Bhatia International vs Bulk Trading S. A.

& Anr on 13 March, 2002

Introduction:
Bhatia Internationals v. Bulk Trading S.A.3 (‘Bhatia International’)
In Bhatia International, SC ruled that Part-I of the Act should extend to
international commercial arbitration carried out outside India (‘outside
arbitration’), though parties could explicitly or impliedly preclude the applicability
of Part- I
Bhatia International vs Bulk Trading S. A. & Anr on 13 March, 2002
Author: S N Variava
Bench: G.B. Pattanaik, S.N. Phukan, S.N. Variava
CASE NO.: Appeal (civil) 6527 of 2001

PETITIONER:
BHATIA INTERNATIONAL

Vs.

RESPONDENT:
BULK TRADING S. A. & ANR.

DATE OF JUDGMENT: 13/03/2002

BENCH:
G.B. Pattanaik, S.N. Phukan & S.N. Variava

JUDGMENT: S. N. VARIAVA, J.

Issues in the Case:

The Court concluded that the following issues would occur if Part-I were
considered to be inapplicable to these arbitrations:

1.
There will be no legislation regulating arbitrations held in countries beyond
the Convention. 
 2. Part-I will apply to Jammu &  Kashmir in all international commercial
arbitrations (which include external arbitrations) but for the rest of India,
Part-I will not apply to external arbitrations.
3. There would be conflict between SectionSection2(4) & (5) & Section 2(2)
of the Act.
4. A party to an external arbitration will have no alternative recourse in
seeking interim reliefs even though the properties which are the centre of
attention of such an interim reliefs application are in India.

Fact behind the Case:

The above concept in Bhatia International has been mauled as entirely erroneous.
“One of Bhatia International’s rationales was that Part-I had not provided for
transitional remedies in arbitrations held outside India. This was the principal
question before the Court”. Before Bhatia International, High Court rulings on the
jurisdiction of a court to order interim measures in an out-of-arbitration were
contradictory. Some high courts held that the law did not give courts the authority
to order interim measures in these cases6, whereas others ruled that because Part-I
was applicable even to outside arbitrations, a court can order interim measures to
be taken under Section 9. In Bhatia International, it has been argued that Art. 1(2)
of the Model Law, which permitted interim measures even though the arbitration
seat was not in the state where the request for such measures was sought, was not
implemented in India. The contention was, therefore, that it was the legislative
intent not to expand a court’s power to order interim measures in the event of
arbitrations conducted outside India. 
Although it was emphatically rejected by the Supreme Court, the argument seems
to be persuasive. On the contrary to the views of the Court that the Act was not a
well-formed piece of legislation, it is argued that the Act is a carefully designed
piece of legislation, but with certain deficiencies much like every other statute.
While the drafters of the Arbitration & Conciliation Act took inspiration from the
Model Law, the Act includes some minor but important improvements in pro- that
are intended to ensure speedy & effective arbitration. Under such a carefully
written legislation the lack of provisions for transitional measures under
international arbitrations may not have been accidental.
The ‘lacuna’ was maybe intentional. Through refusing to provide for transitional
measures for arbitrations held outside India, the drafters may have wanted to allow
parties to choose India as the seat of arbitration, albeit strongly. The drafters
‘motive may have been to help Indian parties escape costly arbitration outside
India, & to improve the Indian arbitration market. In any case, post-Bhatia
International, it has been proposed that the law should be revised to restrict the
applicability of Part-I to restricted provisions for external arbitrations, including
provisional steps.
The Court’s error in Bhatia International was in interpreting Section 2(2), which
provides that Part-I would apply to arbitration in India, to mean that Part-I would
also apply to outside arbitration. The Court’s logic was that by not employing the
term “only” in Section 2 (2), the Legislature’s intent was to make Part-I applicable
even to outside arbitrations. This construction is completely out-of-sync with the
literal reading of the provision. This has resulted in ambiguity on the applicability
of Part-I of the Act to outside arbitrations leading to inconsistent decisions,
especially on the issue of implied exclusion of Part-I of the Act to outside
arbitrations. 
For several cases, courts held that Part-I was not excluded even if the location was
outside India, the substantive law of the contract was a foreign law & the
procedural law was not the rule. Though, in some decisions, Part-I was implicitly
excluded in these cases. In some cases, courts observed that “Part-I would
implicitly be excluded if the seat were international & the procedural law was not
the Act. For instance, the substantive law of the contract was Indian law in Hardy
Oil & Gas Ltd. v. Hindustan Oil Exploration Co. Ltd.,” “the substantive law of the
arbitration agreement was English law, the arbitration was to be held in accordance
with the rules of the London Court of International Arbitration & the venue was
London. The Gujarat High Court held that Part- was specifically exempt because
the parties had expressly chosen English law as the arbitration legislation.
The agreement provided for Indian law as the substantive law of contract” in
Videocon Industries Ltd. v Union of India, Kuala Lumpur, Malaysia as the location
of the arbitration, & English law as the law of arbitration. The Court held that “by
virtue of English law being the law of arbitration, Part-I was excluded.” In Yograj
Infrastructure Ltd v Ssang Yong Eng &  Construction Co Ltd-(I), “the agreement
provided for the arbitration rules of the Singapore International Arbitration Center
(‘SIAC’) as the arbitration rules & the seat was Singapore. In Aurohill Global
Commodities Ltd v Maharashtra STC Ltd16 & Paragon Steels Pvt, the Court held
that Part-I was excluded as the contract’s substantive law as per the agreement was
Indian law. Per contra. Ltd v European Metal Recycling Ltd.,” The statutory
substantive law was Indian law, London was the venue in both cases & non-Indian
arbitral bodies were the procedural laws. However, Part-I was considered not to be
excluded.
Furthermore, some courts have applied a different rationale to exempt Section 34
of the Act as the courts seem to have agreed that Part-I would extend to all
arbitrations.
Relevant Case Laws:
Force Shipping Ltd v Ashapura Minechem Ltd., Bulk Trading S. A. v Dalmia
Cement (Bharat) Ltd., Inventa Fischer GmBH &  Co. v. Polygenta Technologies
Ltd., The courts held that Section 34 of the Act (in Part-I) should not extend to
outside arbitration awards on the grounds that general provisions such as Section
34 should extend when there were ‘special’ provisions for the compliance of
arbitral awards. The Bombay High Court held in Goldcrest Exports v Swissgen N.
V., that a foreign award cannot be contested under Section 34, since it would be
impractical to have two rounds of litigation to enforce a foreign award.
In the English case of Roger Shashoua v. Mukesh Sharma (‘Roger Shashoua’) the
ambiguity in the law is amply illustrated. In this event, when the judge sought to
figure out the Indian law relating to the applicability of Part-I of the Act to an
arbitration whose seat was London & with Indian law as the substantive law of
contract, two former Indian Chief Justices gave contradictory evidence on the
same.
There’s also some ambiguity as to whether the curial law principle is compatible
with the arbitration governing law. In Financial Software &  Systems (P.) Ltd. v.
ACI Worldwide Corp., The Madras High Court held that the SIAC Rules were the
curial law but held that the law regulating arbitration was Singaporean. In Yograj
Infrastructure Ltd. v. SsangYong Engg. &  Construction Co. Ltd.-(II), in a related
provision, the Supreme Court’s two-judge Bench held that the Singaporean
International Arbitration Act was the curial legislation.
Final Judgement:
From a transactional viewpoint, a significant consequence of Bhatia International
is that it seriously limits Party autonomy. This gives the parties the option of either
excluding Part-I in its entirety & thereby removing the right to sue an Indian court
for emergency measures or not removing Part-I & thus keeping it within the scope
of Section 34 of the Constitution. Nevertheless, it should be noted that in an
external arbitration, Bhatia International provided that the parties could exempt any
or all of Part-I provisions. This held that “any or any of the provisions of Part-I can
also be omitted in the event of external arbitrations by an actual or implied
agreement of the parties”. Thus, parties may choose to exclude Part-I, with the
exception of Section 9, which would require a party to obtain provisional measures
in India. Despite this, it is a difficult exercise even for attorneys to draw up
arbitration clauses. It must be noted that in India, contract agreements are generally
performed by businessmen with little to no legal counsel. The rule should be clear
so that businesses can sign arbitration clauses. Now that the law has become
complex, the transactional costs of foreign trade transactions are dramatically
increasing.
Conclusion:

 Lastly it must be stated that the said Act does not appear to be a well drafted
legislation. Therefore the High Courts of Orissa, Bombay, Madras, Delhi and
Calcutta cannot be faulted for interpreting it in the manner indicated above.
However, in our view a proper and conjoint reading of all the provisions indicates
that Part I is to apply also to international commercial arbitrations which take place
out of India, unless the parties by agreement, express or implied exclude it or any
of its provisions. Such an interpretation does not lead to any conflict between any
of the provisions of the said Act. On this interpretation there is no lacunae in the
said Act. This interpretation also does not leave a party remedyless. Thus such an
interpretation has to be preferred to the one adopted by the High Courts of Orissa,
Bombay, Madras, Delhi and Calcutta. It will therefore have to be held that the
contrary view taken by these High Courts is not good law.