Bhatia International to BALCO: Piloting a Much Needed Course

Correction
(Project Report)

Submitted To:
Dr. Parvesh Kumar Rajput,

(Faculty, Dept. Of Law of Alternative Dispute Resolution)

Submitted by:

Name: SNEHAL RANJAN SHUKLA

SEMESTER-6, B.A.L.L.B. (Hons.)
ROLL NUMBER: 168
SECTION: B

Hidayatullah National Law University,

Post Uparwara, Abhanpur, New Raipur – 493661 (Chattisgarh)

 Table of Contents
DECLARATION................................................................................................................1

ACKNOWLEDGEMENTS...............................................................................................2

INTRODUCTION..............................................................................................................3

AIMS &OBJECTIVES......................................................................................................4

REVIEW OF LITERATURE............................................................................................4

SCOPE & METHODOLOGY..........................................................................................4

RESEARCH QUESTIONS...............................................................................................5

SCHEME OF THE INDIAN ARBITRATION ACT.......................................................6

THE DECISION IN BHATIA INTERNATIONAL V BULK TRADING S.A.............7

REINSTATEMENT OF THE TERRITORIALITY PRINCIPLE..............................10

CONCLUSION.................................................................................................................13

BIBLIOGRAPHY............................................................................................................14
 DECLARATION

I, Snehal Ranjan Shukla hereby declare that the project work entitled, ‘Bhatia International to
BALCO: A much needed course correction” submitted to H.N.L.U., Raipur is a record of an
original work done by me under the able guidance Dr. Parvesh Kumar Rajput, Faculty
Member, H.N.L.U., Raipur.

Snehal Ranjan Shukla

Roll Number: 168

Batch XV

Sem VI

2|Page
 Acknowledgements

Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty. This research venture has been made possible due to the generous co-
operation of various persons. To list them all is not practicable, even to repay them in words
is beyond the domain of my lexicon.
This project wouldn’t have been possible without the help of my teacher Dr. Parvesh Kumar
Rajput Faculty of Alternate Dispute Resolution at H.N.L.U, who had always been there at my
side whenever I needed some help regarding any information. He has been my mentor in the
truest sense of the term. The administration has also been kind enough to let me use their
facilities for research work. I thank them for this.

3|Page
 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 Inc1 (‘BALCO’),
which overruled the Supreme Court’s much criticised decision in Bhatia International v Bulk
Trading SA2 (‘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.

The procedural history of this case up to the controversial decision in Venture Global v.
Satyam Computer Services Ltd,3 is fairly well known. In short, after failing to get the award
in favour of Satyam set aside before courts in Michigan and Illinois courts and after the
enforcement of the award was granted in the United States, Venture filed a sought setting
aside of the award in India. Though the civil court and Andhra Pradesh High court ruled that
a foreign award could not be set aside under Section 34 of the Arbitration and Conciliation
Act, 1996, Supreme Court in Venture Global v. Satyam Computer Services Ltd, held that a
foreign award could be set aside under § 34 and remanded the application under § 34 to be
decided by the Civil Court.

It 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 Indian Supreme Court in BALCO case 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. 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.

1 (2012) 9 SCC 649

2 (2002) 4 SCC 105.
3 [(2008) 4 SCC 190]

4|Page
 Aims &Objectives

The main objectives of the study are:-

 To understand the judgement of Bhatia International Case.

 To understand the shortcomings of judgement of Bhatia International Case.

 To understand the judgement of BALCO Case.

 To understand the positive consequences of BALCO Case.

Review of Literature

Madhusudan Saharay, Textbook on Arbitration and Conciliation with Alternative

Dispute Resolution (Universal Law Publishing, ISBN-13: 978-8131252208), 4th Edition,
2017

In this book it was been observed that the apex courts judgement from Bhatia International
Case to BALCO Case, was a much needed course of action in the light of the arbitration
scheme which is present in India.

Scope & Methodology

The scope of this project is limited to the judgements of the Hon’ble Supreme Court in
Bhatia International v Bulk Trading S.A. & Bharat Aluminium Co. Ltd. v. Kaiser Aluminium

5|Page
Technical Services. The Scope also includes the scheme of arbitration which is followed in
India.

This research project is Doctrinal in nature since it is largely based on secondary & electronic
sources of data and also since there is no field work involved while producing this research
and it largely involves study of various theories and comparison from different books, journal
and other online sources thus not being empirical in nature.

Research Questions

The questions of research in this project are:

 What is the judgement of Bhatia International Case?

 What are the shortcomings of judgement of Bhatia International Case?

 What is the judgement of BALCO Case?

 Why did the court had to overrule its previous judgement in BALCO Case?

 What are the consequences of BALCO Case?

6|Page
 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 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.

§34 of The Arbitration and Conciliation Act, 1996 entails for setting aside arbitral award. It
provides for 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 sub-section (3) of the
proviso. §34 [(2A)] states that an arbitral award arising out of arbitrations other than
international commercial arbitrations, may also be set aside by the Court, if the Court finds
that the award is vitiated by patent illegality appearing on the face of the award: Provided that

4 Nigel Blackaby et al, Redfern & Hunter on International Arbitration (5th Edn, 2009), p 180.

7|Page
an award shall not be set aside merely on the ground of an erroneous application of the law or
by appreciation of evidence.

The decision in Bhatia International v Bulk Trading S.A.

The Supreme Court, in the year 2002, decided in the case of Bhatia International v Bulk
Trading S.A.5 that Indian courts had exclusive jurisdiction to test the validity of an arbitral
award made in India even when the proper law of the contract is the law of another country.

The facts of the concerned case of Bhatia International are that the parties to an international
contract had recoursed to arbitration according to the ICC rules of arbitration in Paris, with a
sole arbitrator. As the foreign party wanted to ensure the recovery of its claim from the Indian
party in the case of a favourable award, it moved an Indian court for interim measures
securing the property of the Indian party. The Indian party raised objection to the submitted
application on the ground that the arbitration under consideration was taking place in Paris,
and the New York Convention provides no provision for interim measure being granted by a
court other than one in which the arbitration is taking place. However, the High Court
rejected the argument. Thereafter, the Indian party approached the Supreme Court, which
upheld the judgment of the High Court.

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 §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.

5 (2002) 4 SCC 105

8|Page
The court ruled that §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.”6

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.7

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 Ltd8 (‘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 PLC9 , 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

6 (2002) 4 SCC 105, 116.

7 See Promod Nair, Surveying a Decade of the ‘New’ Law of Arbitration in India (2007) 23 Arb Int’l 699 at
718.
8 (2008) 4 SCC 190.
9 (2008) 10 SCC 308.

9|Page
progeny”10 , 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 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.11 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 200912 which proposed amendments to the Act,
primarily to undo the effects of Bhatia International.

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.13

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
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
10 A colourful term used by Fali Nariman used to describe cases which endorsed and followed the principle of
law laid down in Bhatia International.
11 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.
12 Proposed Amendments to the Arbitration & Conciliation Act, 1996: A Consultation Paper -
http://lawmin.nic.in/la/consultationpaper.pdf. See, in particular, pp 4-15.
13 White Industries Australia Ltd v Republic of India, UNCITRAL Award (India-Australia BIT), 30 November
2011.

10 | P a g e
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:
a) to give effect in India to an agreement referring disputes to arbitration in another
country, pursuant to the New York Convention,
b) to enforce foreign arbitral awards in India, in accordance with the provisions of the
New York or Geneva Conventions.

11 | P a g e
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 landmark judgment of Bharat Aluminium v. Kaiser Aluminium Technical Services

(BALCO) had, thus, put the controversy aside by overruling the doctrine laid down in Bhatia
International and Venture Global Engineering by, inter alia, holding the following:

1. Part I of the Act would have no applicability to International Commercial Arbitration held
outside India

2. Part I of the Act shall apply to all arbitrations which take place only within India

3. There can be no overlapping or intermingling of the provisions contained in Part I with

that in Part II of the Act

4. In a foreign seated international commercial arbitration, no application for interim relief

would be maintainable under any provision, as applicability of Part I is restricted to all
arbitrations which take place within India only

5. No suit for interim injunction would be maintainable in India, when the seat of arbitration
is outside India

6. As Part I would have no applicability to international commercial arbitration held outside

India, the arbitral awards will be subject to the jurisdiction of Indian courts when the
same are sought to be enforced in accordance with Part II of the Act.

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.
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

12 | P a g e
 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.

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.

13 | P a g e
 CONCLUSION

“A brighter future for arbitration in India”

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 is to insulate arbitrations seated outside India from unwelcome
interference by the Indian courts. Notably, the Indian courts are no longer able to consider
challenges to foreign awards. This has reduced 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. 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.

14 | P a g e
 BIBLIOGRAPHY

 Nigel Blackaby et al, Redfern & Hunter on International Arbitration (5th Edn, 2009).

 Promod Nair, Surveying a Decade of the ‘New’ Law of Arbitration in India (2007) 23
Arb Int’l 699.

 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.

 Proposed Amendments to the Arbitration & Conciliation Act, 1996: A Consultation

Paper http://lawmin.nic.in/la/consultationpaper.pdf. See, in particular.

 White Industries Australia Ltd v Republic of India, UNCITRAL Award (India-

Australia BIT), 30 November 2011.

15 | P a g e