Seat/Venue/Place of Arbitration – The Unending Saga

The “seat of arbitration” determines the applicable law governing the arbitration proceedings and the court which will have supervisory power over the arbitration. The Supreme Court has dwelled upon the mechanism to determine the seat of arbitration and the dichotomy between the “venue or place of arbitration” and “seat of arbitration” for many years. Although it was believed that the ratio laid down in the case of BGS SGS Soma JV v. NHPC Ltd[1] (“BGS Soma”) had provided clarity to the conflicting views on the issue and held the judgment of Union of India vs Hardy Exploration and Production (India) INC[2] (“Hardy Exploration”) as bad in law, a concurrent bench of the Supreme Court in Mankastu Impex Private Limited v. Airvisual Limited[3] (“Mankastu”) has reiterated the law propounded by Hardy Exploration and distinguished the decision in BGS Soma.


Hardy Exploration


In Hardy Exploration, the parties had agreed for the governing law of the contract to be Indian law. The parties chose Kuala Lumpur as the venue of arbitration and the arbitration clause further provided that the arbitration proceedings would be governed by the UNCITRAL Model Law on International Commercial Arbitration, 1985 (“UNCITRAL Model Law”). As disputes arose between the parties, the matter was referred to arbitration, the arbitration proceedings were held in Kuala Lumpur, and the arbitral award was delivered and signed in Kuala Lumpur as well.


Before the Supreme Court, it was the Petitioner’s argument that India was the seat of arbitration. In support of this argument it was argued that Article 20 of the UNICTRAL Model Law permits the parties to the arbitration to choose a place of arbitration and in case there is no such agreement between the parties, the arbitral tribunal shall determine the place of arbitration. However, in the instant case the agreement between the parties neither specified Kuala Lumpur as the “place of arbitration” nor did the arbitral tribunal declared it to be so. It was further argued that in the absence of any specific choice on the law governing the arbitration agreement, the same would be determined by the substantive law of contract, being Indian law in the present case. It was also argued that by providing UNCITRAL Model Law as the curial law, which was adopted by the Indian Parliament by enacting the Arbitration and Conciliation Act, 1996 (“said Act”), parties intended to apply Part I of the said Act in the present case. Opposing the foregoing contentions, the Respondent argued that the arbitral proceedings having been conducted and the award having been passed in Kuala Lumpur would conclusively mean that the place of arbitration is Kuala Lumpur and thus Part – 1 of the said Act shall not be applicable.


The Supreme Court held that while the terms “place” and “seat” can be used interchangeably, the interchangeable use shall not apply stricto sensu in case a condition precedent is attached to the term “place” and till such time the said condition is fulfilled, the place of arbitration would not mean the seat of arbitration. In the case in hand, the place of arbitration was either to be agreed by the parties or was to be determined by the arbitral tribunal. The Supreme Court opined that in the absence of any such agreement by the parties or determination by the tribunal, Kuala Lumpur was not the “seat” or “place” of arbitration and India was held to be the seat of arbitration, even though no conclusive reasoning has been provided for the same. The Supreme Court further held that the arbitration clause should be read holistically to gauge the intention of the parties with respect to “seat of arbitration”.


BGS Soma


In BGS Soma, the Supreme Court was dealing with the issue of determination of the juridical seat of arbitration in relation to an international commercial arbitration held in New Delhi, India.


The disputes between the parties arose from a contract entered into between NHPC Ltd. (Respondent) and one BGS SGS SOMA JV (Petitioner) for a hydroelectric project in Assam and Arunachal Pradesh. The agreements in the instant case were signed at Faridabad. The arbitration clause as agreed by the parties (clause 67.3 of the agreement between the parties) stated that, “Arbitration Proceedings shall be held at New Delhi/Faridabad, India and the language of the arbitration proceedings and that of all documents and communications between the parties shall be English.” The arbitration clause further provided that in an arbitration with an Indian contractor, the arbitration would be in accordance with the said Act and read with UNCITRAL Model Law. Due to occurrence of certain disputes, arbitration proceedings were initiated and conducted at New Delhi and a unanimous award was passed in favour of the Petitioner.


Aggrieved by the award, the Respondent filed an application under Section 34 of the said Act seeking to set aside the award before the District Court at Faridabad. The Petitioner filed an application for return of the petition for want of jurisdiction. In November 2017, after constitution of Special Commercial Court at Gurugram, the Section 34 application filed by the Respondent at Faridabad was transferred to the said Commercial Court, and the said court allowed the application filed by the Petitioner for return of the Section 34 application and the Respondent was directed to file the objections before the competent court in New Delhi.


In an appeal filed by the Respondent under Section 37 of the said Act, the High Court of Punjab and Haryana at Chandigarh held that the Faridabad Court was competent to hear the application under Section 34 of the Act as the cause of action had arisen there. The High Court further held that since the District Court at Faridabad was approached first, that court alone would have jurisdiction by application of Section 42 of the said Act. The High Court also held that New Delhi was merely a convenient venue for conducting the arbitration proceedings. The Petitioner, thereafter, challenged the judgment passed by the High Court before the Supreme Court.


The Supreme Court, apart from dealing with the question of maintainability of an appeal under Section 37 of the said Act, held as follows with respect to the test and determination of the juridical seat of arbitration:


a. Concurrent jurisdiction: The Supreme Court has held that although paragraph 96 of the judgment in Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc.[4] (“BALCO”) affirms the concept of concurrent jurisdiction of courts, i.e. courts within whose jurisdiction the cause of action arises wholly or in part, and courts within the jurisdiction of which the dispute resolution i.e. arbitration, is located, a wholistic reading of the entire judgment would lead to an incontrovertible conclusion that choosing of a seat would amount to a decision of the parties that the courts at the seat would exclusively have jurisdiction over the entire arbitral process. The Supreme Court further held that the judgment of the Supreme Court in Indus Mobile Distribution Private Limited v Datawind Innovations Private Limited[5] (“Indus”) reinforced the aspect that designation of a seat in an arbitration is akin to an exclusive jurisdiction clause which would then vest the courts at the “seat” with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.


b. The Supreme Court held that the judgment of the Delhi High Court in Antrix Corporation Ltd. v. Devas Multimedia Pvt. Ltd.[6] (“Antrix”) was bad in law, which held that if only courts at the seat of arbitration would have jurisdiction it would make Section 42 of the said Act otiose. The Supreme Court observed that Section 42 of the said Act avoids any conflict in determining the jurisdiction of courts by placing supervisory jurisdiction over all arbitration proceedings to an exclusive court. In case of designation or determination of a seat, the court at the seat would alone have jurisdiction and all further applications would have to be filed in the said court. However, in case there is no designation of seat or till such determination of seat of arbitration, an application as regards the arbitration proceedings may be preferred before a court where a part of cause of action has arisen and such court, where the earliest application has been made, would have exclusive jurisdiction over the arbitration proceedings.


c. Test for determining juridical seat of arbitration: The Supreme Court relied on the principle of law propounded by the English Court in Roger Shashoua and Ors vs Mukesh Sharma[7] (“Roger Shashoua”), which has been approved by the Supreme Court in BALCO, and held that “wherever there is an express designation of a “venue”, and no designation of any alternative place as the “seat”, combined with a supranational body of rules governing the arbitration, and no other significant contrary indicia, the inexorable conclusion is that the stated venue is actually the juridical seat of the arbitral proceeding”.


d. The Supreme Court further held that the language of the arbitration clause plays a vital role in order to ascertain the seat of arbitration. It was held that the designation of a place of arbitration as the “venue” of the arbitration proceedings, would mean that the said venue is in fact the seat of arbitration as the expression “arbitration proceedings” includes the proceedings as a whole, including the making of an award at that place and not merely one or two specific hearings. Further, the mention of the term “shall be held” at a particular venue, in relation to arbitration proceedings, would also indicate the party’s intention to anchor such place as the seat of the arbitral proceedings.


e. After observing that the principle of law laid down in the case of Roger Shashoua (“shashoua principle”) is the correct test for determining the juridical seat of arbitration, the Supreme Court held that the judgment passed by a concurrent bench in Hardy Exploration did not lay down good law in as much as it failed to apply the shashoua principle. The court held that by not applying the shashoua principle, both the courts at Kuala Lumpur, where the award was made and courts in India, as per the judgment, would have jurisdiction to challenge the arbitral award and create a chaos and which would be contrary to the judgment passed by the 5 - Judge bench in BALCO.


Eventually, applying the shashoua principle, the Supreme Court held that the designation of New Delhi/Faridabad as the venue of the arbitration proceedings would amount to India being the juridical seat of arbitration, as there were no other significant contrary indicia. The Supreme Court went on to hold that since the arbitration proceedings took place in New Delhi and the award was made in New Delhi, the parties had chosen New Delhi as the juridical seat of arbitration.


Mankastu


In Mankastu, the parties had entered into a Memorandum of Understanding (“MOU”) in terms of which the Petitioner was to be the exclusive distributer of the Respondent’s air quality monitor products for a period of five years. The Respondent was subsequently acquired by an entity, IQAir AG (“IQAir”). IQAir informed the Petitioner that it would not assume any contractual or legal obligations of the Respondent, including those contained in the MOU and, thus, a dispute arose between the parties. The Petitioner invoked the arbitration clause contained in the MOU which provided that the MOU would be governed by the laws of India and the courts at New Delhi would have the jurisdiction. The clause further provided that the disputes between the parties would be settled by arbitration administered in Hong Kong and the place of arbitration would also be Hong Kong.


As the parties failed to commence the arbitration proceedings in terms of the MOU, the Petitioner filed a petition under Section 11 of the said Act before the Supreme Court.


The Petitioner argued that India was the “seat” as the arbitration clause in the MOU did not designate any place as the seat of arbitration and Hong Kong was merely a venue and relied on the judgment passed by the Supreme Court in Hardy Exploration. It was further contended that as the parties had chosen the governing law of the contract to be Indian law and the courts at New Delhi to have jurisdiction, Part – 1 of the said Act would be applicable. On behalf of the Respondent, it was argued that the parties having agreed for the place of arbitration to be Hong Kong and the arbitration being administered in Hong Kong, would reach to the conclusion that Hong Kong was the seat of arbitration and the Respondent placed heavy reliance on the judgment of the Supreme Court in BGS Soma.


The court, while deciding on the issue opined that the mere expression “place of arbitration” is not sufficient to designate such place as the seat of arbitration and the intention of the parties is to be understood by a wholistic reading of the arbitration agreement, as has been held by the Supreme Court in Hardy Exploration. It further held that the expression “place of arbitration shall be Hong Kong” has to be read along with clause 17.2 of the MOU which provided that the arbitration would be “administered in Hong Kong” and which is an indicia, that the seat of arbitration shall be Hong Kong.


Conclusion


The finding of the Supreme Court on Mankastu, as mentioned hereinabove, appears contrary to the judgment of the 5 - Judge bench in BALCO and later on in BGS Soma which provided that the designation of place of arbitration would be regarded as seat of arbitration, in the absence of any other significant contrary indicia. Furthermore, the judgment of the court in BGS Soma, thereby holding the judgment passed in Hardy Exploration as bad in law, in as much as both the judgments were delivered by a 3 - Judge bench of the Supreme Court, may not tantamount to an overruling of Hardy Exploration, and there is a possibility that the issue may be referred to a larger bench.


The judgment in Mankastu has added to the lack of clarity on the law governing the seat of arbitration and, thus, it is advisable that while drafting a dispute resolution clause in any agreement, clearly defining the seat of arbitration would lessen the chances of any requirement of judicial intervention and interpretation.


Optimus Legal

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[1] (2019) SCC Online 1585 [2] (2018) 7 SCC 334 [3] Petition No. 32 of 2018, decided on 5th March, 2020 [4] (2012) 9 SCC 552 [5] (2017) 7 SCC 678 [6] 2018 SCC Online Del 9338 [7] [2009] EWHC 957 (Comm)

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