Scope of Section 34 of the Arbitration and Conciliation Act, 1996

SAKUMA EXPORTS LIMITED V. LOUIS DREYFUS COMMODITIES SUISSE S.A.

INTRODUCTION

A bench comprising of Justice Shiva Kirti Singh and Justice Anil r. Dave of the Supreme Court of India (“SC”) while exercising Civil Appellate Jurisdiction and deciding the application and scope of Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”) have upheld the judgment of the Hon’ble Bombay High Court and have held as under:  

“Where the parties have expressly chosen the proper law governing the contract, the chosen law must, in the absence of an unmistakable intention to the contrary, govern the arbitration agreement”. 

FACTS OF THE CASE

Appellant is an Indian Company, carrying on the business of import and export of sugar among other commodities – Respondent is a Swiss Company – The Appellant and the Respondent entered into an agreement dated January 12, 2010 for the purchase of 2700 metric tons of Brazilian white sugar of a stipulated description – Consignment was to be shipped between January 15, 2010 and February 15, 2010 at the option of the Respondent – The port of destination was to be Nhava Sheva or Kolkata at the option of the Appellant – Disputes arose between the parties which were submitted to Arbitration.

RELEVANT PROVISIONS OF THE CONTRACT

Terms and conditions: This Contract is subject to the Rules of the Refined Sugar Association, London as fully as if the same had been expressly inserted herein, whether or not either or both parties to it are Members of the Association.

The arbitration agreement: All disputes arising out of or in conjunction with this Contract shall be referred to the Refined Sugar Association, London for settlement in accordance with the Rules relating to Arbitration. This Contract shall be governed by and construed in accordance with English Law.

Paragraph 20 of Bombay High Court judgment reads as follows: In the present case, the parties have specifically made their contract subject to the rules of the Refined Sugar Association, London. Leaving no ambiguity of interpretation the contract mandates that the rules of the Refined Sugar Association, London are incorporated “as fully as if the same has been expressly inserted” in the contract. The governing law of the contract is English law. All disputes arising out or in conjunction with the contract were to be referred to the Refined Sugar Association for settlement in accordance with the rules relating to arbitration of the Association. The law in the U.K. is, therefore, the substantive law of the contract.  The seat of the arbitration is in the U.K. Parties have made it clear that the rules of the Refined Sugar Association would govern the resolution of their disputes.  Rule 8 of the Rules of the Refined Sugar Association (on which there is no dispute between the parties during the course of the hearing of the appeal) provides as follows:

Rule 8: For the purpose of all proceedings in arbitration, the contract shall be deemed to have been made in England, any correspondence in reference to the offer, the acceptance, the place of payment or otherwise, not-withstanding, and England shall be regarded as the place of performance. Disputes shall be settled according to the law of England wherever the domicile, residence or place of business of the parties to the contract may be or become. The seat of the Arbitration shall be England and all proceedings shall take place in England. It shall not be necessary for the award to state expressly the seat of the arbitration.

The terms of the contract as well as Rule 8 of the Rules of the Refined Sugar Association would make it clear that disputes shall be settled in accordance with the law of England wherever the domicile, residence or place of business of parties to the contract may be or become. Moreover, for the purposes of all proceedings in arbitration, the contract shall be deemed to have been made in England and England shall be regarded as the place of performance. The seat of the arbitration shall be England and all proceedings shall take place in England. On the basis of these provisions, it has been submitted that parties have, by the terms of their agreement, impliedly excluded the provisions of Part-I.  We find merit in the submission. It is clear from the terms and conditions which have been accepted by the parties in the purchase contract, read with Rule 8 that parties have accepted English law as the governing law of the contract; that the seat of the arbitration would be London; that disputes shall be settled according to the law of England which would include the resolution of disputes and that all proceedings shall take place in England. Alternatively, even if it were to be held that parties have not provided for the curial law governing the arbitration, the decision in Bhatia International does  not  prohibit the exclusion of the application of Part-I on account of  the proper law of the contract  being  a  foreign  law. Where the proper law governing the contract is expressly chosen by the parties, which they have done in the present case by selecting English law as the proper law of the contract, that law must, in the absence of an unmistakable intention to the contrary, govern the arbitration agreement. The arbitration agreement, though it is collateral or ancillary to the main contract is nevertheless a part of the contract. In an application for challenging the validity of an arbitral award under Section 34, the Court would necessarily have to revert to the law governing the arbitration agreement which, in our considered  view, would be the law of England.”

CONTENTIONS

The petitioners sought to challenge, the final award as passed by the arbitral tribunal on December 31, 2010, under Section 34 of the Act.

The respondents questioned the maintainability of the said petition by arguing that the courts in India have no jurisdiction to entertain the petition. The respondent most specifically raised the ground that the applicability of Part - I of the Act was excluded by the agreement between the parties and even under the law as it then prevailed in Bhatia International – a petition under Section 34 of the Act was not maintainable in the given circumstances.  

DECISION

The terms of the contract make it subject to the Rules of Refined Sugar Association, London by expressly inserting them in the contract. Rule 8 of the Refined Sugar Association, London, leaves no doubt that the parties have accepted English law as the governing law for the contract and have also submitted all disputes and arbitration to the law of England. Admittedly the seat of Arbitration is England. Thus, the courts in India have no jurisdiction to entertain the petition under Section 34 of the Act.

SC ON APPLICATION OF PART – I OF THE ACT TO INTERNATIONAL ARBITRATION 

A Constitution Bench of the Hon’ble SC in the case of Bharat Aluminum Company etc. vs. Kaiser Aluminum Technical Services Inc. etc. overruled the earlier judgment in Bhatia International and concluded that Part I of the Act would have no application to International Commercial Arbitration held outside India. The SC also directed that the law so declared shall apply only prospectively i.e. to all arbitration agreements executed thereafter.

Accordingly the arbitration agreement in the present case was to be governed in accordance with the law as decided in the case of Bhatia International. Thus the provisions of Part I of the Act were to apply to the International Commercial Arbitration held outside India unless the parties by an agreement, express or implied, exclude all or any of its provisions.