TR E T R IM S E DIS U E P T

X V R E O U IO S L T N
IN

I N E N TO A TR AI NL

B U IN S S ES

TR NA T N A S C IO S

Commercial Reservation in International Commercial Arbitration

BIM L R A A E H R A J SKA VTH

Y R

[I D N O.1 1 ] 36 o s .) n

B . , L .B (H .A L .

NATIONAL LAW SCHOOL OF INDIA

BANGALORE

TABLE OF CONTENTS
I. INTRODUCTION................................................................................................................................4 II. COMMERCIAL RESERVATION CLAUSE: INTERNATIONAL RESPONSES.....................5 GENEVA PROTOCOL ON ARBITRATION CLAUSES, 1923...................................................................................5 GENEVA CONVENTION ON THE EXECUTION OF FOREIGN ARBITRAL AWARDS, 1927............................................5 CONVENTION ON THE RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS, 1958..........................6 UNCITRAL MODEL LAW ON INTERNATIONAL COMMERCIAL ARBITRATION, 1985..........................................6 III. NATIONAL RESPONSES THROUGH STATUTORY INCORPORATION...........................8 IV. JUDICIAL RESPONSES..................................................................................................................9 FRANCE....................................................................................................................................................9 UK.......................................................................................................................................................10 UNITED STATES OF AMERICA....................................................................................................................10 CANADA.................................................................................................................................................11 INDIA.....................................................................................................................................................12 V. CONCLUSION..................................................................................................................................14

I. INTRODUCTION In its opening statement, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (The New York Convention) states, This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the states where their recognition and enforcement are sought.1 If this opening article stood without qualification, it would mean that an award made in any State (even if that State was not a party to the New York Convention) would be recognized and enforced by any other State that was a party, so long as the award satisfied the basic conditions set down in the Convention. It wouldve been an extremely internationalist approach. However, there is a qualification to the opening statement and it comes in the form of two reservations that ratifying states are allowed to make under Article 1.3. The first of these is the reciprocity reservation and the second is the commercial reservation. What does the term commercial reservation imply for a country, in the context of enforcement and recognition of foreign arbitral awards? The semantics of the term international commercial arbitration seem to have been taken very seriously by the major international institutions engaged in the same, as can be gauged by the laws framed by them. Both the UNCITRAL Model Law on International Commercial Arbitration as well as the New York Convention place immense value on the words international and commercial. In jurisdictions which have adopted the UNCITRAL Model Law, it is only commercial disputes of an international character which can be resolved under the provisions of that law. A commercial dispute is also a pre-requisite for enforcement under the New York Convention, provided a ratifying country has entered into a commercial reservation. The idea of commercial reservation probably took root in the civil law countries, where a distinction has been maintained between commercial and non-commercial contracts. A commercial contract, broadly speaking, is a contract made by merchants and traders in the ordinary course of their business, and governed by a special code of commercial law. Also, in many civil law countries, only disputes arising out of commercial contracts can be submitted to arbitration.2 The fact that the UNCITRAL Model Law more or less clearly defines the limits of commercial makes the New York Conventions approach more amenable to research. However, this paper will focus on both these international statutes and try to compare and contrast the ways in which various states have deemed it fit to interpret this concept. In so far as it does this, there will be no distinction drawn between the concept of commercial in the Model Law and in the New York Convention. As will be seen, the Indian Arbitration and Conciliation Act, 1996 incorporates both these
1

Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (The New York Convention), Art 1.1. 2 A Redfern & M Hunter, Law and Practice of International Commercial Arbitration (N. Blackaby & C. Partasides, ed, London: Sweet & Maxwell, 2004) at 56.

international statutes, while referring to only one concept of commerciality. The paper will be limited to, with reference to statutory incorporation of the concept, the Indian context, simply because the emphasis is on how the judiciary in various countries have analysed the concept and it would be unnecessarily tedious to engage in an analysis of all national legislation regarding commercial reservation. This paper will first look at the provisions of the UNCITRAL Model Law and the New York Convention which deal with the concept of commerciality and the way in which they have been incorporated into the Indian Arbitration and Conciliation Act, 1996. It will then dissect case law from major jurisdictions in the world, before coming to an exhaustive analysis of Indian case-law on the same. A normative conclusion will then be reached as to the benefits or costs, as the case may be, of the Indian approach, and the ways in which it can be improved. II. COMMERCIAL RESERVATION CLAUSE: INTERNATIONAL RESPONSES Before we plunge into a discussion on the treatment accorded to the concept of commerciality by various countries, a look at the international legislations and their mention of commercial reservation is in order. Geneva Protocol on Arbitration Clauses, 1923 Article 1 of the Protocol deals with commercial reservation. However, this document, framed under the aegis of the League of Nations does not provide any clue as to what boundaries such a reservation should have, and leaves it completely to the discretion of the contracting states.3 Geneva Convention on the Execution of Foreign Arbitral Awards, 1927 This Convention does not make any direct reference to commercial reservation. Being more in the nature of an addition to the abovementioned Geneva Protocol, it just restricts its application to arbitral awards made in pursuance of an agreement, whether relating to existing or future differences covered by the Protocol on

Article 1 of the Geneva Protocol states that Each of the Contracting States recognises the validity of an agreement whether relating to existing or future differences between parties, subject respectively to the jurisdiction of different Contracting States by which the parties to a contract agree to submit to arbitration all or any differences that may arise in connection with such contract relating to commercial matters or to any other matter capable of settlement by arbitration, whether or not the arbitration is to take place in aion is to take place in a country to whose jurisdiction none of the parties is subject. Each Contracting State reserves the right to limit the obligation mentioned above to contracts which are considered as commercial under its national law. Any Contracting State which avails itself of this right will notify the Secretary-General of the League of Nations, in order that the other Contracting States may be so informed.

Arbitration Clauses.4 This, of course, means that only disputes considered as commercial under the national law need be enforced. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 Article 1(3) of the New York Convention provides that a State may declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the law of the State. UNCITRAL Model Law on International Commercial Arbitration, 1985 Another noteworthy mention of the concept of commercial reservation happens in Article 1(1) of the UNCITRAL Model Law- it states that the Law applies to international commercial arbitration. As though pre-empting the confusion that might ensue out of use of the word commercial, a footnote provides guidance as to how the word commercial should be interpreted. It states, The term commercial should be given a wide interpretation so as to cover matters arising from all relationships of a commercial nature, whether contractual or not. Relationships of a commercial nature include, but are not limited to, the following transactions: any trade transaction for the supply or exchange of goods distribution agreement; commercial representation or agency; factoring; leasing; construction of works; consulting, engineering; licensing; investment; financing; banking; insurance; exploitation agreement or concession; joint venture; carriage of good or passengers by air, sea, rail or road. The last two mentioned above are the two major provisions relating to commercial reservation in international instruments. The practical effect of this insistence that a
4

Article 1 states of the Geneva Convention, 1927 states that, In the territories of any High Contracting Party to which the present Convention applies, an arbitral award made in pursuance of an agreement, whether relating to existing or future differences (hereinafter called "a submission to arbitration") covered by the Protocol on Arbitration Clauses, opened at Geneva on September 24, 1923, shall be recognised as binding and shall be enforced in accordance with the rules of the procedure of the territory where the award is relied upon, provided that the said award has been made in a territory of one of the High Contractingne of the High Contracting Parties to which the present Convention applies and between persons who are subject to the jurisdiction of one of the High Contracting Parties. To obtain such recognition or enforcement, it shall, further, be necessary: (a) That the award has been made in pursuance of a submission to arbitration which is valid under the law applicable thereto; (b) That the subject-matter of the award is capable of settlement by arbitration under the law of the country in which the award is sought to be relied upon; (c) That the award has been made by the Arbitral Tribunal provided for in the submission to arbitration or constituted in the manner agreed upon by the parties and in conformity with the law governing the arbitration procedure; (d) That the award has become final in the country in which it has been made, in the sense that it will not be considered as such if it is open to opposition, appel or pourvoi en cassation (in the countries where such forms of procedure exist) or if it is proved that any proceedings for the purpose of contesting the validity of the award are pending; (e) That the recognition or enforcement of the award is not contrary to the public policy or to the principles of the law of the country in which it is sought to be relied upon.

dispute be commercial is more strongly felt in the case of the New York Convention 5. The New York Convention leaves it wholly open for the ratifying State to decide exactly what kind of dispute should be deemed commercial and to, thereby, restrict the applicability of the Convention.6 The effect of this reservation, like the reservation as to reciprocity, was to narrow the scope of the New York Convention7, and the fact that each contracting state may determine for itself what relationships it considers to be commercial has created problems in the application of the New York Convention.8 Relationships which are regarded as commercial by one state are not necessarily so regarded by others, and this does not assist in obtaining a uniform interpretation of the Convention.9 As will be seen, there have been cases where differing interpretations of the ambit of commercial has led to confusion within a single state as well. It can be noted that, in contrast, the UNCITRAL Model Law does not give that much leeway to the interpreter in deciding the ambit of the word commercial. The drafting of the Model Law was a renewed exercise to bring about unification and harmonization of International Commercial Arbitration law across the world, and as part of this, there was an attempt to provide a definition of the word commercial.10 Countries like Mexico specifically wanted foreign direct investments and financial transactions entered by the government to be excluded, as they were considered to be part of public debt.11 Countries like Germany and the United States specifically wanted a clause to expressly state the commerciality of a transaction would depend on the character of the parties to the transaction, i.e. if a non-merchant enters into a commercial transaction, it would not be considered commercial.12 The footnote delineating the boundaries of the word is a testament to the attempt to reconcile such differing interests. However, in the 306th meeting to discuss the UNCITRAL Model Law, it was recognized that it would be impossible to set out a detailed list of matters which should be construed as being commercial.13 The group reached the conclusion that it
5

A Tweeddale & K Tweeddale, Arbitration of Commercial Disputes (Oxford: Oxford University Press, 2005) at 143. 6 Fouchard, Gaillard & Goldman, International Commercial Arbitration (The Hague: Kluwer Law International, 1999) at 78. 7 Of the 137 states which were party to the Convention by April, 2006, 46 had taken advantage of the commercial reservation. On March 12, 2001, Serbia and Montenegro confirmed Yugoslavias declaration of 1982 restricting the application of the Convention to economic disputes. Norways reservation stated that it would not apply the Convention in any disputes if the subject matter was immoveable property in Norway, or rights in such property. 8 A Redfern & M Hunter, Law and Practice of International Commercial Arbitration (N. Blackaby & C. Partasides, ed, London: Sweet & Maxwell, 2004) at 57. 9 Mustill & Boyd, Commercial Arbitration (2nd edn., London: Butterworths, 1989) at 98. 10 Russell on Arbitration (Daniel St. John Sutton et al., ed., 21st edn., London: Sweet & Maxwell, 1997) at 158. 11 Summary Records of the United Nations Commission on International Trade Law for meetings devoted to the Preparation of the UNCITRAL Model Law on International Commercial Arbitration, (1985) XVI Ybk Comm Arbn 406. 12 Analytical compilation of comments by Governments and international organisations on the draft text of a model law on international commercial arbitration: report of the Secretary-General, 18 th session of UNCITRAL, June 3-21, 1985, U.N. Doc. A/CN.9/263 at para 12. 13 Summary Records of the United Nations Commission on International Trade Law for meetings devoted to the Preparation of the UNCITRAL Model Law on International Commercial Arbitration, (1985) XVI Ybk Comm Arbn 402.

would be open to each country to determine the meaning of the term. Therefore, though the broad boundaries of the term have been defined in the Model Law itself, a completely unified approach by the courts regarding the meaning of the term commercial has been missing.14

III. NATIONAL RESPONSES THROUGH STATUTORY INCORPORATION India The Arbitration and Conciliation Act, 1996 is almost an exact replica of the UNCITRAL Model Law. However, S. 2(1)(f) of the Indian Act states that international commercial arbitration means an arbitration relating to disputes arising out of legal relationship, whether contractual or not, considered as commercial under the law in force in India.15 This has led to a situation where certain transactions which would be commercial as per the footnote would not be commercial under the countrys laws. The effects of the footnote are, therefore, ambiguous. On the other hand, the International Arbitration Act, 1990 of Ontario, Canada makes it expressly clear that the analytical commentaries accompanying the drafting of the Model Law can be used to interpret the national legislation. In fact, even in the absence of such an express provision, so long as the act does not insist on the transaction being commercial under the countrys laws, it would make sense to turn to the footnote in the Model Law for guidance. As will be seen, the courts in India seem to have had trouble making up their minds about whether to go with a narrow or a broad interpretation of the term. As mentioned, only 46 states have taken advantage of the reservation with respect to commerciality, in the context of the New York Convention. Surprisingly, despite the fact that they have traditionally not harboured any notable distinction between commercial and non-commercial disputes, even common law countries like India, the USA, Canada etc. have also adopted this reservation. Issues relating to sovereign immunity could have been the major reason which prompted these countries to opt for such a reservation. The enforcement and recognition of foreign awards in India is governed by Part II of the Arbitration and Conciliation Act. Chapter I of Part II deals with New York Convention Awards, and Section 44 defines a foreign award, culling out an exception for commerciality as allowed by Article 1(3) of the Convention.16
14

Fouchard, Gaillard & Goldman, International Commercial Arbitration (The Hague: Kluwer Law International, 1999) at 83. 15 S. 2. Definitions- (1) In this Part, unless the context otherwise requires-. (f) international commercial arbitration means an arbitration relating to disputes arising out of legal relationship, whether contractual or not, considered as commercial under the law in force in India and where at least one of the parties is(i) an individual who is a national of, or habitually resident in, any country other than India; or (ii) a body corporate which is incorporated in any country other than India; or (iii) a company or an association or a body of individuals whose central management and control is exercised in any country other than India. (iv) the Government of a foreign country. 16 S.44: Definition- In this Chapter, unless the context otherwise requires, foreign award means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October,

The commerciality of a dispute is followed up on by Section 34 and Section 48 of the Act of 1996. Section 34 makes it clear that if the Court finds that the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, the award may be set aside by it. 17 It can also be noted that it is not expressly stated in the Act that a dispute has to be commercial in order for domestic arbitration to lie with respect to it. However, whether the concept of commerciality will apply to domestic arbitration as well, in the absence of an express provision, is not an issue for this paper to tackle. Section 48 of the Act also contains similar provisions with respect to the enforcement aspect of arbitral awards.18 Thus, the Act is water-tight in that, as far as international commercial arbitrations are concerned, if a dispute is not regarded as commercial in India, it is susceptible to a successful challenge by the aggrieved party. IV. JUDICIAL RESPONSES France France, being a civil law country, a distinction was historically made between civil and commercial arbitrations. An arbitration agreement that purported to refer civil disputes to arbitration was void. However, the distinction between domestic commerce and international commerce comes into play here.19 For example, European continental law does not allow consumer disputes to be referred to arbitration but such a restriction mainly applies in the case of domestic arbitrations and not with regard to international arbitrations involving consumers and no country will refuse enforcement of consumer arbitration awards in relation to the Convention.20
1960(a) in pursuance of an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies, and (b) in one of such territories as the Central Government, being satisfied that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies. 17 S.34: Application for setting aside arbitral award- (1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3). (2) An arbitral award may be set aside by the Court only if-.. (b) the Court finds that(i) the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. 18 S.48: Conditions for enforcement of foreign awards- (1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the Court proof that-. (2) Enforcement of an arbitral award may also be refused if the Court finds that(a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India.
19 20

R. David, Arbitration in International Trade (Netherlands: Kluwer Publications, 1985) at 149. E. Gaillard, France: The Commercial Requirement in International Commercial Arbitration, 1(1) International Arbitration Law Review (1997) at 11-12.

In the case of Kuwait Foreign Trading Contracting and Investment Co. v. Icori Estero Spa21, the Paris Court of Appeal held that the notion of commercial in international commercial arbitration is distinct from the narrow, technical one employed in domestic contexts. The court observed that the commercial character of an international arbitration would not be dependent on the nature of the parties, the purpose of the contract or the applicable law. Rather, it would be commercial when it related to an economic transaction involving the movement of goods and services. The dichotomy between civil and commercial was thus blurred. In 1989, France withdrew its commercial reservation which it had entered while ratifying the New York Convention. In Zanzi v. de Coninck22, the principle that an arbitration clause within an international contract is valid even though no reference is made to the commercial nature of the transaction was re-affirmed. A broad range of matters can now be settled by arbitration under French law. In V2000 (formerly Jaguar France) v. Renault23, the French court held that contracts for the purchase of consumer goods could be arbitrated. Thus, it can be noted that French law permits a broad range of dispute to be referred to arbitration than under the UNCITRAL Model Law. Under the UNCITRAL Model Law, a consumer contract is unlikely to fall within the definition of the word commercial.24 UK Under English law, there is no requirement that an arbitration, whether domestic or international, should be commercial in nature and the United Kingdom, in acceding to the New York Convention, did not enter into the commercial reservation.

United States of America In the case of Societe Generale de Surveillance, S.A. v. Raytheon European Management and Systems Co.25 , a dispute arose between an American and a French Company with respect to contract for the field testing, inspection and evaluation of missiles. The contract was, thus, one relating to services and not an exchange of commodities. It was held by the Court that it was commercial. It was also opined that there is a strong judicial policy favouring the submission of contractual disputes under the provisions of the Federal Arbitration Act and that, therefore, the term commerce should be broadly construed. In the 1985 case of Faberge International Inc. v. De Pino26, it was held that an employment contract was commercial and that the fact that an employer-employee contract may involve a degree of fiduciary obligation does not deprive it of its commercial character. It is to be noted that the Commentary to
21 22

(1977) IV Comm Arbn 271. (1996) XXIII Ybk Comm Arbn 901. 23 [1996] 2 Model Arbitration Law Quarterly Reports, issue 4, 70. 24 See the Analytical Commentary on the Draft Text of a Model Law on International Arbitration, Report of the Secretary-General, UN Doc A/CN.9/264 25 March 1985. 25 643 F.2d 863 (1st Cir. 1981). 26 109 A.D.2d 235 (N.Y. App. Div. 1985).

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the UNCITRAL Model Law specifically excludes employment contracts from the ambit of commerciality. In Prograph International Inc. v. Ralph Barhydt27, the United States District Court of North Carolina considered the question of when it had a mandatory obligation to refer matters to arbitration. The court stated that it must undertake a limited enquiry to decide four questions, which came to be known as the Riley factors. One of the questions of such an enquiry would be- Does the agreement arise out of a legal relationship, whether contractual or not, which is considered as commercial? The court held that the Federal Arbitration Act gives guidance as to what types of contract are considered as being commercial. The court referred to the case of Allied Bruce Terminix Cos. v. Dobson28, in which the Court had stated, A broad interpretation of this language is consistent with the Acts basic purpose, while a narrower interpretation would create, unfamiliar test that would unnecessarily complicate the law and breed litigation. The court therefore held that there could be no doubt that a contract, involving the employment of a United States citizen working for a foreign corporation, would involve interstate or foreign commerce.29 Canada The word commercial was considered by the High Court of Ontario in a case involving two families regarding the sale of a domestic property.30 An arbitral award had been made and enforcement of the award was sought in Ontario which had implemented the UNCITRAL Model Law. McLaughlin argued that the sale was for personal use and neither of the parties was involved in trade and hence the transaction was not commercial. The main issue before the courts was whether this was a commercial dispute. The court looked at the analytical commentary contained in the Report of the Secretary General to the eighteenth session of UNCITRAL. The court held that the word commercial should be given a broad interpretation so as to embrace matters arising from all relationships of a commercial nature and that the broad interpretation of the term would mean inclusion of commercial relationships, irrespective of whether the parties are commercial parties or merchants under any given national law. Just because the sale was not connected to the business activity of the parties was not sufficient enough to term the transaction as non-commercial. In this case, the sale was done in a business like way and bore all the characteristics of a commercial transaction. However, this broad interpretation was dealt a blow in the case of Borowski v. Heinrich Fiedler Perforiertechnick GmbH31. In this case, the claimant, an employee of the respondent, sued for damages in lieu of notice of termination of his employment contract. The case came before the High Court of Alberta and it was held that as the dispute arose from a contract which created a master and servant relationship, it was not a commercial relationship of the type falling under the Article 1(1) of the Model Law.
27 28

(1998) XXIII Ybk Comm Arbn 901. 130 L Ed 2d 753 (1995). 29 This was also the ratio in Ernesto Francisco v. Stolt Achievement M/T, (2001) XXVI Ybk Comm Arbn 1082. 30 Re Carter and McLaughlin, (1996) 27 OR (3d) 792, OJ No 328. 31 [1996] 2 Model Arbitration Law Quarterly Reports, issue 4, 70.

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India The commerciality of a dispute has been given a narrow interpretation in a number of cases under Indian law, and a broad interpretation in the others. It would be fair to say that Indian courts have been oscillating with regard to the approach to be taken when confronted with the commerciality of a dispute. The saga of indecision begins with the case of Societe De Traction Et D'electricite Societe Anonyme v. Kamani Engineering Company Ltd.32. The Court laid down that if the nature of work does not inculcate any element of business or trade and is exclusively of a professional character, it is not commercial in nature. There should be no element of participation in commercial activity and the remuneration, if any, should be limited to only fees. In that event, the commercial reservation clause comes into effect and the disputes arising out of such agreements cannot be referred to arbitration. It held that the consultancy services which were the subject matter of the dispute in this case would be of a professional, and not commercial, nature. When, in 1978, in the case of Indian Organic Chemicals Ltd v. Chemtex Fibres Inc33, the Bombay High Court was asked to decide whether an agreement to supply machinery, equipment, technical information and data relating to the machinery and its installation was a commercial contract. The judge concluded that although the agreement was of a commercial nature, it was not a commercial agreement under the law in force in India. The judge stated the defendant was unable to call in aid any statutory provision or any operative legal principle in India according to which the transaction could be considered as commercial. In European Grain & Shipping Ltd. v. Extractions (P) Ltd.34, the Chemtex decision was overruled and the Court held that the mere use of the word under would not necessarily mean that a statutory provision or provision of law which specifically deals with the subject matter of a particular legal relationship being commercial in nature needs to be proved. The Supreme Court, in Renusagar Power Co. Ltd. v. General Electric Co.35 , held that the Foreign Awards (Recognition and Enforcement) Act, 1961 was meant to facilitate international trade and hence the expression should be liberally interpreted. However, we were back to square one when, in the case of Josef Meissner GmbH & Co. v. Kanoria Chemicals and Industries Ltd.36, the meaning of the word commercial was again considered by the Calcutta High Court. The contract between Meissner and Kanoria concerned technical assistance for a fee. Kanoria argued that an agreement for the provision of technical know-how was not a commercial transaction under Indian law. Ignoring the rationale of the Supreme Court in Renusagar, the judge agreed and held that the agreement in substance provides for the supply of technical know-how and expertise from Meissner to Kanoria in exchange for the payment of a fee to Meissner. He stated that there was no element of transaction between the merchants and traders as understood in Indian Law. The judge therefore concluded
32 33

AIR 1964 SC 558. AIR 1978 Bom 106. 34 AIR 1983 Bom 36. 35 (1984) 4 SCC 679. 36 (1986) AIR Cal 45.

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that a stay to arbitration should not be granted as the matter in dispute was not commercial in nature. The Supreme Court again came to the rescue by holding, in RM Investments and Trading Co (P) Ltd. v. Boeing Co.37, that consulting was a commercial activity and that the term commercial need not always imply trade. In this case, an Indian Company entered into an agreement with a Company registered in USA. The Indian Company agreed to provide Boeing with consultancy services for sale of Boeing Aircraft in India. Agreement for purchase of two Boeing Aircrafts was executed. A dispute arose and the appellant claimed compensation and remuneration for consultancy services. In view of arbitration clause, the matter was referred to arbitrator. It was contended by the foreign Company that there was no `commercial element' and hence the application was liable to be dismissed. For guidance, the Court turned to the case of Atiabari Tea Co. Ltd. v. State of Assam38 which, even though not dealing with arbitration, dealt with what commerce meant. The Court had therein stated that trade and commerce do not mean merely traffic in goods, i.e., exchange of commodities for money or other commodities. In the complexities of modern condition, in their wide sweep are included carriage of persons and goods by road, rail, air and waterways, building contracts, banking, insurance, transactions in stock exchanges and forward markets, communication of information, supply of energy, postal and telegraphic services and many more activities- too numerous to be exhaustively enumerated- which may be called commercial intercourse. The Court then proceeded to depart from its constricted approach to arbitration to toe a much more liberal line by conferring a broad construction upon commerce. The Court remarked that the matter was commercial in nature and could be referred to arbitration. It also observed that the word commercial must be construed broadly to promote arbitration, which in turn would facilitate international trade through faster resolution of disputes. Placing reliance on the UNCITRAL Model Law which recommends giving a wide construction to the term commercial, the Court remarked that commercial contracts must be liberally interpreted and narrow pedantic approaches to the same must be rejected. In the 2008 judgment of Comed Chemicals Ltd. v. C.N. Ramchand39, the Supreme Court has provided an expansive scope to the phrase commercial in International Commercial Arbitration. In this case, the respondent contended that his agreement with Comed Chemicals was solely for the purpose supplying technical know-how and expertise for which he was remunerated with fees. Therefore, the agreement, devoid of any commercial attributes, could not be referred for arbitration. He placed reliance on the pre-Act apex Court ruling in Kamani Engineering and submitted that it had been held that if the work undertaken by a person is of a professional character and does not involve business or trade, the contract cannot be said to be of `commercial' nature. Such contract did not involve business or trade and there was no element of participation in commercial activity or in profit. Remuneration, if any, is in the nature of `fees'. The contention was that, as such, provisions relating to arbitration agreement in the field of commercial arbitration are not attracted to these cases. The Court went on to refer to all the cases since Kamani and ended with the case of Citibank N.A. v.
37 38

AIR 1994 SC 1136. AIR 1961 SC 232. 39 (2009) 1 SCC 91.

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TLC Marketing PLC and Anr.40, wherein it was held that commercial contract must be broadly construed with a view to give efficacy to such contract rather than to invalidate it. Clauses of the contract must be liberally interpreted. Narrow and technical approach should be avoided. The apex Court stated that if the nature of work undertaken by the respondent is such that it is inextricably linked with functions which could be undertaken by a businessman or by a Company and such activities form an integral part of his activities, there is element of `commerce'. Thus, the Court propounded a new test to bring professional services under the ambit of commerce i.e. if the work discharged by the professional can be done by companies or a businessman and such work forms the core of his activities, then the contract is invariably commercial in nature. However, the Court refused the blanket extension of commerce to all employment contracts stating that if the contract is merely that of a employee-employment or master-servant, then the matter cannot be referred to Arbitration Tribunal. V. CONCLUSION It can be seen that the absence of a unified definition of the word commercial has been the source of much confusion. Certain recurring disputes which stoke this confusion would be employment contracts, contracts for consultancy services and sale of immoveable property. As has been discussed, different jurisdictions have differing views on whether to treat these legal relationships as commercial or not. For example, the US courts have held that employer-employee relationships are commercial in nature, while Canadian courts have held that they are not. Thus, even among countries that have accepted a broad interpretation of the term, there are different degrees as regards the breadth of the interpretation. What could be the reason for countries to persist with this categorization of disputes as commercial and non-commercial? One reason given is that not all disputes are amenable to arbitration, and a categorization such as this will help in ensuring that certain disputes are resolved as they are meant to be, through the Court. Usually, disputes in which one party is weaker would be considered not arbitrable; because of unequal bargaining power, the Court would draw an adverse inference and would want to dispense justice itself. This could be the motivating factor for countries to still keep the option of being able to decide the commerciality of a dispute in international commercial arbitration open. However, this logic does not hold in many countries where a domestic dispute which goes to arbitration need not be commercial in nature. If the objective is the protection of the weaker party who presumably is less commerce-savvy than the other, this is defeated by not making domestic disputes subject to commerciality as well. In India, as we have seen, the Courts have gravitated eventually towards a liberal approach. The importance of this lies in the fact that, keeping in with the rise of international commercial arbitration as an effective, alternative means of dispute resolution, most jurisdictions around the world are expanding its scope to include disputes which were hitherto considered fit for resolution only by the municipal Courts. When European Courts and arbitral tribunals have included within the
40

AIR 2008 SC 118.

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definition of arbitrable disputes matters involving corruption and bankruptcy proceedings, which were, until recently, considered to be dealing with matters of public policy, and therefore outside the scope of private dispute resolution, it would not do for India, if she is interested in emerging as a major trade-oriented country, to still stick to outdated, narrow interpretations of the word commercial. There are, as has been seen, different approaches to determine what is commercial. These approaches usually revolve around looking at the nature of the parties involved and considering the kind of work they are usually involved in, and checking whether the transaction is connected to such work. There are three trains of thought possible at this juncture. If the parties are businessmen, but the transaction in question is not strictly in the course of their business, then the fact that the parties are businessmen may lend a commercial hue to the transaction, if the court is of an extremely liberal bent of mind. Another possibility is that a commercial transaction may not be considered to be so, because the parties are not businessmen. A third possibility is that the transaction can be gauged on its own merits and not be dependent on the parties involved at all. In India, the two major strains of thought emerge in Kamani and in Comed. In the former, the Court laid down that if the nature of work does not inculcate any element of business or trade and is exclusively of a professional character, it is not commercial in nature. There should be no element of participation in commercial activity and the remuneration, if any, should be limited to only fees. The second, more liberal test was propounded in Comed- if the nature of work undertaken by the respondent is such that it is inextricably linked with functions which could be undertaken by a businessman or by a Company and such activities form an integral part of his activities, there is element of commerce. This test seems to be sufficient to lay to rest the controversy regarding consultancy services and their categorization as professional or commercial services. As mentioned before, the use of commercial reservation lies in the fact that it can ensure that, in the international arena, Indian companies are not unduly taken advantage of. However, with the rapid strides in business that Indian companies have made, this fear is increasingly becoming unfounded. A linked reason could be that the Government could also extricate itself from certain disputes, if the commercial reservation is brought into play. As Prof. Sornarajah puts it, In developing countries, much trading is done through state trading entities and an immediate question is whether their transactions can be regarded as purely commercial, i.e. when the state interferes in trading through legislative or administrative means, can the transaction still be regarded as commercial or whether it leaves this sphere and becomes a public law transaction? Cases seem to show that such a conversion is possible and even desirable at the mere whim of the state and that a private commercial transaction can be converted into a matter of public law where it implicates economic policies which find expression through legislative means. Similarly, certain employment contracts provide for patently unfair arbitration clauses, and an Indian employee in a foreign company might be adversely affected. In all these cases, Indian courts can refuse to treat these relationships as commercial.

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Therefore, it would be illogical to make a sweeping statement that India should withdraw its commercial reservation and make all disputes which parties want to submit to arbitration, capable of being arbitrated upon. What is needed, though, is some clarity, on what exactly is arbitrable. As can be noted from the Comed case, confusion still exists as to the nature of consultancy services. Similar is the case of employment contracts. A fine balance has to be maintained between protecting Indian interests and chasing off foreign business opportunities.

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BIBLIOGRAPHY Books Cases Canada

A. Redfern & M. Hunter, Law and Practice of International Commercial Arbitration (N. Blackaby & C. Partasides, ed, London: Sweet & Maxwell, 2004). A. Tweeddale & K. Tweeddale, Arbitration of Commercial Disputes (Oxford: Oxford University Press, 2005). Fouchard, Gaillard & Goldman, International Commercial Arbitration (The Hague: Kluwer Law International, 1999). H. C. Alvarez et al., Model Law Decisions (The Hague: Kluwer Law Interntional, 2003). International Commercial Arbitration A World Handbook Vol. II (Peiter Sanders, ed., The Netherlands: Martinus Nijhoff, 1960). J. D. M. Lew, Applicable Law in International Commercial Arbitration (New York: Oceana Publications Inc., 1978). M. L. Moses, The Principles and Practice of International Commercial Arbitration (Cambridge: Cambridge University Press, 2008). Mustill & Boyd, Commercial Arbitration (2nd edn., London: Butterworths, 1989). P. Malhotra, The Law and Practice of Arbitration and Conciliation (1st edn., New Delhi: Lexis Nexis Butterworths, 2002). R. S. Bachawat, Law of Arbitration & Conciliation I, II (4th edn., Nagpur: Wadhwa & Co., 2005). Russell on Arbitration (Daniel St. John Sutton et al., ed., 21st edn., London: Sweet & Maxwell, 1997). V. A. Mohta, Arbitration, Conciliation & Mediation (2nd edn., Noida: Manupatra, 2008). Yearbook of Commercial Arbitration.

Borowski v. Heinrich Fiedler Perforiertechnick GmbH, [1996] 2 Model Arbitration Law Quarterly Reports, issue 4, 70. Re Carter and McLaughlin, (1996) 27 OR (3d) 792, OJ No 328.

France

Kuwait Foreign Trading Contracting and Investment Co. v. Icori Estero Spa, (1977) IV Comm Arbn 271. V2000 (formerly Jaguar France) v. Renault, [1998] 2 Model Arbitration Law Quarterly Reports, issue 4, 75. Zanzi v. de Coninck, (1996) XXIII Ybk Comm Arbn 901.

India

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Atiabari Tea Co. Ltd. v. State of Assam, AIR 1961 SC 232. Citibank N.A. v. TLC Marketing PLC and Anr., AIR 2008 SC 118. Comed Chemicals Ltd. v. C.N. Ramchand, (2009) 1 SCC 91. European Grain & Shipping Ltd. v. Extractions (P) Ltd., AIR 1983 Bom 36. Indian Organic Chemicals Ltd v. Chemtex Fibres Inc, AIR 1978 Bom 106. Josef Meissner GmbH & Co. v. Kanoria Chemicals and Industries Ltd, (1986) AIR Cal 45. Renusagar Power Co. Ltd. v. General Electric Co,. (1984) 4 SCC 679. RM Investments and Trading Co (P) Ltd. v. Boeing Co., AIR 1994 SC 1136. Societe De Traction Et D'electricite Societe Anonyme v. Kamani Engineering Company Ltd., AIR 1964 SC 558.

USA

Allied Bruce Terminix Cos. v. Dobson, 130 L Ed 2d 753 (1995). Faberge International Inc. v. De Pino, 109 A.D.2d 235 (N.Y. App. Div. 1985). Prograph International Inc. v. Ralph Barhydt, (1998) XXIII Ybk Comm Arbn 901. Societe Generale de Surveillance, S.A. v. Raytheon European Management and Systems Co., 643 F.2d 863 (1st Cir. 1981).

International Instruments European Convention on International Commercial Arbitration, 1961. Geneva Convention for Execution of Foreign Arbitral Awards, 1927. Geneva Protocol on Arbitration Clauses, 1923. New York Convention on Enforcement and Recognition of Foreign Awards, 1957. UNCITRAL Model Law of Arbitration, 1985.

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