Service of Notice on Parties to an Indian Arbitration

In Benarsi Krishna v Karmayogi Shelters, the Supreme Court has decided that the word “party” in section 34 of the Arbitration and Conciliation Act, 1996, does not include a party’s agent. This, it is respectfully submitted, is incorrect or, at best, too widely stated. The important practical consequence of this proposition is that the period of limitation does not begin to run from the date of service on counsel. Since it is well-known that a Court has no power to condone a delay beyond the limit imposed by section 34 and its proviso, the exact date on which the period of limitation begins to run is of immense significance in arbitration law.

First, the facts: the claimant in the arbitration instituted proceedings for the breach of a collaboration agreement and obtained a successful award from a single arbitrator. This award was served on counsel for the respondent on 13 May, 2004. An application was filed to set aside this award on 3 February, 2005—plainly time-barred, if the date of receipt of the award was the 13^th of May. Accordingly, a single judge of the Delhi High Court dismissed the petition. The Division Bench set aside this order, relying on the judgment of the Supreme Court in Union of India v Tecco Trichy Engineers, on the basis that service of the award had not been properly effected.

In considering this problem, it is important to carefully distinguish between two arguments: first, that the word “party” in section 34 excludes agents; and second, counsel has neither actual nor apparent authority to accept service. The first is a point of statutory construction, but the second calls for the application of well-known (if contentious) principles of the law of agency. The Supreme Court has, with respect unfortunately, accepted the first submission. In other words, it has held that the word “party” is defined as one who is party to an arbitration agreement and, as a matter of construction, does not include counsel. The following observations of the Court should be studied closely:

The expression "party" has been amply dealt with in Tecco Trechy Engineer's case (supra) and also in ARK Builders Pvt. Ltd.'s case (supra), referred to hereinabove. It is one thing for an Advocate to act and plead on behalf of a party in a proceeding and it is another for an Advocate to act as the party himself. The expression "party", as defined in Section 2(h) of the 1996 Act, clearly indicates a person who is a party to an arbitration agreement. The said definition is not qualified in any way so as to include the agent of the party to such agreement. Any reference, therefore, made in Section 31(5) and Section 34(2) of the 1996 Act can only mean the party himself and not his or her agent, or Advocate empowered to act on the basis of a Vakalatnama.

[emphasis mine]

With respect, it is submitted that this conclusion contains two errors. The first is the contrast between an Advocate acting “for” the party and an Advocate acting “as” the party. This is a distinction without a difference unless one concludes that the word “party” in section 34 contemplates personal service—which was the issue before the Court. In other words, the first reason cannot be a reason for the conclusion that the word “party” excludes agents: it begs the question. The second reason given is that the word “party” is not qualified by Parliament to exclude agents. This, with respect, is a questionable proposition of law: the general rule of law is that a principal is bound by the acts of an agent and, with in relation to notice requirements, has been codified in the Companies Act and the Code of Civil Procedure. It is difficult to imagine that the Court intended every use of the word “party” in the Arbitration Act to refer to the party excluding its agents and yet the language in which its conclusion is expressed makes it difficult to resist this inference. Nor is this a surprising rule: when banks, for example, pay our electricity bill in accordance with a standing instruction, our debt to the Electricity Department is discharged because the law of agency treats the bank as our agent in relation to third parties, although it is our debtor with respect to the money it holds. For the same reason, a payment to our bank discharges a debt owed by any third party to us: the bank is our collecting agent. If a statute used the word “party” or “person” and defined certain legal consequences, it is therefore difficult to suppose that the word was intended to exclude agents.

In addition, one is bound to ask: what of legal entities? It is well-established law that a company acts through the deeds of human beings some of which are treated, by primary or secondary or other rules of attribution, as the acts of the company. In an outstanding judgment in Meridian Global, Lord Hoffmann explained that it is therefore misleading to talk of the company in anthropomorphic terms: the correct analysis is that the acts of certain persons are treated as the acts of the company by virtue of rules of law. These rules of law include rules of attribution and rules of agency. It is, in other words, impossible for a company to act (in the eyes of law) except through the acts of human beings whose acts are, by virtue of applicable rules of law, treated as its acts. It is difficult to reconcile this with the Supreme Court’s conclusion that service on the “party” excludes service on its agents. No doubt it will be suggested that there is a difference between “external agents” (like lawyers) and the company’s own agents (like the legal manager or CEO). That suggestion would be incorrect, because there is no difference at all in the eye of the law between external agents and internal agents: both are agents, albeit constituted differently and with different levels of authority.

The question, ultimately, is not whether the word “party” can include agents, for it plainly does, but whether the agent had authority to accept service. The authority of solicitors and counsel has always proved troublesome, generally in the context of settlement: in Waugh v HB Clifford and Sons [1982] 1 Ch 374, the defendant builder, who had instructed solicitors to settle a dispute with his customers by purchasing their houses, withdrew those instructions and told them not to settle. Unfortunately, this information did not reach the solicitor handling the case until after he had (subject to the question of authority) concluded a binding contract of settlement. Brightman LJ held that a solicitor have apparent authority to settle a dispute provided the terms of the settlement do not involve anything “collateral” to the dispute for which he was instructed. This, with one exception, echoes the analysis of a leading Indian decision: Surendra Nath v Tarubala Basi AIR 1930 PC 158, where the Privy Council held that a counsel has implied and apparent authority (arising from knowledge of implied authority) to compromise suits, but expressly declined to rule on whether this is the case where the agency is created by a written instrument, such as a vakalatnama.

The important question in this case—which was unfortunately not decided—was the scope of a counsel’s authority to accept service of an award. The question falls to be decided by asking the two usual questions: was there actual express/implied authority? If so, the matter ends there. If not, was there apparent authority? This would ordinarily arise from the existence of implied authority but would exist even if the implied authority did not exist in the particular case (for example, because of a prohibition not communicated to a third party). The added complication is the question of whether the claimant in the arbitration is entitled to ostensible authority with respect to an award sent to the defendant’s counsel by the arbitral tribunal, and whether authority, if any, exists after the arbitration is concluded. The Court records that one of these contentions was raised, but did not, in the result, have to rule on any because of the view it took on the meaning of the language of section 34(4).

The final point that should be made is about the reliance on Tecco Trichy: that was a case in which Lahoti CJ held that service on an unknown clerk in a large Government office does not constitute effective service. This conclusion can be ascribed to the traditional authority-based reasoning: such an employee is unlikely to have actual or ostensible authority to accept service. It should not be treated as authority for the general proposition that service excludes all agents, whatever their authority.

Supreme Court on Sukanya Holdings and section 45

It is well-known that the Supreme Court in Sukanya Holdings held that a cause of action cannot be “bifurcated”. Applying this rule, the courts held in several cases that a dispute involving several parties, some of whom are not parties to the agreement containing the arbitration clause, is not arbitrable. Although attempts were made to limit Sukanya, there was considerable doubt as to its scope, particularly in foreign arbitrations in which an attempt is made by a party to invoke the jurisdiction of the Indian court. In Chloro Controls v Severn Trent, a three-judge Bench of the Supreme Court was invited to overrule Sukanya. Although it declined to decide this issue, it made several important observations about its applicability to foreign arbitrations.

Chloro Controls was a dispute between an Indian company and an American joint venture partner. The facts are of some importance. Chloro Controls, a company run by the “Kocha Group”, was engaged in the business of manufacturing and selling gas and electrical chlorination equipment. Severn Trent agreed to appoint Chloro Controls as its exclusive distributor in India and a joint venture company [“the JVC”] was incorporated in India for this purpose. As is not uncommon in such transactions, there was a network of several interlinked agreements, each dealing with a different aspect of the commercial relationship between the parties. In all, there were seven agreements, of which the Shareholders Agreement was the principal agreement, to which Mr Kocha, Severn Trent and Chloro Controls were parties. Clause 4 of the SHA provided that Chloro Controls could not, during the subsistence of the agreement, deal with similar products manufactured by any other entity. Clause 30 provided that disputes would be resolved by English law arbitration in London. The SHA made reference to the other agreements to be executed between these and other parties. The difficulty arose because not all parties had signed all the ancillary agreements, and some of the ancillary agreements did not contain an identical dispute resolution clause. For example, the International Distributor Agreement, by which the JVC was appointed as the exclusive distributor, was signed by Severn Trent and the JVC: neither Mr Kocha nor Chloro Controls was party, and it contained a dispute resolution clause in favour of the courts of Pennsylvania, USA. Similarly, Chloro was not a party to the Export Sales Agreement, which contained an arbitration clause, but seated in the USA, not London.

Eventually, a dispute arose as to whether the JVA covered electrical chlorination equipments as well, and Severn purported to terminate it. Chloro instituted a derivative suit in the Bombay High Court impleading inter alia Severn, the JVC, the Kocha group and the directors of the JVC as parties. It also impleaded two respondents who were not parties to any of the agreements. Severn sought a reference under section 45 of the Arbitration Act to arbitration, pleading that the dispute was essentially about the scope of the JVC and the validity of its termination, matters eminently within the arbitration clause. A Division Bench of the Bombay High Court agreed.

In the Supreme Court, Chloro’s case was that a litigant has a right to approach the civil courts, displaced only by express or clear language; that Sukanya was correctly decided, and that it is impermissible to refer these multi-party disputes to arbitration when some agreements contain no arbitration clause or an arbitration clause on materially different terms. Severn’s case was that Sukanya has become a charter for the disgruntled litigant to avoid the arbitration clause and subject the other party to lengthy proceedings in the Indian courts, notwithstanding the express selection of arbitration as the preferred means of dispute resolution; and that Sukanya was wrongly decided and in any event a complete irrelevance to section 45.

The Supreme Court held that section 45 leaves no room for discretion: if the conditions in sections 44 and 45 are satisfied, the civil court is required to refer the parties to arbitration. With respect to whether it is appropriate to do so in multi-party arbitrations, the Court examined many theories on the basis of which such references have been made: group companies, claiming “through or under” a party to the arbitration clause etc. It accepted that a reference is permissible if the agreements are “intrinsically interlinked” and the ancillary agreements serve no purpose except in connection with the principal agreement which contains the arbitration clause. In other words, a composite transaction can be referred to arbitration even if some of the parties named as respondents are not parties to the arbitration clause. It also observed that Sukanya Holdings is of no relevance to an application made under section 45 for a reference to arbitration because that case was decided under section 8. The following observations of the Court illustrate the point:

… In a case like the present one, where origin and end of all is with the Mother or the Principal Agreement, the fact that a party was non-signatory to one or other agreement may not be of much significance… In cases involving execution of such multiple agreements, two essential features exist; firstly, all ancillary agreements are relatable to the mother agreement and secondly, performance of one is so intrinsically inter-linked with the other agreements that they are incapable of being beneficially performed without performance of the others or severed from the rest. The intention of the parties to refer all the disputes between all the parties to the arbitral tribunal is one of the determinative factor.

Although the Court has stopped short of overruling Sukanya Holdings, its judgment enhances the prospect of resolving multi-party disputes through arbitration and ensuring that the jurisdiction of the civil courts remains excluded.

Long term contracts and dispute resolution clauses - Part II

(Part I outlined the facts of Interserve v Katowice, and discussed its findings on variation).

After holding that the side/supplemental agreement in this case did not form part of the sub-contract, the High Court movies on to consider the alternative argument based on the implication of terms. Without referring to A-G Belize or any other cases on the implication of contractual terms, the Court puzzlingly concludes that there is an implied arbitration clause in the settlement agreement; based solely on “the analysis or rationale of Ramsay J in L Brown”. However, this reliance on L Brown v Crosby Homes ignores that it was a case where the High Court concluded that the supplemental agreement was a variation of the sub-contract, and that disputes arising out of the supplemental agreement were disputes arising out of the sub-contract. Therefore, Ramsay J in Brown was discussing variation and the scope of the phrase ‘arising out of and in connection with’. The implication of terms does not form the basis of that decision; in fact, there is no reference to implication in the case report (notwithstanding a slightly puzzling stray reference to the ‘officious bystander’, which is a test which was used for the implication of terms prior to A-G v Belize).

Further, not only is the reliance on Brown misplaced, but it is also inadequate when assessing whether on the facts here, there was indeed an implied term in the supplemental contract. This is particularly the case when, as here, the settlement agreement has a jurisdiction clause of its own and there is no vacuum which needs to be filled by the sub-contract. The Court reasons that, based on Paul Smith Ltd v H & S International Holding Inc [1991] 2 LL Rep 127 and Axa Re v Ace Global Markets Ltd [2006] EWHC 216 (Comm), the jurisdiction clause in the settlement agreement can be reconciled with the arbitration clause in the sub-contract by treating the jurisdiction clause merely as specifying the lex arbitri, the curial law or the law governing the arbitration. However, the Court does not adequately address the argument raised by the claimant that both those cases dealt with single contracts which contained (by express reference) an arbitration clause and a jurisdiction clause. That is a fundamentally different situation from one in which two independent contracts contain a jurisdiction clause and an arbitration clause each, and one is sought to be implied into the other. Therefore, while such reconciliation of jurisdiction and arbitration clauses is not unsound in theory, applying it to the present case amounts to putting the proverbial cart before the horse. The need for such reconciliation arises only when the arbitration clause expressly forms part of or can properly be implied into the settlement agreement; the possibility of such reconciliation is not an argument in favour of such implication. To the contrary, the existence of a potentially conflicting jurisdiction clause in the settlement agreement should be a factor which goes against such an implication.

Therefore, with respect, the Court’s conclusion and the reasoning underlying this conclusion are both suspect. It is of course arguable that the dispute here was such that it fell within the scope of the dispute resolution clause in the primary contract, and that the Court’s conclusion was justified on the facts. However, without any discussion in the report as to the nature of the dispute, and given the absence of any reference to this argument, it appears difficult to rationalise the decision on that basis.

The principled debate notwithstanding, the greater significance of the case is in outlining the issues to be borne in mind when drafting settlement agreements, or other side/supplemental agreements to long-running contracts. Given the ambiguities and the fact-specific inquiries involved in such cases, it is probably best to carefully consider how any subsequent disputes in connection with the primary contract or the side/supplemental agreement should be resolved, and draft the dispute resolution clauses accordingly. Drafting the side/supplemental agreement as a variation or amendment to the primary contract, or incorporating the dispute resolution clause of the primary contract by reference seem to be the ideal ways in which the dispute resolution provisions of both agreements can be kept consistent. However, if a different dispute resolution mechanism is intended to apply to the side/supplemental agreement, it is advisable to expressly include a provision to that effect, rather than relying on the result of a fact-specific inquiry into the parties’ intentions and the nexus between the two contracts.

Long term contracts and dispute resolution clauses - Part I

Dispute resolution under long-running contracts with continuing obligations can often pose issues which do not commonly surface in other scenarios. Often when disputes arise under a long-running contract, it is in the interest of both parties to not terminate the ongoing relationship, but settle the dispute either by themselves or by using some form of ADR. Such a settlement may take the form of a side/supplemental agreement. The nexus between such a side/supplemental agreement and the primary contract can vary- it may either be a variation or amendment of the primary contract, or it may be a standalone agreement with some nexus with the main contract. If however, subsequent disputes arise between the parties in relation to the performance of this side/supplemental agreement, an interesting question is the extent to which the dispute resolution clauses of the primary contract can apply to such a dispute. If the dispute resolution clauses in the side/supplemental agreement and the primary contract are identical or substantially similar, this is an academic question. However, if they are inconsistent, and a party seeks to rely on the dispute resolution clause under the primary contract, there are two main ways of achieving this result:

• Arguing that the side/supplemental agreement is a variation of the primary contract, and forms part of it; and
• Arguing that the nexus between the two contracts is such that disputes in connection with the performance of the side/supplemental agreement are disputes falling within the scope of the dispute resolution clause in the primary contract.

Against this backdrop, it is interesting that the English High Court in Interserve Industrial Services v ZRE Katowice recently considered a third option- implying the dispute resolution clause from the primary contract into the side/supplemental agreement.

We have previously discussed the issue of implying terms into a contract- noting the decision in Attorney General v Belize which held that terms may be implied into a contract only when, viewed objectively, the parties intended something other than what the language of the contract indicates. Implication is not the process by which a Court may add terms to a contract merely because they are reasonable, or because they would improve the contract or remove defects. However, in concluding that the arbitration clause in a contract can be implied into a subsequent settlement agreement between the same parties, the High Court in Interserve appears to have come perilously close to engaging in the second-guessing exercise which A-G v Belize warned against.

Interserve v Katowice involved a dispute between the contractor and sub-contractor at a construction site, which was successfully resolved by a settlement agreement. Pursuant to this agreement, an agreed outstanding sum was to be paid by the contractor to the sub-contractor on the latter achieving certain milestones. These milestones were identified with reference to the continued performance of the primary sub-contract. Clause 8 of the settlement agreement provided- ‘This agreement is governed by and construed in accordance with the laws of England and Wales and the courts of England and Wales shall have exclusive jurisdiction in respect of any dispute arising under this agreement’.

Subsequently, there arose a fresh dispute between the parties as to the payment of the agreed outstanding sum, and the sub-contractor sought to enforce the settlement agreement in the English courts. The contractor relied on an arbitration clause in the sub-contract to seek a stay of the court proceedings. As outlined earlier, the contractor had two main grounds on which to base its argument. Surprisingly however, the Court discusses only the first of these, i.e. variation; along with the novel alternative argument that the arbitration clause could be implied into the settlement agreement.

After an extensive examination of industry practice, the Court observes that unless the side/supplemental agreement is entirely unconnected with the earlier agreement i.e. standalone, or unless it has settled all claims arising out of the earlier agreement such that no reference to the earlier agreement is required any longer, English courts have held such side/supplemental agreements to be variations of the earlier agreement and therefore subject to the same dispute resolution provisions as the earlier agreement. However, after examining the parties’ submissions on the nature of the sub-contract and settlement agreement in this case, the Court concludes-

… on its proper construction, in many respects the December agreement either does not in fact vary the terms of the subcontract, or – if it does – then it does not do so in any material respect. However, the determination of that issue does not provide an answer to the key issue in the application, which is whether or not the December agreement incorporated the dispute resolution provisions of the subcontract … the key issue in the application is whether, on its proper construction, there was an implied term of the December agreement that disputes under the December agreement would be subject to the same dispute resolution procedure as obtained in the subcontract.

Therefore, the settlement agreement here did not vary the sub-contract, and the sub-contract and the settlement agreement were two separate agreements. The only two ways in which the dispute resolution clause of the sub-contract could be applied to this dispute would be (i) if the dispute arose out of the sub-contract (which is not discussed); or (ii) if the dispute resolution clause could be implied into the settlement agreement, which the Court proceeds to discuss.

Part II will discuss the Court's reasoning on the implication point and the merits of this approach.

The Supreme Court overrules Bhatia International and Venture Global

The Supreme Court has overruled Bhatia International, and has once and for all held that the supposed omission of the word “only” from section 2(2) has no significance (see below). Importantly, it has also held that a party cannot file a civil suit in relation to the subject matter of the arbitration agreement in order to obtain interim relief. The Court has overruled these decisions prospectively, that is, the law declared today will apply only to arbitration agreements made (not suits/petitions filed) after 06.09.2012. This means that any application for relief under sections 9 or 34 in respect of foreign-seated arbitrations will continue to be governed by the old law (including the law on implied exclusion) if existing arbitration agreements are not amended.

For a summary of the issues before the Court, readers may wish to refer to our account of the judgments of the High Courts under appeal. In today’s judgment, delivered by Nijjar, J. on behalf of the Constitution Bench, the Court has made several important observations on these and other issues of Indian arbitration law. The following summary briefly describes these observations, with a reference to the paragraph number. We will have an opportunity to comment in more detail in the days to come.

1. Section 2(2) and the reasoning in Bhatia International
1. The omission of the word “only” does not mean that Parliament intended to make Part I applicable to foreign-seated arbitrations. The reason for the omission is explained by the 330^th Meeting of the drafters of the Model Law on 19 June 1985. The reason is that article 1(2) of the Model Law had the words “except articles 8, 9, 35 and 36”, and therefore had to insert the word “only” to clarify that these provisions would apply also to domestic arbitrations (Para 63, 68).
2. Section 2(2) does not conflict with section 2(4) or with section 2(5). Section 2(5) only means that the Act applies to all arbitrations where it would be otherwise applicable (Para 85).
3. The proviso to s 1(2), in relation to Jammu & Kashmir, does not mean that the Act has extra-territorial application. It simply provides for the application of the J&K law (Para 55)
4. There is no “lacuna” in the Act therefore not applying to non-Convention awards. Such awards cannot be enforced under Part I (Para 175)
2. Section 2(7), which uses the words “domestic award”, contrasts domestic award with foreign award, not international award; that is, an international commercial arbitration in India is not a foreign award. This in fact indicates that Bhatia International was wrongly decided (paras 88 and 94).
3. In international arbitration, jurisdiction is generally determined by the “seat” of arbitration. The “seat” is a juridical concept, which is not affected by where hearings are conducted (Paras 72 and 100). In the rare case where the parties choose a seat of arbitration and a lex arbitri which do not coincide, it is a matter of construction whether the designation of the foreign seat was in fact a reference to the place of arbitration.
4. The two “alternatives” in section 48(1)(e), ie the court of the country in which the award was made (the country of the seat) and the court of the country under the law of which the award was made do not confer concurrent jurisdiction. The legislative history of art V(1)(e) of the NY Convention shows that the objective was to provide for the second alternative where the first alternative is unavailable (ie, where the country of the seat does not entertain a challenge to the award). Further, section 48 does not confer jurisdiction to set aside an award: such jurisdiction must be found in the applicable national law. Section 48 merely provides that a domestic court may decline to enforce an award if the conditions in the provision are satisfied. In any event, the words “under the law of which” are a reference to the lex arbitri, not the law governing the substance of the agreement (Paras 137, 148).
5. Parts I and II are mutually exclusive. The Indian Act, like the UNCITRAL Model Law, is founded on the “territoriality principle”. Therefore, Sections 9 and 34 of the Act apply only if the seat of arbitration is in India. This does not render a party seeking interim relief remediless. Even if it does, that is a matter for the legislature, not the courts (Para 167).
6. No civil suit can be instituted purely for interim relief, because interim relief is granted on the strength of the final relief sought on a recognised cause of action. The prayer for interim relief cannot itself constitute the cause of action for a suit (Paras 187, 197)

Lord Saville: 15 Years of the English Arbitration Act

The UKSC Blog has highlighted a speech by Lord Saville, “Reflections on the English Arbitration Act 1996 after fifteen years”. Lord Saville, who was intimately connected with the drafting of the English Act, makes several interesting points.

He deals with the narrow right of appeal on questions of law u/s 69 of the English Act. In does so, he addresses the argument that having a narrow right of appeal hinders the orderly development of principles of commercial law. Hence (the argument goes), there ought to be a wide review of an arbitrator’s decision on pure questions of law. Lord Saville addresses the argument thus: “The fear has been expressed that by this means, English commercial law runs the risk of atrophying and losing its world-wide reputation as about the most developed system of laws governing international trade and commerce. There is undoubtedly force in this point, at least from the point of view of the development of English commercial law. But from the point of view of the majority of those using arbitration, I believe things look rather different. Commercial entities do not generally choose to resolve their disputes by arbitrating in order, at of course their expense and with added delay, to contribute to the body of English commercial law. They have chosen arbitration, as Michael Moser put it, because they do not want to go to court. I do find some difficulty (as did Lord Devlin many years ago) in accepting the proposition that those seeking a resolution of their disputes by arbitration rather than litigation should somehow be obliged nonetheless to finance the development of English commercial law by dragging their dispute from their chosen tribunal to the court…”

Next, on the issue of independence and impartiality of arbitrators, Lord Saville questions “with great temerity… the need for independence as well as impartiality…” Undoubtedly, he says, a judicial officer and an arbitrator must be impartial and must have the appearance of impartiality. Given this, what is the additional need for “independence”? “Independence and impartiality are fine-sounding words. They form a phrase that sounds good. It has a ringing tone. But to my mind the phrase creates serious problems, because it contains two words where one would do on its own. The object is to ensure that arbitrators act fairly and even-handedly between the parties. The object is met by requiring impartiality and the appearance of impartiality. Independence adds nothing of value…” 

Lord Saville also deals with the issue of whether arbitrators should have the power of granting ex parte interim measures. He is convinced that they should not. On consolidation of connected arbitrations, he is of the view that consolidation is dealt with best by means of appropriate contractual drafting and not be means of external legal imposition. He also touches on issues of privacy and confidentiality. The text of the speech is available here.

Court of Appeal on the Law of the Arbitration Agreement - Part II

There are two ways of interpreting Moore-Bick LJ's reasoning and conclusion, discussed in Part I:


First, one could argue that this case is a reaffirmation and extension of the recent trend in English cases of applying the law of the seat to the arbitration agreement. The best example of this approach is the decision in C v D [2007] EWCA Civ 1282.

Although this interpretation has considerable explanatory power, it goes against several observations made in other parts of the judgment. Moore-Bick LJ devotes a large part of his reasoning (most of paragraphs 7 to 26) to explaining that the proper law of the contract would often extend to the arbitration agreement, and that the seat, though important, was not conclusive. There are also an interesting section of the judgment (paragraph 26) where he explains that the concept of severability also does not automatically suggest that the law of the seat governs the arbitration agreement, since severability does not amount to breaking all connections between the substantive contract and the arbitration agreement. However, while these observations indicate that the seat is not crucial in determining the implied choice of law, the express reasoning on the 'closest and most real connection' test suggests that the seat is critical and possibly conclusive if there is no express or implied choice.

Second, one may argue that while the seat was a very important (and possibly clinching factor) for the 'closest and most real connection' test, it was the effect of Brazilian law on the arbitration agreement that drove the Court's conclusion on implied choice. This is similar to the principle of 'effectiveness', which suggests that the parties are taken to have intended the arbitration agreement to be effective, and hence, impliedly chosen a governing law under which it would be effective.

While there is much to be said for the principle of effectiveness, it is not entirely clear that this is an appropriate case for it to be applied. The effect of Brazilian law was not to render the arbitration agreement ineffective; it was only to make the insured party's consent a condition precedent to the commencement of arbitral proceedings. While there undoubtedly is force in the learned judge's reasoning, one may argue that the reason the contract didn't include this consent as an express condition was because the parties assumed that the arbitration agreement would anyway be governed by Brazilian law, and hence contain this pre-condition. More significantly, the judgment suggests that there was no finding of the Commercial Court on whether this was indeed the effect of Brazilian law (paragraph 30). In effect, the insured party contended that the arbitration agreement was enforceable only with its consent, and the Court used this contention against the insured party's own case so as to make the arbitration agreement enforceable.

Therefore, neither interpretation of the reasoning and conclusions is particularly satisfactory. Further, the concurring judgment of the Master of the Rolls also raises a couple of thorny issues. First, unlike Moore-Bick LJ, the Master of the Rolls does not draw a distinction between implied choice and the 'closest and most real connection' test, saying only that the two factors discussed by Moore-Bick LJ suggest that the arbitration agreement was governed by English law. Second, he agrees with Moore-Bick LJ that the reasoning in C v D is not the foundation of the Court's decision here; in fact, he thinks a "powerful case" may be made against the reasoning in C v D. Finally, he seems to take a different view from Moore-Bick LJ on the relevance of the principle of severability. He suggests that "the growing awareness of the importance of the principle" may explain the relatively recent trend in English law of giving more importance to the seat of the arbitration.

In conclusion, the decision of the Court of Appeal in Sulamerica is a reminder (if ever one was needed) of the complex and conflicting jurisprudence on the law governing arbitration agreements. If one were to look only at the conclusion of the Court, it appears that the seat of the arbitration, and especially the fact that it was London (which meant the mandatory application of certain statutory provisions) was a very major factor. However, at the same time, large parts of the reasoning point towards the seat not being a conclusive factor. Further, the Court's apparent extension of the 'effectiveness principle' is not entirely convincing. Given these issues, and the conflicting jurisprudence highlighted by the Master of the Rolls, it can be expected that future decisions will shed some more light on this very significant and intriguing issue.

Court of Appeal on the Law of the Arbitration Agreement - Part I

While we eagerly await the decision of the Indian Supreme Court in Bharat Aluminium, the English Court of Appeal has delivered a controversial but significant decision on the significance of the seat in international arbitration. In Sulamérica Cia Nacional De Seguros S.A. v Enesa Engenharia S.A. [2012] EWCA Civ 638, the insurance contract in question concerned a project in Brazil, was governed by Brazilian law, and disputes arising out of or in connection with the policy were subject to the exclusive jurisdiction of the Brazilian courts. However, the Court of Appeal affirmed the High Court in concluding that English law governed the arbitration agreement, influenced primarily by the seat of the arbitration being London and the implications of applying Brazilian law.


The case involved a claim by the insured party for losses arising in the project. The insurers served a notice of arbitration, seeking a declaration of no liability. The insured party responded by initiating proceedings in Brazil, to restrain the insurers from commencing arbitration, and obtained an injunction. In response, the insurers made an application to the Commercial Court in England seeking an anti-suit injunction preventing the insured party from pursuing Brazilian proceedings. The insured party opposed this application on broadly two bases:

• The arbitral tribunal did not have jurisdiction over the issues which the insurer was seeking to refer to it, and under the terms of the contract, mediation was a pre-condition to commencing arbitral proceedings

• Under Brazilian law, an arbitration agreement could be commenced only with the consent of the insured party

While the first of these objections is not relevant for present purposes (discussed in paragraphs 33 to 46 of the judgment), it was in dealing with the second objection that the Commercial Court and then the Court of Appeal was called on to determine the law governing the arbitration agreement. If it was Brazilian law, the arbitration could not have been brought, and the Commercial Court would not grant an anti-suit injunction. If it was English law, then the arbitration could be brought, and subject to the Court's conclusions on the first of the insured party's objections, it could grant an anti-suit injunction.

In English law, the law governing an arbitration agreement is determined the same way as the proper law of a contract, by applying a three-stage process: (i) express choice of the parties; (ii) implied choice of the parties; and (iii) closest and most real connection. Here, there was no express choice of the parties as to the law governing the arbitration agreement, leaving the court to apply prongs (ii) and (iii).

The insured relied on several factors which suggested an implied choice of Brazilian arbitration law: (i) Brazilian law was the proper law of the contract; (ii) exclusive jurisdiction of Brazilian courts; (iii) close commercial connection between the policy and Brazil (the parties, the subject matter of the insurance and the currency of the policy were Brazilian; and the language of the policy was Portuguese); and that (iv) the clause on mediation, which was arguably a pre-condition to arbitration, was governed by Brazilian law. Although Moore-Bick LJ, delivering the lead judgment of the Commercial Court, recognised that these were "powerful factors", he rejected the insured party's argument citing two other factors:

• The seat of arbitration was London – this choice is taken to indicate "an acceptance that the law of that country relating to the conduct and supervision of arbitrations will apply to the proceedings … [which] tends to suggest that the parties intended English law to govern all aspects of the arbitration agreement, including matters touching on the formal validity of the agreement and the jurisdiction of the arbitrators" (paragraph 29). The fact that the choice of London as the seat of arbitration made certain substantive provisions of the English Arbitration Act 1996 mandatorily applicable, was taken to suggest an intention that the entire arbitration agreement was governed by English law (relying on XL Insurance).

• Under Brazilian law, the arbitration could only be commenced with the insured party's consent – since this would be a departure from the usual commercial practice, this effect of Brazilian law was considered a "powerful factor". Further, if this was what the parties intended, they could have included an express provision in the contract to that effect. To the contrary, one of the sub-clauses in the mediation provision indicated that either party may submit the dispute to arbitration, which suggested a contrary intention to that which would result from an application of Brazilian law.

Therefore, although the Court observed that "[a] search for an implied choice of proper law to govern the arbitration agreement is therefore likely … to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract" (paragraph 26), the Court concluded that these two factors refuted the existence of any such implied choice.

Moving on then to the 'closest and most real connection' test, Moore-Bick LJ concludes that "an agreement to resolve disputes by arbitration in London, and therefore in accordance with English arbitral law, does not have a close juridical connection with the system of law governing the policy of insurance, whose purpose is unrelated to that of dispute resolution; rather, it has its closest and most real connection with the law of the place where the arbitration is to be held and which will exercise the supporting and supervisory jurisdiction necessary to ensure that the procedure is effective" (paragraph 32). What this very brief conclusion on this issue does not make clear, is what his view is on the slew of other factors which connected the dispute with Brazil. Although he draws a distinction between a connection with the substantive contract and a connection with the law governing the contract, that distinction does not explain why all the other connecting factors are irrelevant in applying the 'closest and most real connection' test to the arbitration agreement. Possibly the judge is relying on the distinction between connecting factors to a country, and connecting factors to that country's laws, but there is nothing in the judgment to indicate as much.

[Part II will discuss the issues arising out of this judgment]

The Delhi High Court on Foreign Awards and Implied Exclusion of Section 34

We have discussed on several occasions the scope of the proposition in paragraph 32 of Bhatia International that the parties may “expressly or impliedly” exclude the applicability of Part I of the Arbitration Act in cases in which it would be otherwise applicable. The Court has previously held that Part I is not impliedly excluded merely by choosing a foreign substantive law (Indtel Technical Servicesand Citation Infowares), but may be if it is coupled with the designation of a foreign seat of arbitration (Dozco India v Doosan), or if the parties expressly choose a foreign seat and a foreign lex arbitri (Videocon). The Court appears also to have impliedly rejected the proposition that the mere designation of a foreign seat of arbitration excludes Part I, because the seat in Bhatia International was Paris, and the seat in Yograj was Kuala Lumpur. Even if Bhatia can be explained on the basis that the Court relied on the language of article 23(2) of the ICC Rules, Yograj clearly found that it was the application of Rule 32 of the SIAC Rules 2007 that excluded the Indian Act, suggesting that the designation of Singapore as the seat did not of itself lead to this result.

Muralidhar, J. last week considered these issues in Indiabulls Financial Services v Amaprop Ltd. In 2005, Amaprop invested in the shares of a subsidiary company of Indiabulls and was granted a Put Option enabling it to compel Indiabulls to acquire those shares at a predetermined price. The contract contained the following provisions on governing law and dispute resolution: (a) the contract is to governed by New York law, with an exclusion of renvoi (Section 12.10(a)); (b) each party accepted the non-exclusive jurisdiction of the courts in New York (Section 12.10(b)) and (c) all disputes shall be settled by arbitration in New York in accordance with the Rules of the American Arbitration Association, without prejudice to the right of any party to make an application for injunctive relief (Section 12.11).

Amaprop exercised the Put Option in 2010 at the predetermined price, but an application filed by Indiabulls with RBI to make the transfer at this price was refused. Amaprop commenced arbitration under the contract. The Tribunal’s award directed Indiabulls to make a fresh application to the RBI to transfer at a certain price, and left open the possibility that the difference between the option at the RBI-permitted price and the Option Price would form the basis of a money award for Amaprop. Amaprop brought an action in New York to confirm the award and obtained an anti-suit injunction in respect of Indian proceedings.

Thereafter an application was filed by Indiabulls under section 34 to set aside the New York award on the ground that it was contrary to Indian public policy in ignoring the provisions of the Foreign Exchange Management Act, 2000 and RBI Circulars. Amaprop took a preliminary objection on the basis that the parties had impliedly excluded the application of Part I of the Indian Act.

There is a strong case for the view that Bhatia International itself requires reconsideration, and that the selection of a foreign seat is the clearest indication that the parties intended to exclude Part I – but these points are concluded by authority and will remain so unless the Supreme Court overrules Bhatia International and Venture Global in BALCO. Therefore the analysis is whether, as a matter of construction, it can be said that the parties intended that Part I of the Indian Act should not apply. At first sight, there is little to suggest this, beyond the selection of a foreign seat of arbitration and a foreign proper law, and Supreme Court authority in Yograj and perhaps Bhatia itself suggests that that does not suffice. There is, of course, Dozco v Doosan, since the parties here also chose a foreign proper law.

Muralidhar, J. reaches the conclusion that Part I was excluded on a different basis. First, the learned judge rejects the suggestion that giving the New York courts non-exclusive jurisdiction indicates that the parties did not intend to exclude the jurisdiction of the Indian court. For this purpose, the Court cites the well-known decision of the Court of Appeal in Deutsche Bank v Highland Crusader. However, the context in which that case was decided was the prior decision of the Court of Appeal in Sabah Shipyard v Government of Pakistan, where the court had granted an anti-suit injunction restraining certain proceedings in Pakistan even though England was the subject of a non-exclusive jurisdiction clause. Sabah was subsequently criticised, notably by Mr Rapahel, and in Deutsche Bank, Toulson LJ explained that the conclusion in that case was correct only because it could be shown, independently, that commencing proceedings in Pakistan was vexatious and oppressive. Although there is an observation in that case that bringing proceedings in a certain forum may be vexatious or oppressive even if the chosen forum was given only non-exclusive jurisdiction, the thrust of the Court’s analysis was in fact that such a finding is unusual and requires material independent of the jurisdiction clause. To the extent the Delhi High Court relies on this case to hold that giving New York non-exclusive jurisdiction is not inconsistent with excluding the jurisdiction of the Indian court, it may be correct, but it can go no further.

Secondly, Muralidhar, J. held that the contract itself indicates that the intention of the parties was that an arbitral award would be tested only in a New York court, because of the reference to the New York court in section 12.10 and the conduct of the parties when proceedings were commenced in New York. Thirdly, the Court refers to the fact that New York was the seat of arbitration, and to Rule 57(2) of Dicey and Morris, which, of course, is the correct analysis but may be contrary to what the Supreme Court has held in NTPC v Singer and Bhatia International.

Two other points are of interest. The first is the finding that it was open to Indiabulls to raise non-compliance with Indian law in the New York court under the rubric of public policy. It is not clear if this is possible, because it is ordinarily accepted public policy in the New York Convention is a reference to the public policy of the enforcing State. The second is that this case appears to implicitly accept that parties can impliedly exclude certain provisions in Part I without excluding the remainder. That is because section 9 would not have been impliedly excluded in this case, since section 12.11 of the contract allowed the parties to approach other courts for interim relief – and yet, section 34 was.

Arbitrability of an Unfair Prejudice Claim (Part II)

(continued from earlier)

The next argument was that any unfair prejudice claim under s.994 attracts a degree of state intervention and public interest such as to make it inappropriate for disposal by anything other than judicial process, independent of the nature of the claim or the company in this particular case. In response, the Court undertakes a historical analysis of the unfair prejudice claim, observing that since the 1980 Companies Act, the scope of the unfair prejudice claim has consciously been given a life independent of the relief of winding up on just and equitable grounds. Thus, although the two may overlap, the legislature has made a conscious effort to allow the unfair prejudice claim and reliefs under it, for reasons which may not apply to other shareholders in the same class as the claimant, or to creditors. Thus, the unfair prejudice claim is more ‘personalised’ than the winding up of the company on just and equitable grounds. The Court observed that while some of the reliefs sought under an unfair prejudice claim could affect third parties, it was not inherently a class remedy. In cases where it did affect third parties, the Court could impose limitations of the reliefs that could be claimed through arbitration.

This conclusion was apparently at odds with Exeter, which had held relied on an Australian decision in A Best Floor Sanding Party Ltd v Skyer Australia Party Ltd [1999] VSC 170, to hold that the shareholders have an inalienable right to approach a Court for an unfair prejudice claim and had denied a stay. However, as the Court of Appeal here rightly points out, the applicable Australian statute was materially different from its English counterpart. It mere included unfair prejudice as an additional ground for winding-up, and not as an independent head of relief. Further, the reliefs sought there were for winding up and not merely a contractual dispute which formed the basis of an unfair prejudice claim. The Supreme Court of New South Wales in ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896 has also similarly narrowed the scope of the Skyer Australia decision, lending further support to this interpretation. The Court observes that certain company law issues like the rights of members; and the duties of directors, or the consequences of insolvency are not such as may be arbitrated. However, the Court observes that Exeter incorrectly extended the rationale of Skyer Australia beyond these limited cases.

Here, the Patten LJ observes that,

the determination of whether there has been unfair prejudice consisting of the breach of an agreement or some other unconscionable behaviour is plainly capable of being decided by an arbitrator and it is common ground that an arbitral tribunal constituted under the FAPL or the FA Rules would have the power to grant the specific relief sought by Fulham in its s.994 petition. We are not therefore concerned with a case in which the arbitrator is being asked to grant relief of a kind which lies outside his powers or forms part of the exclusive jurisdiction of the court. Nor does the determination of issues of this kind call for some kind of state intervention in the affairs of the company which only a court can sanction. A dispute between members of a company or between shareholders and the board about alleged breaches of the articles of association or a shareholders’ agreement is an essentially contractual dispute which does not necessarily engage the rights of creditors or impinge on any statutory safeguards imposed for the benefit of third parties. The present case is a particularly good example of this where the only issue between the parties is whether Sir David has acted in breach of the FA and FAPL Rules in relation to the transfer of a Premier League player ... The statutory provisions about unfair prejudice contained in s.994 give to a shareholder an optional right to invoke the assistance of the court in cases of unfair prejudice. The court is not concerned with the possible winding-up of the company and there is nothing in the scheme of these provisions which, in my view, makes the resolution of the underlying dispute inherently unsuitable for determination by arbitration on grounds of public policy. The only restriction placed upon the arbitrator is in respect of the kind of relief which can be granted.

Having settled this point, the Court (following ACD Tridon) goes further to say that even in cases where a contractual dispute like the one here was being relied on as the basis of a winding up petition, the right to approach the court continued to be contingent on the underlying dispute being settled by arbitration. “The agreement could not arrogate to the arbitrator the question of whether a winding-up order should be made. That would remain a matter for the court in any subsequent proceedings. But the arbitrator could, I think legitimately, decide whether the complaint of unfair prejudice was made out and whether it would be appropriate for winding-up proceedings to take place or whether the complainant should be limited to some lesser remedy.”

Finally, the Court considered the third and fourth prongs of argument. The third was held as not being supported by the statute, while the fourth was rejected on the basis that while the clause was very broad, inherent limitations would be read in based on the arbitrability of the subject matter of the dispute.

In sum, this is an important decision on the extent to which a company law dispute may be arbitrated. Admittedly, the facts of the case played a crucial role in the conclusion arrived at. However, the analysis of the nature of an unfair prejudice claim, and the concept of arbitrability provides useful guidance for future issues of a similar nature.

(Note: It was helpfully pointed out by a reader that on 22 February, the UK Supreme Court refused Fulham leave to appeal against the UKCA decision.)

Arbitrability of an Unfair Prejudice Claim (Part I)

A recent post considered the relation between arbitration and company law, in the context of the inability of arbitration to develop the body of corporate law jurisprudence. Another fascinating area of substantive overlap, is the arbitrability of company law disputes, which the UKCA in Fulham v David Richards was called on to consider in relation to claims of unfair prejudice.

Given the fact-specific conclusion the Court arrives at, a slightly detailed explanation of the factual backdrop is mandated here. Fulham Football Club had filed an unfair prejudice petition in relation to the Football Association Premier League (which manages and regulates the English Premier League) (“FAPL”). FAPL is organised as a company, with the different football clubs in the English Premier League as its members. The claimant contended that the chairman of the FAPL Board had acted as an unauthorised agent in breach of the FA Football Agents Regulations by brokering the sale of a player owned by Portsmouth Football Club (Peter Crouch, for the benefit of those who follow football) who Fulham were interested in to Tottenham Football Club. Under the FA Rules, any player or club is prohibited from using or seeking to use the services of an unauthorised person to act in the capacity of an agent, representative or adviser to a club, either directly or indirectly, in the negotiations or arrangements of any transaction facilitating or effecting the transfer of the registration of a player from one club to another. When Fulham approached the FA for relief, they were informed that the issue would be put to a shareholders’ meeting. In the alternative, the FA asked Fulham to bring arbitration proceedings under the FA Rules. Fulham instead approached Companies Court, alleging that it was an implied term of the FAPL Rules that members of the board of the FAPL would comply with their fiduciary obligations and not act so as to prefer the interests of one member club over another. By way of relief, Fulham sought an injunction restraining Sir David from acting as an unauthorised agent or from participating in any way in negotiations regarding the transfer of players. In the alternative, it sought an order that Sir David should cease to be the chairman of the FAPL and such other relief as the Court thought fit. On the basis of the arbitration clause in the FA Rules which the clubs were bound by, the FA and Sir David sought a stay of the Court proceedings, under section 9 of the English Arbitration Act, 1996.

Against this factual backdrop, the court was called on to determine the arbitrability of this dispute, and to reconcile two earlier decisions of the High Court in Re Vocam Europe Ltd [1998] BCC 396 and Exeter City Association Football Club Ltd. v. Football Conference Ltd. [2004] 1 WLR 2910, which had arrived at seemingly different conclusions. Although the High Court in this case followed Vocam and granted a stay, Fulham appealed on four principal grounds:

(a) the relief in an unfair prejudice claim would affect third parties and hence was not arbitrable;

(b) the very nature of the unfair prejudice claim was one which involved public interest and could not be resolved by a private contractual arrangement;

(c) the 2006 Act impliedly rendered the right to approach a Court for an unfair prejudice claim an inalienable right; and

(d) the arbitration clause here was too wide to be enforced.

The Court begins by clarifying that neither the Arbitration Act nor the Companies Act had anything which expressly indicated the arbitrability or otherwise of such a dispute. Hence, the decision turned on first principles of arbitrability, and the nature of an unfair prejudice claim, both very interesting and complex issues.

On the first issue, the Court admitted that usually, a decision on an unfair prejudice claim had consequences for several other shareholders who would not be parties. However, the special nature of the FAPL (discussed in paragraphs 47 and 48 of the judgment) meant that the nature of disputes were much more limited than in other private companies. Thus, the Court concluded that the nature of the relief it was seeking in this particular case was not one that would render it unarbitrable.

(to be continued)

Corporate Law and Arbitration

The virtues of arbitration as a method of resolving commercial disputes are well-known. The primary benefits of arbitration over the conventional court system are the reduction in costs and delays. However, during a recent conversation with a senior corporate counsel, I was given to understand one drawback in using arbitration as a method of resolving disputes in corporate law. And, that is its inability to develop the body of corporate jurisprudence through judge-made law and interpretation. Given that one of the key features of arbitration is the confidentiality of proceedings, the arbitral awards and the reasoning of arbitrators neither operate as precedents (even if they are not binding in subsequent cases on the lines of stare decisis) nor are they even available for consideration subsequently by courts or other arbitrators.

An apt example of this limitation is the arbitral award in the Sterlite-Balco case, which was on a vexed issue of law concerning restrictions on transfer of shares. Although there has been some amount of debate on that arbitration due to its high-profile nature, much of it is based on secondary sources with no public access available to the terms of the award and its reasoning. For instance, one question that remains unanswered is why the arbitrators disregarded restrictions on transfer of shares in contractual arrangements despite a clear ruling to the contrary by a division bench of the Bombay High Court in the Messer Holdings case. For these reasons, the corporate counsel I spoke with suggested an interesting via media, which is to develop a system whereby the principles of law developed in arbitral awards are documented on a no-names basis without reference to specific cases or their facts. That would at least preserve the reasoning for subsequent consideration, reliance and use.

While these issues require some thought, two separate episodes occurring in the US have raised further questions about the use of arbitration in corporate disputes. First, the Delaware legislature has adopted a provision in its corporate law that permits resolution of corporate disputes through a confidential arbitration process. This has attracted a lot of attention because the arbitrators would effectively be judges of the court that adjudicates corporate disputes. As the Race to the Bottom blog notes:

What made the provision unique was the identity of the arbitrator.  The provision provided that the Court of Chancery had "the power to arbitrate business disputes when the parties request a member of the Court of Chancery, or such other person as may be authorized under rules of the Court, to arbitrate a dispute."  10 Del. C. § 349. In effect, therefore, parties would get the benefit of one of the Chancellors/Vice Chancellors at the Delaware Chancery Court (or one of the court masters).

It further notes that a constitutional challenge has been mounted to that provision on the ground that it restricts access to free trial.

Second, in its IPO offering document, Carlyle recently inserted an arbitration provision to resolve shareholder claims that effectively barred securities class action litigation. The Deal Professor studies its impact:

The thing that pushes Carlyle’s corporate governance structure over the edge is the arbitration requirements. Carlyle is requiring that public shareholders arbitrate all claims against the company. The arbitration must be confidential, meaning no one would ever even know about it unless it was required to be disclosed by another law. Class-action lawsuits are specifically barred.

The effect of these three provisions is to essentially eliminate any ability of shareholders to sue the board for even the most egregious acts. This includes federal securities law claims as well as any state law claims, though to be honest any grounds for state law claims have largely been eliminated anyway. The costs to most shareholders of bringing this type of litigation are prohibitive unless a class action is available.

However, due to stiff resistance from the Securities and Exchange Commission (SEC), Carlyle was forced to drop the arbitration clause in its offering document. While this seems entirely reasonable, some commentators (here and here) believe that the clause should have been retained since investors have the final choice in whether to invest in the stock or not, and whether to discount its value due to the presence of limitations on class action remedies.

Fourth Week of Arguments: Constitution Bench on Bhatia International

Arguments continued this week before the Constitution Bench comprising the Chief Justice, and Justices Jain, Nijjar, Khehar and Desai. Mr Salve began his arguments this week by pointing out that the choice of the seat of arbitration is of great importance in international arbitration because parties often wish to resolve their disputes in a neutral forum. It is partly for this reason that London, both as an arbitration centre and for its commercial court, is among the most popular dispute resolution venues in the world. Counsel submitted that accepting any theory of “concurrent” jurisdiction undermines this choice and the sanctity of the seat. To the question whether it is possible to challenge in court the validity of an arbitration agreement (especially when it is governed by Indian law) in an arbitration with a foreign seat, counsel’s submission was that the Indian court may consider the issue only if there is a specific provision to that effect (for example, if a suit is brought here and an application under section 45 is filed to refer the parties to arbitration), and that there is no “freestanding” jurisdiction to consider the validity of the agreement or the award simply because the law governing the substance of the dispute is Indian. Similarly, as far as the validity of the award is concerned, counsel’s submission was that if an award is passed by an arbitration with a foreign seat that is contrary to Indian public policy, it is likely that the award will in any event be set aside in the court of the seat, and in support of this submission, reference was made to the decision of the Court of Appeal in Regazzoni v Sethia [1958] AC 301. Counsel argued that there is in any event no remedy if the arbitrators abroad simply “misconstrue” an Indian statute but do not contravene Indian public policy.

Counsel then developed his submission that Indian Arbitration Act, by adopting the UNCITRAL Model Law, firmly committed himself to a territorial approach to jurisdiction. He pointed out that the contesting views before the Model Law, so far as jurisdiction is concerned, were either in favour of the seat of arbitration (the English view), or in favour of what is known as “delocalisation” (principally the French view), and there was never at any point support for the proposition that the court of the country whose law governs the substance of the dispute is entitled to set aside an award. Counsel’s submission was that the drafters of the Model Law, keenly aware of these opposing views, consciously chose the territorial approach based on the seat of arbitration, and that Parliament did likewise in enacting section 2(2). Counsel dealt at some length with the travaux préparatoires to the Model Law, and pointed out that the omission of the word “only”, on which Bhatia International and the Appellants had placed considerable reliance, was in reality irrelevant, because even the UNCITRAL Model Law originally did not contain that word. Counsel placed extracts from the travaux (particularly a statement by the Italian delegate and the Chairman’s response) demonstrating that word “only” was added to article 1(2) of the Model Law because of an apprehension that the exception clause (“except articles 8, 9, 35 and 36”) may otherwise be construed to not apply unless the seat of arbitration is abroad (which was never the intention), and that Parliament did not need to add the word because that exception was itself omitted from section 2(2).

As far as section 34 is concerned, counsel submitted that the words “under the law of which” in section 48(1)(e) do not confer any jurisdiction on the country whose law governs the substance of the dispute, because it is at best only a reference to the lex arbitri. Counsel argued that the judgment of the Supreme Court in NTPC v Singer, on which we have commented, may have been wrongly decided because it misconstrued section 9(b) of the Foreign Awards (Recognition and Enforcement) Act, 1961. As far as section 9 is concerned, counsel’s submission was that Bhatia International was wrongly decided insofar as it relied on the omission of the word “only” for the travaux demonstrated that the inference the Court drew in Bhatia as to this omission was unfounded; and that the only possible remedy a foreign claimant who wishes to preserve Indian assets before or during arbitration has is to obtain a Mareva injunction from an Indian court by way of a suit. Counsel argued that an application under section 45 in such a suit, even if allowed, does not prevent the Court from granting interim relief, and stressed that in any case the lack of such a remedy is in any event no reason to “rewrite” section 9. 

Arguments continue on Tuesday.