Section 42 of Arbitration and Conciliation Act, 1996 and the Uncertainties about Jurisdiction

The complexities surrounding arbitration in India and the clouded arbitration legislation as an oft-judicially-interpreted Act in India is nothing new. To the ones initiated, the Arbitration and Conciliation Act (the Act) in India has undergone modifications since pre-Independence days. However, till date, the prevalent Act can still be regarded as one of the most highly debated and judicially interpreted/mis-interpreted legislations in India.

Coming to the topic, Section 42 of the Act mandates the jurisdiction of Court to deal with arbitral proceedings. It states that only such Court to which an application has been previously made/filed with respect to an arbitration agreement, will alone have jurisdiction over subsequent matters arising from the arbitration agreement and arbitral proceedings.

Section 42 states:  “Jurisdiction   –   Notwithstanding   anything   contained elsewhere in this Part or in any other law for the time being in force, where  with  respect  to  an  arbitration  agreement  any application under this Part has been made in a Court, that Court alone shall have jurisdiction over the arbitral proceedings  and all subsequent applications arising out of  that  agreement  and the arbitral proceedings shall be made in that Court and  in  no other Court.”

However, here Court implies a Court of competent jurisdiction as held in Sabson (India) Pvt. Ltd. vs. Neyveli Lignite Corpn. Ltd. (1991) 2 MLJ 211. It was held in this matter by the Hon’ble Madras High Court that even if an application is filed at a Court of first instance, but if the same court is without competent jurisdiction to decide upon the same matter, then it cannot be held to be the Court of first instance and thereby a subsequent Court will have jurisdiction over subsequent matters arising from the arbitration agreement and arbitral proceedings.

Here, the definition of Court can be understood from Section 2 (1) (e) of the Act which states that:

Court means  the  principal  Civil  Court  of original jurisdiction in a district,  and  includes  the  High  Court  in exercise of its ordinary  original  civil  jurisdiction,  having jurisdiction to decide the questions forming the  subject-matter of the arbitration if the same had been the subject-matter of  a suit, but does not include any civil court of a  grade  inferior  to such principal Civil Court, or any Court of Small Causes.

In Bhatia International and Venture Global Engineering (2004) 2 SCC 105, the Supreme Court has concluded that Part I would also apply to all arbitrations held out of India, unless the parties by agreement, express or implied, exclude all or any of its provisions.

However, the above principles went through a sea change following Bhatia International and then finally in Bharat  Aluminium Company & Ors. vs. Kaiser Aluminium Technical Services Inc & Ors.  (2012)  9 SCC 559, (BALCO) the following points were recorded:

“96.  ….      We are of the opinion, the term “subject matter of the arbitration” cannot be confused with “subject matter  of  the  suit”.  The term “subject matter” in Section 2(1)(e) is confined to Part I.  It has a reference and connection with the process of dispute resolution.  Its purpose is to identify the courts having supervisory control over the arbitration proceedings. Hence, it  refers  to  a  court  which  would essentially be a court of the seat of the arbitration process. In  our opinion, 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. Accepting  the  narrow  construction  as  projected  by  the Learned Counsel for the Appellants would, in fact, render  Section  20 nugatory.  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.

For example, if the arbitration  is held in Delhi, where neither of the parties  are  from  Delhi, (Delhi having been chosen as a neutral place as between a party  from  Mumbai and the other from Kolkata) and the tribunal sitting in  Delhi  passes an interim order Under Section 17 of the Arbitration  Act,  1996,  the appeal against such an interim order under Section 37 must lie to  the Courts of Delhi being the Courts having supervisory jurisdiction  over the  arbitration  proceedings  and  the  tribunal. This   would   be irrespective of the fact that the obligations to  be  performed  under the contract were to be performed either at Mumbai or at Kolkata,  and only arbitration is to take place in  Delhi. In  such  circumstances, both the Courts would have jurisdiction, i.e., the Court within  whose jurisdiction the subject matter of the suit is situated and the courts within  the  jurisdiction  of  which  the  dispute  resolution,  i.e., arbitration is located.

The definition of Section 2(1)(e) includes “subject matter of  the arbitration” to give jurisdiction to the courts where the  arbitration takes place, which otherwise would  not  exist.

On  the  other  hand, Section 47 which is in Part II of the Arbitration  Act,  1996  dealing with enforcement of  certain  foreign  awards  has  defined  the  term “court” as a court having jurisdiction over the subject-matter of  the award.

This has a clear reference to a court within whose jurisdiction the asset/person is located, against which/whom the enforcement of the international arbitral award is sought.

The  provisions  contained  in Section 2(1)(e) being purely jurisdictional  in  nature  can  have  no relevance to the question whether Part I applies to arbitrations which take place outside India.

98. We now come to Section 20, which is as under:

“20. Place of arbitration—(1) The parties are free to  agree  on the place of arbitration.

(2) Failing any agreement referred to in  Sub-section  (1),  the place  of  arbitration  shall  be  determined  by  the  arbitral  tribunal  having  regard  to  the  circumstances  of  the  case, including the convenience of the parties.

(3) Notwithstanding Sub-section  (1)  or  Sub-section  (2),  the arbitral tribunal may, unless otherwise agreed by  the  parties, meet at any place  it  considers  appropriate  for  consultation among  its  members,  for  hearing  witnesses,  experts  or  the parties,  or  for  inspection  of  documents,  good   or   other  property.”

A plain reading of Section 20 leaves no room for doubt that where  the place of arbitration is in India, the parties are free to agree to any  “place” or “seat” within India,  be  it  Delhi,  Mumbai  etc.

In  the absence of the parties’ agreement thereto,  Section  20(2)  authorizes the tribunal to determine the place/seat of such arbitration.  Section 20(3) enables the  tribunal  to  meet  at  any  place  for  conducting hearings at a place of convenience in matters  such  as  consultations among its members for hearing witnesses, experts or the parties.”

Recently, in Konkola Copper Mines (PLC) v. Stewarts and Lloyds of India Ltd, the Bombay High Court held that:

In paragraph 63 of the BALCO judgment, the Supreme Court held that the court was unable to agree with the conclusion of the Supreme Court in case of Bhatia International and Venture Global Engineering that Part I would also apply to all arbitrations held out of India, unless the parties by agreement, express or implied, exclude all or any of its provisions. In paragraph 67, the Supreme Court held that on a plain reading of section 2(2), it is clear that Part I is limited in its application to arbitrations which take place in India. In paragraphs 75 and 76 of the said judgment, the Supreme Court held that the arbitrators at times hold meetings at more convenient locations and law of the seat or place where the arbitration is held, is normally the law to govern that arbitration. The territorial link between the place of arbitration and the law governing the arbitration is well established in the international instruments, namely, the New York Convention of 1958 and the UNCITRAL Model Law of 1985. It is held that the terms “seat” and “place” are often used interchangeably.

In paragraph 78 of the BALCO judgment, it is held that the Supreme Court was unable to support the conclusion reached in Bhatia International and Venture Global Engineering, that Part I would also apply to arbitrations that do not take place in India. In paragraph 86, it is held that the provisions of section 2(4) and Section 2(5) would not be applicable to arbitrations which are covered by Part II of the Arbitration Act, 1996, i.e. the arbitrations which take place outside India and that there is no inconsistency between Sections 2(2), 2(4) and 2(5). In paragraph 89, it is held that Part I and Part II are exclusive of each other is evident also from the definitions section in Part I and Part II. It is held that the intention of the Parliament is clear that there shall be no overlapping between Part I and Part II of the Arbitration Act, 1996. The two parts are mutually exclusive of each other.

In para 96 of BALCO, it is held by the Supreme Court that court where the arbitration takes place shall be required to exercise supervisory control over the arbitral process. In para 100, it is held that in an international commercial arbitration, having a seat in India, hearings may be necessitated outside India and in such circumstances, the hearing of the arbitration will be conducted at the venue fixed by the parties, but it would not have the effect of changing the seat of arbitration which would remain in India. It is held that the seat of the arbitration remains the place initially agreed by or on behalf of the parties and the said view is correct depiction of the practical considerations and the distinction between “seat” (Section 20(1) and 20(2)) and “venue” (Section 20(3)). It is held that only if the agreement of the parties is construed to provide for the “seat” / “place” of Arbitration being in India, Part I of the Arbitration Act, 1996 would be applicable. Part I would be inapplicable to the extent inconsistent with the arbitration law of the seat, even if the agreement purports to provide that the Arbitration Act, 1996 shall govern the arbitration proceedings.

In para 193 of BALCO, it is held that there is no existing provision under the Civil Procedure Code or under the Arbitration Act, 1996 for a court to grant interim measures in terms of section 9, in arbitrations which takes place outside India, even though the parties by agreement may have made the Arbitration Act, 1996 as the governing law of arbitration.

28. In paragraphs 194 to 196 of the said judgment, it is held that Part I of the Arbitration Act, 1996 would have no application to International Commercial Arbitration held outside India and such awards would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996 and that there can be no overlapping or intermingling of the provisions contained in Part I with the provisions contained in Part II of the Arbitration Act, 1996. It is held that section 2(2) of the Act is not in conflict with any of the provisions either in Part I or in Part II of the Arbitration Act, 1996. In a foreign seated international commercial arbitration, no application for interim relief would be maintainable under Section 9 or any other provision, as applicability of Part I of the Arbitration Act, 1996 is limited to all arbitrations which take place in India. In the concluding para, it is held that Part I of Arbitration Act, 1996 is applicable only to all arbitrations which take lace within the territory of India.

According to the BALCO judgment the place/seat of arbitration also However, BALCO judgment decided on 6^th September, 2012 is supposed to have a prospective effect and the judgment clearly mentions so.

The Bombay High Court in Konkola Copper Mines (PLC) v. Stewarts and Lloyds of India Ltd also went on to state that:

“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. For example, if the arbitration is held in Delhi, where neither of the parties are from Delhi, (Delhi having been chosen as a neutral place as between a party from Mumbai and the other from Kolkata) and the tribunal sitting in Delhi passes an interim order under Section 17 of the Arbitration Act, 1996, the appeal against such an interim order under Section 37 must lie to the courts of Delhi being the courts having supervisory jurisdiction over the arbitration proceedings and the tribunal. This would be irrespective of the fact that the obligations to be performed under the contract were to be performed either at Mumbai or at Kolkata, and only arbitration is to take place in Delhi. In such circumstances, both the courts would have jurisdiction i.e. the court within whose jurisdiction the subject matter of the suit is situated and the courts within the jurisdiction of which the dispute resolution i.e. arbitration is located.”

The Bombay High Court in Konkola Copper Mines (PLC) v. Stewarts and Lloyds of India Ltd further held that:

“In our view, it would not be appropriate, while applying the ratio of the judgment in BALCO to hold that the reasons which are contained in the judgment would operate with prospective effect. What the Supreme Court has essentially ordered, while moulding the reliefs is that the declaration of law to the effect that Part-I shall apply only to those arbitrations where the place of arbitration in India shall take prospective effect after the date of the judgment. But equally, it would be impermissible to hold that the interpretation which has been placed by the Supreme Court on the provisions of Section 2(1)(e) would apply only prospectively. The judgment of the Supreme Court is declaratory of the position of law that the Court having jurisdiction over the place of arbitration can entertain a proceeding in the exercise of its supervisory jurisdiction as indeed the Court where the cause of action arises.…”

This leads to imply that the BALCO judgment, although prospective in nature, all the provisions of the Act are not to be interpreted accordingly. This judgment of the Bombay High Court would definitely be appealed at the Supreme Court and it only remains to be seen how the Supreme Court guides the precarious arbitration regime in India.

While arbitration was supposed to be the means to an end to frivolous, time consuming litigation in India, however, in fact, arbitration has become the first step towards litigation and India Inc. really needs to get out of this quagmire before it rings the death knell to business relations in India.