Distinction between obligation created by arbitration agreement and by substantive agreement

In coming to the aforesaid conclusion, this Court relied on a
passage from Law and Practice of Commercial Arbitration in
England, 2nd Edn. by Mustill and Boyd which is as under :
“An agreed reference to arbitration involves two
groups of obligations. The first concerns the mutual
obligations of the parties to submit future disputes,
or an existing dispute to arbitration, and to abide by
the award of a tribunal constituted in accordance
with the agreement. It is now firmly established that
the arbitration agreement which creates these oblig-
ations is a separate contract, distinct from the sub-
stantive agreement in which it is usually embedded,
capable of surviving the termination of the substant-
ive agreement and susceptible of premature termin-
ation by express or implied consent, or by repudi-
ation or frustration, in much the same manner as in
more ordinary forms of contract. Since this agree-
ment has a distinct life of its own, it may in principle
be governed by a proper law of its own, which need
not be the same as the law governing the substant-
ive contract.

REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5765 OF 2014
(Arising out of S.L.P. (C) No. 20041 of 2013)
Reliance Industries Limited & Anr.
...Appellant
VERSUS
Union of India
...Respondent
JUDGMENT
Dated;May 28, 2014.
Citation;(2014) 7 SCC 603

SURINDER SINGH NIJJAR, J.
1. Leave granted.
2. This appeal is directed against the judgment of the High
Court of Delhi at New Delhi rendered in OMP No.46 of 2013
dated 22nd March, 2013. By the aforesaid judgment, the
Delhi High Court has allowed the petition filed by the
respondent under Section 34 of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as ‘the
Arbitration Act, 1996’), challenging the Final Partial Award
dated 12th September, 2012. By the aforesaid Award, the
objection raised by the Union of India relating to the
2
arbitrability of the claims made by the petitioner in respect of
Royalties, Cess, Service Tax and CAG Audit have been
rejected.
3. Before we discuss the legal issues, it would be pertinent to
make a very brief note of the relevant facts.
4. The parties had entered into Two Production Sharing
Contracts dated 22nd December, 1994 (as amended by
Amendment Agreement No.1 and Amendment Agreement
No.2) (hereinafter referred to as “PSC” or “PSCs”) as and
when appropriate. These two PSCs provide for the
exploration and production of petroleum from the Mid and
South Tapti Fields (hereinafter referred to as “Tapti” or “Tapri
Field”) and for the exploration and production of petroleum
from Panna and Mukta Fields which shall be hereinafter
referred to either as “Panna Mukta” or “Panna Mukta fields”.
The two PSCs shall be referred to “Tapti PSC” and “Panna
Mukta PSC,” respectively.
5. One of the PSCs was entered into with Reliance Industries
3
Limited (RIL), the appellant, a body corporate established
under the laws of India. It is a major Indian multinational and
the largest private sector company in India, with interests in
activities including exploration and production of oil and gas,
petroleum refining and marketing petrochemicals, textiles,
retail and special economic zones. The other PSC was
entered into with BG Exploration and Production India
Limited (“BG”), a body corporate established under the laws
of the Cayman Islands. It is a company forming part of BG
Group, an international energy group headquartered in the
United Kingdom with business operations in numerous
countries. In 2002, BG Group acquired the share capital of
Enron Oil and Gas India Limited (EOGIL, a company
formerly part of the Enron group of companies). Upon its
acquisition on 15th February, 2003, the name of EOGIL was
changed to BG Exploration and Production India Limited.
6. ONGC is a state-owned oil and gas company in India in
which the Government of India holds a 74.14 % equity stake.
It produces various petroleum products including crude oil,
natural gas and LPG. These three companies are together
4
defined as the “Contractor” (in the PSCs Clause 1.23).
7. The two PSCs provide a detailed procedure for Alternative
Dispute Redressal Mechanisms. Articles 32 and 33 of the
PSCs are relevant for this purpose. These Articles provide
as under :
“Article 32 – Applicable Law and Language of
the Contract –
32.1 Subject to the provisions of Article 33.12, this
Contract shall be governed and interpreted in
accordance with the laws of India.
32.2 Nothing in this Contract shall entitle the
Government or the Contractor to exercise the rights,
privileges and powers conferred upon it by this
Contract in a manner which will contravene the laws
of India.
32.3 The English language shall be the language of
this Contract and shall be used in arbitral
proceedings. All communication, hearings or visual
materials or documents relating to this Contract
shall be in English.
Article 33 – Sole Expert, Conciliation and
Arbitration :
33.1 The Parties shall use their best efforts to settle
amicably all disputes, differences or claims arising
out of or in connection with any of the terms and
conditions of this Contract or concerning the
interpretation or performance thereof.
5
33.2 Except for matters which, by the terms of this
Contract, the Parties have agreed to refer to a sole
expert and any other matters which the Parties may
agree to so refer, any dispute, difference or claim
arising between the Parties hereunder which cannot
be settled amicably may be submitted by any Party
to arbitration pursuant to Article 33.3. Such sole
expert shall be an independent and impartial person
of international standing with relevant qualifications
and experience appointed by agreement between
the Parties. Any sole expert appointed shall be
acting as an expert and not as an arbitrator and the
decision of the sole expert on matters referred to
him shall be final and binding on the Parties and not
subject to arbitration. If the Parties are unable to
agree on a sole expert, the disputed subject matter
may be referred to arbitration.
33.3 Subject to the provisions herein, any
unresolved dispute, difference or claim which
cannot be settled amicably within a reasonable time
may, except for those referred to in Article 33.2, be
submitted to an arbitral tribunal for final decision as
hereinafter provided.
33.4 The arbitral tribunal shall consist of three
arbitrators. The Party or Parties instituting the
arbitration shall appoint one arbitrator and the Party
or Parties responding shall appoint another
arbitrator and both Parties shall so advise the other
Parties. The two arbitrators appointed by the Parties
shall appoint the third arbitrator.
33.5 Any Party may, after appointing an arbitrator,
request the other Party (ies) in writing to appoint the
second arbitrator. If such other Party fails to appoint
an arbitrator within forty-five (45) days of receipt of
the written request to do so, such arbitrator may, at
the request of the first Party, be appointed by the
Secretary General of the Permanent Court of
Arbitration at the Hague, within forty-five (45) days
6
of the date of receipt of such request, from amongst
persons who are not nationals of the country of any
of the Parties to the arbitration proceedings.
33.6 If the two arbitrators appointed by the Parties
fail to agree on the appointment of the third
arbitrator within thirty (30) days of the appointment
of the second arbitrator and if the Parties do not
otherwise agree, the Secretary General of the
Permanent Court of Arbitration at the Hague may, at
the request of either Party and in consultation with
both, appoint the third arbitrator who shall not be a
national of the country of any Party.
33.7 If any of the arbitrators fails or is unable to act,
his successor shall be appointed in the manner set
out in this Article as if he was the first appointment.
33.8 The decision of the arbitration tribunal and, in
the case of difference among the arbitrators, the
decision of the majority, shall be final and binding
upon the Parties.
33.9 Arbitration proceedings shall be conducted in
accordance with the arbitration rules of the United
Nations Commission on International Trade Law
(UNCITRAL) of 1985 except that in the event of any
conflict between these rules and the provisions of
this Article 33, the provisions of this Article 33 shall
govern.
33.10 The right to arbitrate disputes and claims
under this Contract shall survive the termination of
this Contract.
33.11 Prior to submitting a dispute to arbitration, a
Party may submit the matter for conciliation under
the UNCITRAL conciliation rules by mutual
agreement of the Parties. If the Parties fail to agree
on a conciliator (or conciliators) in accordance with
the rules, the matter may be submitted for
arbitration. No arbitration proceedings shall be
7
instituted while conciliation proceedings are pending
and such proceedings shall be concluded within
sixty (60) days.
33.12 The venue of conciliation or arbitration
proceedings pursuant to this Article, unless the
Parties otherwise agree, shall be London, England
and shall be conducted in the English Language.
The arbitration agreement contained in this Article
33 shall be governed by the laws of England.
Insofar as practicable, the Parties shall continue to
implement
the
terms
of
this
Contract
notwithstanding the initiation of arbitral proceedings
and any pending claim or dispute.
33.13 The fees and expenses of a sole expert or
conciliator appointed by the Parties shall be borne
equally by the Parties. Assessment of the costs of
arbitration including incidental expenses and liability
for the payment thereof shall be at the discretion of
the arbitrators.”
8. In accordance with Article 33.12, the arbitral proceedings
were to be held in London as the neutral venue. At the time
of entering into the PSCs, none of the parties were domiciled
in U.K. In fact, subsequently, the venue of the arbitral
proceedings was shifted to Paris and again re-shifted to
London. Consequently
on 24th February, 2004,
the parties to the PSCs entered into an agreement amending
the PSCs, whereby it was stated that :-
“4. Applicable Law and Arbitration :
8
Except the change of venue/seat of Arbitration
from London to Paris, the Articles 32 and 33 of the
Contract shall be deemed to be set out in full in
this Agreement mutatis mutandis and so that
references therein to the Contract shall be
references to this Agreement.”
9. It appears that certain disputes and differences have arisen
between the parties, under or in connection with the PSCs.
Consequently, the appellant issued a notice of arbitration
dated 16th December, 2010. The disputes, differences and
claims are common to both the Tapti PSC and Panna &
Mukta PSC. The appellant claims that all attempts to resolve
the
disputes
with
the
respondent
amicably
through
correspondences and meetings have failed. The disputes,
differences and claims arising out of or in connection with
the PSCs have been summarized in paragraph 6 of the
notice of arbitration.
10.Pursuant to the aforesaid notice, the arbitral tribunal was
duly constituted on 29th July, 2011. Under Article 33.12, the
venue of arbitration is in London. The parties confirmed the
term of appointment of the Arbitral Tribunal on 29th July,
2011, signed by the Chairman on 15th August, 2011. A
9
substantive hearing was held between 21st May, 2012 to 29th
May, 2012 in Singapore. Thereafter, on the basis of the
amendment made in the PSC as noticed above, by
agreement of the parties, the arbitral tribunal made the “Final
Partial Consent Award” on 14th September, 2011. In the
aforesaid award, it is recorded as under :
“3. Final Partial Award as to Seat
3.1 Upon the agreement of the Parties, each
represented by duly authorized representatives and
through counsel, the Tribunal hereby finds, orders
and awards:
a) That without prejudice to the right of the Parties
to subsequently agree otherwise in writing, the
juridical seat (or legal place) of arbitration for the
purposes of the arbitration initiated under the
Claimants’ Notice of Arbitration dated 16th
December, 2010 shall be London, England.
b) That any hearings in this arbitration may take
place in Paris, France, Singapore or any other
location the Tribunal considers may be convenient.
c) That, save as set out above, the terms and
conditions of the arbitration agreements in Article 33
of the PSCs shall remain in full force and effect and
be applicable in this arbitration.”
11. This Consent Award was duly signed by
Mr.
Christopher Lau SC (Chairman), Mr. Peter Leaver QC (Co-
arbitrator)
and
Mr.
Justice
B.P.
Jeevan
Reddy
10
(Co-arbitrator).
12.Pursuant to Clause 28 of the terms of appointment, the
Chairman
of
the
Tribunal
is
empowered
to
make
interlocutory orders and consult other members of the
tribunal if he considers appropriate or one of the parties
requests that a decision be given by the whole tribunal.
Various directions/ orders/ clarifications were made by the
Chairman, with the concurrence of the other members of the
tribunal.
Pursuant
to
the
above
directions/orders/clarifications, the claimants / Appellants
served upon the tribunal its statement of claim and
amendment to the statement of claim
dated 5th
August, 2011 and claimants’ revised amendment to the
statement of claim
dated 19th January, 2012.
Similarly, the Respondent served upon the Tribunal its
statement of defence dated 31st January, 2012 and
additional statement on behalf of Respondent dated 10th
April, 2012 pursuant to procedural order dated 13th March,
2012. The aforesaid procedural order dated 13th March, 2012
as amended by directions dated 15th May, 2012 set out the
11
list of issues (the May 2012 issues) to be heard and be
determined by the tribunal at the hearing fixed to commence
on 21st May, 2012 and to conclude on 29th May, 2012 (“the
May 2012 hearing”). The parties served upon each other
witness statement of their witnesses. The documents relied
upon by both the parties were also placed on record.
13.
The Partial Final Award dated 12th September, 2012
records the claimant’s claims for relief as set out in Section E
of the Statement of the Scheme.
Paragraph 30.3 of the
Statement of Claim reads as follows:-
“(1) a declaration that, for the purposes of Article
15.6.1, the value of Gas at the wellhead should be
calculated by deducting from the sales price at the
Delivery Point an amount reflecting all of the costs
which are incurred between the wellhead and the
Delivery point regardless of whether such costs are
classified as capital expenditure or operating
expenditure and regardless of whether such costs
are recoverable out of Cost Petroleum under Article
13 of the PSCs.
(2) a declaration that, with effect from the date of
any partial or final award to the termination of the
PSCs, and pursuant to Article 15.6.1 of the PSCs,
12
the Government is required to reimburse any
excess royalties paid as a result of the exclusion of
post-wellhead capital expenditure from wellhead
value calculations made pursuant to the Gazette
Notification or pay damages in the same amount for
failure to procure an exemption in respect of such
excess royalties.
(3) a declaration that the Government is liable to
reimburse the Claimants pursuant to Article 15.6.1
of the PSCs in respect of any additional royalties
imposed and paid by the Claimants since August
2007 as a result of the exclusion of post-wellhead
capital expenditure from wellhead value calculations
made pursuant to the Gazette Notification.
(4) on award in favour of the Claimants requiring the
Government to reimburse the Claimants pursuant to
Article 15.6.1 in the sum of US $ 11,413,172 in
respect of the additional royalties imposed and paid
under protest between August 2007 and March
2011 or pay damages in the same amount for
failure to procure on exemption in respect of such
additional royalties.”
14.In the alternative, the appellants claimed the reimbursement
pursuant to Article 15.7 and 15.8 of the relevant PSCs (as
13
the case may be), the relief prayed for was as under :
“a) directing the parties to consult in order to make
the necessary revisions and adjustments to the
PSCs so as to maintain the expected benefit to the
Claimants as from August 2007 by requiring the
respondent to reimburse any excess royalties
payable following the issuance of the Gazette
Notification;
b) consequential declaratory relief; and
c) an award in damages in the same amount as are
claimed in paragraph 30.3(4) of the Statement of
Claim.”
15.The third set of relief claimed by the appellant is set out in
paragraph 30.3 of the Statement of Claim and is as follows :
“(1) a declaration that payment of royalties under
the PSCs should be made by 15 February in
respect of the period 1 July to 31 December and by
15 august in respect of the period 1 January to 30
June.
(2) a declaration that, provided royalties are paid
within the timeframes specified in (1) no interest is
payable under the terms of the PSCs and any
14
interest otherwise imposed is to be reimbursed by
the Government.
(3) a declaration that, in the event royalties are paid
after the timeframes specified in (1), any interest in
excess of LIBOR plus one percentage point is to be
reimbursed by the Government.
(4) a declaration that the Government is liable to
reimburse the claimants pursuant to Article 15.6.1 of
the PSCs in respect of any additional royalties or
interest imposed which does not accord with the
principles outlined at (1) to (3) above.
(5) an award in favour of the claimants requiring the
Government to reimburse the Claimants pursuant to
Article 15.6.1 in the sum of Rs.7,26,00,532 in
respect of the additional royalties imposed in
relation to royalty payments made between 1995 to
2002.”
16.As noticed earlier, the aforesaid reliefs were claimed by the
appellant under Article 15.6.1, which is as under:-
“15.6.1 – The constituents of the (claimants) shall
be liable to pay royalties and cess on their
participating interest share of Crude Oil and Natural
Gas saved and said in accordance with the
15
provisions of this Agreement.
The royalty on oil
saved and sold will be paid at RS. 481 per metric
ton and cessan oil saved and said will be paid at
Rs.900 per metric ton. Royalty on Gas saved and
said will be paid at ten per cent (10%) of the value
at wellhead. No cess shall be payable in response
of Gas. Royalty and cess shall not exceed the
herein above amounts throughout the term of the
contract. Royalty and cess shall be payable in
Indian Rupees. Any such additional payment shall
be made by the (respondent)”
17.Further the relief is claimed under Article 15.8 of the Tapti
PSC which is in identical terms of Article 15.7 in the Panna
Mukta PSC, which is as under :
“15.8 – If any change in or to any Indian law, rule or
regulation by any authority results in a material
change to the economic benefits accruing to any of
the parties to this contract after the effective date,
the
parties
shall
consult
promptly
to
make
necessary revisions and adjustments to the contract
in order to maintain such expected benefits to each
of the parties.”
18.The four preliminary objections raised by the Union of India
before the Arbitral Tribunal are as follows :-
16
(1)
The Claimants’ claims in regard to royalties
(paragraph 14.1 of the Statement of Defence) are
not arbitrable;
(2)
The Claimants’ claims in respect of cess (paragraph
14.2 of the Statement of Defence) are not arbitrable;
(3)
The Claimants’ claims in respect of service tax
(paragraph 14.3 of the State of Defence) are not
arbitrable; and
(4)
The Claimants’ claims in respect of the Comptroller
and Auditor General’s (“CAG”) audit (paragraph
20.10 of the Statement of Defence) are not
arbitrable.
19.The aforesaid preliminary objections are raised for, for inter
alia, the following reasons :-
“(a) the Claimants’ claim entail a challenge to the
validity
of
the
Oilfields
(Regulation
and
Development) Act, 1948 (“the ORD Act”) and of the
powers exercised under it;
(b) the claimants cannot contract out of such
legislation and any agreement to that effect would
be void and unenforceable by virtue of Section 23 of
the Indian Contract Act, 1872;
17
(c) the Claimants cannot avoid the effect of the
legislation by relying on the doctrine of estoppel;
(d) any dispute in respect of royalties should be
referred to arbitration under Rule 33 of Petroleum
and Natural Gas Rules 1959 (“the PNG Rules”);
(e) there will likely be a defence to enforcement of
any award in India under Article V(2)(b) of the New
York Convention as a matter of the public policy of
India;
(f) since any award has to be enforced in India, this
Tribunal ought not to enter into or adjudicate
questions/issues relating to royalties in view of Rule
33 of the PNG Rules and the decisions of the Indian
Supreme Court in Nataraj Studios vs. Navarang
Studios (1981) 1 SCC 523,Amrit Banaspati Co. Ltd.
vs. State of Punjab (1992) 2 SCC 411 and Mafatlal
Industries Ltd. vs. Union of India (1997) 5 SCC 536;
and
(g) were the Tribunal to do so in reliance on Tamil
Nadu Electricity Board v. ST-CMS Electric Co Pvt.
Ltd. (2007) 2 All ER (Comm) 701, it would be
contrary to the law as laid down by the English
Court of Appeal in Ralli Bros v. CIA Navleria (1920)
18
2 KB 287.”
20.The respondents also contended that the Arbitral Tribunal
cannot, or ought not, to go into or adjudicate the questions
raised by the appellants (claimants) with respect to royalties;
and leave the parties, if they choose, to seek the necessary
relief before the specific forums created under the Oilfields
(Regulation and Development) Act, 1948 and the Petroleum
and Natural Gas Rules, 1956.
21.The appellants (the claimants) on the other hand submitted
that the issue of arbitrability is governed by the law of the
seat of arbitration. The seat of the arbitration being England,
the issue of arbitrability is governed by the English Law. It
was also submitted that although challenge to the validity of
the terms of PSC is governed by Indian Law (Article 32.1 of
the PSC), nevertheless it falls within the jurisdiction of the
tribunal just as any other substantive dispute. The appellants
relied upon the judgment in Tamil Nadu Electricity Board
Vs. ST-CMS Electric Co. Pvt. Ltd.1 It was also submitted
1
(2007) 2 All ER (Comm) 701
19
that the reliefs claimed are founded, only, on contractual
rights. Further, whether or not any of those contractual rights
are vitiated by Section 23 of the Indian Contract Act, 1872 is
a question of substance and accordingly a dispute as to the
underlying merits of the claim. The case of the appellants
(claimants) assumes that respondent is entitled to rely on the
relevant legislation but the claims of the appellants are
purely contractual in nature.
22.Upon consideration of the entire matter, the arbitral tribunal
in the final award concluded as under :
Summary of Conclusions – Formal Final Partial
Award –
“6.1 The Tribunal, having carefully considered the
documentary evidence, the oral evidence and the
submissions of the Claimants and the respondent,
and rejecting all submissions to the contrary,
hereby makes, issues and publishes this Formal
Final Partial Award and for the reasons set out
above
FINDS,
AWARDS,
ORDERS
AND
DECLARES that the Claimants’ claims in respect
of royalties, cess, service tax and CAG audit are
arbitrabe.
6.2. In stating its conclusion on the four arbitrability
20
issues identified in Section A of the List of issues
for the May 2012 Hearing, the Tribunal wishes to
make it clear that it is expressing no opinion on the
merits of the parties’ respective submissions which
were made during the May 2012 Hearing. Subject
to further order in the meantime, the merits of
those issues will be decided in the March, 2013
Hearing.”
23.Union of India challenged the aforesaid award before the
High Court of Delhi in OMP No.46 of 2013. The respondents
invoked the jurisdiction of the High Court under Section 34 of
the Arbitration Act for various reasons namely, (i) the terms
of the PSCs entered would manifest an unmistakable
intention of the parties to be governed by the laws of India
and more particularly the Arbitration Act 1996; (ii) the
contracts were signed and executed in India; (iii) the subject
matter of the contracts, namely, the Panna Mukta and the
Tapti Fields are situated within India; (iv) the obligations
under the contracts have been for the past more than 15
years performed within India; (v) the contracts stipulate that
they “shall be governed and interpreted in accordance with
the laws of India”; (vi) they also provided that “nothing in this
21
contract” shall entitle either of the parties to exercise the
rights, privileges and powers conferred upon them by the
contract “in a manner which will contravene the laws of
India” (Article 32.2); and (vii) the contracts further stipulate
that “the companies and the operations under this Contract
shall be subject to all fiscal legislation of India” (Article 15.1).
24.The
appellant
raised
preliminary
objection
to
the
maintainability of the arbitration petition primarily on the
ground that by choosing English Law to govern their
agreement to arbitration and expressly agreeing to London
seated arbitration, the parties have excluded the application
of Part I of the Arbitration Act, 1996. It was submitted that
the High Court of Delhi had no jurisdiction to entertain the
objection filed by the Union of India under Section 34 of the
Arbitration Act, 1996. It was emphasized that Courts of
England and Wales have exclusive jurisdiction to entertain
any challenge to the award. It was pointed out that the PSCs
were amended on two occasions. On 24th February, 2004,
PSC was sought to be amended to change the seat of
arbitration from London to Paris. However, on 14th
22
September, 2011, the parties to the arbitration agreed that
the seat of the present arbitration proceedings would be
London, England. This agreement is recorded in the Final
Partial
Consent Award rendered by the arbitral tribunal
on 29th July, 2011. As noticed earlier, the final partial consent
award provided that the juridical seat or legal place of
arbitration for the purpose of arbitration initiated under the
claimants notice of arbitration
dated 16 th
December, 2011 shall be London, England. Article 33.9 of
the PSC provides that the arbitration shall be conducted in
accordance with the UNCITRAL Rules, 1985. However,
subsequently it was recorded in the award that the
applicable rules shall be the UNCITRAL Arbitration Rules,
1976. It was also submitted on behalf of the appellants that
the objections raised by the UOI are yet to be determined by
the tribunal on merits and shall be considered after
considering the evidence at the time of rendering the final
award.
25.Upon consideration of the entire matter, the High Court has
held that undoubtedly the governing law of the contract i.e.
23
proper law of the contract is the law of India. Therefore, the
parties never intended to all together exclude the laws of
India, so far as contractual rights are concerned. The Laws
of England are limited in their applicability in relation to
arbitration agreement contained in Article 33. This would
mean that the English Law would be applicable only with
regard to the curial law matters i.e. conduct of the arbitral
proceedings. For all other matters, proper law of the contract
would be applicable. Relying on Article 15(1), it has been
held that the fiscal laws of India cannot be derogated from.
Therefore, the exclusion of Indian public policy was not
envisaged by the parties at the time when they entered into
the contract. The High Court further held that to hold that the
agreement contained in Article 33 would envisage the
matters other than procedure of arbitration proceedings
would be to re-write the contract. The High Court also held
that the question of arbitrability of the claim or dispute cannot
be examined solely on the touchstone of the applicability of
the law relating to arbitration of any country but applying the
public policy under the laws of the country to which the
parties have subjected the contract to be governed.
24
Therefore, according to the High Court, the question of
arbitrability of the dispute is not a pure question of applicable
law of arbitration or lex arbitri but a larger one governing the
public policy. The High Court then concluded that public
policy of India cannot be adjudged under the laws of
England. Article 32.1 specifically provides that laws of India
will govern the obligations of the parties in the PSCs. The
High Court also concluded that the effect of the interplay of
Article 32.1 and Article 32.2 and 33.12 leads to the
conclusion that law of England shall operate in relation to
matters contained in Article 33 in so far as they are not
inconsistent with the law of India. Since the question of
arbitrability of the claim is a larger question effecting public
policy of State it should be determined by applying laws of
India. This would give a meaningful effect to Article 32.2,
otherwise it would be rendered otiose. On the basis of the
aforesaid plain reading, according to the High Court, the
conclusion is that the intention of the parties under the
agreement was always to remain subject to Indian laws and
not to contravene them. It is further held that Article 33 was
confined to conducting the arbitration in accordance with the
25
laws of England and not for all other purposes. Relying on
the judgment of this Court in Bhatia International Vs. Bulk
Trading S.A. & Anr.2, it has been held that Part I of the
Arbitration Act, 1996 would be applicable as there is no clear
express or implied intention of the parties to exclude the
applicability of the Arbitration Act, 1996. The High Court also
relies on the judgment of this Court in Venture Global
Engineering Vs. Satyam Computer Services Ltd.3, in
support of the conclusion that the Delhi High Court has
jurisdiction to entertain and adjudicate the petition under
Section 34 of the Arbitration Act, 1996. Since, according to
High Court, the dispute raised by the appellant relate to
public policy of India, the petition under Section 34 of the
Arbitration Act is maintainable. The High Court also gives
additional reasons for concluding that the petition to
challenge final partial award is maintainable. According to
the High Court, the disputes involved rights in rem.
Therefore, due regard has to be given to Indian laws. An
award which is said to be against public policy can be
permitted to be challenged in India even though the seat of
2
3
(2002) 4 SCC 105
(2008) 4 SCC 190
26
arbitration is outside India. The High Court also took support
from the doctrine of public trust with regard to natural
resources. Since the appellants are seeking refund of
amount of cess, royalties, service tax, all matters of public
money in India, the jurisdiction of the Indian courts cannot be
excluded. The High Court concludes that there is no reason
why the public money be allowed to invested for seeking
adjudication of the claims which may be eventually found to
be impermissible to be enforced. Finally, the High Court
declined to consider the law laid down by the Constitution
Bench of this Court in Bharat Aluminium on the basis that
the operation of the judgment has been made prospective by
the court. The final conclusion has been given in paragraph
59 which is as under :
“59. No submission on the part of the respondents
remains unaddressed. I have already observed that
upon testing the instant case on the principles of
law laid down in the case of Bhatia International
(supra) as well as Venture Global (supra), no infer-
ence as to express or implied exclusion of the Part I
of the Arbitration and Conciliation Act, 1996 can be
drawn. Resultantly, the objection raised by the re-
spondents relating to lack of jurisdiction of Indian
court on the count of express choice of laws provi-
sions cannot be sustained as Indian laws including
provisions of Part I of the Act are not expressly nor
impliedly excluded. The said objection is therefore
27
rejected.”
26.It is this judgment of the High Court which is subject matter
of this appeal.
27.We have heard the learned counsel for the parties.
28.Learned senior counsel for both the parties have made very
elaborate oral submissions. These submissions have been
summed up and supplemented by the written submissions.
Dr. Singhvi appearing for the appellants submitted that once
the English Law is selected as the proper law of arbitration,
the applicability of Arbitration Act, 1996 would be ruled out.
He submits that the High Court has wrongly intermingled the
issues relating to the challenge to the arbitral proceedings or
the arbitration award with the merits of the disputes relating
to the underlying contract. According to him, even if the law
laid down in Bhatia International (supra) is applicable, the
arbitral tribunal would apply the provisions contained in the
Indian Contract Act.
But the English Courts will have
jurisdiction over the control and supervision of the arbitration
28
including, challenge to the arbitral award. In support of his
submission, Dr. Singhvi relies on Videocon Industries
Limited Vs. Union of India & Anr.4 He has also relied on
Yograj
Infrastructure
Limited
Vs.
Ssang
Yong
Engineering and Construction Company Limited5, M/s
Dozco India P. Ltd. Vs. M/s Doosan Infracore Co. Ltd.6,
Bharat Aluminium Company Vs. Kaiser Aluminium
Technical Services Inc.7
29.Dr. Singhvi submitted that the reliance placed by the High
Court
on
Venture
Global
Engineering
(supra)
is
misplaced. In that case, the Court was not concerned with a
clause such as Article 32.1 of the PSC, which has to be
interpreted subject to the provisions contained in Article
33.12. According to Dr. Singhvi, the ratio of Venture Global
Engineering (supra) has lost its efficacy as it has been
overruled by the Constitution Bench in Bharat Aluminium
Company (supra).
Dr. Singhvi then submitted that the
concern shown by the High Court for Indian public policy
4
(2011) 6 SCC 161
(2011) 9 SCC 735
6
(2009) 3 ALR 162
7
(2012) 9 SCC 552
5
29
was wholly misplaced and erroneous. The High Court has
failed to appreciate that Article 32.1 and 32.2 deal only with
the proper law of the contract and not with the proper law of
the arbitration agreement. The High Court has erroneously
distinguished the ratio of law laid down in Videocon
Industries Limited (supra) on the ground that although the
arbitration clause therein was the same but the question of
public policy had not been addressed by the Court. Relying
on State of Gujarat & Anr. Vs. Justice R.A. Mehta
(Retired) & Ors.8, Dr. Singhvi submitted that even if the
issue of public policy was not particularly raised or
addressed, the judgment in Videocon Industries Limited
(supra) still be a binding precedent. According to him, whilst
concluding that the parties did not intend to exclude the
applicability of the Arbitration Act, 1996 to the arbitration
agreement, the High Court has erroneously held that it was
necessary for the parties to exclude not only the provisions
of the Arbitration Act but also specifically plead that public
policy is also excluded.
counsel,
8
(2013) 3 SCC 1
Article
15.6.1
According to the learned senior
has
no
relevance
for
the
30
determination of the question as to whether the Arbitration
Act, 1996 will apply to the arbitration, which is being held in
London.
30.Mr. A.K. Ganguly, learned senior counsel appearing for
Union of India submits that the decision in this case has
been correctly rendered by the High Court based on the law
laid down by this Court in Bhatia International and Venture
Global Engineering (supra) as the arbitration agreement is
pre BALCO. He submits that in order to determine whether
Arbitration Act, 1996 is excluded, the contract had to be
seen as a whole. Here, the contract is in India, for the work
to be done in India over 25 years; secondly, it deals with
natural resources, Union of India is a trustee of these
resources for the citizens of India. London was designated
as the seat of arbitration only to provide certain measure of
comfort level to the foreign parties. The contract can not be
read in such a way as to exclude the Arbitration Act, 1996.
The High Court has correctly concluded that arbitrability had
to be decided by taking into consideration Indian Laws,
which would include the Indian Arbitration Act and not under
31
the English Arbitration Act, 1996. He emphasized that the
present proceedings relate to the interpretation of the
contract, which is of national importance to develop the oil
rich areas in the Indian Coasts. He points out that under the
PSC, the contractor has agreed to be always mindful of the
rights and interests of India in the conduct of petroleum
operations [Article 7.3(a)]. Mr. Ganguly also relied on Article
32.1 and 32.2 and submitted that Contract is to be governed
and interpreted in accordance with laws of India. He points
out that there is a negative covenant in Article 32.2, wherein
Government or the contractor are not entitled to exercise the
rights, privileges, and powers conferred under the PSC in a
manner which will contravene laws of India. Mr. Ganguly
further pointed out that the High Court has correctly applied
the law laid down by this court in Bhatia International and
Venture Global Engineering (supra). He also objected to
the additional documents, which are sought to be relied upon
by the petitioners in I.A. No. 7 of 2014. He submitted that
none of these documents were on the record before the High
Court and can not be permitted to be relied on for the first
time in this Court. He, therefore, submitted that I.A. No. 2
32
ought to be dismissed. He submitted that similar request
was made before the High Court, which was rejected.
31.Mr. Ganguly emphasized that the issues raised by the Union
of India are of public law and not purely contractual as
sought to be projected by the appellants. He points out that
the appellants have sought a number of reliefs with respect
to CAG Audit. It is a challenge to the conclusions recorded
by the CAG Audit and such a challenge would not be
arbitrable.
It is further submitted by him that the issues
raised with regard to royalty is also not arbitrable as it is not
a commercial issue. He has distinguished the judgment of
this Court in Videocon Industries Limited (supra) on the
basis that the issue with regard to the public law was not
considered by the Court in that judgment.
32.As noticed earlier, both the learned senior counsel have also
submitted written submissions. Primarily, the submissions
made in the Court have been reiterated and, therefore,
reference will be made to the same as and when necessary.
33
33.We have considered the submissions made by the learned
counsel for the parties.
34.Before we analyze the submissions made by the learned
senior counsel for both the parties, it would be appropriate to
notice the various factual and legal points on which the
parties are agreed. The controversy herein would have to be
decided on the basis of the law declared by this Court in
Bhatia International (supra). The parties are agreed and it
is also evident from the Final Partial Consent Award dated
14th September, 2011 that the juridical seat (or legal place) of
arbitration for the purposes of the arbitration initiated under
the Claimants’ Notice of Arbitration dated 16th December,
2010 shall be London, England. The parties are also agreed
that hearings of the Notice of Arbitration may take place at
Paris, France, Singapore or any other location the Tribunal
considers may be convenient. It is also agreed by the parties
that the terms and conditions of the arbitration agreement in
Article 33 of the PSCs shall remain in full force and effect
and be applicable to the arbitration proceedings.
34
35.The essential dispute between the parties is as to whether
Part I of the Arbitration Act, 1996 would be applicable to the
arbitration agreement irrespective of the fact that the seat of
arbitration is outside India. To find a conclusive answer to
the issue as to whether applicability of Part I of the
Arbitration Act, 1996 has been excluded, it would be
necessary to discover the intention of the parties. Beyond
this parties are not agreed on any issue.
36.We are also of the opinion that since the ratio of law laid
down in Balco (supra) has been made prospective in
operation by the Constitution Bench itself, we are bound by
the decision rendered in Bhatia International (supra).
Therefore, at the outset, it would be appropriate to reproduce
the relevant ratio of Bhatia International in paragraph 32
which is as under :-
“32. To conclude, we hold that the provisions of
Part I would apply to all arbitrations and to all pro-
ceedings relating thereto. Where such arbitration is
held in India the provisions of Part I would com-
pulsorily apply and parties are free to deviate only to
the extent permitted by the derogable provisions of
Part I. In cases of international commercial arbitra-
tions held out of India provisions of Part I would ap-
ply unless the parties by agreement, express or im-
35
plied, exclude all or any of its provisions. In that
case the laws or rules chosen by the parties would
prevail. Any provision, in Part I, which is contrary to
or excluded by that law or rules will not apply.”
37.In view of the aforesaid, it would be necessary to analyze
the relevant Articles of the PSC, to discover the real intention
of the parties as to whether the provisions of Arbitration Act,
1996 have been excluded. It must, immediately, be noticed
that Articles 32.1 and 32.2 deal with applicable law and
language of the contract as is evident from the heading of
the Article which is “Applicable Law and Language of the
Contract”. Article 32.1 provides the proper law of the contract
i.e. laws of India. Article 32.2 makes a declaration that none
of the provisions contained in the contract would entitle
either the Government or the Contractor to exercise the
rights, privileges and powers conferred upon it by the
contract in a manner which would contravene the laws of
India.
38.Article 33 makes very detailed provision with regard to the
resolution of disputes through arbitration. The two Articles do
not overlap - one (Art.32) deals with the proper law of the
36
contract, the other (Art.33) deals with ADR, i.e. consultations
between the parties; conciliation; reference to a sole expert
and ultimately arbitration. Under Article 33, at first efforts
should be made by the parties to settle the disputes among
themselves (33.1). If these efforts fail, the parties by
agreement shall refer the dispute to a sole expert (33.2). The
provision with regard to constitution of the arbitral tribunal
provides that the arbitral tribunal shall consist of three
arbitrators (33.4). This article also provides that each party
shall appoint one arbitrator. The arbitrators appointed by the
parties shall appoint the third arbitrator. In case, the
procedure under Article 33.4 fails, the aggrieved party can
approach the Permanent Court of Arbitration at Hague for
appointment of an arbitrator (33.5). Further, in case the two
arbitrators fail to make an appointment of the third arbitrator
within 30 days of the appointment of the second arbitrator,
again the Secretary General of the Permanent Court of
Arbitration at Hague may, at the request of either party
appoint the third arbitrator. In the face of this, it is difficult to
appreciate the submission of the respondent – Union of India
that the Arbitration Act, 1996 (Part I) would be applicable to
37
the arbitration proceedings. In the event, Union of India
intended to ensure that the Arbitration Act, 1996 shall apply
to the arbitration proceedings, Article 33.5 should have
provided that in default of a party appointing its arbitrator,
such arbitrator may, at the request of the first party be
appointed by the Chief Justice of India or any person or
Institution designated by him. Thus, the Permanent Court of
Arbitration at Hague can be approached for the appointment
of the arbitrator, in case of default by any of the parties. This,
in our opinion, is a strong indication that applicability of
Arbitration Act, 1996 was excluded by the parties by
consensus. Further, the arbitration proceedings are to be
conducted in accordance with the UNCITRAL Rules, 1976
(33.9). It is specifically provided that the right to arbitrate
disputes and claims under this contract shall survive the
termination of this contract (33.10).
39.The Article which provides the basis of the controversy
herein is Article 33.12 which provides that venue of the
arbitration shall be London and that the arbitration
agreement shall be governed by the laws of England.
It
appears, as observed earlier, that by a Final Partial Consent
38
Award, the parties have agreed that the juridical seat (or
legal place of arbitration) for the purposes of arbitration
initiated under the claimants’ notice of arbitration dated 16th
December, 2010 shall be London, England.
40.We are of the opinion, upon a meaningful reading of the
aforesaid Articles of the PSC, that the proper law of the
contract is Indian Law; proper law of the arbitration
agreement is the law of England. Therefore, can it be said as
canvassed
by
the
respondents,
that
applicability
of
Arbitration Act, 1996 has not been excluded?
41.It was submitted by Mr. Ganguly that the intention of the
parties was never to exclude the applicability of Arbitration
Act, 1996. It is submitted that the expression “laws of India”
under Article 32.2 would also include the Arbitration Act,
1996. This submission is without any merit. In our opinion,
the expression “laws of India” as used in Article 32.1 and
32.2 have a reference only to the contractual obligations to
be performed by the parties under the substantive contract
i.e. PSC. In other words, the provisions contained in 33.12
39
are not governed by the provisions contained in Article 32.1.
It must be emphasized that Article 32.1 has been made
subject to the provision of Article 33.12. Article 33.12
specifically provides that the arbitration agreement shall be
governed by the laws of England. The two Articles are
particular in laying down that the contractual obligations with
regard to the exploration of oil and gas under the PSC shall
be governed and interpreted in accordance with the laws of
India. In contra-distinction, Article 33.12 specifically provides
that the arbitration agreement contained in Article 33.12 shall
be governed by the laws of England. Therefore, in our
opinion, the conclusion is inescapable that applicability of
Arbitration Act, 1996 has been ruled out by a conscious
decision and agreement of the parties. Applying the ratio of
law as laid down in Bhatia International (supra) it would
lead to the conclusion that the Delhi High Court had no
jurisdiction to entertain the petition under Article 34 of the
Arbitration Act, 1996.
42.Article 33 provides for ADR – its limited application is to
dispute resolution through arbitration as opposed to civil
40
litigation.
Therefore, there is no violation of 32.2, as
Arbitration Act, 1996, in fact signifies Parliamentary sanction
of ADR. In fact, Article 32.3 indicates that obligations under
PSC and Arbitration Agreement are separate. Hence, it is
provided that English shall be the language of the Contract.
Followed by the stipulation that English shall also be the law
of arbitral proceedings.
Therefore, the conclusion of the
High Court that PSC is a composite contract is not in tune
with the approved provisions of the PSC. This separateness
is further emphasized by Article 32.1 by making the provision
“subject to the provision of Article 33.12”.
Laws of India
have been made applicable to the substantive contract. Law
of England govern the Dispute Resolution Mechanism.
Provision for Arbitration is a deliberate election of remedy
other than usual remedy of a civil suit. The ADR mechanism
under the Arbitral Laws of different nations is legally and
jurisprudentially accepted, sanctified by the Highest Law
Making Bodies of the member States, signatories to the New
York Convention. India is not only a signatory to the New
York Convention, but it has taken into account the
UNCITRAL Model Laws and the UNCITRAL Rules, whilst
41
enacting the Arbitration Act, 1996. Therefore, it would not be
possible to accept the submission of Mr. Ganguly that the
Law of the Contract is also the Law of the Arbitration
Agreement.
43.In our opinion, it is too late in the day to contend that the
seat of arbitration is not analogous to an exclusive
jurisdiction clause. This view of ours will find support from
numerous judgments of this Court. Once the parties had
consciously agreed that the juridical seat of the arbitration
would be London and that the arbitration agreement will be
governed by the laws of England, it was no longer open to
them to contend that the provisions of Part I of the Arbitration
Act would also be applicable to the arbitration agreement.
This Court in the case of Videocon Industries Ltd. (supra)
has clearly held as follows :-
“33. In the present case also, the parties had
agreed that notwithstanding Article 33.1, the
arbitration agreement contained in Article 34 shall
be governed by laws of England. This necessarily
implies that the parties had agreed to exclude the
provisions of Part I of the Act. As a corollary to the
above conclusion, we hold that the Delhi High Court
did not have the jurisdiction to entertain the petition
filed by the respondents under Section 9 of the Act
42
and the mere fact that the appellant had earlier filed
similar petitions was not sufficient to clothe that
High Court with the jurisdiction to entertain the
petition filed by the respondents.”
44.In coming to the aforesaid conclusion this Court interpreted
similar if not identical provisions contained in the arbitration
agreement. The provision with regard to proper law of the
contract and the arbitration agreement was as follows :
3. For the sake of convenience, the relevant clauses
of Articles 33, 34 and 35 of the PSC are extracted
below:
“33.1. Indian law to govern.—Subject to the provi-
sions of Article 34.12, this contract shall be gov-
erned and interpreted in accordance with the laws
of India.
33.2. Laws of India not to be contravened.—Subject
to Article 17.1 nothing in this contract shall entitle
the contractor to exercise the rights, privileges and
powers conferred upon it by this contract in a man-
ner which will contravene the laws of India.
*
*
*
34.3. Unresolved disputes.—Subject to the provi-
sions of this contract, the parties agree that any
matter, unresolved dispute, difference or claim
which cannot be agreed or settled amicably within
twenty-one (21) days may be submitted to a sole
expert (where Article 34.2 applies) or otherwise to
an Arbitral Tribunal for final decision as hereinafter
provided.
43
*
*
*
34.12. Venue and law of arbitration agreement.—
The venue of sole expert, conciliation or arbitration
proceedings pursuant to this article, unless the
parties otherwise agree, shall be Kuala Lumpur,
Malaysia, and shall be conducted in the English lan-
guage. Insofar as practicable, the parties shall con-
tinue to implement the terms of this contract not-
withstanding the initiation of arbitral proceedings
and any pending claim or dispute. Notwithstanding
the provisions of Article 33.1, the arbitration agree-
ment contained in this Article 34 shall be governed
by the laws of England.
*
*
*
35.2. Amendment.—This contract shall not be
amended, modified, varied or supplemented in any
respect except by an instrument in writing signed by
all the parties, which shall state the date upon which
the amendment or modification shall become
effective.”
45.We are of the opinion that in the impugned judgment the
High Court has erred in not applying the ratio of law laid
down in Videocon Industries Ltd. (supra) in the present
case. The first issue raised in Videocon Industries Limited
(supra) was as to whether the seat of arbitration was
London or Kuala Lumpur. The second issue was with regard
to the Courts that would have supervisory jurisdiction over
the arbitration proceedings. Firstly, the plea of Videocon
44
Industries Limited was that the seat could not have been
changed from Kuala Lumpur to London only on agreement
of
the parties without
there
being
a
corresponding
amendment in the PSC. This plea was accepted. It was
held that seat of arbitration cannot be changed by mere
agreement of parties. In Paragraph 21 of the judgment, it
was observed as follows:-
“21. Though, it may appear repetitive, we deem it
necessary to mention that as per the terms of
agreement, the seat of arbitration was Kuala Lum-
pur. If the parties wanted to amend Article 34.12,
they could have done so only by a written instru-
ment which was required to be signed by all of
them. Admittedly, neither was there any agreement
between the parties to the PSC to shift the juridical
seat of arbitration from Kuala Lumpur to London nor
was any written instrument signed by them for
amending Article 34.12. Therefore, the mere fact
that the parties to the particular arbitration had
agreed for shifting of the seat of arbitration to Lon-
don cannot be interpreted as anything except phys-
ical change of the venue of arbitration from Kuala
Lumpur to London.”
46.The other issue considered by this Court in Videocon
Industries Limited (supra) was as to whether a petition
under Section 9 of the Arbitration Act, 1996 would be
maintainable in Delhi High Court, the parties having
specifically agreed that the arbitration agreement would be
45
governed by the English Law.
This issue was decided
against Union of India and it was held that Delhi High Court
did not have the jurisdiction to entertain the petition filed by
Union of India under Section 9 of the Arbitration Act.
47.In the present appeal, this Court is also considering the
issue as to whether the petition under Section 34 of the
Arbitration Act, 1996 filed by Union of India in Delhi would be
maintainable.
The parties have made the necessary
amendment in the PSCs to provide that the juridical seat of
arbitration shall be London.
It is also provided that the
arbitration agreement will be governed by laws of England.
Therefore, the ratio in Videocon Industries Limited (supra)
would be relevant and binding in the present appeal.
48.The aforesaid judgment (Videocon) has been rendered by
this
Court
upon
consideration
of
Venture
Global
Engineering (supra). Venture Global Engineering and
Videocon Industries Ltd. are both judgments delivered by
two-Judge Bench.
In our opinion, the factual and legal
issues involved in the Videocon Industries case are very
46
similar to the controversy involved in the present appeal.
The Arbitration Agreement in this appeal is identical to the
arbitration agreement in Videocon Industries. In fact, the
factual situation in the present appeal is on a stronger
footing than in Videocon Industries Limited (supra). As
noticed
earlier,
in
Videocon
Industries,
this
Court
concluded that the parties could not have altered the seat of
arbitration without making the necessary amendment to the
PSC.
In the present appeal, necessary amendment has
been made in the PSC.
Based on the aforesaid
amendment, the Arbitral Tribunal has rendered the Final
Partial Consent Award of 14th September, 2011 recording
that the juridical seat (or legal place) of the arbitration for the
purposes of arbitration initiated under the Claimant’s Notice
of Arbitration
shall be London, England.
dated 16 th December, 2010
Furthermore, the judgment in
Videocon Industries is subsequent to Ventura Global. We
are, therefore, bound by the ratio laid down in Videocon
Industries Limited (supra).
49.We may also point out that the judgment in Videocon
47
Industries has been followed on numerous occasions by a
number of High Courts. This apart, the judgment of this
Court in Videocon Industries Ltd. also reflects the view
taken by the Courts in England on the same issues. In the
case of A Vs. B9 considering a similar situation, it has been
held as follows :
““.....an agreement as to the seat of an arbitration is
analogous to an exclusive jurisdiction clause. Any
claim for a remedy......as to the validity of an
existing interim or final award is agreed to be made
only in the courts of the place designated as the
seat of arbitration.”
(emphasis supplied).
50.This Court in Dozco India Ltd. (supra) again reiterated the
principle of law laid down in Sumitomo Heavy Industries
Ltd. (supra), wherein the law was very clearly enunciated in
Para 16:
“The law which would apply to the filing of the
award, to its enforcement and to its setting aside
would be the law governing the agreement to
arbitrate and the performance of that agreement.”
This judgment is rendered by a three-Judge Bench.
51.It is noteworthy that the judgment in Sumitomo was not
9
2007 (1) All E.R. (Comm) 591
48
dissented from in Bhatia International on which the
judgment in Venture Global is based. This again persuades
us to follow the law laid down in Videocon (supra).
52.Again this Court in Yograj Infrastructure (two-Judge
Bench) considered a similar arbitration agreement. It was
provided that the arbitration proceedings shall be conducted
in English in Singapore in accordance with the Singapore
International Arbitration Centre (SIAC) Rules. (Clause 27.1).
Clause 27.2 provided that the arbitration shall take place in
Singapore and be conducted in English language. This Court
held that having agreed that the seat of arbitration would be
Singapore and that the curial law of the arbitration
proceedings would be SIAC Rules, it was no longer open to
the appellant to contend that an application under Section
11(6) of the Arbitration Act, 1996 would be maintainable.
53.This judgment has specifically taken into consideration the
law laid down in Bhatia International (supra) and Venture
Global (supra). The same view has been taken by Delhi
High Court, Bombay High Court and the Gujarat High Court,
49
in fact this Court in Videocon has specifically approved the
observations made by the Gujarat High Court in Hardy Oil
(supra).
54.The effect of choice of seat of arbitration was considered by
the Court of Appeal in C Vs. D10. This judgment has been
specifically approved by this Court in Balco (supra) and
reiterated in Enercon (supra).
In C Vs. D (supra),
the Court of Appeal has observed:-
“Primary Conclusion
16. I shall deal with Mr Hirst's arguments in due
course but, in my judgment, they fail to grapple with
the central point at issue which is whether or not, by
choosing London as the seat of the arbitration, the
parties must be taken to have agreed that
proceedings on the award should be only those
permitted by English law. In my view they must be
taken to have so agreed for the reasons given by
the judge. The whole purpose of the balance
achieved by the Bermuda Form (English arbitration
but applying New York law to issues arising under
the policy) is that judicial remedies in respect of the
award should be those permitted by English law and
only those so permitted. Mr Hirst could not say (and
did not say) that English judicial remedies for lack of
jurisdiction on procedural irregularities under
sections 67 and 68 of the 1996 Act were not
permitted; he was reduced to saying that New York
judicial
remedies
were also permitted.
That,
however, would be a recipe for litigation and (what
is worse) confusion which cannot have been
10
[2008] 1 Lloyd’s Law Rep 239
50
intended by the parties. No doubt New York law has
its own judicial remedies for want of jurisdiction and
serious irregularity but it could scarcely be
supposed that a party aggrieved by one part of an
award could proceed in one jurisdiction and a party
aggrieved by another part of an award could
proceed in another jurisdiction. Similarly, in the case
of a single complaint about an award, it could not be
supposed that the aggrieved party could complain in
one jurisdiction and the satisfied party be entitled to
ask the other jurisdiction to declare its satisfaction
with the award. There would be a serious risk of
parties rushing to get the first judgment or of
conflicting decisions which the parties cannot have
contemplated.”
55.The aforesaid observations were subsequently followed by
the High Court of Justice Queen’s Bench Division,
Commercial Court (England) in SulameRica CIA Nacional
De Seguros SA Vs. Enesa Engenharia SA – Enesa11. In
laying down the same proposition, the High Court noticed
that the issue in this case depends upon the weight to be
given to the provision in Condition 12 of the insurance policy
that “the seat of the arbitration shall be London, England.” It
was observed that this necessarily carried with it the English
Court’s supervisory jurisdiction over the arbitration process.
It was observed that “this follows from the express terms of
the Arbitration Act, 1996 and, in particular, the provisions of
11
(2012) WL 14764
51
Section 2 which provide that Part I of the Arbitration Act,
1996 applies where the seat of the arbitration is in England
and Wales or Northern Ireland. This immediately establishes
a strong connection between the arbitration agreement itself
and the law of England. It is for this reason that recent
authorities have laid stress upon the locations of the seat of
the arbitration as an important factor in determining the
proper law of the arbitration agreement.”
56.In our opinion, these observations are fully applicable to the
facts and circumstances of this case. The conclusion
reached by the High Court would lead to the chaotic situation
where the parties would be left rushing between India and
England for redressal of their grievances. The provisions of
Part I of the Arbitration Act 1996 (Indian) are necessarily
excluded; being wholly inconsistent with the arbitration
agreement which provides “that arbitration agreement shall
be governed by English law.” Thus the remedy of the
respondent to challenge any award rendered in the
arbitration
proceedings
would
lie under
the
relevant
provisions contained in Arbitration Act, 1996 of England and
52
Wales. Whether or not such an application would now be
entertained by the courts in England is not for us to examine,
it would have to be examined by the Court of Competent
Jurisdiction in England.
Public Policy:
57.Mr. Ganguly has vehemently argued that the issues involved
here relate to violation of public policy of India. Therefore,
the applicability of Part I of the Indian Arbitration Act cannot
be excluded even if the seat of arbitration is London. It would
also, according to
Mr. Ganguly, make no difference
that the arbitration agreement specifically provides for the
arbitration agreement to be governed by the Laws of
England. According to Mr. Ganguly, proper law of the
contract would be relevant to determine the question as to
whether the interim final award would be amenable to
challenge under Section 34 of the Arbitration Act, 1996. In
our opinion, the aforesaid submission of the learned counsel
runs counter to the well settled law in India as well as in
other jurisdictions. As noticed earlier,
Mr. Ganguly has
submitted that the disputes in relation to royalties, cess,
53
service tax and the CAG audit report are not arbitrable. In
support of this submission, he relies on the provisions
contained in Article 15.1 read with Article 32.2. Relying upon
these two Articles,
Mr. Ganguly submitted that the
obligation with regard to taxes, royalties, rentals etc. are not
purely contractual, they are governed by the relevant
statutory provisions. He, therefore, placed strong reliance on
the judgment in Venture Global (supra) in support of his
submission that since the disputes are not arbitrable, the
award cannot be enforced under Part II of the Arbitration Act,
1996 but is amenable to challenge under Section 34 of the
Act. It would be appropriate to point out that the judgment in
Venture Global is in two parts. The first part is based on
Bhatia International Ltd., wherein it is held as follows :-
“32. .......In cases of international commercial arbit-
rations 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. In that
case the laws or rules chosen by the parties would
prevail. Any provision, in Part I, which is contrary to
or excluded by that law or rules will not apply.”
58.In this case, the parties have by agreement provided that the
juridical seat of arbitration will be in London. On the basis of
the aforesaid agreement, necessary amendment has been
54
made in the PSCs. On the basis of the agreement and the
consent of the parties, the Arbitral Tribunal has made the
“Final Partial Consent Award” on 14th September, 2011 fixing
the juridical seat (or legal place) of arbitration for the
purposes of arbitration initiated under the claimants notice of
arbitration dated 16th December, 2010 in London, England.
To make it even further clear that the award also records
that any hearing in the arbitration may take place in Paris,
France, Singapore or any other location the tribunal
considers convenient. Article 33.12 stipulates that arbitration
proceedings shall be conducted in English language. The
arbitration agreement contained in Article 33 shall be
governed by the laws of England. A combined effect of all
these factors would clearly show that the parties have by
express agreement excluded the applicability of Part I of the
Arbitration Act, 1996 (Indian) to the arbitration proceedings.
59.We are also unable to agree with Mr. Ganguly that Part I of
the Arbitration Act, 1996 (Indian) would be applicable in this
case, in view of the law laid down by this Court in Venture
Global Engineering (supra). In our opinion, even the
55
second part of the ratio in Venture Global Engineering
(supra) from paragraph 32 of the judgment onwards would
not be applicable to the facts and circumstances of this case.
Firstly, in our opinion, all the disputes raised by the
petitioners herein are contractual in nature. Secondly, the
performance of any of these obligations would not lead to
any infringement of any of the laws of India per se. Thirdly,
the non-obstante clause which was under consideration in
Venture Global is non-existent in the present case. In
Venture Global, the court was concerned with direct
violation of Foreign Exchange Management Act. The actions
of the respondents therein would also have been contrary to
various provisions of the Companies Act in the event the
shares were to be transferred in accordance with the award.
Therefore, this Court was persuaded to take the view that
inspite of the applicability of Part I having been excluded as
the seat of arbitration was outside nonetheless Part I would
apply as the transfer of the shares would be against the laws
of India and, therefore, violate public policy. In our opinion,
such circumstances do not exist in the present case as there
is no danger of violation of any statutory provisions. Prima
56
facie, it appears that there is no challenge to the Gazette
Notification. In fact, claim statement shows that the amounts
of royalties/cess levied have been paid.
Prayer is for
reimbursement of the amounts paid, based on Articles 15.6
and 15.7 of the PSC. There also seems to be a claim for
making necessary revisions and adjustment to the contract
to off-set the effect of any changes in the law. We fail to see
any apparent or so patently obvious violation of Indian Laws
in any of these claims. The basis for filing the petition under
Section 34 is that the Appellants are bound to obey the Laws
of the country. The appellants have nowhere claimed to be
exempted from the Laws of India.
They claim that the
Government of India, party to the Contract, i.e., PSC has
failed to seek and obtain exemption as stipulated in the
contract. Whether or not the claim has substance is surely
an arbitral matter. It is not the case of the appellants that
they are not bound by the Laws of India, relating to the
performance of the contractual obligations under the PSCs.
In view of what we have said earlier, it is not possible to
sustain the conclusion reached by the High Court.
The
arbitration agreement can not be jettisoned on the plea that
57
award, if made against the Government of India, would
violate Public Policy of India. Merely because the Arbitral
Tribunal has held that claims are arbitral does not mean that
the claims have been accepted and an award adverse to
India has been given. We, therefore, have no hesitation in
rejecting the submission made by Mr. Ganguly. For the
same reasons, we are unable to sustain the conclusions
reached by the High Court of Delhi.
60.Another good reason for not accepting or approving the
conclusions reached by the High Court is that it has failed to
distinguish between the law applicable to the proper law of
the contract and proper law of the arbitration agreement.
The High Court has also failed to notice that by now it is
settled, in almost all international jurisdictions, that the
agreement to arbitrate is a separate contract distinct from
the substantive contract which contains the arbitration
agreement. This principle of severability of the arbitration
agreement from the substantive contract is indeed statutorily
recognized by Section 16 of the Indian Arbitration Act, 1996.
Section 16(1) specifically provides as under:-
58
“16.Competence of arbitral tribunal to rule on its
jurisdiction.- (1) The arbitral tribunal may rule on
its own jurisdiction, including ruling on any objec-
tions with respect to the existence or validity of the
arbitration agreement, and for that purpose,--
(a) an arbitration clause which forms part of a con-
tract shall be treated as an agreement independent
of the other terms of the contract; and
(b) a decision by the arbitral tribunal that the con-
tract is null and void shall not entail ipso jure the in-
validity of the arbitration clause.”
61.A bare perusal of the aforesaid would show that the
arbitration agreement is independent of the other terms of
the contract. Further, even if the contract is declared null
and void, it would not lead to the foregone conclusion that
the arbitration clause in invalid. The aforesaid provision has
been considered by this Court in a number of cases, which
are as follows:-
Reva Electric Car Company P. Ltd. Vs. Green Mobil.12,
Today Homes and Infrastructure Pvt. Ltd. Vs. Ludhiana Im-
provement Trust and Anr.,13, Enercon (India) Ltd. & Ors. Vs.
Enercon GMBH & Anr.,14 World Sport Group (Mauritius) Ltd.
Vs. MSM Satellite (Singapore) PTC Ltd. [Civil Appeal No. 895
12
(2012) 2 SCC 93
2013 (7) SCALE 327
14
2014 (1) Arb. LR 257 (SC)
13
59
of 2014]
62.This principle of separability permits the parties to agree:
that law of one country would govern to the substantive
contract and laws of another country would apply to the
arbitration agreement. The parties can also agree that even
the conduct of the reference would be governed by the law
of another country. This would be rare, as it would lead to
extremely complex problems. It is expected that reasonable
businessman do not intend absurd results. In the present
case, the parties had by agreement provided that the
substantive contract (PSC) will be governed by the laws of
India. In contradistinction, it was provided that the arbitration
agreement will be governed by laws of England. Therefore,
there was no scope for any confusion of the law governing
the PSC with the law governing the arbitration agreement.
This principle of severability is also accepted specifically
under Article 33.10 of the PSC, which is as under:-
“The right to arbitrate disputes and claims under this
Contract shall survive the termination of this con-
tract.”
60
63.We are, therefore, unable to uphold the conclusions
recorded by the High Court that the applicability of the
English Law would be limited in its application only to the
conduct of the reference. For the same reasons, we are
unable to accept the submissions made by
Mr.
Ganguly on this issue.
64.In 1982, the Government provided a model Production
Sharing Contract to potential bidders, which provided a
governing law clause, which read as follows:-
“32.1 This contract shall be governed and inter-
preted in accordance with laws of India.”
This was specifically amended and incorpor-
ated in the present PSCs signed on 22nd December,
1994 and provided that the governing law clause
(32.1) would be “subject to the provision of Article
33.12”.
65.Considering the aforesaid two provisions, it leaves no
manner of doubt that Article 32.2 would have no impact on
the designated juridical seat as well as governing law of the
61
arbitration agreement. This would become evident from a
perusal of the Final Partial Consent Award dated 14th
September, 2011, signed by all the three members of the
arbitral tribunal recording that the juridical seat of the
arbitration initiated under the Claimant’s Notice dated 16th
December, 2010 shall be London, England. Therefore, we
are unable to accept the conclusion reached by the Delhi
High Court and the submission made by Mr. Ganguly that
Arbitration Act, 1996 (Part I) would be applicable to the
arbitration agreement.
66.Mr. Ganguly has next sought to persuade us that the seat of
arbitration shall be in India as the PSC is governed by the
law of India. According to Mr. Ganguly, laws of India would
include the Arbitration Act, 1996. Therefore, irrespective of
the provisions contained in Article 33.12, Arbitration Act,
1996 would be applicable to arbitration proceedings. The
English law would be applicable only in relation to the
conduct of the arbitration upto the passing of the Partial Final
Award. We are unable to accept the aforesaid submissions
of
Mr. Ganguly.
As noticed earlier, Article 32.1 itself
62
provides that it shall be subject to the provision of Article
33.12. Article 33.12 provides that the arbitration agreement
contained in this Article shall be governed by the laws of
England.
The term ‘laws of England’ cannot be given a
restricted meaning confined to only curial law. It is
permissible under law for the parties to provide for different
laws of the contract and the arbitration agreement and the
curial law. In Naviera Amazonica SA (supra), the Court of
Appeal
in
England
considered
an
agreement
which
contained a clause providing for the jurisdiction of the courts
in Lima, Peru in the event of judicial dispute and at the same
time contained a clause providing that the arbitration would
be governed by the English Law and the procedural law of
arbitration shall be the English Law. The Court of Appeal
observed as follows :-
“All contracts which provide for arbitration and
contain a foreign element may involve three
potentially relevant systems of law: (1) the law
governing the substantive contract; (2) the law
governing the agreement to arbitrate and the
performance of that agreement; (3) the law
governing the conduct of the arbitration. In the
majority of cases all three will be the same. But (1)
will often be different from (2) and (3). And
occasionally, but rarely (2) may also differ from (3).”
63
67.From the above, it is evident that it was open to the parties
to agree that the law governing the substantive contract
(PSC) would be different from the law governing the
arbitration agreement. This is precisely the situation in the
present case. Article 32.1 specifically provides that the
performance of the contractual obligations under the PSC
would be governed and interpreted under the laws of India.
So far as the alternative dispute redressal agreement i.e. the
arbitration agreement is concerned, it would be governed by
laws of England. There is no basis on which the respondents
can be heard to say that the applicability of laws of England
related only to the conduct of arbitration reference. The law
governing the conduct of the arbitration is interchangeably
referred to as the curial law or procedural law or the lex fori.
The delineation of the three operative laws as given in
Naviera Amazonica (supra) has been specifically followed
by this Court in the case of Sumitomo (supra). The court
also, upon a survey, of a number of decisions rendered by
the English Courts and after referring to the views expressed
by learned commentators on International Commercial
64
Arbitration concluded that:-
“16. The law which would apply to the filing of the
award, to its enforcement and to its setting aside
would be the law governing the agreement to arbit-
rate and the performance of that agreement.”
68.In coming to the aforesaid conclusion, this Court relied on a
passage from Law and Practice of Commercial Arbitration in
England, 2nd Edn. by Mustill and Boyd which is as under :
“An agreed reference to arbitration involves two
groups of obligations. The first concerns the mutual
obligations of the parties to submit future disputes,
or an existing dispute to arbitration, and to abide by
the award of a tribunal constituted in accordance
with the agreement. It is now firmly established that
the arbitration agreement which creates these oblig-
ations is a separate contract, distinct from the sub-
stantive agreement in which it is usually embedded,
capable of surviving the termination of the substant-
ive agreement and susceptible of premature termin-
ation by express or implied consent, or by repudi-
ation or frustration, in much the same manner as in
more ordinary forms of contract. Since this agree-
ment has a distinct life of its own, it may in principle
be governed by a proper law of its own, which need
not be the same as the law governing the substant-
ive contract.
The second group of obligations, consisting of what
is generally referred to as the ‘curial law’ of the ar-
bitration, concerns the manner in which the parties
and the arbitrator are required to conduct the refer-
ence of a particular dispute. According to the Eng-
lish theory of arbitration, these rules are to be ascer-
tained by reference to the express or implied terms
of the agreement to arbitrate. This being so, it will
65
be found in the great majority of cases that the curi-
al law, i.e., the law governing the conduct of the ref-
erence, is the same as the law governing the obliga-
tion to arbitrate. It is, however, open to the parties to
submit, expressly or by implication, the conduct of
the reference to a different law from the one govern-
ing the underlying arbitration agreement. In
such a case, the court looks first at the arbitration
agreement to see whether the dispute is one which
should be arbitrated, and which has validly been
made the subject of the reference, it then looks to
the curial law to see how that reference should be
conducted and then returns to the first law in order
to give effect to the resulting award.
*
*
*
It may therefore be seen that problems arising out
of an arbitration may, at least in theory, call for the
application of any one or more of the following laws
—
1. The proper law of the contract, i.e., the law
governing the contract which creates the sub-
stantive rights of the parties, in respect of
which the dispute has arisen.
2. The proper law of the arbitration agree-
ment, i.e., the law governing the obligation of
the parties to submit the disputes to arbitra-
tion, and to honour an award.
3. The curial law, i.e., the law governing the
conduct of the individual reference.
*
*
*
1. The proper law of the arbitration agreement gov-
erns the validity of the arbitration agreement, the
question whether a dispute lies within the scope of
66
the arbitration agreement; the validity of the notice
of arbitration; the constitution of the tribunal; the
question whether an award lies within the jurisdic-
tion of the arbitrator; the formal validity of the award;
the question whether the parties have been dis-
charged from any obligation to arbitrate future dis-
putes.
2. The curial law governs the manner in which the
reference is to be conducted; the procedural
powers and duties of the arbitrator; questions of
evidence; the determination of the proper law of the
contract.
3. The proper law of the reference governs the
question whether the parties have been discharged
from their obligation to continue with the reference
of the individual dispute.
*
*
*
In the absence of express agreement, there is a
strong prima facie presumption that the parties in-
tend the curial law to be the law of the ‘seat’ of the
arbitration, i.e., the place at which the arbitration is
to be conducted, on the ground that that is the
country most closely connected with the proceed-
ings. So in order to determine the curial law in the
absence of an express choice by the parties it is
first necessary to determine the seat of the arbitra-
tion, by construing the agreement to arbitrate.”
69.The same legal position is reiterated by this Court in Dozco
(supra). In paragraph 12 of the judgment, it is observed as
follows :
“12. In the backdrop of these conflicting claims, the
67
question boils down to as to what is the true inter-
pretation of Article 23. This Article 23 will have to be
read in the backdrop of Article 22 and more particu-
larly, Article 22.1. It is clear from the language of
Article 22.1 that the whole agreement would be gov-
erned by and construed in accordance with the laws
of The Republic of Korea. It is for this reason that
the respondent heavily relied on the law laid down
in Sumitomo Heavy Industries Ltd. v. ONGC Ltd.6
This judgment is a complete authority on the pro-
position that the arbitrability of the dispute is to be
determined in terms of the law governing arbitration
agreement and the arbitration proceedings have to
be conducted in accordance with the curial law. This
Court, in that judgment, relying on Mustill and Boyd:
The Law and Practice of Commercial Arbitration in
England, 2nd Edn., observed in para 15 that where
the law governing the conduct of the reference is
different from the law governing the underlying arbit-
ration agreement, the court looks to the arbitration
agreement to see if the dispute is arbitrable, then to
the curial law to see how the reference should be
conducted, “and then returns to the first law in order
to give effect to the resulting award”. In para 16, this
Court, in no uncertain terms, declared that the law
which would apply to the filing of the award, to its
enforcement and to its setting aside would be the
law governing the agreement to arbitrate and the
performance of that agreement.
70.We are in respectful agreement with the aforesaid judgment.
71.In view of the aforesaid binding precedent, we are unable to
accept the submission of Mr. Ganguly that the Arbitration
Act, 1996 has not been excluded by the parties by
68
agreement.
For the same reasons, we are unable to
approve the conclusions reached by the Delhi High Court
that reference to laws of England is only confined to the
procedural aspects of the conduct of the arbitration
reference.
72.We are also unable to agree with the submission of Mr.
Ganguly that since the issues involved herein relate to the
public policy of India, Part I of the Arbitration Act, 1996 would
be applicable. Applicability of Part I of Arbitration Act, 1996 is
not dependent on the nature of challenge to the award.
Whether or not the award is challenged on the ground of
public policy, it would have to satisfy the pre-condition that
the Arbitration Act, 1996 is applicable to the arbitration
agreement. In our opinion, the High Court has committed a
jurisdictional error in holding that the provisions contained in
Article 33.12 is relevant only for the determination of the
curial law applicable too the proceedings. We have already
noticed earlier that the parties by agreement have provided
that the juridical seat of the arbitration shall be in London.
Necessary amendment has also been made in the PSCs, as
69
recorded by the Final Partial Consent Award dated 14th
September, 2011. It is noteworthy that the Arbitration Act,
1996 does not define or mention juridical seat. The term
‘juridical seat’ on the other hand is specifically defined in
Section 3 of the English Arbitration Act. Therefore, this would
clearly indicate that the parties understood that the
arbitration law of England would be applicable to the
arbitration agreement.
73.In view of the aforesaid, we are unable to uphold the
conclusion arrived at by the Delhi High Court that the
applicability of Arbitration Act, 1996 to the arbitration
agreement in the present case has not been excluded.
74.In view of the above, we hold that:
(i)
The petition filed by respondents under Section
34 of the Arbitration Act, 1996 in the Delhi High
Court is not maintainable.
(ii)
We further over-rule and set aside the conclusion
70
of the High Court that, even though the arbitra-
tion agreement would be governed by the laws of
England and that juridical seat of arbitration
would be in London, Part I of the Arbitration Act
would still be applicable as the laws governing
the substantive contract are Indian Laws.
(iii)
In the event, a final award is made against the
respondent, the enforceability of the same in In-
dia, can be resisted on the ground of Public
Policy.
(iv)
The conclusion of the High Court that in the
event, the award is sought to be enforced outside
India, it would leave the Indian party remediless
is without any basis as the parties have consen-
sually provided that the arbitration agreement will
be governed by the English law. Therefore, the
remedy against the award will have to be sought
in England, where the juridical seat is located.
However, we accept the submission of the appel-
71
lant that since substantive law governing the con-
tract is Indian Law, even the Courts in England,
in case the arbitrability is challenged, will have to
decide the issue by applying Indian Law viz. the
principle of public policy etc. as it prevails in Indi-
an Law.
75.In view of the above, the appeal is allowed and the
impugned judgment of the High Court is set aside.
.....................................J.
[Surinder Singh Nijjar]
......................................J.
[A.K.Sikri]
New Delhi;
May 28, 2014.

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