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NATIONAL LAW INSTITUTE

UNIVERSITY

PROJECT
XIV TRIMESTER

Interpretation of Statutes

The BALCO Decision: Reinterpretation

of Key Clauses in the Arbitration Act

SUBMITTED BY: HARKIRAN SINGH CHIMA

SUMBITTED TO: Prof. KAVITA SINGH

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INDEX

Background - The Legacy of Bhatia and Venture Global

BALCO Decision Reinterpretation of the Scheme of the Arbitration Act

3
6

Facts of the Case

Issues Involved

Development of a new Jurisprudence

Conspicuous omission of "only"

Territorial limits of jurisdiction

Renewed interpretation of the term domestic awards

10

Centre of Gravity of Arbitration

10

Decision

12

Conclusion The Implications of such Reinterpretation

13

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BACKGROUND - THE LEGACY OF BHATIA AND VENTURE GLOBAL

There is a comprehensive worldwide convergence and harmonisation of international
commercial arbitration that has led to a dramatic increase in the number of disputes
resolved through these alternative means. As the number of cases for arbitration has
increased, the judicial control of these foreign arbitral awards has come under more and
more scrutiny. While interpreting many provisions of the Act, the judgments of the
Supreme Court and various High Courts have been confusing and in conflict, which
frustrates a primary object of the legislation. There are some obvious lacunae in the Act
which lead to diverging views. Therefore, it becomes necessary to engaged in the debate
regarding these lacunae and settle on an approach to remove these difficulties in the Act.
The core purpose of this exercise is to devise an ADR method which becomes
increasingly prevalent and so that the objects of enacting the Arbitration law can be
accomplished.
In Bhatia International v. Bulk Trading SA1, the Supreme Court held that Part I of the
Act applied even to arbitrations seated outside of India, unless the parties had expressly
or impliedly agreed to exclude Part I of the Act. This decision was a well-intentioned
attempt to shift the centre of gravity of arbitration from being subject matter oriented to
being seat oriented. If Section 92 applied to foreign arbitrations, then by extension other
1
2

(2002) 4 SCC 105.

9. Interim measures etc.by Court.- A party may, before, or during arbitral proceedings or at any time after
the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court(i) for the appointment of a guardian for a minor or person of unsound mind for the purposes of arbitral
proceedings; or
(ii) for an interim measure or protection in respect of any of the following matters, namely:(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration
agreement;
(b) securing the amount in dispute in the arbitration;
(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the
dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid
purposes any person to enter upon any land or building in the possession of any party or authorising any
samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or
expedient for the purpose of obtaining full information or evidence;
(d) interim injunction or the appointment of a receiver;
(e) such other interim measure of protection as may appear to the Court to be just and convenient,

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sections of Part I could also apply. Consequently, in Indtel Technical Services3, the
Supreme Court appointed an arbitrator for an arbitration seated outside India, under
Section 11 4 of the Act; and in Venture Global 5, the Supreme Court set aside an arbitration

Indtel Technical Services -v- WS Atkins, (2008) 10 SCC 308.

11. Appointment of arbitrators.- (1) A person of any nationality may be an arbitrator, unless otherwise
agreed by the parties.
(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or
arbitrators.
(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party
shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act
as the presiding arbitrator.
(4) If the appointment procedure in sub-section (3) applies and(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the
other party; or
(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their
appointment, the appointment shall be made, upon request of a party, by the Chief Justice or any person or
institution designated by him.
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties
fail to agree on the arbitrator within thirty days from receipt of a request by one party from the other party
to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or
institution designated by him.
(6) Where, under an appointment procedure agreed upon by the parties,(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that
procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that
procedure, a party may request the Chief Justice or any person or institution designated by him to take the
necessary measure, unless the agreement on the appointment procedure provides other means for securing
the appointment.
(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the Chief
Justice or the person or institution designated by him is final.
(8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have
due regard to(a) any qualifications required of the arbitrator by the agreement of the parties and
(b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator.
(9) In the case of appointment of sole or third arbitrator in an international commercial arbitration, the
Chief Justice of India or the person or institution designated by him may appoint an arbitrator of a
nationality other than the nationalities of the parties where the parties belong to different nationalities.
(10) The Chief Justice may make such scheme as he may deem appropriate for dealing with matters
entrusted by sub-section (4) or sub-section (5) or sub-section (6) to him.
(11) Where more than one request has been made under sub-section (4) or sub-section (5) or sub-section (6)
to the Chief Justices of different High Courts or their designates, the Chief Justice or his designate to whom
the request has been first made under the relevant sub-section shall alone be competent to decide on the
request.
5

Venture Global Engineering -v- Satyam Services Ltd and Anr, (2010) 8 SCC 660.

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award made in London, under Section 346 of the Act. Foreign arbitrations, already
regulated by the courts of the seat of arbitration, were exposed to intervention by Indian
courts. In April 2010, the Ministry of Law and Justice, with the objective of emphasizing
the minimum judicial intervention' standard, had suggested an amendment to cure the
lacuna created since the decision in Bhatia International7 . The suggested amendment to
Section 2(2)8 of the Act aimed at inserting the word only with a view to explicitly limit

34. Application for setting aside arbitral award.- (1) Recourse to a Court against an arbitral award may be
made only by an application for setting aside such award in accordance with sub-section (2) and subsection (3).
(2) An arbitral award may be set aside by the Court only if--(a) the party making the application furnishes proof that----(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of
the arbitral proceedings or was otherwise unable to present his case; or (iv) the arbitral award deals with a
dispute not contemplated by or not falling within the terms of the submission to arbitration, or it
contains decisions on matter beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so
submitted, only that part of the arbitral award which contains decisions on matters not submitted to
arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the
agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the
parties cannot derogate, or, failing such agreement, was not in accordance with this Past; or
(b) the Court finds that-----(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time
being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation.---Without prejudice to the generality of sub-clause (ii), it is hereby declared , for the
avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the
award was induced of affected by fraud or corruption or was in violation of section 75 or section 81.
(3) An application for setting aside may not be made after three months have elapsed from the date on
which the party making that application had received the arbitral award, or, if a request had been made
under section 33, from the date on which that request had been disposed of by the arbitral tribunal:
Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the
application within the said period of three months if may entertain the application within a further period of
thirty days, but not thereafter.
(4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so
requested by a party, adjourn the proceedings for a period of time determined by it in order to give the
arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the
opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.
7

(2002) 4 SCC 105.

S. 2(2) - This Part shall apply where the place of arbitration is in India

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the operation of Part I of the Act to domestic arbitration, albeit, with a solitary exception
in the context of interim measures and assistance in collection of evidence. Unfortunately,
no progress was made towards introducing the arbitration amendments in Parliament. The
Supreme Court has proved to be the silver lining in the clouds by reversing the harmful
judgements and assuring the business community of its commitment in shielding and
stimulating international commercial arbitration in India in Bharat Aluminium Co. vs.
Kaiser Aluminium Technical Services Inc9. The broad thrust of this decision is to protect
the future from the flawed and outmoded decisions of the past and, constant with
underlying jurisprudence and character of the New York Convention and UNCITRAL
Model law, encourage Indian courts to become more arbitration-friendly and thereby
resurrect arbitral autonomy in India.

BALCO DECISION REINTERPRETATION OF THE SCHEME OF THE ARBITRATION ACT

The Indian Arbitration and Conciliation Act, 1996 is based on the UNCITRAL Model
Law. On a clearly erroneous statutory construction of the 1996 Act, the Indian Supreme
Court in both the Bhatia International10 and Venture Global11 decisions assumed that,
unless the parties expressly or implied agreed to the contrary, Indian courts had
jurisdiction with respect to foreign-seated arbitration akin to their curial jurisdiction with
respect to arbitrations seated within India under Part I of the 1996 Act. Based on this
flawed analysis of the 1996 Act, Indian courts asserted their jurisdiction to grant interim
measures and even set-aside awards made pursuant to foreign-seated arbitrations.
BALCO v Kaiser12 marks the end of this anarchy seated in Indian Arbitration and
resurrects the hope for an arbitration conducive era.

Bhatia, 2012(3)ARBLR515(SC)

10

(2002) 4 SCC 105.

11

Venture Global Engineering -v- Satyam Services Ltd and Anr, (2010) 8 SCC 660.

12

Bhatia, 2012(3)ARBLR515(SC).

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FACTS OF THE CASE

An agreement was executed between BALCO and Kaiser on 22 April, 1993 for
the supply and installation of a computer based system at BALCOs premises.

As per the arbitration clause in the Agreement, any dispute under the Agreement
would be settled in accordance with English Arbitration Law and the venue of the
proceedings would be London. The Agreement further stated that the governing
law with respect to the Agreement was Indian law; however, arbitration
proceedings were to be governed and conducted in accordance with English Law.

Disputes arose and were duly referred to arbitration in England. The arbitral
tribunal passed two awards in England.

The awards were challenged in India u/s. 34 of the Act in the District and High
Courts. Successive orders in these cases rejected the said challenge. Therefore,
BALCO appealed to the Supreme Court.

The case of Bharti Shipyard Ltd. v. Ferrostaal AG & Anr. was clubbed together
with the above petition for hearing as it was concerned with the applicability of
Section 9 under the Act during the pendency of foreign arbitral awards.

ISSUES INVOLVED
The following issues came up for the consideration of the Court I.

Whether omission of the word "only" would show that provisions of the Act had
not accepted territorial principle?

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II.

Whether Section 2(2) of the Act was in conflict with Sections 2(4) and 2(5) of Act?

III.

Whether Part I of the Act applied only to arbitrations having their seat / place in
India?

IV.

Whether limiting the applicability of Part I of the Act to arbitrations that take
place in India would leave many parties remediless in a number of situations?

V.

Whether there was overlapping or intermingling of provisions contained in Part I

with provisions contained in Part II of Act?

VI.

Whether Section 9 of the Act would be applicable to international commercial

arbitration held outside India?

DEVELOPMENT OF A NEW JURISPRUDENCE

Conspicuous omission of "only"
A large part of the Supreme Courts decision centers around the absence of the word
only from Section 2(2) of Arbitration Act. The word only has been used in Article
1(2)13 of UNCITRAL Model Law and is conspicuously omitted in Article 2(2) of
Arbitration Act. Thus it may assumed that Part I will apply even if place of arbitration is
not India. There are reservations over this conscious decision of the Indian Legislature to
depart from the language used in the Model Law. The Indian Supreme Court considered
that in light of the legislative history of the Indian Arbitration Act, the omission of the
word "only" was not material. The Court held that The word "only" would have been superfluous as none of the exceptions were included
in Section 2(2).14
13

Article 1(2) - The provisions of this Law, except articles 8, 9, 17 H, 17 I, 17 J, 35 and 36, apply only if
the place of arbitration is in the territory of this State.
14

Bhatia, 2012(3)ARBLR515(SC), paragraph 68

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Inclusion of the word would have been necessary if certain exceptions under the Model
Law were incorporated into the Indian Arbitration Act. Moreover, there were other
countries which had dropped the word "only" from their domestic arbitration statute. The
apex court said:
India is not the only country which has dropped the word "only" from its National
Arbitration Law. The word "only" is missing from the Swiss Private International Law
Act, 1987 Chapter 12, Article 176 (1)(I). It is also missing in Section 2(1) of the 1996 Act
(U.K.)15

Territorial limits of jurisdiction

The provisions of this Law, except some articles apply only if the place of arbitration is in
the territory of this State.16 This forms the jurisprudential basis for the territorial principle
of the outer limits jurisdiction of a State. The territorial link between the place of
arbitration and the law governing arbitration has been accepted by leading experts and
commentators on international commercial arbitration. The law of other countries, such
as England and Switzerland, also maintain the link between the seat of arbitration and lex
arbitri.
The Supreme Court considered that there was no conflict between the various subsections
since Section 2(4)17 makes Part I applicable to every arbitration under any other
enactment for the time being in force and the provision simply recognises that apart from

15

Bhatia, 2012(3)ARBLR515(SC), paragraph 77

16 Article
17

1(2) of UNCITRAL Model Law

(4) This Part except sub-section (1) of section 40, sections 41 and 43 shall apply to every arbitration
under any other enactment for the time being in force, as if the arbitration were pursuant to an arbitration
agreement and as if that other enactment were an arbitration agreement, except in so far as the provision of
this Part are inconsistent with that other enactment or with any rules made thereunder;

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consensual arbitrations, there can also be arbitrations convened under the bye-laws of
private associations.
The Supreme Court emphasized the harmonious and expansive understanding of
subsection (5) in light of subsection (4) and subsection (2) to render a precise connotation
to the entire chapter. The Scheme of the Act makes it abundantly clear that the territorial
principle, accepted in the UNCITRAL Model Law, has been adopted by the Arbitration
Act, 1996.18
The Supreme Court held The provision has to be read as a part of the whole chapter for its correct interpretation
and not as a stand alone provision. There is no indication in Section 2(5) that it would
apply to arbitrations which are not held in India 19

Renewed interpretation of the term domestic awards

Section 2(7)20 states that an arbitral award made under this Part shall be considered a
domestic award. Upholding the territorial principle, the Court defined domestic awards ro
mean arbitrations in India where both parties are Indian, but also to international
commercial arbitrations which take place in India.
The Supreme Court considered that the true purpose of this provision was not to extend
the jurisdiction of Part I of the Indian Arbitration Act to a foreign arbitration, but to draw
a distinction between domestic awards and foreign awards. The Court said:
It seems clear that the object of Section 2(7) is to distinguish the domestic award
covered under Part I of the Arbitration Act, 1996 from the "foreign award" covered under
18

Bhatia, 2012(3)ARBLR515(SC), paragraph 69

19

Bhatia, 2012(3)ARBLR515(SC), paragraph 84

20

2(7) - An arbitral award made under this Part shall be considered domestic award.

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Part II of the aforesaid Act; and not to distinguish the "domestic award" from an
"international award" rendered in India. In other words, the provision highlights, if any
thing, a clear distinction between Part I and Part II as being applicable in completely
different fields and with no overlapping provisions.21
The difference is significant because domestic awards can be challenged and annulled
under Section 34 of Arbitration Act. Thus Part I applies to all arbitrations with a seat or
place of arbitration inside India irrespective of it being an international arbitration or a
purely domestic arbitration.

Centre of Gravity of Arbitration

The Act emphasized that the concepts of party autonomy and jurisdiction cannot override
jurisdictional territoriality. The seat of arbitration is intended to be the central point or the
center of gravity. The Supreme Court thus advanced to a seat-centric interpretation of
these sections as opposed to a subject-centric one. The Court stated Arbitration Act, 1996 is subject matter centric and not exclusively seat centric.
Therefore, "seat" is not the "centre of gravity" so far as the Arbitration Act, 1996 is
concerned.22
Section 2(1)(e) defines "Court" as the courts with "jurisdiction to decide the questions
forming the subject-matter of the arbitration if the same had been the subject matter of a
suit". The Supreme Court differentiated between "subject matter of the arbitration" and
"subject matter of the suit". The Supreme Court opined that Section 2 (1)(e) is a purely
jurisdictional provision that enunciates that the courts where the cause of action is located
and the courts where the arbitration takes place would both have jurisdiction over the
parties. The Court said that:
21

Bhatia, 2012(3)ARBLR515(SC), paragraph 88

22

Bhatia, 2012(3)ARBLR515(SC), paragraph 95

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The provision in Section 2(1)(e) has to be construed keeping in view the provisions in
Section 20 which give recognition to party autonomy. In our view, the legislature has
intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction
where the cause of action is located and the courts where the arbitration takes place. This
was necessary as on many occasions the agreement may provide for a seat of arbitration
at a place which would be neutral to both the parties. Therefore, the courts where the
arbitration takes place would be required to exercise supervisory control over the
arbitral process.23
Section 20 underlines the party autonomy with regards to the place of arbitration where
the parties are free to agree on the place of arbitration. The Court read this section in light
of the territorial limitation in Section 2(2) but the Act allows parties to opt out of
Arbitration Act by keeping the seat of arbitration in another country. The use of the term
"place" in Section 20(3) should be read as a reference to venue and not the seat of
arbitration and the parties decision to have the venue of their hearings at a convenient
location outside of India would not change the seat of the arbitration, which would
continue to remain India. 24
Section 28 is a conflict of law provision which draws a distinction between domestic
arbitrations, international arbitrations seated in India and foreign arbitrations and their
applicable conflict of laws rule. The Supreme Court said that the phrase "where the place
of arbitration is situated in India" is not indicative of the fact that the intention of
Parliament was to give an extra-territorial operation to Part I.25
Section 45 provides the obligation of a judicial authority to refer the parties to arbitration
in case of a pre-existing agreement. The Supreme Court explained that rather than
expanding the scope of Part I to international arbitrations it merely enforces a judicial
23

Bhatia, 2012(3)ARBLR515(SC), paragraph 96

24

Bhatia, 2012(3)ARBLR515(SC), paragraph 100.

25

Bhatia, 2012(3)ARBLR515(SC), paragraph 123.

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obligation on the Courts. The Supreme Court also said that Section 45 was insufficient to
alter the scope and ambit of the field of applicability of Part I to include international
commercial arbitrations, which take place out of India.26

DECISION
In response to the issues raised, the following conclusion can be drawn from the analysis
of the jurisprudence developed through the judgment I.

Omission of the word "only" from Section 2(2) of Act did not detract from the
territorial scope of its application as embodied in Article 1(2) of Model Law.

II.

Sub-clause (5) was made subject to sub-clause (4) and was to be read in the
backdrop of Section 2(2) of Act, which provides that this part should apply where
place of arbitration was in India.

III.

If an arbitration agreement was found or held to provide for seat / place of

arbitration outside India, then a provision that the Act would govern arbitration
proceedings would not make Part I of Arbitration Act applicable.

IV.

The parties in question agreed that contracts were to be governed by Indian Law
as their proper law and that disputes should be determined by arbitration in
London.

V.

The Arbitration Act, 1996 accepted the territoriality principle, which was adopted
in the UNCITRAL Model Law and Section 2(2) of Act made the declaration that
Part I of Act should apply to all arbitrations that took place within India.
VI. No interim relief u/s 9 of the Act or Order 39 of the CPC, pertaining to injunction
and interim reliefs, would be available where the seat of arbitration is outside
India.

26

Bhatia, 2012(3)ARBLR515(SC), paragraph 131.

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CONCLUSION THE RESURRECTION OF ARBITRAL AUTONOMY

The decision of the Supreme Court has established predominance to parties' choice of
seat and aligned Indian arbitral jurisprudence with the UNCITRAL Model Law.
However, a significant limitation of the decision in BALCO27 is that it only applies
prospectively. The legacy of the decision in Bhatia International will continue to be felt.
In respect of arbitrations initiated pursuant to such agreements before 6 September 2012,
Indian courts will continue to be able to exercise all the powers available under Part I of
the Act, unless the parties have expressly or impliedly chosen to exclude the provisions of
Part I of the Act. This is, in fact, likely to become a contentious issue in the future. Given
the significant delays in court proceedings in India, the BALCO28 decision effectively
means that despite Bhatia29 and Venture Global30 being expressly overruled, those
precedents will ironically continue to guide the Indian courts for some time to come. The
judiciarys attempt to reinterpret the law of arbitration puts Indian arbitration at
crossroads as a fewer gaps continue to hamper the efficacy of the system. It is hoped that
the Indian courts will continue to adopt such an approach in those legacy cases that do
come before them in the future, especially in light of the clear message of nonintervention sent out by the Supreme Court.
The Indian business community stands to gain benefit from this decision as foreign direct
investment flows towards locations with a stronger governance infrastructure, which
includes how well the legal system enforces alternative dispute resolution methods. In
India, foreign parties were hesitant in dealing and insisted on terms in agreements that
compensated for the legal risks associated with arbitration. The risk premium' which
27

Bhatia, 2012(3)ARBLR515(SC)

28

Bhatia, 2012(3)ARBLR515(SC)

29

(2002) 4 SCC 105.

30

Venture Global Engineering -v- Satyam Services Ltd and Anr, (2010) 8 SCC 660.

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made a plethora of transactions commercially unviable has substantially decreased post

BALCO31. This case has made an attempt to form a road map of Indian arbitration and to
gives it impetus to leave behind the anarchic past.

31

Bhatia, 2012(3)ARBLR515(SC)

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BIBLIOGRAPHY

Alan Redfern, L AW AND P RACTICE

ARBITRATION, 4th Edition (2004).

OF

I NTERNATIONAL C OMMERCIAL