The terms "place", "seat" and "venue" of arbitration are the key drivers of any arbitration proceeding. However, the meaning of these terms, confuse, not just the layman, but the lawyers too, owing to varied interpretations given by the Courts in this regard.
The Supreme Court of India, dealt with these terms in the case of Union of India vs. Hardy Exploration, wherein it held that the terms "venue" and "seat" of arbitration cannot be used interchangeably and a venue becomes seat only when a contrary intention has been attached to it. However, this interpretation was regarded bad in law by an equal strength bench in the case of BGS SGS Soma vs. NHPC Ltd. and the Hon'ble Court inter alia held that "place" of arbitration is akin to "seat" of arbitration (this has been dealt by us in our previous piece, which can be viewed at https://www.mondaq.com/india/Litigation-Mediation-Arbitration/897628/Settling-The-First-Principles-First-Is-Place-Of-Arbitration-Of-Arbitration-The-Seat-Too).
The Hon'ble Supreme Court, however, took a contrary view in the case of Mankatsu Impex Private Limited vs. Airvisual Limited. The Apex Court in this case enunciated that the mere expression "place of arbitration" cannot be the basis to determine the intention of the parties that they have intended that place as the "seat" of arbitration. The intention of the parties as to the "seat" should be determined from other clauses in the agreement and the conduct of the parties.
The above decision has been dealt by us in this article.
Profile of the parties
The Petitioner is a company incorporated in India and is in the business of supplying of air purifiers, air quality monitors, etc. The Respondent, a company incorporated in Hong Kong, manufactures quality monitors, air purifiers, etc.
Memorandum of Understanding entered between the parties
The parties entered into an arrangement, i.e. MoU, whereby, the Respondent agreed to supply Air Quality Monitors to the Petitioner. As per the terms of the MoU, the Petitioner was appointed as the exclusive distributor for the sale of the product in India. The agreement was to subsist for a period of 5 years from the date of first delivery of the lot of the Air Quality Monitors.
The most important clause of the MoU with regards to the present subject, the arbitration clause, is reproduced herein below:
"17. Governing Law and Dispute Resolution
17.1 This MoU is governed by the laws of India, without regard to its conflicts of laws provisions and courts at New Delhi shall have the jurisdiction.
17.2 Any dispute, controversy, difference or claim arising out of or relating to this MoU, including the existence, validity, interpretation, performance, breach or termination thereof or any dispute regarding non-contractual obligations arising out of or relating to it shall be referred to and finally resolved by arbitration administered in Hong Kong. The place of arbitration shall be Hong Kong. The number of arbitrators shall be one. The arbitration proceedings shall be conducted in English language.
17.3 It is agreed that a party may seek provisional, injunctive, or equitable remedies, including but not limited to preliminary injunctive relief, from a court having jurisdiction, before, during or after the pendency of any arbitration proceeding."
Facts leading to the invocation of the arbitration clause
The Petitioner was informed by the CEO of IQAir AG, that it has acquired the Respondent. The CEO also expressed its intention of not assuming any legal obligations arising out of any agreement signed between the Respondent and the Petitioner. However, the CEO was ready to sell the product (modified version) at a price more than what was contemplated under the MoU, which, obviously was not acceptable by the Respondent.
Consequently, the arbitration clause was invoked by the Petitioner.
What followed after invocation of clause has been described herein below:
1. The Petitioner filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (the Act) before the Hon'ble High Court of Delhi, seeking directions against the Respondent and the acquiring entity, IQAir AG, to honour the terms of the contract and consequently restraining the aforesaid parties from dealing with any other distributor in the Indian market.
Outcome: Interim relief was granted however the petition is still pending before the Hon'ble High Court of Delhi.
2. The Petitioner filed a petition before the Hon'ble High Court of Delhi under Section 11(6) for the appointment of the arbitrator.
2.1. Contentions on behalf of the Petitioner:
- That Clause 17.1 of the MoU stipulates that the MoU is governed by the laws of India, therefore the courts at New Delhi have the jurisdiction and not Hong Kong as it is just a "venue" and not the juridical "seat". To buttress its argument, the Petitioner relied upon the decision given by an equal strength bench of the Supreme Court in the case of Union of India v Hardy Exploration, wherein, it was held that "venue" can become "seat" only if – no condition is postulated; if a condition precedent is attached to the term "place", the said condition has to be satisfied first for "venue" to be equivalent to seat.
- It also contended that the recent decision in the case of BGS.SGS Soma vs. NHPC was given by a three-judge bench and therefore the declaration by the later Bench that Hardy Exploration is not a good law, may not tantamount to an overriding of Hardy Exploration as both the decisions were given by equal strength benches. In this regard, the Petitioner relied on Chandra Prakash and others v. State of U.P and another, wherein the Apex Court ruled that the doctrine of binding precedent is of utmost importance as it promotes certainty and consistency in judicial decisions.
- Moreover, the Petitioner contended that the parties have agreed that the proper law of the contract will be Indian laws. However, the MoU is silent on the proper and curial law of the arbitration proceedings and therefore Clause 17.1 would govern the proper and curial law.
Hence, the Petitioner prayed for appointment of sole arbitrator due to the applicability of Part-I of the Act (as courts at New Delhi will have jurisdiction).
2.2. Contentions on behalf of the Respondent:
- The Respondent contended that as per Clause 17.2 of the agreement, the place of arbitration is Hong Kong, which implies that seat of arbitration is located outside India, hence the applicability of Part-II of the Act in the present dispute. To buttress the argument on place and seat of arbitration, the Respondent relied on the recent decision of BGS SGS Soma, wherein, it has been held that venue is really the seat of arbitration proceedings. The term "arbitration proceedings" does not include just one or more single or part hearing but the arbitration proceedings as a whole, including making of the award at that place.
The Respondent finally concluded that the term "administered" used in Clause 17.2 of the MoU clearly shows that the parties have agreed that the arbitration between the parties would be seated in Hong Kong.
2.3. Point for Consideration:
Whether in view of Clause 17.2 of the MoU, the seat of arbitration is in Hong Kong?
In the scenario this follows, whether the Indian Courts have the jurisdiction to entertain the petition filed under Section 11 of the Act?
2.4. Supreme Court's Verdict
On governing law of arbitration proceedings
The Hon'ble Apex Court interpreted Clause 17.1 of the MoU, which prescribes for the governing law of the contract. It ruled that the words in Clause 17.1 "without regard to its conflicts of law provisions and courts at New Delhi shall have the jurisdiction" has to be read conjointly with 17.3 of the MoU.
As per Clause 17.3, the parties agreed that a party may seek provisional, injunctive or equitable remedies from a court having jurisdiction before, during or after the pendency of any arbitration proceedings.
Relying on para 161 of the BALCO case, wherein it has been held that ".....on a logical and schematic construction of Arbitration Act, 1996, the Indian Courts do not have the power to grant interim measures when the seat of arbitration is outside India...."., the Hon'ble Apex Court held that if the arbitration agreement is found to have seat of arbitration outside India, then the Indian Courts cannot exercise supervisory jurisdiction over the award or pass interim orders.
The Supreme Court placed immense emphasis on proviso added to Section 2(2) by the 2015 Amendment to the Act, whereby certain provisions of Part-I of the Act 17 i.e. Sections 9 – interim relief, 27 – court's assistance for evidence, 37(1)(a) – appeal against the orders and Section 37(3) have been made applicable to "International Commercial Arbitrations" even if the place of arbitration is outside India.
Since Part-I is not applicable to "International Commercial Arbitrations", in order to enable the parties to avail the interim relief, Clause 17.3 appears to have been added.
It ruled that a clear interpretation to Clause 17.1 shows that the substantive law governing the substantive contract are the laws of India.
On seat of arbitration proceedings
That place of arbitration cannot be construed as the venue of arbitration proceedings but a reference to Hong Kong for final resolution by arbitration administered in Hong Kong.
The words, "the place of arbitration" shall be "Hong Kong", have to be read along with Clause 17.2. Clause 17.2 provides that "....any dispute, controversy, difference arising out of or relating to the MoU "shall be referred to and finally resolved by arbitration administered in Hong Kong.....".
The Court held that the above stipulation indicates that the parties have agreed that the arbitration be seated at Hong Kong and that laws of Hong Kong shall govern the arbitration proceedings as well as have power of judicial review over the arbitration award.
On maintainability of Section 11 filed
Since the arbitration is seated at Hong Kong, the petition filed by the petitioner under Section 11(6) of the Act is not maintainable as Part-1 of the Act is not applicable in this scenario and therefore the petition is liable to be dismissed.
Does BGS Soma stand over-ruled?
The Hon'ble Supreme Court in the instant case has chosen not to comment on the correctness of the aforesaid judgment as the facts and circumstances of the instant case are different. Therefore, the judgment does not modify the position as it stood in BGS Soma. However, it has taken a view different from BGS Soma by ruling that mere determination of place of arbitration does not indicate the seat of arbitration; acts of the parties are also to be considered.
Key takeaways from the judgment
- That "seat of arbitration" and "venue of arbitration" cannot be used inter-changeably.
- That the mere expression "place of arbitration" cannot be the basis to determine the intention of the parties that they have intended that place as the "seat" of arbitration. The intention of the parties as to the "seat" should be determined from other clauses in the agreement and the conduct of the parties.
- Significance of the "seat of arbitration" is that it determines the applicable law when deciding the arbitration proceedings and arbitration procedure as well as judicial review over the arbitration award. The situs is not just about where an institution is based or where the hearings will be held.
The Hon'ble Court in this case has taken a view similar to Hardy Exploration and dissimilar to BGS Soma. It is pertinent to note that all the three decisions are given by benches of equal strength. It would be interesting to see how stakeholders will view the Mankatsu judgment and Courts will interpret the future arbitration clauses in light of this decision. The Authors feel that the decision of a larger bench of the Hon'ble Court will definitely help in ending the eternal narrative with regards to place and seat of arbitration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.