Section 34 and BALCO Judgment: Exploring the Prospective and Retrospective Application

Section 34 and BALCO Judgment: Exploring the Prospective and Retrospective Application

Author: AYUSH B. GURAV, a STUDENT OF MNLU, MUMBAI

Abstract

The article delves into the jurisprudential evolution of arbitration law in India, primarily focusing on two landmark judgments: the BALCO case and its aftermath, particularly the NOY Case. It navigates the intricate legal landscape, scrutinizing the applicability of the Indian Arbitration & Conciliation Act, 1996, to international commercial arbitrations conducted outside India’s jurisdiction.

The BALCO ruling brought about a significant shift in understanding the territorial scope of the law. It drew a clear line between local awards governed by Part I and international awards under Part II of the Act. According to this judgment, Indian courts do not possess authority over arbitration conducted beyond India’s borders, especially when the arbitration is situated in a foreign country as per the agreement, conforming to the UNCITRAL Model Law. This decision underscores the significance of the chosen foreign jurisdiction’s legal framework in overseeing and regulating such arbitration proceedings.

However, this celebrated judgment faced criticism for limiting interim relief options and its prospective application, leaving parties in pre-BALCO agreements vulnerable. The NOY Case further elucidated this, highlighting the significance of the arbitration seat in determining the jurisdiction for challenging foreign awards, even predating the BALCO decision.

The article critically analyzes these judgments’ implications, highlighting the complexities and challenges faced by parties engaged in international arbitrations. It underlines the necessity for a balanced approach between court intervention and arbitral autonomy, advocating for legal clarity and amendments in agreements to align with evolving legal paradigms post-BALCO. 

Keywords: BALCO Judgment, Arbitral Autonomy, Territoriality Principle, Interim Relief, Foreign-Seated Arbitrations.

Introduction

The landmark case of BALCO emphasizes safeguarding the future from past erroneous rulings. It aims to encourage Indian courts to embrace arbitration, aligning with the principles of the New York Convention and UNCITRAL Model Rule. Preceding BALCO, the “Bhatia International v. Bulk Trading S.A” case raised the principle of territoriality. In this case, the court affirmed the application of Part 1 to arbitrations conducted outside India. The Supreme Court clarified that while certain provisions in Part 1 can be mutually excluded by parties, such as Section 9, for arbitrations within India, Part 2 applies to those outside, alongside any mutually agreed derogations.

Drawing from the UNRCITRAL Model Law, Article 1(2) emphasizes the word ‘only,’ akin to Section 2(2) of the Act, stating Part 1’s applicability to arbitrations seated in India. The “Bhatia” judgment interpreted the absence of ‘only’ in Section 2(2) as the legislature’s intent to extend Part 1 to arbitrations outside India. Sections 2(4) and 2(5) reinforce Part 1’s broad application to all arbitrations and related proceedings. The court’s interpretation aligned with these provisions, applying Part 1 universally.

However, despite its interpretation, this judgment faced international criticism for the courts’ interventionist stance impacting arbitral autonomy, signalling the need for a balanced approach between court intervention and arbitral independence.

1. The BALCO Judgement

The Supreme Court, in response to concerns raised about the “BHATIA CASE,” redirected the BALCO issue from a double bench to a triple bench, later involving the Chief Justice and eventually escalating it to a 5-judge panel. Recognizing the gravity of the case, the court welcomed input from prominent arbitral bodies in India by inviting their amicus curiae briefs.

1. Facts of the Case

The parties involved initially agreed on equipment supply and modernizing a manufacturing facility owned by one of them. While the agreement fell under Indian Law, it included a clause stating that any future disputes would be settled using English arbitration law in London. Essentially, the contract specified that issues related to contract rights or obligations would be resolved under English arbitration law, with the arbitration held in London.

Later, a disagreement emerged between the appellants and respondents regarding the agreement’s execution, prompting arbitration. This led to arbitration proceedings in England, resulting in two awards. The appellants sought to nullify these awards under S. 34 of the 1996 Act. However, both the District Court and the High Court of Chhattisgarh declined to annul the awards. Consequently, the appellants appealed this decision to the Supreme Court of India.

In their appeal, the appellants referred to past cases like Bulk Trading and Venture Global to argue that Part I of the Arbitration Act applied to proceedings in London. They argued that the awards could be nullified under Section 34 of Part I. Their aim was to establish a link between different provisions of the Act, asserting that Part I was relevant to International Commercial Arbitration taking place outside India.

Issues Involved

The concerns addressed by the arbitral tribunal encompassed two main aspects:

1. Questioning the validity of challenging two awards issued in England under S. 34 of the 1996 Act.
2. Determining the applicability of S. 9 of the 1996 Act in relation to this particular case.

2. The Court Held

The SC’s decision emphasized the clear separation between the ‘Domestic Award’ under Part I and the ‘foreign award’ under Part II of the Act, both functioning distinctly without intermingling.

This differentiation becomes crucial, especially when the arbitration selects a foreign country as the ‘seat’ and embraces the Act as its governing law. In such cases, the laws of that foreign country would govern the arbitration process, taking precedence over Part I of the Act, thereby preventing Indian courts from supervising the arbitration or its resulting award.

This emphasizes that when parties select a foreign seat for arbitration, they incorporate specific clauses from the Act concerning the internal workings of their arbitration, without conflicting with essential procedural laws of the chosen foreign jurisdiction. Consequently, Part I of the Act applies solely to arbitrations conducted within India.

Contrary to the Bhatia International case, the Court’s interpretation asserts that Indian courts retain the authority to provide interim measures for arbitrations held outside India, a stance derived from a comprehensive analysis of the Act’s provisions.

2. The Conclusion of the Supreme Court’s Order

In this judgment, the Supreme Court affirmed that the 1996 Arbitration Act follows the principle of territoriality, aligning with the UNCITRAL Model Law. After thorough examination of the arguments, the court highlighted that Section 2(2) explicitly mandates the application of Part I of the 1996 Act to all arbitrations conducted within India’s borders.

It’s important to note that the Supreme Court clarified that Part I of the Act, doesn’t extend its reach to International Commercial Arbitration happening outside India. Consequently, awards stemming from such arbitrations fall within the jurisdiction of Indian courts only when seeking enforcement in India, adhering to the guidelines set in Part II of the Act.

The Supreme Court in this ruling, has concluded that the Arbitration Act of 1996 embraces the territoriality principle, aligning itself with the UNCITRAL Model Law. The court, after careful consideration of the arguments presented, emphasized that S. 2(2) explicitly dictates the applicability of Part I of the 1996 Act to all arbitrations conducted within the boundaries of India. 

Notably, the Supreme Court clarified that Part I of the Arbitration Act, 1996 does not extend its jurisdiction to International Commercial Arbitration conducted outside India. Consequently, awards arising from such arbitrations fall under the jurisdiction of Indian courts only when enforcement is sought in India, in accordance with the provisions outlined in Part II of the Arbitration Act, 1996.

The court underscored the unequivocal stance of the Arbitration Act, 1996, asserting that any intertwining or overlap between the provisions of Part I and Part II is impermissible. Section 9 of the Act pertains to transitional actions taken before or after arbitral hearings, or subsequent to the arbitral award but preceding its application to comply with Section 36. The court clarified that such transitional actions under Section 9 are applicable solely to arbitrations held within the Indian jurisdiction. 

In the context of international commercial litigation involving foreign parties, the court explicitly stated that no petition for temporary relief can be filed in India, whether through arbitration or a lawsuit, as clarified by Section 36 of the Arbitration Act, 1996. This ruling establishes a clear delineation between domestic and international arbitration procedures, providing legal clarity and guidance in the enforcement of awards.

3. BALCO Judgements Downsides

The BALCO judgment, despite its celebrated status, brings forth significant drawbacks worth noting. Primarily, it leaves a party, subject to an arbitral award within India, in a state of vulnerability without adequate recourse. Moreover, its benefits are strictly forward-looking, disallowing retrospective application.

1. Absence of Interim Relief Options

The BALCO case’s impact extends to rendering the Part I provisions of the Act, including the authority to grant interim relief under S. 9 of the 1996 Act, unenforceable for commercial arbitrations held outside India. Additionally, the court specified that initiating a distinct inter partes legal action exclusively for provisional relief in a foreign arbitration, in accordance with the Code of Civil Procedure (CPC), would not be considered viable. Despite concerns raised by some experts, the court dismissed the notion that affected parties were left without recourse, asserting that they could seek appropriate remedies from the courts with jurisdiction over the arbitration’s seat. Critics argue that excluding interim relief provisions hampers rather than advances the arbitral process.

2. Limitations on Interim Relief in Foreign Seated Arbitrations

In the context of foreign-seated arbitrations involving disputes situated in India, the omission of interim relief under the Act may prove detrimental. This omission could undermine the purpose of arbitration proceedings, even if the final award is favorable. Parties against whom an award is made, with assets in India, might exploit the absence of interim relief to dispose of their assets during ongoing arbitration. This tactic aims to thwart an award rendered against them outside India.

3. Prospective Application

Crucially, the principles established in the judgment are only applicable to arbitration agreements executed on or after 7th September 2012. Consequently, parties engaging in arbitration agreements made on or before 6th September 2012, pertaining to foreign-seated arbitrations, are urged to review and potentially amend such agreements to avoid any ambiguities in light of the BALCO decision. This exercise is deemed prudent and foresighted to align with the evolving legal landscape.

4. Prospective and Retrospective Application: NOY Case

The BALCO Judgment and its implications have sparked considerable controversy and debate. Discussions have revolved around its relevance, especially concerning Arbitration Proceedings initiated before this landmark ruling.

This ambiguity becomes evident when examining the “Noy Vallesina Engineering SpA V Jindal Drugs Ltd & Ors.” case, subsequently referred to as the “NOY CASE.” Here, the Supreme Court made a significant ruling rejecting the application of Part – I of the Arbitration & Conciliation Act 1996, even in scenarios predating the BALCO decision. This ruling pertained to situations where the parties had mutually agreed for the seat of arbitration to be outside India.

1. Contentions raised in ‘NOY Case’

The Defendant/Respondent initially engaged Engineering Chur AG for a plant project in India, later transferring the contracts to the Plaintiff/Appellant. Disputes arising from these contracts led to arbitration at the International Court of Arbitration in Paris. The Defendant contested a partial award u/s 34 of the 1996 Act. The High Court of Bombay, initially ruled that a foreign award could not be challenged under this section. The Defendant appealed this decision to a larger bench, which allowed the appeal against awards issued before the BALCO Judgment. This ruling was then taken to the Supreme Court.

Before the Supreme Court, the Defendant argued in favor of the larger bench order based on two main points: first, the contract explicitly referred to the application of Indian law and intended the arbitration seat to be in India; second, the prospective application of the BALCO Judgment was highlighted. The Appellant opposed this order on the grounds that the contract specified London as the arbitration seat, the exception in BALCO didn’t apply to challenge awards under S.34, and Indian courts lacked jurisdiction over challenges to foreign-seated arbitration awards.

The argument further delved into whether the Arbitration Act, 1996, could be invoked for arbitrations outside India, contending that its provisions might only apply to arbitrations within India. It emphasized that the regulation, conduct, and challenge to an award should fall under the jurisdiction of the courts where the arbitration seat resides. This perspective aligned with international instruments like the Geneva Convention, New York Convention, and the UNCITRAL Model Law, emphasizing the significance of the territorial principle and a country’s sovereignty in regulating through its national courts. The conclusion drawn was that choosing the seat in the arbitration agreement essentially signalled a choice of forum for seeking remedies against an award.

2. Decision given in ‘NOY Case’

The Supreme Court underscored the pivotal role of the arbitration proceedings’ seat in determining the jurisdiction of Indian courts to entertain challenges to a foreign award. Given that the seat in this instance was London, Indian Courts lacked jurisdiction. Quoting recent rulings, the Supreme Court overturned the decision of the larger bench of the Bombay High Court.

Simultaneously, during the Supreme Court appeal, the Plaintiff sought to enforce the partial award. The Defendant challenged this enforcement, and the Bombay High Court permitted it. However, the Defendant appealed this permission to a larger bench of the Bombay High Court. The Supreme Court, nonetheless, declared that the Defendant’s appeal was not tenable in light of Section 50 of the Arbitration & Conciliation Act 1996.

Conclusion

The BALCO ruling marks a crucial initial stride by India’s Supreme Court, though it doesn’t solve all of the arbitration challenges within the country. It’s a positive signal, yet the journey toward establishing India as an arbitration-friendly realm is demanding, tangled with intricate legal and policy hurdles. Despite this, the BALCO decision sparks optimism for a new era in Indian arbitration, standing firm in favor of arbitration and rejecting the intrusive approach often seen in the Indian judicial system. This stance not only promotes arbitral independence but also elevates India’s global standing in the field.

However, the BALCO judgment does have drawbacks. It lacks interim relief for foreign seated arbitrations and doesn’t apply retrospectively, potentially resulting in unjust resolution of arbitration issues and ambiguity in executing arbitration agreements and awards. To address these gaps, the legislature amended Section 2(2) of the Act through the 2015 Amendment Act, extending the provision for court-ordered interim relief (S.9) even to foreign seated arbitrations.

Moreover, the Noy Vallesina judgment reinforces that foreign courts at the seat of arbitration hold jurisdiction over substantive challenges to foreign awards, irrespective of when the contract was formed. Additionally, Section 48(1) empowers the court to refrain from enforcing a foreign award if satisfactory evidence is presented, based on the grounds specified in the section. It’s noteworthy that the phrase “set aside or suspended” in clause (e) of Section 48(1) doesn’t inherently imply that a foreign award enforceable in India can be challenged on its merits in Indian courts.

References

1. Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc., (2012) 9 SCC 552. 
2. Noy Vallesina Engineering Spa v. Jindal Drugs Limited, (2006) 9 SCC 775
3. Bhatia International v Bulk Trading [2002] 4 SCC 105
4. Manish Kumar Patni, Applicability of Section 34 and Prospective & Retrospective Application of Balco Judgement, 4 INDIAN J.L. & LEGAL RSCH. 1 (2022)
5. Jain, Tarun, A Critical Analysis of the Balco Case. Available at SSRN: https://ssrn.com/abstract=1087593
6. Ashish Chaug, “The Bharat Aluminium Case: The Indian Supreme Court Ushers in a New Era,” Kluwer Arbitration Blog (September 26, 2012), https://arbitrationblog.kluwerarbitration.com/2012/09/26/the-bharat-aluminium-case-the-indian-s upreme-court-ushers-in-a-new-era/
7. Sagar Gupta, Exclusive Jurisdiction & Seat of Arbitration: Examining the Indian Arbitration Landscape, 1 INDIAN REV. INT’l ARB. 94 (2021).