Intent of Parties to Arbitration cannot be ignored relating to law governing Arbitration #indianlaws

The Hon’ble Supreme Court has held that the parties are free to agree on application of three different laws governing their entire contract – (1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration, which is popularly and in legal parlance known as curial law. The agreement, in the instant case  revealed that the intention of the parties was to apply English Law to the arbitration agreement also and not limit it to the conduct of the arbitration was fairly clear from the relevant article in the Agreement. Once it was found that the law governing the arbitration agreement was English Law, Part I of the Indian Arbitration Act stood impliedly excluded. 

The Constitution Bench Judgment in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. had resolved the conflicting views on the applicability of Part I of Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), holding that “… Part I of the Arbitration Act is applicable only to all the arbitrations which take place within the territory of India”, overruling a three-Judge Bench decision of the Apex Court in Bhatia International v. Bulk Trading S.A. and Anr. [(2002) 4 SCC 105]. This however was clarified to be operative prospectively. In other words, all agreements executed prior to 06.09.2012 were to be governed by the decision in Bhatia International case.

In Bhatia International, it was held that even in cases of international commercial arbitrations held out of India, provisions of Part I would apply unless the parties by agreement express or implied, excluded all or any of its provisions.

In the instant matter, the simple question before the Court was as to whether the parties by agreement, express or implied, have excluded wholly or partly, Part I of the Arbitration Act.

In this matter, an agreement was executed between the Appellant and the Respondent with relation to supply of equipment, and modernization and up-gradation of the production facilities of the Appellant at a particular location. Certain disputes arose between the parties and the same were referred to arbitration. The arbitration proceedings were held in England and the arbitral tribunal made two awards in favour of the Respondent during November, 2002. The Appellant filed applications in the Indian Courts, under Section 34 of the Arbitration Act, which were dismissed. High Court also dismissed the appeals holding applications as not maintainable against the foreign awards.

It was observed that the parties are free to agree on application of three different laws governing their entire contract – (1) proper law of contract, (2) proper law of arbitration agreement and (3) proper law of the conduct of arbitration, which is popularly and in legal parlance known as curial law.

In the matter of interpretation, the court has to make different approaches depending upon the instrument falling for interpretation. It was further observed that in the instant case there was a contract executed between the two parties wherein the court cannot adopt an approach for interpreting a statute. The terms of the contract would have to be understood in the way the parties wanted and intended them to be.

The Respondent had invoked the provisions of English law for the purpose of the initiation of the unsettled disputes. It was noted as something not to be ignored that the parties, intended to avoid impracticable and inconvenient processes and procedures in working out the agreement.  A close perusal of the terms between the parties clearly showed that the first part of relevant Article of the agreement was on the law governing the contract and in the second part the parties intended to lay down the law applicable to the arbitration agreement, viz., the proper law of the agreement of arbitration. The agreement revealed that the intention of the parties to apply English Law to the arbitration agreement also and not limit it to the conduct of the arbitration was fairly clear from the relevant article in the Agreement. Once it was found that the law governing the arbitration agreement was English Law, Part I of the Indian Arbitration Act stood impliedly excluded.

[Bharat Aluminium Company vs. Kaiser Aluminium Technical Services INC.]

(SC, 28.01.2016) – Civil Appeal No. 7019 of 2005