and that English law governs the arbitration agreement. This being the case, it is not open to the Union of India to argue that Part-I of the Arbitration Act, 1996 would be applicable.
  • A Section 14 application made under Part-I would consequently not be maintainable. It needs to be mentioned that its valiant attempt to reopen a question settled twice over, that is by dismissal of both a review petition and a curative petition on the very ground urged before us, must meet with the same fate. His argument citing the case of  Mathura Prasad Bajoo vs. Dossibai N.B. Jeejeebhoy (1970) 1 SCC 613, that res judicata (a matter adjudicated may not be pursed further by same parties) would not attach to questions relating to jurisdiction, would not apply in the present case as the effect of clause 34.2 of the PSC raises at best a mixed question of fact and law and not a pure question of jurisdiction unrelated to facts. Therefore, both on grounds of res judicata as well as the law laid down in the judgment dated 28.5.2014/Judgment- I, this application under Section 14 deserves to be dismissed.
  •  The court held that it is also an abuse of the process of the Court. It is only after moving under the UNCITRAL Arbitration Rules and getting an adverse judgment from the Permanent Court of Arbitration dated 10.06.2013 that the present application was filed under Section 14 of the Arbitration Act two days later i.e. on 12.6.2013. Viewed from any angle therefore, the Delhi High Court judgment is correct and consequently this Special Leave Petition is dismissed.

Conclusions of Judgment-I

  • Applicability of Part I of the Act is not dependent on the nature of challenge to the award. Whether or not the award is challenged on the ground of public policy, it would have to satisfy the pre-condition that 1996 Act is applicable to the arbitration agreement.
  • The remedy against the award will have to be sought in England, where the juridical seat is located. However, the Hon’ble Court accepted the submission of the appellant that since the substantive law governing the contract is Indian law, even the courts in England, in case the arbitrability is challenged, will have to decide the issue by applying Indian law viz. the principle of public policy, etc. as it prevails in Indian law.  Therefore, there is a co-relation between juridical seat and exclusive jurisdiction clause.

Conclusion 

In matters where the damages is the civil remedy, matter can be referred to arbitration by choice by way of agreements between the parties. However, the seat of arbitration especially in International Commercial Arbitration has always been a reason for approaching Indian courts for remedy and giving rise to recent important precedents. The outcome of the article is that the BALCO Judgment (Supra)  will apply to all arbitration agreements entered on or after September 6, 2012. Post this date, all arbitration agreement drafted, the seat will determine the choice of curial law. For arbitration agreements prior to that date means that Part I of the 1996 Act will continue to apply to foreign-seated arbitrations with respect to arbitration agreements concluded prior to that date, unless the parties have either expressly or impliedly agreed otherwise (Bhatia International (Supra)).

[1] SLP 11396 of 2015

[2] Failure or impossibility to act-

(1) The mandate of an arbitrator shall terminate if—

(a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and

(b) he withdraws from his office or the parties agree to the termination of his mandate.

(2) If a controversy remains concerning any of the grounds referred to in clause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate.

(3) If, under this section or sub-section (3) of section 13, an arbitrator withdraws from his office or a party agrees to the termination of the mandate of an arbitrator, it shall not imply acceptance of the validity of any ground referred to in this section or sub-section (3) of section 12.

[3] (2014) 7 SCC 603

[4] (2012) 9 SCC 552

[5] (2002) 4 SCC 105

[6] (2013) 1 WLR 102 : 2012 EWCA Civ 638 : 2012 WL 14764

[7] It is the law governing the arbitration proceedings.

[8] A set of mandatory rules applicable to seat

[9] (1992) 3 SCC 551

[10] (2008) 4 SCC 190

[11] (2011) 6 SCC 161

[12] (2011) 6 SCC 179

[13] (2011) 9 SCC 735)

[14] Civil Appeal No. 610 of 2015

Published :
January 16, 2016
Practice Area :