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International arbitration or domestic arbitration: Can the proposed 2010 amendments bring clarity?

Critically analysing the vital provisions of the Arbitration and Conciliation Act 1996, Hammurabi & Solomon senior partner Shweta Bharti recommends ways to improve the application and workability of the Act to expedite alternate dispute resolution mechanisms for the increasing number of commercial disputes.

The Arbitration and Conciliation Act, 1996 (the Act) is arguably one of the most debated and criticised legislation of our times. The various and divergent interpretations given to some of the sections of the Act have left even the best of experts perplexed, let alone the parties to the dispute who were intended to be the beneficiaries of the fast track dispute resolution mechanism.

What is it about the Act that leaves scope for so much interpretations and variations is definitely something for legislators to mull over. Is the Act too vague or have the wisdom and requirements for looking at alternate methods of dispute resolutions changed too fast with the rapidly changing commercial world?

With international boundaries opening up and India fast catching up as a super power, more international companies are investing into India and vice-versa. In such a situation the commercial requirements and dynamics of doing business have changed too and no one has the time for drawn-out litigation for dispute resolution. Therefore, there is a greater need for faster alternate dispute resolution mechanisms which is arbitration. The arbitration clause is a must in agreements drafted nowadays.

The increased usage of arbitration as an alternate mode of dispute resolution has been examined by various courts in different contexts of the Arbitration and Conciliation Act 1996. The most disputed sections in the Act are sub-section (2) of section 2 and sections 8, 9, 11 and 34.

I will be dealing with section 2(2), which is one of the most variedly interpreted sections and provides that Part I of the Act shall apply where the place of arbitration is in India. Where does it leave a scope for interpretation by various Courts?

The section clearly provides that Part I of the Act which is meant for “domestic arbitrations” shall apply to all those arbitrations, where the “place” of arbitration is India. Even if the arbitration is between two foreign companies based on foreign law, but the place of arbitration is India, in such cases also Part I shall apply and the arbitrations shall be considered to be a “domestic arbitration”. How is it a domestic arbitration?

The law that governs arbitration and its procedure is known as lex arbitri or curial law. Admittedly, in international arbitration law lex arbitri is law of the seat of the arbitration. Since international arbitrations generally take place in a neutral forum, lex arbitri is likely to differ from the law governing the substantive dispute. Sometimes the law of the seat will apply separate rules for international and domestic arbitrations. However, is it really a practical solution or just following the rat race in the name of international best practices?

Let us contemplate another situation where the dispute is between a foreign company and an Indian company where the place of arbitration is London and the arbitration tribunal would be the International Chamber of Commerce in Paris. Would this be a domestic arbitration, meaning Part I shall apply or not?

The Delhi High Court (Dominant Offset Pvt Limited vs Adamouske Strojirny AS, (1997) 68 DLT 157) extensively studied the provisions of the Act so as to see whether it was a matter coming under Part I of the Act. The court finally held that Part I of the Act applies to International Commercial arbitration conducted outside India. The court was further of the opinion that Section 2(2) which states - Part I shall apply where the place of arbitration is in India - is an inclusive definition and does not exclude the applicability of Part I to those arbitrations which are not held in India.

With all due respect, if the definition was to be an “inclusive definition”, why would the legislators so clearly state that Part I “shall” apply to arbitrations held in India? This decision of Delhi High Court was followed in other cases (Olex Focas Private Limited vs Skodaexport Company Limited, [AIR 2000 Del 161].

Then came a third but logical view where the section was interpreted as drafted and meant to be, and that was that Part I of the Act would apply only to arbitrations where the “place” of arbitration is in India (East Shipping vs MJ Scrap (1997) 1 Cal HN 444 and Mariott International Inc vs Ansal Hotels Limited, AIR 2000 Del 377 (DB)).

To end the dispute the Supreme Court came up with a unique solution in the case of Bhatia International vs Bulk Trading (2002 4 SCC 105) wherein it held that provisions of Part I would apply to all arbitrations and to all proceedings relating thereto. Where such arbitration is held in India the provisions of Part I would compulsorily apply and parties shall be free to deviate only to the extent permitted by the derogable provisions of Part I. In cases of international commercial arbitrations held out of India, the provisions of Part I would apply unless the Parties by agreement, express or implied, excluded all or any of its provisions. In that case the laws or rules chosen by the Parties would prevail. Any provision of Part I contrary to or excluded by that law or rules will not apply.

Therefore, at some point the Supreme Court allows the parties to decide that if they so desire they can exclude the applicability of provisions of Part I and thereafter the “laws or chosen rules” of the parties would prevail. It is a thought worth mulling over. If the parties exclude the applicability of Part I, then the laws or rules chosen by them shall prevail. Why can the same not be provided for in the section itself?

I definitely fail to understand the rationale behind the importance accorded by the Ministry of Law and the draftsman to the ‘place or citus’ of arbitration as an important factor in deciding the applicability of Part I instead of the ‘Law’ or ‘Rules’ chosen by the parties.

After Bhatia International’s case also, there have been various interpretations of the issue by the Supreme Court, in the case of Venture Global Engineering vs Satyam Computer Services (2008 (1) Scale 214) wherein the Hon’ble Supreme Court went a step further and held: “The provisions of Part I of the Act would apply to all arbitrations including international commercial arbitrations and where such arbitrations are held in India, the provisions of Part I would be compulsory to the extent permitted by the provisions of Part I. It is also clear that even in the case of international commercial arbitration held out of India provisions of Part I would apply unless the Parties by Agreement, express or implied, exclude all or any of its provisions. We are also of the view that such an interpretation does not lead to any conflict between any of the provisions of the Act and there is no lacuna as such.”

The principles laid down Bhatia International’s case were further upheld by the Supreme Court in Indtel Services vs WT Atkins Rail [(2008) 10 SCC 308].

The above examples clearly illustrate the lack of clarity in law and its interpretations. In order to provide clarity the legislators have now reached a solution by adding “only” in the earlier definition of Section 2(2), and now the suggested Section 2(2) shall read: “This Part shall apply only where the place of arbitration is in India”, but the addition of the word only may not be enough to alleviate the existing confusion. In addition to that what happens to the exclusion contemplated in Bhatia International’s case? Applicability of Part I of the Act may be excluded by the parties' agreement. However, is there a corresponding Section 9 (interim protection) in other Parts of the Act? In the absence of such vital relief, would the Parties be in a position to entirely exclude the provisions of Part I.

Another theory making rounds in the international arena is of de-localised arbitration. The idea is that arbitration should be freed from control by the law of the seat. Instead, international arbitration would operate on a "supra-national", "transnational" or "floating" level, and would be self-governing. Only the laws at the place of enforcement of the award would exert any sort of control over international arbitration. Although delocalisation theory has been much discussed, its relevance in practice is limited.

My opinion is that the parties' express or implied choice of law under the arbitration agreement should be given final effect to determine whether it is a domestic or an international arbitration rather than the seat of arbitration.

However, if (as is often the case where a contract contains an arbitration agreement) there is no express or implied choice of law to govern the arbitration agreement, the tribunal or court may decide the applicable law of arbitration to be the seat of arbitration.

The modern trend appears to be for law of the seat of arbitration to be deemed to govern the arbitration agreement, in the absence of choice by the parties. However, this is a grey area and there is no hard and fast rule as to which approach the court or tribunal will adopt since there is no unified approach or set of rules for determining the governing law of an arbitration agreement.

As per Article 22.3 of the LCIA (London Chartered Instititute of Arbitrators) the Arbitral Tribunal has the right to decide the parties' dispute in accordance with the law(s) or rules of law chosen by the parties as applicable to the merits of their dispute. If and to the extent that the Arbitral Tribunal determines that the parties have made no such choice, the Arbitral Tribunal shall apply the law(s) or rules of law, which it considers appropriate. Even as per Article 17(1) of the ICC Arbitration Rules, the parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of such agreement, the Arbitral Tribunal shall apply the rules of law, which it determines to be appropriate. Where the parties have not included a governing law clause, the general position is that the tribunal will determine the applicable law, subject to any mandatory principles of the law at the place of the arbitration.

We are presently dealing with a situation where one of the Parties is Indian and another a Foreign Company. The Agreement provides for the applicable law to be German Law and the rules of ICC Arbitration to apply. The place of arbitration is India. Therefore, the situs of Arbitration being India and Lex Arbitri being German Laws, it indeed is a perplexed question for us on whether it is a “Domestic” or “International”.

It is matter worth pondering for legislators that in cases where the Parties have made a choice on the governing law, why should the law not permit them to arbitrate based on the law of their choice. I leave it to their wisdom and the necessities of commercial world to compel them take appropriate decision.

Shweta Bharti is Delhi-based senior partner of Hammurabi & Solomon Advocates & Corporate Law Advisors.

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