India: The ‘Seat'ing Arrangement - Controversies In Choice Of Seat

Introduction

The seat of arbitration is a significant facet of any arbitration proceeding. The seat not only determines the location of hearings and availability of arbitrators for adjudication of the dispute, but also determines which court shall exercise supervisory jurisdiction over the entire proceeding. In the wake of controversies regarding the choice of seat of arbitration, this article discusses and analyses the recent judicial trend concerning law and the jurisdiction of the court at the seat of arbitration in the backdrop of the provisions of the Arbitration and Conciliation Act, 1996, as amended from time to time ("the Act").

Law at the Seat

Considering so much has been written on 'seat' and 'venue' of arbitration proceedings, and questions concerning exclusive supervisory jurisdiction of the court at the seat have arisen, it is interesting to note that the Act defines not the 'seat', but the 'place' of arbitration. Section 20, being the relevant provision, is quoted hereinbelow for ready reference:

It is settled law that there is only one "place" of arbitration. This will be the place chosen by or on behalf of the parties; and it will be designated in the arbitration agreement or the terms of the reference or the minutes of proceedings or in some other way as the place or "seat" of the arbitration.

This does not mean, however, that the arbitral tribunal must hold all its meetings or hearings at the place of arbitration. As International commercial arbitration² often involves people of many different nationalities, it is often the case that the arbitration hearings are held in places other than the designated place of arbitration. In such circumstances, each move of the arbitral tribunal does not mean to be a change in the seat of arbitration. The seat of the arbitration remains the place initially agreed by or on behalf of the parties ³.

The selection of seat of arbitration is as much for convenience of the parties as to determine the law that is applicable to the proceeding. It is well known that the law of the seat or place where the arbitration is held, is normally the law to govern that arbitration. The territorial link between the place of arbitration and the law governing that arbitration is well established in the international instruments, namely, the New York Convention of 1958 and the UNCITRAL Model Law of 1985 ⁴. The Court of Appeal, England has succinctly summarized the position of law applicable to international commercial arbitration proceedings. The same is quoted hereinbelow for ready reference:

The Court also culled out the principle that where the parties have failed to choose the law governing the arbitration proceedings, those proceedings must be considered, at any rate prima facie, as being governed by the law of the country in which the arbitration is held, on the ground that it is the country most closely connected with the proceedings ⁶.

Therefore, the distinction between "seat" and "venue" would be quite crucial in the event, the arbitration agreement designates a foreign country as the "seat"/ "place" of the arbitration and also selects the Act as the law governing the arbitration proceedings. It is important to mention that only if the arbitration agreement provides that the "seat" of Arbitration is in India, provisions of Part I of the Act will be applicable to the arbitration proceeding ⁷. If the agreement is held to provide for a "seat" outside India, certain provisions of Part I would be applicable, subject to agreement between the parties in case the award passed is enforceable and recognized under the provisions of Part II of the Act ⁸.

Therefore, the importance of choice of seat in an international commercial arbitration cannot be overstated and the parties to contract must clearly indicate the seat of arbitration keeping well in mind that such choice would also determine the law governing the arbitration proceedings. If a party in Mumbai and a party in Sydney agree to take their arbitral reference to Geneva in Switzerland, it implies that the parties embrace Swiss Law as the law governing the arbitration proceedings and it would be Swiss Law that would govern the adjudication of the procedure adopted at the arbitration reference and the outcome of the arbitral reference. Of course, such a choice of seat for the arbitral reference is subject to a contrary agreement between the parties. However, what is true for international law may not hold the good for domestic arbitration for one reason: if a party in Mumbai were to agree with a party in Kolkata to take their arbitral reference to Delhi, the chosen seat would have no impact on the choice of law since the law governing the arbitration proceedings in Kolkata, Mumbai and Delhi would be the same ⁹.

Court at the Seat

Before delving into the question of exercise of jurisdiction of the court at the seat of an arbitration proceeding, it is essential to understand the definition of "Court" as provided in the Arbitration and Conciliation Act, 1996. Section 2(1)(e) of the Act contains an exhaustive definition marking out only the principal civil court of original jurisdiction in a district or a High Court having original civil jurisdiction in the State, and no other court as "court" for the purpose of Part I of the Act (emphasis supplied) ¹⁰. One must also not lose sight of the fact that the words used in the definition are "means and includes". It is settled law that such definitions are meant to be exhaustive in nature ¹¹. The provision is quoted hereinbelow for ready reference:

It may not be out of place to mention here that the Supreme Court of India has settled the question as to what may be called a Court having territorial jurisdiction over the 'subject matter of a suit' in A.B.C. Laminart Pvt. Ltd. v. A.P. Agencies ¹². The relevant portion of the judgment is reproduced hereinbelow for ready reference:

A plain reading of Section 2(1)(e) of the Act in light of the aforesaid decision would go on to show that for domestic arbitrations, only a court within whose jurisdiction the cause of action in respect of the dispute in question arises, may be considered to be a "Court" under Section 2(1)(e) of the Act.

In the backdrop of such premise, the question that arises for consideration is whether the situs of arbitration can confer jurisdiction to a court, even when the cause of action in respect of the dispute has not arisen within its jurisdiction.

The question as to whether situs of arbitration confers jurisdiction on the court was considered quite some time ago by a learned Single Judge of the Delhi High Court in Sushil Ansal v. Union of India ¹³. In such decision, it was held that the situs of arbitration did not confer jurisdiction to the courts and that while considering the question of territorial jurisdiction, it is vital to consider the competency of the court for deciding the subject-matter of the dispute had a suit been filed instead of invocation of arbitration. The Court, after examining the provisions of Sections 41, 31 and 2(c) of the Arbitration Act, 1940 held that:

Sushil Ansal v. Union of India was later followed in Gulati Construction Company, Jhansi v. Betwa River Board and Anr. ¹⁴, and in GE Countrywide Consumer Financial Services Ltd v. Surjit Singh Bhatia ¹⁵ (judgment rendered in respect of the Act of 1996), wherein the Court made the following observation:

Demonstrating a complete departure from the aforesaid position, the Supreme Court of India, in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012)9SCC552 (BALCO), interpreted Section 2(1)(e) of the Act to hold that the legislature has, in such provision, intentionally given jurisdiction to two courts i.e. the court which would have jurisdiction where the cause of action is located and the court within whose jurisdiction the arbitration takes place. The Court noted that this was necessary as on many occasions the agreement may provide for a seat of arbitration at a place which would be neutral to both the parties. Therefore, the courts where the arbitration takes place would be required to exercise supervisory control over the arbitral process. In such circumstances, both the Courts would have jurisdiction, i.e., the Court within whose jurisdiction the subject matter of the suit is situated and the courts within the jurisdiction of which the dispute resolution, i.e., arbitration is conducted.

The basis of such interpretation perhaps arose from the fact that the regulation of conduct of arbitration and challenge to an award needs to be by the courts of the country in which the arbitration is being conducted. Such a court is then the supervisory court possessed of the power to annul the award. This is in keeping with the scheme of the international instruments, such as the Geneva Convention and the New York Convention as well as the UNCITRAL Model Law. It also recognizes the territorial principle which gives effect to the sovereign right of a country to regulate, through its national courts, an adjudicatory duty being performed in its own country. However, what is true for international arbitrations may not hold the good for domestic arbitrations for one reason: if a party in Mumbai were to agree with a party in Kolkata to take their arbitral reference to Delhi, the chosen seat would not have an impact on the choice of Court since the law governing the arbitration proceedings in Kolkata, Mumbai and Delhi would be the same ¹⁶.

It could be argued that the interpretation in BALCO appears to be an apparent movement in the direction towards party autonomy, however, such approach may be problematic in view of the fact that this interpretation renders Section 2(1)(e) partly ineffectual. Possibly, the Court has incorrectly applied the law applicable to foreign seated international commercial arbitration to the domestic arbitrations, without considering that the Act clearly draws a distinction between them.

Interestingly, the Supreme Court took a step forward in Indus Mobile Distribution (P) Ltd. v. Datawind Innovations (P) Ltd. (Indus Mobile) ¹⁷, to rely upon BALCO, and hold that even in domestic arbitrations, the Court at the seat will have exclusive jurisdiction for the purpose of regulating arbitral proceedings. The relevant portion of the judgment is quoted hereinbelow for ready reference:

The observation of the Court that the provisions of Sections 16 to 21 of CPC will not be attracted is contrary to the legal proposition settled by a three Judge Bench of the Supreme Court that application of Section 20 of the Code of Civil Procedure, 1908 to the Arbitration Act is clear, unambiguous and explicit ¹⁸. However, it may follow from the facts of the case that as the agreement between the parties contained a forum selection clause and also a clause designating the seat of the arbitral reference; both of which identified Mumbai as the appropriate place, the Court reached the right conclusion for the wrong reasons. The result, however, is that the judgment in Indus Mobile cannot govern a situation where the agreement between the parties does not indicate a chosen seat for the arbitral reference ¹⁹. Notwithstanding the aforesaid, it is perhaps surprising to note that courts in India have relied on the Indus Mobile, even where its applicability is questionable specially in cases where the "seat" of arbitration is not a Court having jurisdiction under Section 2(1)(e) of the Act ²⁰.

This is perhaps why the decision in Indus Mobile has been correctly considered and distinguished by the High Court at Calcutta in Hirok Chowdhury & Ors. vs. Khagendra Nath Mondal & Anr. ²¹ and Debdas Routh vs. Hinduja Leyland Finance Limited ²². The judgments state that Indus Mobile has been read down in the light of dictum in Hakam Singh v. M/s. Gammon (India) Limited ²³ to hold that, in case of a domestic arbitration when parties to an arbitration agreement choose a seat for the arbitral reference and a court at the seat of the arbitral reference as the exclusive court, such court would have exclusive jurisdiction only if it is is otherwise clothed with the authority under S.2(1)(e)(i) of the Act read with sections 15 to 20 of the Code of Civil Procedure, 1908, where applicable.(emphasis supplied) ²⁴.

Seat Vs. Venue

In certain cases, the "venue" of the arbitration proceeding may be designated, while the "seat" is not. It may be worthwhile to delve into certain precedents that consider its consequences.

The significance of the parties not specifying a "seat" of arbitration proceeding is far and wide. In Shashoua & Ors v. Sharma ²⁵, the England and Wales High Court (Commercial), while hearing an anti-suit injunction, understood the expression "venue" as seat, as the parties had agreed that the ICC Rules would apply to the arbitration proceedings. Here, the Court was concerned with the construction of the shareholders' agreement between the parties, which provided that the venue of the arbitration shall be London, United Kingdom and the arbitration proceedings should be conducted in English in accordance with the ICC Rules while the governing law of the shareholders' agreement would be the law of India. The Court concluded that London is the seat, since the phrase "venue of arbitration shall be London, U.K." was accompanied by the provision in the arbitration clause for arbitration to be conducted in accordance with the Rules of ICC in Paris (a supranational body of rules). It was also noted that "the parties have not simply provided for the location of hearings to be in London for the sake of convenience and there is indeed no suggestion that London would be convenient in itself, in the light of the governing law of the Shareholders Agreement, the nature and terms of that agreement and the nature of the disputes which were likely to arise and which did in fact arise." ²⁶

In Union of India v Hardy Exploration ²⁷, it had been held that a venue in an arbitration proceeding can become the "seat" if something else is added to it as a concomitant. The Court held that the "venue" does not ipso facto assume the status of seat. Here, the parties had designated Kuala Lumpur as the venue of arbitration, and the agreement did not specify a "seat". The Court interpreted the agreement to hold that as the place of arbitration to be agreed upon between the parties, had not been agreed upon, the Arbitral Tribunal was required to determine the same. As there had been no adjudication and expression of an opinion on the determination of the "seat", the Supreme Court held that Kuala Lumpur was not "seat" of the arbitration proceeding, and Indian Courts had jurisdiction over the arbitration proceeding.

However, in Brahmani River Pellets Limited v. Kamachi Industries Limited ²⁸, where the parties had selected Bhubaneshwar as the "venue" of arbitration proceeding, the Division Bench of the Supreme Court was of the opinion that the Court at such venue will have exclusive jurisdiction. It was particularly observed:

"In the present case, the parties have agreed that the "venue" of arbitration shall be at Bhubaneswar. Considering the agreement of the parties having Bhubaneswar as the venue of arbitration, the intention of the parties is to exclude all other courts."

In this regard, the Bench placed reliance on Swastik Gas ²⁹ where the Supreme Court had clarified that where the contract specifies the jurisdiction of the courts at a particular place and such courts have jurisdiction to deal with the matter, an inference may be drawn that parties intended to exclude all other courts. However, it is settled law that the distinction between the venue and the seat remains, and it has to be adjudged on the facts of each case to determine the juridical seat ³⁰. But, in Brahmani, while arriving at its conclusion, the Bench did not treat Bhubaneshwar as the "seat" of arbitration but the "venue".

It may well be argued that as Brahmani pertained to a domestic arbitration, a different choice of seat would not have altered the law governing the arbitration proceeding, however, as it is settled law that venue of the arbitral tribunal may be moved as per the parties' convenience ³¹, it may be questioned whether now each move in such venue would confer exclusive jurisdiction on a new Court. It is also doubtful as to whether in cases where parties to an international commercial arbitration choose India as merely a "venue" and another country as a "seat", Brahmani will result in conferring upon courts in India exclusive jurisdiction in respect of the arbitration proceeding, when a bare perusal of the provisions of the Act clearly indicate otherwise.

Conclusion

It may be said that BALCO carved out an exception to the established norm that jurisdiction cannot be conferred on a court by consent of the parties, when it does not have inherent jurisdiction. Indus Mobile conferred exclusivity of jurisdiction on such Court, limiting the applicability of the Code of Civil Procedure, 1908. It may be an acceptable argument that party autonomy being paramount in arbitration proceedings, the court at the parties' chosen seat should have exclusive jurisdiction to avoid jurisdictional challenges and dilatory litigations. However, it may be prudent to bring in this change through an amendment of the Act, rather than conflicting judicial precedents that endanger the consistency of law and process. In an age when positive signals should be sent to the international business community, in order to create a conducive arbitration culture in this country, such inconsistency is certainly not welcome.

Footnotes

¹ Section 20 of the the Arbitration and Conciliation Act, 1996

² Section 2(1)(f)"international commercial arbitration" means an arbitration relating to disputes arising out of legal relationships, 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) 2 *** an association or a body of individuals whose central management and control is exercised in any country other than India; or

(iv) the Government of a foreign country;

³ Redfern and Hunter, The Law and Practice of International Commercial Arbitration (1986) at Page 69

⁴ The New York Convention provides a clear territorial link between the place of arbitration and the law governing that arbitration. Model Law which provides in Article 1(2) that "the provision of this law, except Articles 8, 9, 35 and 36 apply only if the place of arbitration is in the territory of the State."

⁵ Naviera Amazonica Peruana S.A. Vs. Compania Internacionale De Seguros Del Peru 1988 (1) Lloyd's Law Reports 116

⁶ See also Conflict of Law Rules as quoted in Dicey & Morris on the Conflict of Laws (11th Edition) Volume 1; later approved by the House of Lords in James Miller & Partners Vs. Whitworth Street Estates (Manchester) Ltd. 1970 1 Lloyd's Rep. 269; 1970 A.C.583

⁷ Section 2(2) of the Arbitration and Conciliation Act, 1996, as amended vide the Arbitration and Conciliation (Amendment) Act, 2015

⁸ Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012)9SCC552

⁹ Hirok Chowdhury & Ors vs Khagendra Nath Mandal & Ors. AIR 2018 Cal 272

¹⁰ State of West Bengal v. Associated Contractors (2015) 1 SCC 32)

¹¹ P. Kasilingam & Ors. v. P.S.G. College of Technology & Ors., (1995) Suppl. 2 SCC 348

¹² AIR 1989 SC 1239

¹³ AIR 1980 Delhi 43

¹⁴ AIR 1984 Delhi 299

¹⁵ (2006) 129 DLT 393

¹⁶ Hirok Chowdhury & Ors vs Khagendra Nath Mandal & Ors. AIR 2018 Cal 272

¹⁷ (2017) 7 SCC 678

¹⁸ Swastik Gases Pvt. Ltd. v. Indian Oil Corporation Ltd. (2013) 9 SCC 32. The Court held: "When it comes to the question of territorial jurisdiction relating to the application under Section 11, besides the above legislative provisions, Section 20 of the Code is relevant."

¹⁹ Hirok Chowdhury & Ors vs Khagendra Nath Mandal & Ors. AIR 2018 Cal 272

^{20 Britannia Industries Limited v. Easwaran 2018(3) KHC 574 and Sasidharan v. Sundaram Finance Limited 2018(3) KHC 638}

²¹ AIR 2018 Cal 272

²² AIR 2018 Cal 322

²³ (1971) 1 SCC 286

²⁴ Khazana Projects & Industries Pvt. Ltd. Vs. Indian Oil Corporation Ltd. (In the High Court at Calcutta; F.M.A. No. 2748 of 2016; decided on August 27, 2019)

²⁵ 2009 2 All ER (Comm) 477

²⁶ Also see Enercon (India) Ltd. and Ors. Vs. Enercon GMBH and Ors. AIR2014SC3152

²⁷ (2018) 7 SCC 374

²⁸ Civil Appeal No. 5850 of 2019 (SLP (C) No. 15672 of 2019; decided on July 25, 2019)

²⁹ Supra

³⁰ Roger Shashoua and Ors.v. Mukesh Sharma and Ors. AIR2017SC3166

³¹ Redfern and Hunter, The Law and Practice of International Commercial Arbitration (1986) at Page 69

12th September, 2019

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