Asian

Asian Dispute Review

Dispute
Review

Since 1999 July 2013

July 2013

Sponsored by
Hong Kong International Arbitration Centre Chartered Institute of Arbitrators (East Asia Branch)
Hong Kong Institute of Arbitrators Hong Kong Mediation Council
case notes
Piloting a Much-Needed Course Correction:
The Decision of the Indian Supreme Court in
BALCO v Kaiser Aluminium
Promod Nair1
Introduction
In a landmark decision on 6 September 2012, a specially
constituted five-member bench of the Indian Supreme
Court overturned a decade-old line of precedents that had
controversially given the Indian courts long-arm jurisdiction
to intervene even in arbitrations seated outside India. Bharat
Aluminium Co Ltd v Kaiser Aluminium Technical Service Inc2
(‘BALCO’), which overruled the Supreme Court’s much-
criticised decision in Bhatia International v Bulk Trading SA3
(‘Bhatia International’), has been widely welcomed by the
Indian and international arbitration communities as a step that
has piloted a much-needed course correction in the evolution
of arbitration jurisprudence in India.
Scheme of the Indian Arbitration Act
The Arbitration and Conciliation Act 1996 (the 1996 Act)
contains two distinct parts dealing with arbitration. Part I
provides a framework of rules for disputes, both domestic
and those with an international element but where the seat
of arbitration is in India. This Part confers significant powers
on the Indian courts, which are empowered to order interim
measures, appoint and replace arbitrators and hear challenges
98
to arbitral awards. Part II, which significantly restricts the
scope of judicial intervention, incorporates the New York and
Geneva Conventions into Indian law and contains provisions
for the recognition and enforcement of arbitration agreements
and arbitral awards rendered in a foreign seat.
The seat-based approach to regulation of arbitration adopted
by the Arbitration Act is consistent with the scheme of
the UNCITRAL Model Law on International Commercial
Arbitration (1985 version), the legislative template on which
the 1996 Act is based. The principle that an arbitration is
governed by the law of the place in which it is seated is also
well established both in the theory and practice of international
arbitration.4
Consistent with both this scheme and the underlying policy
of the 1996 Act, it was generally understood that, by choosing
a foreign seat, parties could preclude the intervention of the
Indian courts and obtain an award that would be enforceable
under the New York Convention. Both this understanding and
the underlying scheme of the 1996 Act were, however, upset
by the Supreme Court’s decision in Bhatia International.

The decision in Bhatia International
In Bhatia International, the Supreme Court held that Indian
courts could exercise the powers conferred on them by Part I
of the Act even in cases where the seat of the arbitration was
outside India. The court’s jurisdiction in this case was invoked by
a party seeking interim measures of protection in relation to an
ICC-administered arbitration seated in Paris. Although s 9 of the
1996 Act empowers the Indian courts to grant interim relief, this
provision is contained in Part I of the Act, which was designed
to apply only to Indian-seated arbitrations. The Supreme Court
was thus faced with a situation where it apparently could not
order interim measures of protection, since the arbitration
clause provided for a Paris seat. Faced with this legal hurdle,
the Court adopted a result-driven approach and held that the
general provisions of Part I of the 1996 Act would also apply to
offshore arbitrations, unless the parties impliedly or expressly
excluded the applicability of the Act.
The court ruled that s 9 (and Part I) of the 1996 Act would
also apply to arbitrations seated outside India because to hold
otherwise would -
“ … leave a party remediless inasmuch as in international
commercial arbitrations which take place out of India, the
party would not be able to apply for interim relief in India
even though the properties and assets are in India.”5
Practical and equitable considerations may often demand
that Indian courts grant interim measures of protection to
support an arbitration seated offshore. A party could indeed
often be handicapped if Indian courts were not empowered
to make interim orders, especially if those courts were to
have the closest jurisdictional link with the subject matter of
the controversy and would be best equipped to order urgent
and effective interim measures. Yet, there can be no denying
that the judgment in Bhatia International represented a clear
instance of judicial legislation. It was also contrary to the
intended legislative scheme of the 1996 Act, in terms of which
Part I would have no application to arbitrations seated outside
India.6
case notes
… [I]t was generally
understood that, by choosing
a foreign seat, parties could
preclude the intervention
of the Indian courts and
obtain an award that could
be enforced under the New
York Convention. … [This
was], however, upset by the
Supreme Court’s decision in
Bhatia International.
The negative fallout from Bhatia International
The well-intentioned solution devised by the Supreme
Court in Bhatia International resulted in the creation of more
problems than it was able to resolve. It considerably extended
the scope for Indian courts to interfere in arbitrations seated
outside India. The ruling also cast a shadow of uncertainty
over internationally-seated arbitrations involving Indian
parties, due to an overlap of supervisory jurisdiction between
the Indian courts and the courts of the seat of the arbitration.
These issues came to the fore when the ratio in Bhatia
International was subsequently extended, in Venture Global
Engineering LLC v Satyam Computer Services Ltd7 (‘Venture
Global’), to permit the Indian courts to reopen and set aside
awards rendered in arbitrations seated outside India. In yet
another controversial extension of the Bhatia International
ruling, in Indtel Technical Services Pte Ltd v WS Atkins PLC8,
the Supreme Court ruled that it was empowered to appoint
arbitrators in the event of a deadlock between the parties, even
in cases where the seat of the arbitration was outside India.
Bhatia International and its“illegitimate progeny”9, in particular
the judgment in Venture Global, have been subjected to intense
criticism in India and beyond for authorising Indian courts to
exercise long-arm jurisdiction and for introducing substantial
[2013] Asian Dispute Review 99
case notes
uncertainty in offshore arbitrations involving Indian parties.
Indeed, in a sign of judicial discomfort with the broad scope of
Bhatia International, the Supreme Court itself and various High
Courts in the country subsequently sought to narrow down
its scope. They also displayed a greater willingness to infer
implied exclusions of the 1996 Act in relation to arbitrations
seated outside India.10 Nevertheless, in order to mitigate the
risk of excessive judicial intervention, it had become standard
market practice in India-related international commercial
transactions to exclude the application of Part I of the Act to
arbitrations seated outside India.
Concerned with the manner in which the Bhatia International
decision had distorted the scheme of the 1996 Act, the Indian
Ministry of Law and Justice published a consultation paper in
200911 which proposed amendments to the Act, primarily to
undo the effects of Bhatia International.
… [T]he Indian Supreme
Court [in BALCO ] has shown
its keenness to direct the
development of Indian law into
a pro-arbitration path. The main
consequence of this judgment
will be to insulate arbitrations
seated outside India from
unwelcome interference by the
Indian courts.
The arbitral decision in White Industries
The far-reaching and adverse consequences of the Bhatia
International and Venture Global decisions most prominently
came to the fore in the widely publicised decision of an
UNCITRAL arbitral tribunal in White Industries Australia Ltd
v Republic of India.12
White Industries, the claimant in the arbitration, obtained an
ICC award in its favour against state-owned mining company,
Coal India, in relation to a contract for the supply of equipment
100
to and development of a coal mine. The arbitration was seated
in Paris; this should ordinarily have precluded the Indian
courts from considering a challenge to the award in India,
such powers being within the exclusive domain of the courts
of the seat of the arbitration. However, Coal India relied on
the Venture Global decision to issue proceedings challenging
the award before the Indian courts. White Industries, in turn,
brought enforcement proceedings in India. The enforcement
proceedings were eventually stayed by the Indian courts
pending a decision on the setting aside proceedings.
Frustrated by the challenge to the ICC award and the resultant
delay in its enforcement, White Industries commenced and
ultimately succeeded in an arbitration against India under
the Australia-India BIT. The UNCITRAL tribunal held India
liable for failure to provide investors with an ‘effective means
of asserting claims and enforcing rights’ owing to the undue
delay in the enforcement proceedings. These delays were
largely attributable to the position created by Venture Global,
thus underlining the far-reaching and negative consequences
of the Bhatia International decision.
Reinstatement of the territoriality principle
It is in this context that the Supreme Court decided to review
and overrule its previous decision in Bhatia International. Based
on an analysis of the history, legislative intent and scheme
of the 1996 Act, the Court concluded that the regulation of
arbitration proceedings (including review of the award) fell
within the exclusive domain of the courts at the seat of the
arbitration.
The Court also clearly delineated the respective jurisdiction
of the courts in cases where arbitrations are seated in India
and offshore. In the former case, Indian courts may exercise
all the powers vested in them under Part I of the 1996 Act in
order to supervise and/or support the arbitral process and are
also empowered to review arbitral awards. In the latter case,
however, the role of the Indian courts is effectively confined
to enforcing the arbitration agreement and also dealing with
matters relating to the recognition and/or enforcement of

an award. The Supreme Court laid down the following key
principles in its decision.
(1) The principle of territoriality is the governing principle
of the Arbitration Act. Accordingly, the seat of arbitration
determines the jurisdiction of the courts. The Indian
courts can only supervise the arbitration process when the
seat of the arbitration is in India. It cannot intervene in, or
supervise, arbitrations seated offshore.
(2) Part I of the 1996 Act applies only to arbitrations seated
in India. Therefore, an Indian court can no longer hear
challenges to awards made in arbitrations seated offshore.
The only powers that an Indian court can exercise in
relation to foreign arbitration are those set out in Part II of
the Act. These are (i) to give effect in India to an agreement
referring disputes to arbitration in another country,
pursuant to the New York Convention, and (ii) to enforce
foreign arbitral awards in India, in accordance with the
provisions of the New York or Geneva Conventions.
(3) The Indian courts are not empowered by the 1996 Act
to order interim measures in support of arbitrations
seated outside India. Likewise, a suit cannot be filed for
this purpose under the general law, viz the Code of Civil
Procedure.
The Supreme Court in BALCO
decided [, however,] that
its judgment would have
prospective effect and thus
apply only to arbitration
agreements executed after
6 September 2012.
Consequences of the BALCO decision
In holding that the Indian courts cannot set aside arbitral
awards made, or otherwise intervene in arbitrations seated,
outside India, the Supreme Court has firmly signalled that the
Indian courts will give effect to party autonomy and efficacy to
the parties’ choice of a foreign seat.
case notes
There are, however, two important consequences of the
decision of which contracting parties should take note.
(1) In the light of the law laid down by the Supreme Court, it
will be difficult to obtain interim measures of protection
from the Indian courts in the case of arbitrations seated
outside India. This could prove to be a significant
handicap, especially if there is a need to preserve assets
or prevent the alteration of the status quo in India pending
the making of an arbitral award. The Court recognised
that there exists a void in the arbitration regime in this
regard. It concluded, however, that the gap in the law was
an issue for Parliament and not the courts to address. It is,
of course, possible for a party to obtain interim measures
from the arbitral tribunal or the courts of the arbitral seat,
but it would likely encounter significant challenges in
enforcing any such orders in India in the absence of an
international convention or the application of the 2006
version of the UNCITRAL Model Law. It is hoped that
legislative amendment will rectify this anomaly, but until
such time, contracting parties should be conscious of this
angle when selecting a seat of arbitration.
[2013] Asian Dispute Review 101
case notes

(2) The Supreme Court in BALCO decided that its judgment
would have prospective effect and thus apply only to
arbitration agreements executed after 6 September
2012. By its terms, therefore, the judgment will not affect
arbitration agreements executed before 6 September 2012,
in which case the law as stated in Bhatia International will
continue to apply. The cryptic reason given by the Court
to justify this approach was that it was necessary “to do
complete justice”. However, given that the court took note
of the adverse fallout of its decision in Bhatia International
and held that Indian courts had no jurisdiction under
the scheme of the 1996 Act to intervene in arbitrations
seated outside India, it is rather curious how it could
justify continued judicial interventionism in the case of
arbitration agreements entered into before 6 September
2012. If Bhatia International were indeed wrongly decided,
a position which the Supreme Court has now accepted,
the overruled judgment ought not to have been allowed
to continue to operate in relation to agreements which
will undoubtedly generate arbitrations for years to come.
A brighter future for arbitration in India
Indian arbitration jurisprudence is now aligned with
the position prevalent in most other arbitration-friendly
jurisdictions and is poised to develop further on a pro-
arbitration trajectory. adr
1 The author appeared as counsel, instructed by LCIA India, which
intervened as amicus curiae in the proceedings before the Supreme
Court in BALCO.
2 (2012) 9 SCC 649.
3 (2002) 4 SCC 105.
4 Nigel Blackaby et al, Redfern & Hunter on International Arbitration (5th
Edn, 2009), p 180.
5 (2002) 4 SCC 105, 116.
6 See Promod Nair, Surveying a Decade of the ‘New’ Law of Arbitration
in India (2007) 23 Arb Int’l 699 at 718.
7 (2008) 4 SCC 190.
8 (2008) 10 SCC 308.
9 A colourful term used by Fali Nariman used to describe cases which
endorsed and followed the principle of law laid down in Bhatia
International.
10 See Dozco India (P) Ltd v Doosan Infracore Co Ltd (2011) 6 SCC 179;
Videocon Industries Ltd v Union of India, (2011) 6 SCC 161; Ferrostaal
AG v Bharti Shipyard Ltd, MANU/KA/1314/2011, unreported; Financial
Software and Systems v ACI Worldwide Corp, MANU/TN/4334/2011,
unreported.
11 Proposed Amendments to the Arbitration & Conciliation Act, 1996:
A Consultation Paper - http://lawmin.nic.in/la/consultationpaper.pdf.
See, in particular, pp 4-15.
12 White Industries Australia Ltd v Republic of India, UNCITRAL Award
(India-Australia BIT), 30 November 2011.

These wrinkles apart, BALCO portends a brighter future

for arbitration in India. Whilst a number of decisions of the
Indian Supreme Court in the last decade have cast a shadow
over its arbitration-friendly credentials, BALCO signals a
welcome course correction. By overruling Bhatia International
and Venture Global, the Indian Supreme Court has shown its
keenness to direct the development of Indian law into a pro-
arbitration path.

The main consequence of this judgment will be to insulate

arbitrations seated outside India from unwelcome interference
by the Indian courts. Notably, the Indian courts will no longer
be able to consider challenges to foreign awards. This will
reduce the scope for purely tactical challenges by a losing party
(who would otherwise have had a second bite at the cherry
before the Indian courts) and also considerably speed up the
timelines associated with enforcing a foreign award in India.

102