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Report No. 176

2.1.3 Need for defining the scope of 'domestic arbitration', 'international arbitration' and 'international commercial arbitration'

The words 'International Commercial Arbitration' are used in the Explanation to section 1(2), and in sections 11(9), 11(12)(a) and section 28(1)(a) and (b) of the 1996 Act. Section 2(1)(f) which defines the term "International Commercial Arbitration" requires that at least one of the parties is a national of, or habitual resident in, any country other than India or a body corporate incorporated in any country other than India, or a company or an association or a body of individuals whose central management and control is exercised in any country other than India or the government of a foreign country.

The Act has made a deviation from the Model Law. The model law lays emphasis on one of three factors namely the parties or place of arbitration or the subject matter. The 1996 Act lays stress on the parties' residence and nationality. But, the Commission is of the view that there is no need to amend this part of the definition in section 2(1)(f).

The word 'commercial' occurs in sec.2(1)(f) of Part I and sec.44 of Part II of the Act (dealing with New York Convention). Sec.44 uses the expression 'foreign awards' to a limited class of awards falling within sec.44 and one of the conditions is that the award must have been made in one of the reciprocator States notified by the Central Government under the Foreign Awards Recognition and Enforcement Act, 1961. India is a signatory to this Convention subject to two reservations.

It is not in dispute that there are "international arbitration awards" which do not fall under Part II, may be because the dispute is not 'commercial' or the agreement is not in writing or the award is made in a non-reciprocating state. The Act in Part I covers awards where all parties are of Indian nationality and award is made in India and also to international commercial awards, i.e., where at least one party is not an Indian national, where the seat of arbitration is in India. Both these types of awards are called 'domestic awards' under sec.2(7). This is the broad nomenclature used in the Act.

It has been suggested that the word 'commercial' can be dropped so that the Act can apply to all international arbitrations, whether commercial or not, where the seat of arbitration is in India. There is force in this suggestion. Firstly, as disclosed from the case law dealing with New York Convention, on several occasions, an issue arises as to whether the arbitration is 'commercial' in nature. This leads to unnecessary litigation. Secondly, there is no reason to omit from sec.2(1)(f) in Part I an arbitration which is international in nature but which is not 'commercial'.

There was no dissent from this view during the discussion on the Consultation Paper. The Indian Chamber of Commerce of Bombay, in fact, made a specific suggestion through a report prepared by a group of retired Judges of the High Court and others, for omission of the word 'commercial'. In fact, even in regard to the New York Convention some countries have withdrawn the 'commercial' reservation. By letter dated 17.11.1989 to the Secretary General, UN, the French Government which ratified the New York Convention in 1959, withdrew the reservation so as to give the widest scope to the Convention.

Out of 121 countries which adopted the New York Convention, only one-third have made the 'commercial' reservation by 1999. There is one other reason as to why the word 'commercial' has to be dropped. The 1985 UNCITRAL Model Law itself watered down the distinction by including in its definition a wide range of matters as is clear from the footnote below the definition in Art.1(1).

It says that the term 'commercial' must be given a wide meaning to cover matters arising from all relationships of a commercial nature and would also include any trade transaction for the supply or exchange of goods or services; distribution agreements; commercial representation of agency; factories; leasing; construction work; consulting engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture or other forms of industrial or business cooperation; carriage of goods or passengers by air, sea, rail and road.

The 'footnote' below Article 1(1) of the Model Law states that the above enumeration is not to be understood as being exhaustive. Unfortunately in sec.2(1)(f) of the 1996 Act, this wider definition of the UNCITRAL Model had not been referred to, even by way of a foot note or by way of an Explanation. It is, therefore, proposed to apply Part I of the Act to international arbitrations whether commercial or not, where the place of arbitration is in India. The result is that sec.2(7) shall now include international non-commercial awards also, where the seat of arbitration is in India.

In order to remove any confusion in understanding as to what is a domestic arbitration, it is proposed to define 'domestic arbitration' as an arbitration in India where none of the parties are nationals of a country other than India. The definition include shall "international arbitration" in India, whether commercial or not, where at least one of the parties is a national of a country other than India and where the place of arbitration is in India.

The definitions of the terms "domestic arbitration" and "international arbitration" are proposed to be added in section 2 of the Act and the existing definition of the term "international commercial arbitration" mentioned under section 2(1)(f) is also proposed to be substituted in next paragraph. These definitions will help in understanding section 2(2) and 2(7) better. Article 1(3) of the Model Law which defines international arbitration does not refer to a company which is incorporated in a country being under the central management and control from outside that country.

Section 202 of Title 9 of the Federal Arbitration Act of the USA also states that the incorporation of a company in USA will be sufficient to deem the company as the citizen of USA. It is, therefore, proposed to drop the word 'company' from sub-clause (iii) if clause (f) of section 2(1). The word 'body corporate' in sub-clause (ii) of section 2(1)(f) will obviously include a body corporate incorporated under a statute or under the Indian Companies Act, 1956. The same method is adopted in the new definition of 'domestic arbitration in the proposed section 2(1)(ea).



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